In 2014, around 80% of HSBCs profits came from Asia and that was mainly Hong Kong, China and economies dependent on them. And at Standard Chartered the figure was similar, again with China and its dependencies making up the bulk. But now?China is in trouble.
A few years ago few of us really understood the extent of the structural problems there.I know I certainly didnt, and I thought the governments growth targetof 7% per year for the nextfew years was reasonable. After all, China was opening itself up to private enterprise and the grip of central control was slowly-but-surely loosening.
Except it wasnt. Now that economic reality isnt going as well as the people in controlordered, theyre tightening their gripagain. Once the party leaders were extolling the virtues of the countrys fledgling stock market. But now theyre blaming the free market enterprise leaders for a stock market bust that was inevitable after the failure of state-ordered attempts to keep the surgesgoing.
Guo Guangchang, often spoken of as Chinas Warren Buffett, was once lauded as a champion of Chinas push for wealth. But hes now seen asone of the chief scapegoats for 2015s stock market crash and has been facing lengthy police questioning.
The BBCs China editor Carrie Gracie made the point this week that no economy has achieved high income status with a closed financial system. And though Chinas centrally-controlled capital allocation and state-sponsored stimulus have been responsible for recent annual growth in excess of that 7% per year, its hard to avoid the obvious conclusion that capital cant be allocated efficiently by such means and that centrally-planned growth is just not sustainable.
And that points to the real drag on Chinas economy its state owned enterprises (SOEs). Theyre horribly inefficient behemoths, financed in part by forced loans from the countrys banks, bogged down by unserviceable debt, and unableto compete in a free market environment. But getting rid of them isnt on the table, as theyre what give Beijings rulers the economic control that keeps them in power.
Giving up power?
I cant see the Chinese government accepting the need to wind down its SOEs any time soon, despite the obvious fact that the move from state ownership to private ownership has stimulated genuine long-term economic growth in every country that has tried it. But until it happens, any long-term 7% annual growth target remains an illusion.
And in the meantime, we really cant tell how much toxic debt (from both state-directed lending and Chinas still-overheated property market) banks like HSBC and Standard Chartered really hold. Right now I wouldnt touch any company heavily invested in China, and certainly not the banks.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.