China: Land of opaque policy and lurking dangers

While the US markets collapse around me, my mind has drifted as it often does to China. What impact will financial chaos in the US have on China? What opportunities may there be for Chinese companies to buy cheap American assets? How is the Chinese Communist Party responding? As is often the case, due to my inability to speak a useful second language, I turn to China Daily.

Bad US debt is at the very least having an impact. As it turns out 3 Chinese banks hold $297m in Lehman debt. I can only imagine that the number presented there is a fraction of the actual amount held by all Chinese banks. What really concerns me is that if the developed world’s banks don’t seem to have a clue how much of this bad debt they hold, what is the situation like in China? Banking regulation has always been lax. Political incentives to show good results are strong. If rich world banks are going bankrupt there must at least be mounting stress on Chinese banks. While continuing to accumulate bad debt, and receiving finance through other channels may make the system seem solid, it only postpones and increases the pain of the future adjustment. We are having enough problems sorting out the problem in the West where we at least claim to have a transparent system. I can’t imagine the situation in China will be easier to sort out.

Beyond specific firms having trouble, China is having general market problems too! They have reduced their tax on buying shares to zero, while maintaining a .1% tax on the sale of shares. All of this is done in the name of stabilizing markets. Still, imposing a greater cost to sell than to buy seems to be setting the markets up to be overvalued. Government intervention in the form of regulation is one thing, but this smacks of overt manipulation of the market to me. In the end, it may simply result in an even greater bubble if the strategy doesn’t outlast the current economic problems…catastrophe.

Moving to a more direct form of intervention, the Central Huijin Investment Co Ltd, an investment arm of the Chinese government, said Thursday it would buy the shares of three major Chinese lenders on the secondary market to shore up their share prices amid stock market slumps. I guess I can’t say too much here. The Chinese are doing more or less what the Americans are, but their government is actually running a budget surplus. Still, this demonstrates that the problems facing the global economy are much more far reaching than simply the developed world.

If US demand crashes either because of rising interest rates, or declining consumption due to other factors, China will be in trouble. If at the same time, China is having its own banking/financial crisis, this could increase the damage even more. At least China is sitting on a mass of cash and oil prices are going down, so maybe things won’t be as bad for them as for us.

Watch this space. Market crises in the age of globalization have spread fast, and been devastating. This time, the epicenters are the biggest economies in the world instead of the fringe players. The shock will be harder, and there will be fewer (no?) resources to bail us out. Can you imagine the US taking a loan from the IMF? At least OPEC has money…