A piece of news you may have missed

You may have missed the news that the last of China’s Big Four banks, Agricultural Bank of China, is going public.  The reason that this news is important is that the significance of the event is likely to be counter-intuitive.  Investors around the world are hailing the fact that China is apparently loosening its grip on the economy and letting market forces begin to dictate economic outcome, rather than state planning.

Unfortunately, this interpretation is naive.  For starters, the other three of the Big Four banks have already gone public, yet those IPOs, and this one also, are just partial privatizations.  That means that the Chinese governments still maintains a firm grip on the banks.  Next, despite the privatizations, meaningful reform, such as running the banks for profitability rather than loan throughput, has yet to occur.  Additionally, China has many large banks, so even if all of the Big Four reformed, there would still be massive problems within the Chinese financial sector.  I have detailed those problems before on the blog, but they include: massive corruption at the local and national level; very poor loan underwriting standards; and not surprisingly, massive portfolios of shaky loans.  Ouch!

The Agricultural Bank of China is super-susceptible to Chinese governmental pressure.  The reason is that China began reforming its economy by bolstering its major coastal cities.  Yet, huge numbers of Chinese are still waiting…and waiting…and waiting for the benefits of China’s economic miracle to affect them.  These folks overwhelmingly live in rural areas, the jurisdiction of the ABC.  What that means is that there is huge incentive for the Communist government to continue to keep their fingers firmly gripped around the throat of the ABC to ensure that the rural areas of China are “served” by its big bank.  In other words, the Chinese government is not relaxing its grip on the economy, and it is not interested in reforming the banks at this time.

Jason