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When the Chinese stock markets were first established, people made a lot of money. Friends tell me they not only amassed profit from their investment within days, even hours, but enjoyed far more fantastic returns. One gentleman friend from Shanghai made 36 times his original investment within only a few weeks.

But those days are long gone. Now, investors, Chinese and foreign, complain about the performance of the Chinese stock markets, and with good reason. At six year lows, both the Shanghai and Shenzhen benchmarks have, as the Asia Times notes, put in “disastrous” performances.

Ostensibly to rally the markets, the Ministry of Finance cut the tax on transactions in shares by a full 50%. And a minor rally was created, at least in Shanghai, which has since disappeared. In truth, the tax, beginning on January 24, 2004, decreased very slightly to 0.1% from 0.2% of A-share and B-share transactions.

This was window dressing, to say the least, and one hesitates to posit a reason for the implementation of this tax cut. Even Xinhua, the state media organ, had nothing positive to report about this latest attempt to bandage a gaping wound. For more background, see this article [Pay site.]

Apparently, there must be some contradiction somewhere. For while the stock markets flounder, inbound investment has soared to US$60 billion and 2004 M&A activity has grown by 50% over 2003.

Where is the money going and why not towards the purchase of the shares of publicly-listed companies? Several reasons are the cause of this amazing phenomenon, which we’ll discuss in our next post.

The Chinese stock markets are queer creatures, if only because of massive state involvement. With nationalization in the 1950s, the Chinese state became the nominal and functional owner of all commerce and industry. The reverse function – privatization – has proved to be a greater difficulty.

Roughly 1,200 state-owned enterprises (SOE) listed on these markets, ostensibly becoming firms owned by shareholders, instead of the state. Closer inspection reveals that the state remains the greatest shareholder in these firms, and they are not easily or readily divested of their interests.

About one-third of the equity in these firms are held in the form of Legal Person (LP) shares, very often owned by state-controlled entities. In contradistinction to past rules on the alienability of LP shares, the Rules on Transfer of Non-Tradable Shares of Listed Companies, which became effective on January 1, 2005, now require share transfer to be registered, conducted through the Shanghai or Shenzhen exchanges and cleared through the China Securities Depository & Clearing Corporation Limited. That is, while many clamor for a resolution of the LP share issue, Chinese law appears to increase state central control, instead of allowing the market to make its own decision.

Approximately a further one-third is held by the state (guojia gu), which may not be traded. Indeed, they aren’t even listed. For somewhat more detail on shareholding, see this article by Wang Jiangyu.

In other words, only about one-third of the market actually trades (as “geren gu”) over the various exchanges. Professor Stephen Green:

"The large proportion of non-tradable equity means that China’s liquid stock market is relatively small, worth just RMB 1,317.9 bn (USD 158.8 bn), less than 17% of GDP, at the end of 2003. This is small in comparison to other markets, even other emerging markets. The markets of Indonesia, Malaysia and Thailand were all more developed, with only the likes of Argentina and Poland behind."

For elaboration, see his report here.

More on China investment in our next posting.

Attendees at a China business conference this past month showed some interest in media related investment. Let’s start off with TV and Radio, as these sectors of the industry are the most visible and influential to the majority of Chinese. Recent changes in Chinese law encourage the injection of foreign capital into TV and radio, albeit with a number of restrictive conditions.

The Administration of Sino-foreign Equity and Cooperative Joint Ventures that Produce and Operate Radio and Television Programmes Tentative Provisions, despite the unfortunately lengthy title, are nicely clarified here with delightful brevity. [Registration required.]

As therein explained, foreign private equity firms are implicitly prohibited from TV and radio investment. However, foreign firms specializing in the radio and TV business may hold up to 49% of a joint venture with Chinese firms possessing required the media permits. The foreign investor must contribute foreign exchange – no form other than cash is acceptable. Regarding the form of the Chinese investment, there is no similar constraint. In other words, the foreigner should hear it unequivocally stated: “Show us the money, baby!”

[The Provisions may be found here in Chinese. More on developments in Chinese media law may be found here.]

One might easily forget that, while just about anything goes on Chinese TV nowadays, a permit may be revoked – at times with speed that stuns. A-Mei, a Taiwanese singer who vocalized her support for Chen Shui-bian’s election to Taiwan’s Presidency by singing the Nationalist anthem, was immediately banned from performing in China. (As of 2004, she is now once again allowed to perform.) The editor personally knows musicians whose performance permits were revoked for no reason stated.

Why, then, given investment restrictions and political involvement of the one-party system, would foreigners show an interest in investing in the Chinese TV and radio industries?

Most likely, it has to do with revenue growth. According to this document, TV advertising revenue has increased from US$300m to US$2.7bn in the past decade. Without looking critically at the exact numbers – and I assume that they aren’t far from the truth, even given just the massive state-of-the-art complex Central China TV (CCTV) has been building in Beijing – they occurred during the meltdown of internet ad revenue in the West that the industry hoped would save it from a poverty of growth.

What then are the trends in advertising a China investor needs to know?

In “Ten Major Trends in Chinese Advertising,” a Chinese analyst discusses future developments in the industry. (If enough readers show sufficient interest, I will translate the document in its entirety and post it.)

1. Increased state supervision over “problem” advertising.
2. Simplification of procedures relating to increasing foreign investment.
3. Growing competition for increased customer spending among national and provincial media outlets.
4. Development of SMS (cellphone messaging) as a major business opportunity.
5. Maturity of online gaming platforms as major advertising channels.
6. “TV Anywhere” and the proliferation of advertising into all aspects of social life.
7. Multinational advertising agencies, in cooperation with local firms, to develop markets in second-tier cities.
8. Advancement of advertising into the digital television realm.
9. Growth of public relations firms as risk reduction vehicles.
10. Development of regulation should help ensure industry standardization, but the administrative wherewithal for uniform implementation may be lacking.

In other words, the analyst foresees only growth and development with minimal intrusion of the government. Naturally, an investor wishes to be somewhat defensive. Ok, call me skeptical – I tend to believe that skepticism is a healthy reaction. So, let’s ask the question: “Is it all that rosy?”

More on this at a future date.

Chinese educators place a premium on rote learning. Those of a more enlightened consciousness believed that the meaning of what one had memorized as a youth would become apparent at a time of greater maturity.

I witnessed the wondrous benefit of this instructional concept at a luncheon in Taipei many years ago. As we discussed how one went about forging business relationships, a Taiwanese friend suddenly banged on the table, shocking us.

He had evidently experienced a revelation of understanding – of a phrase in The Analects by Confucius that his parents had forced him to memorize as a youth 30 years before. [The Analects in English and in Chinese.] “So that’s what it means!” he said. The value of rote learning is apparent. “Life experience,” as an American might call it, brings the idea held within memory, as a seed awaiting the spring, to life.

However, the literalists are far more numerous, especially in modern mainland China. They demand strict obedience to the letter of the teaching – whatever that teaching may be. The ability to reason and come to conclusions on one's own was and is seen as a danger to the powerful. A dear friend, who is also a brilliant intellectual, told me in 1983 he thought Mao Zedong a great man because he controlled the masses with thought. Shocking as that was to a young American intellectual, as I then was, it is nonetheless instructive of a typically Chinese principle: uniformity of thinking ensures control.

What does all this have to do with business in general and investment in particular?

Having spent my life among Chinese – and having trained many – I have found that the most difficult, and yet most pressingly important, task in a Chinese enterprise is teaching employees to think for themselves. Aside from the occasional micro-manager – whom most westerners would consider as lacking vital self-confidence -- the American manager expects his American reports to have the ability to resolve problems on their own with a minimum of supervision.

Chinese managers represent the opposite pole entirely, surely by education and often out of necessity. That is, complete control of all details at all times. Employees aren't supposed to think for themselves because the manager is to do that for them. But how can one create managers out of employees who never have to think for themselves?

That said, the role of the manager in a Chinese enterprise is in flux. The authoritarian style, while remaining the style of choice, shows fine cracks running up and down its facade.

What are some of those changes and why have they come about? How does the manager augment his staff's individual level of capability and self-sufficiency while retaining strong overall direction of his team? What does an investor look for in the management staff of his target, if he hopes to gauge the potential for success of the business? We will address this topic is greater detail over the next few weeks.

SARFT Limits Foreign TV Production Investment

In "Is It All That Rosy for Media Investments," I suggested that an investor approach the Chinese media industry with skepticism.

A week later, we find that the State Administration of Radio Film and Television (SARFT) has announced restrictions on foreign investment. The restrictions, issued on March 4, may be found in ”Notification Regarding Implementation of the Temporary Regulations on the Management of Sino-Foreign Television Production Companies.” [In Chinese: 关于实施《中外合资、合作广播电视节目制作经营企业管理暂行规定》有关事宜的通知 located here.]

Foreigners may invest “in principle” in one and only one TV production joint-venture. A second may be applied for only in the case of “special conditions,” which aren’t clearly defined. One can only guess at the meaning of this phrase. Most likely, it is simply an out, elbow-room for SARFT in case they, for some reason, find it useful to grant permission for a second JV to a foreign investor.

Note the additional restriction that the foreigner investing in his one JV may do so only if he does not harm the interests of the state. "外方合作机构应自申请之日起的前三年内没有对我不友好的记录." [Translation: The foreign partner organization may not have an unfriendly record towards China for the three years prior to the application.]

One suspects, of course, that the paramount interest is control of the medium. TV is the superlative tool for the transmission of “correct” ideological values. (Indeed, for the transmission of any “values,” a watered-down term expressing damp ideas for living. Simply consider American programming, which is very likely as vapid as it is to focus viewer attention on the ever more daring and exaggerated advertising.) With this regulation, the ideological has once again trumped the market.

OUR NEXT POST: A GUEST COLUMN

In tomorrow’s post, we will be pleased to introduce a guest columnist with a timely article touching on the trade deficit, the (U.S.) dollar and recent Federal Open Market Committee minutes.

[Editor's Note: For today's guest column, we are pleased to present analysis by Sam Park with the New York investment and business development advisory service of R. W. Wentworth & Co. While his article doesn't focus on Asia, Mr. Park writes fluently from an economist's perspective on subjects in which the readers of this weblog, especially those residing in Asia, have expressed keen interest. Indeed, American markets, the trade deficit, the movement of the dollar and Mr. Greenspan's comments are perhaps of even greater moment to the businessman residing on the left coast of the Pacific as on the right. Many thanks as well to Mr. Alan Rude, President of R. W. Wentworth, as well as his staff, for permission to post.]

February Minutes of the Federal Open Market Committee

The Federal Open Market Committee (FOMC) continued with its effort to increase transparency by revealing the minutes of its February meeting. The minutes disclose the discussion among the members as they had decided to raise fed funds rate 25 basis points to 2.5 percent. This transparency allows the public to scrutinize and analyze reasons behind the Committee¹s decision on their recent monetary policy.

During the meeting, the consensus was that the economy steadily expanded in recent months. Real consumer spending continued to expand as real disposable personal income rose moderately and consumer confidence remained favorable. New and existing home sales maintained their robustness, however at a decelerating rate. Business fixed investment grew in the fourth quarter and was bolstered by favorable fundamentals. Since the recent data indicates a solid economy, the FOMC has some freedom to raise rates closer to their neutral level that ranges between 3.5 and 4 percent.

A Large Trade Deficit and a Weak Dollar

The U.S. international trade deficit continues growing to record levels, both in nominal terms and percent of GDP. Recent data suggests that the U.S. trade deficit had swelled in the fourth quarter, which had resulted from a decline in exports of goods and increases in imports of oil and consumer goods. Despite the optimistic view of the U.S. economy suggested in the February minutes, the current trade deficit may pose a threat to the ability of sustaining high Federal deficit levels and to the continuing of the economic expansion.

Large deficits typically cause worry that they could hurt the U.S. industry, eliminate jobs, and cause "hard landing" scenarios. Growing deficits could burden future generations with overwhelming foreign debt, leaving the U.S. susceptible to foreign pressures. This could discourage foreign investor confidence in the U.S. and may trigger capital flight, causing a downward spiral of the dollar.

However, according to America's Record Trade Deficit, large trade deficits are typically accompanied by improving economic conditions because of the link between trade deficits and rising investments. The primary cause of the U.S. trade deficit is due to insufficient domestic savings to fund all available domestic investment opportunities. This insufficient savings is filled by inflow of foreign capital, which allows the U.S. to buy more than it sells resulting in a trade deficit. Trade deficits are sustainable as long as the U.S. remains a safe and profitable designation for the world¹s savings.

Several factors challenge the sustainability of the trade deficit. Historically, the U.S. dollar and Treasuries have been viewed as safe and profitable. While the dollar is still safe, several major dollar-holding foreign central banks had recently issued statements of the dollar¹s unsatisfactory returns. These central banks have also indicated their plans of decreasing their exposure to the dollar, and these banks may diverse themselves away from the dollar. The weakened dollar must turnaround to avoid a possible capital flight and recession.

Inflationary Pressures

Another major focus on the Committee's minds is inflation. The weak dollar has caused import prices to rise. This combined with record high crude oil prices are creating inflationary pressures. High productivity growth rates have previously eased such pressures; but as the productivity rates decelerate, core inflation to the consumer will begin to increase.

The latest core Producer Price Index rose .8% (its highest monthly jump in nearly a decade). This implies that costs to firms have risen. The rise in the latest core Consumer Price Index was more moderate. However, unit labor costs had accelerated over the last year; and if this trend persists, core CPI is likely to increase.

The FOMC puts more focus on CPI figures than that of the PPI, and the Committee does not currently seem to be in a panic situation. Then again, some firms/producers have indicated their ability to pass cost increases to product prices, which directly causes higher core CPI figures. FOMC members probably understand this possibility and may take a more aggressive monetary stance in the months ahead.

Contradictory Interest Rate Situation

As shown in previous newsletters, consumer inflation levels affect FOMC's policy stance and decisions on fed funds rates. Given so, the upward inflationary pressures will force the Committee to take a tighter stance, which will effectively increase short-term interest rates. Nonetheless, consequences result from actions.

Greenspan has mentioned how he faces a conundrum seeing the recently declining long-term Treasury rates after having raised rates six consecutive times. Rising short-term rates not only causes a flattening yield curve, but the low long-term rates also accelerates the process. This implies that economic outlook appears uncertain. If the curve becomes inverted (when short-term rates exceed that of loner-term Treasuries), then we are likely to face a dismal economic situation.

Where Fed Funds Rates Are Headed

As mentioned, the FOMC tends to focus majority of their attention on consumer's inflation. Granted so, they will continue raising target rates. Currently, the fed fund futures is pricing approximately 65% probability of a 50 basis point increase in fed fund rates during the upcoming FOMC meeting and implies that at least 25 bps rise is virtually definite in their meeting on March 22nd.

Summing It Up

The Federal Reserve forecasts real GDP to expand between 3.5 and 4 percent for 2005, and the Committee expects the pace to slightly decelerate and range between 3.25 and 3.75 percent in 2006. Firms surveyed by the Fed have indicated more confidence about the economic outlook, and a significant reduction in capital spending is not anticipated in the early part of 2005. Both firms and consumers have taken advantage of low longer-term nominal interest rates, which is partly attributable to well-contained inflation expectations.

The low rates have discouraged savings and helped sustain spending trends. The current low savings rate appear to have resulted by expected income gains, low interest rates, and higher household wealth. The rise in equity and housing prices were major factors in creating that wealth. A reversal of home price appreciation trends would adversely affect household wealth.

A downward spiraling home price or bursting of a housing bubble is possible only if a negative catalyst occurs (i.e., unemployment rates taking a sudden and sharp hike). Since this scenario appears doubtful in the foreseeable future, downside economic risk seems contained. A bleak economy can be avoided as long as imbalances do not force the FOMC to considerably deviate fed fund rates away from neutral levels.

The Federal Reserve Board will most likely raise rates 25 bps on March 22nd. However, if Greenspan fears that increasing inflationary pressures to the consumer is eminent, the FOMC may opt to raise more aggressively by 50 bps during the March meeting.

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In an article worth reading, Caroline Baum, a Bloomberg columnist, imagines that “Asian central banks are poised on the edge of a cliff.”

A vivid metaphor, indeed. In other words, given recent signals from Japanese and Korean officials, it would appear that the US dollar hovers on the brink of an extreme revaluation.

Unsurprisingly, given the great set-up in the article’s first sentence, Ms. Baum then asks the question: “Who will be the first to jump?” Any answer to this question presupposes that someone will jump.

Ms. Baum goes even further, explicitly encouraging a first mover. “It would be much smarter for these banks to quietly sell dollars, if that's what they want to do, without calling attention to it.”

But will any of the central banks jump into the abyss?

If media reports are to be believed - please be skeptical - many think so. On an unusually warm weekday at the end of last year, certain currency traders expected a devaluation of the renminbi over the weekend – drinks were had all around on the Saturday, but no one had yet profited from that bet. Nor months later, as of today.

To be sure, the idea of RMB devaluation has been batted around like a badminton birdie since the late 90s. More conflicting signals from the Chinese government – if signals they be, instead of expressions of indecision – confuse the issue.

I have steadily maintained that a major revaluation runs contrary to China’s national interest. [Here and here.] This, despite indications that China must do so or suffer the economic consequences, as summarized by James Dorn, here.

At the end of 2004, Chinese foreign reserves reached US$610bn, an enormous sum by any earthly measure. But Chinese officials, historically, tend to use even grander measures to gauge China. Zhou Xiaochuan, governor of the People’s Bank of China has stated that "China's foreign reserves are indeed somewhat high, but not by any big magnitude.”

A major policy change is, of course, possible. After all, China raised interest rates after many years of speculation and chatter. But only after foreign governments shut up and stopped complaining about it. Indeed, when the day comes for the peg to be removed, it will happen only after foreign governments stop complaining about it - and when Chinese officials under difficult circumstances have no choice but to do so. And when they do so, that action will be explosive and change China as greatly as removal of Taiwan's NT dollar to US dollar peg changed Taiwanese economic life.

Note, however, that the Chinese central bank has diversified over the past few years away from the US dollar to Euros. Is this the “quiet selling” that Ms. Baum suggests for the Japanese and Koreans?

Imagine what might happen when – if – the Asian central banks jump, having first hollered. (Of course, the hollering is aimed at the ears of their dear friend, the government of the United States of America, for help in an hour of need.)

Imagine when - if - the current administration fails to put a good word in for their allies in the region and, by not informing the markets that the value of the dollar is sacrosanct, fails to pre-empt the radical dollar movement everyone but the administration fears. Suddenly, it is sold in great quantity. It tanks. US Treasuries held by those foreign governments concomitantly suffer enormous loss in value.

The first mover may gain somewhat – but everyone loses in the end. A jump into the abyss.

Thunderbird will host a discussion panel entitled, "Investing in China: Will the Boom Continue?" in Shanghai on April 12.

Confirmed speakers include Christian Giannini, Vice President, ChinaVest; Kenneth Rhee, Vice President, Shanghai Dragon Investment; Steven Xu, Director of Advisory Services, Economist Corporate Network; Joe Zimny, Director, Oxford & Associates.

Click here to see a detailed description of the event.

By the way, you might want to consider becoming a member of ORIENTED.COM, which, as their website notes, is "an international, professional network that brings together businesspeople and students alike who share a common interest in Asia." I've found their networking events fun, but populated mostly with people in their 20s and early 30s, including students. In other words, I would not recommend it for serious business networking with more senior executives.

The traditional misidentification of China as the “Middle Kingdom,” a literal translation of 中国 (zhong-guo), leads many modern observers to claim, as did their 19 century counterparts, that China has been an historically insular nation which sees itself as the “center of the world.”

