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Tuesday, January 25, 2005

Well, a friend of mine from China sent me the results of an unprecedented banking survey done by Xie Ping of the PBOC. This survey asks a sample of almost 3000 bankers and brokers what they thought of corruption in the Chinese financial sector. The results, though not surprising, is quite interesting.

1. General How much corruption is there in China’s financial sector?
Respondents, %
Very common 36.6
Fairly common 45.2
Rare 12.8
Does not exist 5.4

How would rate China’s financial institutions in terms of corruption? (1 – most corrupt)
1 Securities companies
2 Insurance companies
3 Rural and urban credit co-operatives
4 Shareholding banks
5 State banks
6 Policy banks

Are you satisfied with anti-corruption efforts so far?
Respondents, %
Very satisfied 6.7
Kind of satisfied 25.3
Not satisfied 43.2
Very unsatisfied 24.8

The cases of financial corruption currently being discoveredar
Respondents, %
Happened in the past 72.2
Are happening now 2.82.

What are the costs involved in obtaining a loan? When applying for a bank loanar
Respondents, %
A bribe is not required 31.8
Conditional on making deposit at bank 22.7
A bribe is required 45.5

As an enterprise, when you apply for a loan of CNY1m, what is the total ‘application fee’?
CNY
National 38,811
North 63,004
North-east 52,291
Central 32,852
East 14,654
South 25,167
West 44,897

As an enterprise, what cost is involved in retaining credit facilities?
% of total loan, per year
National 4.9
North 5.2
North-east 4.2
Central 6.1
East 3.4
South 4.0
West 6.3

The total yearly extra cost of loans to enterprises
% of total loan, per year
National 8.8
North 11.5
North-east 9.4
Central 9.4
East 4.9
South 6.5
West 10.7

As a rural household, to obtain a loan of CNY10,000, what is the total ‘application fee’?
CNY
National 590
North 869
North-east 332
Central 707
East 248
South 600
West 782

As a rural household, what cost is involved in retaining credit facilities?
% of total loan, per year
National 2.9
North 4.1
North-east 3.9
Central 2.5
East 1.7
South 3.1
West 2.3

What is the total cost to a rural household gaining credit?
% of total loan, per year
National 8.8
North 12.8
North-east 7.2
Central 9.6
East 4.2
South 9.1
West 10.13.

Defaults and punishments Do banks pursue defaulters?
Respondents, %

If they discover them, they pursue them vigorously 13.7
They know who they are, but they never pursue 20.3
They discover them, but only pursue some of them 19.8
They do not look and they do not pursue 46.2

How would you describe the flexibility of punishments by the banking regulators?
Respondents, %
Little flexibility 34.7
Some flexibility 33.4
Lots of flexibility 17.2
Do not rigorously punish 14.74.

The stock market Is the stock market manipulated?
Respondents, %
Commonly 48.8
Seriously, but getting better 40.0
Rarely 11.2

Do securities companies massage the accounts of listing companies?
Respondents, %
Yes 82.5
No 17.5

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Friday, January 14, 2005

Just read an interesting piece on the Chinese wire. Apparently, the PBOC and the MOF is now engaging in a fight over how to recapitalize ICBC, most likely the next bank to go IPO after BOC and CCB. Wait a minute, so you think, well they are probably trying to pass the buck to the next guy right? You would expect that the PBOC, which runs SAFE--China's foreign exchange czar--, would want the MOF to issue bonds to recapitalize, while the MOF would want SAFE to use the foreign exchange reserve to recapitalize. Not so. In fact, they are lobbying the reverse with PBOC lobbying for a forex recapitalization and the MOF fighting for the issuance of a special bond. What??? But that goes against everything we know about the MOF, that they hate increasing the deficit. Why would they voluntarily increase the deficit to bail out a mediocre bank? Yes, they want a piece of the action. They have witnessed how our dear Xie Ping and other PBOC officials all of the sudden found themselves in the powerful position of running two state-owned banks and being courted by an army of foreign investment bankers.

