Chinese premier Zhu Rongji had been slowly drawing the net around the country's second biggest investment and trust company long before the outside world or indeed the company's own executives knew what was happening. He sent trusted aides to Guangdong where they worked quietly for months to flush out financial irregularities and clean up the scandal-ridden province. Their investigations led to the shutdown of Guangdong International Trust and Investment Company (Gitic).
The move caught the market by surprise. The company was considered quasi-sovereign risk. It was number two among the 240 privileged "merchant banks" or trust and investment companies (itics) which had been set up by local governments with the blessing of Beijing to tap overseas markets for capital for the country's modernization programme.
Not only was Gitic the flagship fund-raiser for China's richest and fastest growing province, it also had a high profile among international bankers. Thus, although signs of serious problems had been emerging, including a top management reshuffle several months ago, few expected Beijing to take the drastic step of closing it down. But when Gitic ran short of funds to meet payment on a debt of about $700 million, the Guangdong authorities were not permitted to use provincial funds to keep their flagship afloat.