Originally, more than two millennia ago, the term was understood to have several meanings, none of which encompassed that of the English translation. It has never meant what we have ascribed to it.

Furthermore, several dynasties of yore were cosmopolitan in a very modern sense. The Tang (唐) dynasty is the cosmo poster boy most often trotted out by Sinologists. Our recent burgeoning of Sino-Western contact is hardly a new phenomenon.

So let us dump on the ash heap of historiography the fantasy of a timeless “Middle Kingdom” which, because it sees itself as the center of the universe, is predisposed to disregard the rest of the world. Chinese do not see themselves to be anymore at the center of the international world than do Americans.

And yet, Chinese often blithely wander their own way with scant regard for the international sphere, and, it would appear, to their detriment. We have a timely example, in fact, that takes us to Korea on our way to the mainland.

Korea, having seen Japan’s threat to change its currency mix fail to move the Bush administration to strengthen the dollar, issued notice of a surprising policy change. Korea will now encourage outbound investment in an attempt to move offshore much its massive foreign currency reserves of $205.4 billion. As the Korea Times article notes,

"The policy shift is considered a big step to slow the pace of the won’s appreciation against the U.S. dollar and reduce the widening deficit in the service account as well as stabilize the domestic real estate market."

The Chinese government, on the other hand, steadfastly maintains its RMB to USD peg, is unable to contain rampant property speculation and continues to accumulate foreign currency reserves (foreboding grave consequences, including inflation). A recent World Bank report warns of the potential for large capital losses to those countries with excessive foreign currency reserves.

In October, 2004, Chinese regulation was promulgated to make it somewhat easier for businesses, as opposed to individuals, to invest overseas, given the requirement of specific approvals. See page 3 of this document.

Contradictorily, and despite the economic risks, China has this past month decided to place severe constraints upon individual, as opposed to business, outbound investment. As Barbara Mok of Jones Day writes, “Outbound investment by domestic residents becomes more difficult, if not impossible.”

The impetus for the State Administration of Foreign Exchange (SAFE) regulation on individual investment may have been rooted in an attempt to curtail the pilfering of state assets. But is it any less difficult for a business to manipulate the approvals system?

The contradiction embodied by these regulations -- allowing business while curtailing individual investment -- may perhaps have originated in a disagreement among the various ministries involved. But, I am unsure of the validity of this assessment.

Chinese individuals have virtually no investment options. The Chinese stock markets continue their 6 year slide. Other than the very scary real property markets or the boringly unremunerative savings account in a state bank, gold bullion and postage stamps are what is laughably left.

If individuals were allowed to invest overseas, money would explosively drain out of China to places where it would find its higher return. The plug must stick in the drain, it seems, for fear that a freer flow of capital will wash it away.

The broughouha receiving great wads of press this past week relates to the Chinese stock markets. In a nutshell, the 证监会 (China Securities Regulatory Commission) has apparently decided to implement a “reform” of the markets. Or at least they have decided to toe-test the waters.

As I answered in “Who Owns the Equity in Chinese-Listed Companies?” the state does, or at least, two-thirds of it. Last week, comes the report of an experimental program by which state holdings may, it is hoped, be successfully unwound. [Pay site. Registration required. Or see this page.]

To be fair, the program involves only four companies, heavily invested in by the state. Details of the rumored process by which the companies were selected may be found here. [In Chinese.] Proposed reasons for the selection:

对于已经公布的四家试点企业，华泰证券裴雷认为，这批公司尽管处于不同的地域，属于不同的行业，但它们至少有这样几点共性：

　　从规模来看，四家上市公司都不属于中央级的大型国有企业，而属于地方国企和民营企业。紫江企业、三一重工均为民营企业，其中紫江企业还是中外合资公司；清华同方和金牛能源则是地方性国有企业。从股权结构来看，四家公司的股权结构都相对简单，控股股东能够具有绝对的发言权。

　　而在股份类别上，四家公司均为纯A股公司，未含B股或H股。从经营业绩来看，四家公司自上市以来均未出现过亏损，且盈利能力较强。尤其是近三年来业绩发展持续稳定，显示出较强的行业竞争力。

In other words, the chosen companies are all profitable and competitive smaller, regional enterprises with uncomplicated stock ownership structures involving only A shares. So, is this an experiment representative of a sell-off of state interests in the market as a whole or more likely one conceived to please members of the State Council? [That was a rhetorical question.]

[Let me answer it.] This is a program designed to ensure the highest chance of success. Is it possible that the wider implementation of the sell-off has not yet been approved at the highest levels, but is dependent upon the success of this experiment? To what extent is wide scale implementation a certainty?

Yes, we are already reading the Chinese media play to the mass by portraying the program as the vanguard of a “total solution.” A Jiangnan Daily headline proclaims that “The State Council Has Now Become Directly Involved: The Problem of the Chinese Stock Markets to be Thoroughly Resolved.” But, in the past, the state has announced many programs with similar fanfare that have nonetheless died the slow death of wholesale inattention.

By the way, “unwound,” as I mentioned above, is the Financial Times's polite parlance for “dumped,” which I think, although a rude allusion to a garbage can, the more apt verbal selection. The introduction of an additional 200% of the outstanding stock to failing markets, already dead-swinging at a six-year low, can not possibly be a hopeful occurrence. If timing could be any worse, one could not think of it. But is any timing propitious for the offloading of more surplus shares than currently exist on the market, under business conditions at present in China?

The markets were designed with a fundamental flaw – massive state involvement -- in what became overvalued shares. Some have called for massive state injection of funds in the markets, which the magazine, “Caijing,” editorializes as “wrong headed” and “dangerous.” One doesn’t see how the Chinese state can save the day with any plan. It is a conundrum, with the only real resolution likely causing collosal damage domestically while baring the weaknesses of the Chinese economy to the world.

View the update to my April 7, 2005 post, "New Regulations Curtail Individual Outbound Investment."

The American Bar Association, Section of International Law, China Committee, will present a breakfast and CLE (pending) in Shanghai.

Topic: Interpreting the NDRC Rules
Presenter: Yingxi Fu-Tomlinson, Partner, Kaye Scholer
Date: Friday, June 24, 2005
Time: 7:30 – 9:30 AM
Place: Squire, Sanders & Dempsey L.L.P., Kerry Centre, Suite 1207
1515 Nanjing Road West, Shanghai, Phone: 21-6103-6300

"Obtaining the Ministry of Commerce's (or its predecessor's) approval of projects has been key for foreign investors wishing to access the PRC market. In July of last year, the State Council issued its Reform of the Investment System Decision, which appeared to signal an important role for the National Development Reform Commission (“NDRC”) and perhaps a significant step in development of a registration system instead of an approval system. However, the Decision was broadly worded and left open the specific procedures to be applied by the NDRC.

Of keen interest to foreign investors is how the NDRC registration process will in fact fit with the MOFCOM approval process. The NDRC subsequently adopted the Administration of the Verification of Foreign-invested Projects Tentative Procedures (issued October 9 2004), with the apparent aim of clarifying matters. However, significant questions still remain."

Ms. Fu-Tomlinson will present respecting the new NDRC rules and their impact on the approval process for foreign-invested projects.

Register for this program.

For more information: Jessica Elliot

You may remember the experiment to test the "unwinding" of the state's interest in the Chinese stock markets. See this post for a refresher.

Investors of two of the four companies involved have voted on proposals to offload state shares. IHT reports that Tsinghua Tongfang investors rejected the proposal put to them; Sany investors accepted theirs. Partial success for Chinese regulators.

The Financial Times of London paints a very different portrait:

"China's plan to reform the complicated shareholder structure of its stock market has suffered a setback as investors in one of the four companies involved in its pilot programme rejected the proposals." [Subscription required.]

Is it accurate to call this a "setback?" Possibly. As I explained in my May 11 post, companies were carefully selected to ensure the "experiment" succeeded. And yet FT didn't even bother to tell its readers of the nearly 100% vote in favor of the plan at Sany.

The Sany proposal passed with 99.9% of the vote of tradeable shares -- flying colors -- Tsinghua Tongfang's failed by only 4 percentage points. Why? Perhaps we might come up with an answer as investors talk to the Chinese press in the next few days.

Crazy old Xinhua must have been smoking something. The (Hong Kong) Standard adds -- in the final paragraph of the IHT/Bloomberg article run otherwise word for word -- Xinhua's first report, make that incorrect report, of the passing of Tsinghua Tongfang proposal passed:

Tsinghua Tongfang's statement contradicts a report from Xinhua news agency, which said the plan was approved by 93.4 percent of shareholders of the tradable stock at the meeting. Xinhua Saturday corrected its report ``after checking with the company's board.''

What a great line: "after checking with the company board." Touché!

Click the little triangle to hear today's update post on developments in the PRC plan to sell state shares in the Chinese stock markets.

For the background to this post, click here.

The China Securities Regulatory Commission (CSRC) 中国证券监督管理委员会 announced an extension of its plan to sell the non-tradeable state shares of 42 listed companies. This Bloomberg article lists the companies involved.

FT also reported on the announcement, noting briefly that

"The State-owned Assets Supervision and Administration Commission (SASAC) 国务院国有资产监督管理委员会, which controls the state's equity holdings, said at the weekend it would engage in the shareholder reform plan, but added that the state would maintain controlling positions in many state-owned enterprises."

Hmm... That's a frighteningly contradictory assertion.

The finance magazine Caijing deals with this idea in greater depth:

"...in spite of...optimistic pronouncements the plan still faces major obstacles. Most notably, it must overcome the “lack of policy harmony” among its proponents on key issues. Since the plan’s announcement, some shareholders have attempted to claim compensation from the reforms, pointing to the losses they suffered during the 15-year development of China’s stock market. Until now, the State-owned Assets Supervision and Administration Commission (SASAC), which manages all state-owned property, has made no formal declaration regarding whether and how to compensate these shareholders.

The conduct of the SASAC has left some analysts pessimistic about whether the CSRC’s plan will ultimately survive: “the SASAC has made many statements supporting [the floating of untradeable state shares], but with no concrete action. The CSRC, on the other hand, could resort to one desperate last measure, slamming more restrictions on the future fundraising efforts of those companies who haven’t solved their untradeable shares problem,” said one analyst from Boshi Fund Management. 'The CSRC appears to be pushing aggressively, but it is doubtful whether a unilateral action would succeed.'”

[ABI editor's ellipsis. NB: I have been unable to locate original Chinese version of this article on the Caijing site, and have put in a query for the link with the editors.]

Is it possible that some firms will divest their non-tradeable state shares and others will not?

That aside, the market -- at least the Chinese financial media -- appears to understand that an intractable inter-agency dispute at the highest levels may ultimately affect the execution of CSRC's share sale plan.

Why a continuing dispute over an issue of major proportions? The issue is this: who, if anyone, will compensate investors when share lots of gargantuan proportions come on the market? Perhaps no one can offer anything near a satisfactory answer. It is a hot potato question that everyone fears and few career bureaucrats would dare to touch. No wonder the inter-agency dispute.

Despite this, it appears that the CSRC has thrown down the gauntlet, having decided -- forgive my mixed metaphors -- to blaze a trail. It could be that the CSRC, having failed to come to terms with SASAC, has simply opted for the capitalistic notion that the market must take the pain now for future benefit. It is a decision based either on careful planning and analysis, complemented by a dose of courage and the support of some on the State Council -- or sheer foolhardy cheek.

Given the extraordinarily intelligent and well-trained Chinese peppering the ranks of the bureaucracy, I would tend towards the former. But knowing that the ranks can be otherwise salted, the latter remains a distinct possibility.

Click the little triangle to hear an audio summary of the post directly below.

We posited this question in a prior post: will the Chinese plan to sell non-tradable shares apply to all companies? Evidently not, according to Shang Fu-lin, the chairman of the CSRC. Although all listed non-tradable shares will be converted into tradable shares, not all listed companies will sell those shares. The state will hold on to much of its holdings.

Financial Times's Geoff Dyer posits that this announcement is related to the fact that "some investors [are] afraid of a glut of new shares coming on to the market." [Subscription page.]

Not really. There is more at work here.

From the website of the embassy of the People's Republic of China in the U.S.:

"After the non-tradable shares become tradable, whether they would come into circulation or not depends not only on the shareholders' strategic choice, but also on relevant restrictions, said Shang.

He clarified the restrictions as follows: firstly, it depends on the entire strategic layout of state-owned sectors. After the reform on non-tradable shares is completed, state-owned shares can be cashed in only upon the approval of the state-owned assets authorities.

Secondly, it depends on the intention of controlling shareholders. Even though there are no restrictions in the laws and policies, the controlling shareholders will hold a substantial amount of shares in the long run in order to control the company."

Well, that clears things up: the state will choose the companies to participate in the sale of converted shares. The state will continue to hold the Ace cards as investors plaintively ask for approval.

Am I hallucinating or doesn't this latest pronouncement tend to make less valuable the publicy-owned shares of those companies whose converted non-tradable shares won't be sold? The publicly-traded shares in those companies will remain burdened by a state ownership beholden to nary a market force. They will gather at the lower end of the market, weighing it down, while the companies whose shares are more or less freely tradable will better reflect their market values.

And then, there is the further complication of H shares. There has been a report in western media that H shares will be included in the reform, but it appears that this is, as yet, just talk:

尚福林說，A股和H股分屬大陸和香港兩個市場，分別適用兩種不同的市場規則。在股權分置改革的過程中，對含有H股的公司解決其A股的股權分置問題，在具體方案的設計上要充分考慮這一因素。在境內證券市場的發展過程當中，我們有很多規則的制定都是學習和借鑒了香港市場的做法，今後我們還會一如既往地加強與香港證券監管部門及證券交易機構的溝通和交流。

So, even as the state announces cheerfully that the problems in the stock market will be resolved within one to two years, it injects further distortion and confusion into the plan to sell off state shares.

Disciple: What is this thing that is like a share, but not a share?
Master: Ah, yes. Tell me, what is the sound of one investor's hand clapping?

Click the little triangle to hear today's post.

Note the Editor's updates to this post, found at its conclusion below.

[Editor's Note: I'd like to thank Dale Oesterle, professor of contract law at Ohio State University, who has graciously provided today's post, which also runs on his Business Law Prof Blog. Author of the casebook, The Law of Mergers and Acquisitions (West 2002), he addresses the question: will the US government approve the proposed union of CNOOC-Unocal?]

CNOOC's Bid for Unocal: CFIUS Approval

by Dale Oesterle, Professor of Law
J. Gilbert Reese Chair in Contract Law
Moritz College of Law, The Ohio State University

Hong Kong based CNOOC, Ltd, China's largest offshore oil producer made a bid last week for Unocal Corp. CNOOC is 71 percent owned by state controlled China National Offshore Oil Corporation. The acquisition falls under of the interagency Committee on Foreign Investment in the United States (CFIUS). CFIUS, a committee that has worked in relative obscurity (it is the last chapter, never covered, in my Mergers & Acquisition casebook), will now be in the bright lights. The Unocal acquisition appears to be the first of many attempts by China and Chinese companies to buy American companies.

CFIUS has its origins in the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988. A Japanese company, Fujitsu had attempted a takeover of Fairchild Semiconductor Corporation in 1987 and the Exon-Florio Amendment was Congress's response. The President now has the authority to block foreign acquisitions of American companies if the acquisitions "threaten to impair the national security." The President delegated authority under the Act to CFIUS to investigate and advise the President on whether foreign acquisitions threaten national security. CFIUS is chaired by the Secretary of the Treasury and has eleven members -- representatives of the Departments of Treasury, State, Defense, Commerce, and Justice, and the Office of the Trade Representation, the Office of Management and Budget, the Chair of the Council of Economic Advisors, an Assistant to the President for Economic Policy and the Director of the Office of Science and Technology Policy. National security is not defined but Congress included a list of "factors" that include a focus on national defense requirements. Oil would clearly meet one of the factors; oil production is necessary for the "capacity of domestic industries to meet national defense requirements."

The Unocal acquisition will be a test case for CFUIS and our response to China's efforts to buy major American companies. I suspect that CFUIS will recommend that the President block the acquisition and that the President will agree to do so. In so doing, of course, the President will make Chinese officials very unhappy. China, however, does not let Americans buy controlling stakes in Chinese companies and in international affairs, reciprocity is the name of the game.

[Editor's Update, July 3, 2005: In light of this post, see also FT's article Congress Votes to Stymie CNOOC Bid. Subscription required for the entire article. But the first paragraph: "Political pressure surrounding CNOOC’s $18.5bn unsolicited bid for Unocal, the California oil company, was stepped up on Thursday as Washington lawmakers overwhelmingly supported a measure aimed at blocking the bid by cutting off funds for the Bush administration to investigate the deal."]

[Editor's Update, July 8, 2005: From the Financial Times.

"The proposed deal does raise questions but most relate to its commercial logic. China’s belief that it needs to buy resources producers in order to secure supplies makes sense only if its companies can manage them more efficiently than their owners. Otherwise, locking up capital to acquire raw materials that are freely traded on world markets is at best wasteful and at worst very risky. Odder still is CNOOC’s belief that it needs to buy a US oil company to gain access to Asian reserves which it could have bought directly from elsewhere. Integrating management, operations and corporate cultures will be a formidable task, of which the Chinese company has no previous experience, and it may also be obliged to dispose of some of Unocal’s assets."

Subscription required to view the entire article.]

Few Chinese would give much credence to the notion that law is at all important to the their businesses, despite the growing number of regulations that impinge upon commerce. Traditionally, to the Chinese, whatever the law might be at the moment depends very greatly on the man who is executing it and your relation to him. This remains true to a large extent even today, especially since Chinese judges need not rely upon precedent, nor need they in practice explain their rulings.

However, given the many tens of thousands of lawsuits proceeding throughout China at this moment, far more than perhaps ever before, as well as the central government's insistence upon what it calls "rule of law," the law has become something like the fly that buzzes constantly around one's head, until one must take notice of it. And that is precisely what I would suggest. Your attorney will guide you through the minimal requirements that Chinese law demands of you in your particular situation, which with exception, will be generally less that what you would find inescaple in the West.

The Chinese Company Law has just been revised. The Legal Daily (法制日报) has reported upon the changes in the law with a brief comparative review, portions of which I have translated. Here is our first installment:

Understanding Revisions to the Company Law: A Comparison of the New with the Old

By Wu Kun

On October 27 [2005], the 18th Session of the Standing Committee of the Tenth National People’s Congress approved by majority vote the revised Company Law, to take effect beginning on January 1 [2006]. This is the third revision enacted by China’s legislative body to the Company Law since its passage on December 29, 1993, at the 5th Session of the Standing Committee of the Eighth National People’s Congress

As all know, the Company is the most important form of enterprise in a market economy. Enterprises with the company form do not represent the largest percentage among all enterprise forms, but their total capital and overall economic contribution far exceed other enterprise forms. At the same time, the company is an important mode by which the modern enterprise system is created. Currently, in China's state-owned enterprise reform, the use of the company structure to implement reform is very important. The revision of the Company Law and China’s company legal system contributes to the strengthening of China’s establishment and perfection of the Socialist market economy, hastening economic development. We may clearly discover, through a comparison of the old and the revised law, what of the new Company law will have various effects on the maintenance of the market economy structure.

1. Introduction of "Piercing the Corporate Veil"

Current law: Not in the current law.

Revised law: A shareholder who abuses the independent position of the company’s legal person and the shareholder’s limited liability to evade obligations, seriously damaging the interests of the obligees, assumes responsibility for those obligations.

To be continued...

