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Wednesday, September 29, 2004

So, there was a brief discussion on the renewed pressure for the RMB to revaluate. Someone said that revaluation is unlikely because the effect of the macroeconomic policies recently is still unclear. Someone else made the point that revaluation is deflationary (since it slows the flow of hot money into China), which would be undesirable at the moment due to increasing deflationary pressure in the economy. These are both very good points. I only add a related point:

In addition to the good reasons listed already, I think the new administration's "left" leaning orientation might compelthem to stay on the current course. Despite talk of labor shortage insouthern China, there is still considerable urban unemployment or under-employment problems, as well as problems with rural surplus labor. A sudden revaluation is bound to have some negative consequences on the labor market, which, if we believe in the Hu-Wen rhetorics, would deter the new leadership from revaluating. They would rather have an under-valued currency and let wages rise than the other way around.

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Wednesday, September 22, 2004

A reporter asked me about a possible conflict between CBRC and the PBOC. Below are my observations:

(This week, Zhou Xiaochuan, governor of PBOC attended the restructuring ceremony for the China Construction Bank, but not Liu Mingkang, the head of the China Banking Regulatory Committee) I think Zhou's attendance but not Liu at this week's ceremony should not be read into too much. After all, everyone knew that Liu is slated to leave, and Shang Fulin is currently receiving training at the Central Party School, so Zhou is standing in. However, the earlier events you mentioned, the PBOC announcements on investment funds and on banking restructuring, are significant.

When the CBRC was formed, although the general division of labor was known, there was considerable grey area. For example, who would be in charge of restructuring the Big Four banks? Is this an issue of monetary policy or an issue of financial regulation? Over time, the PBOC has skillfully expanded their jurisdiction over this grey area such that its mission now includes all monetary policy, as well as other policies vital to the financial stability of China. Meanwhile, the CBRC's mission is increasingly confined to monitoring financial institutions to make sure they comply with existing financial regulations and laws. So, over time, PBOC has staked the role of a policy innovator, while CBRC took on the role of a policy enforcer. The memorandum of understanding reached between the CBRC, CSRC, and CIRC supports this point (this is on the CBRC website). Although the PBOC was not party to this memorandum, this document gave CBRC the mission "to make regulations and methods pertaining to the monitoring of financial institutions." Just monitoring regulations, not general financial regulations. I think Zhou Xiaochuan's greater political clout and connections in the capital certainly has much to do with this.

On the April crackdown, there might be elements of elite politics playing into this. Essentially, though a technocrat, Zhou has much better ties with the Jiang faction than Liu, who, along with CBRC party secretary Yan Haiwang, has much closer ties with Wen. Throughout much of last fall and this spring, Zhou toed a softer line on monetary policy than Wen did. Wen was perhaps frustrated with Zhou's soft stance and thus ordered the CBRC, which he could rely on, to carry out the crackdown.

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Monday, September 20, 2004

Okay, just a quick vent, but what is the CBRC thinking!?! The CBRC will begin collecting "monitoring fees" from all financial institutions in China, and it will be regressivly applied (bigger banks pay less than smaller banks). First of all, this flies in the face of the MOF's recent attempt to consolidate extrabudgetary fees into the national budget. The 5 billion they expect to collect is no small change, and I doubt that the CBRC on its own needs that much money. The regressive structure (see below) obviously benefits the Big Four banks, but as the article suggests, the last thing these banks need is to pay another fee to the CBRC. This money should be used to writeoff bad debt! not to pay more to the bloated bureaucracy. Sigh.....


Monday, September 20, 2004REGULATIONCBRC expects 5b yuan in new fees
BEI HU
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China's banking regulator expects to collect five billion yuan from mainland lenders this year as it imposes a new fee from today to cover its costs.
The China Banking Regulatory Commission (CBRC) yesterday said it was following international practice and bringing its financing in line with those of domestic securities and insurance industry watchdogs.

