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 some experience dealing with banking regulators in Asia since doing time in Sing Singapore, but I must admit that the HKMA has really achieved a new level of annoying bureaucracy unrivalled 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 recently, 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 to 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.