[Editor's Note: A weblog I've only recently discovered is Value China, and find to be worthwhile reading simply because of its presentation of unusual and contrarian commentary on China business. The article below, written in June of 2005 when CNOOC still pursued Unocal, is an example. I have translated it not because that deal, now dead, is currently relevant, but simply to show that there are Chinese in the investment community who do not support global mega-deals, and the reasons for their disapproval. We rarely hear the contrarian viewpoint expressed so bluntly and forcefully.

Commonly heard in conversation with Westerners, and rarely in official media, are arguments like that below. In other words, that China is poor by any standard and functioning substantially on borrowed money. Hence, China should be made strong by directing investment to its own domestic markets rather than allowing capital leak out onto the global market. The government's energy policy is thus indirectly criticized, despite a clause inserted to direct blame away from high-level government officials. Note also the strong flavor or nationalism that percolates through the piece, as well as the final line, a gratuitous thrust at unmentioned parties, a subtle stab at the U.S., thus considered an enemy who would, it is assumed, wreak havoc upon the Chinese economy with pleasure.]

Some Chinese Have Gone Nuts
--A Commentary on the CNOOC “mad swallow” of Unocal

By Song Tai-wei, Shanghai Cai Sheng Investment Information Co.
上海财盛投资咨询有限公司 宋太伟

Recently, the boldness of a few Chinese have stunned both Chinese and the world. The Lenovo Group invested USD 1.25 billion to purchase IBM’s global personal computer business. Thereafter, the Haier Group invested USD 2.25 billion to purchase Maytag, the American appliance giant. Followed quickly thereafter, CNOOC astonished when it madly swallowed a soon-to-be bankrupt Unocal Corporation with a cash investment of USD 18.5 billion (about RMB 154 billion). After all this purchasing of large American businesses by Chinese government supported companies, using what are astronomical sums of capital to the still not wealthy Chinese, won’t there be even more astonishing, crazy purchases?

Actually, the average living standard of Chinese makes China a backwards nation in the world. To the foreigner, attracting foreign capital remains the most important work of the vast majority of Chinese local authorities. At such a time, can foreigners not be surprised when Chinese enterprises frequently spend astronomical sums of US dollars to purchase American enterprises that are nearly bankrupt? Aren’t Chinese very poor? So how can they have suddenly become rich overnight? We ourselves feel that some Chinese have changed too quickly, are too bold, and behave without restraint, almost as if crazy.

In this article, I do not wish to vainly aim criticism at the behaviors of Lenovo, Haier or the CNOOC / Unocal incident. What I wish to say is this: their legality, necessity and business economics all are problematic.

Legality: the ownership of CNOOC, although a listed company, is controlled by the Chinese state. The purchase used RMB 160 billion, nearly the investment in the SanXia project (planned at under RMB 180 billion). Such a large investment in socialist China, even if national leaders had no authority to make such a decision themselves, was even more so at the national enterprise leadership level! Only the entire Chinese people have the complete authority regarding national and personal property, even if, from the perspective of the business management level, CNOOC’s huge purchase is illegal, its net net assets are just over RMB 80 billion. Putting up double the company’s net assets in cash in US dollars to make an overseas investment is prohibited under the “Company Law,“ national capital investment management regulations, foreign exchange management regulations and several other laws. The ultimate risk is for the great mass of people (the nation) who must take on the burden.

Next is the problem of necessity. First, from a national strategy perspective, the energy problem is long-term and global. Moreover, what we can definitely say is that, unless people incessantly innovate science and technology, developing new environmentally sound energy production, this problem will never be resolved. Oil assets are the joint wealth of all of mankind, and any monopolistic behavior can bring on international tension, even war. This is directly connected with national foreign policy and security issues. If Unocal were really worth the SanXia Project, would the Americans, who need oil even more, sell it?

The several decades of rapid growth in China proceeded without sufficient oil reserves. What great problem will it be to continue on this basis for a few years or even long term? Thinking about it, fuel guzzlers are backed up everywhere -- cars creating serious environmental pollution -- so what is the necessity of counting the cost of a purchase when oil is at a historical high of USD 60 per barrel? Go back a step. Even if there is a national oil shortage crisis, so what? We need even more capital for technology innovation. A one-time investment of RMB 160 billion for energy saving technology – solar, atomic, hydrogen or other technological developments – wouldn’t that be a smart national strategy!

Second, Unocal is an American company. Even if the CNOOC purchase had succeeded, guaranteeing a lot of oil production, would it be entirely directed towards the domestic market? The shortage America and other developed regions experience have created great national discussion.

Third, use of this method as a way to ease the RMB exchange rate conflict and take care of dollar reserves is extremely stupid. The RMB exchange rate problem is just an excuse used by others in their interests, and those who think it real are being deceived. Should the RMB really be revalued at all? China’s GDP has reached RMB 14 trillion, the M2 money supply RMB 30 trillion, and as the efficiency of the usage of currency drops, the bubble has become extremely serious. America’s GDP is US$ 12 trillion, with M3 at USD 9.3 trillion. Moreover, 60% of the supply of US dollars may be found overseas! In 2004, China’s foreign reserves had a net increase of USD 280 billion, mostly investment capital. I estimate that China’s foreign reserves are currently USD 660 billion. At most, only USD 100 billion have been earned by enterprises within China that have made this money through the trading of products. The vast majority is direct inflows of investment funds or the savings of foreign enterprises. This is a national debt. The foreign exchange is “used only to make a profit,” and can (in a short period of time) be taken out of the country. If the foreign exchange within the country is wasted, what will be used to repay it? If the stability of the ren min bi or the nation is to be guaranteed? I estimate that within two years, even if China becomes the largest holder of foreign reserves, it will mostly be other people’s money, and one may not dare to consider oneself wealthy. According to the current situation, I estimate that the ren min bi, if freely convertible, can only depreciate. Long-term appreciation is something a nation can be proud of, but it must be based upon reality. Perhaps we have just been deceitfully selling out our labor and our markets.

Economic efficiency. First, the commodity-based economy is cyclical. Crude oil prices can’t continue to increase for very long. A price of USD 80 or 100 per barrel in the near future is a fool’s dream. If the price of crude remains at USD 60 per barrel for a year, a global economic recession is unavoidable, and oil prices would naturally fall. To enter into purchases during the period of crazy high prices, the rational Americans whose companies are being purchased would surely find no end to their joy. Chinese would become the Japanese of the early 90s. Second, Unocal, with assets USD 13 billion, a company needing to apply for bankruptcy protection, certainly has little in the way of net assets. Is it worth USD 18.5 billion? According to documents provided by CNOOC, Unocal’s oil reserves are equivalent to 180 million barrels (about 24 billion tons). Even if it, in its entirety, were figured at 15% profit, its profit from it being drilled at one time would only come to USD 16 billion. If one considers the current value discount and usage losses, the estimate would be even less. CNOOC’s reserves approach 27.53 billion tons (100 times that of Unocal), with production approaching 37 million tons (exceeding Unocal’s by 1.6 times). CNOOC can be valued at only USD 22 billion. Logically, the company that should be acquired is CNOOC. Third, Unocal is global with 6,600 personnel huge management costs and definitely plenty of problems, otherwise it would not apply for bankruptcy protection during a spike in oil prices. One estimates that CNOOC’s huge capital infusion would not be as simple as using that capital directly on the international market to purchase oil, and thus make money.

Chinese enterprises and the domestic market are not conformed to work well together. Is going to far-away America the way to become a hero or savior? The Chinese market is the one world market experiencing the greatest activity. Business from all over the world are running to China. Shouldn’t national enterprises first become strong and sufficient within China? What are they doing running off to America?

Given this situation, aren’t some Chinese going nuts? Those who are secretly happy are naturally those who would cause you to go nuts. Those who will pay the bill (and be buried by the total), is the ordinary Chinese on the street.

An Unsteady Banking System in a Sea of Change

The Chinese stock market languishes, in large part because the state has yet to reform state ownership in listed state-owned enterprises (SOE). But, scrounging around, one finds that a number of root causes exist. As Li Xue-bin writes in "An Unhappy 15th Birthday for the Chinese Stock Market" in 中国经营报 (China Business):

"上市公司上市以后极度缺乏回报意识，而投资者入市后极度缺乏风险意识."

"After listing, companies profoundly lack payback consciousness and investors in the market profoundly lack risk consciousness." [Translation and italics are those of ABI editor.]

Investors with pie-in-the-sky expectations and companies that care little for shareholder value remind one of the hackneyed aphorism that oil and vinegar do not mix.

Little wonder, then, that Caijing (财经) magazine, consistently a proponent of market forces, editorializes against reform of the stock market, at least for now.

"In China, stock indexes never were an economic barometer and might never be, because the stock market has never been a crucial component of national economy. If the government really wants to provide the nation greater economic security, it should focus whole-heartedly on the banking sector, which holds nearly all the expendable income of the entire population."

While Hu Shuli (胡舒立), the editor, also encourages state monitoring of “commodities that make up the basic living costs of citizens, such as real estate,” the state banks remain the single sector most in need of urgent care. They touch all aspects of Chinese economic development, underpinning the export machine that keeps the system running, yet without much of a cure in sight.

Despite the creation of “Asset Management Companies” (AMC) under state control to take NPLs (non-performing loans) off of the books of the state banks [on which western banks expect to earn a return of 21-30% per annum],

"China can reasonably expect to recover only US$100-150 billion from resolutions of its NPLs, and while the AMCs can recover a substantial portion of this total from their own collection efforts and from sales to domestic investors, the domestic market can’t reasonably be expected to absorb it all."

The recent increase of 16.8% in the official GDP -- which Asia Times blessed only two days after its announcement by saying that “the new figures, which reflect a modernization of calculation methods, are widely accepted by outside analysts,” -- makes it appear that NPLs are less problematic to the Chinese economy than virtually every “outside analyst” has heretofore thought. But what makes these new GDP statistics any less inaccurate and unreliable than prior figures?

In 2006, per WTO requirements, foreign entrants to the banking system will finally see the removal of various requirements constraining their business models in China, putting additional pressure upon state banks to compete with healthier and more energetic foreign banks.

Whatever banking reform there has been has taken place ponderously -- in part because there is no solution that does not cause substantial pain to many actors. While 17 have been shuttered in recent weeks, many of the City Co-operative banks, despite questionable reasons for their continued existence, remain. Quoting an unnamed banking regulator, even they see no viable exit strategy for most of these enterprises：

“最大的问题就是我们还没有一个完善的市场退出机制。"

Far more subtle dangers exist at the interconnections of the new systems that have been created inorganically, opening potholes that could swallow the proverbial truck. The nexus where a vulnerable financial sector, nascent legal system, capable, yet overwhelmed regulatory apparatus and the general business public meet continually cough up seemingly minor problems, at least minor in developed economies, which reverberate in waves that find their impact throughout the economy.

Chongqing Cultivation Company Plants A Bad Seed

A company in Sichuan applied for a loan from the Agricultural Bank of China. In its due diligence, the bank discovered information that led it to the conclusion that a loan was too great a risk and denied the application. The company sued for damages. In a western nation, absent some extenuating circumstance of which I can’t possibly bring myself to imagine, such a suit would be readily dismissed. Instead, the Supreme Court of the city of Chongqing held for the company, and damages were assessed at 40% of the amount of the loan, about 800,000 RMB (USD 100,000).

The judge’s reasoning was based, it appears, on banking regulations issued by the People’s Bank of China (中国人民银行)

“这个案件是基于诚实信用原则，以及依据《贷款通则》中贷款人负有及时答复的义务做出终审判决的。”重庆高院参与审理此案的朱鸿春法官说。 [See footnote below for the relevant text.]

“This case is based on the principles of honest credit, and based upon the duty of the lender as set forth in the Regulations on Loans to respond in a timely fashion, said Judge Zhu Hong-chun, participant in the adjudication of this case at the Chongqing Supreme Court.“

In other words, an enterprise considered a bad risk can nevertheless sue for significant damages merely because the lender did not respond in a timely manner to the application. The application itself created a right of timely response and its violation gave rise to a right to damages.

Here is a money-making scheme in the offing. A business could make a business out of filing loan applications throughout the country, hoping that some banks would fail to respond in a timely fashion, and then sue for damages. With perhaps tens of millions of loan applications in the system, imagine the potential liability of the state banks.

Powerless to overturn this case at law, Agriculture Bank, perpetually the weakest of the four big banks, appealed to the People’s Bank of China. The PBOC responded with the non-answer one might have expected, i.e., that the court fulfilled the requirements of the law.

The Chinese Banking Regulatory Commission, however, has gone ballistic, noting the extraordinary danger that this case may present to the banking system at large, despite the fact that the Chinese legal system does not adhere to a system of precedent. In its missive (银监办函（2005）135号 ), found in this article, to the People’s Supreme Court, the CBRC requested the Chongqing court to amend its decision. In other words, at the same time it stresses the importance of banking fundamentals, such as diligent risk assessment, often dismissed in the past, the CBRC insists on playing an end-run around the legal system.

But where else could they go? The People’s Bank of China, who had issued the regulations, was clearly unwilling to change them. They are the apparatus now standing on higher ground. Will higher powers step in? It is anyone’s bet whether or not the CBRC might push the PBOC off of this mountain, but storm clouds are brewing.

NOTE:

The relevant clause reads:

第二十三条 贷款人的义务：
一、应当公布所经营的贷款的种类、期限和利率，并向借款人提供咨询。
二、应当公开贷款审查的资信内容和发放贷款的条件。
三、贷款人应当审议借款人的借款申请，并及时答复贷与不贷。短期贷款答复时间不得超过１个月，中期、长期贷款答复时间不得超过六个月；国家另有规定者除外。
四、应当对借款人的债务、财务、生产、经营情况保密，但对依法查询者除外。

FOLLOW UP, December 28, 2005
[In an interview dated December 22, 2005, Liu Ming-kang (刘明康), Chairman of the China Banking Regulatory Commission (中国银行业监督管理委员会), stated the reasoning behind government approval of recent foreign investment in state-owned banks.

这样做的好处是什么呢？投资主体和利益主体多元化之后，国家财政就不可能再为商业银行的经营亏损“埋单”，否则就有悖于市场公平竞争的原则。基于这种政策理念，引进战略投资者的政策设计和目标导向就不是为了“引资”而是“引智”。也就是说，银行不应该迫于资本充足率达标压力而“引资”，而是要引进国际发达市场的银行先进服务理念、管理经验以及产品开发与维护的技术，迅速提升核心竞争能力。

The stated motivation behind the approval of these investments is simply that state banks require foreign expertise. Later in the interview, the other shoe drops. The state will, he insists, no longer pick up the check:

　　在改制、引入战略投资者和上市之后，国有商业银行从国有独资公司转变为公众公司，切断了国家动用财政和外汇储备对已股改的国有商业银行进行不断“输血”的渠道。因此，这次改革，就是要从制度上切断国家的“输血”机制，建立和完善自身“造血”机制。可以说，股权多元化不仅从体制上消除了商业银行指望国家救助的道德风险，而且在法理上排除了国家再度“输血”的可能，高标准的监管问责制也才能够实施。这也使此次注资真正成为“背水一战”前的“最后晚餐”。

There is nothing new in these statements. The old questions remain. Are foreign expertise and capital sufficient to make a jaguar out of a wooly mammoth? Are the exhortations and manipulations of one regulatory organ sufficient induce systemic change?

Further to our discussion of the Chinese state banks. In "Banking Crises in East Asia: The Price Tag of Liberalization?" -- on the policy implications of economic liberalization -- Ilan Noy asks whether Chinese bank reform can succeed, concluding:

Important questions include: (a) whether the institutional arrangements governing the newly founded regulatory agency are adequately robust to withstand liberalization; (b) whether the regulatory agency has the institutional knowledge and political power to successfully regulate a post-liberalized banking sector; and, most significantly, in light of the author’s arguments, (c) whether the banking sector’s profit margins are sufficiently wide and balance sheets healthy enough to withstand increasing competition from more profitable foreign banks. These are especially pertinent questions considering the previous painful and costly experiences in East Asia in 1997–1998. The answers to these questions will be of vital importance to the health of the Chinese economy and the region in general in years to come.

It is clear that the Chinese banking sector can be successfully liberalized and the danger of a banking crisis averted only if banks’ balance sheets are carefully monitored and the monopoly power enjoyed by the leading banks is dismantled slowly. This, of course, implies that the December 2006 deadline to finish the liberalization process [imposed by WTO agreements] is woefully inadequate.

One can only approach the idea of investment in China's media industry with a healthy skepticism. A recent regulation, while not directly dealing with inbound investment, reminds us a good deal of the atmosphere permeating the Chinese media.

This notice, 《广电总局关于重申电视国际新闻管理规定的通知》, issued by the State Administration for Radio, Film and Television (SARFT), on April 11, reaffirms a strict ban international news footage for use by television stations at all levels, local and provincial. According to this article, the relevant provisions state that all television broadcasts must use the international news provided by Central Television and China International Broadcasting. In addition, news directors are strictly forbidden to use footage obtained from international news by means of satellite feeds or "other methods."

Since this is a reaffirmation of a prior stricture, one can only imagine the difficulty the propaganda departments are having keeping inbound information under control nationwide. Clearly, media rank and file, while appearing to copy down with eagerness the droning oratory of an adminstrative leader at a political training session, have not really been paying attention.

Mainichi runs with a worthwhile summation of the situation from Interfax China. Chinese TV insiders are unabashedly voicing their unhappiness. As if you didn't already know it, you readers who are intellectual property counsel for media interests may wish to take note of a Chinese news editor's complaint: "Firstly and economically, TV stations need not pay for the pictures they get from programs of foreign TV stations."

Interestingly, as of today, the SARFT website does not carry the regulation. However, a Google search for the regulation shows that it was once carried on the SARFT website.

国家广播电影电视总局 - [ Translate this page ]
广电总局关于重申电视国际新闻管理规定的通知(2006-04-11). ·, 广电总局关于印发《 电视剧拍摄制作备案公示管理暂行办法》的通知(2006-04-10). ·, 广电总局关于福建教育 ...
www.sarft.gov.cn/downstage/page_35_1.jsp - 13k - 12 Apr 2006 - Cached - Similar pages

One can only guess when and why SARFT removed it. I reproduce the regulation in full below with the caveat that it may be incomplete. If you have the full and complete current text, please email me.

《广电总局关于重申电视国际新闻管理规定的通知》

《通知》指出，近来，一些国外通讯社和媒体通过多种渠道向国内地方电视台推销国际新闻素材，带有明显政治意图。

为保证电视国际新闻报道健康有序发展，确保正确舆论导向，切实加强电视国际新闻管理，重申如下规定：

　　一、各级广播电视行政管理部门必须牢固树立政治意识、大局意识和责任意识，进一步增强政治敏锐性和政治鉴别力，把加强对电视国际新闻的管理纳入到宣传工作的管理中来，严把导向关，切实负起管理责任。

　　二、要充分发挥系统优势，充分利用中央电视台、中国国际广播电台现有国际新闻资源。

　　三、各级电视台播出的国际新闻必须统一使用由中央电视台、中国国际广播电台提供的电视国际新闻。

　　四、严禁擅自使用从境外卫星电视收录或从其他渠道获得的国际新闻素材制作、播出广播电视国际新闻节目和国际时事政治专题节目。

　　五、不得将境外卫星电视图像配以新华社文字稿进行播出。

　　六、各省级广播电视行政管理部门接到本通知后，要立即按照通知要求，对所属播出机构进行一次检查，对违反规定的要坚决纠正。

　　七、要进一步加强对播放电视国际新闻的监管力度，各级广播电视行政管理部门对发现的问题要及时通报处理，并责令有关电视播出机构立即整改。

　　八、要严肃政治纪律和宣传纪律，切实做到有令必行，有禁必止，坚决制止上有政策、下有对策，拿不准的问题要及时请示报告。

Yale University has confirmed that the Chinese government will now allow it to trade in the Chinese stock market, the first educational institution allowed to do so. Whoopee.

