China of course does not need any of the new inventions made on Wall Street; they are largely designed to cheat people for their money. What China needs is how to manage its colossal savings and how to use the money on a global scale. These needs will become more acute as China amasses more wealth. When your bank account is 20% of the bank’s total deposits, wouldn’t it be wise to get yourself into banking business? After all, you put your money into the bank because the bank is making money and promises to give you a cut. To run the global financial system, China needs Wall Street experts, not charlatans. Hopefully, the nationalization-reprivatization exercise will weed out the charlatans and keep a few gems for a strategic buyer. It’s good that Russia is not a major counterparty to these zombie banks. Singapore and Abu Dhabi neither have nukes or a veto at the UN. Whoever buys the reincarnated banks has to accommodate these SWFs. China has no trouble doing that.

In Asia, L/Cs are still as scarce as hens’ teeth and twice as expensive. The downturn in demand, however, came first.

Thanks for your reply. Can you elaborate on the sequence of events here? The L/C drought started at least as early as October of last year (based on the FT.com reporting at least), and the drop off in trade volumes appears to have come after the credit crunch.

While I’m sure reduced demand is an important part of the story, I wonder to what extent the lack of credit may be amplifying the effect.

What is the cutting point that the Chinese should learn from the US financial system? Should they learn the credit default swap, monte carlo simulation to calculate the value of mortgage backed securities or interest rate and currency derivatives?

Derivatives has proved to prolong the credit expansion and hide risks in the balance sheet of corporations. It has been successful in transferring specific risks from the whole economy into systematic risks in a few number of financial giants. They don’t have much credit now. Though the boom is long, the bust is painful and long too.

The risk and return calculation of wall street doesn’t work well for the long term prosperity of the whole economy. For private business, everyone should hire wall street analyst. But for the health of economy, profit maximization is a wrong-headed approach. For example, tobacco industry earn more profit than the education industry, should more money be allocated to produce tobacco? Some industries or sectors are badly needed for the health of the economy where resources can’t be allocated by private sectors because the value is extremely hard to collect. Such industries or areas include agriculture, forestry, renewable energy, education, environmental protection etc…

The error of the risk return profit maximization system is that too much resources is spend and used on high value added consumption goods and services while ignoring the basic needs of the majority.

My point is that it needs social study to define what goals the people want to achieve and where the economy should go instead of year after year few percentage point growth rate. Central industry planning with input from public spirited scientists, farmers, workers, educators, engineers etc. are needed to guide the direction of the economy. Modern computer system and Internet will assist in the transparency of the decision making process and information flow.

Google is successful only because there is a need for its service and the value of the service can be captured by the private investors. The degree of such success is limited. I don’t object that there may be a certain portion of private funds that allow them to pursue their own interest.

Thanks for the info and the link. Interesting bit here, of the top 10 import-surplus countries to China, Taiwan is 40% of the total and Japan and S. Korea 20% each.

And the latest news flash over the inter-tubes is that Japan’s exports declined 46% y/y in 1/09, as opposed to 35% y/y in 12/08. It’s the latest Japanese monster movie craze: “Revenge of the Carry Trade!”

So maybe my rough surmise of analyzing the composition of disaggregated imports, rather than just aggregate financial amounts might not be entirely off-the-mark.

“Nor can I quite see why the US gov would guarantee funding for a bank owned by another country’s government…”

As opposed to a government or governments owned by another country’s banks?

Banks are leveraged and regulated creatures. I cannot quite get my head around how the US government regulates a bank owned by another government. Nor can I quite see why the US gov would guarantee funding for a bank owned by another country’s government — yet right now few banks can fund itself without a government guarantee. Maybe China is willing to commit its reserves to backstop the deposits of its state-owned banks abroad .. but, well, that too raises a host of issues.

And then there is the following issue: China’s government already has a $2 trillion unleveraged foreign balance sheet. Apply leverage to that balance sheet and it starts looking even bigger … and well, that strikes me a move in the wrong direction.

