Don't Bank on China A flawed audit, or all too accurate?

EARLY LAST MONTH, the accounting firm of Ernst and Young released a report concluding that the "nonperforming" loans of China's banks totaled $911 billion (40 percent of China's GDP)--a figure that far exceeds the Chinese government's own estimate of $164 billion. Beijing's response to the report was not subtle: "The report not only seriously distorts the actual assets quality of the Chinese banking sector," but "its conclusions are absurd and incomprehensible." Ernst and Young withdrew the report the next day, citing fundamental errors in the analysis.

But was the report really that flawed? Or was the firm's report more right than wrong, and retracted only because doing business in China these days requires pulling one's punches?

...

In fact, the Ernst and Young report was not unique. Very few financial analysts believe China's "official" figure for NPLs. Most think the ratio of bad loans is considerably higher, maybe as high as 50 percent, according to Frank Song, director of Hong Kong University's China Financial Research Center. When suspected NPL figures are combined with prospective NPL estimates, the Ernst and Young report's figure of $900 billion is probably not wildly off the mark. In fact, previous estimates by Standard and Poor's and PricewaterhouseCoopers indicated that Chinese NPLs could very well top $800 billion; and Fitch Ratings has just put the number at close to $700 billion. Like any such assessment, it's possible that the Ernst and Young report was based on assumptions and analysis that could be called into question. But it's just as likely that the report's inconvenient timing was the reason it was retracted.

www.weeklystandard.com...

This is the skeleton in the closet of the Chinese economy and it's something they'll HAVE to fix. Japan went through the same thing in the 80's and they still haven't fully recovered.

However, this article is just another extreme of the schizophrenic commentary over China (One common thesis: "China is going to take over the world in 20XX!" The other common thesis: "China is going to collapse TOMORROW!"). The reality will be somewhere in between. China will continue to lead the world's economic growth in the foreseeable future, but the Chinese growth rate will gradually decline to the Korean level toward the end of the next 20 years. Hopefully by then, China will be a freer country (as South Korea became by the late 1980s).

Don't forget, the USSR lasted 70 years as a command economy. I date China's from 1977, so that means it could last until 2047?

posted by Number23

EARLY LAST MONTH, the accounting firm of Ernst and Young released a report . . .

[Edited by Don W]

After the many financial debacles “presided” over by American accounting firms, I’d have to see more evidence of anything related to numbers. Formerly, we tended to take CPAs as pretty much straight forward types until we learned CPAs and MBAs were screwing the economic world. It turned out CPAs were selling their imprimaturs to the highest bidder.

Beijing's response to the report was not subtle: "The report not only seriously distorts the actual assets quality of the Chinese banking sector," but "its conclusions are absurd and incomprehensible." Ernst and Young withdrew the report the next day, citing fundamental errors in the analysis.

So what or who can you believe? That SC congressman said it best, ”Money talks, b***s*** walks” before he went to prison for taking too much money.

But was the report really flawed? Or was the firm's report more right than wrong, and retracted only because doing business in China these days requires pulling one's punches? This is the skeleton in the closet of the Chinese economy Japan went through the same thing in the 80's and they still haven't fully recovered. China will continue to lead the world's economic growth in the foreseeable future, but the Chinese growth rate will gradually decline to the Korean level. By then, hopefully, China will be a freer country as South Korea became by the late 1980s.
[Edited by Don W]

The US says China is undervaluing its currency the Yuan. Our government urges China to raise the value of the Yuan as against the dollar. I think it is currently 8 Yuan to 1 dollar. If the value is raised, to say 4 Yuan to the dollar, then every object China sells in the US - say hello Wal-Mart - will go up in price. So why does the US give a hoot if the Chinese want to sell goods here “below cost?” Who does the US Treasury work for anyway? Would not the increase in the value of the Yuan cause more inflation in the US? Is that a good thing? Or, just who benefits from inflation? I'm sure someone does. Guess who?



[edit on 6/15/2006 by donwhite]

Originally posted by donwhite

So why does the US give a hoot if the Chinese want to sell goods here “below cost?” Who does the US Treasury work for anyway? Would not the increase in the value of the Yuan cause more inflation in the US? Is that a good thing? Or, just who benefits from inflation? I'm sure someone does. Guess who?

The real savings for china in the current picture is in terms of labor costs. They pay their people in Yuan that won't buy much.

Allowing their currency to float would, as you pointed out, raise the US price of Chine mfg'd goods. At that point, the shipping costs from china would make Mexico and other latin-american suppliers a lot more competitive.

If the Yuan were allowed to float, it would probably cause a spiraling revaluation, where the Yuan became worth more and more, destroying a lot of the status quo for them exporting cheaply.

posted by dr_strangecraft

posted by donwhite
So why does the US give a hoot if the Chinese want to sell goods here “below cost?” [Edited by Don W]

The real savings for China is in terms of labor costs. They pay in Yuan that won't buy much. Allowing their currency to float would raise the US price of Chinese mfg'd goods. If the Yuan were allowed to float, it would probably cause a spiraling revaluation . . the Yuan worth more and more, destroying a lot of the status quo for China exporting cheaply. [Edited by Don W]

I believe China’s Yuan is the only major currency that does not float.

Now frankly, Dr S, in money speculation, as in petroleum speculation - futures traders - I am disappointed. I don’t like any so-called “free” market where a few dozen well connected and ultra rich people can actually whipsaw billions of ordinary, hard working, trusting people around the world by pricing the very commodities they must have and on money they cannot live without.

I refuse to accept any system that says a few dozen strategically placed people can run - or ruin - my country’s economy and my future, too. Uh uh. Something gone wrong here. This has got to be fixed.



