January 9, 2008
Illegal Securities Activities Targeted in New Year's Regulatory Action
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。
December 26, 2007
The Seductive Strains of the China Bandwagon
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?
Posted by Richard at 8:43 PM | Comments (0)December 10, 2007
And Wahaha Laughs...
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.
Posted by Richard at 9:21 PM | Comments (0)July 31, 2007
Price-Fixing in China? Case-in-point: the Aluminum Industry
[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.]
Posted by Richard at 9:00 PM | Comments (1)July 17, 2007
What Happens When Your Chinese Supplier Says: Sure, Go Ahead, Sue Me!
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.
June 28, 2007
Citibank and the City of Wuhan: Struggling on the Banks of the Yangtse
The smoggy, foggy and utterly disheveled metropolis of Wuhan, on the Yangtse River in Hubei Province, bears the historical distinction of locus of the river trade. [See photo I took in Wuhan that gives you an idea of the Wuhan version of a sunny day.]
Prior to the establishment of the P.R.C., the river trade consisted primarily of opium, bibles, more opium, tea, automobiles shipped up from Shanghai, coal, bibles, weapons and opium.
Aside from its typical central-China, second-tier lack of aesthetic appeal, Wuhan natives are delightfully spirited – indeed, noted within China for their revolutionary fervor – and, in my experience, fast friends. But fighters to a man.
So when, at a public forum, Citibank announced its intention to set up a bank -- based in Wuhan but spanning the central region -- in which it would hold a 20% interest, the less-than-a-mile-away thunderclap of response was heard all the way to Shanghai.
Complicating matters somewhat was the fact that, in the early years of the last century, Citibank’s predecessor built a magnificent branch, lording over the docks, as a testament to its preeminence in Wuhan business circles. That building remains. I touched it myself, inducing a frisson of electricity as it grounded my historiographically-charged body. [See photo.]
That predecessor, the National City Bank of New York, subject of at least one recent book of national significance and numerous articles, is accused of the theft of imperial and nationalist China’s asset reserves. Among other financially rapacious crimes. Alleged criminal activity, of course. [I am a lawyer, after all.] Demand was made upon Citibank to pay up for the alleged [I repeat] acts of an institution that was not only dissolved decades ago, but its assets nationalized.
Nationalized. Don’t you just love the subtle fragrance of that perfumed euphemism?
Of far greater significance is the state of Chinese banking institutions, such as the unalterably poor condition of the so-called “city banks （城市商业银行）,” rogue kin to the disastrous city cooperatives（城市合作社）and credit collectives （信用社）, mismanaged by the municipal governments that own and barely run them. [Shanghai being an exception, but only by a hare’s tail.]
Fearing the competition Citibank presents as it moves inland by virtue of the timetable specified by the WTO accords – well, intending to move inland and encountering resistance every step of the way -- Hubei provincial banking administrators have spoken out. They don’t like the idea of a new bank, preferring a reorganization of their existing decrepit and debt-ridden system. Perhaps with the aide of a white knight like Citibank, although this remains unsaid.
But Hubei banking administrators are getting scant support, it appears from their own admission, from national banking regulators in Beijing, who haven’t even responded to their reorganization proposal. And Citibank looks to be favoring an end run up to Beijing for additional leverage on the province.
Read all about it! My rough translation of this recent article from 21世纪经济报 follows.
Prelude to a Yangtse River Bank: Citibank’s Ten Billion Yuan Trick
Relevant Applications Not Received by Hubei Banking Administration
People in the Hubei Provincial Banking Administration have disclosed that the reorganization of existing city business banks would be more practical than the establishment of a new bank.
June 23, a.m, on site at the “China Creates” display at the Wuhan Science and Technology Event Center, Citibank’s rather bland display board attracts the attention of event goers.
The Citibank banner, no more than 200 characters long, displays to all their intentions toward the Central region. The bank proposes to inject 10 billion RMB (approx. US$1.25 billion) to create a national stock-issuing bank – Yangtse River Bank, 20% of which will be held by Citibank. It is well known that Hubei has for a long time wanted to create a regional business bank, but the fact that a foreign bank has thrown out a proposal has astonished the financial world. Everyone involved has kept their reactions to a low undertone. Hubei Provincial Banking Administration officials tell reporters that there is nothing to this at present. Citibank China regional public relations executives refuse to comment. Two roads present themselves: integrate the city business banks or to reorganize them entirely. Each presents difficulties.
Citibank’s Proposal
Recent reports suggest that Citibank has already begun to set up a bank in Wuhan by the name of the Yangtse River Bank (or Yangtse River Development Bank). Moreover, Citibank Group’s international executive Vice-President has said in a speech that the Yangtse River Bank will attract 10 billion RMB in capital obtained from international, Chinese and local sources, of which 2 billion RMB will come from the Citibank Group and the American Brysam Global Partners.
On the afternoon of June 25, a reporter telephoned Mao Zhi-hua, manager of public relations for the China region, to ask about the organization of the Yangtse River Bank. Mao said he would not comment at this time.
A source disclosed that no application for the organization of the Yangtse River Bank has to date been received by the Hubei Provincial Banking Administration, and that the proposal was still only an idea. A spokesman from the largest business bank in Hubei province – Wuhan Business Bank -- said he had not heard about the organization of the Yangtse River Bank.
“Currently, there is nothing to this,” came the response on the afternoon of June 25 from the Hubei Provincial Banking Administration.
That spokesman said, “I think this issue should not be raised just now, because the People’s Congress and the Politburo have proposed similar ideas about the improvement of the Hubei banking system. In the past, the relevant departments looked into it and studied improvement of the financial system. But the financial system is a complex problem.”
