Chinese Banking Fraud, Western Naivety & Greed - Part III
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.
Throwing Good Money After Bad - Part II
Meanwhile, not only did the $170 billion of bad loans fester in the state banks' balance sheets, but grew like mushrooms.
Both because China has been growing at anywhere between 7-12% p.a. over the last decade and because there is an almost total lack of social security or pension benefits, domestic savings are very high; thus national, city and regional banks all have vast deposits.
Loan growth therefore exploded as these were doled out (so poor are bank controls, the system can hardly be classified as lending) to the thousands of bankrupt state owned enterprises to keep them afloat.
In propping up these hopeless businesses, giving them sufficient money to allow them to 'pay interest' on earlier loans, the fiction that they are servicing their debts is maintained and therefore solvent.
This has resulted in a remarkable balance sheet clean-up of the entire national banking system. In 2000, non-performing loans were officially nearly 40% of total loans, equal to more than $750 billion.
No banking system at any time in history has survived for long with bad debts over 10%, let alone such a large number. Now they are allegedly a mere 20%.
The Government knew that excessive loan growth would be ultimately destructive and briefly tried to restrict new lending; but even this short slowdown resulted in too many businesses going to the wall.
This was especially true of the small but vital private sector, whose access to loans was squeezed as banks cut them out first, in favour of foreigners and state enterprises.
Given that China's primary economic problem is finding new employment for five million people every year, which can only come from the private sector, such a result was politically unacceptable.
(Even so, private enterprise still has a problem accessing cheap credit, one of the reasons why China's main stock market index has halved since 2000.) So loan growth was again allowed to let rip, with good money thrown after bad. This has made a dangerous problem critical.
Scratch My Back
Occasionally, weak attempts have been made to reform the financial system. In 2003 for example, and with considerable hullabaloo, the Bank of China fired 20 local bank managers (out of 3,000) for corruption. Care to bet that stopped the rot?
More common are 'one-off' rescues, which repeat every few years. $45 billion was shelled out by the financial authorities in 2003 to prop up the Bank of China and the China Construction Bank, followed by $30 billion into ICBC.
Even by western standards, these are simply huge numbers (Barings couldn't even lose a billion, despite trying very hard). All these reforms and bail-outs fail for one reason, the core problem of the "Guangxi" system.
In Part IV we will examine the Guangxi system and the mass hysteria that caused naive and greedy western bankers to precipitate LTCM and a near global systemic failure.
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.
Throwing Good Money After Bad - Part II
Meanwhile, not only did the $170 billion of bad loans fester in the state banks' balance sheets, but grew like mushrooms.
Both because China has been growing at anywhere between 7-12% p.a. over the last decade and because there is an almost total lack of social security or pension benefits, domestic savings are very high; thus national, city and regional banks all have vast deposits.
Loan growth therefore exploded as these were doled out (so poor are bank controls, the system can hardly be classified as lending) to the thousands of bankrupt state owned enterprises to keep them afloat.
In propping up these hopeless businesses, giving them sufficient money to allow them to 'pay interest' on earlier loans, the fiction that they are servicing their debts is maintained and therefore solvent.
This has resulted in a remarkable balance sheet clean-up of the entire national banking system. In 2000, non-performing loans were officially nearly 40% of total loans, equal to more than $750 billion.
No banking system at any time in history has survived for long with bad debts over 10%, let alone such a large number. Now they are allegedly a mere 20%.
The Government knew that excessive loan growth would be ultimately destructive and briefly tried to restrict new lending; but even this short slowdown resulted in too many businesses going to the wall.
This was especially true of the small but vital private sector, whose access to loans was squeezed as banks cut them out first, in favour of foreigners and state enterprises.
Given that China's primary economic problem is finding new employment for five million people every year, which can only come from the private sector, such a result was politically unacceptable.
(Even so, private enterprise still has a problem accessing cheap credit, one of the reasons why China's main stock market index has halved since 2000.) So loan growth was again allowed to let rip, with good money thrown after bad. This has made a dangerous problem critical.
Scratch My Back
Occasionally, weak attempts have been made to reform the financial system. In 2003 for example, and with considerable hullabaloo, the Bank of China fired 20 local bank managers (out of 3,000) for corruption. Care to bet that stopped the rot?
More common are 'one-off' rescues, which repeat every few years. $45 billion was shelled out by the financial authorities in 2003 to prop up the Bank of China and the China Construction Bank, followed by $30 billion into ICBC.
Even by western standards, these are simply huge numbers (Barings couldn't even lose a billion, despite trying very hard). All these reforms and bail-outs fail for one reason, the core problem of the "Guangxi" system.
In Part IV we will examine the Guangxi system and the mass hysteria that caused naive and greedy western bankers to precipitate LTCM and a near global systemic failure.
Comments