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China Intervenes to Shore Up Banks: What Next?

The global financial hurricane has hit China. Declining investor confidence in Chinese banks forced the government to buy bank stock in order to maintain stability. Rapid inflation, a growing housing bubble, and increasing integration with the global economic market mean that China can’t escape the global crisis. From the Wall Street Journal:

China’s sovereign-wealth fund stepped in Monday to buy shares of the country’s battered banks, which have been caught in a selloff that analysts say reflects a broader loss of trust in the integrity of corporate earnings and government statistics.

The skepticism of investors comes as China has become increasingly exposed to global markets, largely through stock listings of its state-owned enterprises and other companies, but more recently through its currency and bonds, which are now traded in Hong Kong.

Although the background is different, in both China and Europe one issue is trust.  Europeans tried to conceal the problems in their banking systems; in China the questions have to do with the accuracy of government statistics.  Once investors lose confidence in the information they have, sentiment can move quickly: the absence of good information can cause investors to jump to excessively pessimistic conclusions.

China’s remarkable growth and its integration into the world market has propelled its policymakers into uncharted waters.  It seems likely that many years of unbroken prosperity combined with local government interference in credit decisions have led to a rickety credit structure whose problems cannot be easily understood — or fixed.  As long as the boom continues, those problems are more hypothetical than real.  When growth is at ten percent even the riskiest loans have a way of working out.  But any change to China’s growth forecast could have startling and dramatic implications for the banking sector.  Stay tuned.

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  • Jim.

    The Chinese practice of fudging government statistics allegedly dates back to Great Leap Forward. If petty bureaucrats found that their Leaps were long or high enough to match top-level plans, it was easier to make up happy numbers than to face the consequences of honesty.

    I’m curious whether the form of Christianity now taking root in China is either widespread enough or Puritanical enough that it will make a difference here. Certainly, any organized effort to get people to be scrupulously honest is an aid in times like these. Efforts backed up by Omniscience and hellfire are markedly more effective even than the efforts based on the mere mouth of a gun.

    “For heathen heart that puts her trust
    In reeking tube and iron shard—
    All valiant dust that builds on dust,
    And guarding calls not Thee to guard.
    For frantic boast and foolish word,
    Thy Mercy on Thy People, Lord!”

    This is just as applicable in economic situations as in military ones, it seems. Perhaps moreso. And just as applicable in the Eurozone or US as in China.

  • play nice

    The ChiComs are liars? Go figure.

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