Critics have said regulation fees, the first to be imposed on mainland banks, will erode lenders' earnings at a time when some are trying to bolster their images and clean up their books for listings.
They argue the fees will also diminish banks' ability to reduce their non-performing loan portfolios, as many of them have been using the bulk of their earnings to write off bad debt incurred from decades of irrational lending to state firms.
The CBRC regulation fees will consist of institution regulation fees and business regulation fees.
Both are applicable to the full range of financial institutions under CBRC supervision, including commercial banks, policy banks, credit co-operatives, trust and investment companies, finance companies, financial lease companies, postal savings organisations and financial asset management firms.
The institution regulation fee takes the form of a flat 0.08 per cent annual charge on financial institutions' paid-up capital, or the working capital of foreign bank branches in China, the CBRC said.
The business regulation fees are levied regressively on banks' total assets, ranging from a rate of 0.02 per cent on the first three trillion yuan of assets to 0.01 per cent on assets between four and five trillion yuan. Assets exceeding five trillion yuan will be exempted.
The first instalment of the fees will be due within the one-month period that starts today.
Aside from CBRC's overseas counterparts in countries such as the United States, Britain, Germany and South Korea, the China Securities Regulatory Commission and China Insurance Regulatory Commission have adopted the regulatory fee schemes in recent years.
"The fees highlight the importance of regulatory costs and efficiency to both the regulator and the financial institutions under its supervision," CBRC said. "It will reduce interdepartmental policy discrepancies."

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A reporter asked me what impact Jiang's resignation will have on China's macroeconomic policies. Below are my responses:

On whether Jiang's departure will have an impact on macroeconomic policy. In the short-run, it probably won't have much of an impact. The soft-landing is proceeding as planned, and I don't think anyone wants to upset that. There will perhaps be less pressure to lower interest rate and increase money supply.

In the medium run, a lot depends on whether Huang Ju, a Jiang follower, will continue to have control over the financial portfolio. It is pretty clear that the recent promotion of Huang Qifan to the CSRC is orchestrated by Huang Ju, since Huang Qifan was a key economic official under Huang Ju. Huang's continual role in the financial sector will bring policy advantages to the Jiangnan region. If Huang Ju is given a less power portfolio in the future, I think financial policies will be more regionally balanced, which is what Hu and Wen prefer.

Looking past the 17th Party Congress, if Hu is able to consolidate power without too much intervention by the Jiang hold-overs, I forsee a gradual split between Hu and Wen. According to the logic of my dissertation, Hu will acquire more and more followers in the provinces, while Wen will consolidate his control in the State Council. If that were the case, Hu will over time prefer a more decentralized mode of economic control, in conflict with Wen's tendency to centralize. But of course, this part is highly speculative.

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Sunday, September 19, 2004

Okay, the guessing is finally over. Old Jiang officially resigned. However, if I were Hu, I wouldn't relax just yet (I suspect he ain't relaxing either). The CMC gained four new members, the commanders of the Jinan military region, the PLA Navy, the PLA airforce, and the PLA Second Artillery (nuclear force) respectively. I don't know about Chen Bingde (commander of the Jinan MR facing Taiwan), but the promotion of the other three was planned by Jiang from before his retirement. The Wenhuibao, a newspaper run by the CCP in Hong Kong, had predicted the promotion of Qiao Qingchen, Zhang Dingfa, and Qing Zhiyuan (airforce, navy, 2nd arty) to the CMC in May this year. While this no doubt has to do with the modernization of the PLA command structure--to give the lesser branches more independence vis-a-vis the army--, Jiang was also able to gain a super-majority in the CMC through the placement of these three. But, since the CMC is now pretty full, Zeng is unlikely to gain an entrance into the CMC, although there is a chance that he will gain an entrance in a year or two.

On the Central Committee side, Tian Fengshan got axed for corruption. Well, it's a bit hard to resist when you are the minister of Land and Resources in the midst of a real-estate boom. I wouldn't touch that job with a ten-foot pool. As for the new CC members, the election of Aisihaiti Kelimubai, the vice secretary of Xinjiang, is no surprised, especially when the secretary of Xinjiang Wang Lequan is now a Politburo member. But, I have no idea how Wang Zhengwei, vice secretary of Ningxia, got promoted to the CC. Since Hu and Wen both came out of Gansu, there doesn't seem to be too much connection between Wang and the new leadership. I suspect Wang is promoted with the help of Jiang's people.

All in all, I think Hu got out of this one a slight winner, although Jiang bargained for his pound of flesh. In the long-run, I think the exclusion of Zeng Qinghong from the CMC will allow the Hu faction to consolidate power. According to the principle of the military obeying the party, Hu can over time replace Jiang cronies from the CMC, but Zeng would have been more difficult to remove. Why did Jiang let go without insisting on Zeng joining the CMC? Part of it is that his threat to not resign was increasingly losing credibility as internal criticism of him increased. It would have been hard for Jiang to stay on when even Deng himself resigned from the CMC two years after resigning from the Politburo.

