JTC, here's an opinion I'm sure you'll agree with:
Global Intelligence Update
Red Alert
August 19, 1998
Japan and China Brace for New Banking Crises
According to Agence France Presse, Taku Yamasaki, a senior official of the
Japanese ruling Liberal Democratic Party, told Indonesia's President on
Tuesday that Japan's economy would face its "most serious crisis" within a
week. The story was also carried by the Japanese Kyodo and Jiji news
services. While Yamasaki did not specify what crisis was brewing, he is
quoted as having said that "I contacted very important persons in the
Japanese government, and they said that they decided not to let ailing
major banks go bankrupt to avoid negatively influencing the economic
situation in the world, especially in Asia." An obvious inference to be
drawn is that some major Japanese banks will be facing a major cash flow
problem next week and may be unable to meet obligations. If this is the
case, the Japanese government is sending out a signal in financially
devastated Indonesia, telling the rest of Asia that the Japanese government
is prepared to bail out the banks, preventing bankruptcy.
Yamasaki's reassurance in anticipation of a crisis that has not yet
surfaced is more chilling than calming. Clearly, senior officials in the
Japanese government are aware of an impending crisis of substantial
proportions, such as the bankruptcy of some of Japan's major banking
institutions, and are trying to soften the shock. This is not the usual
Japanese style. Denial until the last possible moment has been the normal
operating procedure in Japan. Yamasaki appears to be trying to do damage
control in the ASEAN countries, attempting to reassure them and to limit
the effects of the crisis. As economic crises have become the norm in
Japan, Yamasaki's unusual warning indicates that Japan is facing a new
crisis of truly impressive magnitude.
Perhaps part of Japan's concerns were events in China. On Monday, China's
Ministry of Finance announced that they were issuing 270 million yuan
(about $32 billion at the official rate) worth of special, 30-year, yuan-
denominated bonds, carrying an annual coupon of 7.2 percent. The purpose
of these bonds was to supply capital to the Industrial and Commercial Bank
of China, the Agricultural Bank of China, the Construction Bank of China,
and the Bank of China. The bonds were not to be sold to the general
public. Wang Wuhong, a Finance Ministry spokesman, pointed out that the
Ministry could not guarantee that the bond issue will enable the four banks
to meet the eight percent capital adequacy ratio set by the International
Bank of Settlements. According to Agence France Presse, these banks had
capital bases of four to five percent and at least 25 percent of their
loans were non-performing. The banks are also being pressured by the
government to write off bad loans, which involves foreclosure and other
aggressive collection efforts. As in other Asian countries, this action is
difficult to execute because of political and social implications.
At the same time, the People's Bank of China issued a circular urging all
banks to separate themselves from non-financial entities they owned. This
is a crucial step in saving the banking system, since there is a tendency
to support unprofitable linked businesses with favorable loans that are not
economically justified. This linkage between banks and non-financial
businesses has been a key element in the Asian meltdown, since banks'
irrational lending practices have undermined their stability. Of course,
this circular comes about five years too late. With a conservative count
of 25 percent non-performing loans, the damage has already been done.
Not surprisingly, China's Xinhua News Agency reported that Beijing banks
reported a 121.7 percent rise in sales of foreign currencies in the first
half of this year. Thus, we have the key elements of the Asian economic
crisis now clearly in view in China. First, Chinese banks cannot meet the
minimal IBS standards, even with massive infusions of capital. Second,
their non-performing loans stand at 25 percent. Third, the government is
trying, far too late, to get banks to sell off capital-draining assets.
Fourth, the government is trying to get banks to write off bad loans.
Finally, the price of the yuan is kept stable while the public is buying
foreign currency.
The Japanese and the Chinese are tied together now. If the Chinese were to
devalue suddenly, economies throughout Asia, including Japan, would be
devastated. If the Japanese weakened any further, the Chinese would be
forced to devalue. China has been warning Japan about this for the past
few weeks. The Japanese can hear the creaking sounds of China buckling
under the strain. The Chinese see an uncontrolled plummet in Japan's
economy, and are scrambling to do damage control, albeit too little and
much too late.
We believe that the next two weeks will be critical in the Asian crisis.
Japanese banks seem about to break. The Japanese government is going to
forced to save them. They will need to borrow money on the international
market to do so. That means that they will need to strengthen the yen. Of
course, strengthening the yen involves selling dollars, which undermines
their ability to borrow money. The pressure on China will increase. China
is trying to get its house in order, hoping to stabilize its banks in
anticipation of the crunch. Of course, their own banking crisis is far
greater than a $30 billion bond issue can handle.
A question arises: the Chinese have been defending the yuan with currency
controls. If Japan is facing its "most serious crisis" yet next week, is
there any way they can navigate through the treacherous waters without
imposing some sort of currency controls of their own? Given the magnitude
of their problems and their unwillingness to impose genuine, wrenching
controls, we are beginning to wonder if there is any way out, short of such
controls. And with the two largest Asian economies having controlled
currencies, what other Asian countries would follow suit? We note that
Yamasaki was in Indonesia when he made his dire prediction. Even if the
Japanese decide not to impose currency controls, the mere threat should
achieve what Japan wants most -- an American solution. The U.S. is
committed to the current monetary arrangements. If Yamasaki's crisis is as
serious as he is implying, the threat may not be as farfetched in a week as
it seems today.
That is speculation. What is not speculation is that the Japanese are
worried about something, or at least want the world to think they are
worried. We think it is a combination of a Chinese banking crisis and
Japanese bank bankruptcies, converging on each other. And that is a
radical event requiring radical solutions that leave Japan's internal
social and political arrangements intact. We are open to other
suggestions, but Japan does not seem to have many options.
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