Second thoughts

We’ve been interested in, and concerned about, high debt levels in China, for a number of years, and these concerns are valid. And we saw another small regional bank in China collapse the other day, after an explosion in improper lending. However, we’re rethinking at least part of our concerns.

We met with some very bright and experienced people at the Horasis China symposium, including representatives of KraneShares, PeakCapital, Arca, Tapestry, and quite a few others. Everyone is acutely aware of the big conflicts between openness and control in corporate reporting, lending, accounting, and so forth in China.

Our second thoughts arise from that piece at the top of this post on another regional bank bailout, to wit: in a closed system, with no international exposure, who cares if the government is converting the bad loans to equity? The government still has control; its basis is now different. To be sure, none of this works in an international setting, where currencies have to be traded at fair marketplace values (give or take). But a little regional bank has none of that going on. Anyway, we’ve got to think about this some more…

One Response to “Second thoughts”

  1. feeblemind Says:

    From high up in the peanut gallery in flyover America from an obscure peasant:

    I am sure my ignorance of China is readily apparent compared to the very bright and experienced people at the Horasis China symposium.

    However, permit me to play devil’s advocate and suggest that people who work for firms trying to attract capital to China may have a built in bias and may tend to wear rose colored glasses. After all, are they going to say, “Yeah. China’s economy is going into the sewer. Wanna invest some money in that?”

    One other point, being the best and the brightest doesn’t make one infallible. One would have thought companies like Lehman Bros. and AIG had the best and brightest at the top?

    Converting bad loans to equity and being harmless doesn’t pass the smell test. A bank gets equity worth 10% of the loan because that’s all the project is now worth? How is that suddenly a good thing?

    I also don’t understand the concept of the closed system. Are they using monopoly money and not yuans here?

    And finally there is the issue of confidence in the banking system. Small bank failures can cause runs on larger banks if confidence is lost.

    It will be interesting to see how it all works out.

    It might all turn out quite well for China, but I wouldn’t bet my money on it.

    Another article on the companies that do nothing but burn money. They are run by the best and brightest as well.

    How cash-burn machines power the real economy, and what happens to the economy when investors refuse to have more of their cash burned.

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