However, Hu and Wen applied the pressure until the very end. Earlier this month, the China Youth Daily, a branch of the Communist Youth League, published an article about Wanyuan City in Sichuan hiring Song Zuying, reputedly Jiang's mistress, to perform there for 400,000 yuan, around 1% of the city's annual budget. Coincidence? I think not. First of all, Song Zuying has been performing all over the country and earning the blood and sweat of poor Chinese farmers for years. Local party secretaries doubtless tried to curry her favor in hopes of getting Jiang's attention and thus a quick promotion. Sure, it was wasteful to have a cultural activity wasting so much money, but this happens all the time. If it's not a concert, then it's a stadium or a square. Also, why pick on Song Zuying, if not for the fact that everyone knows her to be Jiang's mistress. And of course, the timing is impeccable. Hu got the Chinese people and senior party members all riled up about Jiang, totally delegitimizing him before the 4th plenum. Jiang knew he had to retire one way or another, and Hu and Wen apparently played pretty hardball with him, since Zeng is not in the CMC. This fight, however , is far from over.

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Thursday, September 16, 2004

So, someone emailed to ask whether I thought Liu Mingkang or Shang Fulin made a better head of the Central Banking Regulatory Commission (CBRC). In my previous posting, I suggested that Shang is better off as head of CBRC. I did not say that Shang would be a better head of CBRC than Liu was(is). In fact, that is certainly not the case, at least not from a western market-oriented perspective. In internal minutes of the PBOC monetary policy committee from 1997 to 1999, Liu consistently championed more prudent lending practices and conservative monetary policy, while Shang favored policy compromise with the other agencies. At that time, both men served as vice-governors of the PBOC and served on the PBOC monetary policy committee, which discussed monetary and banking policy. Shang was more apt to "take the overall situation into account," i.e. order state banks to lend in support of Zhu Rongji's growth targets. I think this gave Shang a lot of staying power, since he is considered a cooperative official in the State Council.

If his past record is any indication--and I believe it is--, we canexpect another cooperative stint at the CBRC. Shang will still push very hard for the BOC, CCB ipo's since they are now the showcase events forthe government. However, we will likely see more policy coordination between CBRC and the SDRC and perhaps the MOF to accomplish policy objectives set out by the Premier and Huang Ju. If these objectives conflict with banking regulation, he is more likely than Liu to sacrifice independent banking.

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I am totally speechless about the impending personnel change in the Chinese financial sector. According to the South China Morning Post, Shang Fulin will step down from the CSRC and move to the CBRC. Liu Mingkang will step down from CBRC and become the governor of Fujian. Finally, deputy mayor of Chongqing and former Shanghai official Huang Qifan will take Shang's place. I can see Huang Ju's hand behind all of this, since Huang Qifan was a key official during his tenure as Shanghai party secretary. Huang Ju is of course in charge of the financial portfolio. Truth be told, Shang will probably do a better job at CBRC than he did at CSRC. Everything in Shang's background speaks of a cautious central banker, rather than a market maker.

But, sadly, it seems that Liu will go the way of Dai Xianglong, perhaps ending his career in the obscurity of provincial leadership. Liu is 58, which is just a couple of years away from ministerial level retirement age, so unless he gets promoted to the State Council, he will look forward to a nice post in the NPC or the CPPCC. This is probably what Huang Ju had planned, to slowly ease Zhu Rongji's key lieutenants from the financial sector. It remains to be seen what will happen to Wen's key lieutenant, Yan Haiwang, who is currently the party secretary of CBRC.