The number crunchers at the MOF certainly would not mind this potential path toward a promotion and lots of wining and dining by foreign investment bankers. Moreover, they can once again set up a dummy company which issues bonds to the banks and buys bank shares with the money. That would not increase the deficit at all, since, like the AMC, the MOF provides an implicit guarantee on the bonds. Well, I hope the folks at the MOF get their way, since it is only fair that they get a part of the IPO action.

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Thursday, January 06, 2005

The WSJ carried a very good story about Xie Ping, the head of the new Central Huijin Company, which is now the largest shareholder of BOC and CCB, both slated to go IPO this year. I do have to say that Wen made the right choice in picking Xie, even though the formation of Huijin is unlikely to turn BOC and CCB into completely commercialized banks. As long as they are majority state owned, Xie, along with the bank managers, will have to heed political signals emanating from Zhongnanhai. However, if anyone is going to closely watch bank performance and encourage commercialization, Xie is the person. As head of the PBOC research bureau then the PBOC financial risk department, Xie has seen every trick in the book in terms of bank branches and banks falsifying performance figures and hiding losses. Banks will have to answer to a tough customer in Xie. However, as the article points out, Xie's vigilance might turn into over-intervention from Huijin, which is an arm of the State Council.

Also, it will be interesting to see how Huijin works out its role vis-a-vis the CBRC, which is in charge of monitoring banks, and also the Central Organization Department, which is in charge of appointing top bankers. I am sure all kinds of bureaucratic conflicts will emerge. However, with Wen serving as Premier for the next 8 years, Xie will have a powerful patron in these fights. Furthermore, if Xie Ping does a good job sheparding the Big Four banks through the IPO process, Xie Ping will be poised to move further upstairs. After Wen's first term, Xie might be looking forward to an appointment as the head of the PBOC and eventually even to the pinnacles of power in Zhongnanhai. Much of it, however, will be determined by how smoothly the IPO process proceeds in the next few years. I suppose wish him the best, but I am not popping champagne just yet.

