It’s a bit of everything. Curiously the Chinese banking and corporate law is based very much on the US circa-1995. Part of it was that China made some crucial decisions in 1995, and that the time Japan and South Korea looked bad and the best game in town was the United States. So Chinese banks are structured a lot like US banks (or at least how US banks were structured in 1995.)

One other thing that the US and Chinese governments have in common is this terrible fear of business and banking interests taking over the government, and this results on some similarity in policy.

On the other hand one has to be really careful with that. If someone mortgages farmland and then defaults, how are they going to eat? Farmland has a basic social security function. The other thing about mortgaging farmland is that a lot of the high price of land was because of a real estate bubble.

The basic problem is that money flows uphill. People are much more willing to lend to rich people than to poor people, under the assumption (which often turns out to be incorrect) that rich people are better credit risks.

Thanks for the link to OECD household savings rates. I think they are inappropriate as a guideline to whether Chinese households save too much, although Korea and Italy – in the mid-20% range – suggest that what people consider “high” is negotiable. I would look more for comparisons to India, Indonesia and other high population, mainly rural economies.

I don’t disagree with your disagreements with Prof. Huang, although I would place more emphasis on the inability to mortgage farmland – rather than rural banks – as the key to rural credit expansion.

China’s “model,” is there is one, is a Korean-Japanese-Taiwanese mix. Some huge chaebol, some state-directed industrial models and some “let the locals take care of business, we’re more interested in politics.”

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As for making the Rmb a reserve currency, Beijing is taking experimental steps – just like with the SEZs, unemployment insurance, bankruptcy, etc – in Hong Kong. We expect an announcement any day now on the next steps, which may be corporate Rmb bank accounts in HK (we already have personal ones), cross-border trade denominated and settled in Rmb, and perhaps (not yet) Rmb bonds issued in HK.

One step at a time.

There are only three banks that could even try to do this, you need a FDIC-insured commercial bank connected with a investment bank, and that includes JPMorgan, BoA, and Citigroup. (GS and Morgan-Stanley aren’t FDIC insured. No other bank have large investment banking arms.)

Since the government owns stakes in all three banks, if they try to do something like this and it works, the government can take the money out the other end.

Of course, it’s not likely that it will work. If a bank tries to do this and FDIC finds out that they’ve been left with garbage, the bank runs the risk that FDIC will declare the loans it hasn’t sold off yet to be worthless, and then come in and nationalize the bank.

Geithner’s proposal just won’t work if the banks are insolvent. If you have a bank that is just plain insolvent, then FDIC should close it down and merge it with a bigger bank or in case of the biggest banks, nationalize.

The trouble is that you have lots of banks that are solvent but ill. They have these assets that are paying and aren’t totally worthless, but they can’t get them off the books and issue new loans.

YZ: But given Geitner’s comments about replacing CEO, and waiting to release the final results until the end of month, it does make you wonder what went wrong.

He has a big stick. That doesn’t mean that he is going to use it. Also the reason for waiting until the end of the month is likely so that they don’t interfere with the quarterly earnings reports issued by the banks.

YZ: It might be a useless exercise, what if Citi or BofA (or both) didn’t pass, who else can absorb them besides the government?

Geithner certain can replace BoA and Citi, but they you have to ask should he. Personally, I think that Pandit has done a reasonable job, and I can’t think of anything that could be done with Citi that he isn’t doing. Dimon is basically competent. Lewis handled the ML situation somewhat badly, but that worked to the government’s advantage.

Also all of the big banks have gotten capital infusions from the government already, and my sense is that they have enough cash unless something really goes bad.

Twofish: The stress tests are done, and I agree with you, most of them will pass. But given Geitner’s comments about replacing CEO, and waiting to release the final results until the end of month, it does make you wonder what went wrong. It might be a useless exercise, what if Citi or BofA (or both) didn’t pass, who else can absorb them besides the government?

he argues if banks can buy banks toxic assets, then they can simply set up a seperate entity selling the “toxic” stuff so that the tax payer is left holding nothing.

check out this article. look forward to your argument.

http://www.huffingtonpost.com/jeffrey-sachs/the-geithner-summers-plan_b_183499.html