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Monday, July 25, 2005

So, of course, reporters are scrambling to write numerous stories after revaluation occurred. They even had to knock on the door of yours truly, and being nice but a bit naive, I engaged in long conversations with reporters on topics that I really shouldn't touch on, like the characteristics of Wen Jiabao. Needless to say, I probably said somethings I shouldn't have said, and they sometimes mis-represent what you say. Anyway, in the piece by FT below, there are a couple of points that are misconstrued and can perhaps get me into trouble. Let's hope not since I am in China.

First, I say that Wen is "more leftist than either Zhu or Jiang." Well, I did say that, and I wish I could've thought of a better word than "leftist." Perhaps, more "socialist," "populist." Okay, that was just stupid on my part.

On the second item, where I say "If Zhu had been in charge (the revaluation) would have been earlier and bigger." I DID NOT mean to say that it is because of Wen's timidity that this is the case. I repeatedly told the reporter that I thought Wen's more gradual approach stems from his deeper concern of livelihood and welfare issues. Wen is by no means timid. In fact, a major reason why he got the top job was because he decided not to blow up a series of reserve dikes along the Yangtze River during a huge flood because he predicted that the water would recede. That was a tough call and took a lot of guts to make.




FT
COMMENT & ANALYSIS

The drivers of the rate of change MEN IN THE NEWS WEN JIABAO and Zhou Xiaochuan: The renminbi revaluation has shown divergent approaches to modernising China, write Richard McGregor and Mure Dickie.

By MURE DICKIE and RICHARD MCGREGOR
1,330 words
23 July 2005
Financial Times
London Ed1
Page 11
English
(c) 2005 The Financial Times Limited. All rights reserved

At his annual news conference in March, Wen Jiabao, China's usually dour premier, promised mischievously that any revaluation of his country's currency would come as a surprise to the markets.

Mr Wen's efforts were only partly successful, however. China's move to a more flexible exchange rate has been in the works for so long, and the revaluation itself was so small - just 2.1 per cent against the US dollar - that it caused little shock when it came on Thursday evening in Beijing.

Indeed, the announcement by the People's Bank of China, the central bank, made it clear that it would maintain tight control over the renminbi even after scrapping the dollar peg.

The nuanced nature of the move reflects Mr Wen's wider strategy, which generally involves lengthy and agonising study of an issue with, for the most part, a cautious decision at the end.

The premier's love of studious preparation is reflected even in his rare news conferences, with officials favouring journalists who agree to disclose their questions in advance - and Mr Wen responding with what sound suspiciously like memorised -recitations.

The approach means even dramatic moves are seldom much of a surprise.

"Following the usual pattern, Beijing has adopted a 'radical' policy, of breaking the US dollar peg, but implemented it in a very gradual way," says Andy Rothman, a China strategist at the CLSA brokerage in Shanghai.

However, Mr Wen, whose role as premier gives him responsibility for managing China's fast-growing but fractious economy, has a politician's instinct for dressing up even gradual decisions as decisive. As a result, China got the headlines it wanted, highlighting the break with the greenback alongside the long-awaited revaluation.

The announcement, Chinese analysts contend, is precisely what Washington has been demanding of China in order to puncture the swelling bilateral trade deficit.

"The revaluation reflects the positive stance China has taken towards the US, as the Bush administration and Congress have kept complaining about their surging trade deficit," says Song Guoqing, an economist at Peking University.

"If China's one step back leads to a similar concession from the US, then a balance will be struck. But confrontation will follow if the US makes further demands."

The timing of the announcement is important, as it comes just before Hu Jintao, China's president, travels to Washington in September, a trip that otherwise might have been engulfed by congressional criticism of China's exchange rate policy.

But some analysts say the caution shown by Mr Wen and China's ruling Politburo of top Communist party leaders has been at the expense of more dynamic and globally savvy policymakers, such as Zhou Xiaochuan, the chairman of the People's Bank.

