Trouble in China, says Ken Leonard?

I believe that these economies like China were more government than market driven. The culture is structured to require more commercial obedience to the common goal or ostracism and shame are the result.  A failed executive may have to go through the public shame of arrest and conviction before exiting the back door in these status driven/public face countries.  When troubles arise, transparency is obliterated.  Face is everything, the reality of the numbers are most often ignored.  Good things in the States are overdone too, but the correction is automatic when the entity runs out of cash and capital and defaults at an early, entity stage.  Then more capital is not available, bankruptcy occurs, the assets are remarketed to the capable at a discount and the losses are mixed in with the profits.  In Asia the charade goes on until the largest institutions and ultimately the government are threatened.  Not only that, but the home economies of most Asian nations with the exception of Japan are relatively small.  Recovery of a major situation is not possible due to sales in the home market.  Recapitalization cannot be accomplished internally, either.  Look at what the U.S. financiers did to assist the recoveries there by taking positions in the financial institutions and overseeing them back to health.

I see Citigroup and IBM took a big position in the largest Chinese bank recently.  Transparency in China’s financial institutions is said to be minimal to other than insiders which would account for a largely overbuilt market.  Just try to build a major financial institution in a virgin market quickly when you have no base of investment talent.  There would be no common underwriting discipline in the market which would allow high competition to be profitable too.

I think Mr. Kenneth Leonard has it right in his analysis.  This is my observation in support of his position.