Chinese Banking Fraud, Western Naivety & Greed - Part II
We have previously commented on the "puffery" and media hype coming out of and regarding the Chinese economic system.
Many dubious and suspect numbers get bandied about regarding Chinese GDP, corporate financial statements and the "banking" system.
This series taken from Bedlam Asset Management will point towards the potential importation of an international banking disaster from China.
First There Was GITIC
In 1998, the Guangdong International Trust & Investment Corporation (GITIC) collapsed. It was a specialist 'investment company' owned by the regional government of Guangdong province. The total debt was approximately $4.5 billion.
The collapse was caused by poor investment decisions, astonishingly bad management and an impressive level of old fashioned theft. The Government came up with a ripping wheeze; to stuff foreign bankers with the losses.
These lenders had become exuberant at China's explosive economic growth, following Deng Xiao Ping's 'liberal' reforms. They had naively decided that GITIC, as an enterprise owned by the regional government and controlled by the Central Bank of China, was government guaranteed and therefore represented a sovereign risk, i.e. very low.
Like all bankers who have made bad decisions, they squealed like stuck pigs. Overnight foreign loans and investment dried up, as these foreign banks also tried to call in other outstanding loans.
China then, as now, needs massive foreign investment, credit and expertise to increase its current income per capita from $1,100 to at least a second world level. The leadership quickly realised that foreign bankers and investors like to have their cake and eat it.
As there were another 240 ITICs, of which over half were suffering the same problems, a bailout had to be arranged. As a consequence, around $170 billion worth of bad loans were transferred from these ITICs to various Chinese state banks. This was meant to be the end of the story.
Throwing Good Money After Bad - Part I
The Government renewed its efforts to attract foreign investment. First the Chinese diaspora was encouraged to invest in joint ventures. This policy was soon expanded to western multinationals.
They were more than willing to take advantage of cheap labour, minimal environmental controls, tax holidays and light legal controls. Their western bankers were eager to see them replace their over-priced, often ill-educated workforces (with attitude problems) and fund a rapid relocation of their manufacturing to China.
Domestic Chinese banks in turn far preferred lending to western companies, whose assets they could squeeze and seize if the need arose, rather than to local companies, where the assets were as likely as not owned by a bank director or a senior Communist party official.
In Part III we will further examine how good money was thrown after bad and the resulting exacerbation of the Chinese banking system's problems.
Many dubious and suspect numbers get bandied about regarding Chinese GDP, corporate financial statements and the "banking" system.
This series taken from Bedlam Asset Management will point towards the potential importation of an international banking disaster from China.
First There Was GITIC
In 1998, the Guangdong International Trust & Investment Corporation (GITIC) collapsed. It was a specialist 'investment company' owned by the regional government of Guangdong province. The total debt was approximately $4.5 billion.
The collapse was caused by poor investment decisions, astonishingly bad management and an impressive level of old fashioned theft. The Government came up with a ripping wheeze; to stuff foreign bankers with the losses.
These lenders had become exuberant at China's explosive economic growth, following Deng Xiao Ping's 'liberal' reforms. They had naively decided that GITIC, as an enterprise owned by the regional government and controlled by the Central Bank of China, was government guaranteed and therefore represented a sovereign risk, i.e. very low.
Like all bankers who have made bad decisions, they squealed like stuck pigs. Overnight foreign loans and investment dried up, as these foreign banks also tried to call in other outstanding loans.
China then, as now, needs massive foreign investment, credit and expertise to increase its current income per capita from $1,100 to at least a second world level. The leadership quickly realised that foreign bankers and investors like to have their cake and eat it.
As there were another 240 ITICs, of which over half were suffering the same problems, a bailout had to be arranged. As a consequence, around $170 billion worth of bad loans were transferred from these ITICs to various Chinese state banks. This was meant to be the end of the story.
Throwing Good Money After Bad - Part I
The Government renewed its efforts to attract foreign investment. First the Chinese diaspora was encouraged to invest in joint ventures. This policy was soon expanded to western multinationals.
They were more than willing to take advantage of cheap labour, minimal environmental controls, tax holidays and light legal controls. Their western bankers were eager to see them replace their over-priced, often ill-educated workforces (with attitude problems) and fund a rapid relocation of their manufacturing to China.
Domestic Chinese banks in turn far preferred lending to western companies, whose assets they could squeeze and seize if the need arose, rather than to local companies, where the assets were as likely as not owned by a bank director or a senior Communist party official.
In Part III we will further examine how good money was thrown after bad and the resulting exacerbation of the Chinese banking system's problems.
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