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.