Posted on 12/13/2006 1:44:39 AM PST by bruinbirdman
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.
Mr McDonough did not spell out his current fears about China, except to say that it was the issue "on everybody's minds". I must confess that it was not on my mind. It is now.
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.
Charles Calomiris, finance professor at New York's Columbia University, warns in the journal Central Banking that Beijing cannot change course because it faces "political revolution" if it cuts off the flow of credit.
"Bad loans are not some little problem a good regulator can take care of; they are part of the whole way the system functions. Looking into the crystal ball, there will be a crisis in the financial sector in China in 2009-2010," he said. Some say sooner.
It is a fear shared by experts on the ground, if not by foreign banks now buying "pay-to-play" blocs of the Big Four state behemoths. The prospectuses of these Chinese banks are a "comedy show", says Kent McCarthy from the hedge fund Jayhawk Capital.
Above all, the fears are shared by US Treasury Secretary Hank Paulson, who embarks on a star-studded trip to Beijing this week to prevent US-China relations ending in a smash-up.
Mr Paulson is a "friend of China", but he learned where the dead bodies are buried during 70 trips to the country for Goldman Sachs. Those visits were spent sorting out bad loans, which accounts for his jaundiced view of the Chinese miracle.
In a recent speech, he warned against the fallacy of extrapolating "meteoric growth" forever, "as if China has somehow found a way to immunise itself from business cycles".
Shifting peasants from state farms to state factories was the easy part of China's great leap forward. From now on it gets harder. "The tasks faced by Beijing are so daunting that the biggest risk we face is not that China will overtake the US, but that China won't move ahead with the reforms necessary to sustain its growth," he said.
Mr Paulson's brief from the Smoot-Hawley protectionists on Capitol Hill is to scream so loudly at the Chinese over their $168bn trade surplus that they bend to demands for a stronger yuan.
He knows this is the surest path to financial crisis for both countries: for America because China's central bank now holds more than $700bn in US bonds and dollar instruments, including $342bn in US Treasuries. China is now global lender of last resort.
Obviously, China would hurt itself if it set off a run on the dollar and triggered a US recession by pushing up long-term US interest rates. But good sense goes out of the window once tempers fly.
Less understood is that a sharp rise in the yuan could be the last straw for China's banks, sitting on a network of loss-making factories living off marginal exports. Standard & Poor's said a 25pc rise in the yuan combined with a 2pc rise in interest rates would slash corporate profits by a third.
An article in Washington's journal International Economy – which had White House fingerprints all over it – said Mr Paulson's fear is that a "significant Chinese recession" that would spill over into the rest of the world.
In the end, China's bubbling energy and mass of people will likely send it vaulting up the economic league. Much like America's stunning emergence in the 1920s – another tale of over-investment and bank abuse. That is a parallel that should give pause for thought.
The economic boom of the 1920's was stunning. The problems were caused by the government's reaction to it.
ping for later
mark
bump!
The Chinese could be in trouble? How can that be? Don't they have a trade surplus? LOL!
Just wait until the peasants find out their money is not really in the bank and that corrupt commies have stolen a lot of it.
Paulsen says that there are gremlins if they open their eyes, so its best if we get them to keep their eyes shut.
They have (surplus) productive capacity as far as the eye can see, their banks are bankrupt and their government holds 1 trillion (plus or minus) in currency reserves (70 per cent in USD).
If they open their eyes, they'll realize their banks should be in bankruptcy. Thus they can't let in foreign banks which will draw away safety-seeking customers. Also, quickly coming to grips with this problem will send millions of mobile workers into the streets to riot.
So... Paulsen suggests that they keep on doing what they've been doing. I believe this is a case where it pays to slowly eat a little bit of crap over a long period of time. Its best for us (devaluing USD to Renimbi) and for them (minimize the riots). But, in the end, reality (the market economy) must be faced.
I don't think that either the US or China want the Chinese banking and credit systems to collapse.
Here's a mini-microcap which has been working at rolling out a national credit reporting system in cahoots with the Chinese government. This has been a 'work in progress', as they say. The stock trades(rarely) as SMS-V on the Venture Exchange. A seriously speculative stock, largely held by Chinese insiders.
http://www.yangtzetelecom.com/s/Home.asp
From the home-page:
"Yangtze's new service, the Credit Information System, is targeting businesses in China with registered capital of at least $1 million RMB, estimated to number in the millions. The core of the system is a large centralized data base created, updated and queried via a combination of either the internet, a unique SMS channel or interactive voice responsive technology. The system is currently being rolled out to a number of cities primarily through the branch network of China Enterprise Confederation (which, similar to the General Chamber of Commerce or Employers' Association in western countries, is a large quasi-government body with 300 offices thoughout China). A key benefit of this service is in building credibility and providing transparency to China's enterprises, consistent with what the Central Government has identified as a necessary condition to further faciliate economic development."
