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All that glitters . . .

Marketplace Staff Dec 5, 2006

All that glitters . . .

Marketplace Staff Dec 5, 2006


MARK AUSTIN THOMAS: China plans to open its banking sector to full foreign competition by the end of December. It’s taken some the country’s biggest banks public in preparation. Western investors, including Britain’s HSBC bank, have been jumping over each other to get in on the action. But Commentator Austan Goolsbee points to the old proverb: All that glitters isn’t gold.

AUSTAN GOOLSBEE: If you ask me, this smells like an old-style dupefest.

The Chinese government now wants you to invest in their banks. But for years these same banks have always kept the spigot open for some of the most corrupt, crummiest, government-run businesses around. And that’s because party apparatchiks have controlled the loans.

The share of so-called “non-performing” loans at these banks has been almost 20 times higher than at a typical American bank.

To interest foreign investors, the Chinese government knew it had to make the banks look better.

So the government dressed up them up by taking all the rotten loans off the banks’ balance sheets and dumping them off onto other companies.

Then, they took $45 billion from the country’s own reserves and just gave it to the banks.

Bingo. Look at those gold-plated balance sheets! Best IPOs ever.

But the thing is, the government still owns the banks. The government says they’ll start acting like real banks, but the same cronies still control the loans and the recent economic research says they’re still making the same political loans they always did.

If China keeps growing as fast as it has lately, this problem will stay under the rug.

At the first sign of slowdown, though, the death spiral will begin. The government will have to decide whether to let failing state-owned enterprises die or to tell the cronies to reopen the spigot.

The good news for them is they now have a big pile of investors’ money to use.

If you’re one of the people buying into these banks, at least tell me you thought of the risks. Don’t tell me you just wanted to get in on the next big thing. Because, like P.T. Barnum, the Chinese know there’s a Beng Dan born every minute.

THOMAS: Austan Goolsbee is a professor of economics at the University of Chicago’s business school.

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