May 15, 2009
Another Prediction of Chinese Currency Supremacy
A Columbia University economist known for his extraordinary conclusions -- some right -- evidently knows something everybody else does not.
The Chinese yuan is preparing to overtake the US dollar as the world's reserve currency, economist Nouriel Roubini has warned.
Read his article and several comments here. Frankly, it doesn't look like anything more than an educated guess. What support is there for such an extraordinary statement? Certainly none in the article itself. And the RMB isn't even fully convertible -- and I don't believe will ever become so. Convertibility -- essentially, the making of a truly internationalized currency -- has been a subject of discussion and prognostication for 30 years, ever since China used foreign exchange certificates in the early days after the initial economic reforms of 1978. How is it in the interests of the Chinese government and Chinese commerce to make it fully convertible? This is a question that no one seems to address.
Already, some are hitching on to a star in the hopes of its ascending to the extraordinary heights. I well remember the reports and predictions of the supremacy of the Japanese yen in the 1980s.
As proof of this gentleman's economic wisdom, writers consistently cite his previous prediction of financial collapse. But then again, I know quite a few non-economists who predicted the same thing!
April 24, 2009
Guest Post: Victor Shih on the Chinese Stimulus Package: "What did 5 Trillion RMB Buy?"
[Today's post comes to us, with our thanks, from Victor Shih, Assistant Professor of Politics at Northwestern University in the U.S., and blogger at Elite Chinese Politics and Political Economy. Victor is the author of the very fine, Factions and Finance in China, now available in paperback.]
Victor Shih | Apr 23, 2009
I have been getting a wave of bullish sell side reports about how the stimulus program launched late last year is having an unexpectedly good impact on leading indicators in China. Before we draw quick conclusions about how rosy everything will be, let's step back and examine what these figures are actually telling us. In essence, most of the benefits of pumping 5 trillion into the economy are temporary. When this pace of lending slows, many benefits will reverse into major problems.
First of all, I am more or less repeating some points that Mike Pettis raised in earlier notes. Also, unlike many sell side analysts, Stephen Green at Standard Chartered has issued several reports that give a more comprehensive view. Let's look at the latest figures. In conjunction with the stimulus program, the banks issued nearly 5 trillion RMB in new loans in the first quarter, a historically high level. Because there was basically no share issuance or new corporate bond issuance, the 5 trillion from the banks was really the main engine for 1Q 2009. The 5 trillion is almost the size of the US fiscal stimulus package and basically 1/6 of China's 2008 GDP. As far as I know, this is the largest monetary easing in this period of time as a share of a country's GDP (that didn't go into writing off bad debt, that is). Impressive indeed, but what did China get in return?
1. To be sure, fixed asset investment grew by 25+%, which was one of the intended effects of monetary easing of this magnitude.
2. Official PMI, which mainly reflects sentiment among SOEs or state corporation, went back into positive territory, but private sector PMI was still in negative territory at the end of March.
3. There has been a pretty impressive stock market rebound in the A share.
4. The housing market is showing some sign of life after a long winter. Sales in many major cities are going up significantly, even driving up prices in some cases.
So far so good, BUT...
When we look at figures for non-investment economic activities, things do not look good at all. In fact, it is down right disappointing after pumping 5 trillion into the economy.
1. First of all, export and FDI continue to fall at a pretty fast pace, which can't be helped.
2. More alarming, inventory for many industrial goods continue to build UP! According to a recent note by Stephen Green's team, refined oil inventory is up over 35% YoY as of the end of February.
3. Coal inventory seems to have gone down, but that's because many coal mines have ceased to operate. The 21st Century Business Herald reported that 50-70% of mines are "resting" for the moment. Iron ore mines are facing the same problem as international iron ore now costs less than domestic ore.
4. Electricity usage continues to be in negative territory.
Steel consumption has picked up somewhat from a collapse late last year. However, I think the problem there is continual over-capacity. The central government didn't want any major steel firms to go under, so they are spending billions to "merge" a bunch of steel firms. For example, Bao Steel based in Shanghai will buy up several steel producers in the Jiangsu/Zhejiang area. This maintains the over-capacity in the sector and will put upward pressure on inventory.
In electricity generation, there is rumor of CIC2, a mega company that will buy up distressed electricity producers and coal mines from across China, boosting the on-going consolidation financed by bank loans. In the airline industry, billions have been injected into airlines to keep them afloat amidst disastrous bets on world oil prices.
There is then the widely cited figures of 12% increase in urban income at the end of 2008 and increase in car sales in first quarter. In the first instance, I have no idea how the income figures were produced, but they almost always miss migrant workers, who are also urban residents. On the car sales, China Economist already points to a recent FT article which questions whether sales of minivans will help car company profitability. Finally, employment, which supposedly was the main point of the stimulus, was only marginally improved by the 5 trillion. Most large projects haven't gotten going yet as land still needs to be procured. The biggest employment impact was that the 5 trillion prevented the mass bankruptcy of hundreds and perhaps thousands of firms. However, some firms are staying alive by laying off or furloughing workers, like the coal mines.
So, really, when it comes down to it, the 5 trillion bought:
1. some psychological relief
2. some more sales of real estate, thus delaying the bankruptcies of many developers
3. an upbeat stock market, for a while
4. prevented the bankruptcy of numerous state firms, especially in the airline, coal, electricity, and steel sector
The most alarming thing is that these "positive" effects of pumping money into the economy lasts only as long as the money keeps flowing. If for whatever reason, the central government decides to slow down the pace of lending (and there are signs they are thinking of doing so), ALL of the above benefits will collapse relatively quickly. Imagine; if the flow of funds slows significantly, the psychological relief will disappear quickly, as will short-term loans to developers; the upbeat market sentiment will follow as speculative funds withdraw suddenly from the market. SOEs, which are building UP their capacity and inventory as we speak, will face growing losses from depreciation and deflationary pressure on output. Without free flow of bank loans, they will begin to default on their previous loans. Speculative demand for real estate will also collapse, given that inventory is expected to reach over 1 billion sqmtr some time in 2009 (again citing SCB report by Green et al.).
What does this mean? The central government cannot stop or even significantly slow this pace of lending until export picks up in a significant way, else the bubble will burst. This is a race against time. At some point, this pace of lending will lead to a serious NPL problem or inflation, or both. If by that point, export and domestic household consumption remain anemic, I am not sure what options the central government will have.
Posted by Richard at 7:50 PM | Comments (0)March 24, 2009
China Proposes "Super-Sovereign Reserve Currency" to Eliminate the Middle Man
[UPDATE (March 26, 2009): The American response here and here.]
Zhou Xiaochuan (周小川), Governor of the People's Bank of China, has proposed a supranational currency to which national currencies shall be linked and valued according to a system of "rules." Remember China's concern (panic?) over its enormous U.S. dollar reserves and investments in U.S. Treasuries [See: China's Holdings of U.S. Securities: Implications for the U.S. Economy] The New York Times provides a brief overview; WSJ here and here.
Pie in the sky. From WSJ:
Large, deep, and highly traded markets involving a particular currency "don't spring up spontaneously just because the Chinese central bank governor suggests this would be a good idea," says Barry Eichengreen, an economist at the University of California at Berkeley.
This is a shot over the bow. My initial reaction is that, given the statements of Treasury Secretary Geithner, this public announcement of an attack on the dominance of the US dollar indicates a worsening government-to-government relationship in economic matters between the U.S. and China.
Zhou Xiaochuan's comments in full appear below:
Reform the International Monetary SystemPosted by Richard at 2:39 PM | Comments (0)Zhou Xiaochuan
The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question,i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.
Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.
I. The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.
Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand,the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities; on the other hand,they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.
When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.
II. The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.
1. Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.
2. A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
III. The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all.
The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.
Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries. Specifically, the Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997 should be approved as soon as possible so that members joined the Fund after 1981 could also share the benefits of the SDR. On the basis of this, considerations could be given to further increase SDR allocation.
The scope of using the SDR should be broadened, so as to enable it to fully satisfy the member countries' demand for a reserve currency.
Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.
Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.
Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.
Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to a system backed by real assets, such as a reserve pool, to further boost market confidence in its value.