Thursday, September 16, 2004
WATCHDOGS Regulators reshuffle pack at the top News of the changes sends mainland stock markets surging
ELAINE CHAN and BEI HU
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The mainland's stock markets staged their biggest one-day gain in 20 months yesterday on reports the country would get a new chief of securities regulation as part of a personnel reshuffle at two regulators.
Sources said Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), was likely to take over the China Banking Regulatory Commission (CBRC), with current chief Liu Mingkang becoming governor of Fujian province.
Mr Shang, seen as a moderate conservative, had been criticised by brokers and fund managers for failing to rebuild public confidence in the A-share markets.
"What has he done in the last two years?" asked one Shanghai-based fund manager. "He lost credibility a long time ago."
In February, the central government proposed nine measures to boost stock-market development, including ensuring returns to investors and resolving the issue of state shares, but none had been properly implemented.
Mr Shang is expected to be replaced by Huang Qifan, a former top economic policymaker in Shanghai and the deputy mayor of Chongqing.
Sources in Shanghai said Mr Huang's imminent appointment was a boost for the markets as "he plays the markets himself".
The Shanghai A-Share Index jumped 4.2 per cent yesterday while its Shenzhen counterpart rose 4.6 per cent, capping two consecutive days of gains after hitting multi-year lows on Monday.
Although the securities industry cheered Mr Shang's expected departure, sources said he was a poor choice for the CBRC's top job, despite previous stints at the People's Bank of China and the Agricultural Bank of China.
He was more familiar with monetary policies and did not have substantial experience regulating banks during his central bank tenure.
Reviews for Mr Liu were less harsh.
A western banking analyst lauded Mr Liu's strengthening of the regulatory regime, particularly risk management and capital adequacy requirements, in a country where banks have been desperately racing to expand operations.
"It's remarkable what he has done at the CBRC and it's been much tougher than I had expected," the analyst said.
But appraisals from the industry were mixed.
"Mr Liu has done a great deal in introducing advanced western regulatory practices," said a former banker. "However, he sometimes showed a lack of understanding of the domestic industry."
Another source said Mr Liu's imminent transfer to Fujian reflected central government concerns that the speed of financial and banking reforms was too slow.
Mr Liu was deputy governor of Fujian from 1993 to 1994.

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Wednesday, September 15, 2004

So, a reporter asked me whether China was easing into "soft landing." Here is what I had to say. Of course, those who are familar with my dissertation (all six people) will find this very familiar:

On a whole, I think the economy will not face a sudden crash due to Wen's policies. The declining money supply and fixed-asset investment growth figures released recently suggest a gradual decline in investment fever. The danger in the next couple of quarters, in fact, might be that money supply growth would pick up once again. We actually witnessed this in1993 after the first round of Zhu's austerity measures. After a few months of tough PBOC policies, local governments began to borrow at a torrential rate again, causing high inflation in 1994. The collapse of retrenchment in 1993 was brought about by Deng's displeasure with Zhu's policies. Similarly, we hear stories today of elite division over Wen's austerity measures, which might trigger a fresh wave of lending and investment on the east coast. Although growth in fixed asset investment has slowed, it is still growing at 26%, which is quite high.

Also, austerity measures are not costless. According to a piece on SCMP today, 4150 investment projects involving over 800 billion yuan were stopped. This means that banks that provided funding to those projects will see little of their money returned. Again, a lot of non-performing loans were generated in the last retrenchment, and I suspect a new wave of NPLs is being produced by the current austerity period.

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Several vingnettes thanks to Dean Kao at MIT
1. Dean sent me a very interesting article on rampant NPL in student loan (unfortunately, can't be pasted below because it is in Chinese). Basically, the State Council is forcing banks to lend to poor students, but NPL ratio is high for those loans. So, banks find ways to not make those loans, leaving many students unable to attend university. The whole thing is just such a mess because yet again, the central government is trying to fiscalize the banking system. There is a lot of risk associated with student loans, so the MOF should set up a fund in the Big 4 banks and sub-contract the banks to dole out the money.
2. Dean also asked me whether a rise in interest rate would affect the stock market. My response: If they don't adjust deposit interest rate, the stock market should be fine. In any event, I don't think China is to apoint where interest rates have a substantial effect on the stock market. I could be wrong, but it is probably still a "zhu" or "wen" market.
3. We had a discussion on Tian Congming (for googlers out there), the party secretary of Xinhua. Apparently, Tian served as vice secretary in Tibet when Hu was secretary there, which might suggest a close tie between them. However, while it is true that Tian and Hu worked together for a couple of years, Tian's history with another Politburo member, Liu Yunshan, goes much deeper. Both Liu and Tian come out of the Xinhua-Neimenggu xitong. Tian and Liu over-lapped in NMG for many years. Thus, one can infer that Tian is a loyal follower of Liu rather than of Hu. Of course, we know that Liu is loyal to Jiang.

