Banks: China buys, Europe cries

  • 11 October 2011
  • From the section Business
  • comments

European governments have been kicking and screaming against injecting taxpayers' money into their banks - and are now only likely to do so because Dexia's near-collapse sounded the alarm about a possible and devastating chain-reaction of collapsing banks.

Whether they will ultimately inject sufficient capital into banks perceived to be weaker, well we'll just have to wait and see. And, as importantly, whether they will be able to do so in a way that doesn't significantly increase the indebtedness and perceived liabilities of the governments standing behind the banks, such that the perceived credit worthiness of those governments will simultaneously deteriorate, well that's also moot.

Here is the paradox hated and feared in Paris. If France bails out the bigger banks perceived by their respective creditors to have too little capital to absorb potential losses on loans to Greece, Italy, Portugal and so on, that could well jeopardise France's cherished AAA rating, according to well-placed bankers - for the simple reason that the enormous debts of those banks would move a bit nearer to being on the balance sheet of the French state.

Which is why the most difficult debate between eurozone government heads over the coming 10 days before the postponed EU summit is whether individual member states, like France, should bear the costs of recapitalising banks, or whether they should fall on the European Financial Stability Facility, the EU's bailout fund, thus by implication loading the lion's share on rich Germany.

That said, the British government has achieved the trick of persuading the world and its creditors that Royal Bank of Scotland's and Lloyds' enormous borrowings are not significant potential burdens on British taxpayers.

In fact, in some ways the chancellor should regard it as a policy triumph that Lloyds and Royal Bank of Scotland's credit-ratings have been downgraded and there has been absolutely no contagion to the UK's sovereign AAA rating.

In fact, as you know if you read this column, that decoupling of banks' credit ratings from the UK's credit rating is precisely what the chancellor has been engineering and praying for: it is the explicit goal of the recommendations made by the Independent Commission on Banking, to ring-fence banks' retail operations and make sure they have the capacity to absorb losses equivalent to 20% of their risk-adjusted loans and investments without tapping up taxpayers.

Or to put it another way, although these UK banking reforms are trailblazing in a global sense, France might come to the conclusion that doing something similar in regard to their huge banks could make good economic sense.

However, it was not so much the distinction between French and British banking policy that I wanted to draw, but between European and Chinese banking policy.

Yesterday shares in four enormous Chinese banks, Agriculture Bank of China, Industrial & Commercial Bank of China, Bank of China and China Construction Bank, all soared after Central Hujin, the investment arm of China's sovereign wealth fund, CIC, waded into the market to buy shares in them.

They were all up more-or-less a tenth in price.

Or to put it another way, when the share prices of banks in China fall - in much the same way as they have been doing in Europe - the presumption of the Chinese government is that investors who sell have simply got it wrong, and they need to be taught a lesson.

By contrast, if the British Treasury propped up RBS's price by buying more stock or the French finance ministry took a punt on Soc Gen, they would be seen by most analysts and commentators as dangerous maniacs, intent on eliminating any last scintilla of the conceit that banks are autonomous commercial organisations.

Let's be clear, the Chinese government's way of running its banking system - ordering the banks to lend colossal sums to state businesses and local government when the economy is weak, buying shares in the banks when share prices fall - is only credible because of the massive surpluses of the Chinese state: no one doubts that as and when bank loans go bad that China has the resources to recapitalise and strengthen its banks.

So what does the difference between the Chinese and European way of banking tell us? Really only that, for now at least (and it may not last), China has the financial and economic credibility to do what more-or-less what it likes, and European governments don't. Doh!