IV. Entrusting part of the member countries' reserve to the centralized management of the IMF will not only enhance the international community's ability to address the crisis and maintain the stability of the international monetary and financial system, but also significantly strengthen the role of the SDR.
1. Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets. The participating countries can also save some reserve for domestic development and economic growth. With its universal membership, its unique mandate of maintaining monetary and financial stability, and as an international "supervisor" on the macroeconomic policies of its member countries, the IMF, equipped with its expertise, is endowed with a natural advantage to act as the manager of its member countries' reserves.
2. The centralized management of its member countries' reserves by the Fund will be an effective measure to promote a greater role of the SDR as a reserve currency. To achieve this, the IMF can set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired. This arrangement will not only promote the development of SDR-denominated assets, but will also partially allow management of the liquidity in the form of the existing reserve currencies. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR.
关于改革国际货币体系的思考
周小川此次金融危机的爆发与蔓延使我们再次面对一个古老而悬而未决的问题，那就是什么样的国际储备货币才能保持全球金融稳定、促进世界经济发展。历史上的银本位、金本位、金汇兑本位、布雷顿森林体系都是解决该问题的不同制度安排，这也是国际货币基金组织（IMF）成立的宗旨之一。但此次金融危机表明，这一问题不仅远未解决，由于现行国际货币体系的内在缺陷反而愈演愈烈。
理论上讲，国际储备货币的币值首先应有一个稳定的基准和明确的发行规则以保证供给的有序；其次，其供给总量还可及时、灵活地根据需求的变化进行增减调节；第三，这种调节必须是超脱于任何一国的经济状况和利益。当前以主权信用货币作为主要国际储备货币是历史上少有的特例。此次危机再次警示我们，必须创造性地改革和完善现行国际货币体系，推动国际储备货币向着币值稳定、供应有序、总量可调的方向完善，才能从根本上维护全球经济金融稳定。
一、此次金融危机的爆发并在全球范围内迅速蔓延，反映出当前国际货币体系的内在缺陷和系统性风险
对于储备货币发行国而言，国内货币政策目标与各国对储备货币的要求经常产生矛盾。货币当局既不能忽视本国货币的国际职能而单纯考虑国内目标，又无法同时兼顾国内外的不同目标。既可能因抑制本国通胀的需要而无法充分满足全球经济不断增长的需求，也可能因过分刺激国内需求而导致全球流动性泛滥。理论上特里芬难题仍然存在，即储备货币发行国无法在为世界提供流动性的同时确保币值的稳定。
当一国货币成为全世界初级产品定价货币、贸易结算货币和储备货币后，该国对经济失衡的汇率调整是无效的，因为多数国家货币都以该国货币为参照。经济全球化既受益于一种被普遍接受的储备货币，又为发行这种货币的制度缺陷所害。从布雷顿森林体系解体后金融危机屡屡发生且愈演愈烈来看，全世界为现行货币体系付出的代价可能会超出从中的收益。不仅储备货币的使用国要付出沉重的代价，发行国也在付出日益增大的代价。危机未必是储备货币发行当局的故意，但却是制度性缺陷的必然。
二、创造一种与主权国家脱钩、并能保持币值长期稳定的国际储备货币，从而避免主权信用货币作为储备货币的内在缺陷，是国际货币体系改革的理想目标
1、超主权储备货币的主张虽然由来以久，但至今没有实质性进展。上世纪四十年代凯恩斯就曾提出采用30种有代表性的商品作为定值基础建立国际货币单位 “Bancor”的设想，遗憾的是未能实施，而其后以怀特方案为基础的布雷顿森林体系的崩溃显示凯恩斯的方案可能更有远见。早在布雷顿森林体系的缺陷暴露之初，基金组织就于1969年创设了特别提款权（下称SDR），以缓解主权货币作为储备货币的内在风险。遗憾的是由于分配机制和使用范围上的限制，SDR 的作用至今没有能够得到充分发挥。但SDR的存在为国际货币体系改革提供了一线希望。
2、超主权储备货币不仅克服了主权信用货币的内在风险，也为调节全球流动性提供了可能。由一个全球性机构管理的国际储备货币将使全球流动性的创造和调控成为可能，当一国主权货币不再做为全球贸易的尺度和参照基准时，该国汇率政策对失衡的调节效果会大大增强。这些能极大地降低未来危机发生的风险、增强危机处理的能力。
三、改革应从大处着眼，小处着手，循序渐进，寻求共赢
重建具有稳定的定值基准并为各国所接受的新储备货币可能是个长期内才能实现的目标。建立凯恩斯设想的国际货币单位更是人类的大胆设想，并需要各国政治家拿出超凡的远见和勇气。而在短期内，国际社会特别是基金组织至少应当承认并正视现行体制所造成的风险，对其不断监测、评估并及时预警。
同时还应特别考虑充分发挥SDR 的作用。SDR具有超主权储备货币的特征和潜力。同时它的扩大发行有利于基金组织克服在经费、话语权和代表权改革方面所面临的困难。因此，应当着力推动 SDR的分配。这需要各成员国政治上的积极配合，特别是应尽快通过1997年第四次章程修订及相应的SDR分配决议，以使1981年后加入的成员国也能享受到SDR的好处。在此基础上考虑进一步扩大SDR的发行。
SDR的使用范围需要拓宽，从而能真正满足各国对储备货币的要求。
●建立起SDR与其他货币之间的清算关系。改变当前SDR只能用于政府或国际组织之间国际结算的现状，使其能成为国际贸易和金融交易公认的支付手段。
●积极推动在国际贸易、大宗商品定价、投资和企业记账中使用SDR计价。不仅有利于加强SDR的作用，也能有效减少因使用主权储备货币计价而造成的资产价格波动和相关风险。
●积极推动创立SDR计值的资产，增强其吸引力。基金组织正在研究SDR计值的有价证券，如果推行将是一个好的开端。
●进一步完善SDR的定值和发行方式。SDR定值的篮子货币范围应扩大到世界主要经济大国，也可将GDP作为权重考虑因素之一。此外，为进一步提升市场对其币值的信心，SDR的发行也可从人为计算币值向有以实际资产支持的方式转变，可以考虑吸收各国现有的储备货币以作为其发行准备。
四、由基金组织集中管理成员国的部分储备，不仅有利于增强国际社会应对危机、维护国际货币金融体系稳定的能力，更是加强SDR作用的有力手段
1、由一个值得信任的国际机构将全球储备资金的一部分集中起来管理，并提供合理的回报率吸引各国参与，将比各国的分散使用、各自为战更能有效地发挥储备资金的作用，对投机和市场恐慌起到更强的威慑与稳定效果。对于参与各国而言，也有利于减少所需的储备，节省资金用于发展和增长。基金组织成员众多，同时也是全球唯一以维护货币和金融稳定为职责，并能对成员国宏观经济政策实施监督的国际机构，具备相应的专业特长，由其管理成员国储备具有天然的优势。
2、基金组织集中管理成员国储备，也将是推动SDR作为储备货币发挥更大作用的有力手段。基金组织可考虑按市场化模式形成开放式基金，将成员国以现有储备货币积累的储备集中管理，设定以SDR计值的基金单位，允许各投资者使用现有储备货币自由认购，需要时再赎回所需的储备货币，既推动了SDR 计值资产的发展，也部分实现了对现有储备货币全球流动性的调控，甚至可以作为增加SDR发行、逐步替换现有储备货币的基础。(完)
January 30, 2009
On Again, Off Again (Repeat) -- The "Bad Bank"
The Bad Bank (see yesterday's post) has hit a snag and may not progress past the light bulb stage. Executive regulators don't seem to know how it would work in practice.
Federal Deposit Insurance Corp Chairman Sheila Bair is apparently pushing for the top post of Baddest Banker:
FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said.
Surely this sounds like Iraq all over again: a massive invasion frantically cobbled together with little planning as to the "after party."
Posted by Richard at 8:55 PM | Comments (0)January 28, 2009
US to Implement Chinese-Style Toxic Asset Buy
American lawmakers appear to have shelved the frightful idea of "nationalizing" failing banks. However, they've now settled down to discuss -- from media commentary, frantically -- a plan that mimics the experience of modern Chinese banking regulators: the creation of a "bad bank" to remove toxic assets from the system.
