China Teetering On Financial Brink?

Discussion in 'Current Affairs, News and Analysis' started by Not_Whistlin_Dixie, Dec 13, 2006.

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  1. Since the late '90s I've read disconcerting rumors that Chinese prosperity is built on a foundation of dubious loans by undercapitalized banks. This is from the always interesting Ambrose Evans-Pritchard:

    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.


    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.

    "Monday view: China's banks are the Achilles heel of the global boom"
    By Ambrose Evans- Pritchard
    Last Updated: 1:21am GMT 12/12/2006

    If ex-NY Federal Reserve Bank President McDonough's fears materialize the consequences will be felt far beyond the Chinese border.
  2. Not_Whistlin_Dixie your info is a number of years out of date, I think China is in more danger because of its 1 trillion US$ exposure to US Govt bonds, especially as the US is now heading into a slump with property prices due to fall by 10% next year.

    All major Chinese Banks apart from the notoriously bent Agricultural Bank (the smallest) now have significant foreign shareholding partners - Citicorp, BOS, HSBC etc deliberately brought in to reform the sector, they are preventing the old 'soft loan' culture re emerging.

    Average Chinese house hold savings are 60% of GNP allowing more of a safety net than us in the West.

    Just think what would happen if the US actually had to pay old style made in the US prices for its consumer goods!
  3. This is correct.

    It seems that if China stopped buying US fixed income securities, their prices would collapse, meaning that the value of the People's Bank of China's portfolio would collapse. So now the Chinese authorities apparently feel that they must "protect" their "investment" by buying still more of these somewhat questionable securities.

    Falling US real estate prices may mean that US debt securities collaterized with residential real estate mortgages are under-collateralized. So the Chinese financial system may have some serious exposure there also.

    Chinese financial authorities subsidize the Chinese export sector by supporting the dollar on the foreign exchange market.

    If that support were abruptly withdrawn, it would be a catastrophe for Americans who would wake up to discover they could no longer afford to shop at Wal-Mart.
  4. Don't forget this is a command economy (I have lived here for 4 years) in a crisis it can do things that no democracy can do. So don’t go rubbing your hands yet.

    Also China is no longer buying US Bonds – they are going into a much more diverse portfolio, the attitude is that if they take a bath on US securities they can take it, They will explain to the people that the Americans have devalued their own currency because they fear a strong China. They may retaliate by flooding the US with virtually free consumer goods to put any remaining US businesses under out of spite.
  5. Anyone who thinks Eastern Banking Practices are on par with Western Established practices is off his rocker.
    And Yes I know and accept that there are Villens running Banks in the West.
  6. I remember reading an article about dodgy banking practices there where loans were given based upon you being a party member/senior member of the militarty with little hope of repayment.

    The west were concerned that the banking system was corrupt and unsustainable in the long term.
  7. It used to be that the local Party leaders could 'order' the local banks to lend money to however they fancied. This however is no longer the case in most areas of China. The Public Security Bureau is wading through many old loans extracting repayment in place of being shot or imprisoned for crimes against the state
  8. Mr Happy

    Mr Happy LE Moderator

    Not knowing anything about Chinese banking specifically but reading the Economist regularly, I suspect that this is not really an issue for the asian power house. Scaremongering from "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."

    Not the trillions of increasing US debt then?
  9. When they become aware of a problem they certainly take the most direct approach to solving it don't they?

    It sort of beats the denial, lies and spin form of government.

  10. Bernanke backs off from ‘subsidy’ accusation

    By Krishna Guha in Beijing

    Published: December 15 2006 06:06 | Last updated: December 15 2006 06:37

    Ben Bernanke, chairman of US Federal Reserve, on Friday stepped back from accusing China of using a weak renminbi to subsidise its exporters.

    In a speech to the Chinese Academy of Social Sciences, Mr Bernanke avoided referring to the currency as an “effective subsidy” to its exporters - a phrase that was included in his prepared remarks released earlier - shifting instead to the word “distortion.”

    He said allowing the renminbi to appreciate would “reduce an important distortion in the Chinese economy,” by encouraging firms to produce for the domestic market instead of focusing on exports.

    His comments came in a balanced speech, in which he said that while currency appreciation would be “helpful”, the “most direct and probably the most effective way to reduce the external surpluses and increase the welfare of Chinese households” would be to improve China’s social safety net and reduce the incentive for households to save.

    But his criticism on China’s currency policy is likely to be seized on by US manufacturers who have long pressed US government agencies to adopt a tougher stance in trade disputes with China.

    The Fed chairman said China would one day reach the limits of its ability to sterilise reserve inflows.

    But he suggested the bigger danger was that China was channeling investment into export industries “whose economic viability depends on undervaluation of the exchange rate.”

    These projects could turn bad if and when the currency does appreciate, resulting in “an increase in non-performing loans.”

    Mr Bernanke said there were more “signs of excess capacity” in industries such as steel which indicated the likelihood of “capital misallocation.”

    He said greater competition in the financial sector would result in more efficient pricing of risks and reduce the risk that overinvestments could exacerbate the problem of non-performing loans
  11. Agree totally, this is a periodic scaremongering (second time on ARRSE in a year I seem to recall) by the US to placate its own Industrial / Commercial base. They did the same thing with illegal steel tarrifs against the EU last year, rather than reform their decaying Industries they cry foul and beg protections.