When U.S. goes into next recession which is coming soon, this will all unravel.
China's problem is too big. Apologists for China won't be able to spin it. Expect likes of 'Foreign Affairs' to bitch mightily about China.
Please provide a working link for this.
bookmark ping-a-ling for another read , & THANKS bruinbirdman
... I hope this thread , goes on for awhile
What's so funny about that ?
Just because the chineese are not in control of their growth (big miracle !) it doesn't mean that other economies can't be screwed either.
Alan was a printer - not a banker - and you guys are broke.
People who don't understand economics often claim that because the US has a trade deficit that we are somehow in trouble economically. To show the folly of that assumption, I point out that Japan, which has had a large trade surplus for decades had a 15 year deflationary recession since the late 80s.
I also point to Germany which has had a large surplus for decades and tends to have double digit unemployment and anemic GDP growth.
and you guys are broke.
Unlike you guys? LOL!
yes, unlike you.
US private savings rate is below zero.
US household is a wreck.
Your economy runs on foreign loans (2500 bn $).
Large parts of your economy were financed on subprime mortgages that are now imploding, taking the mortgage market for higher ranked loans with it.
broke. unlike us. probably in recession in june.
US savings rate doesn't include capital gains, but subtracts out capital gains taxes paid. It's not a perfect statistic.
US household is a wreck.
How so?
Your economy runs on foreign loans (2500 bn $).
So what? Our GDP grew about 3.1% last year, how'd yours do?
Large parts of your economy were financed on subprime mortgages that are now imploding, taking the mortgage market for higher ranked loans with it.
And still we grew about 3.1% last year. When was the last time your sad excuse for an economy grew at that rate? What's your unemployment rate? What's your government deficit?
>> US savings rate doesn't include capital gains, but subtracts out capital gains taxes paid. It's not a perfect statistic.<<
No statistic is - but you got to have them, haven't you ?
So what does that mean 'gains not inlcuded' ? Are captial gains of one year counted in in the following year ?
>>US household is a wreck. <<
>> How so? <<
'cause you guys have a quite imbalanced household guess it's for "guns and butter" - I can tell because ours is only slightly worse and we have 5 socialist countries to feed.
>> So what? Our GDP grew about 3.1% last year, how'd yours do? <<
Ahh not bad either 2.5% - but we grew in Euro. ;-)
And you do know, that having some unemployed is good for business ?
>> Large parts of your economy were financed on subprime mortgages that are now imploding, taking the mortgage market for higher ranked loans with it.
And still we grew about 3.1% last year. <<
The subprimes imploded THIS year -recently - ok they are bouncing back a bit - but you may want to have an eye on them (google for abx bbb-)
trouble is that even the good rated loans are affected.
Come on - be honest - are you invested in the Dow or Nasdaq today ?
No. Capital gains are never included. In 2004, the IRS collected $151 billion in capital gains tax receipts. That money is subtracted from the savings figure. Capital gains rates vary from 35% (short term gains of high income individuals) down to 10% (long term gains of low income individuals). The most common rate is probably the 15% rate for long term gains.
The $151 billion in taxes was probably the result of around $1 trillion in capital gains. That $1 trillion was not included in the savings figure. The savings figure also ignores unrealized capital gains.
Do you think our capital gains might turn our savings rate into a positive figure?
'cause you guys have a quite imbalanced household guess it's for "guns and butter"
You mean federal budget not household?
I can tell because ours is only slightly worse and we have 5 socialist countries to feed.
Really? Yours is worse? What % of GDP?
As far as feeding socialist countries, we've been feeding yours for 60 years.
Ahh not bad either 2.5%
Wow, back into the single digits. It's been a while.
And you do know, that having some unemployed is good for business ?
So your huge unemployment must be great for business. LOL!
Come on - be honest - are you invested in the Dow or Nasdaq today ?
Of course. For decades.
In 2005 you had 63% of GDP states debt. - we had 68%.
back to those saving - you are saying if I had the right stocks and my portfolio grew by 30% in 2006 and I sold those stocks - that would not be in the savings statistic ?
>> As far as feeding socialist countries, we've been feeding yours for 60 years. <<
Yeah right - feeding us. Ok where's my check ?
Oh wait - one more question - you're in good old american stocks ... wich ones ?
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