While acknowledging China's opaque system makes analysing the inner workings of the leadership difficult, Nicholas Lardy, an expert on the Chinese economy at the Institute for International Economics in Washington, says Mr Wen has been a laggard on renminbi policy.

Reflecting a view shared by many China scholars, Mr Lardy believes Zhou Xiaochuan, the chairman of the central bank, has been advocating change since last year, but has been stymied by the Politburo.

"It has been clear for some time that the central bank and Zhou have favoured some adjustment, but they have had a very hard time selling it," says Mr Lardy. "I believe they have been held up by the inclination of the top leaders for a small move, like we saw on Thursday."

Mr Zhou has none of the institutional clout of Alan Greenspan and would make no pretence of enjoying the freedom to act independently of Politburo policy.

Within the constraints of the Chinese system, however, he has carved out a more central, activist role for the PBoC, and not just in monetary policy.

In the past 18 months, Mr Zhou and a number of key lieutenants have moved to take control of the big state banks from the Finance Ministry. In the last month, the bank has also all but taken over policy to rescue the beleaguered securities sector.

Although not considered to be a consummate politician, Mr Zhou does have deeper financial experience than anyone in the leadership. In between stints at the PBoC, he has headed the securities regulator, run one of the large state banks and also been in charge of the foreign exchange regime.

Mr Zhou's openness is underscored by his support for bringing into the bureaucracy "sea turtles" - foreign-educated Chinese who are so-called because in Chinese the phrase sounds like "returned from overseas", the name given to foreign-educated returnees, who often struggle to find a place in the hierarchical government system.

Some analysts caution against reading too much into Mr Zhou's activism on the currency, saying it reflects as much the responsibilities of the PBoC as it does his personal views.

"The PBoC has been stuck with dealing with the consequences of a failure to revalue, and from a strictly institutional perspective, that is a big hassle," says Victor Shih, of Northwestern University in Chicago.

Mr Wen's cautious approach, however - allowing a headline revaluation, while ensuring it remains small and tightly managed - does reflect his political priorities.

Mr Wen and Mr Hu have studiously set themselves apart from the leadership team that preceded them, headed by Jiang Zemin and Zhu Rongji, by retooling policies in favour of farmers and the working poor. They believed these two groups had been left behind by the high-speed economic growth in the 1990s, and had become a dangerously volatile and destabilising force as a result.

"Wen has always been more concerned about domestic livelihoods, or, if you like, more leftist than either Jiang or Zhu," says Mr Shih.

Mr Wen's skills at performing the high-wire balancing acts needed to survive in top-level Chinese politics are not in doubt.

He was famously present when Zhao Ziyang, then boss and Chinese president, tearfully visited protesting students in Tiananmen Square in 1989, just days before the troops arrived brutally to clear them out.

The late Zhao was purged, whereas Mr Wen survived, and prospered.

These skills have served him well in building the necessary consensus to revalue the currency, a policy change strongly opposed by many lobby groups, especially exporters.

"Wen has done well in co-ordinating interests among pressure groups who support or oppose revaluation," said Zuo Xiaolei, chief economist with Galaxy Securities, one of China's largest brokerages.

Still, in many ways Mr Wen is still stuck very much in the shadow of his more dynamic and charismatic predecessor as premier, Mr Zhu. "If Zhu had been in charge (the revaluation) would have been earlier and bigger," says Mr Shih.

The cautious approach of Mr Wen and Mr Hu is in even sharper contrast to that of past Communist leaders such as late party patriarch Deng Xiaoping, who was still the final voice of authority when China last made a big currency move - a renminbi devaluation of more than 30 per cent.

For many Chinese, political timidity is a minor sin compared with the confidence and decisiveness shown by Mao Zedong, a man capable of happily launching political and economic movements that would destroy millions of lives.

Mr Wen is much more in line with the new era of consensus-based leadership within the Communist party, where no leader now has the political capital to rule alone.

Indeed, caution has so far served Mr Wen very well. But with China's currency and economy still subject to formidable pressures despite Thursday's revaluation, there may come a time when more dramatic action is required. One day Mr Wen may really have to surprise.

