We’ll continue with the subject of the post immediately below. The Wall Street Journal Asia has some interesting tidbits supporting our thesis that the China correction is beginning:

(1) The EU is considering emergency import restrictions on Chinese textiles. We hope the Chinese response to slowing sales is not the kind of price cutting that produces Smoot-Hawley responses.

(2) Bank of China reveals a $78MM loss on one fraud, in the wake of a loss of $120MM stolen by a bank manager in a remote branch that used a manual funds transfer system. Makes you really want to buy that IPO, doesn’t it?

(3) Investment banks are as bullish as ever, singing yesterday’s tune about “stronger and longer” commodity price rises because “China Eats the World.”

WSJ on the bank scandals and the structural weaknesses they reveal:

On the one hand, the scandals show the banks are coming to grips with a legacy of woeful lending decisions that arose partly from a lack of credit controls and management oversight, as well as corruption among senior bank staff. Yet they also emphasize the continued vulnerability of the Chinese banking system, the weakest link in the country’s fast-growing economy.

Even though the two banks have been working hard to set up state-of-the-art risk-management systems and tighten credit controls, the systems are untested in an economic downturn. And it will take 10 years or more for the banks to collect adequate data on their customers to get the best out of their new risk-management software.

The last time the Chinese economy hit the skids, in the mid-1990s, some 40% of all bank loans extended during the boom years in the early part of that decade turned sour. The latest bank lending binge was between late 2002 and early 2004, and it remains to be seen how many of those loans will go bad. However, banks are particularly vulnerable to the real-estate sector, which has been one of the hottest investment areas.

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