Meanwhile in China

I am currently struggling with the Hong Kong banking regulator Hong Kong Monetary Authority (HKMA), and some days the frustration is simply overwhelming. I do have a lot of experience dealing with banking regulators in Asia since doing time in Sing Sing, but I must admit that HKMA has really achieved a new level of annoying bureaucracy unrivaled by any other regulator I have encountered. The most annoying thing about it is the way different banks are treated in a different way based on their origin. If you are Chinese, it seems anything goes. Yet, on a global level, I believe most observers will agree that the Chinese banks are among the most corrupt and suffer from exceedingly weak controls. In my opinion it is only a question of time before something blows up.

Reading some news today, it may be that this time is running out. The whole world has been watching with awe how quickly the Chinese capitalism has developed. Because ultimately there is a huge market of consumers there, the entire world is really looking away from all the things that are wrong with the place, and if anybody dares criticize them, the government basically threatens with trade difficulties. With the global economic crisis, this has worked wonderfully for the Chinese until now, and I believe will still do so for some time. Humans are greedy bastards.

Anyway, to help fuel this extremely rapid growth, lots of money is necessary and the Chinese banks have been handing out huge corporate loans. When you issue such loans, there are obviously certain capital requirements imposed on the banks to ensure that they don’t go under too fast when the debtors run in to financial trouble. These capital requirements are considerably less when doing bank to bank loans, given that the money simply transfers from one monetary institution to another. What the Chinese banks have been doing in order to reduce their capital requirements (because capital costs money), is to issue these corporate loans through a web of transactions in the Chinese interbank market, resulting in making them look like interbank loans. Basically they make corporate loans look like loans to other banks, setting aside less capital and making their balance sheets look much healthier than what they really are. The worst is that such loans are often made to borrowers considered too risky for the banks’ on-balance sheet lending areas. As per the most recent estimates available, there were something like $ 322 billion of such loans issued by June 2013, a figure likely to be considerably bigger now a year later.

Because the world is beginning notice this and express a bit of concern about it, I suppose the Chinese government has felt compelled to try and reassure the world. So, they have announced now some new rules that are a bit stricter on the capital requirements. However, the new rules do not specifically ask the banks to treat these shadow loans the same as corporate loans, and so they are effectively saving the banks from having to increase the amount of capital reserves they set aside. Essentially they have done nothing, and the financial situation in China can continue to degenerate while the world continues with its short term goals. Personally I am extremely concerned about where this is going since much of the global economic recuperation since 2008 is the result of the booming economy in China. If that was to come crashing down again, then the Asian crisis seen in the end of the 90’s will seem like an itch in the nose, and the global crisis of 2008 as a sneeze, whereas this new crisis will be a fully-fledged influenza.

While this is happening, HKMA are making us go through so many controls, audits, reports, check lists over and over again in order to allow us to switch the clients there to our new eBanking solution. The new eBanking is considerably more secure than the old one, and has been in production in all our other locations around the world since 6 months now, but not in Hong Kong…

So they found a way to give loans to people or companies that don't qualify for them. Sounds like the housing crisis from a few years ago.

I simply don't understand why the United States relies on china like we do. I would rather setup shop in India. If the US government was smart they would just begin moving business away from China. That would really put the hurts on the government, and really get the Chinese to act right.

Also aren't those intra-bank loans supposed to be just for a few days? This sounds like the loans are going to be for a significant amount of time.

It's all a cover up to provide corporate loans without providing the normal guarantees. If there is a slump in their economy it is really going to hurt a lot of people.

About India, I would tend to agree with you. The problem is that a country that big with that size of a population is difficult to run if you don't have a dominating government. India is a bit shaky right now because of the change in government, and it still sorely lacks a lot of structure. But there are some very good investment options there though.

Yeah I see india as a long term investment. I know they could never go what the chinease are doing overnight, but slowly moving to them would really help a ton.