Comments:
Wen's decisiveness (or good luck) is given a lot of play in the biography co-authored by Ma Ling and Li Ming (Hong Kong/Taipei), but I don't know it was such a decisive factor in his elevation as premier.
 
Yes it’s quite misconstrued...yet no surprise for Chinese. They often associate Wen’s family name with timidity, but it’s somewhat a distortion to say that many are on the side of cautiousness compared with Mao’s boldness. Again reporters are tailoring it to their own argument...which is also common among social scientists...
 
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There was a time when communities would seek counsel from the elders. More experience usually translated into lessons learned. Having picked up a pearl of wisdom here and there over the years, I am now able to share a thought or two. The main lesson is to never stop learning. Seeking other points of view and new ideas like visiting your blog are steps in the right direction. Finding what is ultimately important leads one to appreciate actuality, efficiency and mindfulness. Helping others to see some of the forest through the trees is its own reward. discernment
 
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Thursday, July 21, 2005

Well, I was going to write a blog post complaining how the Chinese government has blocked my blog, but the RMB HAS FINALLY REVALUATED. See the official post from the PBOC below. Here are some thoughts:


This move constitutes a compromise between various domestic forces, but I am afraid
that it will nonetheless trigger a resurgence of hot money flowing into China. A couple of weeks ago, Chen Xiwen said to the SCMP that the reluctance to revaluate stems to a large extent from Wen's fear that farmers will further lose the incentive to produce grain as increasing Chinese purchasing power allows foreign grain to flood the Chinese market. Also, doemstic industries are always complaining about rising import. Finally, coastal regions are afraid that a steep revaluation will decrease China's competitiveness edge. A 2% revaluation should not have much of a direct impact on all of those fronts, though if I were a farmer, I would switch out of grain production in expectation of further rise in the RMB.

Why should we expect more hot money? The revaluation was much below analysts expectation (which ranges from 5-20%), so the expectation is that there will be more movement. Once credibility has been lost, it will take some time to re-establish it. In the mean time, the PBOC will have to accelerate money sterilization. Moreover, it's not that we have no information about the new basket peg; we know that it isn't composed entirely of dollars (at least in principle) anymore. If the dollar rises further, it is true that the RMB won't have to revaluate along side the dollar.
But is that what we really think the dollar will do in the second half of this year? Sure, the dollar enjoyed a spectacular run during the first half, but will that continue? Will Bush's "declining deficit" continue as the war in Iraq drags on with no end in sight? If the dollar declines, we know that the Chinese no longer has to follow--this is vital information that should bolster investor expectation of a further revaluation of the RMB against the dollar.


BEIJING, JULY 21-- The following is the full text of the announcement published on the central bank’s website (www.pbc.gov.cn):

Public Annoucnement of the People's Bank of China on Reforming the RMB Exchange Rate Regime

July 21, 2005

With a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand, the People's Bank of China, with authorization of the State Council, is hereby making the following announcements regarding reforming the RMB exchange rate regime:

1. Starting from July 21, 2005, China will reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility.

2. The People's Bank of China will announce the closing price of a foreign currency such as the US dollar traded against the RMB in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the RMB on the following working day.

3. The exchange rate of the US dollar against the RMB will be adjusted to 8.11 yuan per US dollar at the time of 19:00 hours of July 21, 2005. The foreign exchange designated banks may since adjust quotations of foreign currencies to their customers.

4. The daily trading price of the US dollar against the RMB in the inter-bank foreign exchange market will continue to be allowed to float within a band of 0.3 percent around the central parity published by the People's Bank of China, while the trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band announced by the People's Bank of China.

The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies. The People's Bank of China is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability.

Comments:
Nicholas Lardy says China's move is too small, because it encourages the expectation of further changes and hence more inflow of hot money. As a political scientist, do you think this small move (2%) was a compromise between different interest groups in China, some for revaluation and some against it? Thanks for your insights. Hans
 
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well, personally i think each move can be viewed in this way.
 
