<<MOF DKJS>>
What about AG, Rubin & Co? -g-
While socialism is practiced in the US of A in the form of one bailout after another:
REAL capitalism is practiced in COMMUNIST China:
Bank Shots in China
Germany's Commerzbank caused something of a stir last week when an official said the bank was reducing its exposure to China in the wake of the collapse of Guangdong International Trust & Investment Corp. Gitic, as it is known, has been declared bankrupt with about $4.3 billion in outstanding loans, and the Chinese government announced last month that it did not intend to cover the losses. While a lot of foreign lenders have been quietly freaking out over the implications of Gitic's meltdown and the potential for similar debacles at other local government Itics, Commerzbank was refreshingly up front about it. In more ways than one.
Not only is Commerzbank curtailing its lending in China, management board member Jurgen Lemmer told a German newspaper. But since the Chinese government is not willing to back up loans, the bank plans to make sure that in future it does business only with partners it knows can repay their debts "without having to rely on the government's stamp."
We don't know exactly what was going through Mr. Lemmer's mind at the time. What it sounds like is that the moral hazard route having failed, an annoyed Commerzbank is now vowing to go back to responsible lending practices. Next time they will insist on collateral or proof of the borrower's ability to repay. Imagine that.
Global fund managers in Guangdong last week to survey the damage got confirmation of China's no-bailout policy. The province's vice governor, Wang Qishan, said that China was determined to burst the bubble of perverse incentives that affected both the behavior of foreign lenders and domestic enterprises accustomed to "riding free on government credit." In a statement issued through Morgan Stanley, Mr. Wang said that while his province would do what it could to sort out the Gitic mess, the investors were on a two-way street.
"Whoever gave birth to the child has to assume responsibility for the child," he said. "China is trying to enforce the principle of borrowing entities taking responsibility for their debt. . . . One clear message from Gitic was that investors would have to make investment decisions based on the merits of a company and market disciplines would be brought to bear."
Mr. Wang was most certainly correct to point out that once moral hazard has been removed from the equation, China's sovereign credit and indeed the entire atmosphere for investment there will be much healthier. For the time being, however, it appears that foreign investors are nowhere near the top of Beijing's list of concerns.
A new securities law that is supposed to come into effect in July is part of a bundle of reforms meant to attract foreign money--both to Chinese companies listed overseas and in general--by establishing regimes and regulations that offer transparency and other normal protections.
Yet it's clear that China's domestic market and domestic investors are the key concern today, as officials scramble to consolidate oversight of local banking practices and try to erect walls between domestic banks and the Itics and other iffy enterprises. Upsetting foreign lenders is bad, but Beijing has seen enough to calculate that many foreigners want to be in the China game so badly that they'll take any amount of pain and still come back. The tens of millions of ordinary Chinese who have put their money into banks and related enterprises are a different story. Scorch them, and you could have a revolution on your hands.
The go-go years for China investment are definitely over. But a hiatus may be just what everybody needs. With less foreign grease on the wheels, we may get a clearer picture of the state of health of the Chinese economy. And while foreigners wait on the sidelines, they will have time to absorb the lessons of the past few months, so as they make fresh forays into China, their money will be used most productively for all concerned.
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