In reponse to Paul B's note on the downgrading of newly-private banks in China by Moody's, which is an interesting example of the "market's" response to financial liberalization: For a foreign lender to a Chinese bank, the ultimate guarantor of repayment is the Chinese government. Although governments will often also assume private foreign debts in crises, debts by state institutions tend to be considered sovereign debt and are thus a bit more "senior." So even though state banks often make large operating losses, governments usually make an effort to pay their foreign creditors. Moody's would seem especially well-advised to downgrade these freshly-privatized banks, given both China's macro situation and the horrible record of newly-privatized banks in many parts of the world. I don't follow China closely, but it's likely that the huge expansion of credit there in recent years has created a lot of bad debt, especially since much of it appears to have occurred outside the control of the central government. Moreover the country's current strong growth in reserves creates conditions for greater financial fragility, whether it's sterilized or not. Perhaps someone out there knows more about recent developments in China. Colin Danby, U.Mass. Amherst