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Friday, July 15, 2005

More interesting facets about the Huijin Company that was revealed as I discussed the issue with my colleagues. Apparently, although Huijin is the largest shareholder of CCB and the sole shareholder of BOC, it did not get the 50 or so billion RMB in dividend due to it from 2004. Instead, the money was used by the two banks to pay back a "special loan" from the PBOC.

My guess about the loan is that it is to pay back the loan that the PBOC gave to CCB (and BOC) when the banks sold NPLs to the AMCs last year. Since the AMCs didn't pay face value for the loans, the PBOC had to step in with a reloan, which CCB and BOC are now repaying with profit. Huijin, the supposed "independent company" is taking a hit for the PBOC, which proves that Huijin is the commercial arm of the financial stability bureau of the PBOC.

A SCMP article (see below) claims that the PBOC lent to the AMCs rather than to the banks. But why would the PBOC give Cinda 140b to finance a 85b purchase? I suspect that the PBOC gave Cinda 85b and BOC and CCB the remainder to fill the gap between what Cinda paid and the face value of the loans. This was obviously done to maintain profit figures of CCB and BOC on the eve of their impending IPOs. In that case, it would make sense for BOC and CCB to repay the PBOC the 55b they owe the PBOC.

The bottom line of all of this is that without the "special loan" from the PBOC when CCB and BOC "sold" the NPLs to the AMCs, the BOC and the CCB would have recorded zero profit for 2004.



SCMP
Thursday, June 24, 2004

PBOC to finance more loan disposals
The state will provide funds allowing Cinda to buy NPLs from Bank of China and Construction Bank

BEI HU


Next Story
The central government has come to the aid of Bank of China and China Construction Bank for the second time in six months, by subsidising their disposal of non-performing loans with a face value of about 280 billion yuan.

China Cinda Asset Management is poised to buy the NPLs from BOC and CCB with financing provided by the People's Bank of China after beating three other asset managers at an auction on Monday.

In January, US$45 billion was transferred from the nation's foreign exchange reserves to the same two lenders, which are racing to clean up their books in preparation for initial public offerings later this year or next. The injection was criticised for potentially creating a moral hazard and also as an inappropriate use of national treasure.

Sources close to this week's auction said the central bank would grant Cinda a three-year, 140 billion yuan loan to finance its purchase.

Cinda would in turn pay the banks about 85 billion yuan for the NPLs - representing a 69.5 per cent discount to the face value - and intended to resell them to international and domestic investors, including the other three asset management firms, over a three-year period, sources said.

The first sale is expected in the second half of this year. The proceeds from these auctions will be used to pay back the PBOC.

"From the bids the asset managers submitted, it's almost certain Cinda's actual recovery rate would fall below 50 per cent," a mainland industry source said.

He said the government eventually would bear the loss should Cinda fail to generate enough cash.

"This is just another way of PBOC injecting money into these banks," a western observer said.

Cinda officials yesterday declined to comment. A PBOC spokesman confirmed Cinda submitted the auction's highest bid, but said "certain technical details have to be discussed" before Cinda could be declared the winner.

The auction marked only the second transfer of NPLs from the Big Four state banks - BOC, CCB, Agricultural Bank of China and Industrial and Commercial Bank of China - to asset managers. Four asset managers - Cinda, Huarong, Orient and Great Wall - took on NPLs with a combined face value of 1.39 trillion yuan on their inception in 1999.

Sources said Cinda's rivals sought to buy the NPLs at a 70 to 80 per cent discount to face value.

Besides the promised recovery rate, track record was one of the other factors determining the winning bid, sources said. They attributed Cinda's willingness to pay. Its cumulative cash recovery rate of 31.78 per cent by March led its three rivals by a wide margin.

The auction methodology falls in line with the government's recent pledge to run the four asset managers like commercial enterprises. It might also be an effort to assuage public criticism of January's government cash injection.

Little is known about the quality of the NPLs except that they have been classified as "doubtful",the second-worst designation in the new five-category classification system. Lenders must make a 50 per cent provision for doubtful loans whose quality is superior only to those marked "total loss".