Can one imagine any activity more imprudent than trusting even a portion of Yale's massive endowment to a market that just keeps going down? Wait...can they short stock, too?

Among the more useful of the quasi-marketing documents put out by the big firms is one entitled "Franchising Opportunities in China, Japan and Singapore," prepared by PWC for the APEC Secretariat. Please don't spend the $60 APEC wants you to dole out for this study since it is available free of charge here. [UPDATE: THIS STUDY IS NO LONGER AVAILABLE AT THIS LINK.]

Many readers have found their way to the Asia Business Intelligence website by way of keyword searches at Google and Baidu for "franchise Asia" and the like, so this study is something to peruse that is directly applicable to that need.

That said, the Chinese section of the study appears to incorporate an odd amalgam of sources varying in trustworthiness from Euromonitor to the Chinese statistics bureau. Not all is new information -- some 3 years old -- and you'll find some of the grammar strange in places (a translation?). Nonetheless, the study is a beginning, at least for those who are just beginning to think about operating food and beverage franchises in China.

[Editor's note: Chinese approached me at different times last year, asking about reverse mergers and backdoor listings. These are legal methods whereby a private company merges with a listed shell company, thus becoming a listed company itself.

According to practitioners, Chinese salivate over the idea of going public in the U.S. and have been attaching themselves to the form like limpet mines on a U-Boat. This Wall Street Transcript panel entitled "China’s Obsession with Reverse Mergers" devoted a panel on just this topic last year. This Heller Ehrman white paper, "U.S. Listing Options for Hong Kong and Chinese Companies," dated August, 2003, shows dissemination of the idea that reverse mergers are possibilities for Chinese companies, but note the firm's distinct, well-reasoned hesitation in recommending the form.

I as well was not encouraging to my guests, not least because of the reputation traditionally attached to those who make use of the reverse merger. But the Chinese with whom I spoke noted with distinct relish what they believed was a faster and cheaper avenue by which they could be listed in the U.S, which assumpion is not necessarily the case. More importantly, they believed that the reverse merger would eliminate burdensome disclosure requirements the IPO process presented. Remember that many Chinese companies have serious financial difficulties which due diligence often exposes -- the Black Scrim of Death for many who lust to list.

Then the SEC issued rules last year compelling the production of additional financial documentation in the event of a reverse merger. One might think that would have stopped the show for Chinese companies, but, according to China Confidential's investigative reporting, it hasn't. With gratitude to its anonymous author who has kindly consented, we reproduce the post in full below.]

From China Confidential

More Chinese Firms Likely to Go Public in US

New rules governing Initial Public Offering (IPO) issuances could encourage more Chinese companies to go public in the United States through so-called reverse mergers with listed or over-the-counter (OTC) shell companies.

The rules, which the China Securities Regulatory Commission (CSRC) released in draft form before the week-long Labor day holidays, are aimed at upgrading the quality of listings.

The CSRC wants companies to have accumulated profit of at least 30 million yuan (approximately $3.7 million) and combined revenues of no less than 300 million yuan over the preceding three-year period prior to floating shares.

In contrast with China and most countries in the world, securities laws in the US are based on disclosure, not merit, though the nation's leading stock exchanges--the New York Stock Exchange, NASDAQ, and the American Stock Exchange--all have their own rules and requirements governing listings and related matters. The US Securities and Exchange Commission (SEC), the agency responsible for administering federal securities laws, has no profitability rule. It does not approve the prospectus, or registration statement, of a company--issuer in securities parlance--seeking to sell shares in an IPO or secondary public offering. Instead, the SEC clears a company's registration statement--an important distinction.

After clearing the Commission, as US securities lawyers say, the registration statement is "declared effective" and the issuer is then free to trade on an electronic trading system known as the OTC Bulletin Board, where the only meaningful listing requirements, apart from basic corporate governance rules, are the filing of quarterly and annual reports with the SEC, including audited financial statements, and timely disclosure of all materially important events and developments through special SEC filings and the preparation and dissemination of press releases.

"Disclosure is the operative word," says a New York-based US securities lawyer. "The US system is designed to provide a level playing field for all investors. Everyone is supposed to have access to the same information before making investment decisions."

For small to mid-cap domestic and foreign issuers, the reverse merger method--whereby a publicly traded shell issues so many shares to acquire an operating company that it becomes the surviving entity--has historically been a popular fast-track alternative to typically more time consuming, costlier IPOs. But because reverse mergers have also often been abused by shady penny stock promoters and brokerage firms, the SEC recently tightened rules for these deals, requiring merged companies to file audited financial statements within days of closing their transactions.

Despite predictions to the contrary, the new SEC rules have not been a significant deterrent to Chinese companies seeking to go public in the US by merging with shells.

"All the filing requirement did was weed out smaller, suspect companies," a veteran Wall Street investment banker tells China Confidential. "Companies that want to go public but are not large enough to qualify for traditional IPOs are still drawn to reverse mergers."

Securities lawyers who have represented Chinese and other foreign issuers report that their clients are usually surprised by the relative ease with which it is possible for virtually any company with more than a few hundred shareholders to go public in the US, though the country's ongoing reporting requirements--and civil and criminal penalties for misrepresentation and corporate mismanagement--seem severe to many overseas executives.

"It's the cost of going public that shocks them," says one high-priced New York lawyer. "Depending on the size of the company and the complexity and nature of its business and financial history, a reverse merger could easily exceed $300,000 in legal and accounting fees."

Last Friday, in a stunning turn of events, Ernst and Young announced the retraction of its May 3 report on China's NPL (non-performing loan) exposure. Claiming that the report had not gone through internal review, Ernst and Young further stated that the report "contained errors" requiring retraction of the study in toto. In doing so, E&Y has bowed lower than any western firm one can remember in recent times, offering in addition to the public shame of retraction, its profuse apology as well as sincere regrets.

And what errors, if errors they be. But are they? The global accounting firm had estimated NPLs for the four largest banks (CCB, ICBC, ABC, BOC) at US$358 billion. The press release notes that the "official level" of NPLs, that issued by the Central Bank, is but US$133 billion, a third of the E&Y figure. An error that large in official Chinese statistics is entirely believable -- the Chinese government recently revised upwards its GDP statistics by 16.4%. But when studied by professional economists at a respected global company?

Here's what Jack Rodman, a managing director at E&Y, said when the report was issued, before the retraction:

"I think the numbers will be a big surprise because China has been giving the impression (with its banks listing overseas) that the problem is behind us," said Jack Rodman, a managing director with E&Y. "China has not really resolved the issue - they have just moved it from one state enterprise to another."

Wow! It was refreshing to hear so bold a comment uttered by an executive representative of a major western business operating in China. (We have been writing in a similar vain for a number of years.) But then came the muzzling of those who felt it safe to speak in earnest. What happened?

Read the press release carefully, as it appears to have been drafted with great care. Within this work of fine draftsmanship (I heartily commend the writer), one finds an explanation to its global readership. May I paraphrase?

"We, a global leader in professional services committed to restoring the public's trust in financial accounting, told the world Chinese big four NPLs hit 358, but we were on the receiving end of some serious heat from the central bank the week it was issued, even though they characteristically didn't announce us by name. And, anyway, we're auditors for two of those banks, so what could we do? We haven't any choice but to kow-tow if we want to keep the business -- this is China and we're in it up to our double chins. Ok, here's the official number: $133 billion. We're not saying explicity that we avow the truth of that number, but it is the official version. Can you dig it?"

Sadly, none of the western press seems to have picked up on anything but the exact wording of the press release, making it appear as though E&Y was entirely at fault. At least, in the near term, their bold assertion may work to harm their reputation in the eyes of those who without China business experience. E&Y press relations people outside of China may wish to pitch the rest of the story, off the record, to their media contacts at some point.

[UPDATE (May 16, 2006): Bloomberg discusses why this is such a sensitive issue for the Chinese government here. A quote from the article:

"Chris Ruffle, a Shanghai-based fund manager, won't buy Bank of China shares when the nation's No. 2 lender goes public this month. As a Bank of China customer, he's all too familiar with the bank's failings...Banks are the weakest part of the Chinese economic system, so buying into them doesn't make sense to me.'"

Click the link to hear today's post.

Tennis, anyone?

Having ourselves penned a good deal of virtual ink on the subject of Chinese stock market reform (see our Investment archive), we thought it in order to recommend Seung Chong and John C. Leary's article on the development of the Chinese share system.

While much legal writing seems to be carved out of granite, theirs is not a ponderous read by any stretch of the imagination. I found especially practical and to the point their discussion of the legal issues involved in the acquisition of C and G shares by foreign investors.

For those searching for it, newly promulgated regulation on the purchase of PRC enterprises by foreign investors may be found here (in Chinese).

The Federation of International Trade Associations and Dutch company Omni Bridgeway will present a free event in Manhattan:

Date: 28th September 2006
Time: 5:00 PM until 7.30 PM
Location: AIG - 70 Pine Street, 60th floor, New York, NY
(The seminar will be followed by cocktails & hors d’oeuvres.)

For further information, visit this page on the Omni Bridgeway website.

The IPO and the "UTD" Syndrome

ICBC, one of China's big four state banks, has now privatized. Or so it might be presumed, as the bank has issued stock; the extent to which the bank is no longer subject to state direction remains a significant question.

At a minimum, ICBC can now claim the World's Biggest Swinging Bank Award with an IPO of gargantuan proportions. (Investment bankers, gasping with dropped jaws, raise their heads in an expression of collective awe.)

The stock opened up 17-plus percent. But we think it more than likely that the UTD (Up, Then Down) Syndrome, a classic symptom of the chronic illness of Chinese stock markets, will shortly take effect and the stock will plum the depths of many an investor wallet. We'll keep an eye on the share price over time -- not because we have money in it (if we'd had, we would have been out of it by now.), but simply for the vicarious thrill of the roller-coaster ride.

The ICBC IPO and the "UTD" Syndrome. Click the little triangle to hear today's post. (If you are reading this in an RSS viewer and the podcast does not display, you may hear it at www.asiabizblog.com or on iTunes in the business podcast section.)

Don Clarke's, Chinese Law Prof Blog, heartily recommended for attorneys with an interest in China, takes note that 800,000 judgments -- the number given by Supreme People's Court president Xiao Yang -- have gone unexecuted.

While Don cautiously and with merit suggests that we haven't as yet the perspective to say if this is objectively good or bad, the gut tends me towards the position that it should not give much confidence in the value of a Chinese judgment.

Indeed, that a number was even publicized gives credence to the notion that unexecuted judgments have become a problem of major proportions in the eyes of the judiciary -- one need only note below the euphemistic phrase "“执行难”问题." Even granting the questionable perception of openness, supposedly fostered by government, the number 800,000, without a verifiable basis, is very likely itself under-reported.

Xiao Yang's remarks:

最高法称执行难问题未根本扭转 80余万案件积压

新闻来源：法制网 转载时间：2006-10-31

最高人民法院院长肖扬今天向十届全国人大常委会第二十四次会议作“关于开展规范司法行为专项整改报告”时说，经过一年来对执行积案的集中清理，人民群众反映强烈的“执行难”问题尚未得到根本扭转，有80余万件积压案件未能执行。

　　肖扬说，为缓解“执行难”问题，在专项整改中，各级法院采取多种措施：严格执行条件，解决暂缓执行、中止执行、终结执行、查封案外人财产和超标的查封的问题。此外，加强执行管理，将选定评估和拍卖机构的环节作为整改的重点，切断拍卖过程中不正当的利益联系，彻底杜绝拍卖中的暗箱操作；建立执行款专用账户，防止个别法院违法使用、截留、挪用、侵吞、私分执行款物。强化执行公开，解决消极执行、拖延执行和执行人员的违法违纪问题。

　　肖扬表示，全国法院执行案件信息管理系统正逐步扩大试点范围，力争明年起全面实施。通过互联网公开执行信息，加强与有关部门配合，对不履行生效裁判的被执行人实行财产申报、强制审计、限制出境、公布被执行人名单等措施，促使被执行人自动履行义务。

Click the little triangle to listen to today's post.

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%

American cabinet officials will travel to China to "press for changes in Chinese economic policies long criticized by the administration and Congress, officials said Wednesday."

At long last, another Magical Mystery Tour. The mystery is that they should believe in the power of their magic at all. Chinese can be awfully stubborn when asked to take actions they see running contrary to their interests. (Was that too subtle?)

You may remember that the film was panned with gusto. We await the film of this trip with bated breath.

[We are grateful to Michael Burke for today's post, an update on China's recently enacted M & A regulations. Mike is an attorney with Williams Mullen, where his practice focuses on advising U.S. companies on the structure and operation of investments in Greater China. He is experienced in China-related direct investments, acquisitions, private equity transactions and technology ventures. Mike is currently Co-chair of the American Bar Association, Section of Int'l Law & Practice, China Law Committee, and Visiting Fellow at the Asian Institute of International Financial Law, Hong Kong Faculity of Law.]

On September 8, 2006, the Provisions on Acquisitions of Domestic Enterprises by Foreign Investors (the New M&A Provisions), issued by China’s Ministry of Commerce (MOFCOM) and other agencies, became effective, replacing 2003’s Provisional Rule on Acquisitions of Domestic Enterprises by Foreign Investors. The New M&A Provisions are a significant development in the regulation of mergers and acquisitions in China.

Under the New M&A Provisions, a purchaser may use its own equity (provided it is listed on a foreign stock exchange) to acquire equity interests in a domestic Chinese company. A Chinese-registered advisor must conduct specific due diligence into the purchaser’s financial condition and submit a required report to MOFCOM.

In certain circumstances, the equity in a Special Purpose Vehicle (SPV) (an offshore company directly or indirectly controlled by domestic Chinese companies or residents) may be listed on a foreign stock exchange. Proceeds from such listing must be used only for authorized purposes, including establishing a new foreign invested enterprise (FIE). Such equity, subject to certain conditions, may be used as consideration in a M&A transaction.

The New M&A Provisions reiterate that the foreign-owned equity interests in a target after a foreign-invested M&A transaction must exceed 25% of its registered capital for such FIE to be able to avail itself of any FIE-related incentives or preferences. In addition, the New M&A Provisions clarify the treatment of FIEs established by offshore entities that, in turn, are controlled by domestic Chinese persons or enterprises.

The burdensome antitrust review process created by the 2003 M&A regulations remain in the new M&A Provisions. This process relies in part on vague and undefined terms to determine which M&A transactions should receive antitrust review.

If a M&A transaction would (a) result in any change in control of any domestic company in a key industry; (b) involve the holder of a well-known Chinese mark or brand; or (c) have potential or actual impact on national or economic security, such transaction must be approved by MOFCOM. This approval process is independent of the usual approval processes imposed on all foreign investment in China, including M&A transactions. Note that the New M&A Provisions do not define terms such as “key industry” or “well-known brand” and do not specify the approval procedures or timeline applicable in this context.

The New M&A Provisions are the Chinese government’s latest effort to regulate foreign-invested M&A transactions. In some measure the New M&A Provisions reflect the Chinese government’s concerns over asset stripping of state-owned enterprises and potential abuse of FIE incentives. They also reflect the government’s efforts to enable more forms of M&A transactions in China. The New M&A Provisions likely will be supplemented with implementing rules in the near future, meaning that China’s M&A regime will continue to evolve.

A brief link this morning to the Financial Times, which interviews David Rubenstein, CEO of the private equity firm, Carlyle, of interest because of the firm's extensive movements in China.

[NB: He speaks in as flat a tone as one has ever heard with virtually no inflection, creating the impression of stability in emotion and consistency in thought. However, each comment thus appears to be of equal value in the listener's mind. It is rather difficult to understand him from anything but a rationalist's perspective -- essentially cutting away a vast swath of potential information about the speaker and the subject of his talk.]

In the interview, Mr. Rubenstein notes the firm's great interest in purchasing privatized SOEs (state-owned enterprises), which, he believes, will decrease to a mere 100 from 200,000, either wholly or partially divested by the state. This statement tends to supplement the quote of Sean He, a managing director of the firm, said recently that publicly that ""We are very interested in private companies in China, which are very different from state-owned companies, from their business scope to management level." But one wonders the extent to which central, provincial and local governments will divest profitable SOEs, given the revenue they bring into the public coffers.

Of interest to attorneys, Mr. Rubenstein expressed an interest in limiting suits against American corporations. One would like him to expand on this idea, indeed.

Once again, my criticism reaches out to the FT editors. Yet another interview of an older white male business leader well established in the Western corporate community -- can't FT find anyone who doesn't fit this mold to comment on the week's news?

Our healthy skepticism has been confirmed. (See our April, 2006 post: Further Restrictions on the Media.) China has now officially proscribed foreign investment in television and film production companies.

On the eve of the American Magical Mystery Tour to China, the U.S. Trade Representative appears to have anointed herself in the holy oil of tradition, while reciting the usual ineffective incantation, such as we have heard ad nauseam for years.

However, the Financial Services Forum, a private association once headed by Hank Paulson, currently U.S. Treasury Secretary, has issued its own prayer in the form of a lovely little white paper, which may denote an attitudinal change on Paulson's part of no little significance to future dealings, at least on a surface level, with China:

"...no new framework of communication [between the U.S. and China] represents a 'silver bullet' that can be expected to immediately resolve difficult outstanding issues." [Editor's italics.]

Paulson himself has recently uttered a similar statement:

"There is a tendency in Washington to want immediate answers, but a relationship this important [between China and the U.S.] will have consequences for our economy and for our nation over generations..." [Editor's italics.]

Either Paulson has decided to take the high road with China by abjuring statements that appear to pressure PRC officials -- while Schwab plays Mutt to his Jeff -- or he has begun to circle the wagons, knowing full well that little will come of his meetings with the Chinese except a fine excursion and even finer cuisine.

UPDATE (Dec. 14, 2006): Uh oh... FT reports: Ms Wu criticised the US for “not only having limited knowledge of, but harbouring much misunderstanding about the reality in China.”

UPDATE (Dec. 15, 2006): Controversy Avoidance 101. FT again: "Ben Bernanke, chairman of US Federal Reserve, stepped into a political minefield on Friday when he released remarks branding China’s undervalued currency an 'effective subsidy' for its exporters which was distorting patterns of production and trade. In what looked to be a last minute bid to avoid controversy, Mr Bernanke then dropped the phrase from his speech to the Chinese Academy of Social sciences, using the less inflammatory term 'distortion' instead."

[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

[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

Bloomberg: The Chinese government permits foreign investment in new capacity, but has essentially closed the door to foreign acquisition of established Chinese businesses in many industries.

``China now has so much capital that the central bank has to slow the spending growth,'' says Lu Jianfeng, finance director at the Jiangsu provincial government's Department of Foreign Trade and Economic Cooperation. ``China can now afford to be a little more selective in the kind of overseas investments that we want.''

For readers of Chinese, this relevant article may also be of interest: 国资委:培育大企业集团是增强国有经济着力点.

UPDATE to this post: More silliness from Washington. [One is sorely tempted to employ the perjorative "stupidity," given the continued emphasis upon ineffective strategies.] The Chinese government will give scant attention to strident but empty-fisted pronouncements.

Token offers of appeasement, like the single digit percent movement of the value of the RMB, effected over years -- we have heard similar promises about revaluation since the early 1990s -- should be taken as mere off-putting tactics which many in the American business community have come to understand for what they really are.

