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Bank of America Helps Stimulate Chinese Economy with Taxpayer Dollars
East Providence, RI
Tuesday, November 18, 2008
Bank of America Helps Stimulate Chinese Economy with Taxpayer Dollars
According to the Wall Street Journal, Bank of America has just raised its stake in China Construction Banks (CCB), one of the four main mostly government owned Chinese banks from 10.75% to 19.1% at a cost of $7 billion. The fact that this is foolish is one issue. The other issue is that Bank of America just received $15 billion from the US Treasury, which makes the purchase outrageous. But that is not the punch line. The Chinese government has a $586 billion stimulus package which is to be partly funded by bank loans! So the US taxpayers are not only funding the US stimulus package but, thanks to Bank of America, the Chinese as well!
Even without the use of taxpayer money, this is an idiotic investment. Chinese state owned banks are trash heaps of bad loans. According to an Earnst and Young study in 2006 the Chinese financial system had almost a trillion dollars in bad loans. It is undoubtedly much higher. It was estimated by the Financial Times that 50 percent of the profits of Chinese state owned companies came from gambling on the Chinese stock and real estate markets. Both have crashed. As I predicted in 2007, the stock market has crashed and is down by over 65% and according to The Economist real estate in Beijing has collapsed by 50%. All of these Chinese state owned companies along with real estate developers borrowed heavily from the state owned banks including CCB. They have not paid off their bad loans from the last recession in 2001.
The stock market and real estate mess would be bad enough, but the rest of the Chinese economy is falling faster than a Wall Street banker's bonus. Metal production had been skyrocketing. Not anymore. The vast majority of Chinese aluminum producers are losing money and the largest, the Aluminum Corporation of China, has cut production 18%. Both nickel and steel production have plunged by 17%, while most mills are running at 30 to 50% of capacity. In the once bubbling manufacturing center of Wenzhou in the wealthly coastal province of Zhenjiang 300,000 small firms have close. Even Santa's elves have thrown in the towel. Over half of toy exporting firms have closed. Both the Chinese purchasing managers' index and a government survey of manufacturers have had record falls.
Meanwhile economists are scrambling to lower their forecasts. Last year I warned in a letter to the Financial Times that the idea that the Asian economy and other emerging markets had somehow "decoupled" from the financial problems of the US was ridiculous. As I predicted, these economies are not growing as many economist predicted. They were just slower to feel the pain. Now they have been wounded, and the hemorrhaging is severe. China was forecast to grow at 12%. This number has been 'revised' rapidly down for the past few months. It is now 9% and according to the economist Stephen Roach of Morgan Stanley, the Chinese authorities know that it is probably below 8 percent. Some economists are even suggesting that growth may slow to 6 percent for a quarter or two. A cause for celebration in most countries, but a disaster for China where the Communist party relies on growth of at least 8% to keep social unrest in check.
Despite the precipitous drop in the Chinese economy, American companies and investors cannot seem to wean themselves off of the belief that China is still going to grow, grow, grow. General Motors, a company known for its business savvy still believes. According to Nick Reilly, president of General Motors Asia, "I do not see this as the start of a significant decline" The founder of David Rubenstein, founder of Carlyle Group was quoted as saying "China itself will be the single most attractive place to invest" This despite the fact that Carlyle wasted three years an tens of millions of dollars on its unsuccessful attempt to acquire. These examples of American optimism provide an excellent illustration of the cognitive bias anchoring.
The reality is that these are relation based systems as opposed to rule based systems. These economies operate based on trust in relationships, rather than trust in the law. The problem is illustrated by the collapse of the so called Asian tiger economies in 1998. These include Thailand, Indonesia, Malaysia, the Philippines and South Korea. Pre crises growth rates from 1990-96 have slipped by an average of 2.5 percentage points per year in the post crises period 2000-06. Perceptions of legal risk have increased and the result is less growth. China is in the same position. Its economy is coming apart very fast. Once it's problems start, it will take a long time to recover. It is like the partner of a philandering spouse. Once the trust is gone, it will take a long time to restore.
What is worse, it that the Chinese government, the real owner of CCB, is almost guaranteeing that it will not make money. The punch line to Bank of America's increased stake is that the money will no doubt be used to stimulate the flagging Chinese economy! Earlier this month, the Chinese like other countries announced a stimulus package. What was eye popping was the amount. The Chinese announced that their package was $586 billion approximately 15% of China's GDP. Germany and Japan in contrast have announced stimulus packages equal a puny 1% of GDP.
