Tuesday, May 30, 2006

So, Bush apparently nominated Henry Paulson, chairman and CEO of Goldman Sachs, to be Secretary of Treasure. While it is debatable whether he will have any influence on Bush's fiscal policy, the claim that he is "a China hand" is questionable. Sure, he has made many trips to Asia, but he was never really in charge of concrete business in Asia, like Fred Hu or others. He just flew in to sign deals.....so now serving on some board at Qinghua qualifies you as a "China hand?" True, this is a trivial issue; the main issue is whether someone with Wall Street background will push Bush toward deficit reduction......

Paulson experience with China may calm both sides By Greg Robb, MarketWatch
Last Update: 5:37 PM ET May 30, 2006

WASHINGTON (MarketWatch) -- The appointment of Henry Paulson as Treasury secretary gives the Bush administration a proven China hand with deep professional connections to the world's most populous country, though experts said his arrival should be not viewed as a shift in U.S. strategy towards the Asian economic powerhouse.

Paulson, the chairman and chief executive of Goldman Sachs Group, has made more than 70 trips to China over the last decade, and is considered an expert on issues American businesses face "on the ground' in China, and of the condition of Chinese banks. This experience is expected to serve him well as a member of the administration.

"He may be able to be more effective because he has a much deeper understanding and experience with China," said Nao Matsukata, former director of policy planning at U.S.T.R. and the chair of Strategic International Business Practice at Hunton & Williams.

Xiaobo Hu, a professor of political science at Clemson University, called Paulson "one of the pioneers to get into the Chinese market. "

By appointing Paulson, "it shows that the Bush administration is moving one step closer to a serious attempt at working together with and in the Chinese market, " Hu said.

But these same experts do not predict that Paulson's assumption of the top job at the U.S. Treasury will change White House policy toward China and its fixed currency.

"I wouldn't see any reason to think that we will have a new approach to China," said Desmond Lachman, formerly the chief emerging-markets economic strategist at Salomon Smith Barney and now an analyst at the American Enterprise Institute.

"On the direct issues, I can't think of any immediate impact" from Paulson's nomination, said Adam Segal, senior fellow for China Studies, at the Council of Foreign Relations.

"It's not a personality problem. There are huge structural problems that don't have an easy solution to them," Segal said.

The United States, along with multilateral institutions such as the Group of Seven, the International Monetary Fund and the World Bank, have argued that China's misaligned currency is one source of growing global imbalances that could threaten the robust global expansion.

Last July, China moved to decouple the yuan from the dollar, but there has been very little movement since that first 2.1% one-day move.

But to keep the yuan pegged to the dollar, the Chinese have purchased hundreds of billions of dollars worth of U.S. assets, primarily government debt and home mortgages.

U.S. and China appear to be at a standstill on the currency issue.

Despite "strong disappointment" in the slow progress being made on strengthening the yuan, the U.S. Treasury concluded earlier this month that China has not met the technical requirements to be named a currency manipulator. See full story.

The Chinese insist that they will move toward more flexibility on exchange rates at their own timetable. Essential institutions, such as the banking and payment systems, must be reformed first, they say.

Looming in the backround is Congress.

A bill written by Schumer, D-N.Y. and Lindsey Graham, R-S.C., would slap a 27.5% tariff on Chinese imports if China doesn't take a meaningful step to revalue its currency and set a timetable for an eventual float. The senators have said they will bring the bill up in September unless China moves further to allow its currency to appreciate versus the dollar.

Experience counts

Experts say it is difficult for the nomination of one man, even the U.S. Treasury Secretary, to alter these forces.

U.S. policy is driven by concerns about North Korea and Iran and China policy is driven by concern for its domestic economy.

But in sharp contrast with Treasury Secretary John Snow, Paulson has had "a tremendous amount of personal and professional experience in China," Matsukata said, which will be beneficial.

"He also has very good professional, if not personal, relationships with some of the most senior economic officials in China," Matsukata said.

Goldman owns a stake in one of that country's brokerages, Goldman Sachs Gaohua and has or will lead three of China's biggest initial public offerings. Among them: PetroChina, Ping An Insurance and Bank of China.

"He can help educate the members of Congress about the challenges China faces domestically," Matsukata said.

