World
Chinese Roll Over

The great thing about the state-controlled lenders is that they do what they are told. In this case they have been told not to try and collect the loans, just roll them over. If there is no panic and no one actually tries to collect the loans, then there is no reason to believe that their value has declined

All financial crises occur for one reason: Too much debt. We are seeing the endless drama with this issue in regard to Greece. Investors and banks lent Greece a lot of money based on the assumption that it was Germany. This assumption is rather silly in retrospect, but the result is that Greece, not being Germany, can’t pay its creditors back the full amount that it owes. This causes a problem.

In the US we experienced a similar issue. Lenders lent money to home owners based on the assumption that house prices would go one way—up. Worse through the magic of modern finance, the debts multiplied beyond either reason or even sanity and then were sold, not just in the US, but around the world. In retrospect this also turned out to be a bad idea.

Still the issue was not the form of the loans. Whether the debts were sovereign, as in the case of Greece, or collateralized debt obligations (CDOs), as in the case of US mortgages, in the end they made little difference. They are both debts. The point was that an awful lot of lot of money was lent to debtors who could not pay the money back.

What is really interesting about financial crises though is not the cause; it is the trigger. The problems of Greece were not a secret. Perhaps the extent of the problem was, but the issue itself did not become obvious until the world went into recession and creditors decided that they wanted their money back. The same is true with the US housing mess.

The savage lending that led to the bubble could have gone on much longer than it did. If the creditors had never started to doubt the safety of their investments the lending would have certainly continued. If the creditors just assumed that everything was fine and did not try to collect, not much would have happened. Panics start when everyone tries to be the first out the door.

Now let us consider China. The Chinese government required its state-owned banks to flood the country with loans, in excess of $4 trillion since the beginning of 2009. Most of these loans went to either state-owned companies or local governments. It was not only the banks that lent the money. The provinces and cities also created scads of finance vehicles to get around the lending limits. This lending binge was encouraged by the central government in Beijing to the extent that the loans were considered almost a patriotic duty, until now.

It should hardly surprise anyone that many of these loans went bad. When this amount of money goes out the door, much of it will end up in the wrong place. This is especially true of China where loans are made for political and not financial considerations.

But investors need not worry. This particular pile of toxic lending waste will not melt down. Why? Simple, the creditors are not rushing to the door. The great thing about the state-controlled lenders is that they do what they are told. In this case they have been told not to try and collect the loans, just roll them over. If there is no panic and no one actually tries to collect the loans, then there is no reason to believe that their value has declined.

Is this a problem? Many commentators dismiss it. After all unlike Greece, Europe or the US, the Chinese economy is rapidly growing at a projected 8%, so it can easily absorb these bad debts. But one wonders that if the Chinese economy were not flooded with cheap loans whether it would be growing as fast.  

It has also been suggested that the problem is nothing more than a flawed national financial system that needs to be reformed. If the provinces and cities could have issued bonds rather than borrowing from banks, all would be well. The problem is now being resolved because a handful of cities are being allowed to issue bonds.

Exactly why bonds would be better than bank loans is not exactly clear, at least to me. It seems both are debts and both can go bad. But bad loans are not the problem. According to a Chinese investment banker, calling in the loans would be the “surest route to trouble”

But of course this entire assumption is just as absurd as the assumption that Greece is Germany or that housing prices won’t go down. No matter the form, a bad debt is a bad debt. It is money that could have been used more efficiently elsewhere. It prevents further stimulus and stymies growth. So maybe the Chinese have avoided a crash, but don’t expect growth either. Over time quick dramatic pain might have been the better option.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected])

 

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Anti-graft lessons for Anna from Hong Kong - Part 1

Till the early seventies of the previous century, Hong Kong was much like India, a cesspool of graft and bribery, probably one of the most corrupt cities in the world. Hong Kong today has been transformed into one of the cleanest places in the world

Till the early seventies of the previous century, Hong Kong was much like India, a cesspool of graft and bribery, probably one of the most corrupt cities in the world. 

Graft pervaded every aspect of life—from womb to tomb. Firemen would not turn the water hoses on a burning building unless the owner paid them “tea money” or “heavenly grease” as James Clavell puts it in Noble House, his novel of Hong Kong in the sixties.

Ambulance crews would demand money before picking up sick people...  Even hospital ayahs asked for ‘tips’ before giving patients a bedpan or a glass of water. Hong Kong was the pits. A taxi-driver could even buy a monthly label to stick on the taxi and it would guarantee that there was no prosecution for traffic violations. 

A close ‘business’ association existed between law enforcement agencies and organized crime syndicates. All types of organized crimes, vice, gambling and drugs were protected. 

The sixties and seventies saw rapid economic change in the city state. Massive growth in population and fast expansion of manufacturing industry accelerated social and economic development. The government was unable to meet the insatiable needs of the swelling population. 

This provided a fertile environment for the unscrupulous. Many people had to take the “back-door” route simply to earn a living and secure other than basic services. Bribes became not only familiar to many Hong Kong people, but were accepted with resignation as a necessary way of life.

