Twofish's Blog

July 10, 2008

Notes of China as a creditor

Filed under: china, finance — twofish @ 11:34 am

Huizer: as was the previous owner. In order to have ofices in the US, a foreign bank/BHC itself must comply with the Basle accords, and its domestic governance and regulation must also be in accordance with those accords.

There really shouldn’t be a major issue with this, since China has agreed in principle to the Basel accords, and I don’t see anything within the CIC structure that would prohibit it from acting as a BHC under Federal Reserve supervision.

Also there are lots of Chinese banks that aren’t owned by CIC.

One issue here is that a lot of the regulations on foreign banks operating in the US are discretionary, which gives a lot of power to the regulator to prohibit a license if they just don’t like you. Also in the case of the US, there are so many different regulators, that it’s easy for one to just say no if they don’t like you. One of the goals of WTO was to reduce this problem, and a lot of the standards that China agreed to was to reduce regulatory discretion. However, when the WTO accords were being negotiated, no one really thought about or cared Chinese banks operating in the US, so the agreements that China made in opening up the financial services markets aren’t reciprocal.

Keeping on topic (heh, heh) that might be one of the larger consequences of China as creditor in that the issue of opening up the US financial services market to Chinese banks is now on the table, whereas it was not before. The concept until this year was that US banks would be the intermediaries for Chinese savings since they were supposedly much better run than Chinese banks.

As a side note, German Landesbanks were a major buyer of mortgage-backed securities. They were required by Basel to have reserves consisting of “high quality” securities, and guess where you can get AAA bonds paying very high interest……. Ooppps….

Huizer: But that leaves the problem that these banks are, part of the same BHC.

Hypothetically, the Chinese government could split up ownership of the banks with different holding companies, however in that case, it’s not unclear that this would satisfy US regulators since the different holding companies would ultimately answer to the Communist Party.

However, this is another consequence of last years events, since last year you could argue that having Chinese banks under the ultimate control of a quasi-governmental agency was a bad thing that would automatically disqualify a bank from operating in the US, since private banks were obviously much better at risk control. You can’t make that argument now without people laughing at you.

Also, there is a spectrum of effective control among Chinese banks. There are banks that are more controlled by the Party and Central Government and banks which are less controlled by the Party and Central Government. It’s not necessarily the case that the banks that are less controlled are better run.

Looking at broader issues, the big obstacle I think is to have the US government more or less accept that the Chinese economic system in which the Communist Party makes a lot of the decisions is legitimate way of running a country. It’s not that China is explicitly trying to export its system of government, but rather there is this psychological block that says that the US can tolerate a system of government run by “evil Communists.”

There is much less of a block on the other side, since there is no psychological block that I can see for the Chinese government to adopt practices by “evil capitalists” if they can see it as being able to keep themselves in power. But there was in 1980. Coming up with theories of government which would allow China to adopt “capitalist” ideas without calling into question the legitimacy of the whole system was a major challenge.

I suppose what will come out of this is likely the notion that the United States can tolerate a Party run economy, without tolerating the way that the Party treats political dissidents, but even accepting this idea is going to require some time.

This is the only unique thing I can think about the Chinese situation. There are a lot of challenges in getting the German and Japanese banking system to work the US, but in the case of Germany and Japan, the US can accept that they are not being run by “evil Communists.”

The problem that the US faces is that if it goes the route of saying “we aren’t going to let the evil Communist Chinese set up banks in the US” it goes against a lot of the other norms that the US has stated it believes in like regulatory transparency or creation of an impartial legal system.

Huizer: In fact an interesting situation, taxing the routinely adversary lawyers mentality of US regulators in the face of foreign authorities that are skilled in not taking no for an answer and (falsely or rightly aware) that they have financial leverage.

Also if you have money, you can hire your own lawyers. One thing that is happening is that Chinese banks are very actively recruiting Chinese Wall Street bankers with deep knowledge on how the system works. There have been a number of recruiting efforts in NYC by Chinese banks, and at one of them, I was struck that the bank had recruited into its top management one of the legendary people in Wall Street.

One problem is that there is still something of a “Cold War” mentality lurking in the US, which is a problem since the issues that China is posing are ones that are very different from the Cold War Soviet Union. The Soviet Union was never in a position to set up banks in the US or to recruit high level US bank executives to run its economy, and there never was a de-facto alliance between American capitalists and Soviet Communists. The Chinese Communist Party has embraced markets and international trade in a way that the Soviets were never able to for the reason that markets generally work better than central planning, but the fact that the CCP has been market-oriented for a generation is now posing some a lot of new issues.