John Frisbie, president of the U.S.-China Business Council, a trade group for U.S. businesses with operations in China, said Paulson was a very good choice to help China reform the financial system. China's fixed currency is designed to protect China's weak banking sector. China still maintains capital controls. There is concern that removal of the controls would lead to a large outlflow of capital.

"Paulson understands China's financial sector. He understands the reforms that are needed, and I think he will be able to address those," Frisbie said.

During his visit to China last October, Snow sought to broaden the discussion of China's currency reform to include financial sector reform.

"Hopefully Paulson would pick that up and, given his background, take that even further ," Frisbie said.

On the other hand, Patrick Mulloy, a commissioner on the U.S.-China Economic and Security Review Commission, said he hoped Paulson would take the issue of China's foreign currency reserves move seriously that Snow did.

China is gaining "enormous leverage" over the U.S. economy through their dollar holdings, Mulloy said.

Paulson is on the advisory board of Tsinghua University School of Economics and Management, a virtual whose who of top U.S. businessmen in China including Craig Barrett, the chief executive officer of Intel Corp., Philip Condit, the chief executive officer of The Boeing Co., Douglas Daft, head of the Coca-Cola Co. and Michael Dell, head of Dell Computer Corp.

Comments: Post a Comment
New State Council measures to curb housing prices. The fact that nine ministries are involved in drafting suggests they mean business. But as you can see, the enforcement will be difficult.



关 于 调 整 住 房 供 应 结 构
建设部 发展改革委 监察部 财政部 国土资源部
人民银行 税务总局 统计局 银监会

  (二)明确新建住房结构比例。“十一五”时期,要重点发展普通商品住房。自2006年6月1日起,凡新审批、新开工的商品住房建设,套型建筑面积90 平方米以下住房(含经济适用住房)面积所占比重,必须达到开发建设总面积的70%以上。直辖市、计划单列市、省会城市因特殊情况需要调整上述比例的,必须报建设部批准。过去已审批但未取得施工许可证的项目凡不符合上述要求的,应根据要求进行套型调整。
  (七)加大对闲置土地的处置力度。土地、规划等有关部门要加强对房地产开发用地的监管。对超出合同约定动工开发日期满1年未动工开发的,依法从高征收土地闲置费,并责令限期开工、竣工;满2年未动工开发的,无偿收回土地使用权。对虽按照合同约定日期动工建设,但开发建设面积不足1/3或已投资额不足 1/4,且未经批准中止开发建设连续满1年的,按闲置土地处置。

Comments: Post a Comment

Saturday, May 27, 2006

In a true manifestation of the "Three Represents," the Central Party School, whether senior cadres go for mid-career training, are holding classes for private entrepreneurs. I wonder how much the lecturers get paid and the level of guanxi one needs to set this up. My guess on the first one is that they get paid between 10-20 thousand RMB per lecture. In a way, this is a great way to monetize post-retirement benefits for senior cadres since that crappy apartment unit for life isn't as attractive as it once was. Opportunities for these payoffs increase the slope of the yield curve for long-term government service and should in theory lessen the incentive for younger cadres to be corrupt. It is of course much more complicated than that, but these nice payoffs at least give some incentive for officials to try to serve until their retirement instead of risking capture by taking huge bribes. Of course, another interpretation is that sanctioned corruption has spread to even the Central Party School.

24 April 2006
South China Morning Post
(c) 2006 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.

Though the courses do not count towards an MBA, businesspeople are beating down the door of LiuJianjun to hear his ideas.

The chairman of a Guangdong business consulting company is offering entrepreneurs the chance to spend six days learning from the leading lights at the Central Party School, the training ground for the country's civil servants.

The school was set up in the 1930s with the main aim of training party officials in communist dogma and counts President Hu Jintao among its former senior staff. But it is now reaching out to the wider community.

For 6,800 yuan, businesspeople can hear about some of the thinking that goes into central government policies.

"The training only lasts six days and is provided by former senior Communist Party officials," Mr Liu said. "People can listen to the party scholars and officials talk about {hellip} the party's thoughts during each historical period, and the latest political and economic policies made by central party decision-makers, including the background and tasks of the 11th Five-Year Programme.

"[They can also hear about] social problems the party struggles with and the development trend of private enterprise in China."

The courses have proved so popular that Mr Liu has doubled his intake and put on extra programmes at a time when his competitors are fighting declining interest in business education.

