View Full Version : Monday view: China's banks are the Achilles heel of the global boom

12-11-06, 10:25 PM
Monday view: China's banks are the Achilles heel of the global boom (http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/12/11/ccview11.xml)
December 12, 2006 (Ambrose Evans- Pritchard – Telegraph UK)

If you are not keeping a close eye on the Chinese banking system, perhaps you should be. Bill McDonough, the ex-chief of New York Federal Reserve, let slip at a conference in Italy this week that China's rickety credit structure was the biggest single menace to the world economy.

It was Mr McDonough, now an adviser to Lehman Brothers, who rescued the hedge fund Long Term Capital Management after it made an $80bn bad bet on Danish, Swedish and south European bonds in August 1998.

He orchestrated three rate cuts, admitting afterwards that some $1,300bn in derivatives had threatened to topple like dominoes and "freeze" the global system. The trigger for this crisis was the Russian default, but the deeper roots lay in Asia's banks.

Mr McDonough did not spell out his current fears about China, except to say that it was the issue "on everybody's minds". I must confess that it was not on my mind. It is now.

AntiSpin: What happens to the U.S. economy if the Chinese banking system collapses and takes the economy down with it? Is the result likely to be much different than if the U.S. banking system and economy tank first? One is very likely to precipitate the other. Does it matter who goes first?

More on Ambrose Evans-Pritchard's report:

Beijing admits that the banks are the "soft underbelly" of its booming economy, but says the system has been cleaned up after an estimated $400bn in bail-outs since 1998. Critics reply that fresh money has been wasted by Communist bosses meting out credit for political ends, digging the country into a deeper hole.

Investment is running at 43pc of GDP, leaving an oversupply of factories and office blocks, like Japan in the 1980s, but with even less market discipline. Ernst & Young calculated the bad debts at more than $900bn in a report this year but was forced to recant by Beijing.

Gordon Chang, author of The Coming Collapse of China, said the regime had embarked on a suicidal course, living from one day to the next from fear that 140m footloose urban migrants could turn violent.

"China is just piling up more and more non-performing loans, and eventually it's going to come crashing down, because economically this doesn't make any sense," he said. "You can't blow up your balance sheet at 20pc to 25pc a year with a well-managed bank in a well-regulated society. How the devil can you do it in China? This is just ludicrous," he said.

Charles Calomiris, finance professor at New York's Columbia University, warns in the journal Central Banking that Beijing cannot change course because it faces "political revolution" if it cuts off the flow of credit.
iTulip Economic M.A.D. (http://www.itulip.com/economicMAD.htm) says:

"China and the U.S. are running inter-dependent bubble economies, relying on the economic equivalent of Mutually Assured Destruction (M.A.D.) to keep one from blowing up the other’s economy. Whether by intent or accident, sooner or later market forces will assert themselves and both economies will go through tough transitions. How will the world look after that?

"The U.S. and China are have distinctly different bubble economies. The Chinese bubble economy runs mostly on credit and corruption, like the Japanese bubble economy of the late 1990s except more extreme.

"To keep its credit-corruption economy going, China’s ruling party, the CCP, needs the U.S. to buy Chinese exports at a rate that keeps its economy growing fast enough to keep its new entrepreneur class growing and supporting the regime. If they fail, the CCP loses their core political support base.

"Meanwhile, the U.S. needs cheap imports from China to balance out the inflation created by its asset-speculation based economy. Lacking cash savings, U.S. consumers cannot buy Chinese exports except with credit. To get access to credit, U.S. consumers need low interest rates. Thanks primarily to China now, and Japan and the UK in the recent past, purchases of U.S. treasury debt keeps U.S. interest rates low, allowing North Americans to re-finance their homes to free up cash to pay for hammers and nails at Made in PRC."
No one can say where the fire will start, but by the time it burns out, China's economy will be suffering strong deflationary pressures and the U.S. powerul inflationary ones.

Charles Mackay
12-12-06, 08:46 AM
Why can't the banks be reliquefied in China the same way they are reliquefied in the U.S.? Forbes says that 1 year deposit rates are 2.5% in China but the banks must lend at 6% or higher..giving them a 3.5% cushion. Since the RMB is a fiat currency just like every other currency and they DO have printing presses just like every other currency, what's to stop them from inflating when they have a problem? A slow down in growth, manufacturing, and exports yes, but deflation in money?

12-12-06, 09:42 AM
A while back we had a discussion of SOX keeping companies from being listed on US exchanges and my response was -- who wants them! Guess what a number of those big listing were -- Chinese banks. While living in Australia I read a report which said the only accounting less reliable than that coming out of Australia (I apologize to any readers down under) was that coming out of China. My definition of an idiot is anyone who would invest in a company in China (and anything out of the Soviet block). You might make money but it will only be on the Bigger Fool theory. Yes, the banks can be reinflated. Seems to mean the Yuan is not that under valued. This is one of the problems with so called fair trade with a country that does not have a freely trading currency.

Japan never cared about profitability it only looked at market share and due to shady accounting was able to cover if where this lead. The Japanese companies were losing money but banks kept lending to keep them growing. In this situation, all the manufacturers were ran out of business because they could not compete in such a situation (the Yen was also under valued). This continued until the exchange rate of the Yen was changed. I think China is Japan in the 80's on steroids. Due to China not having a freely traded currency and the other controls in place, it will not blow up first. The US will blow up due and then there will be a second but bigger explosion in China followed by echo explosions through out China.

For some reason the Jefferson Starship song Ride the Tiger is going through my head right now.