The FT video below does good job explaining China’s continued addiction to debt. This is why we remain bears on China even as the recovery in the country’s manufacturing sector accelerates (apparently).
Monetary policy and the financial sector are still in the firm grip of the Party and dominated by China’s big four banks even though nontraditional sources of financing are on the rise.
Imagine President Obama, for example, having the power to order Citibank, Bank of America, and JP Morgan to, say, triple lending to CalTrans or Toll Brothers funded by deposits from savers at rates well below inflation. Then imagine the consequence – a gross misallocation of resources resulting in an economic and financial bust.
Foreign banks remain shut out of any meaningful market share, owning only about 2 percent of total domestic financial assets the last we looked. Note, BofA sold its stake in the China Construction Bank (CCB) over the weekend. The Wall Street Journal reports,
HONG KONG—BAC +0.99% is selling its entire remaining stake in Corp. 0939.HK +1.89% for up to US$1.5 billion, marking the end of an era for the Wall Street banks that piled into major Chinese banks in the last decade in hopes of having an edge in China.Corp.
Bank of America is the last of the major American banks that are selling out of the big Chinese banks they bought into before those banks went public in Hong Kong, a time when China, and these lenders, were booming. These banks, most recently Goldman Sachs Group Inc., GS +1.66% have been disposing of their Chinese bank stakes since the financial crisis five years ago, raising billions of dollars in the process, while reducing the effects on their balance sheets from financial holdings.
Finally, we leave you with a couple of informative graphics from the IMF’s Article IV report released in July.
(click here if video is not observable)