The BOC had 116.3 billion yuan of doubtful loans at the end of last year, 5.3 per cent of its loan book. The CCB booked 137.5 billion yuan or 6.4 per cent.

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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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Tuesday, July 05, 2005

Chen Xiwen, vice director of the head office of the Central Financial and Economic Affairs Leading Group, the highest body for economic decision-making in China, recently conducted a remarkable interview with South China Morning Post reporters (Congratulations to the said reporters by the way; it's a big scoop). In it, he reveals several important insights about the future course of rural policies in China.


First, as per the riot article (the second one), he tacitly admits that there are some 30,000 "mass incidents" in rural China every year. Second, he unambiguously stated that township election will not take place. This signals the Hu-Wen leadership's reluctance to expand direct election, at least until the 17th PC. Instead, some counties are experimenting with "inner-party democracy" at the township level, i.e. having all CCP members in a township elect the local PS.

The streamlining of township government is happening in a lot of places, so it's not that remarkable. Finally, I think there is a definite move nation-wide to freeze the prefecture level out of the transfer payment chain from central down to county/township. Most of the central transfer payments to the county government currently still get sent down level-by-level, with each level capturing a share of he transfer regardless of who the intended recipients are. It is an odd coalition whereby provincial and county governments lobby to freeze the prefecture level out of
the transfer chain. Chen's remarks confirm that this trend will accelerate.

Monday, July 4, 2005

Shake-up of grass-roots government in pipeline


CARY HUANG in Beijing


Prev. Story | Next Story
Copyright ?2005. South China Morning Post Publishers Ltd. All rights reserved.

buy scmp photos

Chen Xiwen says reforms being tried in some provinces could be implemented nationwide with the aim of alleviating the burden on peasants. Picture by Ricky Wong

Beijing has embarked on a five-year programme to restructure village and township governments, aimed at streamlining bureaucracy and reducing expenditure, according to a senior central government official in charge of agriculture.

Chen Xiwen , vice-minister of the Office of the Central Leading Group on Financial and Economic Affairs, told the South China Morning Post the government hoped the move would eventually reduce the financial burden peasants must bear.

But he ruled out expanding direct elections in small villages to upper-level villages or townships.

The mainland's 37,000 village and township governments employ nearly 1.1 million cadres, but taxpayers actually foot the bill for more than 10 million workers because local governments employ people to provide social and agriculture services.

"There are a lot of social and services institutions, such as agricultural science and technology stations, farm-machinery promotion and forest-protection stations under grass-roots governments in the countryside," Mr Chen said.

Acknowledging that many services provided by social institutions were useful to peasants, Mr Chen said the reform should focus on streamlining bureaucracy.

It also should look at repositioning the functions of grassroots governments in tandem with on-going reforms of the fiscal system.

Mr Chen said a recent reform that stripped village and township governments of their tax-collecting function made many local cadres nervous about their duties.

He said Beijing encouraged provincial governments to initiate reform experiments and a pilot programme underway in Hubei province could be implemented nationwide.

In the Hubei experiment, the number of government departments at the village and township levels have been reduced from as many as several dozen to three, and they are responsible for taking care of party and government; economic; and social affairs.

The party and government office is made up of the party committee, government administration, the People's Congress, or local legislature, and the local Chinese People Political Consultative Conference - the so-called four leading organs at all levels of governments on the mainland. The offices for economic and social affairs are supposed to implement central government laws and policies and provide all services to local residents and peasants, Mr Chen said.

"Hubei province is moving forwards in the reform of village and township governments and has achieved good results," he said.

Guizhou province , one of the mainland's poorest regions, has also launched a pilot reform of its fiscal system. It involves giving the provincial government the power to directly oversee the fiscal affairs of county governments, bypassing municipal governments.

There are five levels of government under the mainland's hierarchy: the central, provincial, municipal, county, and village and township governments.

