Good News For China

The floatation of China Construction Bank (CCB) at the end of last month is good news. Despite the enormous market capitalization of $66 billion (which makes it larger than Barclays, American Express and Deutsche Bank) based on perhaps less than reliable indicators, it is a step in the right direction when countries allow national banks to become public.

The scepticism expressed by some about the value of the investments CCB receive as collateral for lending should be eased by the other scenario: that CCB remains private and thus does not need to be accountable to a large pool of public shareholders about its internal valuations and projections. Because the money trails of most investments lead back to banks in one way or another – especially in the case of the CCB – they are usually pretty good indicators of the genuine performance of market as a whole, helping to give some good performance indicators. This has been evident in developed countries for many years - when the good times start rolling, banks are usually the first to feel the impact; conversely, when the going gets tough, banks tend to catch cold more quickly than some of the more elastic industries.

Part of the problem with investing in China before now was the lack of a large public financial organization. Because of the lack of any financial regulatory or reporting systems in China in the 90’s, it made it very hard for foreign investors to gage the valuations of the market as a whole – even in the case of traditional manufacturing industries investors paid way over.

As hard as Liu Mingkang, head of the China Banking Regulator (CBRC) tries, real-time reporting is often the best indicator of economic performance. CCB going public means it will be harder for companies within China to fudge valuations as the bank is forced to become more reliable with its reporting figures. This can only mean for a more accurate and efficient market. The long-term viability if investment China depends on more than the current round of sales hype.

There may be some teething troubles as industry in China adjusts to this new step-up in reporting efficiency, but the long term benefits will be felt with a higher degree of confidence in China as a whole, which should bring transparency and liquidity to shadier areas of the market. This is exactly what happened in Thailand a decade ago, and helped massively in swiftening the recovery of the economy after the currency debacle in 1997 as the world banks and economies were able to offer viable solutions to the hybrid loans weighing down on cashflow. The more investors can see, the more willing they are to participate, whatever the scenario.