Friday, July 08, 2005

I recently wrote a short report on the Central Huijin Company, currently the "owner" of China Construction Bank and the Bank of China through the 45b USD injection from the foreign exchange reserve. In this piece (which will be posted once it is officially published), I make the argument that Huijin should increase market displine in the financial sector marginally, but also masks the PBOC's empire-building effort. A couple of my colleagues gave me early feedback (thank you!), which generated some interesting discussions:

Is this a part of Zhou Xiaochuan's own empire-building effort?

Me: don't get me started on the elite politics behind this. I totally agree with you that Zhou is trying to grab more power. However, this might go even deeper. Zhou's immediate boss in the Leading Group of Big 4 reform is Huang Ju, and Zhou's ties with Jiang's faction has been quite cordial. Meanwhile, the CBRC is the stronghold of Wen Jiabao. Huang Ju has been very frustrated with his limited power in the financial sphere despite his position as the v-premier in charge of finance. Huijin and the impending IPOs are giving him much more power and influence. Of course, I can't put this speculation in the report.

What incentives are there for Huijin officials to pursue a high ROI (return on investment)?
The only incentive structure in place to produce a higher ROI, as far as I know, is higher pay for Huijin officials. At this point, it is not clear whether Huijin will be a comprehensive agency like SASAC or just a shell. I'll look into that in Beijing.

Is Huijin's takeover of the securities firm related to the effort to boost the stock market while non-tradable shares are floated?
Basically, by gaining control over the major securities firm, the PBOC can order a coordinated effort to "save the market," but again, this encroaches upon the CSRC's territory. Nonetheless, Shang might be cooperative since he is a banker at heart and might be gunning for PBOC governorship next.

Is ROI really the main objective of Huijin?
That is the question. I think reformers like Xie Ping would like it to be, but senior leaders like Zhou, Huang Ju, and Wen Jiabao see Huijin as a political and policy tool. This will cloud Huijin's mission as a responsible shareholder.

Is the appointment system fixed or evolving in the financial sector?
Yes, I agree that the appointment system is in flux, but with the formation of Huijin, the PBOC's clout has risen on average.

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