The spokesman said that the establishment of new financial institutions was far more difficult than coming up with the idea to do so. From Citibank’s point of view, they can naturally express their own ideas on the subject, “ But this issue isn’t just about talking. Even though foreign banks think the Wuhan financial market is ripe for development, setting up a financial institution can lead to a series of problems, and whether the idea can be put into practice is awfully hard to say.”
Reorganization of the Old or Establishment of the New?
What differs in Citibank’s idea, in the eyes of local Wuhan scholars, is that the development of the Wuhan Business Bank would have stronger roots within the local region.
“Strengthening and expanding the Wuhan Business Bank, creating a stock-issuing bank that spans the region, is, I think, the most practical,” says Wuhan University Economic Study Center’s President, Ye Yong-gang.
Ye Yong-gang’s proposal is to first inject capital into the Wuhan Business Bank with a share issue, thereafter change the bank’s name, and finally to change the business model to operate regionally as a stock-issuing bank.
Song Qing-hua, professor at Southeast Financial Economy, Law and Politics University, Xinhua Finance and Insurance Study Center, believes that a regional stock-issuing bank with its main branch at Wuhan has two possibilities: reorganization or the establishment of a new bank.
Song Qing-hua tends toward reorganization. “China already has over 130 banks, not a few, and the crucial thing is to take these banks and create a real market presence, and to increase competitiveness. Since we’re talking about bank, it must have a certain size, and only in this way, can it create trust among people and be capable of meeting its competition.”
A spokesman for the Hubei Provincial Bank Administration said that the integration of the city business banks in Hubei would be more practicable than the establishment of a new bank. “We could take the Wuhan Business Bank and [those of other cities] and merge them.”
Wuhan Business Bank would naturally form the core. Established in the late 1990s, its registered capital is 568 million RMB, and the Wuhan City Economics Bureau holds 17.6%, as its largest shareholder.
“Creating a large Wuhan Business Bank would meet with very great obstacles, coming from those municipalities with their own city business banks,” says a source.
An administrator who knows Hubei finance says that the Hubei provincial government has wanted to merge and reorganize the city business banks and credit collectives, creating a big and strong “Yangtse River Development Bank.”
“But there’s some difficulty in doing this.”
The difficulty includes the fact that within Hubei, banks and credit collectives have developed unevenly, just as was the situation encountered when Jiangsu provincial banks were reorganized into the Jiangsu Bank. A source close to the Wuhan Business Bank disclosed that, in planning future development strategy, Wuhan Business Bank wanted to take off on its own and to launch an IPO. It was not willing to merge and reorganize with other banks in the province.
The Dream of a Regional Banking Center
During the “China Creates” event, Hubei Provincial Vice-Governor Li Chun Ming did not express an opinion as to Citibank’s plan.
Sources say that Citibank has raised the idea with Hubei provincial officials in the past. As to the establishment in Wuhan of a national stock-issuing bank, Hubei province and the city of Wuhan have many times submitted their applications to national administration, but have never received any response. “At this time, they purposefully maintain a low profile on this issue, and I guess they are worried that national administrators are taking a long time in the approval process.”
Wuhan has never stopped dreaming of the day when it would once again become a financial center. The most recent proposal for a regional bank was submitted at the 5th meeting of the 9th plenum of the 2007 Hubei Political Committee, when top officials suggested that “a regional development bank can only be established in Wuhan.”
Previously, at the 2004 national meetings, the former Wuhan City Political Committee Chairman Liu Shan-bi submitted a proposal in his capacity as a national official, entitled: “A proposal to speed up the development of a regional financial center, regarding establishment in Wuhan of the Hankow Development Bank,”
Liu Shan-bi believes that, a stock-issuing bank, rooted locally, serving the central region, and aiming at national service, is established in Wuhan, it would have a far reaching effect on curtailing the loss of capital away from the area, support the growth of the central region, stimulate production..etc. etc. etc.”
21世纪经济报道 2007-06-26 16:18:30
