2007: Could China experience similar disruptions as Japan in 1990?

AUDIENCE MEMBER: Hi. I’m John Golob from Kansas City.

I have a question about the Chinese economy. Some observers have suggested that the Chinese banking system looks a little like Japan back in the 1990s.

Are you concerned that China could experience similar disruptions as Japan in ’90 or is China possibly — with different institutions — possibly more resistant to economic disruptions?

WARREN BUFFETT: I would have to say I don’t know the answer to that. I mean, it’s a very interesting question. It’s a very important question.

But, you know, I didn’t necessarily understand what was going to happen in Japan before it happened, and my insight into Chinese banks is about zero.

We’ve been offered chances to buy into various Chinese banks and, again, because I don’t know anything about them, I pass. It’s no judgment that there’s anything bad.

It just means that sitting in Omaha, Nebraska, not knowing what some item of loans and advances — what composes it or anything about the real operation of the place — that I can make a decision whether it’s worth X, half of X, 2X, a quarter of X, I just don’t know.

And I really don’t know — I just have no notion as to the answer to your question, but maybe Charlie does.

CHARLIE MUNGER: Well, if you stop to think about it, all of the remarkable economic progress that we’ve seen in China in the last 15 years has been accompanied by practices in their government banks that would make you shutter if you compared them to normal banking standards.

So everything you see in terms of progress has occurred despite — the banks were almost doling out money for aid as distinguished from doing normal banking.

So I’d be very leery of predicting that that’s sure to cause a huge economic collapse in Japan — in China.

They’ve been doing it for a long time, and they may actually be getting better now.

WARREN BUFFETT: Yeah. We’ve had our share of banking troubles in this country. I mean, it wasn’t that long ago in terms of the savings and loan crisis and all kinds of things.

And strong economies come through those things. So, you know, if ahead of time you’d seen all the problems with foreign loans that the commercial banks got into and all the problems with real estate loans that the savings and loans got into, you could have said, you know, it’s going to be terrible for the American economy, and it did produce a lot of dislocations and all of that.

But if you look at the regular American economy, it’s come through all kinds of financial crises with the real output per capita rising at a very substantial rate just decade after decade.

I don’t know what will happen in China, but I think it’s pretty amazing in terms of the gains that have been made.

And I think they’ll be — I think they’ll continue to be made, and I don’t know what will happen with the banking system, though.