Does China want to buy the US banks? It depends on how China wants to make the international financial system work more favorably for China. There is the de novo method, which will cause lots of conflicts, if not wars. And there is the alternative – buy and assimilate. Is it too different from buying lots of steel factories in US, cutting them apart and reassembling them in China to make China the #1 steel producer? The banking industry in the US now is pretty much like the steel industry once upon a time. US sees troubles in them and China sees opportunity to get what China does not have, quickly.

Although everyone hates Wall Street now, it is still the central nervous system of the Empire. Without Wall Street, who is going to do IPO’s to launch the next Google, who is going to disseminate the fiat, who is going to lubricate the engines of economy …?

I think China needs them, quite badly, so that it can create its own financial system to park its huge reserves. Didn’t the Americans do the same thing to the British?

If Joe Sixpack had lived within his means, there wouldn’t have been negative personal savings rates, over-consumption, record high household debt-service ratios and bursting bubbles. In other words, hey, no (more) credit bubbles.

In addition, if the US government had lived within it means (e.g., as in 1996-2001), there wouldn’t have been a repeated record-breaking fiscal deficits, repeated record high federal debt levels, unprecedented demand for T-bills and the consequent prolonged low interest rates. In other words, no national default dangers.

Further, if the regulatory authorities hadn’t been overwhelmed by technological progress, blinded by the “up is good / down is bad” stock market mentality, and hood-winked by credit rating agencies seeking to profit over Basel I and II bank capitalization requirements, we might have a solvent financial system.

Did I mention how none of this is remotely related to China tremendous success over the past 5, 10 or 30 years?

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Seth,

In Asia, L/Cs are still as scarce as hens’ teeth and twice as expensive. The downturn in demand, however, came first.

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Twofish,

1. It wasn’t Lehman’s that killed the L/C. It was a very broad loss of counter-party confidence.
2. The ‘shadow banking system’ throughout China (not just the south) is wholly domestic. Households pool their money and borrowers bid on the funds. Very traditional, very local.
3. Foreign lenders were scared away from “quasi-official” arrangements after the ITICs crisis of a decade ago.
4. Capital controls are a joke; getting dollars to repay debt is not a problem in China. Pre-crisis, anyone who couldn’t accumulate sufficient dollars in a short amount of time and at competitive exchange rates wasn’t really trying.
5. The reason China was so export-oriented in 2003-08 goes back to Joe Sixpack, and was greatly helped by a solid decade of huge capital flows that built the most modern, productive and cost-effective NEW manufacturing base in the world.
6. The “slowdown in China” is, at least thus far, pretty much limited to the coastal regions. 300-400 million people is nothing to be ignored, but the other billion provide a very strong foundation. Private consumption expenditure, in my view, c a n n o t contract in China.

Oh, and there is nothing ‘normal’ about the current circumstances. Nothing.

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Indian Investor,

Your views on post-colonial capital bases and future development might be assisted by a study of Taiwan, ca. 1945-70. Lots of great infrastructure provided a solid base, but it was mostly neglected in the first decade.

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john c. halasz,

China’s imports last year, by product: mechanical and electrical products were 41.9% of imports (Jan-Oct data) and the increase in imports of those products comprised 45.9% of the total increase in imports. ICs, LCDs and diodes were (together) 3.4% share and 4.1% of growth, respectively. Oil (crude and refined) was 7.2% of imports and 17.0% of growth. The data are here: http://zhs.mofcom.gov.cn/tongji.shtml.

Imports by foreign-invested enterprises comprised 54.4% of the total, about the same as the foreign share of total exports.

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Those who “cannot imagine” the US letting China (or other sovereign wealth funds) buy US banks or other assets are still in denial.

This isn’t a recession, folks!

They do. Irrevocable letters of credit are the standard method of funds transfer in international trade. The basic problem is that the buyer can’t completely trust the seller to send the money and the seller can’t completely trust the buyer to send the goods. Since everyone is in a different country, you can’t easily rely on the court system to step in if something goes wrong.

So in order to securely send money from one place to another you use banks as an intermediary. The buyer sends an ILOC the seller gets the ILOC and sends the goods. Once the goods arrive, the bank releases the money to the seller.