You may remember that the Chinese banking system was (and remains) functionally bankrupt. [This article from 2005 is worthwhile reading.] Through deft financial sleight-of-hand, a satisfactory percentage of non-performing loans (NPLs) were removed to a state-controlled holding companies (AMCs), thus allowing, among other benefits, quasi-state-owned financial institutions to list on foreign stock exchanges, sporting "acceptable" NPL ratios. But NPLs continue to rise, despite Chinese statistics (read "notorious.") to the contrary. (Whom to believe?)
PWC Hong Kong's China NPL Investor Survey 2006 -- evidently the last issued, for good reason (remember that Ernst & Young retracted its NPL report of 2006 under pressure from Chinese regulators) -- states:
The size of the China NPL market is extensive. Based on the statistics provided by the China Banking Regulatory Commission ("CBRC") as at the end of the 3rd quarter of 2006, the total number of NPLs in China's commercial banks was approximately RMB1.3 trillion (US$160 billion). However, this amount does not include the NPLs that are presently held by the AMCs -- the only NPLs from China's banking system that to our knowledge are available for sale to investors.
It is difficult to estimate the amount of unresolved NPLs within the AMCs as they generally only report the amount disposed from their initial 1999 transfer loans of RMB1,400 billion (US$170 billion), and not amounts disposed from the various subsequent transfers made in 2004/05 which, based on press reports, we estimate total approximately RMB1,225 billion (US$153 billion). Recent press reports indicate that as of the second quarter of 2006, the AMCs have resolved approximately RMB1,169 billion (US$145 billion and paren of the 1999 transfer loans. That leaves a balance of RMB231 billion (US$30 billion) of the 1999 transfer loans that still need to be resolved and an unknown number of the RMB1,225 billion (US$153 billion) subsequent transfer loans requiring disposal. Whatever way you look at it, the AMCs still have a large number of NPLs on their books that they need to resolve.
It shouldn't surprise that foreign investors are no longer in the market for NPLs:
The China NPL market for foreign investors is very quiet and we expect it to remain so for some time. While there is supply and demand, only a handful of transactions have been completed this year and foreign NPL investors are leaving the market in droves. In addition, we have not noticed any new entrants to the market.
Now, with the U.S. very likely to purchase its own children's toxic assets, perhaps it will turn to China for expertise? With similar "success?"
And who will buy these assets, if they can be called that, from the proposed "bad bank?" And for what prices: who will determine them and by what method? Mark to market? What market? what astronomical sum would it, in fact, cost? No one, it seems, really knows...
Posted by Richard at 4:47 PM | Comments (0)January 19, 2009
The Trade Surplus: Will China, Like Garbo, Continue to Plead: "I Vant to Be Alone?"
An enjoyable article by Alan Wheatley: China and the "Garbo Defense." Indeed, what economic policy toward China will the Obama administration adopt? Any at all?
"In bad times everybody talks more about financial cooperation, but the reality is that in bad times everyone wants to take care of himself first," said Shi Yinhong, an international security professor at Renmin University in Beijing.
"There is a great deal of interdependence, but built into that interdependence there are many potential conflicts," he said.Posted by Richard at 2:08 PM | Comments (0)
November 14, 2008
The Chinese "Stimulus Package" -- A Few Notes from a Political Economist
Victor Shih's always engrossing Elite Chinese Politics & Political Economy blog talks about the Chinese bail-out:
There is a rumor that Chinese Academy of Social Sciences, a government think-tank, came up with a plan to set up a government fund to buy up Chinese stocks if the market falters drastically.
Read it all here.
November 10, 2008
Auto Bailout, Financial Bailout, What Next?
Massive non-performing loans that force major financial institutions into insolvency. Significant state investment in manufacturing industries. National governmental leadership in product planning. Taxpayers "profiting" from equity investments in quasi-private enterprises.
What nation do you think I'm referring to? Could be China, but no.
The United States has apparently embarked upon the creation of a quasi-capitalist economy with socialist characteristics:
The Democratic lawmakers said federal aid should come with "strong conditions," such as requirements that car makers build more fuel-efficient vehicles, and equity stakes for the government so taxpayers could profit if the companies recover.
A re-run of the last 25 years of a Chinese state-led market economy, Americanized?
Posted by Richard at 4:04 PM | Comments (1)October 23, 2008
CITIC Pacific's Great Big Bet (Bath) -- Who Else Is Next? China Railway!
Details have emerged in the CITIC Pacific forex scandal:
Citic Pacific Ltd.'s attempt to manage currency risk means the Chinese steelmaker and property developer has four times more money riding on the Australian dollar than it earned last year.
The unit of China's largest state-owned investment company has contracts committing it to buy as much as A$9.44 billion ($6.3 billion) of the currency, according to an Oct. 20 statement. That's more than quadruple Citic Pacific's market value yesterday and compares with 2007 net income of HK$10.8 billion ($1.4 billion).
More here.
As worldwide currency traders continued to deleverage risky positions -- with greater volatility and uncertainty than ever done before -- we will certainly see many more Chinese currency investments unwind with significant losses to major overseas investment subsidiaries.
What you know, but the Hong Kong subsidiary of China Railway Group has just announced currency trading losses of $278 million.
Posted by Richard at 2:13 PM | Comments (0)October 15, 2008
Impact of the Credit Freeze on International Shipments -- Where's the L/C?
Bloomberg reports that the credit freeze is expected to reduce the number of international shipments banks commonly guarantee:
``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''
Companies completely dependent upon product purchased overseas by means of letters of credit could be badly affected if L/Cs will not issue. Very few will purchase product from China T/T and who will ship D/P? Primarily self financed manufactured goods (not many of those, one expects) and domestic manufacturers may be somewhat better off.
One would expect effects to be seen at American and EU factories dependent upon foreign parts and retail stores within a matter of weeks. What possible effects? fewer imported products? increased difficulty of obtaining product? Higher prices, if demand remained steady? Production ramped up in the US and scaled down in China?
Posted by Richard at 2:30 PM | Comments (0)October 10, 2008
Another Attorney Scam -- India, China, Japan, This One's Got It All
As we in the U.S. find ourselves inching ever closer to the nationalization of private banks -- despite Treasury denials -- let's take a break in the turmoil for some humor and at least an instance of successful self-preservation. Here is another example of the attorney scam with an Asian, about which I've written many times. Click this link to save it to your desktop and view it large enough to read it clearly.
The URL is linked to a server in Mumbai. Saitama is nowhere near Shanghai. The text is completely unpersuasive. DON'T visit the URL -- might be a malicious website. Many thanks to my colleague who sent it in.
Posted by Richard at 3:51 PM | Comments (0)October 9, 2008
More Chinese-Style Financial Steps Planned for American Banking System?
The Fed has discussed a plan to take ownership stakes in American banks, even healthy ones
"It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,'' Paulson said. ``We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.''
Direct infusions of capital into specific banks, taking equity stakes in return. If this doesn't hint of the Chinese system, I don't know what does
"No such moves are imminent, but the fact that the department is engaging in such discussions is an indication of how the crisis is constantly morphing. Such a move was not under consideration just a few days ago but has become more of a possibility in recent days as the stock market has plunged and the credit crunch shows no signs of easing."
Where are these ideas coming from? Apparently from a Republican administration. I must confess to be frightened at the mere contemplation of such ideas at the highest level of American governmental authority. If such invasive activitiy is to be practiced now, what next?
[UPDATE: This article asks: "The End of American Capitalism?"]
Posted by Richard at 2:45 PM | Comments (0)October 7, 2008
IRS Allows Multinationals to Borrow Larger Sums of Cash from Overseas Subsidiaries
As a further response to the credit crisis (crash?), the American Internal Revenue Service issued a temporary guidance last Friday allowing multinationals to borrow cash from overseas subsidiaries for as long as 60 days, three times a year, without incurring corporate tax.
