I have been wandering through the fascinating nation of China of late, so I have not had much time to peruse the blogosphere - I guess this means that for a month I had a life. I was fortunate enough to spend a few days in the beautiful city of Lijiang in Yun'nan province. This mid-sized Chinese town is famed for its wonderfully restored 'old city', a cobbled and confusing maze of shops, traditional inns with gorgeous courtyards and a grid of small canals filled with luminous fish and gushing clean water. A beautiful place to while away a few days, but Lijiang is not really known for its nightlife. So on the evening of the 25th of December, I got trawling through some of the past articles on Samizdata. Reading through the comments section on this post, I noticed that an article I wrote early in 2005 got a mention. It was a pity I was not around a computer regularly, because a debate raged in the comments section that I would have very much liked to have been a part of. For all my appreciation of China, I am one of the few Sino sceptics.
I should explain. I am not a sceptic of the aspirations of the billions of Chinese people who sense greatness in the Chinese identity. After all, I'm mentioning a deeply rich culture backed up by a vast talent pool on the mainland and in the diaspora that has the capacity to change the world radically in the future. I am, however, deeply pessimistic about China in its current nominally Communist incarnation, for reasons I have outlined in a previous post. I will not go into specifics; if you're curious, please read my rationale here.
Some interesting developments have taken place between now and then, however. These merit further analysis. One or two of the commenters in the mentioned Samizdata piece stated that they were keeping abreast of banking developments in the Middle Kingdom. In 2002, Chinese officials admitted that 25% of the loans written by the state owned banks were non-performing. Standard and Poors and a number of others said it was closer to 50%, and possibly more. Within the space of four years, the Chinese administration has revised its estimation of the rate of non-performing loans down to an average of about 12%. How can this be done so fast? I'm not really sure. We are, of course, talking about the writing down or otherwise accounting for of many hundreds of billions of dollars of bad loans. I assume that it's due to the fact that most or all of the bad loans have been transferred to special "asset management" companies set up by the government. I suspect that the banks have been able to revise their non-performing loans (NPL) ratio down so quickly by performing a debt-to-equity swap with these holding companies. The article linked to immediately above believes the asset management companies have taken a chunk of the banks' loans and issued them with 10 year bonds in return.
This solution is clearly economic sophistry. At the end of the day, someone has to pay the tab - at some stage depositors are going to want their money. The equity in these holding companies is effectively (if not nominally for the time being) worthless - after all, their assets consist of a bunch of loans that will never be repaid. What is being done about the essentially state-owned industrial sector, which was - and most likely still is - the major recipient of these loans? There's a saying in China that goes something like "The mountains are high and the Emperor is far away". I have no doubt that this thinking pervades China's provincial administration and its state-owned industrial sector, and it explains the pervasive corruption that is, contrary to official publications, as rampant as ever. For every high-profile trial and execution of an apparently "senior" official on corruption charges, there are hundreds of thousands more who not only escape undetected, but are also politically untouchable into the bargain. Quite simply, the central government cannot be everywhere at once, and its reach is frequently limited by local powerbrokers. Consider this case in Guangdong, one of China's more prosperous provinces, where the central government could not exercise its will due to local political considerations, even though humiliating international media attention was beaming down. And who is to say that the central government is not as corrupt as its provincial counterparts? It is hardly unreasonable to say that corruption probes have a definite glass ceiling when it comes to the powers that be in Beijing.
I believe that the Chinese banking sector's dire straits constitute the gravest threat to global stability in the coming years. The Chinese government is always harping on about its "deepening" banking and state-owned industrial enterprise reforms, and this is a mantra is being repeated across the world. Unfortunately, the Chinese state is so opaque that it's impossible to verify the veracity of such claims, and the unrealistic numbers being thrown at us by the Communist party (like the drop of NPLs from 25% to 12% in less than five years) and the shonky juggling of bad debt from one insolvent bank to another woefully undercapitalised holding company do not inspire much confidence in the nature of the reforms. Frankly, I believe the banking sector is too far gone to reform without collapse. In international terms, the crisis in the Chinese banks and SOEs is an elephant that stands in the middle of the room, but everyone is either perceiving it as a mouse or trying to pass it off as a mouse. I believe the Australian government is in the latter category, as are a great many others around the world.
Stock markets around the Asia-Pacific region opened sharply lower Wednesday after a dizzying sell-off in China sent global markets into a tailspin.
Japanese share prices tumbled 3.56 percent in morning trade Wednesday, tracking a rout on global markets on fears of a US economic slowdown and concern over China's possible stock bubble.
The Tokyo Stock Exchange's benchmark Nikkei-225 index of leading shares fell 644.85 points in the morning session to 17,475.07.
Earlier this week, the world's second largest bourse had registered near seven-year highs on optimism over the Japanese economy.
The TOPIX index of all first-section companies dived 70.36 points or 3.88 percent to 1,740.97 by the break.
Singapore also opened down 4.82 percent lower, in line with continued falls in regional markets.
Most Asian markets plunge
By HANS GREIMEL, Associated Press Writer 42 minutes ago
Chinese stocks bounced back Wednesday after their biggest decline in a decade, but stock markets in Asia and Europe fell for a second day amid investor jitters about possible slowdowns in the Chinese and U.S. economies.
Shares in Japan, South Korea, Singapore, India, Australia and the Philippines all tumbled more than 2 percent after Wall Street suffered its worst day Tuesday since the Sept. 11, 2001, terrorist attacks.
While several Asian markets trimmed big early losses by afternoon, nervous investors were still wary of whether the slump marks the beginning of a downward spiral or just a one-time jolt to cool overheating markets.
"We don't need to worry about a big reduction from here, but this correction could continue for the next couple months," said Shinichi Ichikawa, an equity strategist with Credit Suisse First Boston in Tokyo.
In China, the Shanghai Composite Index rose 3.9 percent Wednesday to close at 2,881.07, rebounding from its 8.8 percent plunge Tuesday its biggest drop in a decade.
Bullish comments in the state-controlled media appeared to reassure jittery domestic investors, who account for virtually all trading. China will focus on ensuring financial stability and security, the official Xinhua News Agency cited Premier Wen Jiabao as saying in an essay due to be published in Thursday's issue of the Communist Party magazine Qiushi.
Stocks set to open higher after sell-off
By TIM PARADIS, AP Business Writer 11 minutes ago
Stocks were poised to open higher Wednesday following a massive worldwide sell-off Tuesday that rattled investor confidence but left fertile ground for bargain hunters.
The declines Tuesday, which began following a drop in the frothy stock markets of mainland China, naturally raised questions about whether a larger correction was in the offing. Overnight, stocks fell in most of Asia though the Shanghai Composite Index, whose nearly 9 percent drop set off the domino-effect selling, closed up nearly 4 percent Wednesday. Stocks were also off in Europe, but the declines were milder than on Tuesday.
Following the selloff that erased the U.S. major indexes' gains for the year, already important economic news and testimony from Federal Reserve Chief Ben Bernanke will take on a new urgency as investors try to determine whether stocks will regain their footing.
Futures signaled a higher opening. Futures for the Dow Jones industrials, which fell more than 400 points Tuesday, were higher by 54.24 points, while Standard & Poor's 500 index futures were higher by 5.94 points. Nasdaq composite index futures were higher by 10.52 points.
Preliminary figures on fourth-quarter gross domestic product are due before U.S. markets open. Investors expect the Commerce Department will show the economy grew at an annual rate of 2.2 percent, more than a percentage point below the initial estimate of 3.5 percent.