China Bank to Buy $1 Billion Stake in Bear Stearns

[DominiConnor]

The technical issues for a Chinese FDIC can be solved relatively easily since it can simply hire people from countries that already have one. I know civil servants who also help developing countries with this sort of stuff as part of general international cooperation.

There is even an international market for law making. My father in law has written bits of several countries commercial law.

However Chinese banks suffer from the issue that any state owned business has a tension between doing what is economically rational, and what their political masters tell them. Thus they have huge bad debts which they dare not take any action upon.
We see this to a less horrible extent in Germany, where there is too close "cooperation" between states and banks.
In Britain, a midsized retail bank nearly died because of poor risk management, but the authorities made it clear that whereas they would guarantee retail investors money, other financial organisations had to do risk management properly, and if they lost big time, then this was tough, even if one of the banks had employed a senior member of the Royal Family.

Both the Fed and the Bank of England have lent money to banks hit by the credit crunch, but the loans are secured against real assets and at quite high rates of interest. Thus the banks are being made to feel the pain they need to feel, else they will let their risk management slip.

This doesn't happen in China, and thus the internal culture of banks is entirely not equipped to manage risk. That doesn't just mean having too much risk, it can also mean being too risk averse, and thus be both risky but at the same time not make much money.

The short version is that capitalism needs bankruptcy the same way Christianity needs hell.

 

[Dmytro]

Capitalism needs bankruptcy the same way Christianity needs hell.

this is awesome, thanks! =D>

 

[Muting]

The technical issues for a Chinese FDIC can be solved relatively easily since it can simply hire people from countries that already have one. I know civil servants who also help developing countries with this sort of stuff as part of general international cooperation.

There is even an international market for law making. My father in law has written bits of several countries commercial law.

However Chinese banks suffer from the issue that any state owned business has a tension between doing what is economically rational, and what their political masters tell them. Thus they have huge bad debts which they dare not take any action upon.
We see this to a less horrible extent in Germany, where there is too close "cooperation" between states and banks.
In Britain, a midsized retail bank nearly died because of poor risk management, but the authorities made it clear that whereas they would guarantee retail investors money, other financial organisations had to do risk management properly, and if they lost big time, then this was tough, even if one of the banks had employed a senior member of the Royal Family.

Both the Fed and the Bank of England have lent money to banks hit by the credit crunch, but the loans are secured against real assets and at quite high rates of interest. Thus the banks are being made to feel the pain they need to feel, else they will let their risk management slip.

This doesn't happen in China, and thus the internal culture of banks is entirely not equipped to manage risk. That doesn't just mean having too much risk, it can also mean being too risk averse, and thus be both risky but at the same time not make much money.

The short version is that capitalism needs bankruptcy the same way Christianity needs hell.

I totally agee about the internal control issue. The most urgent thing for Chinese banks to do is not to employ state-of-art math model but to improve its internal control system. This problem is especially severe in branch banks where is far from the bank headquarters. Most of the big loss comes from the branches which are hard to monitor due to the multiple layers of supervision. Some persons in these branches can serve as both accountant and bookkeeper.

Besides, the recovery rate hardly exists in China and many bankcruptcy cases are settled not in a formal way. This situation leads to absence of a leveraged loan market.

But I still keep my faith and believe things are improving, even not in a satisfactory pace.

Muting

 

[Bridgett]

I totally agee about the internal control issue. The most urgent thing for Chinese banks to do is not to employ state-of-art math model but to improve its internal control system. This problem is especially severe in branch banks where is far from the bank headquarters. Most of the big loss comes from the branches which are hard to monitor due to the multiple layers of supervision. Some persons in these branches can serve as both accountant and bookkeeper.

Besides, the recovery rate hardly exists in China and many bankcruptcy cases are settled not in a formal way. This situation leads to absence of a leveraged loan market.

But I still keep my faith and believe things are improving, even not in a satisfactory pace.

Muting

When the need is urgent enough, changes will take place quickly enough. It's evolving even as we speak.

 

[kean]

....

In China, it is not an east story. I think for many people changes are easy like an overnight thing if the central government wants to implement it immediately. However, equities distribution is the main thing in China at the moment. It can't just change as we speak.

I think those who know Chinese can read Prof. Lim Yi Fu articles and that will help to understand the current Chinese Economy and Political System. Visiting Cinda or CHAMC website, you will know how badly are those bad debts created by weak internal control currently sit in China banking system.

Said is easier than done. In this discussion, it started from the point of derivatives products. However, A country economy is not only derivatives products. It involved people, bilateral trades, and global issues. It is beyond my imagination.

China will evolve and change but I do not see immediate change. It will change slowly. Let alone Shanghai has approximately 20 million population (in 2004) and Beijing is about close to 20 million population. These two cities' populations are anytime larger than any countries in Europe. Do you think a good central government can change any policy as we speak without consideration of the huge population and poverty in other states in China.

Basically, there are four main group of Chinese people in China.

1. Those with political powers.
2. Businessmen or families who have strong political connection.
3. Middle class with no strong connection.
4. Farmers and the rest.

In particular, group three are those highly educated middle class. This group is the one that wants immediate changes because they feel that they deserve to be "rich" or they believe group one and two are corrupted or cartel to profit from China wealth. Wealth should be shared.

Group three may prone to the West and we will find this group tends to criticize China Government from overseas. Frankly speaking, inequality appears to be seen everywhere in this world. I think hate and jealousy may limit our thoughts. Technical skills and education can leverage our chances approaching the limit of success. To be very successful, network and who we know are more important in every aspect in life.

I wish China will prevail and China will do well if they can improve internal control system and withstand unreasonable demand from the external environment. Like Muting said, I do have faith on China.

The technical issues for a Chinese FDIC can be solved relatively easily since it can simply hire people from countries that already have one. I know civil servants who also help developing countries with this sort of stuff as part of general international cooperation.

There is even an international market for law making. My father in law has written bits of several countries commercial law.

However Chinese banks suffer from the issue that any state owned business has a tension between doing what is economically rational, and what their political masters tell them. Thus they have huge bad debts which they dare not take any action upon.
We see this to a less horrible extent in Germany, where there is too close "cooperation" between states and banks.
In Britain, a midsized retail bank nearly died because of poor risk management, but the authorities made it clear that whereas they would guarantee retail investors money, other financial organisations had to do risk management properly, and if they lost big time, then this was tough, even if one of the banks had employed a senior member of the Royal Family.

Both the Fed and the Bank of England have lent money to banks hit by the credit crunch, but the loans are secured against real assets and at quite high rates of interest. Thus the banks are being made to feel the pain they need to feel, else they will let their risk management slip.

This doesn't happen in China, and thus the internal culture of banks is entirely not equipped to manage risk. That doesn't just mean having too much risk, it can also mean being too risk averse, and thus be both risky but at the same time not make much money.

The short version is that capitalism needs bankruptcy the same way Christianity needs hell.

 

[kean]

agreed

This doesn't happen in China, and thus the internal culture of banks is entirely not equipped to manage risk. That doesn't just mean having too much risk, it can also mean being too risk averse, and thus be both risky but at the same time not make much money.

The short version is that capitalism needs bankruptcy the same way Christianity needs hell.[/quote]


I totally agreed. China will learn and improve.

For Chinese people, we must have faith in China. No matter how, or where we live...we can't change history and we can't change our root. What we can do is to make improvement. We help to improve international relations, peace, economy and prosperity with our friends.