Submitted by Experience Not Logic Blog

Bank of China (BOC) just reported a 31% increase in profits for 2007 over 2006, and Industrial & Commercial Bank of China (ICBC) reported a 65% increase in net profit for 2007. In a time characterized by bank crises how did these two banks with significant subprime mortgage exposure manage such a profitable year? Well, the kind folks at the Wall Street Journal had a story today by Jason Leow explaining just how the Bank of China might have managed to post an impressive increase in profits in a subprime year, “Bank of China Cuts Subprime Exposure.”

Long story short, BOC simply did not include the full extent of its possible losses from subprime investments in its financial reports.

To increase the length of the story, WSJ says that analysts have suggested that BOC’s accountants have taken advantage of “legal” accounting methods in China to write off their loss to the government:

“Some of the losses could have been booked to shareholder equity rather than recorded as a profit-and-loss number. If so, the government–which owns about 70% of the bank–would have taken the lion’s share of the hit, rather than foreign and domestic investors. Such an accounting method is legal, analysts say.”

Though we can’t know for sure that this is what happened, the history of Chinese banks and non-performing loans suggests that the government isn’t afraid to take a few hits for the benefit of the creditworthiness and financial health of their banks. Is it just me or is it sort of strange when Washington is overtly propping up domestic financial institutions and Beijing is covertly propping up domestic financial institutions?