Why should China move when there is little genuine pressure upon their position? American investment money flows into China like the proverbial honey. Americans purchase ever increasing quantities of China-made products, even as their own manufacturing base has suffered terribly.

Change in yuan policy will come only when export revenue diminishes and inbound investment falls. Chinese understand that American pols are, frankly, impotent -- none will attempt to curtail U.S. domestic consumption of Chinese product or the massive capital outflows from the U.S. into China that do more to strengthen the Chinese position than anything the Chinese could do themselves.

More renminbi revaluation silliness from Washington... Click the little triangle to listen to today's post.

[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.　　　　　
　 　

The Mainland Affairs Committee and the Ministry of Economic Affairs will allow Taiwanese investment in 0.18 micron process technology in China, lifting the lengthy ban. Taiwan Semiconductor (台積電, TSM) will likely be the first to benefit. Read about the announcement here in Chinese or here in English.

Former President Li Teng-hui recently criticized moves to loosen restrictions on Taiwanese investment in China. This article suggests that Taiwanese investment in chip processing technology in China lags that of the U.S. [In Chinese.]

While McKinsey spins a positive take on the potential for growth in Chinese consumer spending, foreign businesses in the consumer luxury space respond in the negative.

When Eric Douilhet opened China's first Paul Smith and Moschino fashion boutiques in 2002, he didn't expect they'd be making money by now. He didn't think they'd be losing this much, either.

``I was definitely expecting sales to be higher, the losses to be smaller,'' says Douilhet, 43, president of Bluebell (Asia) Ltd., which also operates Jaeger clothing and Davidoff cigar stores in China. ``People are too optimistic about China.'' He declined to quantify the losses.

We find this extremely interesting, considering that it has recently been reported in the Taiwanese press that over half of the largest 250 Taiwanese entreprises in China are barely profitable.

調查指出，國內前兩百五十大集團，大陸投資佈局呈現「三高兩低」！投資金額高、營收規模高、負債比率高，不過，平均稅後純益低、平均純益率低；將近五成虧損，平均每家純益率只有百分之二點零五。

Which idea do you buy into - a future Fort Knox or a grinding money-pit? Perhaps both are fundamentally correct. The snail's paced growth of a consumer market in China does not necessarily dovetail with one's hopes for a consistently profitable revenue stream.

As we have stated consistently over many years, investment in China must be approached skeptically. Expect less where more seems possible. Temper enthusiasm with caution.

So who's making money in China? You'd be surprised to hear who isn't...

What? Bribery, McDonalds, Whirlpool, McKinsey, Shanghai -- all in one paragraph? Without further comment (as I am working feverishly on a project), let me direct you to this New York Times article.

For those involved in China finance, read Joe Studwell's latest column:

Over the medium term, the big significance of the move on corporate bonds is diversification of systemic financial risk. A financial system with three legs is harder to knock over than one with two. Moreover, while we have seen emerging market financial crises based on state bonds (Latin America) and corporate bank borrowing (south-east Asia), we have yet to see one result from the issuance of corporate paper.

Perhaps China will show that corporate bonds can produce a crisis. But more likely this is the last chance to diversify and strengthen the financial system in this period of particularly fast growth. When growth slows, as a result of diminished external demand or a falling number of labour market entrants early in the next decade, and banks begin to report higher non-performing loans, the system will need resilience.

As its lead story, Nanfang Daily publishes a lengthy, but interesting interview originally carried in 南方都市报 with the real estate investor, Pan Shi-yi (潘石屹). Pan's blog graphically displays the percentage of property ownership....well, take a look. [In Chinese.]

Mr. Paulson has chosen Alan Holmer, a negotiator without China knowledge or experience, to "run the US-China strategic economic dialogue." After many years of dealing with Americans who deal with China, I fail to comprehend how the American businessman, other than the mere buyer of a commodity product, continues to assume that success can be had in any foreign nation without substantial knowledge of it.

One hopes that Mr. Holmer will prove himself to be incredibly persuasive, resourceful and manipulative. But he is a curious choice when there are more than a handful of highly-trained negotiators with China-specific expertise. He could be ripe pickings for an excuse when Mr. Paulson's initiatives to move China fail to budge it.

Read 'em and weep. Note HSBC's Garry Evans -- a most unfortunate ex post facto comment: "I think the market had gotten a little too expensive." Another article from a Chinese perspective.

UPDATE: With remarks from Cheng Si-wei (成思危) like this, a drop can't be considered that surprising, although its one day magnitude goes beyond expectation. [More articles in Chinese here and here.]

"泡沫正在形成。投资者应关注风险，”成思危在接受英国《金融时报》采访时表示。“但在牛市行情中，人们的投资相对不理性。每个投资者都认为自己能赢，但许多投资者最终都是输家。不过，这就是他们的风险，也是他们的选择。"

Read the comments of Chinese investors here. [In Chinese.} When Chinese markets open in but 4 short hours (8.15 pm New York time), we will see if they continue to drop or, perhaps, return some equilibrium. Far from evidencing panic, you will note many comments made today, such as this one, hinted at by Cheng:

在这里可以给各位一个肯定的回答:没有,牛市没有结束!今天的暴跌可以说是大盘长期利空积累的一个爆发,这样的暴跌也是大盘在为节前出逃的资金创造一个重新进场的机会!

Our last post touched on warnings of market volatility, uttered prior to the sell-off, by high-ranking officials with authority and credibility among Chinese financial policy-makers. To what extent was the sell-off at 3000, immediately upon the return from the Lunar holidays, triggered by official movement? And the evidence for such a claim? None but rumor on the Chinese bulletin boards. And yet, given pervasive Chinese state involvement in all facets of big money, I do not believe it can be discounted.

Just think of the timing -- massive amounts of non-tradable state shares have come on the market over the past two years. [Read prior posts on this subject here and here.] Shouldn't this have dampened share prices across the board in an already weakened market? Instead, shares have rocketed. Now that the process of making those shares marketable has more or less completed, officialdom proclaims to throw the burden of loss upon the "irrational exuberance" of the hair-dresser cum day trader -- just before a major correction. And when shares finally stabilize, the converted shares will retain apparent value so greatly above what the market may have commanded without the general market rise. Oh, gee whiz, I should be ashamed of myself, shouldn't I... Is that a conspiracy theory or what?

Stephen Green, about as accurate and knowledgeable a reader of the Chinese financial tea leaves as one finds, on the rumors of state involvement in price stabilization after the sell-off:

"There were some reports of state buying -- I don't know how reliable those are. But it's also possible people may have decided 9 percent in one day was too much and they are still bullish on stocks," said Stephen Green, senior economist at Standard Chartered Bank in Shanghai. "I don't think anyone really knows where we go from here."

Down, perhaps? As low as 2300? [In Chinese.] How low is this thing "supposed" to go?

Prepared Remarks by Treasury Secretary Henry M. Paulson, Jr. on the Growth and Future of China's Financial Markets [Here's one take on it.]

Shanghai, China – Thank you very much. I am very happy to be here in Shanghai, and I appreciate your warm welcome. In December, I was in Beijing for the first meeting of the U.S.-China Strategic Economic Dialogue. After that meeting, I decided that I should return to Shanghai to speak about the growth and the future of China's financial markets.

In my travels here over the last 15 years, I have seen this city grow to be a cosmopolitan center of finance and culture. Shanghai has in many ways come to symbolize the economic dynamism of China. It is an example of China's emergence as an important participant in the global economy. So it is only fitting that I am making this visit against the backdrop of a global economy, which over the last several years has been as strong as any I have seen during my business lifetime – an economy that has been characterized by strong growth, low inflation, and high levels of liquidity.

As China has grown, the relationship between the United States and China has become more important than ever before. We welcome China's growth and integration into the world economy – it benefits the Chinese people, and the people of the world. Today, China is transitioning from a planned economy to a market-driven economy and there is no doubt that this process will continue for a number of years. But because of its size and its role in world markets, China is already a global economic leader and deserves to be recognized as a leader. And with leadership comes responsibility. Decisions about the pace and shape of your economic reforms, as well as policies relating to energy and the environment, affect nations around the world.

Since the economic relationship between our two countries is an important part of the overall relationship, I have focused intensely on China from the day I became Treasury Secretary. To manage the economic relationship between our two nations on a long-term basis, President Bush and President Hu established the Strategic Economic Dialogue. We were very pleased with our first meeting in Beijing in December, and will meet again in Washington in May. Because the U.S. and China share many strategic economic interests, I am confident the SED will help us make progress on fundamental long-term structural economic issues, as well as on very pressing short-term issues.

The economic relations between our two nations are vital to the future of the global economy. And I believe we share many of the same goals – the policies of openness and market principles that the United States advocates are similar to those that China's leaders have embraced to bring balanced, harmonious growth to your nation. As I have said many times, our policy disagreements are not about the direction of change, but about the pace of change. It is worth noting that over the last five years, the U.S. and China accounted for over 50 percent of global growth. Make no mistake about it, China's continued economic success is not only vitally important to the people of China, but also to the rest of the world.

China ups the pressure on star quarterback Hank Paulson by showing him he shouldn't count on the Chinese putting most of their eggs in the U.S. treasuries basket.

Finance Minister Jin Renqing:

''We can achieve more profit from the investments,'' Jin said at a news conference. ''We are now preparing the organization of this new corporation.''

A fine bit of statecraft, if nothing else, as the sale of any great amount of China's holdings of US treasuries -- a tremendous sum -- would very likely lead to its massive devaluation. Of course, Paulson understands that the Chinese are handcuffed as well. But how tightly? [In Chinese.]

UPDATE (March 16, 2007):

Wen Jia-bao in yesterday's press conference stated:

“I can assure you that by instituting such a foreign exchange reserve investment company, it will not have any adverse impact on US dollar-denominated assets,”

One hand (Jin) slaps the face, while the other (Wen) caresses it.

This is a characteristically Chinese technique of controlling an adversary at close quarters. I have observed that, in business, it does not issue from a perception of strength. Instead, one who perceives himself to be weaker attempts to keep the threatening party off balance with a display of contradictory ideas, showing both the ability to harm the stronger and the inclination to assist him.

Executives jockeying for territory and promotion use it against each other, as will a more than usually insecure manager with his staff. The statements made and actions taken by the weaker party in his own defense are themselves of little value.

[Editor's Note: We are grateful to Paul Jones for today's post on China's new franchise regulation, in which he delineates the differences between it and previous franchise regulations. Mr. Jones is a franchise and intellectual property lawyer in Toronto, Canada, and a Chinese speaker. The international law program at John Hopkins University currently uses his paper on the interpretation of the previous Commercial Franchise Measures to illustrate the differences between common law and civil law. He may be contacted at this address.]

China has just released a new franchise Regulation (商业特许经营管理条例) to come into effect on May 1, 2007. It replaces the existing Commercial Franchise Measures (商业特许经营管理办法) that came into effect on February 1, 2005. [In Chinese.] The new regulation (hereinafter, "Regulation") is significantly different from previous Measures that had caused considerable concern amongst international franchisors and led to intervention by the U.S. Trade Representative.

The Regulation tries to balance a variety of international and domestic concerns and there is some question as to whether it manages to satisfy the needs within China for intervention to prevent fraud and abuse, and the international desire for easier access to the China market. The new Regulation has clarified that it will apply to all franchises operations in China equally. The Measures had a separate chapter (第七章外商投资企业的特别规定) that had requirements for Foreign Invested Enterprises (FIE), but it was not clear from the text what triggered the requirement to set up an FIE, and some questioned whether these separate requirements were in line with China’s WTO commitments. The Regulation has eliminated this issue by eliminating separate requirements for FIEs.

Another international concern was the requirement for a franchisor to have owned and operated two locations in China for at least one year. The requirement to have owned and operated two locations has been retained in the Regulation, but the requirement that they be in China has been removed. Foreign franchisors that have met this requirement in their home market will now be eligible to franchise in China.

But there are also restrictions to try to curb the rampant fraud in the domestic market for franchises. The State Council’s Legislative Affairs Office and the Ministry of Commerce (国务院法制办、商务部) also released a set of questions and answers on the new Regulation. [In Chinese.] They describe the Regulation as having five aspects that are designed to deal with problems in the franchise market.

Firstly, only corporations and other legal entities can be a franchisor. Individuals may not be franchisors. Franchisors must have a mature business model and have the resources to provide support.

Secondly, franchisors must disclose sufficient information for the franchisee to make a suitable investment decision. This information must be accurate, complete and not omit related information. Previously, U.S. franchise lawyers had complained strongly about the vagueness of the unfamiliar civil law drafting in this section. The wording has been changed, but the obligation to disclose all material facts may still arise out of Article 42 of the Contract Law (合同法). Article 42 requires that parties negotiate a contract in good faith and not conceal “key” or “material” facts (重要事实). It is based on similar provisions now codified in Germany’s Bürgerliches Gesetzbuch. German courts have relied on the equivalent law to impose an obligation of pre-contractual disclosure on franchisors in several cases. The questions and answers clearly indicate that the General Principles of the Civil Law (中华人民共和国民法通则) and the Contract Law continue to govern franchising.

Thirdly, franchisors must now register within 15 days of signing their first franchise agreement in China. The Regulation specifies certain documents that must be submitted for registration, such as a marketing plan, but does not specify the fees, if any.

Fourthly, the Regulation stipulates a number of items that must be in a standard form franchise agreement, including an unspecified cooling-off period.

And finally, the Regulation sets certain standards for the relationship, such as requiring the franchisor’s approval for the transfer of locations and requiring the franchisee to protect the franchisor’s commercial secrets.

The Regulation will make it easier for foreign firms to enter the China market, but the greater concern will continue to be not the laws and the courts, but the lack of more developed “rule of law” culture, or as the State Council calls it, the “chaotic market conditions” (市场秩序较为混乱).

Apologies: no time today to discuss ramifications, if any, of this new measure.

In Chinese: brief article. Somewhat longer article.

The regulation itself, entitled 关于调整商业银行代客境外理财业务境外投资范围通知.

An article in English with quotes from fund managers and economists.

[Editor's Note: A little humor this morning.]

股民搞創意！　大陸國歌變股歌　遭批評有損國歌莊嚴
2007/05/11 16:31
記者牟宗珮、潘郁文／綜合報導

大陸股市紅不讓，炒股票更是成了全民運動，腦袋動得快的投資人於是把中國國歌「義勇軍進行曲」改編成「炒股進行曲」，歌詞內容改編成「快漲、快漲、前進！」，因為頗能反映實情，在民間廣為流傳；雖然有專家認為改編歌曲很有創意，但卻覺得調侃之作「有損國歌莊嚴」。

聽起來頗雄壯威武的大陸國歌「義勇軍進行曲」，如今在炒股成為大陸全民運動下，被改成了「炒股進行曲」，原因就是大陸股市紅通通，投資人前仆後繼奮不顧身地把錢投入股市，光是4月份就超過500萬人開戶，也超過前2年開戶的總和。

國歌原詞如下：「起來！不願做奴隸的人們！把我們的血肉，築成我們新的長城！中華民族到了最危險的時候，每個人被迫著發出最後的吼聲。起來！起來！起來！我們萬眾一心，冒著敵人的炮火，前進！前進！前進！進！進！」

歌詞被改成：「起來！還沒開戶的人們！把你們的資金全部投入誘人的股市！中華民族到了最瘋狂的時刻，每個人都激情地發出買入的吼聲！快漲、快漲、快漲！我們萬眾一心，懷暴富的夢想，前進！前進！前進！進！進！」

改編大陸國歌的「炒股進行曲」內容相當有趣又貼近股民心聲，因此很快就在股民中傳唱開來，不少股民還稱讚改編者有創意；不過就是因為這首股歌實在太紅了，也惹來不少人士批評有損國歌莊嚴，也有律師建議，應該制定大陸國歌法，防止大陸國歌又被濫用了。

After months of hints and proclamations of irrational exuberance from official and unofficial (Li Ka-shing) sources, China's Ministry of Finance yesterday announced an increase in the stamp tax on stock transactions to 0.3% from 0.1%. The Chinese markets fell steeply.

财政部突然上调股票交易印花税至3‰，股市今日天量暴跌，沪指收盘4053.09点、跌281.83点、跌幅6.5％；深成指收盘12627.15点、跌829.45点、跌幅6.16％。两市成交金额超4200亿元，近千家个股跌停。

The reaction from Morgan Stanley:

摩根士丹利发表研究报告表示，内地上调印花税要传递的讯息相当强烈，投资者应严肃对待。此外，Ｈ股中的金融类股由于与Ａ股的关联性较高，相信将会受到拖累。报告表示，内地监管者愈来愈担心资产泡沫，并试图令股市软着陆，是次调整对投资者而言影响并不是很大，但传递的讯息相当强烈。今天沪综指收市大跌6﹒5％，报告表示，Ａ股反应如此强烈，是因为市场预期政府不会采取行政干预股市的希望已经幻灭，市场也正猜测政府下一步的行动。报告表示，如果Ａ股不理会政府的讯号而迅速反弹，相信更多的调控措施，如推出资产增值税和沽空股票╱期指等产品，才能有效控制资产泡沫的膨胀。

Citibank claims investors were over-reacting.

On what basis do these pundits claim the Finance Ministry is looking for a 15-20% correction? And then state that a 40-50% correction would induce the Ministry to invoke measures to stimulate the market?

但德意志银行表示，市场可能不理会该政策，并保持快速上涨的势头，如果这样，监管层可能再度上调印花税；但另一方面，如果此举导致股市回调40-50％，将令政府采取与上调相反的举措。

This page for citizen reaction: some very nasty comments indeed.

This image, sent by a friend in China, shows a banner hung across a street by local police. It reads "Why Rob When You Can Invest?"

Another remarkable drop.

6月1日，湖北宜昌股民在观看股市行情。据交易所公布的最新数据显示，截至周五（6月1日）收盘，沪市总市值为133455亿元，流通市值37590.24亿元，不过平均市盈率由周四的43.44倍上升至周五的44.24倍；深市总市值为40253亿元，流通市值为20533亿元；两市总市值为173708亿元，较周四缩水5610亿元。

Bloomberg takes it calmly.

Chinese media outlets stress instead the need for calm.

国内三大证券报6月4日纷纷刊登评论员文章，告诫投资者冷静、全面、深入认识和理解印花税政策，理性预测未来市场走向。管理层上调印花税出发点是抑制过度投机，以避免更大的系统性风险，阶段性市场调整不会改变牛市之基本面

An article worth reading in its entirety, from Bloomberg:

China's benchmark CSI 300 Index would need to fall as much as 54 percent to come in line with the price-to-earnings ratio of Hong Kong's Hang Seng China Enterprises Index, which tracks shares of 41 mainland companies listed in the city. The CSI 300 would have to drop 65 percent to match the average multiple for Chinese shares traded in Singapore, according to calculations by Bloomberg.

Whatever "fair valuation" may be, other than the price people are generally willing to pay, a comparison between the Singapore and China stock indices -- their companies experiencing very dissimilar economic prospects, not to mention the hoopla and ballyhoo for everything Chinese -- does not seem especially relevant. More relevant is this: the ethereal nature of the financial statements issued by the average listed Chinese company and its widespread disregard by tens of millions of investors.

Not directly related to China, but worth your time:

Martin Wolf, Villains and Victims of Global Capital Flows

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.

Because American states must, in most cases, enforce a judgment issued by the court of any other American state, Yanks in business tend to take for granted that fabulous feature of our legal system, known as "full faith and credit." [A dear relative was wont to say "for granite," but the malapropism is nevertheless just as valid, i.e., written in stone.]

