What do Chinese banking practices have to do with my stock values?

Our economy and the economy of China are increasingly entwined, and the
bright and shining Chinese economy is built on an appallingly unstable
banking system.

In my humble opinion, the recent stock market drop has a disturbing similarity to some natural phenomena I have experienced.

If you are a serious student of the market, please feel free to dismiss my conjecturing as idle fancy.

For those who are amused by the conjoining of "isolated events" into subsequent disasters I would like to share some ideas for what it is worth.

Natural disasters:  I have observed houses being built on steep slopes in California where cracks in the soil above and below the houses were simply ignored. When the slopes fell on the houses or the houses fell into the sea, it was viewed as an act of God.

Corporate disasters: I have been involved in more than one company where the term, "Don’t go there!" was used to discourage investigation into unsavory or stupid practices. When the company closed abruptly or its stock value plummeted to 1/20th of its earlier value, that too was viewed as beyond comprehension by some.

The Current Scene: Today’s stock market seems to have a lot of disturbing parallels to these sorts of situations. The Chinese banking system, to which we are increasingly connected has systemic corruption, government interference, bloated payrolls, and a high percentage of toxic loan portfolios!

As we are all in this together, it doesn’t make sense to say it’s "their" end of the boat that is sinking. If the Chinese economy crumbles, we are all going to take a nasty hit!

Parts of this edifice have been failing for several years and have been covered up by slick paper shuffling by the Chinese government with the willing acquiescence of American banking interests.

I think the Chinese banking industry will clean up its act, but it will take some major changes to their legal system and perhaps their form of government. I would look for continuing stock market corrections emanating from the collapsing Chinese banking system for the next six years at least.

If that is going to affect your lifestyle, maybe it is time to rethink your investment activities, with competent help that you trust.

If you would like to see the specific articles that prompted my observations, continue past the jump.

The problem in China is severe. The government owns almost every
bank in China and they are all insolvent. Not only are they insolvent,
the amount of their nonperforming loans (NPLs) is huge.

Only the bravest of bankers boldly go into China. Over the past
year, international bankers and investors have gone gaga over mainland
China’s banks, overlooking a multitude of sins — systemic corruption,
government interference, bloated payrolls, toxic loan portfolios. They
believe the risks are justified by the opportunity, perhaps the
necessity, of getting an early start in the world’s most promising
market for financial services. And they’re being welcomed by Chinese
officials eager to use foreign expertise to modernize their banks.

But in an economy racing along at a 10% growth rate, the huge
negatives don’t really mean all that much. Global investors rushed to
get a piece of the CCB and Bank of China offerings because they believe
that China’s rapid expansion of wealth guarantees secure times ahead
for the big players. Thanks to the economy’s white-hot growth and
rising incomes, China’s banking industry experienced more than 15%
annualized growth in deposits from 2000 to 2005.

One writer
proclaims China’s average savings rate is up 17%, according to
China.org…"Data recently released from the National Bureau of
Statistics showed that the saving deposit of urban and rural citizens
in China has reached 9.43 trillion yuan, up 17.1 percent from last
year, with deposit growth rate beating income growth."

That’s not going to do much good, because China’s banks are distressingly
insolvent. What happens when these thrifty citizens can’t get their money back out of the banks?

Here are some other links you might want to check out:

http://www.iht.com/articles/2007/01/09/bloomberg/sxtaibank.php

http://www.ncu.edu.tw/e_web/newscontent.php?tid=5079

http://www.strategycenter.net/research/pubID.66/pub_detail.asp

http://www.taipeitimes.com/News/biz/archives/2007/01/06/2003343663