(Credit) Crunch Time

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It is not all that long ago that the big credit crunch banks were being lambasted in some quarters for their plans to invest heavily in Chinese banks, and that at least one pundit was predicting “The Coming Collapse of China”. How things change! Now it is the titans of Wall Street and the City that have faced collapse, and western government intervention that has saved (we hope!) the financial system. Today’s Telegraph carries a nice quote from Martin Sorrell, Chief Executive of WPP:

    “This [rescue] is a form of state directed capitalism which is more akin to the Chinese model than it is to our own.”

    Indeed, it was never in much doubt that the Chinese would bail out their own banking system in the event of a crisis – and they did when faced with triangular debts (the model for our own, latest crash?) and non-performing loans (NPLs) via the set up of the asset management companies (AMCs) and Central Huijin.

    Back in 2005, the BBC highlighted the risks of international banks like RBS investing into Chinese banks like Bank of China:

    “…experts have warned that Western banks risk exposing themselves to China’s bad debt problems accumulated after years of state-controlled lending.”

In the same year came this from, the Institutional Risk Analyst:

    “[Sol] Sander’s summarizes China’s economic outlook: “China’s economy is like the old burlesque comedian with a loose string when pulled disintegrates his suit. That a crash is coming is gospel for many China watchers. At dispute is when, which trigger, how big, the political fallout, and how and when economic growth recommences.””

We could go on…

Of course China’s system is not without risks of its own. Chinese banks, the government, and other investors have lost money at home and abroad during the global crash, there has been inflationary pressure, worry over export growth, and concerns over corporate governance and other issues remain. But sometimes the long-term view the Chinese government can afford to take, combined with the high level of control it still exerts over the economy, can provide (admittedly undemocratic) advantages not enjoyed in London or Washington (or Reykjavik!).

SFGate points to a Reuters article suggesting China, as it has avoided many of the problems, could be part of the solution:

    “…”[s]peculation is swirling that China, with U.S. bonds making up the lion’s share of its $1.81 trillion in foreign-exchange reserves, the world’s biggest stockpile, could have a role to play in any globally coordinated response to the global banking crisis”.

    … In China, a financial-news newspaper associated with People’s Daily, a national newssheet, “…quoted Liu Yuhui, an economist at the Chinese Academy of Social Sciences, as saying the Chinese government was on the horns of a dilemma.” Liu was quoted as saying: “If China does not participate in the U.S. bailout plan, and that causes the financial crises to sweep over the real U.S. economy, then the damage to China will certainly be very great….China’s bind is that, if the Chinese government actively participates in the U.S. bailout plan, that will mean the government assumes some of the bailout risk. If the bailout plan is aborted, China may be dragged in even deeper.”

    For now, China’s foreign ministry has emphasized, “China’s main contribution in the face of the current uncertainty is to ensure that it keeps growing quite fast.” ”

So what action will China take? The always well-informed Caijing magazine has the following take on the situation:

    “The response from China’s policy makers to the unprecedented events unfolding in global financial markets in the last week or so has been fast and decisive. In fact, in times of global turmoil, Chinese government officials have always been willing and able to enact strong countercyclical measures. A similar phenomenon is at work in the current cycle.”

China also took (what looks like rather clever) pre-emptive action to reduce its reliance on export-driven growth by developing domestic consumption. Whatever China does next, across a whole range of economic, investment and trade policies, a lot of people will take note.

3 Responses to “(Credit) Crunch Time”

  1. Archive » Don’t Quote Me (On the Financial Markets)| China Business Blog Says:

    […] (Credit) Crunch Time October 14, […]

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  3. China Journal : Best of the China Blogs: October 15 Says:

    […] banks have been relatively insulated from the credit crisis, but could be part of the solution. Also, China’s banking regulator gave the world a quote that seems appropriate after last […]

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