Chinese Banking Fraud, Western Naivety & Greed - Part IV
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.
Guangxi (or connections) is not just having a Scottish Cabinet ruling England and Wales, or Enarques, all of whom attended the same two schools, running the French civil service. It is more subtle.
It includes blood relatives and in-laws; it can extend to cousins of cousins, clans of the same name (China has only 100 proper surnames), people from your village or province and hopefully, senior politicians for whom one of your set once did a favour.
It has been around for hundreds of years. Neither the Manchu nor Mongol rulers understood it or could break it. Guangxi has its strengths; it provides a support net for the weak and dispossessed.
Very large personal networks on a national level can make the creation of new businesses and raising capital a remarkably smooth operation. It also embeds corruption, deeply.
Thus any attempt at reform becomes mired and compromised. Government regulators find themselves having to pull the plug on their own connections, including perhaps their bosses or even worse, senior army officers and politicians.
This is why so many of Hong Kong's listed 'red-chip' companies, run by wholly unqualified children of senior officials, were able to get all the funding, licences and assets they wanted in record time.
Another more recent example of a Guangxi in operation took place in July this year; an order from the Government that the state-owned commercial banks must lend $1.2 billion to around half of the country's 130 securities firms which in practice have gone bust. Each has a major political connection. It is into this hopeless financial morass that western bankers have now decided to invest.
Mass hysteria
When every major bank has the same brilliant idea at the same time, shareholders should start to attend AGMs to ask serious questions; depositors should be very nervous.
One good example of western banks having the same disastrously clever idea at the same time was between 1993 and 1996. In July 1997, a banking crisis started to roll across Asia.
This did not seem to be a western bank problem, until it became apparent the BIS reporting banks* (a quasi-regulatory body which includes every significant or sound bank in the world) had loaned the equivalent of their entire Tier 1 capital (i.e. all their reserves, plus) to just four small countries - Korea, Thailand, Indonesia and Malaysia.
They had no natural business in these nations but wanted to take advantage of superior growth and higher interest rates. The collapse of the banking systems in these countries, whose joint GDP was then less than that of Germany, caused a domino effect into Russia, South Africa, Latin America and then LTCM. It was a very close run thing; a global banking crisis was only narrowly averted.
In Part V's conclusion, we will examine how todays western banks have obviously not learned their lesson and the mass hysteria that has naive western bankers once again piling into what could turn into the largest systemic banking disaster in global history.
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.
Guangxi (or connections) is not just having a Scottish Cabinet ruling England and Wales, or Enarques, all of whom attended the same two schools, running the French civil service. It is more subtle.
It includes blood relatives and in-laws; it can extend to cousins of cousins, clans of the same name (China has only 100 proper surnames), people from your village or province and hopefully, senior politicians for whom one of your set once did a favour.
It has been around for hundreds of years. Neither the Manchu nor Mongol rulers understood it or could break it. Guangxi has its strengths; it provides a support net for the weak and dispossessed.
Very large personal networks on a national level can make the creation of new businesses and raising capital a remarkably smooth operation. It also embeds corruption, deeply.
Thus any attempt at reform becomes mired and compromised. Government regulators find themselves having to pull the plug on their own connections, including perhaps their bosses or even worse, senior army officers and politicians.
This is why so many of Hong Kong's listed 'red-chip' companies, run by wholly unqualified children of senior officials, were able to get all the funding, licences and assets they wanted in record time.
Another more recent example of a Guangxi in operation took place in July this year; an order from the Government that the state-owned commercial banks must lend $1.2 billion to around half of the country's 130 securities firms which in practice have gone bust. Each has a major political connection. It is into this hopeless financial morass that western bankers have now decided to invest.
Mass hysteria
When every major bank has the same brilliant idea at the same time, shareholders should start to attend AGMs to ask serious questions; depositors should be very nervous.
One good example of western banks having the same disastrously clever idea at the same time was between 1993 and 1996. In July 1997, a banking crisis started to roll across Asia.
This did not seem to be a western bank problem, until it became apparent the BIS reporting banks* (a quasi-regulatory body which includes every significant or sound bank in the world) had loaned the equivalent of their entire Tier 1 capital (i.e. all their reserves, plus) to just four small countries - Korea, Thailand, Indonesia and Malaysia.
They had no natural business in these nations but wanted to take advantage of superior growth and higher interest rates. The collapse of the banking systems in these countries, whose joint GDP was then less than that of Germany, caused a domino effect into Russia, South Africa, Latin America and then LTCM. It was a very close run thing; a global banking crisis was only narrowly averted.
In Part V's conclusion, we will examine how todays western banks have obviously not learned their lesson and the mass hysteria that has naive western bankers once again piling into what could turn into the largest systemic banking disaster in global history.
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