    Chinas 'rickety credit structure' is in far far better shape than the US automotive Industry.
  12. I am too busy to keep up to date with what the details of what is going on in the financial world, but it strikes me that there are several large elephants in the room that everyone is studiously ignoring, and this is one of them.

    Others, IMHO, are the outstanding US debt, UK house prices and the economic imbalances in the EU.

    Are we heading for a world crash - just as Japan starts to recover from its last crash and Gordon Brown takes over?

  13. Mr Happy

    Mr Happy LE Moderator

    thansk AJ, as you say and to expand further, by beating up Chinks like this they are making a reasoned case to allow US exports to be sold in China whereas at the moment they are too cheap.

    Bill 'throatfcker' Clinton said something like "with this Chinese trade agreement we are bringing 1.2 billion new customers to American goods" - but since the Chinks can't aford to buy american the reality is that they are doing far better out of the deal. As evidenced by their 1 trillion dollar cash balance. The economist article here is quite interesting:

  14. That's exactly what I thought. I'm in no position to judge the imminence of the threat represented by bad asset portfolios held by Chinese commercial banks. However, I'm skeptical whether that's really the main thing that keeps Mr. McDonough up at night.

    We've got Big Trouble in the USA.

    For an eye-opening picture of it, take a look at this:

    "The Consumer Crunch: December 2006 Update: Is The Party Over On New Year's?" by Stephen J. Church.

    He says:

    1. The amount of cash and cash-equivalents held by the average American household has fallen to enough to live on for about twenty days.

    2. American households have lived on home equity borrowing made possible because (i) mortgage rates were falling and (ii) residential real estate prices were rising.

    3. Interruption of either of those two trends necessarily implies an ominous and drastic fall in living standards. Folks need low rates to make their monthly payments and need rising prices to be able to borrow at all.

    4. He seems to expect long term dollar-denominated US interest rates are going up soon. (If, for instance, our Chinese friends took a notion to liquidate their T-bond portfolios, that's exactly what would happen.) He writes: "Our suggestion: take your gains on long Treasuries!"
  15. It’s good to talk
    Dec 15th 2006

    America still worries about China's weak yuan

    IN SEPTEMBER, Henry Paulson, America’s treasury secretary, emerged from a meeting with Wu Yi, the vice-premier who negotiated China’s entry into the World Trade Organisation, to announce that they had agreed that their respective governments would hold a twice-yearly economic dialogue. The news brought a little cheer to those hoping for more constructive relations between two of the most economically important countries in the world. It also gave a little—a very little—encouragement to those who hope that China will stop pushing down the value of its currency in order to subsidise exports.

    Now the first such talk has concluded, what has been achieved? All of the administration’s economic bigwigs, including Ben Bernanke, the chairman of the Federal Reserve, assembled in China for a two day summit that ended on Friday December 15th (the next one is in May). The currency markets still seem bullish on the yuan, which rose slightly in trading on Thursday. But expectations of anything substantial would have been misplaced. With the Democrats now in control of both houses of Congress, the administration is ill-placed to promote a free-trade agenda and must instead fend off the worst protectionist instincts of both parties at home.

    So Mr Paulson has taken the rather unusual tack of pleading with the Chinese to come to his aid against protectionist factions in America. Citing “resistance in both our countries to greater integration into the global economy”, he called for tangible results “on the most important issues facing our nations.” This is code for allowing the yuan to appreciate, and other measures to rein in the massive trade imbalances between the two countries. China’s cheap currency is the prickliest issue, at least in the public mind. A Democratic senator, Chuck Schumer, along with a Republican, Lindsey Graham, have been pushing a scheme to slap penalties on Chinese goods if China's currency is not allowed to appreciate. Given the composition of the incoming Senate such actions are, worryingly, starting to look more possible.

    But China’s leaders have big political concerns of their own, notably the millions of underused workers in state-owned firms, and the huge numbers each year who join China’s workforce. A booming export sector is helping to absorb many of these workers, so the last thing China wants is to slow sales of its goods abroad. Nor would the government be at all inclined to defer to the demands of China-bashing American politicians. In her statement to the summit, Ms Wu said that America misunderstands the situation in China, and that change is coming as fast as it can. The yuan has already been allowed to appreciate by about 6% since the middle of last year, which is more than many observers expected.

    But Messrs Paulson and Bernanke say that letting it rise further will benefit China as much as the United States, by putting its growth on a more sustainable footing. China’s economy grew by 10.7% in the first nine months of the year, fuelling worries about inflation and an overheating economy. Given the fragile state of many Chinese institutions, particularly its banking sector, an unsustainable boom could lead to a nasty bust, which would please nobody except possibly Ohio’s steelworkers.

    Still, the very fragility of those institutions limits how quickly China can move. No one is quite sure what a big and sudden shock to the system would do, and they don’t particularly want to find out. And at any rate, letting the yuan appreciate might not help as much as everyone fancies. Much of China’s manufacturing consists of assembling parts made elsewhere; a rising yuan would make those inputs cheaper, limiting the price impact on its exports. Moreover, the American economy seems to be relatively insensitive to currency fluctuations, which means that it will probably take more than a somewhat cheaper dollar to adjust its enormous current-account deficit.