Thursday, March 13, 2014


The past couple of days there has been a couple of really big deal things moving around.  In China, much has happened seemingly beyond the knowledge of all but China Watchers and folks in the business of finance although the events could well have repercussions world-wide.

We have spoke of the the first default ever in the Chinese domestic bond market…or perhaps more accurately, the first default ever allowed.  Clearly a warning shot fired by the ministry of finance.  This week came the announcement that over a period of time, Chinese banks will be allowed to compete for deposits on the basis of interest rates; no longer will the government set the same.  And finally,  private bank expansion will be allowed--with restrictions--in certain areas the restrictions being geographic and numerical.

These are huge changes.  For the banks competition has arrived and with it a necessity to conduct their business in a far more careful and credit-worthy fashion given the elimination of guaranteed profit from the funding/lending mismatch.  With this is of course the requirement for far more robust economic modeling and market consideration as the implied Chinese version of "Too Big To Fail" disappears (I'll believe that when I see it).

On the consumer side, the changes may even be more shocking.  Investment choices will increase and risk-taking may decline.  This is probably the #1 hope in all of this for there is no great a group of people in the world who will chase yield harder than the Chinese and take more risk in so doing.  There is a reason why Las Vegas is no longer the biggest gambling center in the world.  But the end of cheap money for banks also poses grave risks in the puncturing of bubbles…and bubbles there are especially in real estate…and the knock-on effect we have all seen and, hopefully, understand.  In spite of all of this…and these are monumental changes…growth estimates have been lowered only slightly, a clear bet by the government that the downside can be contained as indeed, in some cases there will be a downside.  The coordination and precision of the Chinese in their actions is remarkable to see.  Whether they can pull it off is another story.  The bet here is they can get close enough for government work.

Compaire that to what's going on Over Here and Over There.  More on that tomorrow.

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