At a recent presentation to the Asia management group of one of the world’s largest diversified multinationals, I took a quick poll related to the global financial crisis. By a lopsided majority of 35 to two, they agreed that Asian economic developments were not decoupled from developments globally, especially in the US and the EU. By not so quite a lopsided margin, but still a large one, they expressed the belief that we are witnessing structural change, not merely cyclical ones, and that the crisis would last more than a year.
The same day, Reuters economist Bernd Debusmann wrote: "Capitalism as we used to know it is on its deathbed. And those who predicted that the old brand, the unfettered, American-promoted system, was a danger to the world, are being vindicated."
It is true that the crisis roiling world markets was made in America. And it is true that my poll findings are confirmed by the anemic response of world markets to hefty bailout programs in the US and Europe. But they may fall short of supporting Debusmann’s provocative claim.
An industry uprooted
We are witnessing critical changes in the triangular relationship that links the US and European governments, their large financial sector players, and their real economies and consumers who use credit.
It is also fair to say that these developments have made the relationship between the US, UK, and Swiss governments and their major banks more akin to the Chinese model, a model that historically has been consistently criticized by outsider free-marketers.
Henry Paulson, the US Treasury secretary, adamantly opposed taking equity in banks, even as the US$700 billion bailout bill was being passed. But Congress insisted on empowering him to do so, and it turned out the failure of his initial plan to calm markets made the equity option essential.
Since the early 1990s, faced repeatedly with banks accumulating bulging portfolios of non-performing loans, the Chinese government has quickly ported money into the lenders to recapitalize them. In recent rounds, this was structured by Central Huijin – a "private equity" player founded by the central bank – as debt equity swaps, with Huijin taking an ownership position in the banks it recapitalized.
Central Huijin, which is now controlled by China Investment Corp, the country’s sovereign wealth fund, continues to be an important guarantor of liquidity in China’s major banks. It is also supporting banks in share offerings or on overseas acquisitions.
Beijing is clearly more comfortable than Washington or London in buying bank equity and keeping a steady hand on the tiller of its financial sector.
That is not all. Importantly, China has more pathways for intervention than the US government. Central Huijin, the national pension fund, and an undisclosed number of state-owned enterprises are now called upon to support listed banks by purchasing shares on public markets and pre-IPO banks by making share acquisition agreements in advance.
The US government, on the other hand, had to create special legislation, and the Treasury Department itself will take a direct equity interest in the nine banks targeted. The Chinese direction is still zhengqi fenkai, separating government from business operation, putting in layers of separation from pure policy and regulatory organizations to sector associations then to operating enterprises.
In stark contrast, the US direction is toward more direct influence on the lending policies of the banks controlled by the Treasury Department. Officials intend to order the banks to maintain "minimum lending levels," according to recent media reports.
There are more questions than answers for these issues. But there is one question that goes to the core of how enduring and structural the changes in the US and the EU will be: Will the new global landscape and global capital movements that mix private equity, public market ownership, and massive sovereign investors require all countries to forge a new government-banking relationship for their economies to remain competitive and viable?
If the answer is yes, we will see rather astonishing changes continue to unfold before us, a new and starkly different global financial order, and a strong validation of what China has been doing for over 20 years.