"Recognizing current liquidity constraints, we issued this temporary guidance," said Andrew C. DeSouza, a Treasury Department spokesman. He declined to comment on whether any specific companies or their representatives had pushed for the move. "I think we're recognizing there were companies out there that were having liquidity constraints," he said.
Those of you located outside the United States may find headquarters tapping you on the shoulder for your cash somewhat more often.
Posted by Richard at 1:42 PM | Comments (0)September 29, 2008
UPDATE: Chinese Regulators Give Green Light to Borrow from Foreign Banks
Further to this Asiabizblog post, WSJ reports:
Chinese regulators said the finances of foreign banks in the country are sound, a message that appeared aimed at reassuring local banks that have been reluctant to lend to their foreign counterparts because of concerns about the U.S. financial crisis.
The China Banking Regulatory Commission said in a statement posted on its Web site late Friday that the Chinese operations of foreign banks it monitors have "healthy fundamentals, good asset quality as well as adequate provisions, liquidity and capital bases."Posted by Richard at 5:10 PM | Comments (0)
September 26, 2008
AIG Turns to Asia-interest Blogs In Media Relations Program
I wasn't quite sure how to handle this one. Incredulous that a friendly AIG media relations exec would even send it my way. (If they haven't gotten this out in Chinese, Malay, Thai, etc., they are not getting through to their customers directly.)
The text clearly shows that AIG is seriously concerned about counter-reaction in Asia to its recent, most fortunate bail-out. I note in passing that Manulife may purchase AIG's Asian operations. The run on the Bank of East Asia spooked a great many, sending thousands of Hong Kong residents running through the streets to their local BEA branch to pull out cash. [See this image. Imagine, as I have done for you previously, the effect of a run on a mainland Chinese branch. Yes, they have occurred in the past. But a spreading panic is a fearful thing.]
Frankly, I have no opinion as to the safety or danger facing those in Asia holding an AIG insurance policy. Hence, one must take this message either at face value or not at all and I so post it in its entirety. Further investigation is encouraged in those affected.
Rich:Posted by Richard at 6:57 PM | Comments (0)I hope this email finds you doing well. I know you and Asiabizblog have covered quite closely the unfolding financial market news this past week and I wanted to quickly send you some new information.
I want to share the facts with you and your blog’s readers about AIG’s strong commitment to Asia - and to all of our insurance policy holders globally.
AIG’s Chairman and CEO Ed Liddy made the company’s position clear when he reaffirmed that our insurance assets are “sacrosanct.” Take a look at his CNBC interview here:
In addition, The New York State Insurance Department recently released a statement reassuring policy holders about the security of their AIG policies. According to the State of New York Insurance Department, “AIG’s insurance companies are financially strong and fully able to honor all policyholders' claims.” The link to the press release can be found here:
Yesterday, Joel Ario, the Insurance Commissioner of the Commonwealth of Pennsylvania released a statement declaring that his department’s most recent examination of the AIG Companies that are domiciled in Pennsylvania are financially sound and that policyholders’ insurance policies are safe. The link to that press release can be found here:
Additionally, as you most likely have read, AIG has signed a definitive agreement with the Federal Reserve Bank of New York. This important step allows the company to move forward in implementing our strategic initiatives
Finally, I know your readers are following this story literally minute by minute as it unfolds. I’ll continue to post more information in the days and weeks ahead.
September 25, 2008
Rumor: China Banking Regulators Tell Local Banks Not to Lend to U.S. Banks
The China Banking Regulatory Commission (CBRC) has denied a report that it instructed local banks to halt interbank lending to U.S. banks.
"The CBRC has never, through any channel, issued a statement or told domestic commercial banks not to lend to or borrow from U.S. financial institutions," the China Banking Regulatory Commission said in a statement on its website.
CBRC Vice Chairman Wang Zhaoxing told Reuters that a report in the South China Morning Post, which said the agency had told Chinese banks to stop lending to U.S. banks in the interbank market, was not correct.
"If they are not willing to lend, this is the normal practice of risk control," said Wang, speaking on the sidelines of a major banking conference.
The SCMP report is here (paid subscription required).
Posted by Richard at 2:25 PM | Comments (0)September 19, 2008
U.S. to Employ Chinese-style Financial Regulatory Techniques
It wasn't too long ago when American officials excoriated PRC banking authorities for establishing asset management companies to take the nonperforming loans off of the books of technically insolvent banks and to recapitablize them. A ruse, it was shouted to the rooftops, to clean up the books of banks desperately in need of a listing on worldwide stock exchanges, but prevented by numerous "technical" deficiencies. These asset management companies have performed badly: perhaps 20% capital recovery.
With the announcement of a plan involving "sweeping reforms" to "take bad assets off the balance sheets of financial companies," we see basically those same American officials employing -- in essence -- a similar technique. One cannot believe that the cash recovery will be as poor, but who will take the hit? The American treasury. This suggests that the next American President will be forced to raise taxes.
John McCain has just announced his belief that treasury has gone too far in its rescue operations. I'll provide a link as soon as I get one.
September 18, 2008
China Investment Corp. Offers to Raise Stake in Morgan Stanley to 49%
Bloomberg TV has just announced Morgan Stanley refused CIC's offer to raise its stake in the bank to 49% from 10%, preferring to remain "independent." More on this as the day goes by.
[Update: 10.14am EST -- Bloomberg. This article maintains that talks continue, in contradiction to the report on Bloomberg TV.].
[10.18 am -- Bank of China has just announced in Paris (for this event) that it is not in talks and will not buy a foreign bank. No text available at this time.]
[10.22 am -- Report: "Morgan CEO John Mack told Citigroup chief Vikram Pandit that "'we need a merger partner or we're not going to make it.'"
[10.26 am -- China Investment Corp. thruogh Central Huijin Investment Co to buy stakes in major Chinese banks to support the financial sector.]
[10.34 am -- Bloomberg TV reports that CIC / Morgan talks are still in process. The substance of the issue: CIC's offer will substantially dilute equity. A purchase by Wachovia will pair the Morgan with an entity that doesn't offer the stability of a Bank of America.]
Comment: Morgan Stanley's independence in China will be severely constrained if the Chinese government controls such a substantial stake.
September 17, 2008
3 Chinese Banks Hold US$297.4M in Lehman Debt
Following up to yesterday's post, the International Herald Tribune reports:
Three Chinese banks hold a total of US$297.4 million in Lehman Brothers bonds, two of the banks and a state news agency said Wednesday, but analysts said China's total exposure to the failed U.S. investment house should be limited.
Industrial & Commercial Bank of China Ltd., the country's biggest state-owned commercial lender, holds US$151.8 million in Lehman bonds, the Xinhua News Agency said.
Bank of China Ltd., the country's No. 3 commercial lender, said on its Web site it owns Lehman bonds valued at US$75.6 million. It said that includes holdings by its Hong Kong and foreign branches.Posted by Richard at 7:52 PM | Comments (0)
June 28, 2007
Citibank and the City of Wuhan: Struggling on the Banks of the Yangtse
The smoggy, foggy and utterly disheveled metropolis of Wuhan, on the Yangtse River in Hubei Province, bears the historical distinction of locus of the river trade. [See photo I took in Wuhan that gives you an idea of the Wuhan version of a sunny day.]
Prior to the establishment of the P.R.C., the river trade consisted primarily of opium, bibles, more opium, tea, automobiles shipped up from Shanghai, coal, bibles, weapons and opium.
Aside from its typical central-China, second-tier lack of aesthetic appeal, Wuhan natives are delightfully spirited – indeed, noted within China for their revolutionary fervor – and, in my experience, fast friends. But fighters to a man.
So when, at a public forum, Citibank announced its intention to set up a bank -- based in Wuhan but spanning the central region -- in which it would hold a 20% interest, the less-than-a-mile-away thunderclap of response was heard all the way to Shanghai.
Complicating matters somewhat was the fact that, in the early years of the last century, Citibank’s predecessor built a magnificent branch, lording over the docks, as a testament to its preeminence in Wuhan business circles. That building remains. I touched it myself, inducing a frisson of electricity as it grounded my historiographically-charged body. [See photo.]