[edit on 6/15/2006 by donwhite]

Originally posted by donwhite

I don’t like any so-called “free” market where a few dozen well connected and ultra rich people can actually whipsaw billions of ordinary, hard working, trusting people around the world by pricing the very commodities they must have and on money they cannot live without.

I refuse to accept any system that says a few dozen strategically placed people can run - or ruin - my country’s economy and my future, too.

Hmmm.

I think that the world currency market is free-er, and more responsive now, than at any prior point in human history.

Major currencies are actively traded in every nation on earth. There are dozens of major currency auctions around the globe that are functionally impossible to manipulate. Especially since some of them are hostile to the US.

Even major banks, even nations, dumping on the international market has tiny effects. The multinational, US-led bailout of the Mexican Peso in 1995 was a total fiasco. The world's major governments handed billions of taxpayer dollars to currency traders. And the peso went where it was going anyway. Anyone savvy enough to spot the "bailout" was free to jump in and take the government money as they desperately tried to fix mexico.

That was pretty much the last straw of the old Bretton Woods System; ever since, the US has persued a "dollar neutral" strategy, meaning they'll let the buck do what it wants, and whatever other nations set their offficial rates at is their own issue, although the US roots for free markets.

Japan tried to beat down the value of the Yen against the dollar in 1998, and their intervention lasted about 12 hours, and lost billions in value.

The internet has made all this possible.

Just google "currency day-trade" and you'll get literally thousands of offers, some of them by big banks, to let you try your luck at the currency thingy. Millions of people world-wide speculate, most of them losers. A few make a profit, but that's another thread.

The thing is, the interweb basically spells the end of government and bigbank controlled currency exchange. When I travel overseas (I just got back to the states, actually) I constantly hedge the currency I take abroad.

I forsee the day when governments will have to return to an actual commodity-backed currency, just to give people confidence in the paper they use.

The age of fiat currency really IS coming to an end. It will probably take decades. Even so, I intend to profit handsomely from the event.

Look, what I'm saying is, back in the day when ONLY banks were allowed to speculate, it was a controlled oligopoly. Now that anyone can speculate in currency, without even leaving their home country, the BIG BOYS can no longer control the markets.

.

Originally posted by donwhite

Don't forget, the USSR lasted 70 years as a command economy. I date China's from 1977, so that means it could last until 2047?

Try dating it from 1949.

[edit on 15-6-2006 by Astronomer70]

posted by Astronomer70

posted by donwhite
Don't forget, the USSR lasted 70 years as a command economy. I date China's from 1977, so that means it could last until 2047?

Try dating it from 1949.

Well, 1949 - USSR's first nuke test - to 1991, last hurrah of Gen Sec Gorbachev, is about 42 years. If I still use 1977 on China - The Peoples Congress that adopted the new economic theory - that puts China in trouble by 2018. China unlike the USSR may get so big the world cannot let it fail. Like the US, China may join that lofty economics club of the Not Permitted group. Hmm?

Originally posted by dr_strangecraft
The age of fiat currency really IS coming to an end. It will probably take decades. Even so, I intend to profit handsomely from the event.

Any chance you'd be willing to describe your strategy in doing so? I think it's safe to say that even though the ATS community is a large one, many will not have the motivation or opportunity to deflate the profit potential of your strategy by hopping on board.

Thanks in advance...

Originally posted by chaosrain

Any chance you'd be willing to describe your strategy in doing so? I think it's safe to say that even though the ATS community is a large one, many will not have the motivation or opportunity to deflate the profit potential of your strategy by hopping on board.

Thanks in advance...

I'm sending you a u2u.

posted by chaosrain

posted by dr_strangecraft
The age of fiat currency really IS coming to an end. I intend to profit handsomely from the event. [Edited by Don W]

Any chance you'd be willing to describe your strategy in doing so? I think it's safe to say the ATS community will not have the motivation to deflate the profit potential of your strategy by hopping on board. Thanks in advance [Edited by Don W]

I’m aware of 2 kinds of money. Fiat and specie. “Fiat” is an Italian acronym meaning a state owned automobile factory. “Specie” also Italian, means a coin made of valuable metal. Most often gold or silver. Credit Suisse of Zurich issued gold medals or bars weighing as little as 1 gm. 1 gm equals 0322 of a troy ounce. If gold is $500 per troy ounce, then 1 gm is worth $16.10. The London Fix on gold (and other precious metals) is based on 1,000 ounce bars. So the price of a 500 ounce bar might be 101% of the Fix price. And so on. There is always a surcharge for buying gold in small quantities.

Oh, somebody is saying that “Fiat” as in money means it is the legal tender as declared by a government order or law. So forget about the car, Fabrique Italiano Automobili Turin.

The US has in print about $400 billion worth of currency. At face value. 40% + of that is used outside the United States. About $160 -$170 billion worth of our currency, is the world’s currency. Several years ago, the first shipments of our then new $100 Federal Reserve notes were shipped to Moscow and St. Petersburg, because the Iranians were supposedly making counterfeit “C” notes of the old style. (We have not liked the Iranians since 1979.)

The Secret Service has more agents working outside the United States than inside. It is very convenient for Americans that the world uses our money as its currency. We don‘t have to learn how to do exchange rates. Presently, there is no other currency even a close second to the United States dollar. My guess is the Japanese Yen is #2 in the world. Japan has no interest in being Macho Supremo in the world. Leave that title to the Sumo wrestlers. Hiroshima and Nagasaki taught the Japanese a lesson in humility.



[edit on 6/15/2006 by donwhite]

Considering the the Savings & Loan scanal in the US and the Japan Bank issues in the past. China could have similar problems hidden.

It just takes a few Enrons to mess things up.