Economics, Financial Services

The Chinese are coming … to a bank near you

It looks like China will literally be America’s banker. From the WSJ:

Giant banks owned by the Chinese government are coming to the U.S. The Federal Reserve on Wednesday approved plans by three state-backed Chinese banks to expand in the U.S., including the first acquisition of a U.S. retail-banking network by a state-owned Chinese lender.

The approval is a landmark step for U.S. banking regulators. Chinese banks long have sought access to the U.S. banking system in order to provide financing to Chinese companies operating overseas and to do business with foreign investors looking for exposure to the Chinese currency, the yuan. But they have been stymied in previous attempts by assorted delays and rejections.

The Federal Reserve effectively is giving its seal of approval to China’s bank-regulatory system, a big step for U.S. regulators given their past concerns about the adequacy of Chinese supervision of banks.

The decision could open the door to other Chinese takeovers of U.S. banks, although it is unlikely China will make significant inroads into the U.S. banking industry anytime soon.

In general, I am all for closer economic ties between the U.S. and China. They force Beijing to accept international norms and incrementally cede control of the economy from government to markets. They are normalizing in this sense.

But am I imagining things or have I not read numerous stories about how shaky the Chinese financial system is? This analysis from billionaire shortseller Jim Chanos is typical:

The banking system in China is extremely fragile, and that’s one of the messages we wanted to get to people.

In fact, because what happened the last two crises, in ’99 and ’04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over. Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which we’re short, those restructuring receivables are equal to over 100% of their tangible book. The Chinese banking system is built on quicksand, and that’s the one thing a lot of people don’t realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there’s liabilities against that.

Everybody seems to think it is a free and clear open checkbook. It’s not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system.

Indeed, the Agricultural Bank of China was one of the banks the Fed just approved. Or check out this review of Red Capitalism by The Economist:

Chinese banks were not, in the main, exposed to toxic Western debt and, perhaps more importantly, never adopted dangerous Western methods of hiding risks. But China’s own approach presents these problems in a different form.

To the extent that risk has been distributed, it is largely from state-controlled banks to other state entities in increasingly arcane ways. This distorts external perceptions of China’s solvency. State debt appears to be quite low by international standards (just under 20% of GDP) but when all government obligations are lumped together, the authors reckon it is actually 76%.

The bigger problem, though, is that the system trades almost entirely with itself. Critical information about liabilities and pricing is deliberately concealed or impossible to discern; there are no outside entities establishing prices by bidding in the market. That undermines efficient capital allocation and allows excesses to fester.

Many officials are aware of this, but conflicts of interest get in the way of resolving the problem. As the book details, the whole business of providing, receiving and regulating money involves one state entity or another. It may be in China’s overall interest for the system to open itself up, but doing so would pit the government against itself. That will not happen without commitment from those on top.

Now, it is one thing for a Chinese bank to open branches here or even buy a mid-sized bank … and to buy Wells Fargo or some such. And any merger approvals are far from a rubber stamp. As the WSJ story notes, “During the financial crisis, U.S. regulators rejected a bid by China Minsheng Banking Corp., a midsize lender, to buy San Francisco lender UCBH Holdings Inc., the holding company for United Commercial Bank. People familiar with the bid said U.S. regulators rejected it because of worries about Minsheng’s overall strength, risk-management, and anti-money-laundering procedures.”

But would Washington allow a merger or takeover, some day in the future, of a mega-bank so that China would own a “primary dealer” institution that the Fed runs monetary policy through?

One thought on “The Chinese are coming … to a bank near you

  1. Yeah, we don’t have enough banks, do we. Bring in some foreign commie banks with lots of phony assets on their books. Just abolish the Fed.

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