“长江银行”前奏：花旗百亿谋略
湖北银监局尚未接到有关申请
本报记者 聂春林 刘晓 实习记者 王传晓 武汉、上海报道
湖北省银监局相关人士表示，相比成立一家新的银行，整合湖北省现有的城市商业银行更为现实。
6月23日上午，武汉科技会展中心二楼“华创会”现场。花旗银行一块并不起眼的展板引起参展者关注。
花旗银行用不到200字的篇幅向外界展示了其向中部区域渗透的用心。该行建议，牵头引资100亿元，在武汉设立一家全国性股份制银行———长江银行，花旗有意持有20％股份。
湖北方面设立区域性商业银行的意图早已为外界知悉。但此次由一家外资行先抛出一纸建议书却令金融界人士颇觉诧异。
各方对此反应均非常低调。湖北银监局某人士告诉记者，此事目前还没有说法。而花旗中国区负责公共事务的人士也拒绝表态。
摆在湖北面前的有两条路：整合现有地方城市商业银行或者重新组建。无论哪种选择都一样艰难。
花旗的设想
近日有媒体报道称，美国花旗银行拟在武汉组建长江银行(或称“长江发展银行”)，目前已经进入筹建阶段，并援引花旗银行集团全球决策管理部高级副总裁刘恒中的讲话称，长江银行将从国际、国内、民间等引进战略投资资本100亿元，其中，从花旗集团、美国Brysam全球银行投资合伙公司等国际银行财团引进20亿元。
6月25日下午，记者致电该行中国区负责公共事务的毛志华，询问组建长江银行一事，毛表示暂不表态。
一位知情人士透露，关于组建长江银行的申请目前还没有报到湖北银监局，组建“长江银行”一事还停留在设想的层面。湖北省内最大的城商行———武汉商业银行一位人士告诉记者，没有听说组建长江银行一事。
“目前还没有说法。”6月25日下午，湖北银监局办公室相关负责人如是答复本报记者。
该负责人称：“我觉得现在不要提这个问题，因为关于银行的设置问题，有人大、政协代表就如何完善湖北省的金融体系提出过类似的建议，前期相关部门也进行了考察，研究如何完善金融布局。但金融布局是一个比较复杂的问题。”
该负责人表示金融机构的设置远比设想困难。如果站在花旗的角度，自然可以对此事发表自己的看法。“但这个事情不是说说的问题，虽然外资金融机构很看好武汉的金融发展环境，但设置一个金融机构将面临一系列的问题，想法能否付诸实施很难说。”
重组还是重建？
与花旗银行的设想不同，在武汉当地学者们眼中，在武汉商业银行的基础上发展区域性银行似乎更现实些。
“把武汉市商业银行做大做强，扩展成为跨区域的股份制商业银行，在我看来更为现实一些。”武汉大学经济学院副院长叶永刚表示。
叶永刚的方案是，首先将武汉商业银行增资扩股，然后更名，最终转型成为跨区域经营的股份制银行。
中南财经政法大学新华金融保险学院教授宋清华认为，总部设在武汉的区域性股份制银行，有两种组建方式：一是重组，二是新建。
宋清华更倾向于采取重组的方式。“中国已有130多家银行，银行的数量并不少，关键是要将这些银行塑造成真正的市场主体，提高他们的竞争力。既然是银行，就必须有一定的规模，只有这样，对内才可以取信于民，对外迎接竞争。”
湖北省银监局相关人士曾表示，相比成立一家新的银行，整合湖北省现有的城市商业银行更为现实。“可以把武汉市商业银行和宜昌、荆州、襄樊、十堰、孝感、黄冈、荆门等地城市商业银行合并。”
武汉商业银行理所当然成为重组的核心。该银行成立于上世纪90年代后期，注册资本为5.68亿元，其中武汉市财政局占17.6%，是最大的股东。
“做大武汉商业银行，遇到的最大的阻力，在于其他几个地级市的商业银行，一直得不到地方财政的放行。”知情人士告诉记者。
熟悉湖北金融的一位监管人士称，湖北省政府此前也想仿照徽商银行模式，进行省内城商行和信用社联合重组，组建“长江发展银行”(拟)，实现做大做强，“但是有些困难。”
而困难就包括湖北省内各城商行和城信社的发展不平衡，跟当初江苏省组建江苏银行遇到的情况一样。据一位接近武汉商业银行的人士称，在设计未来发展战略时，武汉商业银行更愿意单飞，并有上市的想法，而不愿意参与省内城商行的联合重组。
区域金融中心之梦
湖北省副省长李春明在“华创会”记者见面会上，对花旗银行的建议不置可否。
知情人士称，花旗银行这一设想应该与湖北省有关方面事先沟通过。在武汉设立全国性股份制银行的想法，湖北省、武汉市已多次向国家有关部门提出过申请，但一直未得到回复。“此次刻意保持低调，估计是担心国家有关部门审批手续较长。”
武汉从来没有停止过恢复昔日金融中心的梦想。
最近的一次设立区域金融中心提案，是在2007年湖北省政协九届五次会议上，民革湖北省委员会建议，“成立一家中部发展银行，总部设在武汉。”
此前的2004年全国两会上，武汉市原政协主席刘善壁以全国政协委员的身份提交了一份提案：“关于在武汉组建汉口发展银行，加快推动中部地区金融中心建设的建议。”
刘善壁认为，如果能在武汉新设立一家立足地方、服务中部、辐射全国的股份制银行，对改善中部地区资金外流，扶持中部地区企业发展壮大，促进中部崛起战略的实施，将产生深远的影响。
June 14, 2007
A Link to Martin Wolf on "the Strange World Economy"
Not directly related to China, but worth your time:
Martin Wolf, Villains and Victims of Global Capital Flows
June 11, 2007
Accurate Valuation of China Stocks 65% Lower?
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.
Posted by Richard at 3:56 PM | Comments (0)June 4, 2007
China CSI 300 Index Plunges 7.7%
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Posted by Richard at 2:08 PM | Comments (1)
May 31, 2007
Why Rob When You Can Invest?
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?"
May 30, 2007
Stock Transfer Tax Triples -- China Finance Ministry to Stock Market: We'd Like a 15-20% Correction?
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.
Posted by Richard at 11:27 AM
| Comments (0)
May 15, 2007
Chinese National Anthem to Reflect Revolutionary Fervor? No, Investment Fever!
[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。
Posted by Richard at 7:25 PM | Comments (0)May 11, 2007
China To Allow Bank QDII Investment in Foreign Stock Markets - with Conditions
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.
Posted by Richard at 1:03 PM | Comments (0)March 13, 2007
Guest Column: China Adopts New Franchise Regulation
[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).
March 9, 2007
New Chinese Agency to Invest Currency Reserves
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.
Posted by Richard at 1:45 PM | Comments (1)March 8, 2007
U.S. Treasury Secretary Speaks on Chinese Financial System
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.
I want to take the time today to lay out why I believe increasing the pace of reform in your financial services markets is in the best interest of China's future – to spread prosperity to all the people of your nation, to promote greater stability here and abroad, and to demonstrate leadership in accordance with your global economic presence.
I. Overarching Importance of Financial Markets
I am a strong believer in the power of financial markets to support growth and development, and help a society fulfill its aspirations and needs. Through more than 30 years of work in the global financial sector – including many visits to China – I have witnessed the extraordinary global growth in financial services. And I have seen how deep, liquid, and efficient capital markets pave the way for prosperity, opportunity, and economic dynamism, while minimizing and diversifying risks.
Many years of hands-on experience working in my own country and in nations and markets around the world has convinced me that open, competitive, world-class financial markets are the backbone of stable and balanced growth.
