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Economic Development in China -- Lessons for India - Capital Ideas Online
......Just another story of similar thing in Thailand. So when you go to Bangkok you notice that there are lots of empty apartments and you might ask what are these? These are stupid. When they built these apartments they knew they were stupid. But they built these apartments not to house people but to generate loss in transactions which could be skimmed. So once again we have got some Chinese in here and they owned these companies. So by the time he got to 51 percent of that -- he only owned 1/16 of the equity of this company. This company at the bottom built the apartments. Where did they get the money from? It gets the money from the family bank. So the family bank lends money to these apartments, this company buys the land from this company at 10 times the price and buys cement from this company at 10 times the price. So pretty soon it becomes unable to repay the loan. And that would be the end of the story except that this is the beginning of the Asia Pacific century and Citibank shows up and says gosh, this is the Asia Pacific Center. We need to establish a branch in Bangkok. And so they show up and they meet with the locals and they start making loans to the construction company and these loans are guaranteed by this bank. Of course the bank is already insolvent but they don't know that, because the accounting is not what it should be. So what they do is due diligence firstly they get a mortgage of the land to secure their loan and the mortgage is based on the valuation provided by one of the cousins of this family and the loan is guaranteed by this insolvent bank. So the best thing that will happen to all of the above is the Asian financial crisis. Because that throws up a huge mass of giant discussions in the course of which the Citibank gets the IMF to force the Thai government to honor the guarantees of this bank. So this bank is already insolvent but because the Thais need the IMF to support their exchange rate they have to agree to take up the loans of Citibank. So Citibank gets away scot-free and all these guys get away scot-free and the only people who suffer are the Thai taxpayers because they are so busy coping with the Asian financial crisis that they don't really know what is going on.
So, I have told you some stories and I will skip some statistics and tell you about the evidence that this is going on on a very large-scale in East Asia. What you do is you look at the dividends -- the point is that dividends by definition are paid out to people in proportion to their capital exposure. So if there is a company at the bottom of the pyramid than the controlling shareholder gets very few of the dividends only 30 percent of 50 percent of 50 percent of 50 percent of 30 percent. So they are more interested in shifting value out of the company by some unfair related party transactions like the type I have described. So one sure fire way of identifying where the ripoff is this taking place is looking at the correlation between the dividend rates and the position in the pyramid. Where the position in the pyramid can be measured in the following way. ...Article Continued