China: Banks
Summary
According to the Financial Times (FT) of 24th January 2010, "...loans in the first two weeks of the year surged to an unprecedented RMB 1,100 (...US$160 bn...). At that rate loans would triple from last year's record, which at RMB 9,600 bn, was already double the level of 2008. Beijing this month started tweaking reserve requirements in an effort to cool things down."
An more recently everyone read that the "bad" banks - those who have been particularly enthusiastic lenders - had their reserve ratios increased by another 50 basis points, to 16.5%.
Well, do you buy or sell Chinese banks off the back of this news?
Topics Covered
- Growth worriers vs. growth warriors
- Questionable market reaction
- How to make & save money off this idea
Background
1. Growth worriers vs growth warriors
The growth worriers are the monetary policy makers. In particular we mean the Central Bank, the Peoples' Bank of China (PBOC), and the regulator, the China Banking Regulatory Commission (CSRC). These thinkers want to avoid the nasty consequences of too rapid a growth in money supply: inflation.
The growth warriors are those politicians in Beijing and at a grassroots township and county level. These "vote getters" want to avoid the nasty consequences of rising unemployment and lower payoffs...
It seems that for now, the growth worriers are winning the battle. Not only did the PBOC tighten reserve requirements a couple of weeks ago. According to said FT, "...the regulator has issued verbal 'guidance' to all banks, imposing lending quotas and warning the most aggressive lenders to temporarily halt loans, according to several banking executives."
2. Questionable market reaction
On 23rd January, markets took a route off the back of this lending news. The curious view of the market was that slower Chinese growth would imperil global growth. We are bemused by this view. China may have the land mass of America, and she may have 10x as many people as America does; however, her per capita incomes are one tenth of America's!
Where we can agree with the market's swoon is that China is one of many moving parts in the puzzle of a changing Economic Time®. There is the demise of Greek bonds, the fog on Capitol Hill about the future of American banks, and now China's diminished growth prospects lurk in the background... We, since last July, have been forecasting a market crash. I suppose that if you bleat long enough, what you have been bleating about will eventuate. So we will stick with our view that the global Economic Time is worsening, and that this is the crux of the matter as to why the market out look is worsening.
3. How to Make & Save Money Off This Idea
- Always consult your financial adviser first.
- Make money by shorting the Chinese stock market. I own such an ETF, FXP:US
- Save money by avoiding Chinese banks for now. With the regulator clamping down, and with the likelihood of many an already granted loan going sour, fear must exceed greed at this stage of the Economic Time®.