This month, 80 entrepreneurs enrolled in his training programme flew more than 1,900km from Guangdong to Beijing for the week-long course.

Mr Liu said the school's short-term training programme was attractive to many of the province's wealthy and influential businesspeople because the course covered issues that were key to doing business in a party-led country.

"No one can understand the policies of the central government better than the Central Party School. It's the party's premier training academy," Mr Liu said.

He said it presented opportunities for entrepreneurs to interact with professors and classmates.

"It's not easy to find top-ranking professors and officials to guide your business and build up a network with other entrepreneurs," he said. "The training is very efficient because they can learn political and economic trends by day, and make friends at night."

The last intake was lectured by Chen Qingtai , former dean of the School of Public Policy and Management and a former vice-president of the State Council's Development Research Centre.

Mr Liu is just one agent channeling businesspeople to the school's non-degree training courses. More than 10,000 private entrepreneurs throughout the country have participated in the programmes and the number is expected to grow.

Many trainees said the Central Party School's brand name and networking opportunities motivated them to apply.

But Shi Jingming , vice-chairman of Guangdong Guo Bang Investment Co, said people should not expect too much from the programme. He said the tutors did not offer surprising background information on the party, and information about the latest policies and conflicts was conservative.

"It's interesting to listen to the former officials because their attitudes on politics and economics are very close to the central government's view," Mr Shi said. "But the programme only sheds light on understanding the nation and can't offer practical ways to expand your business. Besides, a six-day course is also too short to build valid friendships with others."

But he thought the training was still worth the time and money.

"For less than 7,000 yuan - including air fare and accommodation - you can get a diploma from the party's premier training academy and the chance to meet former senior officials," he said.

See the artcile "Reining in capitalists" from the Hong Kong Standard 17 April 2006 for a more nuanced view.
Post a Comment

Monday, May 15, 2006

The E&Y Report is worse than what I had thought. Apparently, the figure mentioned in the report even contradicts with the results of E&Y's own audit of ICBC! This is the worst aspect of this report: E&Y and other accounting firms have pushed the Chinese to adopt the five-category loan classification and to hire them as "independent" auditors of the books. Fine, but then it turns around and accuses the Chinese of falsifying figures. True, that still happens, but to say that the extent of falsification is the same as before is simply ridiculous, and they know it. Fortunately, they are called on their exaggeration this time. See the official retraction below, as well as an excellent FT article on this:

Ernst & Young's statement
Ernst & Young Withdraws NPL Report

Global Headquarters, London, 12 May 2006 The Nonperforming Loan (NPL) Report that was issued on 3 May 2006 reported that the NPL exposure for China was estimated at US$911 billion. Throughout the report this amount was identified as a potential future amount that includes NPLs totaling approximately US$358 billion for the big four commercial banks. Upon further research, Ernst & Young Global finds that this number cannot be supported, and believes it to be factually erroneous.

The NPL Report did not go through our normal internal review and approval process before it was released to the public and, as it contains errors, we are withdrawing the report.

The official level of NPLs of US$133 billion for the big four commercial banks in China is computed on a regulatory and accounting standard based on objective evidence of impairment. Ernst & Young China serves as auditors for one of those four commercial banks and their audit, performed under international standards of auditing in order to form an opinion on the bank’s state of affairs in accordance with International Financial Reporting Standards, supports the bank's contribution to the total of US$133 billion for all four of the commercial banks.

We apologize that this erroneous report was issued. We sincerely regret any misleading views that the report conveyed.

Ernst & Young withdraws China NPL report

By Richard McGregor in Beijing

Ernst & Young, the accountancy firm, has withdrawn a controversial report on China's non-performing loans, saying its estimate of bad debts for the country's big four state banks "cannot be supported" and "is factually erroneous."

The announcement comes days after the report was attacked by the People's Bank of China, the central bank, as "ridiculous and barely understandable" and at odds with the firm's own auditing of Chinese banks.

The main problem for E&Y appears to have been a conflict between the NPL report and its own auditing of the Industrial & Commercial Bank of China, the country's largest lender, ahead of an overseas listing slated for September.

E&Y in its NPL report identified the level of bad debts in the big four state banks, including ICBC, as US$358bn, much larger than the official number of US$133bn.

The additional US$225bn in extra bad debt was derived from a UBS research report estimate of the amount of new sour loans resulting from a surge in lending in China between 2002 and 2004.