That predecessor, the National City Bank of New York, subject of at least one recent book of national significance and numerous articles, is accused of the theft of imperial and nationalist China’s asset reserves. Among other financially rapacious crimes. Alleged criminal activity, of course. [I am a lawyer, after all.] Demand was made upon Citibank to pay up for the alleged [I repeat] acts of an institution that was not only dissolved decades ago, but its assets nationalized.
Nationalized. Don’t you just love the subtle fragrance of that perfumed euphemism?
Of far greater significance is the state of Chinese banking institutions, such as the unalterably poor condition of the so-called “city banks （城市商业银行）,” rogue kin to the disastrous city cooperatives（城市合作社）and credit collectives （信用社）, mismanaged by the municipal governments that own and barely run them. [Shanghai being an exception, but only by a hare’s tail.]
Fearing the competition Citibank presents as it moves inland by virtue of the timetable specified by the WTO accords – well, intending to move inland and encountering resistance every step of the way -- Hubei provincial banking administrators have spoken out. They don’t like the idea of a new bank, preferring a reorganization of their existing decrepit and debt-ridden system. Perhaps with the aide of a white knight like Citibank, although this remains unsaid.
But Hubei banking administrators are getting scant support, it appears from their own admission, from national banking regulators in Beijing, who haven’t even responded to their reorganization proposal. And Citibank looks to be favoring an end run up to Beijing for additional leverage on the province.
Read all about it! My rough translation of this recent article from 21世纪经济报 follows.
Prelude to a Yangtse River Bank: Citibank’s Ten Billion Yuan Trick
Relevant Applications Not Received by Hubei Banking Administration
People in the Hubei Provincial Banking Administration have disclosed that the reorganization of existing city business banks would be more practical than the establishment of a new bank.
June 23, a.m, on site at the “China Creates” display at the Wuhan Science and Technology Event Center, Citibank’s rather bland display board attracts the attention of event goers.
The Citibank banner, no more than 200 characters long, displays to all their intentions toward the Central region. The bank proposes to inject 10 billion RMB (approx. US$1.25 billion) to create a national stock-issuing bank – Yangtse River Bank, 20% of which will be held by Citibank. It is well known that Hubei has for a long time wanted to create a regional business bank, but the fact that a foreign bank has thrown out a proposal has astonished the financial world. Everyone involved has kept their reactions to a low undertone. Hubei Provincial Banking Administration officials tell reporters that there is nothing to this at present. Citibank China regional public relations executives refuse to comment. Two roads present themselves: integrate the city business banks or to reorganize them entirely. Each presents difficulties.
Citibank’s Proposal
Recent reports suggest that Citibank has already begun to set up a bank in Wuhan by the name of the Yangtse River Bank (or Yangtse River Development Bank). Moreover, Citibank Group’s international executive Vice-President has said in a speech that the Yangtse River Bank will attract 10 billion RMB in capital obtained from international, Chinese and local sources, of which 2 billion RMB will come from the Citibank Group and the American Brysam Global Partners.
On the afternoon of June 25, a reporter telephoned Mao Zhi-hua, manager of public relations for the China region, to ask about the organization of the Yangtse River Bank. Mao said he would not comment at this time.
A source disclosed that no application for the organization of the Yangtse River Bank has to date been received by the Hubei Provincial Banking Administration, and that the proposal was still only an idea. A spokesman from the largest business bank in Hubei province – Wuhan Business Bank -- said he had not heard about the organization of the Yangtse River Bank.
“Currently, there is nothing to this,” came the response on the afternoon of June 25 from the Hubei Provincial Banking Administration.
That spokesman said, “I think this issue should not be raised just now, because the People’s Congress and the Politburo have proposed similar ideas about the improvement of the Hubei banking system. In the past, the relevant departments looked into it and studied improvement of the financial system. But the financial system is a complex problem.”
The spokesman said that the establishment of new financial institutions was far more difficult than coming up with the idea to do so. From Citibank’s point of view, they can naturally express their own ideas on the subject, “ But this issue isn’t just about talking. Even though foreign banks think the Wuhan financial market is ripe for development, setting up a financial institution can lead to a series of problems, and whether the idea can be put into practice is awfully hard to say.”
Reorganization of the Old or Establishment of the New?
What differs in Citibank’s idea, in the eyes of local Wuhan scholars, is that the development of the Wuhan Business Bank would have stronger roots within the local region.
“Strengthening and expanding the Wuhan Business Bank, creating a stock-issuing bank that spans the region, is, I think, the most practical,” says Wuhan University Economic Study Center’s President, Ye Yong-gang.
Ye Yong-gang’s proposal is to first inject capital into the Wuhan Business Bank with a share issue, thereafter change the bank’s name, and finally to change the business model to operate regionally as a stock-issuing bank.
Song Qing-hua, professor at Southeast Financial Economy, Law and Politics University, Xinhua Finance and Insurance Study Center, believes that a regional stock-issuing bank with its main branch at Wuhan has two possibilities: reorganization or the establishment of a new bank.
Song Qing-hua tends toward reorganization. “China already has over 130 banks, not a few, and the crucial thing is to take these banks and create a real market presence, and to increase competitiveness. Since we’re talking about bank, it must have a certain size, and only in this way, can it create trust among people and be capable of meeting its competition.”
A spokesman for the Hubei Provincial Bank Administration said that the integration of the city business banks in Hubei would be more practicable than the establishment of a new bank. “We could take the Wuhan Business Bank and [those of other cities] and merge them.”
Wuhan Business Bank would naturally form the core. Established in the late 1990s, its registered capital is 568 million RMB, and the Wuhan City Economics Bureau holds 17.6%, as its largest shareholder.
“Creating a large Wuhan Business Bank would meet with very great obstacles, coming from those municipalities with their own city business banks,” says a source.
An administrator who knows Hubei finance says that the Hubei provincial government has wanted to merge and reorganize the city business banks and credit collectives, creating a big and strong “Yangtse River Development Bank.”
“But there’s some difficulty in doing this.”
The difficulty includes the fact that within Hubei, banks and credit collectives have developed unevenly, just as was the situation encountered when Jiangsu provincial banks were reorganized into the Jiangsu Bank. A source close to the Wuhan Business Bank disclosed that, in planning future development strategy, Wuhan Business Bank wanted to take off on its own and to launch an IPO. It was not willing to merge and reorganize with other banks in the province.
The Dream of a Regional Banking Center
During the “China Creates” event, Hubei Provincial Vice-Governor Li Chun Ming did not express an opinion as to Citibank’s plan.
Sources say that Citibank has raised the idea with Hubei provincial officials in the past. As to the establishment in Wuhan of a national stock-issuing bank, Hubei province and the city of Wuhan have many times submitted their applications to national administration, but have never received any response. “At this time, they purposefully maintain a low profile on this issue, and I guess they are worried that national administrators are taking a long time in the approval process.”
Wuhan has never stopped dreaming of the day when it would once again become a financial center. The most recent proposal for a regional bank was submitted at the 5th meeting of the 9th plenum of the 2007 Hubei Political Committee, when top officials suggested that “a regional development bank can only be established in Wuhan.”
Previously, at the 2004 national meetings, the former Wuhan City Political Committee Chairman Liu Shan-bi submitted a proposal in his capacity as a national official, entitled: “A proposal to speed up the development of a regional financial center, regarding establishment in Wuhan of the Hankow Development Bank,”
Liu Shan-bi believes that, a stock-issuing bank, rooted locally, serving the central region, and aiming at national service, is established in Wuhan, it would have a far reaching effect on curtailing the loss of capital away from the area, support the growth of the central region, stimulate production..etc. etc. etc.”
