China’s future?
The Bank of Korea is taking ongoing losses on its reserve holdings.
South Korea’s central bank may have a loss of as much as 3 trillion won ($3.1 billion) in 2006 because of interest costs from [domestic sterilization] bond sales, the opposition Grand National Party said, citing a Bank of Korea report.
“We judge that there is a possibility that the central bank will record a loss between 2.5 trillion won and 3 trillion this year,” said Lee Jeong, an aide to opposition party lawmaker Yun Kun Young, who sits on parliament’s economics and finance committee.
Still, the central bank said interest revenue will be larger in the second half of the year than the first. That revenue should help prevent the loss in 2006 from growing beyond last year’s, the bank said in a statement today.
Losing money on your reserves isn’t unusual. In most emerging economies, domestic interest rates are higher than US and European (let alone Japanese) rates. Korean policy rates aren’t really all that high – 4.5%. They just aren’t super low.
But the reported losses must include valuation losses from won appreciation.
China has avoided these problem. The RMB hasn’t been allowed to move much (there is a reason no one wants to hedge … the RMB hasn’t been that volatile, and there isn’t much risk it will fall) Base money is very high – which helps the central banks profits. And China has intentionally held domestic interest rates well below US rates to discourage speculation.
That helps keep the PBoC profitable. But it creates other problems. Like too much bank lending …
No Responses to “China’s future?”
Joseph Wang • September 18th, 2006 at 4:58 pm
China holds interest rates on deposits low, but there are no controls on interest rates on lending, so I’m not sure how those controls encourage lending.
The controls on deposit interest rates exist as something of a tax in order to get the banks solvent. It’s also to prevent the banks from engaging in risky activity in order to boost depositor returns, which was a big problem with the ITIC’s before they were put under the control of the banking regulators.
There are parts of the system which look very much like the US financial system of the 1960/70′s with controlled interest rate passbook savings and zero interest checking accounts.
JW • September 18th, 2006 at 6:50 pm
If the interest rate on deposits is low, the lending rate would also be low (relatively speaking after adding the margins) in a competitive market. Surely that would encourage lending right?
Joseph Wang • September 19th, 2006 at 11:08 am
It’s not a competitive market. Most savings go into banks, and there aren’t really any formalinvestments available to someone that doesn’t want to do something stupid like invest in the stock market or real estate. The only way to really make money without doing anything stupid is to start your own business or invest in a business of a relative (and that’s not necessarily a bad thing).
One way of thinking about Chinese banks is that they are really “cash storage companies” rather than capital allocators.
Emmanuel • September 19th, 2006 at 11:40 am
Chinese banks look like they will be compelled to reform, like it or not, as the WTO stipulations regarding financial services come into effect this year (and the Bloomberg article suggests they’re doing so). From the China Business Review:
With China’s WTO entry requirements winding down, will 2006 become China’s “Year of the Bank”?
China is reaching the final deadlines to open its services sectors to foreign companies, as set forth in its World Trade Organization (WTO) entry agreement. The focus this year will be on the banking sector, which has been relatively protected from foreign competition and is scheduled to be fully opened by December 11, 2006. This is one of the most anticipated commitments China has yet to phase in.
DOR • September 19th, 2006 at 8:43 pm
Emmanuel,
If we assume that China fully and uniformly meets the WTO requirements exactly on time, there will be a “big bang” type of impact.
That’s a huge assumption.
.
Joseph Wang • September 20th, 2006 at 9:37 am
1) The WTO financial services agreements are largely anti-climactic since most of the provisions of WTO are either already being implemented or just need to be “rubber stamped.” The Chinese banking authorities have been tremendously supportive of foreign banks who are allied with the Chinese government to increase the efficiency and risk management of the banking system and prevent a 1998-style Asian crisis.
2) One of the curious things is that there aren’t any foreign banks that I know of that are deciding to go head to head against Chinese banks. Every bank that I can think of is partnering with some Chinese bank. The main reason for this is that a Chinese bank already has “boots on the ground.” This actually matches banking strategy in the United States. One thing that you’ll notice is that the major banks are opening a branch practically on every street corner, since finance is fundamentally a face-to-face business and tellers are cheap. Most of the banks want to do the same sort of thing in China, and it makes sense to partner with someone that has already hired the tellers.
I wonder what Gordon Chang thinks about all of this……
