Tuesday, June 24, 2008

The Head of the China Banking Regulatory Commission is full of it

Western governments must strengthen their oversight of financial markets and improve cross-border regulatory co-operation if they are to avoid future global financial crises, a senior Chinese banking regulator told the Financial Times on Tuesday.

"I feel the western consensus on the relation between the market and the government should be reviewed," said Liao Min, director-general and acting head of the general office of the China Banking Regulatory Commission....

The majority of China's financial sector is still owned by the state, and the government retains tight control over many aspects of the industry, including senior personnel decisions at the country's largest banks, insurers and brokerages.

Thanks to China's lack of integration with global financial markets as well as the cautious regulatory approach of the CBRC, Chinese banks have emerged relatively unscathed from the global credit crisis, which so far has caused nearly $380bn of losses at western financial institutions.

Just because you've "protected" your banks from investing in foreign assets doesn't make your financial system less backward. The big danger for Chinese banks is a crash in China, which would put at center stage the dusty artifact that is the Chinese financial system. Need I remind you of the Asian financial crisis, which while barely affecting China macroeconomically, caused a whole string of Chinese banks to collapse? What will happen to Chinese banks when the real crisis comes (and it will come)? Nomura and other Japanese banks had this same sort of dismissive attitude toward western banks in the 1980s, but then when the tide finally went out we all discovered that all the Japanese banks were swimming naked.

Want to know something cool about the "Western" financial system? Even though big investment banks have had their share of woes, commercial banks have been largely unscathed. The same cannot be said about Chinese commercial banks. As recently as 2003, Chinese commercial banks have gone bankrupt for routinely giving out bad loans. How fucking ignorant are you? Do you really think the Chinese financial system is of good health? When the People's Bank of China can't even keep domestic inflation in control without having to raise reserve requirements, because the money market for domestic treasuries is, to put it lightly, broken?

Having China lecture us about our financial system would be akin to Saudi Arabia lecturing us on the freedom of religion. It's really, truly, rich. Because idiots like Liao Min obviously have no clue how deeply dysfunctional the Chinese banking system is, I won't be able to help but show my schadenfreude when the house of tofu finally comes crumbling down.

The Chinese financial system is a relic. It is the number one risk facing China's long term growth. Time and time again, we've seen the importance of having healthy and flexible banking systems - the great depression was largely due to the collapse of the faulty banking sector, and the lingering lack of growth in Japan is most likely due to their continuing refusal to bring their financial system into the 21st century. It may not be this decade, but if China doesn't take the initiative to reform their brain dead banks now, the country will stagnate. And it won't be pretty.

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