21世纪经济报道 2007-06-26 16:18:30
“长江银行”前奏：花旗百亿谋略
湖北银监局尚未接到有关申请
本报记者 聂春林 刘晓 实习记者 王传晓 武汉、上海报道
湖北省银监局相关人士表示，相比成立一家新的银行，整合湖北省现有的城市商业银行更为现实。
6月23日上午，武汉科技会展中心二楼“华创会”现场。花旗银行一块并不起眼的展板引起参展者关注。
花旗银行用不到200字的篇幅向外界展示了其向中部区域渗透的用心。该行建议，牵头引资100亿元，在武汉设立一家全国性股份制银行———长江银行，花旗有意持有20％股份。
湖北方面设立区域性商业银行的意图早已为外界知悉。但此次由一家外资行先抛出一纸建议书却令金融界人士颇觉诧异。
各方对此反应均非常低调。湖北银监局某人士告诉记者，此事目前还没有说法。而花旗中国区负责公共事务的人士也拒绝表态。
摆在湖北面前的有两条路：整合现有地方城市商业银行或者重新组建。无论哪种选择都一样艰难。
花旗的设想
近日有媒体报道称，美国花旗银行拟在武汉组建长江银行(或称“长江发展银行”)，目前已经进入筹建阶段，并援引花旗银行集团全球决策管理部高级副总裁刘恒中的讲话称，长江银行将从国际、国内、民间等引进战略投资资本100亿元，其中，从花旗集团、美国Brysam全球银行投资合伙公司等国际银行财团引进20亿元。
6月25日下午，记者致电该行中国区负责公共事务的毛志华，询问组建长江银行一事，毛表示暂不表态。
一位知情人士透露，关于组建长江银行的申请目前还没有报到湖北银监局，组建“长江银行”一事还停留在设想的层面。湖北省内最大的城商行———武汉商业银行一位人士告诉记者，没有听说组建长江银行一事。
“目前还没有说法。”6月25日下午，湖北银监局办公室相关负责人如是答复本报记者。
该负责人称：“我觉得现在不要提这个问题，因为关于银行的设置问题，有人大、政协代表就如何完善湖北省的金融体系提出过类似的建议，前期相关部门也进行了考察，研究如何完善金融布局。但金融布局是一个比较复杂的问题。”
该负责人表示金融机构的设置远比设想困难。如果站在花旗的角度，自然可以对此事发表自己的看法。“但这个事情不是说说的问题，虽然外资金融机构很看好武汉的金融发展环境，但设置一个金融机构将面临一系列的问题，想法能否付诸实施很难说。”
重组还是重建？
与花旗银行的设想不同，在武汉当地学者们眼中，在武汉商业银行的基础上发展区域性银行似乎更现实些。
“把武汉市商业银行做大做强，扩展成为跨区域的股份制商业银行，在我看来更为现实一些。”武汉大学经济学院副院长叶永刚表示。
叶永刚的方案是，首先将武汉商业银行增资扩股，然后更名，最终转型成为跨区域经营的股份制银行。
中南财经政法大学新华金融保险学院教授宋清华认为，总部设在武汉的区域性股份制银行，有两种组建方式：一是重组，二是新建。
宋清华更倾向于采取重组的方式。“中国已有130多家银行，银行的数量并不少，关键是要将这些银行塑造成真正的市场主体，提高他们的竞争力。既然是银行，就必须有一定的规模，只有这样，对内才可以取信于民，对外迎接竞争。”
湖北省银监局相关人士曾表示，相比成立一家新的银行，整合湖北省现有的城市商业银行更为现实。“可以把武汉市商业银行和宜昌、荆州、襄樊、十堰、孝感、黄冈、荆门等地城市商业银行合并。”
武汉商业银行理所当然成为重组的核心。该银行成立于上世纪90年代后期，注册资本为5.68亿元，其中武汉市财政局占17.6%，是最大的股东。
“做大武汉商业银行，遇到的最大的阻力，在于其他几个地级市的商业银行，一直得不到地方财政的放行。”知情人士告诉记者。
熟悉湖北金融的一位监管人士称，湖北省政府此前也想仿照徽商银行模式，进行省内城商行和信用社联合重组，组建“长江发展银行”(拟)，实现做大做强，“但是有些困难。”
而困难就包括湖北省内各城商行和城信社的发展不平衡，跟当初江苏省组建江苏银行遇到的情况一样。据一位接近武汉商业银行的人士称，在设计未来发展战略时，武汉商业银行更愿意单飞，并有上市的想法，而不愿意参与省内城商行的联合重组。
区域金融中心之梦
湖北省副省长李春明在“华创会”记者见面会上，对花旗银行的建议不置可否。
知情人士称，花旗银行这一设想应该与湖北省有关方面事先沟通过。在武汉设立全国性股份制银行的想法，湖北省、武汉市已多次向国家有关部门提出过申请，但一直未得到回复。“此次刻意保持低调，估计是担心国家有关部门审批手续较长。”
武汉从来没有停止过恢复昔日金融中心的梦想。
最近的一次设立区域金融中心提案，是在2007年湖北省政协九届五次会议上，民革湖北省委员会建议，“成立一家中部发展银行，总部设在武汉。”
此前的2004年全国两会上，武汉市原政协主席刘善壁以全国政协委员的身份提交了一份提案：“关于在武汉组建汉口发展银行，加快推动中部地区金融中心建设的建议。”
刘善壁认为，如果能在武汉新设立一家立足地方、服务中部、辐射全国的股份制银行，对改善中部地区资金外流，扶持中部地区企业发展壮大，促进中部崛起战略的实施，将产生深远的影响。
March 29, 2007
Hey, China, Listen Here! We've Just About Had It With You! (Again)
More American critics of Chinese intransigence here and here. More experts are mustered to plead a case believed persuasive, but not resulting in hoped-for change. And none should be expected, as I've argued many times on this blog, unless Chinese decision makers find change to be absolutely necessary and directly advantageous to them. Constant reports (for years) of what top level Americans are unable to accomplish has become a mainstay of traditional financial news, valuable to historical researchers 50 years from now and to a few policy makers in marbled halls. But otherwise of little value.
Lest we not forget the baby's rhyme, remember, please, that the wolf never could blow down the brick house of the last little pig. It was too strongly built to fall to the hot air with which the wolf blew down weaker structures. Why didn't the wolf offer the pig a bucket of slops to induce him out into the open? The pig was too smart. Why didn't he use a bulldozer? Because wolfie wanted to eat the piggy alive. Somewhere in the middle of these extremes lies a method involving a strong arm, but one must be willing to use it.
Quite a few years ago, I was interviewed for a position in Beijing representing a large Western industrial organization, which, it turned out, hoped to significantly influence Chinese government policy. I suggested it was not possible to move Chinese policy as far as the organization wished. (I hope, however, their choice for the position has done what I didn't think quite possible.) During our talks, I asked what the organization believed it could offer to benefit Chinese policy makers and, as well, what strength it possessed that would allow it to put substantial pressure on them, forcing change. As you have likely guessed by now, the latter is an essential part of achieving a goal in China when contrary individuals possess as much or greater authority than you. It appeared to me that the organization had not even considered these fundamentals of the equation. Needless to say, we were not a match.
Benefits are easy for Americans to think up. We really do like to help out. But this is different. Where is the stick and who is going to wield it?
[UPDATE: Has the administration decided to up the ante?]
Posted by Richard at 12:43 PM | Comments (1)December 29, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part 3)
[Editor's Note: This is the final installment of our series on money laundering in China. Read Part 1 here. Part 2 here.]
“Wipe Clean” and “Wring Dry”
“Wiping clean” follows soaking -- allowing dirty money to distance itself from its unlawful origin. After the dirty money has entered the banking system, [they move it in and out of] accounts in as many different locations as possible or holding companies [they] establish, creating a complex web of financial transactions that render helpless any auditor and moving the dirty money farther and farther away from the criminal boss [of the original enterprise].
When Huang Guang-rui would set up a false account, the deposit usually came in and went out on the same day or the following. Huang Xi-tian and the others would split up and deposit money in the accounts set up by Huang Guang-rui. Huang Guang-rui would then move it on the same day or the following into the accounts of Gao Zhan-kun, Wang Li-Mei and others, leaving a small balance in the [transmitting] account.
Thereafter, the money would be transferred to Huang Guang-rui’s Hong Kong Xinxing International Trade Company and YongXing International Trade Company accounts. Once wrung dry, the dirty money had been washed clean, becoming money Huang Xi-tian could make use of without worry,
An important middle man, called “A-Nan,” who exchanged RMB for Hong Kong dollars and has not yet been made part of this case, moved Huang Guang-rui’s RMB across the border, completing the important step of wringing the money dry.