In a statement issued with the retraction of its report, E&Y resolved the conflict firmly in favour of its auditors, saying the official figure was "computed on a regulatory and accounting standard based on objective evidence of impairment."

E&Y China serves as auditors for one of those banks and their audit, performed under international standards of auditing in order to form an opinion on the bank's state of affairs in accordance with International Financial Reporting Standards, supports the bank's contribution to the total of US$133bn for all four of the commercial banks,” the statement says.

In a separate statement on Monday, E&Y said the NPL report had erred by treating "unverified forecast data compiled by others as if it were historic information."

E&Y said it was clear that its own internal policies for approving such reports were not followed and procedures would be reviewed to ensure that such an embarrassing situation will not happen again.

The E&Y report on bad debts took many by surprise as the market had become much more relaxed about China's NPL issue after a wave of initiatives to clean up the books of the country's big banks in particular.

The timing of the E&Y report was especially aggravating for the PBoC, coming just before the launch of a roadshow to promote the US$9.9bn initial public offering by Bank of China in Hong Kong, and the preparations for the ICBC listing.

The overseas listings, the first of which was late last year with the IPO of China Construction Bank in Hong Kong, are a central part of the government's plan to transform them into genuine commercial lenders.

E&Y's estimate of China's total NPL liabilities of US$911bn in its report released in early May was nearly double the same firm's 2002 estimate of about US$480bn.

E&Y says it plans to review the original NPL report, issued on May 3 this year, and release a revised version.

Although they did not include the same high numbers as the E&Y report, both PwC, the consultancy firm, and McKinsey Global Institute, have issued reports in recent weeks reaching similar conclusions about mounting levels of new bad loans in the Chinese banking system.

"The Economist" (May 20th) thought E&Y caved in too easily to the pressure of the PBOC. The E&Y figure and the official figures differ because E&Y tried to estimate the new NPLs that will result from a lending spree between 2002 and 2004, and the economist thought the estimate was roughly reasonable. What do you make of it? thanks.
Post a Comment

Friday, May 12, 2006

Sigh......well, yet another squabble between foreign firms and the Chinese government has broken out. In response to an Ernst Young estimate that NPLs in China is as high as 900 billion USD, the PBOC issued a rebuttal, calling the estimate "a serious distortion." Essentially, the Jack Rodman perspective is that most special mention loans are NPLs. I have no doubt that some are, but to say that most are goes too far. I think that actual NPLs is at most 30% higher than official figures, rather than double the official figures. This was certainly the case eight years ago, but it likely is no longer the case today. The independence of the CBRC from the PBOC plays a large part in this change, and fancy auditing systems that firms like E&Y sold to Chinese banks should play a role as well!

Obviously, E&Y --especially Jack Rodman,who oversees E&Y's Asia NPL business-- is trying to drum up business for the firm. E&Y serves as an intermediary between foreign investors who want to invest in Chinese NPLs and the Chinese market. E&Y is trying to make a splash with this report to revitalize deal flow when in reality, the market has less need of intermediaries like E&Y. The Chinese NPL market today is populated either by increasingly well-financed and well-connected domestic firms or seasoned foreign investors who have been in the market for a few years. These players have little need of a foreign intermediary (they do need Chinese ones). Unfortunately, the PBOC played right into this publicity stunt by issuing a rebuttal, which will further fuel speculation about NPL ratios in China.

China Defends Its Banks
Nation Says a Report
Exaggerates the Value
Of Sector's Bad Loans
May 12, 2006

BEIJING -- China's central bank rejected a research report that nonperforming loans in the country's banking system could be as high as $900 billion.

"The overseas accounting firm's so-called research report...not only greatly distorted the current asset quality of China's banking industry, but also has great discrepancy with its audit results on many Chinese financial institutions," an unnamed official at the financial-stability bureau of the People's Bank of China, said in a statement published on the PBOC's Web site.

The PBOC didn't name the accounting firm. Earlier this month, media reports, citing a study by New York-based Ernst & Young LLP, said China's banking-debt problem is far worse than official estimates indicate.

The reports said nonperforming loans for China's Big Four banks alone were valued at $358 billion, more than double the government's figure, and the total for the banking system could be as high as $900 billion.

