my theory is that bank consolidation is occuring between China and the US so that the american DI's get chinese deposits and chinese DI's get access to cheaper financing, wider markets etc.
in essence, we can build a privately-run DI conduit between China and the US to refi the next US bubble and get the world moving along again.
The comment is below:
The purpose of this essay is to get to the real themes in China and analyze them, without any national origin or ideological bias, to determine the best course of action for private market participants.
The broader conflict is ideological, between the United States model of capitalist enterprise in a democratic framework and the Chinese model. The Chinese economic model in practice today is a mix of state owned enterprises and private enterprises with statutory limitations on private participation in the economy. The political model is one where there’s internal accountability within the Communist Party but without a robust wider accountability to the general public through free elections.
The broader conflict has several themes, and the main ones are:
1) Privatization and liberalization of the commercial banking sector
2) Privatization and liberalization of state owned enterprises
Disagreement over the above two themes leads to another theme of economic conflict:
3) Trade imbalances between the United States and China, with the focus on exchange rate imbalances
4) The trade issue can easily lead to a major escalated conflict in the diplomatic and military spheres.
1) State owned Commercial Banks:
Banking sector reforms are the main theme in China. Allowing purchase of controlling stakes in China’s banks by foreign strategic investors is the source of disagreement between the Communist Party and the United States. Since 2006, China Banking Regulatory Commission has liberalized the banking sector and allowed strategic investors to acquire stakes in China’s small and medium sized banks without a cap. The four largest state owned banks have a 20% limit on individual investor stake and an overall 25% limit on foreign investment.
2) State Owned Enterprises:
Reform of the state owned enterprises to ensure a level playing field with private companies and allowing foreign investment in those enterprises is a source of disagreement.
Implications of a Hard Landing:
If there’s a hard landing in the Chinese economy, that’s an opportunity for foreign banks to consolidate their stakes in the local banks and local corporations.
Current Policy Direction:
The Communist Party’s policies are to ensure that there’s no hard landing and emerge from this crisis as they did after the East Asian crisis of 1997. The Communist Party is propping up the export sector with continued exchange rate interventions and a massive fiscal stimulus to stimulate local demand. If this policy is continued successfully, the current structure of the big four banks and the state owned enterprises will survive the on going credit crisis.
The United States intention appears to be to disrupt the continuation of that structure. In an ideal world China will do as this World Bank quarterly report suggests. They will liberalize and open up the banking and other sectors for foreign investment. Then they will correct the exchange rate imbalance. This will ensure the collapse of the export sector and the banking sector that has exposure to the export firms. Insolvent banks will be ‘resolved in an orderly manner’, and the wording indicates that that manner is the opposite of that prescribed for the likes of Goldman Sachs, Citigroup, AIG, etc.
Once the export sector comes to a standstill and the banking sector collapses, the liberalized system advocated will allow a few foreign banks to buy up almost all of the banking sector in China.
I don’t think that the Communist Party is going to listen to this. That takes the conflict to the next stage, which is basically a trade war.
China’s exports are composed of 50% to other emerging markets, and the share of exports to the US is not as high as it’s made out to be. Sanctions or import restrictions from the United States will mean that China’s export sector will continue with exports to other countries. Combined with a large fiscal stimulus and continued exchange rate interventions on the consuming currencies, once again the Communist Party will succeed in maintaining their rule.
To meaningfully enforce a trade embargo, the US has to blockade China’s Eastern Coast, since most of the exports are by sea. Setting up bases in countries like Thailand (Gulf of Thailand and South China Sea Blockade), Taiwan (East China Sea blockade), Sri Lanka (Indian Ocean blockade) and various other scenarios need to be considered for that.
The other way to enforce a trade embargo would have been to sanction against petroleum supplies to China. Through bilateral agreements and the oil pipelines from Kazakhstan and the planned one from Myanmar, China has ensured that petroleum supplies will continue.
However it’s not possible to fully evaluate a trade war against China in isolation. There are diplomatic and military consequences of a global nature to that.
The ongoing crisis can only end if there’s a diplomatic resolution to the question of ownership of China’s banking sector in between, which will possibly avert escalation to a full trade war.
Again, around the world, there are several such considerations to be resolved, and it’s not possible to evaluate the entire global crisis without looking at all of them.
Though Roubini’s prediction of a hard landing in China is not based on any sound economic reasoning, a hard landing in China is a strategic intention of US policy, and it is made more likely due to that intention being there.
What I would conclude from this analysis from a private investment perspective is that it makes sense to make cautious investments in stocks of Citigroup, Bank of America, Goldman Sachs, AIG, etc since the powerful Washington policy establishment is providing selective support to those entities as opposed to others.
