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.
And as our economy continues to grow much faster than yours and as our annual deficit continues to shrink, we'll look even better. So what's your unemployment rate?
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 ?
Yes. And the capital gains taxes you paid would be subtracted from the savings rate.
Yeah right - feeding us.
60 years of our military protecting you from the Russians.
Oh wait - one more question - you're in good old american stocks ... wich ones ?
I like the financial sector. And you can't lose with Altria.
has become one of the slowest growing economies in the euro zone. A quick turnaround is not in the offing in the foreseeable future; however, stronger growth this year has improved employment considerably. Growth in 2001-03 fell short of 1%, rising to 1.7% in 2004, falling back to 0.9% in 2005, and increasing to 2.2% in 2006.
That's some nice growth you've had this decade. LOL!
>>Yeah right - feeding us.
60 years of our military protecting you from the Russians. <<
So you where not feeding us - but protecting us.
And what if I said it was the other way 'round ?
Certainly I know it was a good thing to have you guys here - but that wasn't an act of selflessness.
I mean it would have been our turf that you would have defended the american way of life on - or not ?
Our rate of unemployment is realy high (about 10% - but falling a bit) - but that should drop further in the near future. Denmark nearly cut theirs by 50% - that should be possible here, too.
Debts are a far worse problem.
Btw:
Altria and JP Morgan are great - didn't even think of s&p stocks though because I fear the negative dollar effect.
Got RBS instead and no brand marketer at all...
What do you think of this commodities hype ? Is it really a plus in security to have physical gold. Or do I just ad weight to my socks drawer ?
Besides protecting you, we had to make sure you didn't do anything stupid.
didn't even think of s&p stocks though because I fear the negative dollar effect.
Negative dollar effect? Please explain.
Got RBS instead and no brand marketer at all...
I owned a bank that RBS bought a few years ago. I may buy some RBS.
What do you think of this commodities hype ? Is it really a plus in security to have physical gold.
I love to taunt goldbugs. They tend to have poor math skills and a poor grasp of economics. Especially the idiots who buy gold on margin.
yeah - but the germans after 49 were certainly unable to disturb french ladies in paris again. The stupid thing we could have done would have been to surrender to the red army - rather then surrendering to yours.
Eur. to dollar ex. ratio - I guess it will decrease a bit since the fed res. cannot increase prime interest any furhter and since I have to earn my bread in euros - I'd loose.
Goldbugs and doomsayers are wrong ? I mean - all wrong ? The poor chineese e.g. can buy nothing for their dollars you owe them... no harbour facilities, no partnership in united technologies ;-)
So they buy commodity contracts all around the world. Even if they slow down because they surprisingly cannot sustain 10% growth over 10 years - these contracts are made and the ore and oil and gas is gone to china for that prices.
So these things will get rare. Gold is always rare since it's a beloved currency for people owning some lira, rupie or trouserbutton and would like to add some security.
Security on the other hand is - as long as nothing happens - just a feeling. Doesn't gold feel safe somehow ? I mean noone can surprise you in one thing - it's rare - it doesn't decay and it's thoroughly accepted to be precious. Something you cannot always say about dinar, rupie or trouserbutton - and if helicopter berny does it wrong - the greenback.
Regards,
U.
So I supposed your 12% unemployment rate is preferred to our situation?
Private savings is NOT zero - that number doesn't include equity in homes or 401k retirement accounts.
Yes.
The poor chineese e.g. can buy nothing for their dollars you owe them... no harbour facilities, no partnership in united technologies ;-)
You're right, we only exported $1 trillion worth of stuff last year. Nothing good to buy from us.
Doesn't gold feel safe somehow ?
Sure. If you bought gold in 1980 at $850 it took you until............wait, you still haven't gotten your money back. I feel safer already. Don't forget the 27 years worth of gold interest and gold dividends you collected. Oh, wait, it doesn't pay those either. You've convinced me. LOL!
I mean noone can surprise you in one thing - it's rare - it doesn't decay
Except for the price.
got me wrong here - they cannot really invest in your economy -that's what I meant. Certainly they can smoke marlboro eat toblerone and whoppers and get drunk on coke... but can they cannot invest these dollars in american core business. I mean noone can surprise you in one thing - it's rare - it doesn't decay. Except for the price. Well gold isn't an investment to build your pension on - it's an anchor against inflation and an insurance for cold times.
10% !
12% was last year
as I said we didn't grow in worthless paper but in euro ;-)
Then they're stupid to send us all those goods for useless dollars.
but can they cannot invest these dollars in american core business.
I guess you missed when they bought Lenovo?
Well gold isn't an investment to build your pension on - it's an anchor against inflation and an insurance for cold times.
I prefer stocks with growing earnings and dividends.
How long before that silly currency collapses?
The Chinese Economy is a house of cards that can crumble at any time.
Their $1 trillion in reserves might plug the holes in their banking system.
China's government is certainly just as capabale at reacting in such a bone-headed way.
Up to now it works out - but if they were not concerned - why would bernanke pay them a visit to explain how he's planning to keep the greenback flying - and why would they announce a change in their monetary strategy - to buy more $ based corporate bonds and less $ statesbonds ?
Lenovo ? Has always been chineese, or not ? They were kindly allowed to buy IBM's Laptop business in 05 for $600 million cash and about the same in stocks. 600 Million against a (european) billion of paper in a safe - that's 6 to 10 000 or 600 ppm of the problem they have. This IS nothing
Dunno - it's just become the most common cash to use in this world. Doesn't look like it's not in fashion.
Why would stocks I own be hard to find?
They were kindly allowed to buy IBM's Laptop business in 05 for $600 million cash and about the same in stocks.
Yes they were.
This IS nothing
You said they can't invest in US economy. I just showed they did. Sorry you were wrong. Don't invade anybody, please :^)
now your taking the piss...
...and besides I showd that you were wrong (or as you put it right to 600 ppm)
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