Efficient and competitive financial sectors help allocate scarce resources to their most productive uses and generate significant multiplier effects for economic growth. Markets connect money with ideas and ambition – which are the lifeblood of innovation and dynamism. They offer a diverse array of financing channels, providing for more innovation and a lower cost of finance. They allow new financial products to enter the markets and help people, young and old, acquire consumer goods and make the investments they need to meet their financial goals, provide retirement security, and insure their families against risk. Deep and liquid capital markets also increase stability and reduce volatility.
The building blocks for strong capital markets buttress the broader development of a prosperous economy. Strong capital markets require strong property rights; a robust supervisory regime with clear, transparent rules which strike the appropriate balance to ensure market integrity while promoting the entrepreneurial spirit and innovation; sound accounting standards; strong corporate governance; strong financial institutions; objective, independent financial information, analysis, and research; a meaningful disclosure regime; and independent credit rating agencies – each of which strengthens development in other sectors of the economy.
Efficient financial sectors are, in a sense, the central nervous system of modern economies, making countless decisions all the time to keep the body in good working order.
II. Role of Capital Markets for China
Well-developed financial markets are a necessary precondition for China's development as well – moving this nation toward its goals of more balanced, harmonious, innovation-based, and environmentally sustainable growth. Efficient, developed capital markets will allocate resources more effectively and efficiently, allowing China to continue growing at a healthy pace, while spreading prosperity throughout the economy and giving Chinese citizens a better return on their savings and investments.
China's growth is increasingly imbalanced – among regions, households, and sectors. These imbalances in economic structure and income inequalities differentiate China's current development challenges from those of past decades. Today, China's economy depends heavily on low-cost manufacturing goods, mainly for export. This has produced tremendous growth. But over-reliance on a single part of your economy has the potential to cause problems in the future. Your long-term economic strength requires a diverse economy, with high-value-added manufacturing and world-class services, including financial services.
China's most recent five-year plan acknowledges the need to achieve better balance in the economy, by increasing the role of the services sector, increasing the quality of inputs – not just their quantity – and developing a more innovative and technologically sophisticated economy. With a population aging as rapidly as that of any advanced economy, the five-year plan also recognizes the need to provide health care and retirement security for China's population. The Chinese people seek continued growth, with more innovation and harmony, so that the benefits of growth reach out from the cities into the country, from the coasts into the heartland, and to all the Chinese people.
Financial sector development is the key to China's transition into an economy that is less reliant on industrial activity, produces more high value-added products, and reduces the intensity of natural resources consumption. Your leaders recognize the power of financial markets to speed your transition to harmonious growth. Speaking at the National Financial Working Group meeting in January, Premier Wen said: "We must push financial reform and development into a new phase, and promote the complete development of a sustainable, healthy, and secure finance industry."
With an underdeveloped financial sector, investment in China doesn't reach its potential in generating returns, personal saving is not adequately rewarded, and risk is not appropriately priced, managed, and diversified.
Inefficient allocation of investment means fewer jobs are created for any given level of investment, inefficient companies fail to reform, new companies with higher-value added production are stifled, and growth remains less balanced.
Inadequate reward to savings hurts the Chinese people. While China's people work every bit as hard – if not harder – than people in other economies, they are not yet as well off. Today, Chinese citizens have $2 trillion – or 16 trillion RMB at today's exchange rate – deposited in banks, earning on average a 2.5 percent return. After inflation and taxes, the real return on bank deposits is probably negative. People in many other parts of the world have more choices of where and how to save, and routinely earn a much better return – often in the high single digits even in economies that are not growing nearly as fast as China.
If China's financial sector were developed and offered a variety of savings and investment securities and vehicles, the potential rate of return on a well-managed pension portfolio of financial assets in a rapidly growing economy like China's could be much higher, even if China's growth rate moderates over time Let us assume for illustrative purposes that rather than earning 2.5 percent, Chinese savers were to earn 8 percent over 30 years. The difference in the return on this 16 trillion RMB in savings would be truly significant due to the power of compounding. Instead of having 34 trillion RMB ($4 trillion) at the end of 30 years, Chinese households would have 160 trillion RMB ($20 trillion), which amounts to an estimated 124,000 RMB ($16,000) per capita. This is money that can be dedicated to meeting the Chinese people's needs, funding education and health care and securing retirement.
III. China's Reform of its Financial Markets
You have recognized that a deeper, more sophisticated, and more competitive financial sector will help you to achieve your aspirations of harmonious growth. And already you have made significant strides. I have seen your progress on a first-hand basis. China's banking, securities, and insurance sectors have all made substantial progress over the last 10 years.
Banking
You have recapitalized four of your top five state-owned banks and, even more importantly, invited in strategic investors and completed IPOs, which bring with them the added discipline of enhanced corporate governance, external audits, and new public shareholders. As someone who in my former job participated in and hopefully positively contributed to this process, I was highly impressed by the speed with which you move to execute a plan once your leaders have made a decision. The IPOs of your banks, like some of your earlier IPOs of state owned enterprises in other industries, were executed much more quickly than I have witnessed in any other country.
Corporate governance of large banks has improved considerably, with more qualified senior management and – in many cases – foreign directors. Non-performing loans are being reduced. And WTO commitments mean that foreign banks can now open 100 percent-owned subsidiaries without geographical restrictions.
Of particular note is the separation of responsibilities for monetary policy and financial stability, on the one hand, and the regulation and supervision of banks on the other. Regulatory transparency is also improving. Last fall, CBRC consulted extensively with foreign companies, the U.S. Treasury, and other regulators before issuing final regulations on the operations of foreign banks.
