October 10, 2012

China Bank Head Ditches IMF Meet in Snit Over Islands

Territorial dispute escalates as four Chinese banks bail out as well

Meetings of the International Monetary Fund (IMF) and World Bank were a few short as they got under way this week in Japan. Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), wasn’t there, nor were China’s four largest state-owned banks. The reason? A territorial dispute over a group of small uninhabited islets claimed by both Japan and China that has been escalating over the past few months.

Bloomberg reported Wednesday that the meetings, scheduled to run through Sunday in Tokyo, were expected to draw around 10,000 participants, and Zhou was scheduled as a speaker at events held by the IMF and the Institute of International Finance (IIF). However, PBOC is instead being represented by Yi Gang, a PBOC deputy governor, and Vice Finance Minister Zhu Guangyao.

Ownership of the islands, called Senkaku in Japanese and Diaoyu in Chinese, has been in dispute since 1885, but recent events escalated tensions when, as previously reported by AdvisorOne, Japan announced its intention to purchase them from a private Japanese owner.

As both sides sent everything from fishing vessels to warships to the islands to display their ownership, the atmosphere grew heated. Demonstrations and vandalism in China shuttered factories, car dealerships and restaurants, and Fitch Ratings warned that continued hostilities could lead to a downgrade for companies involved in the closures.

The $340 billion trade relationship between the two Asian countries has been put in jeopardy as China continues to flex its muscles over the islands, and now the dispute has spread to international meetings of the IMF.

“It’s a signal that the dispute is very serious to China, and that it will impact relations with Japan in all areas,” said Dariusz Kowalczyk in the report. Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, added, “China is becoming more assertive with the historical territorial issues.”

The Chinese banks’ decision to avoid the talks indicates that the issue has escalated beyond its financial effects on consumer sectors such as tourism and the automotive industry to possibly have an impact on the financial sector. Chinese banks, assisted by government bailouts, have become the most profitable in the world.

Although China insists that the row is entirely Japan’s fault and earlier even encouraged its citizens to demonstrate their displeasure with the Japanese over the issue, Chen Xingyu, an analyst at Phillip Securities Research in Shanghai, downplayed the possibility of any harm to the financial sector.

In the report he was quoted saying, “The political significance of their action is greater than its economic significance. It’s just a way of the government making clear its stance and it is ready to use other supplementary measures to assert itself against Japan. Any impact on the banks’ businesses is likely to be very small.”

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