Corruption was rampant in the public sector. Bribes had to be offered to the right officials when applying for public housing, schooling and other public services. Corruption was particularly serious in the police force. Corrupt police officers offered protection to vice, gambling and drug activities. Law and order was under threat. Many in the community had fallen victim to corruption. And yet, they swallowed their anger.

See something similar around you?

In the early seventies, a new and potent force of public opinion emerged. People pressed incessantly for the government to take decisive action to fight graft. Public resentment escalated when Peter Godber, a corrupt expatriate police officer under investigation escaped from Hong Kong with a huge graft hoard of HK$4.3 million. The case proved to be the last straw.

 Godber’s escape unleashed a public outcry. Students spearheaded a mass rally in Victoria Park, protesting and condemning the government for failing to tackle corruption. Demanding prompt government action, protesters with slogans like “Fight corruption, arrest Godber” insisted that Godber be extradited to stand trial.

Sir Alastair Blair-Kerr, a senior puisne judge, was appointed to form a Commission of Inquiry into Godber’s escape., Sir Alastair pointed out that “responsible bodies generally feel that the public will never be convinced that the government really intends to fight corruption unless the anti-corruption office is separated from the police...”

In the wake of the Blair-Kerr reports, the then governor Sir Murray MacLehose proposed an independent anti-corruption organisation. In a speech to the Legislative Council in October 1973, Sir Murray said: “I think the situation calls for an organisation, led by men of high rank and status, which can devote its whole time to the eradication of this evil.” Sir Murray told legislators. “A further and conclusive argument is that public confidence is very much involved. Clearly the public would have more confidence in a unit that is entirely independent, and separated from any department of the government, including the police.”

Thus was formed the Independent Commission against Corruption (ICAC). Goder was extradited, tried and sentenced to four years in jail. Many in the community sensed the wind of change at this time. They started to see the government setting the stage for the birth of an effective anti-corruption regime

Hong Kong today has been transformed into one of the cleanest places in the world, recognised as such by international institutions such as the World Bank, the Heritage Foundation and the Transparency International. Some countries have looked up to the ICAC as an effective model of combating graft holistically through detection, prevention and education.

(This is the first part of a three-part series on the subject)

(R Vijayaraghavan has been a professional journalist for more than four decades, specialising in finance, business and politics. He conceived and helped to launch Business Line, the financial daily of The Hindu group. He can be contacted at [email protected].)

 

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COMMENTS

Rambabu Shastri

5 years ago

Even in corporations, as long as the audit and investigations wing is independent of the normal business administration, it works independently and also ensures that corrupt practices supported by those in the administration do not occur. Independence of an anti-corruption wing or the CBI in India with amendments in law that ensure exemplary monetary punishment for those found guilty will help reduce corruption levels. Imagine... today a US court ordered that a maid who filed a case against her Indian employers for slavery in the US got USD 1.5 million. This kind of penalty makes headlines and also acts as a deterrent to would-be offenders.

Narendra Doshi

5 years ago

On 18th Feb, MLF had screened the documentary film"The Journalist and the Jihadi". There were many doubts and discussions on the way to go forward. This article answers many of the points and may be the future for India , also.

Nagesh Kini FCA

5 years ago

Even Sukhram's conviction didn't make headlines. Only a death sentence will make headlines!
There is an urgent need for immediate confiscation of all ill-gotten assets. One State (Is is MP?) has such a law in place. The corrupt in Karnataka are still glossing over their wealth.
Even owning Disproportionate Assets is considered a status symbol as most enjoy being classified under this category!

The Journalist and the Jihadi – The Murder of Daniel Pearl

“At a time when paid news is holding all our attention, it is probably important to watch and reflect on a different kind of journalism too, where lives are risked and sacrificed to bring information to us, the people”

Moneylife Foundation, on Saturday, held the screening of the documentary, The Journalist and the Jihadi – The Murder of Daniel Pearl. This the third session on documentary screening conducted by the Foundation.

The 75-minute film screening was followed by a free-wheeling discussion. Participants including few journalists, discussed about how in the era where whistleblowers are attacked and efforts are made to stone-wall information, lives are risked to bring out that information and present reality to the people. “At a time when paid news is holding all our attention, it is probably important to watch and reflect on a different kind of journalism too, where lives are risked and sacrificed to bring information to us, the people,” says Sucheta Dalal, founder of Moneylife Foundation and managing editor of Moneylife.

The Journalist and the Jihadi- The Murder of Daniel Pearl, is a film directed by Ahmed Jamal and Ramesh Sharma which documents the life of the reporter Daniel Pearl, working with Wall Street Journal, who was kidnapped and executed by a terrorist outfit in Karachi. The movie compares and contrasts his life with that of one of the terrorist, Omar Sheikh, mastermind of the killing. Both were well-educated, but where Pearl sought to bring people together through his work, Sheikh took a path that led to religious extremism. The film showcases how Pearl’s death reverberated through much of the world.

Earlier, Moneylife Foundation had screened two documentaries—noted media man Paranjoy Guha Thakurta’s documentary “Blood and Iron” on destructive illegal mining in Bellary and Umesh Aggarwal’s documentary, “Brokering News”, produced by the Public Service Broadcasting Trust (PSBT), exploring the alarming issue of paid news in depth, including the Niira Radia tapes.
 

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