Securities Markets
China has also made significant improvements in its securities markets, including new accounting standards that were adopted at the beginning of this year. The proportion of non-tradable shares of listed companies has been reduced. The IPO market was reopened in mid-2006 to allow domestic investors to participate in the landmark bank share sales, as well as a number of others. Financially weak securities companies are being merged with stronger ones. Foreign participation in the equities market has increased, while Chinese investors have been given the right to invest in overseas stock and bond markets through approved funds. The People's Bank of China has created a vibrant short-term bond market. And the number of mutual funds and asset management firms has increased significantly, including through joint ventures with foreign companies.
Insurance
The quality of China's insurance companies is also improving, as foreign and domestic institutions expand into new regions and offer new products to better serve Chinese individuals and companies seeking to manage their risks.
The Benefits of Continued Reform
This nation is clearly on the right track, and further reforms lie ahead. As you develop deeper, more liquid, broad-based, and transparent markets with greater participation of sophisticated institutional investors – markets which are more representative and reflective of your strong underlying economic fundamentals – you will benefit from less volatility, better dispersion of risk, and greater stability. To achieve your goals of balanced and harmonious growth, there is much still to do in the development of open, competitive capital markets. And the experiences of nations around the world offer helpful advice in charting your own course.
IV. Structural Challenges Facing China
China's financial markets face four important structural challenges:
* Your capital markets remain underdeveloped;
* For all practical purposes, China has no institutional market;
* The banking system is also underdeveloped;
* And China lacks a predictable, transparent regulatory structure that fosters innovation.
Addressing these challenges is vital to China's long-term economic growth.
Capital Markets
As I said earlier, strong capital markets require strong property rights; robust supervision; sound accounting standards and corporate governance; strong financial institutions; objective financial analysis; a meaningful disclosure regime; and independent credit rating agencies.
The extent to which China's capital markets still need to develop becomes clear in comparison with other countries. A McKinsey study found that in 2005, equity market capitalization, excluding non-tradable, state-owned shares, was 17 percent of GDP. This is the smallest market cap ratio in emerging Asia, where the ratio averages 70 percent. Corporate bond issues by non-financial companies amounted to between 2 and 3 percent of GDP, compared with a typical 50 percent in other emerging Asian markets. Access to your markets is limited, restricting potential buyers, and bid-offer spreads are wide, indicating a lack of competition and liquidity. China's capital markets lack a diversity of products. And the quality of market participants varies widely.
Moreover, the Chinese private sector currently produces over half of the country's GDP and in some regions 75 percent of new jobs, yet state owned enterprises get three-quarters of the bank financing and account for most of the corporate issuances in the stock and bond markets. Few of your best companies are issuing securities in China. And for the most part, state-owned enterprises, with rising profits, don't pay dividends. As a result, most corporate investment is financed through retained earnings or the informal sector. This leads to less efficient investment because there is not a rigorous arms-length vetting process of a project's viability, and it leads to a more volatile investment cycle as companies tend to over-invest during good times when they are flush with cash.
To develop stronger capital markets, China needs a larger and more accessible government bond market, a more liquid and transparent corporate bond market, and a legal construct in which private equity can flourish.
Experience around the world shows that government bond markets are the first part of the bond market to develop. China's government bond market offers a very narrow range of products with only limited secondary market trading. By establishing a deeper government bond market with open access and competition, as well as more issues throughout the maturity structure, China can create a longer, more representative yield curve. And this will facilitate development of the corporate bond market by providing a reliable benchmark for pricing.
In addition to the difficulties caused by the immature government bond market, China's corporate bond market is underdeveloped in large part because of excessive regulation. Trading is segmented between an over-the-counter market and the listed bonds that trade on stock exchanges. These barriers should be removed.
China would also benefit by moving to a "disclosure-based" system in which regulators focus on ensuring that listed corporations provide the market with adequate information and investors decide who should get financing and on what terms. In this regard, we applaud recent announcements from the National Financial Working Conference that bond market development will be a high priority. A "disclosure-based" system also relies on good credit rating agencies, which need to be independent from the government and evaluate risk in an objective and systematic fashion.
Eliminating interest rate controls and requirements that long-term bonds receive guarantees from state-owned banks will facilitate the proper pricing of risk.
And a legal construct that allows for limited liability companies will help cultivate private equity and venture capital. Private equity and venture capital investors will channel resources to start-up companies, including those in the high-tech area, who might not yet be ready for market listing or for whom bank loans may be too expensive. This will move China toward its goal of becoming an innovative and knowledge-based economy. As President Hu said in January of last year, "The basic role of the market will be given a full play in the allocation of scientific and technological resources." Private equity and venture capital have a demonstrated record of directing resources to new, promising technologies.
Institutional Market and Asset Management
The cornerstone of developed capital markets throughout the world is the institutional market, and the mutual fund and asset managers who populate it. Institutional investors are the most rigorous in their analysis, and innovative in developing new securities and investment strategies. Yet China's markets lack these important elements.
Without a meaningful institutional investor base, the market relies too much on retail investors. The result can be a more speculative environment and a more volatile equity market. Private pension funds, mutual funds, and insurance companies are critical in providing long-term finance and improving corporate governance. A broader base of institutional investors and asset managers will lead to a wider array of market strategies, reducing volatility and the risk of "herd mentalities".
The development of a broad-based institutional investing market is being inhibited by a number of policies, including the fact that some important institutional investors, such as insurance companies, are highly restricted in the types of investments they can own. Big investors, such as insurance companies and pension plans, with large pools of capital, should drive the development of an institutional market when an appropriate tax and regulatory regime is in place.
Permitting professionals to enter the asset management business would strengthen the fiduciary role, protect investors, and develop trust in the industry. A switch to risk-based capitalization requirements in the asset management industry from a fixed minimum capital requirement would also be beneficial.
