Tweet
Monday view: China's banks are the Achilles heel of the global boom
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:
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. says: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.
"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.
"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."
Comment