But nations do not fall within the American constitutional system: American court judgments aren't not often enforced outside of the U.S. Unless, of course, there is a treaty between the U.S. and a foreign nation, there is little chance a court of that nation will recognize and enforce an American judgment. And, lest we forget, vice-versa.

For this brief post to be of any value to you, I must mention Don Clarke, who teaches at Harvard. He's written a brief article, entitled "The Enforcement of United States Court Judgments in China: A Research Note," and even if you are not an attorney, it is worth your time. Don says, in essence, that Chinese courts do not recognize and haven't enforced an American judgment.

My point in recommending you read Professor Clarke's article is this: here lies an important lesson for American companies who do business with China. Don't expect you can take an American judgment against a Chinese company to China and sue upon it. Your American judgment will not be recognized. Your more likely remedy would exist when the Chinese company has established sufficient presence in the U.S., such that you can sue the company in an American court. But unless that Chinese company has assets in the U.S. upon which you can levy, you are unlikely to recover very much at all.

What implications does this have, exactly? For importers, for example, the Golden Rule is to guard your money carefully -- before you even enter into a transaction with a Chinese exporter. Do not pay up front and then expect to receive product. You may not receive it once the money has left your hands. You will simply have no recourse.

The wise prefer to spend the extra fee to open a letter of credit, payable upon your acceptance of the product, rather than resort to prayer. Now prayer is a good thing, but its efficiency in trade is yet to be proven. Who wouldn't spend the extra? Many inexperienced traders. Perhaps you. Especially if you are new to importing -- and some I've spoken with are sourcing via the internet without even visiting the physical location of your provider -- you should never blindly pay cash up front. [If you haven't visited your supplier, you are neglecting essential due diligence.] But even if you have longstanding relationships with your suppliers, I would not recommend anything but L/C based transactions, except in the rarest circumstances (emergency circumstances where a mold needs to be opened immediately, etc.). Continue to pray, by all means, but, with some recourse in your own country, you won't need to pray so very urgently.

More on the practical aspects of Don's article in upcoming posts.

[Editor's Note: Price fixing and industry collusion aren't generally considered hot topics among investors and lawyers, except when the discussion turns to China. Does Chinese business culture, whatever that may be, favor monopolistic behavior, eschewing competition? Or is price fixing, where it occassionally pops up, merely a symptom of inadequate regulation, incompetent administration or general chaos, regardless of the region?

Alas, these questions have been subject to endless disputation, often argued anecdotally, for lack of hard evidence, as mere unsubstantiated claim. We are thus grateful to Lou Schwartz for today's post, which provides us with the benefit of his lengthy experience analyzing and reporting on the Chinese aluminum industry. His bio may be found at the end of his post.]

Contrary to Lou Dobbs’s characterization of China as “Communist” or “Red,” China’s economy today is actually raw, unbridled capitalism. The Chinese aluminum industry, which I have followed closely for more than eight years, is very representative of the road that China’s economy has taken since the death of Mao and the beginning of the Reform Period. From an outdated and lethargic industrial base managed by an enormous government-run mega-corporation to a plethora of new companies whose world-class plants are financed with much more private capital than state-owned bank loans (in 2006 77.2% of the capital which the Chinese non-ferrous metals industry used for fixed asset investment came from non-bank sources), the aluminum industry represents how Chinese industry has become more like what is described in The Wealth of Nations than the Communist Manifesto. And if there still is a doubt that the Chinese economy has become the greatest example of pure capitalism -- with all its warts -- since Adam Smith described it, one need look no further than the aluminum industry again, which has been spotted organizing cartels in an effort to save themselves from their own excesses.

The Chinese aluminum industry largely has followed the same meteoric trajectory as a wide variety of Chinese industries. In the first forty years (1953-1992) of its existence, the industry’s capacity to produce primary aluminum grew to 1 million tonnes per year (tpy). It took just an additional 5 years for primary aluminum capacity in China to reach 2 million tpy. Assisted by the restructuring of the Chinese non-ferrous industry beginning in 1997, a plethora of new companies in this space has grown China’s aluminum smelting capacity to a projected 14.6 million tpy this year from 3 million tpy as of the end of 2001. By late 2005, a group of 23 primary aluminum smelting companies, smarting from growing losses caused by their unrestrained development of smelting capacity which had exceeded even the torrid ramp up of demand for aluminum in China, banded together and agreed to idle 10% of their capacity to stabilize the price of aluminum. This consortium was sufficiently disciplined in idling capacity that it was able to mostly stave off a series of projected insolvencies among Chinese aluminum smelters.

Perhaps the most significant reason why primary aluminum smelters felt compelled in 2005 to form a seller’s cartel and idle capacity was that the price of alumina, their most significant input, had more than doubled in price -- due to the rapid increase in capacity in the Chinese primary aluminum smelting industry. The world’s producers of alumina, including the remaining Chinese state-owned aluminum industry behemoth--the Aluminum Corporation of China Limited (Chalco) ((中国铝业股份有限公司 (中国铝业)) benefited royally from surging alumina prices: Chalco leveraged the squeeze that primary aluminum smelters found themselves in to acquire companies that were at the brink of insolvency.

As the world price of alumina rose, Chinese entrepreneurs ((including Xinfa Aluminum Industry (信发铝业) and Weiqiao Aluminum Industry (魏桥铝业)), now inhabiting a free-wheeling economy, leapt at the apparent opportunities in alumina refining and in early 2006 began a rapid multi-billion Yuan build-up of alumina refining capacity in China. As of the end of 2007, total alumina refining capacity in China is expected to reach 27.7 million tpy, an increase of 4.4 million-tpy over year-end 2006 and a 17 million tpy increase over year end 2005! Not surprisingly the price of alumina has dropped by two-thirds since late 2005 and the price of the alumina refining industry’s most significant input -- bauxite -- has increased precipitously. This turn of events caused a group of seven private alumina producers, to meet in early 2007 and agree to adjust output to support alumina prices.

Meanwhile, lured by outsized prospects in supplying aluminum sheet, coil and foil for the construction, automotive and packaging industries in China and easy access to capital, Chinese industrialists flocked to the aluminum rolling industry beginning in 2004, pushing capacity up from 1.5 million tpy in 2004 to 2.5 million tpy in 2005; when all the rolling mills under construction or in planning are completed as of 2010, China’s rolling industry will have more than 5 million tpy of rolling capacity. In the so-called “Double 0” segment of the rolling industry (named for the thickness in millimeters of the aluminum foil produced) which supplies aluminum foil to that part of the packaging industry serving the tobacco, food, beverage, pharmaceutical and cosmetics industries, the growth in capacity is expected to grow to a significant proportion of the 940,000 tpy in total aluminum foil capacity which will be in place by 2010. Once again the response of the thinner gauge segment of the aluminum foil industry was to form a cartel to attempt to control output and prices. According to a report in 中国铝业网, in February 2006 five of the principal producers of “Double 0” aluminum foil met at a “summit” meeting to agree, among other things, to hold their respective shares of the domestic market to a fixed amount, to export all output in excess of their agreed share of the domestic market, to adhere to a specified lowest domestic and export processing price and to refrain from selling their products for a price in excess of the imported price.

In the free-wheeling economic environment that is today’s China it is far from certain that the attempts to monopolize markets is likely to have more than short term benefits to the Chinese monopolists. Rather, the central dynamics which Adam Smith discussed with such acuity in 1776 are at work in China today and will ensure that the attempts at monopoly power by some of the actors in this panoramic economy will not permit the level of control that was a fixture of the pre-Reform period.

[Lou Schwartz is president of China Strategies, LLC and publisher of the China Renewable Energy and Sustainable Development Report, as well as the China Aluminum Industry Report. Mr. Schwartz earned degrees in East Asian Studies from the University of Michigan and Harvard University, as well as his J.D. from George Washington University Law School.

Fluent in Mandarin Chinese, Lou work includes matters dealing with China's legal system, economic development, trade and investment. After serving at a large U.S. law firm, Lou has for a decade taught at the University of Pittsburgh School of Law and College of Arts and Sciences.]

We briefly posted on the Danone-Wahaha scandal in June. Now comes the sound of the other shoe dropping. From the Wall Street Journal:

A Chinese beverage maker won a trademark arbitration ruling against joint-venture partner Groupe Danone SA, the latest legal twist in a closely watched case and one that is unlikely to end the dispute.

The Hangzhou Arbitration Commission said the period had lapsed during which Danone was eligible to file its case against Hangzhou Wahaha Group Co. The case was aimed at forcing Hangzhou-based Wahaha to honor alleged obligations to transfer ownership of the Wahaha brand to the companies' joint ventures, a key aspect of Danone's effort to re-establish control over the Wahaha business in China.

Paris-based Danone said it is "shocked" by the result and is studying its options.

Shocked!

On a related note, a Harvard Business Review study of the supposed influences of Mao on modern Chinese managers, refers to the CEO of Wahaha:

High-profile Chinese business leaders who have used...Mao-style tactics to dominate their managers include Zong Qinghou, the founder and former CEO of Wahaha, the French-Chinese beverage joint venture. Zong recently circumvented the formal organizational procedures during a dispute and mobilized Wahaha employees to publicly denounce the French management. As of this writing, no settlement of the dispute was in sight.

Is it accurate to state that managers emulate Mao? Any case, apparently analogous, requires one to trace an influence from cause to effect, which the authors do not seem to attempt. And what is the benefit of an analogy so tenuously tied?

Instead, it is more accurate to say that mainland Chinese in positions of authority, and to a lesser degree Chinese outside of the PRC, share a purposefulness in their methods, often ruthless, usually creative, straightforwardly ambitious, enormously resourceful and extraordinarily authoritarian.

Jim Rogers, megamillionaire, has given up on the United States: China is the promised land. (He's flogging a book.) Who can fault the investing expertise of one who has made more money than we ever will? Martin Howell of Reuters, for one, in an article succinctly entitled, Jumping on the China Bandwagon with Jim Rogers." Mr. Howell writes of Mr. Rogers:

He counsels us to "get out of the dollar, teach your children Chinese and buy commodities" and declares that it is scarier to have savings in the U.S. stock market than to have some of them in China.

These suggestions, in and of themselves, are frightening enough, but Mr. Rogers further recommends that we attempt to understand the Chinese by eating Chinese take-out.

"Now is the time to engage China and all things Chinese," he says. If you can't go for a visit, take a class in tai chi and then learn about Chinese medicine, watch Chinese movies, Rogers suggests. "The point is to develop a clear sense of how Chinese people view the world and lead their lives. Try to figure out how China's consumers will spend their hard-earned cash and where they might put it to grow."

Understanding how Chinese "view the world and lead their lives" is essential to productive interaction with them, but one can not rise above shallow faux-knowledge gleaned from Western-adored emblems of Chinese culture, like tai chi, without learning the language or living and working with Chinese on a daily basis. (I have come across self-professed experts on China who can not even speak the language fluently -- a defect I find scandalous.)

A little knowledge is a dangerous thing. It is better to remain entirely within one's upbringing than to believe it possible to skim the surface of a vastly different set of assumptions about the world and think one has the keys to the kingdom. Ask yourself: is it possible for a foreigner to understand your conception of the world from a single visit to your nation's capital, or a viewing of your latest hit film, or the reading of a holy book?

Investors should note the following article, detailing "illegal securities activities," this past week made the target of apparently concerted regulatory enforcement. Specifically, activities include the issuance of stock as well as the offering of brokerage and investment research services without prior government approval, 90% of which are allegedly carried on with criminal intent to deceive. While the article quotes the authorities calling it a widespread problem, only 1,400 such cases were reported nationally in 2007. However, what interested me most was this:

突出问题是罪与非罪的判断，非法证券活动往往涉嫌擅自发行股票罪、非法吸收公众存款罪、集资诈骗罪等，但这些罪名如何区别、定性；非法经营罪与擅自发行罪在审理过程中是否应互为前提；非法证券活动受害人能否通过民事诉讼进行救济等等都不明确，阻碍了打击非法证券活动的效率。 [Editor's paraphrase: The problem that stands out is the delineation of what is legal and what is illegal...as well as how to distinguish between violations of the criminal law...whether a victim can proceed in a civil suit based on illegal securities activities, etc....all obstacles to effective securities law enforcement.]

Hence, perhaps, the issuance of this order 《关于整治非法证券活动有关问题的通知》(证监发［2008］1号, which may be found in its entirety here.

四部门扎篱合围非法证券活动

21世纪经济报道 　2008-01-08 11:38:42

　　本报记者　于海涛　北京报道
　　
　　非法证券活动将在今后一段时间内受到更加严厉和更有效率的“联合围剿”。
　　1月6日，最高人民法院、最高人民检察院、公安部、中国证监会四部门联合公布了《关于整治非法证券活动有关问题的通知》(证监发［2008］1号，以下简称“1号文”)，标志着又一打击违法、惩治犯罪的强有力武器的“亮剑”。
　　据悉，一段时间以来，非法证券活动出现了新动向，即通过网络非法发行股票和从事非法证券活动的案件时常出现。这类案件蔓延速度快、危害面广，已经引起了监管部门的高度重视。
　　此次四部门联合发文，将加强监管部门与公安、司法机关协作配合，在法规体系、工作机制上扎紧“篱笆”，更及时、高效地打击资本市场各类新型违法犯罪活动。
　　
　　非法证券五大特点
　　“非法证券活动主要有两大类：一是非法发行股票；二是非法经营证券业务，主要是针对场外市场。”中国证监会有关人士表示。
　　非法发行股票包括未经证券监管部门核准而擅自公开和变相公开发行股票两种行为。而未经证监会批准，任何机构和个人从事股票承销、经纪(代理买卖)、证券投资咨询，均为非法经营证券业务。
　　据悉，与“带头大哥777”在证券市场上收费荐股方式的案件不同，此处所称“非法经营证券业务”主要有三类。一是以“证券投资咨询公司”、“产权经纪公司”等为名，未经批准非法买卖、代理买卖未上市公司证券；二是所谓外国资本公司或集团公司驻中国办事处，以给境内企业提供境外上市服务为名，未经批准从事未上市公司证券买卖；三是一些地方的“产权交易所”、“产权托管中心”等违规从事证券业务。
　　尤其值得注意的是，一些非法发行股票的公司，让当地产权交易机构给投资者出具股权托管文件或所谓的股权证，迷惑投资者。实际上，这些股权托管文件或股权证并不能证明其活动的合法性。
　　在上述人士看来，非法证券活动是一种典型的涉众型的违法犯罪活动，严重干扰正常的经济金融秩序。
　　从近期办理的一些案件看，非法证券活动具有五大特征。
　　一是按照最高人民检察院、公安部《关于经济犯罪案件追诉标准的规定》(公发［2001］11号)，绝大多数非法证券活动都涉嫌犯罪。据不完全统计，非法证券活动中90％以上都涉嫌犯罪，而从目前各地查处情况看，最终被追究刑事责任的，只占很小一部分。
　　二是花样不断翻新，隐蔽性强，欺骗性大，仿效性高。“有的通过亲戚朋友或熟人兜售股票，带有传销性质；有的采取股份置换方式；有的采用信托、集资等方式。”上述证监会人士说。与此同时，非法证券活动出现了新动向，即利用网络平台非法发行股票和从事非法证券活动。
　　三是案件涉及地域广，涉案金额大，涉及人员多，同时资产易被转移，证据易被销毁，人员易潜逃，案件办理难度大。从已立案调查的案件看，范围小的涉及几个省市，多的涉及二三十个省市；涉案金额大多在千万元以上，有的达到数亿元；牵涉到投资者少则上百人，多则数千人。这些非法证券活动一般都是有预谋、精心策划的，有的还有很高的反侦察手段，当公安机关收集到一定证据，决定实施抓捕时，经常是人去楼空，证据被销毁，赃款不知去向。“其中一些中介机构从事非法证券经营活动还带有明显传销性质，采取类似'洗脑'方式进行宣传，逐渐形成一张巨大的销售网络，且内部组织严密，对外界调查持高度警惕。”上述人士说。
　　四是不少案件涉及到境外资本市场，办理该类案件政策性强，专业水平要求高。现阶段主要是一些非上市公司编造虚假信息，以即将到国内或者国外上市、业绩优秀、已由政府批准、已经递交上市申请材料等名义为诱饵，以获得高额回报为幌子，以兜售所谓的“原始股”为形式，采取非法手段诱骗群众购买股票。
　　五是投资者多为离退休人员、下岗职工等困难群众，承受能力差，极易引发群体事件。
　　
　　扎篱“合围”
　　“只有从重从快地审理一批大要案，才能震慑住犯罪分子，遏制住非法证券活动的蔓延势头。”上述证监会人士说。
　　目前，各部委正在扎紧篱笆，对非法证券活动实现联合围剿。
　　据悉，政策法律不明晰、适用标准不一致是导致此前大部分非法证券案件不能被追究刑事责任的主要原因之一。
　　突出问题是罪与非罪的判断，非法证券活动往往涉嫌擅自发行股票罪、非法吸收公众存款罪、集资诈骗罪等，但这些罪名如何区别、定性；非法经营罪与擅自发行罪在审理过程中是否应互为前提；非法证券活动受害人能否通过民事诉讼进行救济等等都不明确，阻碍了打击非法证券活动的效率。
　　“1号文”的发布，对上述问题均做了详细的政策法律界定，还明确了新老《证券法》的衔接问题和非法证券活动受害人的救济途径问题。从而与其它法规一起构筑起了打击非法证券的法治体系，从法规层面扎紧了第一道篱笆。
　　此外，“1号文”首次以四部门联合发文的形式，明确有关法律适用问题，尝试各部委协作配合，使得联合执法机制和快速反应机制更加顺畅地进行，也为今后相关部门及时、高效地打击资本市场各类新型违法犯罪活动，提供了新模式。
　　此前，中央成立了由证监会牵头，公安部、工商总局、人民银行、银监会并邀请最高法院、最高检院等有关单位参加的整治非法证券活动协调小组，全面负责打击非法证券活动的组织协调、政策解释、性质认定等工作。
　　而地方的非法证券活动查处和善后处理工作按属地原则由各省、自治区、直辖市及计划单列市人民政府负责，形成了联合打击的合力，为有力推进打击非法证券活动工作提供了制度保障。
　　在工作机制层面，协调小组办公室建立了协调小组定期工作会议制度、信息月报制度、工作简报制度、信息共享制度、大案要案的督办制度等。
　　数据显示，过去一年，证监系统全年共收到涉及非法证券活动的各类来信、来访1400余件，并将其中366件涉嫌犯罪线索移送公安机关；一批大案要案进入司法程序，证监会协助公安部督办的8起重点案件均已侦查终结，并移送检察机关审查起诉，其中4起已经法院一审判决。目前，8起案件共抓获犯罪嫌疑人48 人，取缔非法中介机构19家。
　　实际上，涉嫌犯罪的非法证券类案件从调查取证到审理终结，主要涉及证监、公安、检察、法院四个部门。此前有部分地区的一些案件久拖不决，有的甚至出现'踢皮球'现象，分工协作不甚顺畅，案件办理周期过长。
　　“1号文”对相关部门的工作分工及协调配合做了总体部署。
　　首先确定了证监系统的“督促、协调、指导”等核心功能，除对非法证券类案件及时出具性质认定意见外，还要创新办案模式，在当地政府的领导下，密切与其他行政执法机关的联合执法，提高快速反应能力。
　　同时根据工作需要，可组织当地公、检、法等部门相关人员进行业务培训或案情会商等。
　　“1号文”还要求公检法部门加强沟通衔接，以提高办案效率，为打击非法证券的工作机制提供了强有力的法律武器。可以预见，近期将会有一批涉及非法证券活动的大案要案进入司法程序，一批犯罪分子将会受到应有的惩处。
　　此外，记者获悉，在善后处理方面，证监会联合高法、高检、公安部等单位，正积极探索研究在现有法律架构内的投资者民事诉讼保障机制。　　
　　
　　·链接·　　
　　
　　从事非法证券活动承担的法律责任　　
　　
　　关于非法发行证券，根据《证券法》第一百八十八条规定，不法分子将受到警告、罚款等行政处罚；如数额巨大，构成《刑法》第一百七十九条规定的擅自发行股票罪，不法分子将处五年以下有期徒刑或者拘役。
　　以发行股票为幌子，而以非法占有为目的，涉嫌犯罪的，依照《刑法》第一百七十六条、一百九十二条，以非法吸收公众存款罪、集资诈骗罪追究刑事责任。如果数额特别巨大或者有其他特别严重情节的，不法分子将处十年以上有期徒刑或者无期徒刑，并处罚金或者没收财产。
　　关于非法经营证券业务，根据《证券法》第一百九十七条规定，不法分子将受到警告、罚款等行政处罚；如情节严重，构成《刑法》第二百二十五条规定的非法经营罪，情节严重的，处五年以下有期徒刑或者拘役，并处或者单处违法所得一倍以上五倍以下罚金；情节特别严重的，处五年以上有期徒刑，并处违法所得一倍以上五倍以下罚金或者没收财产。
　　以股票承销、经纪(代理买卖)、证券投资咨询为幌子，而以非法占有为目的，涉嫌犯罪的，依照《刑法》第一百七十六条、一百九十二条之规定，以非法吸收公众存款罪、集资诈骗罪追究刑事责任。如果数额特别巨大或者有其他特别严重情节的，不法分子将处十年以上有期徒刑或者无期徒刑，并处罚金或者没收财产。

One has heard of the promise of private equity investment in China at various times since the early 90s. What is really going on?

