Twofish's Blog

November 16, 2006

Comments on NYTimes article

Filed under: china, finance — twofish @ 5:42 am

Comment I made on Victor Shih’s blog:

The agreement that CCB made with BOA states that if CCB has to restate any of its figures that CCB will bear the cost of any consequences that result from this.  This was probably why CCB was eager to share information with BOA about this issue.

I think that you vastly overestimate the amount of leverage that the Chinese government has over BOA.  BOA could have allowed itself to be outbid by another suitor and walked away.  The threat of being barred from China is not much of a threat if you think that there are still some systemic problems in the banking system that you don’t know about.

In particular, there is a lock in period before BOA can cash out of the CCB deal.  If BOA thinks that there is a major problem that will cause it to lose money before the lock-in period ends, it makes no sense to go forward with the deal.

Finally the NYT article is very confused in its accounting.  The 7.5 percent bad loan ratio is largely concentrated in the Agricultural Bank of China.  The $400B number from Fitch doesn’t contradict the $163B from the Chinese government since the Fitch number counts about $250B in rural credit cooperatives and loans that have been moved to the asset management companies.  The $163B number from the Chinese government counts only bad loans in the big four, and those are almost all in ABC.

There is also the strong temptation here to assume “good whistleblower versus evil corporate managers” but that’s not necessarily always the case.  The possibility exists that BOA and CCB looked into the risk managers position and correctly concluded that they were incorrect.


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