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Monday, September 13, 2004

Okay, I think Hu Jintao is getting desperate because his power base is still going nowhere. This desperation is shown by his followers going to the western press and talking up Hu's power. If Hu was really that powerful vis-a-vis Jiang, there would be no need to talk it up in the NYT, there would be a front-page article in the People's Daily trumpeting General Secretary Hu's "core" role in the 4th generation. Even this innocuous statement has not seen the light of day. Instead what we see is "Three Represents" plastered all over the media. Also, why don't we see any Jiang people talking to the NYT. Sure, they are less liberal, but also because they don't need to.

FT (thanks Dean Kuo for the correction)
China's Hu Jintao tightens his grip on powerBy James Kynge in BeijingPublished:
September 12 2004 22:12 Last updated: September 12 2004 22:12

Nearly two years after he attained the top position in China's rulingCommunist party, President Hu Jintao has consolidated his power through acombination of manoeuvring and compromise with his predecessor and rivalJiang Zemin, several people within the party said.The shift of influence from Mr Jiang, who remains head of the armed forces,to Mr Hu has been gradual.But as party leaders prepare for a plenum this week, it is clear that MrHu's policies and vision are prevailing over those associated with Mr Jiang,party insiders said.The rivalry between Mr Hu and Mr Jiang has been one of attrition rather thandirect confrontation. Although it has influenced decisions, notably in theformulation of Beijing's tough policies towards Hong Kong, it has notescalated into a power struggle, several official sources and Chineseacademics said."Hu is now stronger than Jiang. Even officials promoted by Jiang are nowco-operating with Hu. That is the way it works. They value their future morethan their loyalty to Jiang," said one party official.The fourth plenum of the 16th Central Committee, a key meeting that beginson Thursday, will reflect both in style and content the preferences of MrHu, sources said.The meeting is to focus on "making a big effort to strengthen the governingpower of the Communist party," according to Xinhua, the official newsagency.This would mean trying to reverse the party's waning respect andeffectiveness among its people by combating widespread official corruptionand introducing fairer and more transparent systems to select and promoteparty functionaries, officials and academics said.These aims represent Mr Hu's central vision. That the party has broken withtradition and announced the subject of the plenum before it has even startedis also consistent with an emphasis on greater transparency in top-levelparty meetings.Mr Hu has espoused such transparency since he took over as party boss inlate 2002.In its account of the plenum's agenda, Xinhua mentioned other policiesassociated with Mr Hu, including an exhortation to "govern for the sake ofthe people", a variant of Mr Hu's bedrock philosophy of "yi ren wei ben" orputting people first.Nevertheless, the plenum's agenda also shows traces of a willingness to seekcompromise and co-operation with Mr Jiang's camp.The "three represents", an arcane political philosophy credited to Mr Jiang,is described as an "important thought".Similarly, the "concept of scientific development", a phrase created byofficials promoted by Mr Jiang, is also mentioned.Mr Jiang, 78, has come under pressure to step down as head of the party'sCentral Military Commission just as his predecessor, the late Deng Xiaoping,did in 1989, two years after relinquishing his place in the rulingpolitburo.However, Mr Jiang is unlikely to follow Mr Deng's precedent at this week'splenum in spite of recent speculation in party circles that he is planningto retire.

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Friday, September 10, 2004

Anyway, we are back debating whether China will raise interest rates again. I attach an excellent NYT piece on this issue. Essentially, I agree with the assessment of the article. I think raising lending interesting now is politically much more feasible. First of all, real lending interest is virtually zero. More important, with the Feds raising interest rates already, there is less pressure from hot money if interest rates were raised in China. It is unlikely that Wen will raise deposit interest rate because he wants to continue consumer spending momentum. Also, the State Council doesn't want to harm the profits of the Big Four too much, especially with restructuring and public offering on the horizon.


