[PEN-L:4874] Re: Real world of finance capital

[Colin Danby <danby@xxxxxxxxxxxxxxx>]

In reponse to Paul B's note on the downgrading of newly-private
banks in China by Moody's, which is an interesting example of the
"market's" response to financial liberalization:

For a foreign lender to a Chinese bank, the ultimate guarantor of
repayment is the Chinese government.  Although governments will
often also assume private foreign debts in crises, debts by state
institutions tend to be considered sovereign debt and are thus a
bit more "senior."  So even though state banks often make large
operating losses, governments usually make an effort to pay their
foreign creditors.

Moody's would seem especially well-advised to downgrade these
freshly-privatized banks, given both China's macro situation and
the horrible record of newly-privatized banks in many parts of the
world.  I don't follow China closely, but it's likely that the huge
expansion of credit there in recent years has created a lot of bad
debt, especially since much of it appears to have occurred outside
the control of the central government.  Moreover the country's
current strong growth in reserves creates conditions for greater
financial fragility, whether it's sterilized or not.

Perhaps someone out there knows more about recent developments in
China.

Colin Danby, U.Mass. Amherst