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Saving Beijing’s Bacon
The Chinese banks have arrived in the US. Today, they are not only lending the US Treasury money by purchasing Treasury Bills, but they’re now also lending American businesses money. The Chinese banks are here and they’re ready to lend. And apparently, as reported by the Financial Times, they are as strong—or stronger—than many of the biggest US banks:
The increased syndicated lending by Chinese banks comes as their balance sheets compare favourably with US counterparts. Standard & Poor’s last year upgraded the long term credit ratings of Bank of China and China Construction Bank from A- to A. The credit rating agency maintained the rating of Industrial and Commercial Bank of China (ICBC) at A. At the same time, the long-term credit ratings of Bank of America, Citigroup and Goldman Sachs were cut to A-.
What does this mean for US businesses? It depends upon the business.
At the moment, the Chinese banks, whether it’s the Bank of China, the Bank of Asia, Industrial and Commercial Bank of China, Chinese Construction Bank, or others, are all lending money to corporate America. We can all recognize the names—Walt Disney, Caterpillar, Walmart, UPS, Tiffany, Pfizer, Dell, and many more—but do we recognize the reason why?
Why lend to US firms?
Why should Chinese banks want to lend money to American firms? After all, isn’t the Chinese economy so much healthier than ours? Why lend to American firms when you can put your money to work with much more profitable and healthy Chinese firms? And per Standard & Poor’s ratings, Chinese banks are stronger than our own.
More to the point, why not lend more money—i.e. inject more liquidity—into the Chinese economy rather than in that of the US? The Chinese economy is challenging our own; at least I recall so many news reports telling me so.
Does corporate America need more cash? No, that can’t be it. US firms are sitting on more the $1.7 trillion in cash. How about liquidity? Same deal. Remember, the Federal Reserve’s quantitative easing programs have put more than enough money into the banks and corporations, lifting stock prices back up to 5-year highs. That translates to hundreds billions of dollars in extra liquidity for corporate America.
Another good question is why would we let Chinese banks compete against US banks? Where is the benefit for US banks? The best answer is that there are no more US banks in the old meaning of the term. Those huge US banks are now transnational entities with little or no use for quaint ideas like belonging to or being part of a specific national identity. That’s just too limiting for a Citibank or a Goldman Sachs.
Maybe it’s because US banks aren’t lending the way they used to. Unlike cash-flush US banks that don’t have to lend if they don’t want to, Chinese banks are forced by the Chinese government to lend money whether they want to or not.
Why is this important? Because in China, where economic statistics and reality are never in the same room together, banks are compelled to lend money to anyone with any kind of connection to the government, that is, the Communist Party. Heck, a borrower can be on the verge of bankruptcy and not even own the collateral he’s putting for the loan and still get funded.
Squaring away Triangular debt?
Qualifying for a loan in China is like getting invited to a nice dinner party in Beverly Hills; it’s all about who you know. In fact, China now is feeling the deepening pain from something called “triangular debt.” That’s where Company A owes money to Company B, who owes money to Company C, who owes money to Company A. Everyone owes money to everyone else, and as the economy slows down—which it is—no one is paying anyone back any money.
The solution? Compel banks to make more loans to keep the economy afloat by adding liquidity into it. It’s easy to do. China prints more yuan to keep the exchange rate stable or devalued relative to the dollar, and has the banks lend the money out. Does that sound vaguely familiar?
The problem is, as I mentioned above, business statistics, like almost all statistics in China, have nothing to do with reality; they are virtually worthless. Consequently, the loans made to them will be also. But wait; if loans to Chinese businesses issued by Chinese banks are on the verge of collapsing—which they are—then why are Chinese banks rated so highly?
How can Standard & Poor’s overlook such portfolio risks? Perhaps a better question might be how can they not? They’ve done it before, haven’t they?
It may not really matter what rating Standard & Poor’s gives Chinese banks. In the end, it won’t change things by even one length of chopstick. The Chinese most certainly understand the nature of their system and it’s condition; and I imagine that in closed-door meetings where it is openly discussed, it must scare the hell out of them.
Looking for the real thing
This would explain the desire of Chinese banks to lend to corporate America.
Unlike the knock-offs for which Chinese firms are notoriously famous, the Chinese banks can’t afford to be lending money for imitation profits. They want the real thing.
It’s certainly no exaggeration to say that US businesses are much more transparent than Chinese firms; they have no choice but to be so. Not saying there isn’t a fudge factor here and there, and certainly not denying that accounting is a sick science any way you look at it. But still, by and large, US corporate balance sheets have to be based in reality; profits must exist to be called profits, otherwise share prices fall and heads roll.
From this point of view, one question keeps coming back to me. Are Chinese banks helping US businesses; or are US businesses saving Chinese banks?
And those are…The Gorrie Details.