US vs. Chinese Banks: Where’s the Risk?

Wednesday, April 8, 2009 10:26
Posted in category The Big Picture

A quick follow up to yesterday’s post China’s Economic Exposure and Forward Policies , one of the more interesting offshoots was a back and forth on the risks found within Chinese banks.

It was kicked off by Victor Shih, when he was responding to a comment made by Quoc and said:

My argument is that China is in exactly the same position as the US, if not worse.  Please bear in mind that for the past few years, the PBOC issued 10 trillion in notes to sterilize. This is 10 trillion RMB that the PBOC OWES the public. The China Development Bank like wise issued trillions to finance public projects; again, this is trillions that CDB OWES the public.  We can go down the list and find hundreds of local government investment entities which have issued and borrowed additional trillions.

Victor’s comment was then picked up on by Yalan, who said:

China´s public debt around 30% GDP, US around 70% GDP, Japan 170% GDP.

Short-term sterilization T-bills are just that: FX sterilization securities – rapidly unwound in case of a reversal of volatile flows (India as a case in point). US T-bills issuance ain´t for sterilization but for funding needs.

I beg to disagree: CH is not in the same position as the US.

Which, brings us to the question I believe is the most important (at least it is for me). Taking Yanlan’s numbers at face value, and taking into consideration Victor’s comments, it is clear that both have placed a different risk premium to both China and the US.

In exploring this issue, I submitted the following response – and it is a response I would encourage others to consider and comment on:

Where I see the real difference between China and US at the bank level is that effectively 30-40 banks have been lost in the US without a complete collapse in the system as a whole. There have not been runs of banks at a macro level, and confidence in savings accounts is still there.

But, would the same hold true in China were the same conditions present???

I fear not. China’s system is far more vulnerable to shocks and runs, and were one of the big 4 (perhaps even a large regional) to be seen as failing, my bet is we could see a quick reaction in the market place as people began lining up at the ATM… Remember the lines in 97?

This is where the real risk is (In my opinion). That China would not have to support a single bank, but all of them.

So, Ya Lan, to your point that China is in a different situation, I would agree because from a pure numbers analysis, this look very different – and appear to be in China’s favor.

However, I would also say that as the risk premium in China is far higher on a system wide basis, which adjusts the figures you have put forward to be at a much higher level.

Sound credible to you?

If credible, what risk level on a scale of 1 to 10 would you give each (US and China), and what implications would any difference have when considering that China has once again opened a flood gate of new loans onto the system? Are we looking at 3-5 years from now a Chinese banking system that is suffering from its own subprime like meltdown as non-performing loans begin to weigh down on China’s banking sector?

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4 Responses to “US vs. Chinese Banks: Where’s the Risk?”

  1. anon says:

    April 8th, 2009 at 11:02 am

    actually, there already was a “run on the bank” in the US. it was a run on the money markets. the fact that the US indeed did survive is a testament to something…i’m not sure what, but whatever it is… it is positive.

    Here is Sen. Kanjorski’s recount of those fateful days last Sept. (ffw to 2:00 mark)…scary stuff.

    Does china have the same control/discipline/organization over their financial system that developed countries do? My thinking is “no.”

  2. anon says:

    April 8th, 2009 at 11:10 am

    sorry, just to add — what caused the “run on the banks” in the US was a lack of standardization with the way authorities were handling the crisis. Selective bailing out of Bear stearns and then allowing the failure of Lehman made investors second-guess whether or not their money was safe…after letting lehman fail, the US had taken, what seemed to be, an arbitrary stance towards ensuring safety (confidence). if the chinese banking system witnesses a similar run, its important that they act with uniformity and do whatever it takes to slow the process down.

  3. jaylifoto says:

    April 11th, 2009 at 9:59 pm

    well, the trillions bailout money owned to the public, in China’s case, was spent on public projects that will pay dividend; in US’s case, was given to bankers to line their(and shareholders) pocket.

    I would say the US is in much more risk.

    Also, the Chinese people, never experienced a collapsed state-owned bank, will have more faith in their banks.

  4. che says:

    May 4th, 2009 at 5:41 am

    what used to be the difference between US and China, is that Chinese banks are completely controlled by the Govt. If the Govt completely controls the banking system, how are the deposits of such banks not the liabilities of the Govt? Govt directs the funds from deposits into FA investments, and effect would be exactly the same if it borrowed money via the bond market. So 30% public debt figure in China is misleading at best. Given deposits at Big 4 banks are 22tn RMB (90% of GDP), de facto public debt in China is actually 120%. Now US is slowly moving into a direction of nationalization of its banking system, although i doubt that they will ever exert the same control of the system.