BusinessWeek, which curiously seems to mistitle its articles often, implies a boom. Shaun Rein's article implies great potential, but no boom yet. Adduced in favor of that proposition are the following:

...the continued optimism and growth of China's middle class in spite of inflation and the global downturn, the increasing global competitiveness of domestic Chinese firms that need expertise and capital to expand internationally, the tightening of credit from Chinese banks, and the decline of China's stock market.

Echoes of the past. Why is now any different?

Other observers are rather less positive, but seem to see a somewhat rosy future indicated by the defections of high-level Temasek and Goldman people, who have decided to set up their own shop, often in "cooperative" competition with their former employers.

One Beijing-based attorney put it to me this way (I'm paraphrasing here):

"Of 10 investments, nine will fail miserably, but one will make everything back and then some. Quite a lot more than then some. Everyone is chasing the 10th deal."

The investments to which he referred were, to most corporate investors, minor, each well under $10 million. But what about the big investments, which preoccupy the minds of private equity investors? Rick Carew writes:

Although smaller than the multibillion-dollar deals struck in North America and Europe, stakes in Chinese companies can be lucrative. A consortium led by Carlyle Group invested $740 million in China's third-largest life insurer, China Pacific Insurance (Group) Co., ahead of the insurer's IPO.

Post-IPO, the 17.3% stake is valued at around $4 billion, though the stock has declined this year alongside other China shares. Still, deals have been slow to come because of Beijing's worries about foreign capital and criticism that Western buyers got overly favorable terms for state assets.

China has withheld approval of a Carlyle deal to invest $375 million in a Chinese construction machinery company for three years. Carlyle has cut the size of its proposed stake repeatedly to get a deal done, to no avail.

Last year, Chinese legislators enacted a new corporate income tax, effective January 1, 2008. Just before the close of 2007, the state Council approved regulations regarding its implementation. A number of circulars, attempting to further clarify the law and regulations, have issued since the law has become effective. Compared with American tax law, it's Chinese counterpart isn't nearly as voluminous. That doesn't make the job of the accountant or attorney any less difficult because the law itself is, typically, rather a lot less specific and its implementation often haphazard.

The goal of tax equalization -- which Chinese regulators have promised since the 1980s -- between domestic and foreign corporate taxpayers will, in principle, vanish at a rate of 25%. That said, certain firms may transition to that rate over the course of several years. In addition, the law exempts certain industries -- agriculture, forestry, for example. -- and provides a variety of incentives, including a 15% tax on certain high-technology companies. Some of the tax concepts introduced by the corporate income tax law are new to the Chinese environment -- giving one pause as to how they might be handled by administrators. The new law also deals with transfer pricing, a withholding tax on dividends and a thin capitalization rule, which may tend to work against overseas investors.

The main difficulty, as with all Chinese law, is its generality, leading to a good deal of confusion as to the law's implementation and application to one specific situation.

Strafford Publications has announced the following online audio seminar to be presented on Thursday, August 7, 2008 at 1:00–2:40pm Eastern:

China's New Business Income Tax
Shielding Non-China Income From the Expansive Enterprise Income Tax
Plus: The Impact of IRS Contract Manufacturing Regs for U.S. Operations in China
A Live 100-Minute CPE & CLE Teleconference with Interactive Q&A

Speakers:

Peng Tao, Of Counsel, DLA Piper, New York.

Melanie Chen, Managing Director of China Group, UHY Advisors, New York

Alan Granwell, Partner, DLA Piper, Washington, D.C.

For more information and to sign up for what promises to be a seminar of great interest to corporate management, their attorneys and accountants, click this link.

Der Spiegel reports that one out of five German companies has ceased or is planning to cease production in China due to rising costs.

"The big story here is that globalization is for real -- and China is no longer what it was," says Ronald Haddock, a vice-president at consultant Booz Allen Hamilton...

Corporate fright at seemingly unstoppable upwardly moving human resources cost, the rapid turnover of highly trained workers, the insufficiency of energy supplies coupled with fast rising demand, the slight appreciation of the RMB and a revulsion by many consumers in the West at the prospect of seeing their local shops stocked entirely by Chinese -- all contribute to the "China no longer is what it was" phenomenon. Elsewhere on this blog, I have suggested as much, viz., a decrease in the increase of the rate of at which Chinese goods find their shores in the US. Even so, read this:

Chinese companies, too, are increasingly outsourcing production abroad, Eddy Henning, the head of corporate banking at Deutsche Bank in Beijing, told the newspaper. "Someone who just wants to produce T-shirts is more likely to go to Vietnam or Africa," he said.

As energy prices make container transport unprofitably expensive for heavy products, some furniture manufacturers in North and South Carolina in the United States have brought back production from China. But has the tide turned back to the countries that have lost their manufacturing? Not likely:

In only four years, from 2002 to 2006, the value of furniture production in China has nearly tripled in value, from just under $20 billion to just under $60 billion. As production has increased, China's furniture exports have experienced a similar boom. From 1997 to 2006, the value of furniture imported to the US from China has increased more than nine-fold, to hit $14.4 billion in 2006. The percentage of US furniture imports from China rose from 32% in 2001 to 50% in 2005. Due to a weaker currency and state regulations, Chinese manufacturers can produce finished products at much lower costs. In fact, the average wage of a Chinese furniture production worker is only four percent of the average wage of a worker in the U.S. This fact combined with China's modern, high-tech plants make them a huge threat to the stability of the industry in North Carolina.

One wonders whether the German companies profiled by Der Spiegel are smaller companies which should never have been in China in the first place. The Chinese export engine continues to hum. Visit the ruins of the American manufacturing industries throughout the US and one will see what it really means to pull production.

Hmmm... Now everyone is jumping on the China downturn bandwagon.

Textile exports fell 4.2 percent in June from the same month last year, a serious blow to an industry that employs millions of people. Overall export growth in June was 18.2 percent, down from May's 28 percent rate.

Note the change in overall export growth means that there has been a decrease in the rate of increase, but that exports continue to grow.

China's international reach for precious commodities extends as far as Cuba, lately earning the Minxia Non-Ferrous Metals Company a substantial Office of Foreign Assets Control (”OFAC”) fine. (Not this far more delightful Minxia.)

How is it that a Chinese metals dealer has been ordered to pay $1.5 million to the US Treasury?

Our story begins with a fairy tale island, white beaches nestled in lapping warm waves of a clear blue sea. [Ok, so my descriptive muse has overdone it a little...] Playboys and celebrities once danced to a Cuban Rhythm. They still drive 1959 Bel-Airs there, because that's the last year American autos could be imported. The American embargo of Cuba began in the depths of ancient time and, unbelievably, continues to this day, viz. the Cuban Assets Control Regulation (31 CFR 515), etc.

The excellent ExportLawBlog takes up the story:

Minxia Non-Ferrous Metals is a subsidiary of China Antimony Chemicals Co., Ltd., which, in turn, is a subsidiary of China Minmetals Non-Ferrous Metals Co., Ltd., which is, in turn, a subsidiary of the giant Chinese metal conglomerate China Minmetals Corporation. This climb up the corporate ladder may reveal what had OFAC in a snit about Minxia’s trades — namely, the $600 million joint venture between China Minmetals Corporation and Cuba to exploit Cuba’s large nickel supplies. China is one of the largest consumers of nickel which is a key component of stainless steel, and nickel is Cuba’s largest export — plenty there to get OFAC in a tizzy. In fact, the Bush administration announced a crackdown on nickel exports in July 2006, claiming that they constitute more than half of Cuba’s foreign income.

Sadly for the Chinese, if this was the cause of the fine, the Chinese interest in the nickel joint venture was recently bought out by Venezuela in what may not have been an arms-length, consensual transaction.

Make sure you click over to the ExportLawBlog page for this item to get the links, generously provided by its editor.

[Editor's Note: I continue to write for Chinese Americans about legal issues relevant to their communities. The article below -- on how desperate things can become when a business partnership dissolves -- was published in the August 31, 2008 print issue of World Weekly (世界周刊）．]

法律之窗 ／柯亦清 (Richard Kuslan, Esq.)

生意興旺時，華人合夥人意見不同，就通常能夠自己解決。在商業環境裏，合作的確不是爲了慈善的動機：是確保各自利益的手段。雙方認爲為了小事情而爭論會浪費賺錢的寶貴時間。雙方最好盡量合作。

可是，小公司成立后卻不見得一定會成功。按照美國中小企業局(Small Business Administration)的發表研究，將近三分之一的小公司成立后兩年就會停業。成立后四年只有44%還能生存。

在糾紛演變嚴重，合夥人爲了保護自己經常會放棄溝通而進入「打仗狀態」， 這樣就提高解決衝突的複雜性。何況在生意失敗的情況下！此時因爲雙方盡力挽救資產或減少個人須負擔的債務，合夥人相互指責使得感情分裂更激烈。某一方決定通過法律的途徑來解決問題，會有效嗎？

因爲跟美國法律接觸不夠多，很多華人對美國法律體系懷抱著一個理想：法律是客觀的萬能武器，用起來保證處罰邪惡的敵人並且會讓人得到適當的賠償。偶爾有如此積極的結論。盡管如此，總可以經過法律途徑而獲得該得到的觀念是不怎麽符合事實的。

律師甲和律師乙為客戶打官司。律師甲的目的是，提交足夠的證據説服法官按照可適用的法規接受他的賠償請求。對方的律師乙也是同樣的目的。法官可以接受甲或乙的説法或憑他自己的看法下判決。在這種情況下，任何一個律師都向客戶難以保證結果。假如由6到12個人當陪審團下決定更難預測結果。所以，律師只能以他的知識與經驗而為客戶盡力。在一般情況下，雙方出庭前能夠和解就省時間，金錢和痛苦。

在美國組成公司的華人合夥人自然地以中國人的生意模式營業：非正式，口頭上交易多，以現金爲主要付款方式，缺少書面記錄等，這種做法導致證據遠離完善的情況。有些人以爲把自己的看法說給法官聼就可以得到好結果，但口頭的解説不夠：法院要求的是更有説服力的證據。因此，沒出庭過的人認爲絕對成功的案子並不一定能成功。

證據是什麽？其範圍相當廣泛，譬如，合約紙或電子收據；物體和抽象的個人財產（像音響系統或電子部件的專利），本人當證人或第三人(專家)的説辭，等等。如果律師無法向法官提交有説服力的證據又怎麽能夠證明他的説法呢？

非正式的生意模式比較方便簡易，省掉日常的麻煩。除外，也有其他不單純的用處，包括：隱藏職員的非法移民身份，逃稅漏稅等。因此緣故，生意興旺的時候，對於未來可能會發生的壞事華人基本上不在乎。 向華人提起此可能性，華人通常輕鬆地回答：「沒事就沒事了。有問題，到時候再説吧。」

華商的世界觀很簡單：因爲誰也無法預料未來，所以問題出現才解決。設想營業計劃來預防可能不會出現的難題是大浪費。進入美國法庭的環境之後，一般人會後悔這個想法。

打官司時中國人生意模式所引起的困難，我們以兩個假想的故事來解釋一下「預備」的價值。

缺少書面記錄：投入資產的證據沒了？糟糕了！

組成公司之前，合夥人商量而決定各自投資的額度。可以投入的資產取決於州法的制定與合夥人互相之間的承諾，包括許多種類，如金錢、個人財產、不動產或職業服務等。譬如說，合夥人王和陳一起開公司。王和陳簽的書面營業協議制定各自投入一百萬元。在理論上，王和陳每個人擁有公司50%的股份 。按照營業協議，利潤和虧本照股份分配。王和陳兩個人都認爲可以分享利潤的50%，虧本的話也同樣的情況。

（營業協議是什麽？合作夥伴簽署營業協議來記錄營業方面的同意，包括資產投入，營業方式，分解程序等重要題目。不少商人根本沒有任何書面營業協議。口頭協議卻又缺簡樸。沒有書面文件好像最自由，可以隨時調整夥伴的協議，不過風險很大。到時候有衝突的話，就難以證明口頭協議的内容。）

我們來進一步了解王和陳的實際資產狀況。其實況不如預期，就與書面營業協議已非常不同。王開了25萬元的私人支票直接投入新公司的支票帳戶。陳投入10萬元現金，但他的方法不正規。因爲公司辦公室需要裝修，陳叫他親戚從國外銀行的私人帳戶直接匯錢到裝修商戶頭來付清債務。陳在美國也有一棟小倉庫，同意投入給公司。陳知道倉庫的價值為10萬元。王不了解不動產市場，但因爲資本不是公司非常需要倉庫的投入，就受騙而同意40萬的價位。不動產市場最近非常不景氣。前營業協議後，兩個合夥人再也沒有投入一毛錢進去。合夥人疏忽履行協議。

按照營業協議，陳和王每個合夥人具有50%的股份。按照以上的投資數目，這就不合實際。在表面上，王的投資達到25萬元而陳的投資高達50萬，所以按照實際資產投入，王可能只有三分之一的股份，而陳就又三分之二。

可是，王的投入的證據比較可靠。陳則很難證明10萬元的匯款原來是他的資產。對於倉庫來講，也可能有點問題。當陳把倉庫投入公司的時候，市場價就不一定達到40萬元。除了予人欺騙的把柄以外，陳或王怎麽能夠證明這筆資產的價值？可能必須要通過商業不動產的專家估價師來評估才能搞定。公司股份的支配比率到底如何？利潤怎麽分配？債務該誰負擔？

有關職員的身份記錄：聘請非法移民，老闆本身要不要負責？

某華人公司爲了減少工資，逃避向政府繳收入稅加以免除支付州法定的勞動賠償費，聯邦醫療保險稅（FICA）等的負擔，就決定聘請非法移民。兩個合夥夥伴梁和董自己身份已經合法了。他們決定不保留任何有關職員的書面記錄，且用現金支付工資，認爲因此就不會有事。梁和董同意只要把非法移民的身份隱藏起不告訴任何人，就好了。据他們的判斷，若職員發生事情的話，絕對不會影響他們兩個合夥人。

按照非法移民計劃公司安全地營業一段時間后，兩個人聽説有賺外塊的妙方法：幫人家申請勞動簽證。董的親戚有朋友在大陸認識蛇頭。親戚不是律師，但自己在中華街創辦了移民簽證事務所，好像很賺錢。兩個人就開始拍賣公司的職位，收每人一大筆錢。與聯邦勞動局規格相反，他們認爲從海外過來的人沒有任何學歷或工作經驗也無所謂。夥伴決定僞造重要文件，認爲誰也不會發現。他們不承諾任何人會有任何保障。如果得不到簽證不會是他們的問題。梁和董很有信心一切都會順暢。兩個人処得很好，以爲互相之間絕對保密。

非法移民廖在公司工作一段時間，對待遇和安全情況不滿。提出抱怨時，合夥人很快就把他解雇了。可惜的是，輕舉妄動的廖氣得快吐血了，向地方警察局和移民局打小報告誇張梁和董又實行非法計劃又進口毒品，使得政府開始調查。“絕對不會有事”很快就變得嚴重了。由於密告事由，梁和董的計劃就由此導致入罪。

按照聯邦移民和勞動法再加一般州法，公司不能不保留有關職員的記錄，並且必須要繳支法定的稅．９１１事件后，勞動與移民的監管更拉緊了。各老闆爲了保護自己的利益，責怪對方才是黑手。儘管過去很順暢，一旦發出嚴重問題，整個情形顛倒了。證據稀薄，哪個合夥夥伴也難以駁回政府的控告。在這種情況下公司能活多久呢？

結論

爲了保護自己的利益，華人在美國必須採取美國人也必得不疏忽的預備措施。譬如：
• 商量並達成合夥人書面營業協議，了解並履行條款内容。協議有變化時，條款照樣修改。
• 按照法律的要求和自己最明智的判斷，保留個交易的書面記錄，包括資產投入，消費，收入，職員信息等。
讀者該為未來採取保護性的措施。其實，中國古時候最出名的將軍也照樣建議了：

夫未戰而廟算勝者，得算多也﹔
未戰而廟算不勝者，得算少也。
多算勝，少算不勝，而況無算乎！
吾以此觀之，勝負見矣。
《孫子兵法》計篇第一　　　　

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.

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.

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).

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:

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.

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."

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.

Just over the wire: the Fed will set up an SPV (special-purpose vehicle) to purchase bad commercial paper directly from banks and non-banks. Echoes of the Chinese experience...

An extraordinary step, which appears to be authorized by the Federal Reserve Act, Section 13:

3. Discounts for Individuals, Partnerships, and Corporations

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

[12 USC 343. As added by act of July 21, 1932 (47 Stat. 715); and amended by acts of Aug. 23, 1935 (49 Stat. 714) and Dec. 19, 1991 (105 Stat. 2386.]

This clause has been invoked very rarely in the past.

Statistics compiled by the Chinese state are unverifiable and unreliable, but Western company representatives seem to agree that the bloom is still there, but wilting somewhat. Indeed, the Chinese economy has slowed drastically, even before the American melt-down. Expect more to come as American and EU retail spending plummets over the course of the next year.

You read intimations that trade was slowing here (and elsewhere on this blog) long before you could read it there.

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.

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?

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.

Growth in electric power generation "has collapsed under the weight of the global economic implosion — at least for now," claims Andrew Revkin, author of the New York Times Dot Earth blog,. Environmental activists appear to consider this progress in the climate control wars -- the necessity for which I question. Global warning is a theorem whose proof I find circumstantial and unpersuasive. [But then, I'm generally skeptical and don't usually rush to judgment. Let's give it another generation or two...]

Certainly, the graph the weblog displays, based upon China's notoriously unreliable National Bureau of Statistics, claims a decrease in growth. Here, here and here (from 2002), just for starters. To what extent have these energy stats been studied, picked apart, cross-tested?