Banking
China's third challenge is a banking system which, while making progress, is still transitioning to a modern, efficient, market-driven system with proper controls, management, and professional staff. Some risk-averse credit officers may still believe it is safer to lend to state-owned enterprises backed by what they see as implicit government guarantees, rather than to dynamic small, medium-sized, and private businesses. In addition, corporate control of a massive and geographically dispersed branch network remains a challenge, and branch lending decisions are still often influenced by local pressures. And the lack of consolidated data reporting in Chinese banks means that the true extent of China's non-performing loans is unclear and provisioning is insufficient.
There is widespread recognition of what needs to be done to reform China's banking sector – better risk management; a more developed and accessible credit bureau; more consumer finance products; greater scope to set interest rates to reward depositors and price risk; consolidated supervision and reporting; greater competition, including of electronic payment systems; and opportunities for new banks to expand branch networks far more quickly. The insurance sector would also benefit from greater opportunities to expand branches in China.
Regulatory Regime
The final challenge China faces is a regulatory regime that may be inhibiting innovation and development of a modern financial market. As China transitions from a centrally administered economy to a market-based economy, its regulatory regime must adapt. Today, central authorities continue to be too involved in investment decisions that are more efficiently made by the market. For example, to get approval to issue bonds, no fewer than three government bodies must approve the details of a company's fundraising and investment plan – a construct unlikely to ensure that funds are directed to their most efficient use. The result is that it can take more than a year to issue a bond in China, compared to one or two months in Pakistan or the Philippines and less than a month in other Southeast Asian countries. Markets would better channel funds to the most dynamic sectors and businesses in the economy. The appropriate role for government is to set the rules for the market as a whole and enforce them – rather than to make individual investment decisions.
Government has a responsibility to set corporate governance rules and enforce them. But today, these rules are unclear and adherence to them is weak. In addition, Chinese accounting standards – although moving toward international standards – are in continuous flux, creating more uncertainty and weakening financial disclosure.
The continued large role of non-market factors that influence both state-owned enterprises and private enterprises – including financial services companies – stifles the dynamism of economic decision-making and the strength of regulatory integrity. Increasing the pace of privatization of state-owned enterprises would be beneficial. And state-owned enterprises should pay meaningful dividends if the cost of capital is to become a more meaningful concept in the Chinese economy.
It is clearly the government's responsibility to maintain a macroeconomic environment that supports harmonious growth. Right now, the combination of a rigid RMB exchange rate regime and large external surpluses means that there is a flood of liquidity into the banking system. The authorities mop up as much liquidity as possible. Twelve percent of assets in the big four banks are now sterilization bonds. Sterilized intervention hurts banks' income through higher reserve requirements or by forcing banks to buy PBOC bonds at low rates, which barely cover the banks' cost of funds.
Liquidity which cannot be absorbed is available to the banks for lending, running the risk of excess lending and future non-performing loans. Administrative controls to clamp down on lending are less effective in the larger, more market-oriented and globally integrated economy China has become. A more effective monetary policy – one less absorbed by managing the exchange rate – could assist efforts to reform the banking system, making it more market driven as well as help assure more stable growth.
V. Fostering Openness to Competition
China can make progress toward financial sector reform simply by making these domestic changes. But allowing much more foreign participation in China's financial markets would speed reform, as well as the stability and prosperity it will bring. I don't know of a single country in the world with a successful and sustainable well-balanced economy that doesn't have a strong capital market in place. And I cannot think of any such country that isn't open to competition – both domestically and from abroad.
In his National Financial Working Group speech, Premier Wen established a goal of – quote – "Opening up the financial sector wider to foreign financial help, and introducing advanced foreign management experience, technology, and personnel to accelerate the pace of innovation in China's financial system to improve efficiency and competitiveness."
Opening your capital markets to global competition and participation would bring many benefits: World-class financial institutions can introduce new technology and products to China, enhance training and the transfer of skills, improve market practices and infrastructure, and enhance financial stability.
Allowing Chinese banks to sell controlling stakes to foreign investors – currently capped at 25 percent – can promote China's efforts to strengthen risk management and internal controls in small and medium sized banks. Chinese banks would benefit from stronger credit analysis skills that enhance their ability to make sound loan decisions. And the banking sector as a whole would become more competitive as the capital markets develop and alternate sources of financing become available.
Opening to international competition does not mean compromising your own rules or identity. If China opens its markets to foreign participants, those participants will be subject to Chinese regulation and supervision. While undoubtedly international companies will have some foreign managers, the bulk of the people employed in China's financial services industry will be Chinese and the benefits generated will largely stay in China. Consider the large foreign investment banks in Japan, which are overwhelmingly comprised of and managed by Japanese professionals. As a matter of fact, they are almost as Japanese as some of the historically Japanese institutions. The wealth that is generated in Japan stays in Japan.
Foreign headquartered financial enterprises operating in China would provide tremendous resources for domestic skill development, and for training those who will become the leaders of China's financial industry, as well as future Chinese entrepreneurs.
China currently maintains tight caps on foreign participation in its capital market. Foreign securities companies can only own up to 33 percent of a joint venture and foreign asset management firms up to 49 percent of a joint venture. These limitations are among the most restrictive in large emerging markets.
Experience demonstrates that the joint venture model doesn't work in the securities sector, because investment banks are difficult to manage and control. The model of minority foreign stakes has not produced world-class investment banking institutions. China would benefit by eliminating its ownership caps in the securities industry, as have almost all major developing countries, including Brazil, India, and Russia. This might not happen overnight, but the sooner the better.
To understand why this is true, let me briefly discuss an area I know something about – managing an investment bank. An important role of an investment bank is to serve as an intermediary between users and providers of capital. To do this well, these institutions must combine advisory, sales, risk management, market-making, and investing skills. Premier world-class institutions must combine the full range of these functions globally with capabilities in various domestic markets delivered by locals staffs trained and executing to international standards.
