Few things are as mysterious as Asian business practices. It is a strange combination of complexity and opacity, sprinkled with a heavy dose of dishonesty that is forever off-limits to the Western mind. The word “inscrutable” comes to mind. A good example is right here. In the West, a firm struggling to pay its bills and threatening to default will do so in a very public fashion. If the regulators take over, they perform a public audit, liquidate the assets and pay creditors based on an agreed upon framework.
If the firm goes into bankruptcy, that is also a public process. If a white knight comes in and puts up a bunch of cash, then we learn who it is and why they are coming to the rescue. It is not perfectly transparent, but the public and interested parties will know enough to judge the results. A big part of Western economics is transparency. That does not mean there are no insiders doing inside deals, but we have laws against insider dealings for a reason.
In China, the banking system is a mystery to everyone, including the people in the Chinese banking system. China Credit Trust Co has no money of its own. It sold a product to investors promising a ten percent return on loans to a firm that has no money to repay the loans. That’s not how it was presented, but that is the reality of it. In the West, this is called fraud, but in China this is just how deals are done. They make New York City real estate seem simple.
Zhenfu Energy, desperate for cash, went to private firms to borrow money at rates well above market. China Credit Trust Co appears to have created a product to be sold to retail banking customers to funnel money into the struggling energy company. It was a fraud, but most of modern banking is a fraud. Now that the energy company is defaulting on the loan, China Credit Trust Co cannot pay the retail investors their promised return.
This was all supposed to happen at the end of the month. Today a mysterious and undisclosed white knight has arrived to supply the cash. Everyone knows the white knight is the Chinese Communist Party, but no one will dare say it. It is simply a “restructuring” that papers over the problem for now. A month from now some mid-level functionary will kill himself and everyone will know why, but no one will dare say.
It is no way to run a modern economy, but that’s another thing everyone knows, but no one dares say. Instead, the West looks the other way and hopes those inscrutable Chinese keep buying up the useless paper the credit machines keep emitting every month. At some point, the incompatibility between Asian practices and western practices will become too obvious to ignore. Most likely, it will cost the West a lot to learn this lesson.