In 2001, Tom Rawski, economist at the University of Pittsburgh, in "What's Happening to China's GDP Statistics," argued persuasively that the unreliability of Chinese energy statistics has caused serious flaws in official GDP calculations. Has something happened between 2001 and 2008 in China that have made these statistics more trustworthy? [That was a rhetorical question.]

Yes, yes, I know. It seems believable: a widespread decrease in manufacturing will most likely cause a drop in energy generation. But where are the hard numbers? Why are Stanford academics parroting official Chinese numbers? Where is the analysis?

For a brief summation on Electricity Regulation in China, read this short paper, authored by Lehman, Lee and Xu, which Aldo de Nobili and Ed Lehman were kind enough to send me. Download file

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.

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...

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."

Recommended: this story -- Jailed Billionaires Show New Face of China as Markets Unravel -- rich in detail, like this:

Greaves hasn’t seen or spoken to Huang, 39, since. One morning in November, the dapper, baby-faced tycoon failed to turn up, along with his Maybach limousine, at Gome’s Beijing headquarters, where he normally worked such long hours that he had installed a double bed in the office adjacent to his own.

Well-worth reading.

[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 System

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)

地下錢莊 (literally, "underground bank") flourishes wherever Chinese borrowers need cash quickly without having to go through the process of a loan application at a formal bank. They are as easy to access as black market foreign exchange in any Chinese city, if you get an introduction. While not always tied to criminal gangs, one never knows whether the poorly dressed man in the watch repair shop is a front for a group of successful, wealthy store owners or potential leg breakers.

Fujian （福建）immigrants to the United States, businessmen who are completely on the level, for example, will often pool assets to lend to the Fujianese newcomer so that he may open his business. This has been a common practice in Chinese communities in the United States since the mid-19th century, e.g. the 同鄉會 (an association of people originating in the same locale). Koreans, as well.

Cash is advanced at terms certain and agreed, usually at a high rate of interest (in one case, I was told, 12% monthly), often with the reversion of certain properties occurring on nonpayment, including the entire business, personal automobile, etc. Sometimes, the parties sign a simple document，much like an IOU, several of which I have seen. Other times, a relationship, family or close friend, serves as the bond sufficiently close to compel either repayment or a transfer of property. Many times, that family or friend, who was the intermediary, is the one who must pay up upon default of the primary debtor.

What happens to those who don't pay? in Malaysia, apparently this. Public ostracism. But this is certainly the easy-out. Among Chinese, as far as I am aware, beatings, leg-breakings and death -- where lender-debtor are strangers, not family or friends -- occur frequently.

An example, which occurred in Taipei. A friend lent a substantial sum of money to an investor. The investor's business failed. Fraud was suspected. My friend arranged for a small-time gangster to visit the investor, but when the gangster returned, he informed my friend that the investor had already been stabbed to death. The investor paid a very high rate of interest, indeed, and my friend's investment was entirely lost. In other words, my assumption is that the deeper truth among Malaysian loan sharks and their debtors is not as 單純 (pure and simple) as the Bloomberg writer, who otherwise wrote a terrific article, makes it out to be.

[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.

The New York Times reports:

Exports from mainland China slumped 22.6 percent in April from a year earlier, official statistics showed — a fall that was not only larger than economists had expected but also bigger than that in March, when overseas shipments declined 17.1 percent.

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!

This fascinating report on the "88 Queensway Group" by the U.S.-China Economic & Security Review Commission details the "private" overseas investment projects of Chinese state-owned entities with substantial connection to the Public Security Bureau and Chinese intelligence.

With text like this, I found it a great read for any China watcher:

Lo Fong Hung appears to serve as the public face of the 88 Queensway Group, making several public appearances on behalf of companies associated with the consortium.2 Although there is little information publicly available about Lo’s personal or professional background prior to 2003 (when New Bright was incorporated), she is listed currently as the director of no fewer than thirty-four companies incorporated in Hong Kong, most of which are listed at the 88 Queensway address. Lo’s husband, Mr. Wang Xiangfei, is a former director of China Everbright Group and currently is a nonexecutive director of China International Trust and Investment Company (CITIC), both state-owned companies in the PRC. China Everbright has been identified previously as a company affiliated with Chinese military intelligence, to include a role as a nominal employer for overseas agents operating under cover. CITIC is a huge, Chinese state-owned conglomerate, incorporating forty-four subsidiaries involved with industries as varied as financial services, telecommunications, construction, manufacturing, mining, property development, and media. Wang Xiangfei and Lo Fong Hung both have connections to China Petroleum and Chemical Corporation, also known as Sinopec, and are listed as officers of Sinopec subsidiaries.6 While Wang Xiangfei holds official leadership positions in at least six of the companies owned by the 88 Queensway Group, it is unclear exactly how much control or leadership he exerts within the Group.

If that fails to pique your interest, how about this?

On company filings, Wu lists his residential address as “No. 14 Dong Chang An Street, Beijing, China.” This address is the headquarters for the Ministry of Public Safety (MPS), a domestic security service of the Chinese government. Also located in this compound is a reception office for the Ministry of State Security (MSS), the primary state agency responsible for foreign intelligence activities.

More than a thousand steel workers in China's northeast staged an at-times violent protest against the planned takeover of their state-run employer and a group of them killed a top executive at the private company that was to acquire it, Chinese state-run media reported.

The article is here.

Not surprisingly, the Chinese Ministry of Commerce announced today that

Investment declined 35.7 percent from a year earlier to $5.36 billion, the Commerce Ministry said at a briefing in Beijing today. That compared with a 6.76 percent drop in June.

Creatively spinning this data -- which, as with most Chinese statistics, likely represent an optimistic representation -- Commerce Ministry spokesman and advance man for the investment roadshow, Yao Jian, said:

“China’s FDI is still healthy compared to the global slump in investments...We can say that China is one of the most attractive places for investments.”

[Editor's Note: Steel is a big deal in China. The World Steel Association has noted:

The case has generated a great deal of discussion among attorneys involved with China. The following post I found especially interesting and worthwhile reading. Today's post has been graciously provided by Vivienne Bath, Senior Lecturer and Director of the Centre for Asian and Pacific Law, University of Sydney. Ms. Bath writes that the opinions expressed are entirely her own and do not represent the views of Sydney University.]

Comments on the Stern Hu/Rio Tinto Case

The case of Stern Hu and his colleagues continues to present a number of difficult issues. The first is that when Stern Hu and his colleagues were arrested, the allegation seemed to be that they were being investigated for theft of state secrets – an offence which is not clearly defined and is potentially very far-reaching – even though the information in question appeared to be commercial information of state-owned enterprises. Given that the Chinese Ambassador to Australia spent considerable time making speeches when the Chinalco-Rio Tinto deal was under consideration saying that state-owned does not mean state run and the primary aim of enterprises like Chinalco is to make money, the state secrets allegation appeared to confirm much of what the Australian Opposition and the Australian press had been saying about the proposed investment. If the original allegation had been commercial bribery and infringement on business secrets, there would undoubtedly have been a discussion on why Rio’s employees were targeted, but nothing like the fuss that the state secrets allegation created.

It should be noted that most prosecutions for bribery in China concentrate on the officials or executives who are bribed rather than the companies or people who did the bribing. Most cases involving the “bribers” have been brought by the US authorities (although Australia has its own version of FCPA, no prosecutions have ever been brought under the legislation).

It is also not clear why it is only the employees have been targeted if the allegation is commercial bribery. Why not Rio itself? If bribes were paid, where did the money come from and for whose benefit were they paid?

Another question is whether the fact that the employees are all either Chinese or, in Stern Hu’s case, formerly Chinese makes a difference to their position. James Peng, the Australian who was tried and put in goal for 6 years in China over what appeared to be primarily a commercial dispute, was also formerly a Chinese national. Chinese nationals (and former nationals) do tend to have much better access to sources in China and to be able to work with their Chinese contacts in a way that non-Chinese Australians are generally not able to do, but that does not necessarily mean that they are more inclined to act dishonestly. It does seem, however, that they are more exposed.

The last point is the motivation for the charges and the question of what message, if any, is being sent – and to whom. It appears that the Stern Hu case is probably related to the iron ore negotiations, particularly since, according to reports, various executives in Chinese steel companies have also been detained. It comes at the same time as other significant developments in the generally friendly Australia-China relationship, however.

On the one hand, stresses in the Australia-China relationship include the failure of the Chinalco-Rio deal, which was due to the Rio shareholders rather than the Australian government. The Australian government (perhaps fortunately for it) was never required to make a ruling, although this may not be believed in China, where the role of foreign governments in business is often over-estimated. In addition, from the Australian point of view, the relationship has not been at all assisted by the efforts of the Chinese Embassy and the Consulate to try to induce the government to refuse a visa to Radiya Kadeer (who actually has close relatives in Australia and has made several visits in the past) and on the Melbourne Film Festival and the National Press Club not to show a documentary about her. On the other hand, an announcement has just been made of a 20 year LNG gas purchase contract between PetroChina (which is, of course, also state-owned) and Exxon for the purchase of gas from the Gorgon field off Western Australia – reportedly the largest trade deal ever signed involving Australia. If the message in the case of Stern Hu and his colleagues is to the Australian government, therefore, it is completely unclear what it is. If it is directed at Rio Tinto and the Chinese steel companies, the ramifications have been considerably broader than intended.

On September 29, 2009, the U.S.-China High Technology Working Group, sponsored by NAM, MOFCOM and the Dept of Commerce, will hold a "Public-Private Sector Dialogue," described as follows:

The U.S.-China High Technology Working Group (HTWG) was established to facilitate high-technology exports to civilian end-users in China, in accordance with U.S. export control requirements. In furtherance of this effort, the Department of Commerceʼs Bureau of Industry and Security (BIS) and the Peopleʼs Republic of Chinaʼs Ministry of Commerce (MOFCOM) are pleased to announce that the 2009 HTWG meetings will include a public-private dialogue on Tuesday, September 29, 2009.

In this public-private HTWG event, participants will focus on identifying barriers to U.S.-China high technology trade, particularly in two of the largest categories of bilateral advanced technology trade: civil aviation-aerospace and information technology. This all-day event will provide ample opportunity for two-way dialogue. The principal goals of this dialogue are to offer an opportunity for U.S. and Chinese companies to interact with each other and with government officials directly on these issues, and to learn from individual U.S. and Chinese companies about the ways in which the two governments can further support high technology trade for civilian end-uses in China.

A number of interesting speakers. In light of the tire tariff decision, this meeting might prove worthwhile if only to witness the sparks that might be generated.

I attended something similar to this in the mid-1980s when China was first eagerly developing its approach to technology transfer. And the US was eagerly divesting itself of its design and manufacturing capabilities in a vast swath of technology products. How the world has changed...

Note the last sentence of the indented paragraphs: "...for civilian end-uses in China." Ah, yes, creating the consumer economy of China. When will they wake up? Better asked, will they? What of American technology manufacturing?

Register here.

I've heard this same argument, in its various iterations, from so many people over the past 15 years that I'm not surprised to see James Chanos, a well-known short seller, join the club, even at this late date.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

Notwithstanding his record of contrarian success, Mr. Chanos is but another Westerner to see past the smoke and mirrors to conclude that the end is near. (If you have been reading this blog over the past eight years of its existence, you will have read of many such prognostications.) If one could only find Chinese who agree.

[UPDATE (Jan. 11, 2010): Even more - yawn! - bubble talk. I don't mean this. I mean this.]

Why do they call it China's "empty city?"

“Media is always a losing proposition in China.”

I was thrilled to read Anne Stevenson Yang's forthright and accurate assessment of foreign involvement in Chinese media. Finally, a non-Chinese within China is willing to state the obvious to a public audience. Brava!

And what elicited the comment? Google's threat to pull out of China because of cyberattacks, originating in China, leading to theft of company intellectual property and instrusion into Gmail accounts, ostensibly belonging to users with connections to human rights movements. Don Clarke's post on the topic is worth reading.

Perhaps 30 years ago, I came into possession of a 1960's US Department of the Army treatise on China, entitled, "China: Ruthless Enemy or Paper Tiger?" It may still sit on the shelf in my library. Is Google a Paper Tiger?

Note: the company announced it was "considering" quitting the market.

These attacks and the surveillance they have uncovered--combined with the attempts over the past year to further limit free speech on the web--have led us to conclude that we should review the feasibility of our business operations in China. We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.

What does Google hope to gain announcing a mere possibility of "withdrawal" from China? Surely, by now, the company has accumulated enough wisdom to know that they have been on the losing end of a hopeless battle with the Party. Furthermore, the abrupt decision to end compliance with government censorship requirements is a direct assault on the leadership, akin to the jester throwing down the gauntlet at the Black Knight -- within his castle. The company cannot hope to alter the activities of its massive and muscular propaganda organ, it's vast surveillance functions, all freely exercised. Party leadership will be incensed and take appropriate action, as one might expect of them. I do not see any way back from this precipitous decision.

On the other hand, business has been tough for Google in China, partly because of the business model which they had hoped to transplant, dependent upon substantially greater freedoms of expression than the Party is willing to tolerate, even from foreign entities with clout. As a result, Baidu -- with its hand-in-glove relationship with media censors and administrators -- has eaten Google's proverbial lunch. This seems as good a reason as any for Google to surrender while appearing to save face.

More on cyberattacks originating in China of private companies with interests contrary to the Party. Article here.

Lawyers suing China for 2.2 billion dollars in an Internet-censoring software piracy case said they came under cyberattack this week.

Attorneys at the California law firm of Gipson Hoffman & Pancione said that on Monday they began receiving "Trojan emails" crafted to trick them into opening files booby-trapped with malicious software code.

Download the original complaints filed in federal court in California.

Cybersitter v. People's Republic of China, et al.

Cybersitter v. CBS Interactive

I write this to satisfy the curiousity of those who may not see a quotation referenced in an Asiabizblog post.

The New York Times has removed or revised two quotations from an article it published on January 13, originally titled, "China's Exit Threatens China's Internet," by David Barboza, et al. The revised article, running at the same URL as the original, is entitled, "Baidu’s Gain from Departure Could Be China’s Loss." Among the quotations removed is that of Anne Stevenson Yang, whom I quoted in yesterday's post. (See post below.) Yes, that quote was there and is now gone. Along with this one: "It's the epitaph for US online involvement here."

In addition, the following quote from the original story was partially revised.

“Baidu keeps a great relationship with the government,” says Hong Bo, a consultant at 5G, a Beijing-based consulting firm. “If the government wants something removed it will do it immediately. On the other hand, everything with Google has to go through its headquarters.”

The revised article curiously allows the writer to ventriloquize the first sentence:

Baidu’s strong relationship with the government contributed to its rise. “If the government wants something removed, it will do it immediately,” said Hong Bo, a consultant with 5G, a Beijing consultancy. “On the other hand, everything with Google has to go through its headquarters.”

Other than these changes, the articles appear similar. So, why were any changes made? Why were quotes dropped?

[H/T to a friend.]

Sources not named by Reuters allege employee collusion:

Google (GOOG.O) is investigating whether one or more employees may have helped facilitate a cyber-attack from China that the U.S search giant said it was a victim of in mid-December, two sources told Reuters on Monday.

Extraordinary -- unnamed sources. Unnamed and yet virtually identified?

The sources, who are familiar with the situation, told Reuters that the attack, which targeted people who have access to specific parts of Google networks, may have been facilitated by people working in Google China's office.

In other words, other Google employees with an ax to grind? American executives who are sick and tired of surveillance? The PR department?

Furthermore, despite Google's claim to cease filtering, it is not evident that the company has made any change in Web search filtering.

This is a strange game of cat and mouse. We know what the cat wishes to do. What exactly is the mouse doing?

Google has announced a delay in China of the launch of mobile phones using its Android software.

One must question this move as simply more Google shadow boxing. Despite its threat to remove web filtering, Google does not appear to have done so. Similarly, a postponement is simply that. The delay of a marketing expense will have no effect on top-level cadres, other than to demonstrate weakness of resolve. Why?

Because Google can't extricate itself from China. Think of the likely effect "leaving China" on the introduction into world markets of the Nexus, the new Google phone. After all, the product itself will be manufactured in China (where else?). Apple must be jumping for joy.

(Even were Google to leave, Chinese authorities would still welcome revenues resulting from the contract manufacturing of the Nexus, but the threat of being cut off from supply would remain.)

If Google's Board believes its announcement serves to generate public pressure from foreign investors, I think it is much mistaken. Could they suffer from grandiose notions of its importance in Chinese affairs? China can do very well without Google. After all, China has its own Google: Baidu, modeled in its image.

Google is vulnerable, and in China the strong prey upon the weak without mercy. American manufacturers and even end-users, including the United States armed forces, now plainly see how vulnerable they have become to the agglomeration of manufacturing resources in China, the purported need to sell in China and the compromises that must be made to do so.

Commercial espionage among nations should not come as a surprise to anyone involved competitive businesses. I am a proponent of the idea that American intelligence should practice it far more than we already do, which is either so brilliantly executed as to stay below the radar of public view or relatively inconsequential.

Not so Chinese commercial espionage, which is far from a new story. I distinctly remember in the early 1990s the Taiwanese visitor to a certain bearing manufacturing in the United States, discovered wearing shoes with magnetized metal soles to catch iron filings during a factory tour.

But Chinese commercial espionage is "evidently" well-funded and coordinated. An MI5 report, leaked to the Sunday Times, contains details of interest, including this:

A leaked MI5 document says that undercover intelligence officers from the People’s Liberation Army and the Ministry of Public Security have also approached UK businessmen at trade fairs and exhibitions with the offer of “gifts” and “lavish hospitality”.

The gifts — cameras and memory sticks — have been found to contain electronic Trojan bugs which provide the Chinese with remote access to users’ computers.

Granted, given the prevalence of virus activity and the near absence of antivirus applications in use in China, it is always possible that rogue applications find their way onto "gifts." It has also been rumored -- and I believe unproven, correct me if I'm wrong -- that applications to ease ingress by hackers have been installed unto computer hardware at certain Chinese factories.

Need I say it? if you are senior executive or assistant to such an officer in a sensitive industry or multinational, beware of strangers -- especially PLA or PSB people -- bringing gifts.

The U.S. Federal Government, heavily invested in General Motors, investigates not only its competition, but its competition's suppliers, using its extraordinary powers:

Warrants were carried out on the Michigan offices of Yazaki Corp. in Canton, Denso International America Inc., in Southfield, and Tokai Rika Co., also known as Tram, in Plymouth, an FBI spokeswoman confirmed Wednesday.

"The Antitrust Division is investigating the possibility of anti-competitive cartel conduct of automotive electronic components suppliers," said Department of Justice spokeswoman Gina Talamona.

Prior to the federal bailout of GM, GMAC, Chrysler and Chrysler Financial, the Department of Transportation was relatively inactive with regard to Toyota safety issues. Surely, the Justice Department had not been involved. After the bailout, we see significant activity. What other agency will descend upon this company? Not I alone consider the dramatic change in Toyota's fortunes -- and now its suppliers -- with great suspicion, which the administration has brushed away like so much dander.

Yesterday, Secretary LaHood was asked before Congress if the the fact of US investment in the auto industry would have any impact upon the Toyota investigation. He immediately promised it wouldn't (I am looking for an mp3 or transcript of his testimony, which I heard over the radio.) With any administration, but especially with this strongly pro-statist group manning the helm, who can possibly believe such glib nonsense, especially when federal actions belie it?

We now have the US, as a regulator cum stakeholder, launching a criminal probe against a competitor. Do you not find this as frightening as I do?