Actually, before the end of 2000, Huang Guang-rui didn’t know who A-Nan was. Later, he was introduced to A-Nan, who, through his gang, made money off of the forex spread across the border. But in the beginning, when the amount of RMB was small, A-Nan was never directly in touch with Huang Guang-rui.
The turning point came after 2002. The amount of smuggled money that was wired had become rather large, so Huang Guang-rui began direct contact with A-Nan so that [RMB could be] exchanged into Hong Kong dollars.
Between them, Huang Guang-rui and A-Nan established a fixed fee schedule. Huang Xi-tian and Huang Chu-dong called Huang Guang-rui to ask the daily rate (not the official rate, higher than the bank’s officially announced rate, and based on the supply of Hong Kong dollars at the time of the transaction), and paid Huang Guang-rui in RMB based on the rate Huang Guang-rui had provided. Huang Guang-rui would pay A-Nan based on the rate provided by A-Nan, making money off the forex spread.
Changed into Hong Kong dollars, A-Nan would then transfer, via underground money-lending networks, to the Hong Kong Xinxing International Trade Company and YongXing International Trade Company accounts.
Judiciary organs have said that, since A-Nan has not been made part of this case, the exact methods of those who use underground money-lending networks to move money across border remain a mystery. Moreover, the details of the transacations between Huang Guang-rui and A-Nan are impossible to prove, as there is so little evidence.
Huang Guang-rui said that he only wished to give RMB to A-Nan. He guessed that A-Nan, in order to exchange currencies, may have had a relationship with a joint venture factory, to which A-Nan would have provided RMB in cash, in return for the joint venture (or foreign invested factory) would have placed the equivalent in Hong Kong dollars into the Hong Kong accounts.
In addition, Huang Guang-rui disclosed the activities of several other underground money lending networks – which directly exchanged RMB for Hong Kong dollars in cash and then moved it out into Hong Kong accounts. Chinese who gambled and won Hong Kong dollars on horse racing or the lottery in Hong Kong would give over their cash to A-Nan, who would then pay RMB to them in China. Outside of China, criminal elements who received smuggled goods would take Hong Kong dollars and within China pay RMB at a certain rate to people of a similar ilk.
Just like Huang Xi-tian and the others who profited from laundered, smuggled cash, there was still the originator of the smuggling – a Vietnamese trader name Zhang Ze-chun
For ease of moving money from one account to another, Huang Guang-rui and Zhang Ze-chun settled accounts via cellphone messaging that would send money from the Hong Kong accounts to Huang Xi-tian, and then to Huang Guang-rui. Block amounts of 500,000 or 1 million Hong Kong dollars were moved into Zhang’s Hong Kong accounts. The money arrived the same day. Zhang only shipped product once he had the money in hand.
By means of this cycle, the laundered cash entered the “wringing dry” stage, or perhaps one might say it had reached the “return of capital” stage. Just like legal capital, the laundered money was moved out to other destinations.
Well over 100 million RMB, dirty money earned through the smuggling efforts of Huang Xi-tian and 15 of his brothers and sisters, had been washed clean.
December 20, 2006
Audio: Renminbi Redux - Have They Begun to Circle the Wagons
More renminbi revaluation silliness from Washington... Click the little triangle to listen to today's post.
December 15, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part 2)
[Editor's note: Read Part 1 here.]
“Soaking”
This isn’t something everyone can do – laundering money requires contact with financial institutions so that cash can move up to the surface from underground, becoming legal income – it requires a series of complex techniques. The players in this industry have specialized knowledge and skills: lawyers, accountants, auditors, financial consultants and others.
Born in 1972, Huang Guang-rui was nonetheless considered a skilled mouthpiece. From 1990 to 1993, after studying at the Guangdong International School of Finance, he spent the next five years working in a bank branch in Shenzhen. After resigning in 1998, with an inside-out knowledge of the way banks move money, he became a expert money launderer.
His activities fit the classic laundering process – using the analogy of clothes-laundering, the money laundering cycle of “placement, layering and blending” became to them “soaking, wiping clean and wringing dry.
Soaking is the first stage. Placing unlawful revenue into the financial system, into ordinary channels of distribution, is the first step. Important methods include the use of bank current accounts, postal money orders, travelers checks and other commonly circulated instruments.
Under ordinary circumstances, a very large bank deposit will attract the attention of regulators. Huang Guang-rui didn’t have much he could do about this. He used the most common technique – he opened tens of accounts in the local branches of two banks under many false names.
These accounts were patently preposterous. A few were opened using the altered IDs of his cousins. As an example, the account name of "Huang Juan-hua" was opened with a copy of photographs taken from an ID of Huang Guang-rui’s wife Huang Hai-xuan and sister-in-law Huang Xiao-yan, but with altered ID names, addresses and other pertinent information, The account name of "Huang Hui-juan" used Huang Hai-xuan’s photograph, but the ID name and number did not match hers.
Kanjiang’s “Boss Chen” shipped smuggled cigarettes into Guangzhou, Shenzhen and other designated stores, included cigarette counters and tea shops. Then those who were responsible for selling the smuggled cigarettes would figure their total revenue, and using banking institutions over a wide area, deposit that money over computer networks into the accounts Huang Guang-rui had established with falsified documents.
Experienced international money-launderers all know that the soaking stage is the most fragile, the most easily detected. But Huang Guang-rui was fortunate. The Judiciary has stated that the counter staff at two banks he patronized were insufficiently alert. Due diligence on the customer was halted at the auditing stage, becoming somewhat like a dead letter.
Identity auditing is but the first link. If one wishes to uncover soaking, one only needs to look very closely and often at the individual bank account.
Usually, a bank account opened with a false identity will show constant movement of large sums in and out. From July 1, 2003 to Feb. 27, 2004, the deposit account of "Huang Rui-juan" received 73 deposits for total of RMB 38.35 million (US$4.5 million). On August 8, 2003, however, that account showed 5 transactions amounting to over RMB 4 million (US$500,000).
However, in developed areas such as Guangzhou and Shenzhen, a single account with flows exceeding several tens of millions and even over 100 million is not that unusual. This provided good camouflage for Huang Guang-rui.
TO BE CONTINUED
December 14, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part I)
[Editor's Note: Given the restrictions upon the movement of money within China and across its borders, money laundering -- the transformation into apparently clean income of unlawfully transferred or earned money -- has become a commercial activity of great significance. This article from 21世纪经济报, which I have roughly translated, describes the methods used by a major player in that business, now imprisoned, that turn "black" money, as the Chinese call it, into mainstream wealth.]
Money Laundering
Special Report
Reporters: Zhong Wen-qing (Shanghai)
“Soak, wipe clean, wring dry” – and several hundred millions of dirty money become clean. Huang Guang-rui has not been in prison long. On December 4, China’s Anti-Money Laundering department announced that it had broken up one of Shanghai’s largest underground money laundering cases since the founding of the PRC, involving as much as 5 billion RMB (US$ 625 million).
All international money laundering experts know that the soaking stage is the most delicate and easiest to be discovered. But Huang Guang-rui was fortunate. The Judiciary department has said that counter staff at two local banks he patronized weren’t alert.
For nearly five years, Huang Xi-tian took his 15 siblings and disappeared into the border area between China and Vietnam.
They liked the feeling of flying at night. Each time, they loaded up their private airship with its five engines full of carefully chosen name brand cigarettes, like Southern Comfort and 555. [Private dirigibles in China? You bet.]
Flying from Situn over the Gulf of Tonkin, Huang Xi-tian traveled into Hepu County in Guangxi to a shrimp farm on the coast. Zheng Xu-ming owned the shrimp farm. Many nights, he waited for the airship to land on the dock at the farm. Radar had been installed on the roof of the shrimp farm’s office building, used specifically to monitor the patrol status of the Customs, Coast Guard and other police unit. After the goods had been safely unloaded, they were loaded onto trucks and transported to Guangzhou, Shenzhen, Kanjiang and other places, to be sold to many [buyers]. [Editor's Note: Does any reader know the Vietnamese name for the port of 四屯?]