This business model is difficult to execute and it comes down to people – hiring and training the right people, and instilling in them proper values. Much of the training needs to be done on the job in both the commercial and the control side of the business. The management and control of these enterprises is very difficult even when there is 100 percent ownership by organizations with strong cultures and long institutional memory.
China also maintains tight controls over how much funding foreign companies can bring into the "A" share market through the Qualified Foreign Institutional Investor scheme. Despite the sharp rise in stock market capitalization and foreign exchange reserves, the quotas for QFIIs have barely budged. This slows development of the equities market, giving foreign investors access to less than two percent of the market capitalization of local exchanges, which deprives Chinese markets of buyers and expertise. Increasing QFII quotas will speed China's financial market development. Foreign securities companies are leaders in derivatives, yet only banks are allowed to trade them in China. Since all markets have periods of volatility, well-developed, sophisticated financial markets give investors the tools to manage volatility through a variety of financial instruments and techniques, including futures, and the ability to offset positions by borrowing and selling securities. The availability of these instruments also increases market liquidity and reduces volatility.
The Qualified Domestic Institutional Investor scheme is a good start in allowing Chinese institutions to invest overseas. Granting more QDII licenses to asset management firms to invest in overseas equities would open up new avenues for Chinese investors to diversify their financial assets and earn higher risk-adjusted returns.
Most nations recognize that large, well-managed securities and asset management firms which bring with them international best practices are critical to strong domestic capital markets. Nations that want robust, sustainable, harmonious growth do not impose caps. China is a large and powerful country, and you should not limit your own potential by restricting your access to world-class financial expertise that can enhance your capital markets.
VI. Conclusion
Time is of the essence. China's underdeveloped financial markets place the nation in a challenging position, trying to balance between a centrally administered and a market-driven economy. One lesson I have learned over the years is that although perhaps not as easy politically, it is better to implement reforms during periods of economic strength. The risks for China are greater in moving too slowly than in moving too quickly toward transparent, liquid, stable capital markets. The longer China waits, the more difficult it will be to create robust capital markets and reach your goal of more balanced, harmonious, and innovation-based growth. Some industries that may seek protection from competition will grow more politically powerful as they grow more economically powerful. That will make it more difficult to withdraw protection, to the detriment of a nation and its citizens who are deprived of world-class performance.
It's been said that everyone is in favor of competition, unless it is competition for themselves. Historically speaking, existing financial services companies tend to oppose liberalization and reform that brings new competition, even if it brings new opportunities and produces benefits for society overall. This has certainly been true of major financial sector reform in the United States and the United Kingdom, where market participants have almost always resisted change which increased competition in their sectors – change which ultimately proved to be beneficial to society as a whole and to the financial sector, which continued to grow and flourish with greater competition, efficiencies, and increases in employment.
To be sure, financial markets need to strike the right balance between supervision and regulation, and dynamism and efficiency. This is not an easy challenge to master. Yet the reality of the situation is that an open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention.
Rebalancing your economy and welcoming international competition in the financial services sector is a win-win proposition. China and its major trading partners will benefit from increased prosperity that will strengthen other parts of your economy.
China's emergence as a global economic leader presents an important responsibility. All world leaders, including China and the United States, must maintain a transparent system of regulation and rule of law that gives international and domestic investors confidence in our markets.
I look forward to continued cooperation with Chinese leaders, particularly in the context of our Strategic Economic Dialogue, which is an important forum for discussing and managing our economic relationship. We received a very warm welcome in Beijing in December for our inaugural discussions, and I look forward to welcoming Madame Wu Yi and the Chinese delegation to Washington in May.
China has come a long way in developing its capital markets, but the journey is not complete. At the end of this road lie benefits for all the Chinese people. With visionary leadership and steady progress, these benefits are within reach. We wish you continued success as you work to attain them. Thank you very much.
Posted by Richard at 1:30 PM | Comments (0)March 5, 2007
More on the Chinese Stock Sell-off. Is This a Who Dunnit?
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?
Posted by Richard at 12:19 PM | Comments (0)February 27, 2007
China Stock Market Drops 9%
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!Posted by Richard at 2:14 PM | Comments (1)
February 13, 2007
U.S. Treasury's New Point Guard for Economic Talks with China
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.
Posted by Richard at 1:12 PM | Comments (2)February 6, 2007
Pan Shi-yi Invokes Deng Xiao-ping in Criticism of Land Ownership Controls
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.]
Posted by Richard at 2:16 PM | Comments (0)January 22, 2007
China, Corporate Bonds and Weakness in the Financial System
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.Posted by Richard at 12:59 PM | Comments (0)
January 19, 2007
Shangai Bribery Case May Entangle Western Corporations
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.
Posted by Richard at 7:48 PM | Comments (0)January 3, 2007
Audio: Who's Not Making Money in China?
So who's making money in China? You'd be surprised to hear who isn't...
January 2, 2007
Who's Not Making Money in China?
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.
Posted by Richard at 1:31 PM | Comments (1)December 30, 2006
Taiwan Gives Go-Ahead to 0.18 Micron Chip Investment in China
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.]
Posted by Richard at 1:36 PM | Comments (0)December 29, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part 3)
[Editor's Note: This is the final installment of our series on money laundering in China. Read Part 1 here. Part 2 here.]
“Wipe Clean” and “Wring Dry”
“Wiping clean” follows soaking -- allowing dirty money to distance itself from its unlawful origin. After the dirty money has entered the banking system, [they move it in and out of] accounts in as many different locations as possible or holding companies [they] establish, creating a complex web of financial transactions that render helpless any auditor and moving the dirty money farther and farther away from the criminal boss [of the original enterprise].
