Chinese banking liberalization: Time to invest in the walking dead
Nature abhors a vacuum. Financial vacuums are invariably filled by suckers, ideally greedy ones. When it comes to emerging markets, the greediest suckers are invariably western bankers. With all the poise and self-restraint of Homer Simpson faced with an ‘all you can eat buffet’ western banks have a rich history of leveraging their way into a smorgasbord of emerging markets and deleveraging their way towards bankruptcy on the way out. Just ask Barings. It wasn’t Nick Leeson who broke it originally. Rather a Bank of England consortium rescued Barings in 1890 after it bought too much South American debt...
Nearly a century later, western bankers masterminded their near downfall in the 1970’s, lending with leveraged gusto to emerging markets in South America (again!). Conventional banker ‘wisdom’ suggested sovereign nations couldn’t go bankrupt. When these countries simply didn’t bother repaying their loans: default felt eerily similar to “normal” bankruptcy...
Therefore emerging markets resemble banker catnip. Now western lenders are wildly excited about a brave new frontier: the Chinese is eager to open the banking market, welcoming foreign participation. In terms of poisoned chalices, this one comes with a gold plated ivory handled revolver attached.
The Chinese financial system is not looking pretty with domestic lending on the verge of crisis. Overall the broad brush of financial reform is long-term good but we can’t rely on the western banks to finesse their timing for the next cycle. Yes, the pure Communist delusion failed in China as spectacularly as elsewhere, as several millions starved by Mao would readily attest, if they weren’t already dead. Thus the long march to capitalism was undertaken with significant quasi-oxymoronic central planning and cautious incremental liberalization. 35 years later the Chinese economy dangles on a debt precipice.
China has enjoyed a marvelous economic growth phase giving it a serious opportunity to challenge western domination just as the old world has gone backwards, indulging divisive reactionary socialism once more. Thus we reach a situation where the Chinese are considering further bank deregulation. For instance, prescriptive interest rate caps on loans (which have created a bubble in alternative financing sources - peer to peer lending and other quasi-banking initiatives) are earmarked for removal. China also proposes encouraging new sources of capital from overseas. Naturally, the usual suspects, idiot western bankers, can only see upside. Besides they don’t have to worry about bankruptcy risks as they remain convinced moronic western governments will always bail the bankers out when it all goes pear shaped.
As brilliant Societe Generale analyst Albert Edwards has noted, the copper price is a key indicator in just how far removed from ‘pure’ banking Chinese borrowing has become. Remarkably high interest rates aimed at slowing growth have created opportunities for all manner of “carry trades” (based around borrowing against copper) which deliver cash to invest in high yielding Chinese private debt. It’s complex but the key point here is that the copper price has recently fallen off a cliff. In other words, there may be a credit contraction in China right now which isn’t apparent in the banks themselves (yet) but it is obvious if you consider copper prices alongside growing problems in peer to peer lending.
Moreover, the first Chinese corporate bond default of recent times took place the other week. Bonds rarely default in total isolation, preferring to do so in waves. China has been trying to rein in lending for some time so expect more. With market confidence fragile…what better time to open Chinese banking to intrepid westerners? Their track record is impeccable: vacuuming up any old rubbish late in the economic cycle and then retrenching back west, tails between their legs when the boom implodes across their balance sheet.
That said, will the Chinese economy now proceed to collapse with gusto and go through a long difficult deflationary cycle driven by the sort of policies which have left the EU/Japan stagnating? I doubt it. CLSA economist Russell Napier sapiently notes China will go the short sharp shock route: let the Yuan devalue then restart the whole credit cycle again…
However that leaves a massive caveat emptor above the Chinese market right now. Those who rush to exploit deregulation will be in the wrong place at the wrong time. Welcome to China, bankers! You too can buy the zombie loan portfolio of your dreams!
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.