Skip to Main Content
PCBB Banc Investment Daily December 30, 2013
Banc Investment Daily
December 30, 2013

Dragons As Guardians Of Wealth

The next Hobbit movie is out and this one concerns the dragon Smaug who hoards vast quantities of gold in a big spooky castle. There is a long history in stories of dragons as the fearsome guardians of wealth. The first recorded versions of this relationship are found in Greek mythology, continuing through the tales of Beowulf and in Biblical stories. Medieval paintings also have plenty of dragons, generally involved in mortal combat with saints. Dragons are universally portrayed as fearsome and loathsome and the personification of evil - except in China, where dragons are symbols of good luck and nobility. Like so many things, it all depends on where you grew up.
Speaking of China, there has been lots of news about the country recently. There are the usual issues about currency manipulation of the value of the Yuan, but the Chinese government continues to widen the trading band, allowing greater fluctuations of currency values. The Yuan rose to a 20Y high this year on a surge in the country's trade surplus and the People's Bank of China is seen as basically ending intervention and allowing the Yuan to fluctuate according to market supply and demand. China's trade balance has also widened, as exports have increased. The wider band for the currency should allow the Yuan to go up in value versus other currencies for some time.
Related and important for the population of China is a report that new leadership is undertaking some broad based economic and market reforms. The changes will bleed over into social policy as well. Already announced are changes allowing more private investment in state controlled industries and a relaxation of the one-child policy.
Why the change you might wonder? China has experienced rapid economic growth in the last two decades, but the result is that the wealth gap between the rural and the urban population has increased. This has created social unrest and especially with some slowing of economic growth, the government is taking steps to help the rural population. There are land reforms, which should unlock wealth for farmers by allowing them to sell land that previously was beyond their reach. The sale of land will generate tax proceeds for local governments and allow them to issue bonds like a US-style municipal market.
All of these changes means there will be more freedom of movement of the population allowed between the rural areas and small cities, which should improve income and productivity. That should increase the pool of labor for China's manufacturing industry. Market-based reforms are always slow to roll out in China, but the latest ones include greater access to banking licenses. This should boost the entry of private enterprise into the banking sector, thereby increasing diversity and competition in the sector. The result should be more efficiently priced capital.
None of these reforms will take place overnight and resistance to change will clearly slow progress at times. Nonetheless, things are on the move with one the US's most important trade partners. If your bank processes international trades with companies that do business with China, these developments should allow for greater growth and prosperity in China and therefore growth opportunities for your bank. Remember as with the history of dragons, perspectives differ, so keep an eye on all sides of the equation and your bank should be poised to benefit.