Can you be a global bank with no Chinese operations? Today, yes. Tomorrow, ???. So take a shot or two at getting in. It’s a risky business but they probably think they have to try, at least the conventional wisdom says you have to try. Time will tell, as the conventional wisdom used to say you needed to be an internet business. Disney put money into Go.com and Time Warner ate the sour AOL apple. Thinking about the internet changed, quickly. China has a LONG way to go to have a market like ours, so only time will tell if now is the right time, and if Citigroup and others made the right deal.
Let’s look at Corporations in China. They have a horrible situation because what disclosure they do have isn’t correct or audited. They simply write down what they want. How can anyone price that? Isn’t the key to market efficiency having an idea about the value of the product, in this case, stocks? The lack of transparency, much like Ackerloff showed with his work in information asymmetry and used cars pricing being lower due to the buyer not knowing if it was a lemon or not, stocks would all fall in value if we couldn’t trust the foundation upon which the price was built. What if companies just made up the numbers? They could get away with it for years if there was no audit process, no disclosure requirements. Once we found that to be the case, who would buy a stock? Confidence would be lost and that is all that holds the markets together.
If China floated their currency, trade would be more balanced as we would be paying more for their goods and so we would look elsewhere. Their exports would fall along with their economy. Our prices would be higher, leaving us with less goods for more money and our economy would stall. So we are stuck. We need a slow revaluing over time so we avoid a potentially disastrous shock for both countries. But that’s off the topic.