When Will the Chinese Banks Step In?

Monday, September 29, 2008 18:11
Posted in category The Big Picture

If there could be a system in more disarray than the Chinese milk industry, it would be the financial institutions of the US.

Laden with large non-performing loans, the banks are failing on all sides.  Fannie Mae, Freddie Mac, Merrill, Lehman, Wachovia, Wamu, and even some European banks have fallen… and those are just the national/ global banks….

and like the Bush Administration’s response to hurricane Katrina, the US administration’s efforts to deal with the situation has been late, lacking, and will lead to a lot of misery that could have been avoided had a proper response been taken from Day 1 (2 years ago).

so now…I am left to wonder where are the Chinese?

Why have they not stepped in to save the US economy, the global economy, when it is so clearly in their interest to do so?

There have been a few articles on this topic that I think provide a measure of insight into the problem –WSJ article Ping An Suffers as Fortis Crumbles, China’s CCB puts managing risk before overseas buys, and  Time’s Why China Won’t Come to the Rescue – which look at the psychological hurdles that the Chinese institutions face.  Each essentially say the same thing, that because Chinese investments in the financial industries abroad have performed so poorly, that they are unlikely to enter the market and risk loosing more money.

But, is it that they will not invest because they are not willing to lose more money through bad investments?  Or is it that they are unwilling to invest at this time, and at this price?

With my first foray into NPLs being in China, I learned quite a bit going through several auctions and working with western banks on taking up Chinese bad debt.  for most, it was clear that many of the portfolios were old, that many of the assets may be uncollectible, and what made it more difficult was that the auction process was managed poorly (incomplete data CDs, short timelines, etc).

Many of the banks I spoke to, or worked with, were all interested.  they would each spend the money to get the discs, but after a week you would begin seeing drop outs.

Complicating the matter further, there is a law in China that says you cannot sell a state asset below its book value.  A huge hurdle when trying to sell off a non-performing assets for 10 cents on the dollar.  So, even when auctions and private deals were going thorugh, they risked being shut down at the state level.

So you tried smaller deals, in areas with stronger regional governments, with assets that were clearly on their last breath, etc.

and now I am wondering what is going through the minds of Chinese bankers.   historically willing to take on far more risk than any Western banker, I have always been impressed by their ability to model and value assets, and while the middle/ senior management may not have always made the risk deal, once the lines of risk, value, and opportunity collided a deal was done.

The question now is where are the lines, and how much more value do the banks need to lose before being considered attractive?

It must be clear to anyone by now to everyone that investors just sitting on the sidelines and waiting is only to their benefit.  that the US response is doing more harm than good, and as the lifelines are being created the boats are sinking.

the only question I have at this point is what is the value that the Chinese banks have now modeled for the Western banks?  How far are we? and what does that mean for the US/ global economy?

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5 Responses to “When Will the Chinese Banks Step In?”

  1. Duncan says:

    September 30th, 2008 at 5:19 am

    And let’s not forget that extra layer of political bureaucracy that is now involved every time a Chinese financial institution wants to make an acquisition overseas. I suspect that this is a fatal flaw for these types of deals that tend to be finalised in a last minute rush as the state steps in to force sales/capital injections, as it leaves the Chinese unable to compete in terms of decisiveness with other foreign institutions like the Japanese. (Also suspect that the US restrictions on the degree of management control they’re willing to cede to China’s SOEs might still be a lingering factor). Could see the mainlanders snapping up some bargains in the later firesales as assets are carved up into new forms though…

  2. Rich says:

    September 30th, 2008 at 8:48 pm

    Duncan.

    Fire sales of equipment could be an interesting one. Already, a lot of older machinery was being sent over, but how about some of that new shiny stuff that Uncle Sam originally was unwilling to sell direct…. financial pressure could move some of the lines in the sand?

    Thanks for the comment
    R

  3. Rich says:

    September 30th, 2008 at 8:58 pm

    Further to the above, here are a coupld of articles that I thought would be of interest:


    Do not doubt that this is a real crisis: more on Fed’s balance sheet
    seriously.. LOOK AT THAT CHART! If you cannot see the problem, read the article, but if you have ever looked at a line graph that did that before – you can immediately see that something is seriously wrong

    Mexican billionaire says China should lead crisis rescue
    Interesting that he should propose it, and many have. My stand point is that surely there is a role that China could play, but if it bailed out the US, what would that mean? Would the US gets its house in order? Or would the US just take the handout and go forward like it has before, and only put off the inevitable?

    If you are behind the first, then China should give us more money, and if you believe the latter, then China should pick off assets in a strategic fashion that are good investments for itself.

    Life of the Party: The Bright Side of Financial Turmoil.
    Simon writes up where China stands to gain, even politically on a domestic level, when things go wrong. Where I would disagree with the quip he has written is simply that I am not sure China’s domestic infrastructure is in place should things really get nasty, and there is no foreigner for China to blame should the whole house of cards come crashing down.

  4. Paul Denlinger says:

    October 4th, 2008 at 7:44 pm

    Rich–
    There are still a lot of things which China does not yet have, and needs to save money for. Just a few are:
    1. National healthcare system: This is the single biggest thing which China does not have even though it has been discussed since 1991. With a rapidly aging workforce, this is badly needed.
    2. National unemployment safeguards: China needs to create 25M new jobs annually; most of this growth was channeled to factories in Guangdong exporting to the US market. For all practical purposes, this is gone. What’s going to take up the slack? China has a history of civil unrest when things get bad economically.
    3. China’s urban/rural development is seriously out of balance. The Chinese government has devoted almost all development to urban growth, leaving farmers largely impoverished with no social benefits. They planned to turn China’s population from 80% rural/20 urban into 80% urban/20% rural in a 30 year period. The collapse of the US market occurred just when China’s urban development plan is about 1/2 complete. It is unlikely to be completed smoothly now. And there is no Plan B.
    4. Rapidly aging workforce: Because of the one-child policy, the current workforce will begin to retire in 15 years. When that happens, China’s consumer spending will start to fall off a cliff, and China’s economy will look a lot like Japan’s now.

    For these reasons, I believe that the Chinese government will choose to save its own cash reserves for use on the Chinese economy issues, rather than use it on bailing out the US economy. Besides, I do not believe that the US authorities have shown the willingness to address the root causes of this crisis, which are lack of transparency.

  5. Rich says:

    October 4th, 2008 at 8:39 pm

    Paul

    It is sad to say that the US has a problem with transparency.. and a bit ironic given all the complaints about the Chinese NPL process – seems somethings are not all that dissimilar.

    With regards to your list, all good point, I would also add they they have to hold a serious chunk to combat inflation. Perhaps all this economic turmoil will cushion the blow, but when the government is subsidizing oil firms it is also coming from this pool as well.

    R

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