this is exactly what you have been saying for awhile about the chinese banking system.
Euphoria, Meltdown and China's Economy
Apr 30, 2004
Summary
New lending policies in China are triggering a fundamental rethinking of the stability of the Chinese economy. This time no amount of damage control can hide the fact that the myth of the Chinese economic miracle is finally -- and perhaps fatally -- breaking apart
...
To understand China's problems, it is necessary to look at the structure -- and failures -- of other Asian economies. We have already seen two major systemic crackups in Asia during this generation. Japan went from being an economic superpower that was predicted to dominate the global economy in the 21st century to an economic cripple during the early 1990s. East and Southeast Asia, excluding China, similarly passed from economic miracles to economic catastrophes in 1997. In both cases, the striking characteristic was the speed at which overblown Western expectations turned into disappointment. It is our view that China, which got started later than other Asian economies, is on course to be the third Asian meltdown in this generation. The euphoria about China until very recently -- and China's assiduous attempts to stoke expectations -- tracks with what happened in the rest of Asia.
The core problem in Asia -- a problem that the Chinese government is trying to address belatedly -- is that its banking systems do not allocate capital based on market forces. Loan decisions are made out of political and social considerations, and real interest rates vary depending on these relationships. Long-term business relationships in Asia receive favorable treatment from banks regardless of the actual business case to be made for a loan.
Of equal importance, these are debt rather than equity driven economies. The major source of financing does not come from sale of shares in businesses, but from direct loans. There are two reasons for this. The legal structure of Asian corporations gives limited rights and protections to shareholders, who do not collectively control corporate boards. Therefore, maximizing shareholder value is not a driving consideration. It also means that a core measure of economic performance -- the rate of return on capital -- is not a critical variable.
stratfor.com |