Business/Financial Desk; SECTW
China Poised For Decision On Raising Interest Rates
By KEITH BRADSHER 1,038 words 9 September 2004The New York TimesLate Edition -

Final1English(c) 2004 New York Times Company

HONG KONG, Sept. 8 -- With a slew of important economic statistics due for release in the next several days, China's central bank is in the final stages of deciding on what could be the country's first increase in interest rates in nine years, economists and government-controlled media said on Wednesday.
China faces rising inflation and signs that speculative investments have increased steeply in the last few weeks. Since last spring, Beijing has been trying to rein in many building projects, especially those financed with loans obtained by dubious means from government-owned banks and proceeding without zoning or environmental approvals.
Numerous reports in the government-controlled media have said that the central bank, the People's Bank of China, has already decided to raise the benchmark rate for one-year corporate loans at the end of the month. Senior bank officials denied the reports on Wednesday.
''There is no such thing -- the central bank has not issued anything like that and the reports have completely no basis,'' said Yi Gang, the bank's monetary policy director.
The official New China News Agency reported on Wednesday that Zhou Xiaochuan, the governor of the central bank, had said that a decision would have to wait for the release of economic statistics for August, expected in the next few days.
The one-year lending rate, which stands at 5.31 percent, is used as the base for calculating interest rates for a variety of corporate loans.
Expectations that a rate increase could come soon were fed by a report on Tuesday in Securities Market Weekly, an official newspaper controlled by the China Securities Regulatory Commission, China's version of the Securities and Exchange Commission.
Citing an unidentified official at a big commercial bank, the report said that the one-year rate would be raised to 5.76 percent during the weeklong National Day holiday at the start of October. Bank deposit rates, also regulated, would not rise, the report said.
Frank Gong, an economist with J.P. Morgan, said in a research report on Wednesday morning that rates would rise. ''We believe the debate on the rate hike is closing, and the first rate hike is expected in late September,'' he said.
Mr. Gong said that the People's Bank of China was likely to act only after the Federal Reserve's Open Market Committee meets on Sept. 21 and decides whether to raise short-term interest rates in the United States.
An American increase would make an increase in China more likely because the yuan is pegged to the dollar.
China's consumer price index has risen 5.3 percent in the year through July, meaning that a company that borrowed money at 5.31 percent a year earlier could pay it back essentially without interest, after adjusting for inflation.
But even that situation understates the incentive for companies to borrow heavily and to plow the money into investments or stockpiles of raw materials in short supply. The government regulates prices for many consumer goods and services, to avoid upsetting the public, and this has held down increases in the consumer price index.
Industrial prices are less regulated, however, and those climbed 14 percent in the first seven months of the year.
That figure is a better indicator of the business conditions facing companies, and a sign that China's interest rates have actually been deeply negative.
Still, there have been a few signs that administrative measures, like restrictions on bank loans, have slowed the economy somewhat in the last few months.
Industrial output climbed 15.5 percent in July compared with a year earlier, down from a peak of 23 percent growth in February. An official at the National Bureau of Statistics said that the industrial production figure for August should be released on Friday, and the consumer price index for August should come out on Monday.
The People's Bank of China had been expected to release the August figures for money supply and domestic credit on Friday as well.
But a bank official said that it was still awaiting figures from the statistical bureau, and that the numbers would be released by next Wednesday instead.
While interpreting bureaucratic maneuverings in China is always difficult, many economists and bankers with connections in Beijing have said in recent weeks that an economic policy tussle is under way there.
The skirmish pits Western-trained economists at economic policy agencies like the central bank and the securities commission against political bosses who are leery of higher interest rates, fearing they could halt or even reverse China's upward-spiraling property prices.
In the Chinese government's weekly auction of one-year Treasury notes on Tuesday, interest rates climbed to 3.46 percent from 3.41 percent a week earlier. But demand for the notes was very strong and the government nearly quadrupled the volume of bills auctioned, to $1.8 billion worth.
Interpreting such auctions is difficult in China.
In the United States, such strong demand for bills and a fairly modest increase in interest rates could be a sign that investors were confident that inflation would not rise much in the next 12 months.
But in China, where four deeply troubled, government-owned banks dominate the financial system, the strong demand could be another sign that the banks remain awash with cash.
Foreign investment has been flowing rapidly into China for the last two years, and the central bank has swapped the incoming dollars for yuan, sharply expanding the money supply and feeding inflation.
China was suffering from deflation just two years ago, but annual growth of 15 percent to 20 percent in the supply of yuan created an inflation problem instead.
China's initial efforts to slow the economy last spring caused Chinese stocks to lose more than a quarter of their value in a month, and they have only begun showing faint signs of recovery in the last several weeks.
Photo: A luxury housing complex in Beijing. Cheap loans have spurred a building boom, but rates may rise soon. (Photo by Peter Parks/Agence France-Presse -- Getty Images)(pg. W7)

