Pressures at Home, Tensions Offshore – By Bill Bishop

China’s gross domestic product grew 7.8 percent in 2012, its slowest pace since 1999. The growth slowdown appears to have bottomed out, and for the fourth quarter of 2012 the economy grew at 7.9 percent, slightly ahead of expectations.

Many analysts questioned the health of the apparent recovery and the limited progress in rebalancing the economy away from investment toward consumption.

In spite of the improvement in the Chinese economy, the construction and mining sectors have remained relatively weak. Caterpillar‘s China operation has had some difficulties, and it now turns out that the company has had to deal with not only a weak economy but also what it says was outright fraud.

In 2011, Caterpillar announced the acquisition of ERA Mining Machinery for up to $886 million. On Friday afternoon, on the eve of a three-day weekend, Caterpillar issued a news release saying it had “uncovered deliberate, multiyear, coordinated accounting misconduct” in ERA’s operations.

Another month, another Chinese fraud, a cynic might quip. What makes this scam so remarkable is that a huge multinational with decades of experience in China was fooled, possibly because of a “distracted board of directors”, and that the principal shareholders of ERA – Emory Williams, a former president of the American Chamber of Commerce in Beijing, and James E. Thompson III, heir apparent to the Crown Shipping fortune – are prominent Western expatriates.

Caterpillar has not publicly accused Mr. Williams or Mr. Thompson of misconduct, but the release says “Caterpillar’s investigation of these matters is ongoing and any other comment at this time is not appropriate.”

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