The China Perspective posted the following comment
Although we feel there are a lot of great companies in China, ICBC along with the other mahor bank would not be on our list. As mentioned above the rampant corruption along with banks lending habbits make this a risky bet.
With that said when you consider how bad shape these banks were in five or ten years ago and see the enormous amount of progress that they have made, who knows what another tens years might bring....
My response is as follows:
First, the reality is that no one knows how much progress Chinese banks have made in the past five or ten years. In the United States at present there is some discussion as to whether the present administration has been completely honest in the conduct of its policy in Iraq. The United States is a long standing democracy with free speech, investigative reporters and a fiercely competitive media, to say nothing of internet bloggers. Even with all of these safeguards in place, we often find that public officials and managers of companies are sometimes not willing to tell us the whole truth.
In contrast China is a single party state where all speech is restricted. During the SARs epidemic the editor of the Guangdong magazine Southern Weekend who broke the SARs story was replaced by the person who covered it up. If the Chinese are willing to cover up a loathsome disease with global epidemic proportions, what else are they willing to hide?
In this morning’s Financial Times, Mr. George Sanders points out that Chinese statisticians “accumulate all the necessary numbers less than three weeks after the end of the quarter…and publish the report of of a $15.3 bn trade surplus for September, just 12 days after the end of the period.” It takes the US and Canada six weeks to publish similar data. Mr. Sanders concludes that “every financial statistic that flows out of China is pure fiction.” A market economy is about choice. To make an good choice or an efficient investment you need accurate and timely information, to get accurate and timely information you need free speech.
In 2000 the Chinese government made a bid splash by saying that they would solve the bad debt problem. They recapitalized the banks and moved all of the bad debt to asset management corporations (AMCs) in exchange for notes at face that paid interest, even though the bad debts probably were worth 2 cents on the dollar. (see my the chapter in my book on GITIC)
The AMCs were supposed to liquidate the debts and then themselves. Six years later they probably have not liquidated anything. Lonestar, the American company interested in distress debt closed its office in Beijing, because the Chinese were unwilling to get rid of the debt at anything close to a reasonable price. Instead the AMCs have been trading among themselves and now want to be investment banks! The bad loans and the notes are still on the books of Chinese banks.
Earnest and Young estimated earlier this year that the bad debts in the banks were about $358 bn and there was another $600bn bad debts within the financial system. I personally believe that then bad debts are well over a trillion dollars, because there is no way to collect a debt in China. Defaults on car loans are over one third and the Chinese supreme court ruled that you cannot foreclose a mortgage on residential property.
In 1999 the head of the state bank said that there were not going to be any more “free lunches” yet six years later there are still problems. The biggest one is that the management of the state banks is still the same. So although there has been some massive restructuring, or so we are told, the same people who caused the problem are still running the show. (see my 2003 article in Harvard International Review and comparison between ICICI and CCB last December)
Also according to the Chinese they reduced bad loans from 30% down to 5%^ in less than two years. It took Sweden, Japan, India and most of Asia about 10 years to reduce bad debts of about 10% to around 3%. The US took at least five. With no bankruptcy law, bad documentation and protective courts, the Chinese number is totally suspect.
If it was possible for a bank from the developed world to purchase 100% or a controlling interest in a Chinese bank and if the government regulator was free and independent, it might be possible to make money investing in a Chinese bank. But these things are not in the cards.
What is in the cards is the $ 40 bn of investors money available for Chinese banking employees to gamble away in Macao like the $1.5 bn which was embezzled in the past few years.