International
China's Banks Get Mr. Fix-It --- Premier Taps Outspoken Academic, Signals Intent to Shake Up Sector By Andrew Browne 1,281 words 5 January 2005The Wall Street JournalA8English(Copyright (c) 2005, Dow Jones & Company, Inc.)
Hong Kong -- IN A TWO-DECADE-long career at China's central bank, Xie Ping was notorious for speaking his mind at carefully scripted policy meetings. His knack for causing offense had been widely thought to have stunted his career.
But when Premier Wen Jiabao was casting around for an aggressive manager to look after the government's investments in two top commercial lenders, he picked the 49-year-old Mr. Xie for the post in November. The choice of the independent-minded Mr. Xie illustrates the central government's determination to shake up China's troubled banks -- but also the difficulties to come.
Mr. Xie doesn't have much time: In 2007, China's banking sector will be thrown open fully to foreign competition. Ahead of this enormous challenge for China's long-coddled state-run lenders, the government is doing what it can to strengthen their balance sheets.
A year ago, the government poured a total of $45 billion into Bank of China and China Construction Bank, the country's second- and third-largest banks, respectively, to help them wipe off bad loans and prepare to list their shares on the stock market. Mr. Xie runs Central Huijin Investment, the government investment vehicle set up to manage that enormous sum. Because Huijin owns virtually all the shares in both banks, a stake that still could be as high as 80% after the listings, Mr. Xie essentially calls the shots at both lenders -- an unprecedented position of authority. Huijin appoints five of the six seats on both banks' boards, with the power to weigh in on everything from staff-incentive plans to decisions on information-technology spending.
Turning around a decades-old culture of wasteful and politically driven bank lending is probably the most critical of all Beijing's overhauls. Because banks are the weakest link in China's fast-growing economy, success or failure could have broad repercussions now that China has become a key driver of global growth. China's biggest lenders are still burdened with mountains of bad debt -- estimates of nonperforming loans in the entire banking system go as high as $400 billion -- and an avalanche of lending in 2003 and early 2004 as parts of the economy overheated is sure to add substantially to the total.
Chinese state banks traditionally have measured success by the size of their loan books. Mr. Xie's task will be to force the two banks under his watch to gauge profits instead.
On a recent afternoon, Mr. Xie, who still dresses in the crumpled style of the academic he used to be, plants his feet on a coffee table in his old central-bank office, piled high with boxes in anticipation of his move. The table is cluttered with research papers, old newspapers and a large bottle of shampoo. The shampoo was recently handed out to all central-bank staff -- an outdated practice left over from the days when government employers acted as welfare agencies for their employees, supplying everything from soap to cinema tickets. Mr. Xie is out to change precisely that culture of entitlement.
His efforts hit home recently at the headquarters of Bank of China. All the office's employees received notice that they now must reapply for their jobs and justify their positions. Mr. Xie says he is looking overseas to recruit a chief credit controller and a risk-management officer.
"It's possible we could replace the manager of a bank if we don't like what he's doing," he says. That is a bold statement, given that the heads of Chinese banks are appointed by the organization department of China's Communist Party.
The need to instill discipline is crucial. During the past several years, Beijing has put together huge bailout packages for the four biggest banks -- Industrial & Commercial Bank of China and Agricultural Bank of China are the largest and fourth-largest, respectively -- only to watch bad loans continue to pile up. "It's not a matter of capital: They have enough already," Mr. Xie says. "Now they need market discipline."
Mr. Xie promises to manage with a light touch. "I represent the shareholders," he says. "I help to choose the board members. After that I won't interfere in day-to-day management."
Those who know him, however, are skeptical of such claims. "He won't be at all shy about telling a bank manager: `This is your performance, this is your compensation package,'" says one of Mr. Xie's close associates. The fact that Huijin reports to the State Council, or the cabinet, suggests the government has more confidence in Mr. Xie than in the banks' own managers.
Mr. Xie's efforts likely will put him at odds with powerful ministries and provincial officials who long have treated banks as funding arms for the government. But he has proved he isn't intimidated by power. A native of Wenzhou, a coastal city famous for its entrepreneurial traditions, Mr. Xie spent his early years as a shipyard worker studying English in his spare time. He joined the central bank in 1985 and rose through the ranks, most recently heading the financial-stability department in charge of cleaning up commercial lenders.
He had open disagreements with his former boss, Dai Xianglong, then the governor of the People's Bank of China -- rare in the formal and deferential culture of Chinese government. According to bank insiders, Mr. Dai favored working through existing bureaucracies to overhaul China's banks. Mr. Xie argued for dismantling bureaucracies, bringing in outside shareholders and foreign investors to the banks and creating independent boards to impose real supervision.
Mr. Xie is unusually qualified to exert his will in this new job. He is said to have the ear of Premier Wen, who includes him in a close circle of advisers. He is one of China's most able intellects, a prolific author who has twice won China's top economic-research prize.
Mr. Xie's position as an outsider in the elite world of Chinese politics also could be a factor in his willingness to speak out and challenge higher-ups. Wenzhou's entrepreneurial energy is looked upon by elites with a mixture of admiration and disdain, and natives of the city are rare in academia and government.
But these very characteristics could also alienate others. In central-bank meetings, those who have watched him over the years say Mr. Xie often cuts down his colleagues to their face. "It's not personal," explains one longtime associate. "He just makes logical arguments."
---
Cui Rong in Beijing contributed to this article.
---
Up to the Job

Xie Ping has been tapped to fix up China's troubled big banks before 2007.
A look at how he arrived there:

-- 1955: Born in the port city of Wenzhou in Zhejiang Province.

-- 1977-82: Worker and propaganda staffer at Wenzhou Shipyard.

-- 1982-85: Studied at Xinan University of Finance and Economics in
Chengdu; awarded a master s degree in economics; was on staff at PBOC's
Investigation and Research Dept.

-- 1985-88: Studied at People's University in Beijing; awarded a doctorate
in economics.

