Jul 6, 2011

GaveKal MD unwittingly makes the case for avoiding Chinese financial system at all costs

[In a market system, with independent shareholders and more or less alert debt-rating agencies, the Chinese banks wouldn't last "five minutes".]

But because it's a closed system, they can last indefinitely, because it's in no one's interest to pull the trigger on these institutions and force them to do an instant mark-to-market.

This is a perfectly rational way to organize a financial system at China's level of development. Don't take the metrics and standards that are devised for a mature financial system and impose them on China. If you do, you come to the conclusion that it should fall apart tomorrow. But, by the same standard, the system should have collapsed 25 years ago.

~ Arthur Kroeber, managing director, GaveKal-Dragonomics, interview, Grant's Interest Rate Observer, May 20, 2011

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