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I've been busy with several things, so haven't had a chance to update. Anyway, I will make up for lost time. The big news recently is undoubtedly the NYT piece suggesting that Jiang might retire at the 4th plenum. First, I think this is a ploy by Jiang to get a better bargaining position for Zeng. Basically, it is a false offer of retirement to put Hu on the defensive. Jiang knows that the Politburo, where he has a majority, would not actually vote on his retirement without his personal consent, so he is not worried about Hu forcing him into retirement. At the same time, he can appear as the reasonable party in this negotiation because he has "given up a step" (rangbu). Needless to say, there is little chance that he will actually retire without Zeng gaining an important position in the Central military Commission.

Jiang's manuvering is not completely without cost, however. There are signs of gathering pressure on him to retire, even from Chi Haotian, whom Jiang elevated to the Minister of Defence position. In Chi's reminescence of Deng Xiaoping, which was published in Qiu Shi last month, Chi praised Deng for saying "bye bye" to his post at the CMC. Praising Deng's resolution to retire has become a marker of latent criticism against Jiang. Incidentally, Chi's article also suggests that his promotion was at Deng's behest more so than at Jiang's, which makes Chi less of a Jiang crony than analysts thought. In any event, Chi's article is yet another in a series of articles and commentaries by veteran cadres and Deng followers to call for Jiang's retirement. Though Jiang's followers are in powerful positions today, complete violation of party norm might do his faction serious harm. Thus, Jiang now hopes to get Zeng a secure position of power to maintain the long-term viability of the faction. Also, to ensure that his son is not investigated for corruption......

Okay, back to the economy. There are signs that Wen's retrenchment program is cracking. Industrial output is back up to over 15%, but the main indicator will be the fixed asset investment figures released next week. In July, FAI grew by over 30% from the same period last year, and I will bet money that FAI surge is at least 25%, if not more, for August. Basically, rumors that Wen was criticized by Chen Liangyu during a Politburo meeting for cracking down too hard on lending undermine Wen's retrenchment programs. Local governments are undoubtedly continuing to put pressure on local banks to lend to firms and construction projects. Things will get very interesting economically and politically if FAI increases by over 30% and if inflation starts to creep up above 5%. Those of you into steel and cement future, get on it (I have no stake in it, since I am a poor, indebted professor). Please see the Reuters piece below:

China’s output rises for first time in 6 monthsBEIJING (Reuters) - Sept 10, 2004

China’s industrial output growth for August quickened to 15.9 percent from 15.5 percent a month earlier, accelerating for the first time in six months in a sign that the impact of economic cooling measures may be fading.
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Growth was higher than expected. The median forecast of eight economists surveyed by Reuters was for a rise of 15.2 percent compared over the previous August.
“This is going to raise fears that relaxation of the previous measures was premature and that the economy is again starting to overheat,” said Tim Condon, an economist with ING Financial Markets in Singapore
“This number sets us up for an upside surprise: an unpleasantly strong fixed asset investment number next week,” said Condon, who had expected industrial output to rise 15 percent.
Government curbs on lending and investment have caused industrial growth to slow since it peaked at 23.2 percent in the 12 months to February.
But with officials claiming initial success in taming the heated economy, debate has sharpened over whether the measures should be rolled back or tightened further, perhaps through the first rise in interest rates in nine years.
The central bank has said it needs to carefully study the August data before making a decision on whether more tightening is needed.
“As for the effects of macro-economic controls, we need to look as other indicators, such as inflation,” said Song Guoqing, an economist at the China Stock Exchange Executive Council in Beijing.
China is to release other economic indicators, such as the consumer price index and fixed-asset investment, next week.
Beijing’s cooling measures have been aimed at red-hot industries such as steel, cement and automobiles, and the August numbers showed mixed results.
Cement output in August was up 9.4 percent from a year earlier, slower than July’s rise of 11 percent. But steel production jumped 22.9 percent, continuing to accelerate after an 18.5 percent rise in July and 17.3 percent rise in June.
Car production was 386,000 vehicles in the month, up just 3.6 percent from a year earlier, and down from the 5.4 percent growth for July and 20.4 percent growth for June.
Industrial output from January to August was 17.1 percent higher than in the same period of 2003, the State Statistical Bureau said in a statement.
Others said the August production figures showed the world’s seventh-biggest economy was so far avoiding a hard landing.
“To me that’s a good sign. We don’t want to see industrial production decelerate too much. Around 15 percent is about right,” said Chris Leung, an economist with DBS Bank in Hong Kong.

