Michel Klompmaker
It is Tuesday morning 3 March 2020 and it has been a while ago, the great financial crisis of 2008/2009. We can still remember it, just like yesterday, because we were in Vienna at the SIBOS Event in mid-September 2008, where bankers from all over the world were present and heard the news about Lehman Brothers in major panic. How long ago was that? Have we forgotten the causes? Can it happen again today or in the foreseeable future? The measures taken by supervisors and global committees of experts should protect us against such a crisis? But is that really so? We believe that a much greater economic catastrophe is coming, caused by a new global player and by the country with the most inhabitants in the world but with only one party. The new crisis can only be prevented if the Western Financial Services Industry does not fall for it with open eyes.
Later in this article, we will elaborate on why and explain the facts, but first, for the sake of good understanding, go back to the origins of the 2008/2009 financial crisis in order to make a comparison with what we have around us today see happening. Well-known are the stories of American sellers who could win big commissions if they could only sell mortgage loans, even to people they knew or could know that they would never be able to pay back the loan. In the USA that practice could easily continue to exist, after all, house prices rose steadily and in the event of non-payment, the key to the house was simply handed over and the defaulter was left out.
In the meantime, the banks had made nice “packages” of those mortgage loans as real assets and sold them to other financial institutions, which in turn put a nice snare around them and resold the package. The new buyer did the same again and of course you guessed that with a little setback, in this case a fall in housing prices, the collateral was very far away and the person who took out the original loan could not be found. Et voilà, the financial crisis was a fact.
What measures were taken then?
It is undeniably the case that regulators and governments, in consultation with many international organizations and smart people, have announced a whole package of measures to prevent a second financial crisis à la 2008/2009. Banks are subject to much stricter controls, have to maintain higher financial buffers and they can “rejoice” in the increased interest of all kinds of supervisors. We mention in passing that they are allowed to pay the invoices of those supervisors themselves. Specific additional measures have been taken for each country, such in the Netherlands as the Bankers’ Oath and the legislation on bonuses to remove the perverse incentives from the system, and a bank tax has also been introduced.
The geopolitical landscape in 2020
It is important to consider the international geopolitical relations for a moment. First of all we are dealing with the most powerful economy in the world, the USA, currently led by a president who has a special relationship with the truth and facts. The fact is that federal government debt is rising sharply in the USA and that many top economists are starting to worry seriously about the level of US government debt.
The former superpower the USSR, now reduced to Russia, ended up in major financial problems after the fall of the Wall in the early nineties. Ultimately, power in Russia, as the main remnant of the USSR, came into the hands of Vladimir Putin through the KGB. This power politician wanted coûte que coûte to prevent his Russia from being dependent on international capital markets again. And it worked. The government money is now splashing against the skirting boards in Moscow.
Then the familiar, old continent, Europe, more specifically the EU, still not a shining example of a unified political policy versus non-EU countries, but economically a powerful bloc, despite the troubles around Brexit. In any case, thanks to the euro and the agreed budget discipline, there is no question of an economic time bomb in terms of debt position under the European foundation.
From Mao Tse-tung to Xi Jinping
China is a special case. After decades of economic isolation, China has become interested in the rest of the world and vice versa. Of course, non-Chinese companies wanted to make use of that enormous potential of cheap labor, which happened. But especially in recent years under the conditions that were determined by the Chinese. Gradually the market became slightly more open to non-Chinese companies, but it didn’t actually really open. There, too, just like in Russia, there is only one power device that is in control and ultimately that one power device, the communist party top, determines the actual rules that apply in China. The rulers in China have the ultimate goal to celebrate in 2049, exactly 100 years after Mao Tse-tung came to power, together with the Chinese people, that they are the most powerful people in the world in all respects.
The debt problem in China
So, after this brief explanation of the geopolitical situation, we will name the problem. It just has to do with debts, nothing more and nothing less. The Chinese multi-year economy plan has a strong objective with regard to annual economic growth. The party top thinks it is less desirable if the annual growth would be less than six percent.
For the record, the American gross national product is still about 60 percent higher than that of the Chinese, but the Chinese gross national product is now nearly three and a half times as large as that of Germany and almost three times as large as that of Japan. Compare that with the situation at the start of this century! In 2002/2003 at the time of the outbreak of that other virus, called SARS, China’s share in the world economy was only four percent, now that share has risen to almost 20 percent.
The consequences of this growth financing can be guessed, a substantial increase in national debt, which has now risen to 250 percent of the gross national product. The question is how the Chinese leaders want to deal with this in the future.
By way of comparison, in Europe some countries have a serious problem when it comes to the official national debt, such as Belgium and Italy, but there are reservations about this because a lot of private wealth has been built up in those countries. Other European countries, on the other hand, have their finances in good order, in the sense that the national debt is below the 60 percent norm, which many economists regard as a maximum and is recommended by the EU as a maximum.
Then back to China, because it is fundamentally different there! The national debt there is no less than 250 percent of the gross national product, so more than four times as much as is thought desirable in Europe! The debt increase was particularly strong in the period 2011 to 2016, with an annual increase of an average of 10 percent per year … in recent years the level has stabilised to around 250 percent, but the question is of course what the impact this year will be due to the recent events surrounding the coronavirus. We have just had a spectacular week at the fair. Many had forgotten that it could and could not be: stock prices can also fall. Also those of the Chinese listed companies, which already contain a lot of Western capital. Back to the Western Financial Services Industry: they are not having an easy time, the traditional revenue model with interest margins has been under great pressure for years, regulators are regularly on the doorstep, shareholders are not very satisfied, so there is great temptation …
Opening-up is the trap
Given the interdependence between the Chinese business community and the government, this bizarre debt percentage of 250 percent is extremely worrying. How are they going to solve this? Well, the Chinese government may think it has found the solution. In the past, foreign financial institutions were not or hardly welcome on the Chinese market, now there is a clear turning point. Yes, by the end of this year 2020 it should be that there is even “full ownership” for foreign banks and insurance companies. In this context, the Chinese speak of “opening-up” of the market. After all, a lot of Western money has already been invested in Chinese listed companies. Opening up the internal financial market to foreign banks and insurance companies is in line with the trend now that more and more Chinese people are swarming across the world, both in the business sphere and as a tourist. It seems there are more than 100 million annually. The control of imports and exports of currencies by the Chinese authorities as a result has become very difficult.
Now that non-Chinese banks and insurance companies will soon be allowed to operate on the internal Chinese market, one has to wonder, for what purpose does Beijing do that? Do they not play well in the well-known theme of greed? Well, the second economy in the world, shouldn’t we be there? Logically, right? Yes, and if there are a few large (financial) sheep across the dam, then we can’t stay behind right?
In itself it seems fantastic, a country with such good growth figures, but who determines that? And what about the culture? And the Chinese language? It may be clear that Beijing has its own agenda with the ultimate goal of having a party in 2049. Look at what is happening in Africa, Suriname, Greece and Serbia.
Once inside China you should not be surprised when the legal rules are changed and then? You may be required to pay off the Chinese national debt as a kind of “satisfaction” to the Chinese people. You can still choose now. Simply put, don’t. If you do participate, don’t complain that you were not warned!
Just think about the consequences for your company, your employees, your shareholders, the global economy and your conscience. Perhaps again study the period before 2008/2009 well? Or perhaps even further back in the period of post-war Germany with “Wir haben es nicht gewusst”?
