I continue to follow your comments and audios regularly, thanks a lot for the wonderful service. I am at a cotton conference in Denver. During a meeting with an Indian exporter, I was advised they are unable to have L/Cs from Chinese Banks confirmed even paying confirmation charges themselves. I would be grateful for your (or the collectives’) views on how serious the banking sector's troubles are in China. I presume so far this situation has not made you consider reducing your positions in China. Thank you very much in advance.

David Fuller's view

Thanks for your comments and your long interest in this service. 

I cannot comment of the Letter of Credit difficulty that your Indian exporter contact mentioned, because I have no insight on this.  However, it is likely that some Chinese banks are affected by the current stock market imbroglio, particularly regarding leveraged accounts.  Nevertheless, most Chinese banks are at least partially owned by the state and local governments.  That can be a problem for the private sector but it also makes the banks less risky.  See: China’s So-Called ‘Commercial ‘ Banks Are Anything But, from Forbes.

Given that China’s banks are not fully independent, they should not have the same risks, as for instance, US banks during the 2008 meltdown.  China’s managed economy has bungled its stock market management this year, but I doubt that this is anywhere near as serious as the US housing loan crisis of nine years ago.  For evidence, here is China’s Xinhua A600 Bank Index, which has reacted but is not doing badly relative to the Shanghai A-Shares Index.  Here also is the Industrial & Commercial Bank of China, the country’s largest bank.  Interestingly, all three are encountering some support near their 200-day (40-week) MAs.  Additionally, China’s mainland stock market is considerably less overvalued today than it was near the 2007 peak, and the economy has grown significantly since then.

With hindsight, I wish I had taken some profits on my personal long-term investments in China between April and May.  I did not know what was going to happen but they were overextended relative to their MAs.  If I had, I would probably be buying them back today.  Mind you, China is not for everyone.  It is command capitalism, which sometimes works well and is frightening at other times, as we have seen recently.  If you followed me in by any chance, you may wish to bail out on the next decent rally.  Japan, for instance, has democratic capitalism and a QE tailwind.  So does Germany.