Really Bad Banks in China, Continued

Last May I wrote an article for Seeking Alpha called “Really Bad Banks”. The article was about the Chinese Asset Management Corporations (AMCs). These are basically repositories for toxic assets from the 1999 to 2001 recession. Well, they are still there.

In theory, or at least according to the Wall Street Journal, these AMCs got rid of their toxic assets a long time ago at 20 cents on the dollar, which I find wildly optimistic. Bondholders of some recent meltdowns have been lucky to receive 3 cents on the dollar. Whatever the number is makes little difference. The toxic assets were ‘sold’ to the AMCs by China’s four major banks in exchange for bonds valued at the full face value of the loans. These bonds are still on the books of the banks at face value even though their real value is probably a small fraction of face.

Well the bonds are coming due. Rather than solve the problem, the WSJ reported that they are just being rolled over. According to the WSJ, the Ministry of Finance has made noises about helping "provide support" in paying interest on the bonds, in essence a government guarantee, hardly surprising in this era of government guarantees.

That’s not the problem. The problem is that these AMC bonds are potentially a big hole in the bank’s balance sheets, half of the “net assets” and nothing has been done to fix it for the past ten years. I wrote first about these things in my book, Investing in China, in Chapter 3. Although Investing was published in 2002, the predictions are still accurate.

No doubt the present $1.2 trillion stimulus package in the form of loans from the banks will create a new a new crop of toxic assets, which will undoubtedly still be on the bank books in another ten years. Along with many other issues, the inevitable result will be slower growth for China.

Comments

[bluesky123:]

This is what I love about America. An article like this could never appear in China. Transparency is what moves a society forward. Not hiding the shadows. More transparency please. Let the battle of ideas for America's future begin. Let the best ideas win. Let the creativity in America be unleashed and let's build America into a powerhouse again. I don't think we can do this. I know we can do this. We have the best creativity in the world and when we're on our A game, we're unstoppable. Time to raise ourselves from sleeping off the latest drunk stupor on the park bench. That time is now over. It is now time to bring the A game.

Sep 23 02:18 PM

[William Gamble:]

Markets are about one thing choice. To make a good choice you need information. To get timely, complete, and accurate information you need free speech.

Sep 24 09:14 AM

[mna:]

You're absolutely wrong about that. Articles like this can and do appear in the media frequently in China. Goes to show how prejudiced everyone is already towards China. Agree with the rest of the post though.


On Sep 23 02:18 PM bluesky123 wrote:

> This is what I love about America. An article like this could never
> appear in China. Transparency is what moves a society forward. Not
> hiding the shadows. More transparency please. Let the battle of ideas
> for America's future begin. Let the best ideas win. Let the creativity
> in America be unleashed and let's build America into a powerhouse
> again. I don't think we can do this. I know we can do this. We have
> the best creativity in the world and when we're on our A game, we're
> unstoppable. Time to raise ourselves from sleeping off the latest
> drunk stupor on the park bench. That time is now over. It is now
> time to bring the A game.

Sep 24 01:47 PM

[William Gamble:]

mna
Agreed. It is a matter of degree. Information has value. If there is an sufficient economic incentive to provide false, late, or incomplete information and insufficient legal disincentives, then people will provide false, late or incomplete information as Bernie Madoff proved.

The difference in China is not about prejudice. Information is questionable because of the size and growth of the state owned industries, which represents a conflict. Governments everywhere do not force themselves to tell the truth. Also if information is not protected, then the legal disincentives are reduced increasing the probability that the people who have the information will not provide it to the markets

Sep 25 11:02 AM