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Friday, November 21, 2003

My friend Bill's reply to my earlier posting about the statistical bureau in China:

I do think, however, that the unbelievable degree of false or incomplete
reporting on a number of issue areas by lower level makes most Chinese
aggregate data so unreliable that I will shy away from any quantitative
analysis until this improves dramatically even from where it stands now. That
things have gotten immensely better in terms of both data quality and
availability in recent years is without question. But things do still have a
long long way to go - I think it is potentially a sign of real progress for
the SSB director to admit this.

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Rob Fannion, my former roomate, wanted to goad me into making some comment about Chinese banking, and he succeeded by sending me a FT article about the CBRC:

Okay, you have succeeded in goading me into making a comment about the latest "show" orchestrated by the Chinese government. So, the PBOC and the CBRC have been inviting a stream of foreigners to "advise" them what to do. In fact, there are a zillion research institutes in China perfectly capable of coming up with a million proposals on any given topic. So, the role of the foreigners is basically a tool for bureaucratic players to fight wars with each other. With an advisory board, the CBRC can go to the State Council or other bureaucracy and say "ha, even the foreigners are saying that we should do this." Of course, if the foreigners are not saying anything they like, it won't enter the debate. This has happened time and again before. The CSRC, China's stock regulator, recruited a regulator from Hong Kong to serve as vice chairman in 1999, but she ended up being a total puppet. I am just really skeptical about this whole thing.

The article from FT:

Okay, you have succeeded in goading me into making a comment about the latest "show" orchestrated by the Chinese government. So, the PBOC and the CBRC have been inviting a stream of foreigners to "advise" them what to do. In fact, there are a zillion research institutes in China perfectly capable of coming up with a million proposals on any given topic. So, the role of the foreigners is basically a tool for bureaucratic players to fight wars with each other. With an advisory board, the CBRC can go to the State Council or other bureaucracy and say "ha, even the foreigners are saying that we should do this." Of course, if the foreigners are not saying anything they like, it won't enter the debate. This has happened time and again before. The CSRC, China's stock regulator, recruited a regulator from Hong Kong to serve as vice chairman in 1999, but she ended up being a total puppet. I am just really skeptical about this whole thing.

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So, it's official, the CHinese have formally admitted that they have bad economic data. I added my two cent, and the original article follows:

Yes, I read that article as well, but I have to say that things are improving. They have had to switch from the Soviet accounting system to a Western one, although it took them 20 years to do so. The task is still not completed yet. As for banking data, I think most of the big bank headquarters now report “truthful” figures in that they report what the branch banks report to them. Now, the branch banks are lying through their teeth, and several on the spot inspections have shown wide-spread false reporting. In my up-coming paper ( I will send to you guys once it is polished), my coauthor and I show that false reporting in profitability is especially rampant. I do think that the NBS people are trying to make things better by doing sample surveys.



SCMP
Friday, November 21, 2003
Economic figures were flawed, top official says
ALLEN T. CHENG in Beijing

China's top statistician yesterday acknowledged for the first time that the government's economic estimates were flawed and that its research methods "did not always reflect the real situation".

Li Deshui, director of the National Bureau of Statistics, announced the government would implement a massive overhaul of the research methods used in its census and gross domestic product calculations.

"In the past we did not follow international standards and practices," said Mr Li. "Our research methods did not always reflect the real situation in China."

The reforms include standardising cyclical census studies for the economy from once every few years to every five years to correlate with the government's five-year plans. Each economic census - a wholesale study of the population broken down by economic sectors - will also include measures for the industrial, services, property and construction sectors. Such studies provide the database for GDP estimates.

In the past, the studies did not include all services or the construction and property sectors, instead focusing primarily on industrial growth.

Mr Li also announced that the bureau would begin following standard international practices of readjusting quarterly and annual GDP growth estimates once more complete data sets come in, even after they have been announced. "In our traditional thinking once we announce a growth rate, we thought it was embarrassing to change it," he said. "In other words we never had a systematic way of adjusting our GDP and growth estimates once they were released."

The changes will take effect in January. "So in the future when you journalists see us adjusting past GDP estimates, don't get mad at us. This is more in line with international practices and actually shows we in China are becoming more transparent and accurate with our economic estimates."

Top US economists, including Harvard professor Thomas Rawski, have long argued that China's statistical gathering process needed an overhaul. In a major study released last year, Professor Rawski caused a storm in Beijing when he questioned the authenticity of Chinese statistics.

Mr Li maintained that the reforms did not mean that the nation's past economic measures were "way off the mark".

However, his announcement does bring into question how much China's official growth rates for the past 20 years will change once the new methodology begins next year. Official statistics indicate the nation grew at more than 9 per cent a year since market opening reforms began in 1978, one of the key reasons foreign investors continue to pump billions of dollars into the mainland.

"I can say with confidence that no nation has a 100 per cent perfect statistical gathering system," he said in defence.

"We in China have reformed from a planned economy to that of a market economy and the adjustments take time. We can say with certainty that our past statistics and growth estimates - though not completely accurate - showed a general trend."



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Wednesday, November 19, 2003

A colleague of mine recently asked me this:

Just met with some Party School people and we chatted about Party finance. They said that the salaries of local party secretaries and the CCP school were financed by the MoF and the national budget. I had assumed that the party and the government had separate finances, but it seems not. The membership fee seems to be too small to fund much. Surely the zhengdang fenkai policy should tackle this. Anyone?