Huang Xi-tian was very busy, flying often in the past five years, and having smuggled from Vietnam over 47,000 cigarette cartons across the border, they now had 170 million RMB (US$20 million) in hand. But with any more money than that, they were anxious – after all, it was dirty money.
Huang Guang-rui was a genuine money god for them. Only through him could the money become Huang Xi-tian’s legal income. Money laundering – the “dirty money industry” practiced by Huang Guang-rui, was becoming the world’s third largest business activity after foreign exchange and oil.
But now, the easy life was over. On August 23, 2006, the Guangxi People’s Supreme Court sentenced Huang Xi-tian and 15 defendants to prison, reprieved from death sentences, for various terms for commodity smuggling crimes
Moreover, Huang Guang-rui set a precedent – since the amendment of the criminal money laundering law of 1997, this was the first case in China where guilt had been established for money laundering with smuggling as its predicate crime.
TO BE CONTINUED
November 10, 2006
Guess What? New Rules!
The Wall Street Journal reports on new Chinese banking regulations that will further delay Citigroup's China strategy.
The rules will "strengthen and improve the supervision and management of foreign banks and promote the stable operation of the banking sector," the State Council said in a statement Wednesday.
One would think, given the state of the Chinese banking system, that foreign banks require less supervision. But China can be -- how can I put it nicely? -- counter-intuitive.
FOLLOW-UP: Readers of Chinese will find of interest this 金融界 special edition on foreign banks. As of November 28, 2006, 金融界's online reader survey reported the following results:
外资银行管理条例发布调查
共有790人参与
您认为外资银行是否会对我国银行业造成冲击
会，内资银行将倒闭几家 53.04%
不会，内资银行可以经得住竞争 33.04%
不清楚，现在不好判断 13.92%
作为个人，您更倾向于选择内资银行还是外资银行
外资银行 54.81%
内资银行 45.19%
November 8, 2006
The Cost of Free Trade in China: Corruption and the FCPA
May 15, 2006
Audio: Ernst and Young Retracts China Bad Loans Report
Click the link to hear today's post.
February 22, 2006
The Incredible Vanishing Credit Card
[Editor's Note: After our post on counterfeiting (and we thank you all for the wonderful audience reaction), we are forced to admit to a fascination with the "look-alikes" in Chinese business that aren't exactly what they seem to be. Today, we turn to the credit card. Credit cards are a financial tool of recent invention in the West, but in China are much like newborn babes in swaddling clothes. But is there really a living baby in there or a doll made up to look like one?
Despite many obstacles, the Chinese internet community is active, well-educated, opinionated, agressive and very often spot on. Business is not a suspect topic -- but consumer discontent is some form of revolt, no matter how one may cut it. This article by Wu Xiang-hong (吴向宏), a financial blogger, takes the Chinese credit card industry to task. While some of Wu's comments are inexact, he clearly has done his research. We went jaw agape upon reading the allusion to the American Truth-in-Lending Act and Regulation Z, which cap consumer liability in case of unauthorized usage. One would venture to suggest that most American consumers have no knowledge of this law and the benefits it confers upon them. (Many buy the outrageously expensive credit insurance -- completely valueluess -- that issuers routinely flog to the unknowing.)
Wu's post has been reprinted countless times on many Chinese internet sites, resulting in hundreds of comments, generally in agreement.]
The Beautiful Lie of Chinese Credit Cards
In the U.S. and other developed western nations, you needn’t worry when your credit card is lost. American law stipulates that one need only report a credit card stolen within 24 hours (or after discovery of theft), regardless of the amount of the theft, and the cardholder’s loss is capped at $50. Similar law exists in England, stipulating the cardholder’s loss at £50. The remaining portion above that amount becomes the bank’s loss, unless the bank can prove obvious error by the merchant. Actually, many banks implement terms that are even more favorable than the law allows. Not only do they allow more time to report a stolen card, they also take the loss on the $50. That is to say, the bank uses its own credit as a guarantee for all credit card consumption.
In China, all loss owing to the theft of a credit card is borne by the consumer. This makes us aware of the fact that, even though a small plastic card called a “credit card” is running around on the Chinese market, there is no bank guarantee behind it. In all frankness, there is no “credit” in our “credit cards,” and can’t possibly be discussed on even terms with those of the developed nations. The latter truly has a magical feel to it, almost as if one sees the bank when one sees the card itself.
I must elucidate this point because in China the phrase “international norm” is invoked in order to justify bank fees. As an example, in the midst of the brouhouha over annual fees for bankcards in the past two months, some declared that annual fees for bankcards were an “international norm.” Recently, during a similar brouhaha in Shenzhen and other cities where issuers refused to process cards, we also heard a similar tune. Merchants believed that bank processing fees were too high and demanded fees be lowered. The Chinese banking industry retorted that international processing fees run at 2% and that Chinese banks were only half that. So you still want us to decrease fees?
[For detail regarding the Shenzhen brouhouha, see this article.]
Their use of the “international norm” was inaccurate. At the beginning of the year, many experts (including the author) pointed out that most international bank cards do not charge annual fees. The argument that the so-called annual fee is an “international norm” can not be established. And this time, their use of “international norm” is slimy. In the U.S., card processing fees for retail merchants run as cheap as $0.20 plus 1.6% of the transaction, generally averaging around 2%. But the rate for debit cards is as low as $0.40, that is to say, 0.4% for every $100. How can this possibly “average around 2%?” Don’t forget, the bank cards currently used in China are primarily debit cards (requiring a PIN number), which should permit a lower fee rate.
But these details aren’t the core of the problem. The core is the basic standard required for doing business, which is, “you (should) get what you pay for.” If you hope to bring fees in line with international standards, then the content and quality of your product and service must also. In the life of Chinese business, we encounter many things like this – the price tracks international standards, but the content does not.
Our so-called “credit card” is, unfortunately, a beautiful lie. Today, within China, much of the PR makes the public believe that the primary value of credit cards is in allowing people to consume before paying and to overdraw. Looking more closely, the PR attributes the reasons for China’s laggard credit card industry to “Chinese not having the custom of buying first and paying later.” This is completely misleading. It is a fact, even if we look at the origins of the credit card, that overdrawing is only one of its complementary functions.
The core of the credit card business is that the bank’s credit functions as a guarantee for the safety of the transaction between the consumer and the merchant. Use of a credit card can actually be more annoying than the use of cash. On what basis does the consumer and the merchant turn down the annoyance of swiping a card and willingly spend money needlessly on such things as processing and annual fees? The first reason is precisely the safety a credit card provides. Aside from the risk of theft, as we spoke of previously, there are other safety aspects to the transaction. For example, in many transactions, the consumer must first pay or leave a deposit before seeing the product or service. At certain times, the product or service is unsatisfactory, even perhaps defective. In such a situation, purchasing goods in a developed nation, the consumer can return the goods completely risk-free. The bank will reverse the charge, crediting the consumer’s account, or the bank will resolve the problem with the merchant. This system of credit safety is important for many consumer formats, such as TV, telephone and mail-order purchasing. In China, mail-order transactions are the province of fraudsters who blow smoke and wind. In the credit transaction system, the banks remove those fraudulent merchants from the ranks of those who may accept credit cards.
Merchants also enjoy a guarantee of safe transactions. For example, an individual rents a car with a credit card and wrecks it. The merchant can within limits first obtain recompense from the bank. Even if amounts exceed the individual’s ability to pay, even as much as to bankrupt a person, the bank is the only one who sustains the loss. Further, the travel, entertainment and leisure industries commonly take reservations, in which the merchant risks a no-show. But if the consumer uses a credit card to make the reservation, the merchant can receive payment from the card when the consumer does not hold to his end of the bargain.
From the time China’s banks established our credit card industry, they’ve continued to hide from risk, continually refusing to provide credit guarantees. In the very beginning, consumers were required to put up money as security against the issuance of a credit card. Up until today, a Chinese credit card is nothing more than a debit card allowing payment to be postponed. Even more, the quality of service is very far from international standards. Upon what basis can it demand fees similar to those commanded internationally?
Posted by Richard at 1:13 AM | Comments (0)