When Huang Guang-rui would set up a false account, the deposit usually came in and went out on the same day or the following. Huang Xi-tian and the others would split up and deposit money in the accounts set up by Huang Guang-rui. Huang Guang-rui would then move it on the same day or the following into the accounts of Gao Zhan-kun, Wang Li-Mei and others, leaving a small balance in the [transmitting] account.
Thereafter, the money would be transferred to Huang Guang-rui’s Hong Kong Xinxing International Trade Company and YongXing International Trade Company accounts. Once wrung dry, the dirty money had been washed clean, becoming money Huang Xi-tian could make use of without worry,
An important middle man, called “A-Nan,” who exchanged RMB for Hong Kong dollars and has not yet been made part of this case, moved Huang Guang-rui’s RMB across the border, completing the important step of wringing the money dry.
Actually, before the end of 2000, Huang Guang-rui didn’t know who A-Nan was. Later, he was introduced to A-Nan, who, through his gang, made money off of the forex spread across the border. But in the beginning, when the amount of RMB was small, A-Nan was never directly in touch with Huang Guang-rui.
The turning point came after 2002. The amount of smuggled money that was wired had become rather large, so Huang Guang-rui began direct contact with A-Nan so that [RMB could be] exchanged into Hong Kong dollars.
Between them, Huang Guang-rui and A-Nan established a fixed fee schedule. Huang Xi-tian and Huang Chu-dong called Huang Guang-rui to ask the daily rate (not the official rate, higher than the bank’s officially announced rate, and based on the supply of Hong Kong dollars at the time of the transaction), and paid Huang Guang-rui in RMB based on the rate Huang Guang-rui had provided. Huang Guang-rui would pay A-Nan based on the rate provided by A-Nan, making money off the forex spread.
Changed into Hong Kong dollars, A-Nan would then transfer, via underground money-lending networks, to the Hong Kong Xinxing International Trade Company and YongXing International Trade Company accounts.
Judiciary organs have said that, since A-Nan has not been made part of this case, the exact methods of those who use underground money-lending networks to move money across border remain a mystery. Moreover, the details of the transacations between Huang Guang-rui and A-Nan are impossible to prove, as there is so little evidence.
Huang Guang-rui said that he only wished to give RMB to A-Nan. He guessed that A-Nan, in order to exchange currencies, may have had a relationship with a joint venture factory, to which A-Nan would have provided RMB in cash, in return for the joint venture (or foreign invested factory) would have placed the equivalent in Hong Kong dollars into the Hong Kong accounts.
In addition, Huang Guang-rui disclosed the activities of several other underground money lending networks – which directly exchanged RMB for Hong Kong dollars in cash and then moved it out into Hong Kong accounts. Chinese who gambled and won Hong Kong dollars on horse racing or the lottery in Hong Kong would give over their cash to A-Nan, who would then pay RMB to them in China. Outside of China, criminal elements who received smuggled goods would take Hong Kong dollars and within China pay RMB at a certain rate to people of a similar ilk.
Just like Huang Xi-tian and the others who profited from laundered, smuggled cash, there was still the originator of the smuggling – a Vietnamese trader name Zhang Ze-chun
For ease of moving money from one account to another, Huang Guang-rui and Zhang Ze-chun settled accounts via cellphone messaging that would send money from the Hong Kong accounts to Huang Xi-tian, and then to Huang Guang-rui. Block amounts of 500,000 or 1 million Hong Kong dollars were moved into Zhang’s Hong Kong accounts. The money arrived the same day. Zhang only shipped product once he had the money in hand.
By means of this cycle, the laundered cash entered the “wringing dry” stage, or perhaps one might say it had reached the “return of capital” stage. Just like legal capital, the laundered money was moved out to other destinations.
Well over 100 million RMB, dirty money earned through the smuggling efforts of Huang Xi-tian and 15 of his brothers and sisters, had been washed clean.
December 20, 2006
Audio: Renminbi Redux - Have They Begun to Circle the Wagons
More renminbi revaluation silliness from Washington... Click the little triangle to listen to today's post.
Renminbi Redux: Have They Begun to Circle the Wagons?
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.
Posted by Richard at 1:19 PM | Comments (0)December 18, 2006
Chinese Restrictions on Investment
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.
Posted by Richard at 1:34 PM | Comments (0)December 15, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part 2)
[Editor's note: Read Part 1 here.]
“Soaking”
This isn’t something everyone can do – laundering money requires contact with financial institutions so that cash can move up to the surface from underground, becoming legal income – it requires a series of complex techniques. The players in this industry have specialized knowledge and skills: lawyers, accountants, auditors, financial consultants and others.
Born in 1972, Huang Guang-rui was nonetheless considered a skilled mouthpiece. From 1990 to 1993, after studying at the Guangdong International School of Finance, he spent the next five years working in a bank branch in Shenzhen. After resigning in 1998, with an inside-out knowledge of the way banks move money, he became a expert money launderer.
His activities fit the classic laundering process – using the analogy of clothes-laundering, the money laundering cycle of “placement, layering and blending” became to them “soaking, wiping clean and wringing dry.
Soaking is the first stage. Placing unlawful revenue into the financial system, into ordinary channels of distribution, is the first step. Important methods include the use of bank current accounts, postal money orders, travelers checks and other commonly circulated instruments.
Under ordinary circumstances, a very large bank deposit will attract the attention of regulators. Huang Guang-rui didn’t have much he could do about this. He used the most common technique – he opened tens of accounts in the local branches of two banks under many false names.
These accounts were patently preposterous. A few were opened using the altered IDs of his cousins. As an example, the account name of "Huang Juan-hua" was opened with a copy of photographs taken from an ID of Huang Guang-rui’s wife Huang Hai-xuan and sister-in-law Huang Xiao-yan, but with altered ID names, addresses and other pertinent information, The account name of "Huang Hui-juan" used Huang Hai-xuan’s photograph, but the ID name and number did not match hers.
Kanjiang