This week, the Chinese government took the not-so-unusual step of dipping into its vast cash reserves and injecting $45 billion into two of the country's biggest banks, the Bank of China (BOC) and the China Construction Bank (CCB).
I say this is not so unusual because it's the third large bailout for China's banks in the last six years.
Why should you care? Because soon enough, these banks will be trading on Western exchanges. And if recent history is any guide, investors will drive these stocks to huge gains within days of their IPOs. Remember China Life Insurance
In fact, the move to buttress these banks against failure is seen by most industry observers as a measure specifically engineered to keep the two IPOs on track for late 2004.
Over the past couple of weeks we've repeatedly warned investors to look before they leap into foreign stocks. But we'd be remiss if we didn't remind you -- again -- to be wary of floods of capital into Chinese companies, like the $40 billion gained last week by just three Chinese companies, Sinopec
It's not that these are bad companies. It's not that there isn't great potential in China. It's just that over there, the rules are different. As an article in The New York Times points out, the Chinese press isn't even allowed to publish the full extent of the BOC's and CCB's bad loans. Analysts suspect it could be twice as much as the 20% that's officially claimed. Factor in the sad truth that many of these bad loans were made because corrupt local politicians strong-armed bank managers into making loans to their cronies, and you have a recipe for continual mini-disasters.
So next fall, when the big Chinese bank IPOs come around, remember that $45 billion. And remember the 40% nonperforming loans. And remember the anonymous Beijing banker who asked The New York Times, "What makes you think these guys will do anything differently in the next four years?"
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Seth Jayson once got a free haircut on the streets of Guangzhou, and that's enough risk for him. When he's not wishing he were in China, he answers email to FoolishSeth@sethj.com.