The Chinese Financial System:
The phrase “Unsustainable actions continue until they don’t” is absolutely appropriate relative to the Chinese financial system. Analyses being published about China’s banking system and financial markets continue to highlight the irregularities that suggest that their banking system once again needs to be bailed out.
Th size of the current potential bailout being discussed is similar in size to the TARP that was passed by Congress in September of 2008 as our financial markets were collapsing. Although China’s banks do not appear to be in as bad of shape as our American banks were in 2008, they have very significant challenges and some may not be viable. Some of the facts that recently came out include the following:
- The state-controlled industrial firms that are the biggest borrowers of the biggest banks in China are earning a 4% return on their assets while the average bank lending rate is 5.6%. That is unsustainable.
- The amount of bad debt being held by the banks far exceeds the loan loss reserves of China’s banks;
- The small Chinese banks are the primary lenders to the small, private businesses in China. Yet the small banks are the ones that are having the greatest difficulty in being profitable. The Chinese Vice Premier recently instructed the large banks that they needed to increase their loans to small businesses by 30%. That is sort of like pushing on a wet noodle.
Chinese banks will probably need hundreds of billions of dollars in new capital by the 2020’s. Clearly, if it wasn’t for the fact that the Chinese government owns the majority of the big banks, that banking system would have already collapsed.
Eventually global currency traders will start factoring in the instability of the Chinese banking system. When that happens, the Chinese currency will become unstable and the resulting economic ripple effects will quickly move around the globe.
It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land.