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April 23, 2007
China takes another step
In today's Wall Street Journal:
Today, for the first time, Citigroup Inc., HSBC Holdings PLC, Standard Chartered PLC and Bank of East Asia Ltd. intend to begin accepting deposits in yuan from Chinese individuals, and offering loans as well. Until now, China's tight controls over foreign banks have made it impossible for them to offer those basic -- and much coveted -- services.
The article goes on to outline the various hoops that the banks had to go through before being allowed to open themselves up to domestic deposits. Mainly that they were required to establish a legally incorporated holding company in China for regulatory purposes.
This, of course, is just one more step in the continuing story of China's road to financial modernization and openness. This particular step is one that was discussed here and on macroblog back on Feb. 24, 2006. The Nattering Naybob was not impressed. But here we are 14 months later, and it has begun. Four foreign banks can try to tap into a $2 trillion market. Is it a good investment? Marginally, perhaps. It is risky, and a lot of other banks are choosing to stay on the sidelines for now. But let us not forget that for the overall health of and hopes for the Chinese economy it is necessary.
Kash finds a different China story, but it's not hard to tie them together.
This piece by Bloomberg today could really have been written any time in the past five years. But I'm starting to wonder if China's economic growth is not reaching the point where China's monetary policy is going to have to adjust considerably. If China's central bank does indeed take significant steps to cool the economy, then it may be the case that we're soon going to stop reading stories like this one.
The Bloomberg piece is titled: "Paulson May Be Unable to Get China, U.S. Off Collision Course"
But Kash is, I believe, a little premature in calling this the "last chapter".
I've long thought that China's exchange rate will only be changed significantly when it is in China's interests to do so. The easiest way to imagine a yuan appreciation being in China's interests is a) if it would help cool down an overly-hot economy, and b) if the domestic economy (or perhaps better put, its social structure) is strong enough to handle the inevitable income and job losses that will follow in some of China's export industries. Condition (a) is clearly met at this point, I think. What we need now is some confidence that condition (b) is not out of reach, either.
I have voiced similar sentiments, but my concerns have been more for the banking system. I would suggest a condition (c) that the banking system is strong enough to survive a shake-out as yuan appreciation renders a large chunk of the loan portfolio worth less, if not worthless. Their banking system has been insulated and isolated from global financial competition for a long time. It will only improve when it is forced to compete and accept the possibility of failure. Today's news is good in that having some large new (and most importantly, experienced) players in the market will continue to push them in the right direction. Ultimately, it is necessary. But I'm not totally convinced in the system's ability to withstand a downturn. The monetarist inside me can't help but be a little nervous about that.
That said, today's news is a net plus for China, and the global financial market, in the long run.
Posted by William Polley at April 23, 2007 04:19 PM
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Comments
William,
A tip o the hat for the link. I've Blogrolled back to you. Keep fightin the good fight.
The Nattering One
Posted by: The Nattering Naybob at April 23, 2007 08:54 PM