(Today’s report is provided by guest editorialist Matthew Kruse.)
I recently spent two weeks in China with my executive MBA group, in an attempt to gain better insight on what makes China’s economy tick.
China represents the world’s largest car market. There is virtually every major car brand in the world in China, with more than 125 brands represented in total.
Half of those brands are making cheap carbon copies of the major brands like Volkswagen, Ford and Fiat, but the Chinese do little to curb this infringement of intellectual property as even the cheap fakes create jobs.
If you are Chinese, you would never finance your car. You save your money, until you have enough to pay cash for it as is done by 96 percent of the driving population.
The car market in China is booming with 75 percent of car buyers are “first time buyers.”
The cities cannot maintain the major influx of new cars on the street. So in an attempt to curb this growth, Shanghai has mandated a fee of $12,000 to purchase a license plate.
That is on top of the price of the car. Citizens of Beijing must join a lottery in which one’s name is essentially drawn from a hat.
They have no idea when they may get a license or can legally drive the car just purchased.
According to the World Value Roper Report, the top five values attained to by Chinese are – protecting family, duty, stable personal relationships, respecting ancestors and social stability.
One of the top U.S. values that was not in the top 30 for the Chinese, was honesty. I found this out when I went to local restaurants and was told I had to pay first before they would enter my order.
Even when I asked for a refill on my soda, I had to shell out the extra change before the waitress would bring it to me. Apparently they have had too many customers walking out on the bill causing them to demand payment up front.
Next our group visited the National Australia Bank, one of the fourth largest banks in Australia with offices in Shanghai. China is Australia’s largest trading partner, mostly for its hard commodities like iron ore.
It makes sense for NAB to have offices in China, however, it has no plans for any major growth there. Rather than go toe-to-toe with these banking goliath’s, NAB has focused on helping Australians do business in China and vice versa. The banking industry is highly regulated and no foreign bank can own more than 20 percent of a Chinese bank. Big names like HSBC have been in China for more than 100 years.
Despite this, HSBC and all other foreign banks operating in China make up only 2 percent of the total market share.
Chinese banks are now among the largest companies in the world and they are protected by the government from foreign competition.
That is why they need a place to park their money and no other country offers a large enough garage than the United States.
I asked the NAB rep what he thought about China becoming the largest holder of U.S. debt securities and he thought the Chinese would continue to be a good banker.
He felt that the U.S. should not be alarmed by this. To him, this only meant the Chinese interests were aligned with the success of the U.S. economy.
This reminds me of a saying in Brazil, typically told by local farmers – if you owe $100,000 to the bank and can’t pay, it is your problem. But if you owe $1 million to the bank and can’t pay, it is now their problem. As China is the world’s second largest economy and therefore carries a lot of economic weight, the rest of the world needs to begin scrutinizing how China is controlling its growth.
“Shadow banking” in China has rightly come under the microscope as a potential trigger for future defaults and a risk to the global economy.
Rather than an attempt to improve lending, non-traditional financial institutions have created money markets that paid interest of 10 percent per year, well above savings rates of traditional banks.
This created huge investments by Chinese looking to get a better return on investment.
These money markets then turn around and lend this money to anyone they see fit – traditionally real estate – which has been a booming market up until now. The downside to this is these money markets are not well regulated, audited or otherwise managed with proper government oversight.
The representative from NAB that spoke to us was more optimistic arguing that shadow banking has become an important and necessary part of Chinese banking.
I am much less inclined to believe that shadow banking in China will lead to something good. Part of my suspicion is that if it has shadow in the name, it can’t be good, unless we are talking about a new James Bond movie.
Human nature is such that it can’t be left alone to lend money in a responsible and ethical manner.
The Chinese are pushing the envelope, lending money for home loans and other riskier creditors, all for the purpose of improving short term results.
We all know how that works out.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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