Thoughts on China's Insolvent State Banks

May 10, 2010 4:01 AM ETFXI, PGJ20 Comments
William Gamble profile picture
William Gamble

How do you define a bad investment? Perhaps the best definition has to do with the relationship between risk and reward. We are seeing -- in a very dynamic way -- this tug of war being carried out in Greece. Government bonds are by definition guaranteed by a sovereign entity, so should be risk free. At least that is the basic idea as far as US Treasuries are concerned. Of course no sovereign entity can go bankrupt and court orders are generally ineffective methods of enforcement, so the use of law to limit risk does not generally apply to these types of investments.

One of the reasons why investors lost money on the Greek bonds has to do with the promoter of the issue. Greek bonds were obviously sold by the Greek government whose incentives are not just those of profit and loss. The Greek government does not have to worry about balancing its books, because in theory it has the power to tax people in sufficient amounts to pay off debtors. But that is exactly the problem. The Greek government is loath to enforce taxes against its tax dodging citizens to benefit creditors, for the very solid reason that if it does so, soon there will be a different Greek government. Since Greece is a sovereign state, unlike a normal debtor it cannot go out of business nor can it restructure in bankruptcy. Worse-- as a member of the European Union and the eurozone, there is the moral hazard that its financial profligacy will not fall on its own taxpayers, but the taxpayers of other countries.

The Agricultural Bank of China [ABC] is one of China’s big four banks. Along with the Industrial & Commercial Bank of China [ICBC], China Construction Bank [CCB] and the Bank of China [BoC], these four banks control over 70% of China’s banking activity. Like almost every

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William Gamble profile picture
William Gamble has been active in the international business as a consultant, lawyer, investor, and corporate counsel for the past thirty years. He holds two law degrees, an executive MBA and has attended several universities in the United States and France. He has been a member of several state and federal bars. He has spoken five languages, visited over 40 countries and climbed Mt. Kilimanjaro. He has developed an original methodology derived from law and economics and game theory to determine the economic efficiency of a legal infrastructure. His premise is that economics is not just about capital and technological constraints. It is also about political-legal institutions, such as the protection of property rights and the enforcement of contracts that are critical determinants of sustainable economic growth and investment opportunities. His methods allowed him to successfully predict the crash of the Chinese, Russian, Brazilian stock markets along with the price of oil. He has appeared on many television networks including, ABC, CNN Asia, CNN FN, Bloomberg, Fox, CNBC and NDTV Profit in New Delhi. In addition to television, he has appeared on NPR, Bloomberg, and over 60 radio stations throughout the US. He has also appeared in Canada on the CBC and in China on Voice of America. His most recent book Freedom: America’s Competitive Advantage in the Global Market was published in 2007. His other publications include a book: Investing in China, Legal, Financial and Regulatory Risk, and numerous articles for various journals including Foreign Affairs, Harvard International Review, International Financial Law Review, and others for the International Assessment and Strategy Center. He has have published letters in the Wall Street Journal and over 27 in the Financial Times. He has spoken at many conferences and programs all over the world. As a participant in the CFA Institute’s Retained Speaker Program, he has made presentations in 10 countries and 10 US cities in the past year. He has testified before the US China Economic and Security Review Commission. He has been quoted in The New York Times, The ANALYST (India),, Smart Money, USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun (Japan), The Sacramento Bee, The Hartford Courant and on the internet at many web sites including, ProDevelopment (Russia), La Opinion, Univision (Spanish).

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