-- 1988-2004: Joined PBOC, rose from staffer in General Planning and
Currency Circulation departments to head of Deposit Planning and Policy and
Research sections; deputy director of Policy and Research and Nonbank
Financial Institute departments, becoming director of the latter; governor of
PBOC's Hunan branch; and director of PBOC's Financial Stability Dept.

-- 2004: Named general manager of Central Huijin Investment in November.

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Just read a piece on the Chinese wire that frankly brought a warm feeling to my heart. Apparently, the State Development and Reform Commission (SDRC) and the Ministry of Finance are engaged in a nasty fight now over the size of this year's bond issuance. With more growth, one would reason that the government now needs to issue fewer bonds. This is Wen's thinking and obviously the preferred position of the MOF. Thus, In 2004, bond issuance was reduced by 30 billion RMB to 110 billion RMB, and the plan for 2005 is to further reduce it to 80 billion. Well, the SDRC is not happy about this at all, since it is in charge of distributing all "bond financed" investment projects primarily going to western and northeastern regions. They now will have less to dole out to eager local officials. Although the MOF is collecting more revenue due to growth, they are using the new money for "fiscal redistribution," over which they have total control. Thus, the reduction in bond issuance and bond financed projects creates a transfer of relative power from the SDRC to the MOF. Will this mean the end of SDRC? No, SDRC, formerly Planning Commission, has time and again reinvented itself along with the reform, even changing its name. It will do so again.

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Wednesday, January 05, 2005

A reader read my last entry and wisely pointed out the ambiguity in my analysis of the effect of "three agriculture" policies. How is the effect of domestic policies different from the effect of a RMB revaluation. It took some sketching, but I think I have the answer. Of course, real economists out there please feel free to point out any errors.

Because of the "three agriculture" policies, employers are having trouble filling some manufacturing jobs at current wages. Of course, if they increase wages, they will eventually fill these jobs. This is actually fine since “three agriculture” policies create a negative labor supply shock that increases wages but also decreases the quantity of labor supply. Thus, there is no unemployment problem, just problems with China’s competitiveness.

The revaluation of RMB, however, generates a sudden increase in wages for workers (nominal wages stay the same, but workers acquire more international purchasing power) and increase costs for firms. This creates a situation where labor supply outstrips labor demand, and thus unemployment. Chinese manufactured goods will become even less competitive relative to the status quo, and foreign and even domestic investors would relocate to cheaper countries. Of course, China would still be very competitive, but may lose some jobs on the margin to India and Vietnam. Some of these jobs might be taken away from peasants who would want to work in cities despite recent policies, or higher skill urban workers might lose jobs due to relocation.

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Back to the revaluation of the RMB. I know, I am tired of it too, but Wen said at the December Central Economic Conference that RMB exchange rate would maintain a "basic stability." So what does that mean.

While the international investor community expects a de facto appreciation of around 5-7% this year, I remain a bit skeptical. By de facto appreciation, I mean either a shift in the dollar peg upward of 5% or a switch to a basket peg that de facto revaluate the RMB by 5% vis-à-vis the dollar, but not the Euro. From the accounts of the recent Central Economic Working Meeting in December, it seems that Wen remains reluctant to change the exchange rate regime. There are good reasons to maintain the current peg.

Currently, the center is tackling the “three agriculture” problem. If successfully implemented—and there are signs that some aspects are successful--, these policies would decrease farmers' opportunity cost of remaining in the farms instead of seeking jobs in cities. That is, if their livelihood improves as farmers due to tax reduction, they have less incentive to seek jobs in the cities. This is already driving up labor costs and creating labor shortages in some places, although the precise extent is still unknown. Obviously, an appreciation of the RMB would further drive up labor cost in China and probably exacerbate employment pressure in the cities.

Second, the central government has used the foreign exchange reserve successfully to recapitalize the two state owned banks slated to go public this year. If the RMB appreciates, the central government would have to use a greater portion of its foreign exchange reserve to recapitalize ICBC and ABC. It would make sense to wait until the recapitalization of ICBC and ABC before revaluating the RMB.

Of course, the Chinese government also wants to surprise the international community, as it did for the interest rate increase last year. So, it is really anyone’s guess when they would revaluate.

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