Many commentators have analyzed the package and determined that it contained many already announced programs. It is estimated that about half is new money, still an enormous amount. What was interesting is that not all of the money was to come from the government. Apparently only a quarter of the funds will be supplied by the central government. According to the announcement the rest will be provided by "provincial authorities, corporate investors and bank loans" Unlike the US bailout, the Chinese do not need to buy into the banks to encourage them to make loans. Since they already own the banks, they simply order them to loan regardless of the consequences, which in the past have been a disaster. No doubt this program will make the US government's involvement with Fannie Mae and Freddie Mac look positively prudent. When asked if they could use the almost $2 trillion in reserves, the government responded that it was 'unavoidably invested overseas' and could not be repatriated.
Warren Buffett also invested in Chinese banks. Unlike Bank of America, his investment was not restricted. Also Warren knew a bubble when he saw one, so he bailed near the height of the Chinese market in October 2007. B of A was stuck until October. They still could get out with a tidy profit. In fact when they exercised their option, CCB stock listed in Hong Kong declined. Traders assumed that B of A had exercised their option at a 32% discount and would sell a large part of its 9 percent stake that was not locked up. Apparently Bank of America, with help from the American taxpayer, is going to follow this one all the way down.
I am William Gamble, JD, LLM, Ex MBA, KSC, a consultant specializing in emerging markets. I successfully predicted the collapse of the Chinese stock market and real estate market. I have been quoted or interviewed by ABC, CNN Asia, Bloomberg, Fox, CNBC, NPR and other television and radio stations around the world. I have published 24 letters in Financial Times and articles in Foreign Affairs, and Harvard International Review. I have been quoted USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun. I have written two books Investing in China and Freedom: America's Competitive Advantage in the Global Market. In the past year I have spoken to CFA societies in 10 countries and 9 US cities as well as other conferences all over the world.
William Gamble, Your Globalized Lawyer
Author: Freedom: America's Competitive Advantage in the Global Market
EMERGING MARKET STRATEGIES
Suite 1D
1990 Pawtucket Ave
East Providence, RI 02914
Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
http://www.emergingmarketstrategies.com/
According to the Wall Street Journal, Bank of America has just raised its stake in China Construction Banks (CCB), one of the four main mostly government owned Chinese banks from 10.75% to 19.1% at a cost of $7 billion. The fact that this is foolish is one issue. The other issue is that Bank of America just received $15 billion from the US Treasury, which makes the purchase outrageous. But that is not the punch line. The Chinese government has a $586 billion stimulus package which is to be partly funded by bank loans! So the US taxpayers are not only funding the US stimulus package but, thanks to Bank of America, the Chinese as well!
Even without the use of taxpayer money, this is an idiotic investment. Chinese state owned banks are trash heaps of bad loans. According to an Earnst and Young study in 2006 the Chinese financial system had almost a trillion dollars in bad loans. It is undoubtedly much higher. It was estimated by the Financial Times that 50 percent of the profits of Chinese state owned companies came from gambling on the Chinese stock and real estate markets. Both have crashed. As I predicted in 2007, the stock market has crashed and is down by over 65% and according to The Economist real estate in Beijing has collapsed by 50%. All of these Chinese state owned companies along with real estate developers borrowed heavily from the state owned banks including CCB. They have not paid off their bad loans from the last recession in 2001.
The stock market and real estate mess would be bad enough, but the rest of the Chinese economy is falling faster than a Wall Street banker's bonus. Metal production had been skyrocketing. Not anymore. The vast majority of Chinese aluminum producers are losing money and the largest, the Aluminum Corporation of China, has cut production 18%. Both nickel and steel production have plunged by 17%, while most mills are running at 30 to 50% of capacity. In the once bubbling manufacturing center of Wenzhou in the wealthly coastal province of Zhenjiang 300,000 small firms have close. Even Santa's elves have thrown in the towel. Over half of toy exporting firms have closed. Both the Chinese purchasing managers' index and a government survey of manufacturers have had record falls.