"The Guizhou reform is aimed at stripping municipal governments of their fiscal power over county governments in order to reduce red tape and stop the interception of funds earmarked to support agricultural development and help farmers," Mr Chen said.

This year the central government has allocated a record amount of funding to help lift the living standards of peasants, including 66.4 billion yuan to speed up plans to cut back and then abolish the agricultural tax by next year. Another 15 billion yuan is also set aside in this year's budget to help fight poverty in rural regions.

In Guizhou, county governments are now managing funding for village and township bodies.

Mr Chen said the results would be evaluated by Beijing before a decision was made on whether to extend the reforms to other parts of the country.

Regarding the expansion of democratic elections from the small village level - which outside observers have seen as the first step towards a democratic China - Mr Chen stressed that there was a constitutional difference between low-level and upper-level elections.

Beijing currently allows small villages to hold direct elections for most grass-roots management committees. But Mr Chen said while a small village management committee was a collective and non-governmental organ, village and township administrations were seen as government bodies under the constitution.

Any change to the formation of village and township governments would require amendments to the constitution.

While he acknowledged that some regional governments had introduced direct elections in village and township governments, Mr Chen said Beijing had never endorsed such reforms.

"Even though the reform of village and township governments have been going on for years, we could not introduce direct elections at those levels as the overall policy could not allow such experiments." He said experiments in some regions were illegal.

Monday, July 4, 2005

Mainland official hails bloody riots as a sign of democracy
Vice-minister says protests inevitable as country undergoes huge changes

WANG XIANGWEI in Beijing


Next Story
Violent protests by the mainland's farmers are inevitable due to the country's enormous social and economic changes, according to a top central government official in charge of agricultural policy.

Chen Xiwen also hailed farmers' willingness to speak up against injustice as a sign of democracy.

While stressing that he did not approve of using violence, the recent spate of protests demonstrated that farmers now knew how to protect their rights and interests, said Mr Chen, vice-minister of the Office of the Central Leading Group on Financial and Economic Affairs.

Reports of such protests also helped the central leadership act quickly and solve problems faced by farmers, Mr Chen said in an interview with the South China Morning Post.

The mainland has been hit by a spate of violent protests by farmers in recent weeks, mainly over land disputes and pollution. In April, thousands of farmers fought a bloody battle with police and officials over unpopular chemical plants in Huaxi village in Dongyang , Zhejiang province , while at least six people were killed in Hebei province last month when several hundred armed thugs attacked villagers who refused to hand over their land to an electronics factory.

"On the one hand, riots like the one in Dongyang are a tragedy and show that local authorities failed to do a proper job," Mr Chen said. "But on the other hand, they show that our farmers know to protect their rights, which is a good thing.

"It shows farmers' democratic awareness is improving, but unfortunately their sense of law and order has not improved as quickly."

Mr Chen, who has studied mainland agricultural issues for more than 20 years, is the key official credited with drafting a series of central government documents in the past two years that have helped reduce farmers' tax burden and allocated more funds to boost agricultural production.

Uncharacteristic of officials' usual aversion to sensitive issues, Mr Chen is ready to admit the problems and discuss policy from a unique perspective.

Referring to several damning reports on the plight of farmers that have attracted international attention in recent years, he said more protests had gone unreported.

"There are at least 3 million villages across the country and you can imagine how many problems crop up each day," he said.

"If there are 30,000 villages having problems, that accounts for only 1 per cent of the total. People have to look at this from a national perspective and against a backdrop of phenomenal social and economic changes taking place.

"Overseas media tend to play up the riots, and it is their job to do so. But you have to remember, things are getting better for farmers generally and few of them would tell you that they want to go back to the past, despite their complaints."

Mr Chen hailed the role of the media and internet in reporting the riots, which he said enabled the higher authorities to act quickly.

"Now, thanks to the internet, any incident will quickly come to the attention of the highest level of mainland leadership. In the past, they could easily be covered up by local officials," he said.

He said as China was going through a critical stage of reform, the interests of certain groups like farmers could be easily hurt.

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