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Wednesday, September 01, 2004

Xie Ping strikes again. So, the head of the PBOC's Financial Stability Department said a few days ago that the government might list majority shares in Bank of China and the China Construction Bank. Of course, the WSJ got very excited and immediately filed a story. First of all, Xie Ping represents the most reform-minded element in the PBOC, and he is also known for blabbing his mouth about all kinds of subjects. For example, as a junior researcher in the PBOC, he wrote several articles about interest rate liberalization. When he became the head of research under Zhu Rongji, he continued to write articles and tell the foreign press about the impending interesting rate liberalization in China. Guess where we are in interest rate liberalization--no where. I think it is good that the PBOC has someone like Xie Ping to always push the envelope toward more reform. However, the top leaders in China will not be pushed into a corner by this kind of talk. Again, interest rate liberalization is a perfect example. Although PBOC technocrats and scholars have been lobbying for it for over a decade, very little has occurred because central leaders find interest rates to be a powerful tool to control.

So, Xie Ping's comment should be interpreted as part pushing the envelope and part obfuscation. By making this comment, he is again pushing the envelope. I see very little possibility that the government would list the majority of shares in these two banks. They are simply too important to let go. The obfuscation comes from his wording that the shares should be "tradable." As the SCMP piece points out, this doesn't mean that the shares would be tradable to the public, but might be tradable among a few strategic investors, including major foreign players and state investment firms like Huijin and CITIC.



International
China May List Banks Without Keeping Shares --- Government Move Seeks To Change Lending Culture At State's Big Four Banks By Owen Brown and Andrew Browne 581 words 1 September 2004The Wall Street JournalA10English(Copyright (c) 2004, Dow Jones & Company, Inc.)

BEIJING -- China could list two big state banks without keeping a chunk of nontradable shares in state hands, a central-bank official said, a proposal that underscores Beijing's desire to use a listing to impose market discipline and outside oversight on the banks.
Xie Ping, director of the People's Bank of China's Financial Stability Department, told the central-bank run Financial News that as long as the China Construction Bank and Bank of China conform to the relevant regulations of the China Securities Regulatory Commission, their overseas and domestically listed shares should remain tradable. He said shares held by Central Huijin Co., a company set up by the State Council in late 2003 to hold the government's controlling stake in the banks, also should be tradable under these conditions.
This marks a significant change from many previous privatizations in China, in which the government has retained a huge controlling stake in listed domestic firms through state and legal-person shares. State shares can't be traded, while legal-person shares can be transferred only between state-owned companies and agencies.
Both types of shares were used to maintain state control over listed companies to fend off criticism from conservative government members opposed to privatizing state assets.
But these separate classes of stock have cast a shadow over the value of tradable shares, with investors worried that the government could at any time release them into the retail market, driving down prices.
In addition, the fact that the majority of a company's shares aren't traded means that the boards of listed companies worry little about public shareholders. That defeats one purpose of stock-market listings, touted as a way to bring accountability to corporate boardrooms in China.
Regulators appear determined to use the markets to change the lending culture of China's Big Four banks, where performance has long been measured not by profits, but by the size of loan portfolios. That has contributed to a mountain of bad debt in the banking system, estimated at as much as $500 billion.
To do this they are putting a lot of faith in foreign investors to inject discipline. Bank of China and China Construction Bank are looking for overseas strategic investors who will likely have representation on their boards.
Mr. Xie's comments reflect the urgency of Beijing's task to transform the country's biggest banks before the market opens fully to foreign competition in 2007, in line with World Trade Organization rules. The fear is that without market discipline, state money that has been poured into the banks to bail out their bad debts will be wasted.
Regulators have imposed tough conditions on the money. For instance, Bank of China and China Construction Bank are required to achieve a return on assets of at least 0.6% by 2005 and the average of the top 100 international banks by 2007.
Mr. Xie also indicated Industrial & Commercial Bank of China will be the next state-run commercial bank subjected to restructuring, possibly before the end of this year. But he said policy makers are still discussing the fate of the Agricultural Bank of China, regarded as the weakest of the big four state-run banks, in comments that suggest the government might not favor a public-share offering.

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