And my response was this:

Yes, all the important party/administrative cadres down to the township levels are funded by the "budget." But "within budget" could mean either the local budget or the national budget. I suspect that important cadres at the provincial level are all directly funded by the central budget. From a political cohesion perspective, I think funding cadres with the formal budget is much better than the alternatives, which include rampant corruption and widespread "side businesses." Of course, this is happening already, but I think things could be worse without any central subsidies. Also, although party secretaries are nominally party cadres, they are really important decision-makers administratively. Until that changes, they will be considered "state cadres" and paid accordingly. Cheers,

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Friday, November 07, 2003

Someone on the Chinapol list made an insightful comment on the grain price liberalization issue. He said that as the share of urban resident's income spent on food declines, the shock of price liberalization would decrease. The Chinese government can certainly raise prices slowly and not cause too much political problems.

The problem with this is this: The only point I would like to raise is that price reform is extremely tricky business, especially if it is done gradually. If you liberalize prices slowly, farmers or wholesalers would expect prices to rise further and would prefer to hoard grain rather than release it to the market. So, as we see in some cases in Eastern Europe, supply actually diminished after partial price liberalization. This of course exacerbates inflationary pressure. Has anyone done an estimate of how much grain prices would rise if liberalization took place over-night? I know the SPC is in the anti-hoarding business, but how effective is it? Thank you in advance for addressing these issues.

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My friend Matt Rudolph at Cornell sent me a report from Ma Jun at Deutsche Bank, which stated:

"Probably the PBOC has believed that the decline in money velocity is
now contributing more significantly to money demand

growth, and therefore 20% M2 growth would not seem

as threatening as just a few months ago."

Matt asked me: Do you think he mean diminished velocity reflects dampened money demand and therefore the M2 growth is less threatening?

My reply:
I think what Ma Jun said is reasonable. There is no immediate threat of inflation. This occurred in the mid-80s, whereby strong money growth was accompanied by pretty low inflation for a few years, but a sudden policy shock (price reform in 1988) could trigger heighten inflationary pressure. I suspect part of the reason that the PBOC is playing down the money growth issue is because they are under some political pressure to continue a relatively loose monetary environment. Of course, I would say that, wouldn’t I. I don’t think the PBOC’s stance would change, even if inflation was up to the 4% territory. Money velocity also might have declined because more and more bank loans are going toward long-term fixed asset loans, rather than short-term working capital loan. But the precise effect is yet unknown.

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Wednesday, November 05, 2003

In response to the article below, I wrote this comment:

What is worse is that the central government has decided on another bailout. The PBOC is lobbying for the bailout to be entirely in Ministry of Finance cash injection (in the tune of 800 billion RMB), but the MOF and other agencies are sure to resist such a giant injection of capital. The end result might be a compromise like the one we saw in 1998, namely some MOF injection and some transfer to the AMCs. So, before the AMCs have cleaned up the current batch, they might receive even more NPLs. In a strange way, the AMCs might want another transfer. When I interviewed them in 2001, AMC officials admitted that the good assets will be mostly gone after the first few years. If the AMCs receive another batch of NPLs, they get a fresh injection of good assets (or the 10-15% of it) that they can use to maintain their relatively high recovery ratio thus far.

The article from FT:

China's bad loan disposal worries Moody's
By Francesco Guerrera in Hong Kong
Published: November 5 2003 11:31 | Last Updated: November 5 2003 11:31

China's efforts to clean up the balance sheets of its big four banks have been slow and have failed to eliminate financial risks for the state-owned lenders, Moody's warned on Wednesday.

The credit rating agency said China's four "asset management companies"
(AMCs) have found it difficult to dispose of the Rmb1,400bn ($169bn) of bad loans they took over from the banks in 1999.

A sell-off of the estimated $350bn-750bn of non-perfoming loans (NPLs) made by the big four banks - China Construction Bank, Industrial and Commercial Bank, Agricultural Bank and Bank of China - is crucial to the country's financial stability.

"The performance of the AMCs has been uneven, while an illiquid market and a slow bureaucracy have further hampered the resolution process," Moody's said in a report.

The agency estimates the AMCs have resolved some Rmb300bn of bad loans. With a further Rmb400bn having been converted into equity, the AMCs still have to dispose of half of their NPLs allocation after four years of activity.

Moody's comments come as the Chinese authorities are split over whether to have a direct bail-out of the banks or transfer more of their bad loans to the AMCs.

The agency said further transfers of non-performing assets "need to be conducted with care" as they could stoke up future risks for the banks. According to the report, the interest received by the banks on the bonds issued by the AMCs - Cinda, Huarong, Great Wall and Orient - in return for the NPLs will not bolster their balance sheet. This is because the banks have to keep the interest as a provision against the possibility the AMCs would be unable to repay the bonds when they mature in 2009.

Moody's said it was likely the AMCs would be unable to repay the bond's prin cipal in full, leaving the state-owned banks to foot the bill. "Consequently ... the credit risks - which were first thought to have been isolated from the originating banks - are now creeping back to their starting points," Moody's said.

The disposal of NPLs has been made difficult by the fact that foreign investors have so far been interested in only a small portion of them. In the two most recent transactions, Morgan Stanley bought NPLs worth Rmb10.8bn and a Goldman Sachs-led consortium bought assets with a face value of Rmb1.97bn.

In order to speed up the clearance of the NPLs, Industrial and Commercial Bank of China, advised by Credit Suisse First Boston, is considering issuing a bond backed by Rmb3bn of non-performing assets.

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