The PBOC statement said that China is pushing forward its financial reform and development, and that internal controls and risk-management abilities in financial institutions have strengthened, asset quality has improved, and capital-adequacy ratios have increased steadily.

The Chinese banking sector's NPL ratio fell to 8% at the end of the first quarter from 8.6% at the beginning of the year, the central-bank statement said.

Outstanding NPLs at state-owned commercial banks, stockholding commercial banks, rural commercial banks and foreign banks totaled 1.312 trillion yuan, or about $164 billion, at the end of the first quarter, down 13.76 billion yuan from the beginning of this year, the statement said.

At the end of 2005, Bank of China Ltd.'s NPL ratio was 5.41%, while China Construction Bank Corp.'s NPL ratio was 3.84%, it said. Industrial & Commercial Bank of China and Bank of Communications Co.'s NPL ratios were 4.69% and 2.37%, respectively.

At the end of 2004, according to data from the banks, Bank of China's NPL was 5.12%, China Construction Bank's was 3.92%, ICBC's was 18.99%, and Bank of Communications' was 2.93%.

Agricultural Bank of China, the weakest of China's Big Four state banks, is aiming for financial reforms, the statement said.

Comments: Post a Comment

Monday, May 01, 2006

More on the nature of the Chinese economy from Doug Fuller, Ph.D. from MIT and currently a post-doc at Stanford University. This commentary is very thoughtful, and I also wonder how efficiently capital is being used these days. I think efficiency of capital usage has improved a bit, from roughly 2.5% monetary growth for 1%GDP growth to something like 2% monetary growth for 1% GDP growth.

I agree that intra-firm meddling may occur (I think
Vic may question this with his statement about the
state not sweating the small stuff), but I question
how well any of the national champions are managed.
At best, we have Bao Steel and Huawei as black boxes
of which we know virtually nothing about their real
returns on investment over time.

If we are contrasting finance to equity-based
capitalism, China certainly is not the latter so if
these are the only two choices... Nevertheless, I am
less concerned about the taxonomy of China's
capitalism than what the state of China's institutions
says about its future development. My reading of Vic's
work is that financial control by the central state
has not led to a more efficient allocation of capital.
True, the increase in noncorporate lending (lending to
consumers has been a more efficient allocation of
capital vis-a-vis China's past poor practice except
for the now major problem of China's real estate
bubble) may improve efficiency at the margins and goes
back to Matt's point about the state allowing markets
on the wide margins of the economy. Hard data showing
an improving ICOR or some other significant
measurement would change my mind about the continued
severe misallocation of capital, but I have not seen
such data. What I have seen is data showing China's
ICOR underperforming the not-so-inefficient financial
sectors of Japan and Korea in their developing,
investment-heavy heydays and data showing China badly
underperforming current developing countries in
efficient allocation of capital.

Dividing Naughton from the others, Naughton's stance is
that China's capital allocation is becoming more
efficient because the state has 1) abandoned most
industrial policymaking (which he problematically
equates only with chaebol-building) and 2) the number
of formal SOEs are smaller. Others take a more
constructivist approach by pointing out several
"market capitalisms" that exist in China.
The state uses "market as selection" i.e. allows firms
to fail with those firms not important to the center

China may have finance-based Leninist Capitalism, but
what concerns me is China neither has efficient
markets nor efficient hierarchies. In short, in
finance, China suffers either 1) simultaneously from
market and government failures or 2) one could say the
government failure crowds out the very possibility of
a market mechanism, failed or otherwise. I am less
concerned about the debate over how far product
markets operate in China--I think we all acknowledge
that they are pretty extensive-- but Naughton's
announcement that the solution to China's severe
capital misallocation has arrived appears entirely
inaccurate. He seems to be re-stating "growing out of
the plan" by assuming a smaller share of SOEs in the
economy equates to better financial management.

My read on Nolan's 2001 work is that he believes China
has sacrificed dynamic efficiency gains to be gained
through industrial policies on the altar of static
efficiency gains that have been gained through
economic openness by not pursuing an ambitious
industrial policymaking program. He underestimates
the Chinese state's past and perhaps present ambition
and overestimates its capabilities. Nolan also has
that 2004 book that seems much more optimistic about
China's economic reforms (I have not read it) in
contrast to his pessimism about China's dealing with
globalization in his 2001 book.

Comments: Post a Comment

This page is powered by Blogger. Isn't yours?