Huizer: he more I think of it, the spirit of assertiveness and nationalism (see also the Olympics/Tibet display of public sentiment) is probably catching on in Beijing.

It’s actually not “catching on.” Chinese have been assertive and nationalistic for the last 150 years, and popular Chinese nationalism in 2008 is actually much, much less anti-American than it was in 1994. You have people demonstrating against CNN media bias, but those people are trying to get into American schools so that they can get jobs with American companies. Also in 1994, there were a lot fewer Mainland Chinese in the US.

The reason this has come up is that people in the US had the expectation that Chinese nationalism would decline over time, when Chinese youth are probably much more nationalistic than their parents since Chinese youth today grew up in a time in which China has been rising.

The other thing that Americans are not aware of is the degree to which the ideals of “1989 Tiananmen students” have been completely discredited in China. One rough analogy to what has happened in China is a socialist hippie flower child living in the middle of the Reagan revolution. One reason for this is that the Communist Party has embraced markets and globalization, whereas their opponents have tended to be anti-market and anti-globalization (i.e. trade sanctions on China). This is a big problem since it put the Tiananmen students on the wrong side of the tide of history.

Huizer: As a non-Chinese with too little knowledge of Chinese history I would nevertheless tend to dispute claims that Zhonghua is/ has been permanently peaceful.

As a Chinese with a lot of knowledge of Chinese history, I would also strongly dispute those claims. You can write a history book in which China has been always peaceful and defensive, and that is the history book you give to elementary school students to indoctrinate them. However, there are other ways of telling the story. If your goal is to make Chinese look evil and warlike and a danger to civilization that must be crushed, yeah, you can write a history book that says that.

My own view is that to effectively advance Chinese interests in a global world, you *must* read these negative histories so that you can understand how people perceive China negatively, so that you can effectively counter those perceptions.

I should point out that I don’t think that the type of political indoctrination that Chinese elementary school students get is worse or more factually incorrect than the type of political indoctrination that American elementary school students get. One of the purposes of elementary schools of any national-state is political indoctrination.

Huizer: During periods of foreign domination (the Yuan and Qing dynasties) the abject foreign rulers forced China into territorial acquisition which the Chinese people gallantly sabotaged, but not with immediate results.

What gets interesting is when you have multiple and contradictory versions of history within the same book. In the version of history that I tell my kids, the Yuan and the Qing were not “foreign” dynasties, and the Mongol and the Manchu rulers of China were Chinese. Different Chinese, but Chinese nevertheless.

I do have some personal motives here. First is that the broader you define Chinese, the less likely it is that I’m excluded.

The second motive, is that by reading about how the Manchu rulers of China were able to be both “Chinese” and “Manchu” and how they were ultimately able to define the term “Chinese” it gives me a notion of what to do in my situation. I’ve found myself in the ruling power elite of the United States, and the strategies that I’ve ended up using to be both Chinese and American and to define what an American is are very similar to the ones that the Manchus used.


1 Comment »

  1. Twofish,

    I had given up on getting a response to this vague, brief etc comment. In general, we seem to agree that China, tho with extraordinary longevity, has had all kinds of features that other countries, civiliisations have had too. My long held personal view is that the current Chinese (PRC) middle class of over 40 years of age is the least “Asian” community in Asia. Given my interest in Asian politics and economics and given the fact that especially politics is a pretty murky dsicipline, There are several shortcuts that I use to learn more about that phenomenon and a few other things in Asia in general that interest me (the funny way of states dealing with private matters for instance, the elite status of civil servants, etc) More specifically:
    (1) try to understand the expressed subjective logic of members of those communities regarding economics and politics. A postmodernist might call that a discourse.
    (2) use partially symbolic language to state pseudo-arguments (and the occasional ral argument (research does not have to be boring all the time) to see how people using blogs, writing academic papers respond to slightly tangential issues and questions.
    (3) try to understand economic, demographic and social statistics as to how reliable thay ma be and what they mean in a specific context. Number crunching is something that gladly leave to those so inclined and in need of paid work. But, if necessary, sometimes one has to do this ungentlemanly work oneself. I understand that numbers are a Twofish specialty, too bad. True enlightenment comes fro deep understanding and deep understanding does not need crutches. In trying to understand, Rien is never optimistic or credulous. He believes that active politicians are especially selfish (otherwise they would not have power) if successful, risk neutral or even risk seeking and that they will act in a predatory fashion if given the chanc by institutions. Chinese politicians are no different, but their institutions are a mess.

    Comment by Rien Huizer — August 4, 2008 @ 1:56 pm

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