Meanwhile economists are scrambling to lower their forecasts. Last year I warned in a letter to the Financial Times that the idea that the Asian economy and other emerging markets had somehow "decoupled" from the financial problems of the US was ridiculous. As I predicted, these economies are not growing as many economist predicted. They were just slower to feel the pain. Now they have been wounded, and the hemorrhaging is severe. China was forecast to grow at 12%. This number has been 'revised' rapidly down for the past few months. It is now 9% and according to the economist Stephen Roach of Morgan Stanley, the Chinese authorities know that it is probably below 8 percent. Some economists are even suggesting that growth may slow to 6 percent for a quarter or two. A cause for celebration in most countries, but a disaster for China where the Communist party relies on growth of at least 8% to keep social unrest in check.
Despite the precipitous drop in the Chinese economy, American companies and investors cannot seem to wean themselves off of the belief that China is still going to grow, grow, grow. General Motors, a company known for its business savvy still believes. According to Nick Reilly, president of General Motors Asia, "I do not see this as the start of a significant decline" The founder of David Rubenstein, founder of Carlyle Group was quoted as saying "China itself will be the single most attractive place to invest" This despite the fact that Carlyle wasted three years an tens of millions of dollars on its unsuccessful attempt to acquire. These examples of American optimism provide an excellent illustration of the cognitive bias anchoring.
The reality is that these are relation based systems as opposed to rule based systems. These economies operate based on trust in relationships, rather than trust in the law. The problem is illustrated by the collapse of the so called Asian tiger economies in 1998. These include Thailand, Indonesia, Malaysia, the Philippines and South Korea. Pre crises growth rates from 1990-96 have slipped by an average of 2.5 percentage points per year in the post crises period 2000-06. Perceptions of legal risk have increased and the result is less growth. China is in the same position. Its economy is coming apart very fast. Once it's problems start, it will take a long time to recover. It is like the partner of a philandering spouse. Once the trust is gone, it will take a long time to restore.
What is worse, it that the Chinese government, the real owner of CCB, is almost guaranteeing that it will not make money. The punch line to Bank of America's increased stake is that the money will no doubt be used to stimulate the flagging Chinese economy! Earlier this month, the Chinese like other countries announced a stimulus package. What was eye popping was the amount. The Chinese announced that their package was $586 billion approximately 15% of China's GDP. Germany and Japan in contrast have announced stimulus packages equal a puny 1% of GDP.
Many commentators have analyzed the package and determined that it contained many already announced programs. It is estimated that about half is new money, still an enormous amount. What was interesting is that not all of the money was to come from the government. Apparently only a quarter of the funds will be supplied by the central government. According to the announcement the rest will be provided by "provincial authorities, corporate investors and bank loans" Unlike the US bailout, the Chinese do not need to buy into the banks to encourage them to make loans. Since they already own the banks, they simply order them to loan regardless of the consequences, which in the past have been a disaster. No doubt this program will make the US government's involvement with Fannie Mae and Freddie Mac look positively prudent. When asked if they could use the almost $2 trillion in reserves, the government responded that it was 'unavoidably invested overseas' and could not be repatriated.
Warren Buffett also invested in Chinese banks. Unlike Bank of America, his investment was not restricted. Also Warren knew a bubble when he saw one, so he bailed near the height of the Chinese market in October 2007. B of A was stuck until October. They still could get out with a tidy profit. In fact when they exercised their option, CCB stock listed in Hong Kong declined. Traders assumed that B of A had exercised their option at a 32% discount and would sell a large part of its 9 percent stake that was not locked up. Apparently Bank of America, with help from the American taxpayer, is going to follow this one all the way down.
I am William Gamble, JD, LLM, Ex MBA, KSC, a consultant specializing in emerging markets. I successfully predicted the collapse of the Chinese stock market and real estate market. I have been quoted or interviewed by ABC, CNN Asia, Bloomberg, Fox, CNBC, NPR and other television and radio stations around the world. I have published 24 letters in Financial Times and articles in Foreign Affairs, and Harvard International Review. I have been quoted USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun. I have written two books Investing in China and Freedom: America's Competitive Advantage in the Global Market. In the past year I have spoken to CFA societies in 10 countries and 9 US cities as well as other conferences all over the world.
William Gamble, Your Globalized Lawyer
Author: Freedom: America's Competitive Advantage in the Global Market
EMERGING MARKET STRATEGIES
Suite 1D
1990 Pawtucket Ave
East Providence, RI 02914
Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
http://www.emergingmarketstrategies.com/
William Gamble
Emerging Market Strategies
East Providence, RI
401-272-8906
401-272-8139
