Chinese Banking Fraud, Western Naivety & Greed - Part V
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.
Today, most leading western banks have agreed that they must be in China, seemingly irrespective of the price, because of its rapid growth. They cannot resist the lure of potentially 1.3 billion savers and borrowers.
They have swallowed in whole, the myth that the balance sheets of China's financial institutions have been cleaned up. Western banks are now shelving out considerable sums for the tiniest toehold in the China market.
Not surprisingly, one of the earliest players was Hong Kong's Hang Seng Bank. In 2003, together with the finance arm of the World Bank and the Government Investment Corporation of Singapore, it plonked down $324 million for a 24.9% stake in China's Industrial Bank.
Its parent, the better known HSBC, subsequently shelled out $1.75 billion for a 19.9% stake in the Bank of Communications. Both these two banks have an economic imperative and a level of knowledge of how to work in difficult Asian countries, which means they might even make a small return on capital, one day.
For almost all other major banks, there must be considerable doubt. Bank of America is paying $3 billion for a 9% stake in China Construction Bank; Dutch-based ING Groep bought a 19.9% stake in the Bank of Beijing for €166 million. Newbridge Capital of the US bought 18% in the Shenzhen Development Bank.
There is now hardly a major foreign bank not sniffing around Chinese banks and assets in one form or another. Those who have either been snoogling or have stated they are looking at major bank or asset deals include the Commonwealth Bank of Australia, Britain's Standard Chartered Bank, JP Morgan, Credit Agricole, Morgan Stanley, Bank of Nova Scotia and many, many more. It is a global herd.
The reasons given are almost identical; to quote Bank of America's chairman, 'It makes sense if you are looking to tap into economic growth'. Walter Wriston, former head of Citibank, won financial immortality with a similar comment - 'countries don't go bust'. Citibank almost folded two years later when Mexico suffered one of its perennial meltdowns.
A near-term reason may be more prosaic; fees. China is desperate to resolve its hideous domestic bad debt problem through the use of foreign capital. It can see no other way of solving its banking crisis except by importing more and more capital.
For these foreigners, there is the delicious personal prospect of huge fees and bonuses. The current flotation plans for myriad Chinese banks and insurance companies could produce, assuming all go ahead, underwriting and placement fees of over a billion dollars by the end of 2006.
Approximately half of this amount will drop straight into the hands of the executives who engineered these deals; by the time the solids hit the air conditioning, they will have long moved on - to retirement or other banks - because of their international expertise.
All these foreign banks can only buy minority stakes, not control, as Chinese law bars this. All claim to be playing the long game, that their expertise will help sharpen up the domestic banks, i.e. that they can break the thousand year old Guangxi system.
None to date have had a return on capital above its cost. Even more wonderful, they actually believe they know the true balance sheets of the banks they are buying.
1,500 years ago, the Chinese not only invented accounting, they then invented quadruple accounting; a true set for limited internal use, another for the government, one for the investors and then one for their wives.
We are suspicious that mustard-keen western MBAs, whose sights are fixed on 1.3 billion consumers and their near-term bonuses, rather than the $750 billion worth of bad debts in the system, can see through these multiple fictions.
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.
Today, most leading western banks have agreed that they must be in China, seemingly irrespective of the price, because of its rapid growth. They cannot resist the lure of potentially 1.3 billion savers and borrowers.
They have swallowed in whole, the myth that the balance sheets of China's financial institutions have been cleaned up. Western banks are now shelving out considerable sums for the tiniest toehold in the China market.
Not surprisingly, one of the earliest players was Hong Kong's Hang Seng Bank. In 2003, together with the finance arm of the World Bank and the Government Investment Corporation of Singapore, it plonked down $324 million for a 24.9% stake in China's Industrial Bank.
Its parent, the better known HSBC, subsequently shelled out $1.75 billion for a 19.9% stake in the Bank of Communications. Both these two banks have an economic imperative and a level of knowledge of how to work in difficult Asian countries, which means they might even make a small return on capital, one day.
For almost all other major banks, there must be considerable doubt. Bank of America is paying $3 billion for a 9% stake in China Construction Bank; Dutch-based ING Groep bought a 19.9% stake in the Bank of Beijing for €166 million. Newbridge Capital of the US bought 18% in the Shenzhen Development Bank.
There is now hardly a major foreign bank not sniffing around Chinese banks and assets in one form or another. Those who have either been snoogling or have stated they are looking at major bank or asset deals include the Commonwealth Bank of Australia, Britain's Standard Chartered Bank, JP Morgan, Credit Agricole, Morgan Stanley, Bank of Nova Scotia and many, many more. It is a global herd.
The reasons given are almost identical; to quote Bank of America's chairman, 'It makes sense if you are looking to tap into economic growth'. Walter Wriston, former head of Citibank, won financial immortality with a similar comment - 'countries don't go bust'. Citibank almost folded two years later when Mexico suffered one of its perennial meltdowns.
A near-term reason may be more prosaic; fees. China is desperate to resolve its hideous domestic bad debt problem through the use of foreign capital. It can see no other way of solving its banking crisis except by importing more and more capital.
For these foreigners, there is the delicious personal prospect of huge fees and bonuses. The current flotation plans for myriad Chinese banks and insurance companies could produce, assuming all go ahead, underwriting and placement fees of over a billion dollars by the end of 2006.
Approximately half of this amount will drop straight into the hands of the executives who engineered these deals; by the time the solids hit the air conditioning, they will have long moved on - to retirement or other banks - because of their international expertise.
All these foreign banks can only buy minority stakes, not control, as Chinese law bars this. All claim to be playing the long game, that their expertise will help sharpen up the domestic banks, i.e. that they can break the thousand year old Guangxi system.
None to date have had a return on capital above its cost. Even more wonderful, they actually believe they know the true balance sheets of the banks they are buying.
1,500 years ago, the Chinese not only invented accounting, they then invented quadruple accounting; a true set for limited internal use, another for the government, one for the investors and then one for their wives.
We are suspicious that mustard-keen western MBAs, whose sights are fixed on 1.3 billion consumers and their near-term bonuses, rather than the $750 billion worth of bad debts in the system, can see through these multiple fictions.
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