Tuesday, December 30, 2008

The CCP is trying to revamp its cadre evaluation system. According to a new initiative of Hu Jintao, cadre promotion is now tied to an official's ability to handle sudden shocks, like earthquakes. The problem in the past is that performance was tied to things that good connections can get you, like growth or investment. Thus, those performance indicators really did not test how capable an official was, just how connected he was. Instead, Hu now wants to tie performance to exeogenous shocks, which should mitigate the gaming of the system. The new system is also more credible in that an official who did not run away during an earthquake shows credibly that he is loyal to the regime. You can still game the system, but only in particular places. For example, cadres in both Tibet and Xinjiang intentionally carry out repressive policies so that they can "deal" with the resulting riots and terrorist incidents. Not many officials can get away with that though since officials in Han areas are punished for causing instability. For some reason, cadres from Tibet and Xinjiang are immune to it.....

Tying promotion to shocks is also problematic in some sense. For one, it selects for cadres who may be good at dealing with shocks but may not be good at normal governance. For example, you can select a decisive leader who may not be so good at dealing with intricate policies related to the environment or banking. Of course, how one deals with a crisis is subject to interpretation and is not as objective as criteria like investment and growth.

But really, this is not such a new system. That was how cadres during the revolution was promoted. They were promoted in the basis of their ability to fight external enemies and to ferret out "traitors."



2008年12月30日05:44 来源:人民网-《人民日报》
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Thursday, December 18, 2008

Not to steal my own thunder or anything, but I just saw this very interesting article on former head of NBS Qiu Xiaohua. He is out of jail and working for CNOOC, but apparently while in jail,he wrote a book entitled "New Thoughts on the Chinese Economy." And, this article was carried by the People's Daily. Apparently, Qiu still has friends in high places. I think Qiu's "after life" shows that he was a victim of political struggle, and Wen had to give him up so that Hu could get to Chen Liangyu. For Chrissake, he only had one mistress; that is really nothing in contemporary China. Even a township party secretary can swing that, much less a minister. Anyway, 老邱加油!


2008年12月19日04:39 来源:《广州日报》
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  本报讯 (记者陈翔)前国家统计局局长邱晓华新著《中国经济新思考》已出版并在购书网站面市。有网友评价:“以邱经历学识,此书值得一读。”





I really don’t see what Victor Shih is worried about. If the government wants a bank to make a loan and the government is willing to either guarantee the loan or provide the capital for the loan, then there is no issue of risk management for the bank. All the risk managers have to do is to get that sheet of paper saying “The Central Government promises to cover the loan if it goes bad” and it’s no longer the bank’s problem.

The other thing about risk management is that you can properly risk manage things not only by decreasing risk but increasing loss reserves. It’s perfectly fine to lend to risky clients if you have the loss reserves to cover defaults.

Also his article makes it seem like the only reason that Chinese banks fixed themselves was Western pressure, and now that pressure is gone, that the government will backslide. In fact, the reason the Chinese government has spent the last ten years fixing the banking system was because they were (and still are) terrified of a banking crisis that would bring down the government.

Recent events haven’t reduced this fear, and pointing out that Chinese banks aren’t collapsing when American banks are, should be enough to keep banks doing good risk management.

If Westerners want Chinese banks to have good risk management, the thing to do is not to lecture and instead say “look you guys are geniuses and we are idiots, study what we did over the last ten years and whatever you do, don’t do the same things, but rather keep doing what you were doing.”
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Dear All, my op ed on the Wall Street Journal Asia

Chinese Banks' Great Leap Backward
Stimulus may come at the expense of hard-won reform.
By VICTOR SHIH | From today's Wall Street Journal Asia

Around the world, the banks we see today are very different from their former selves of just a few months ago. The transformation has been most pronounced in the U.S. and Europe, where a combination of mergers and government involvement have reshaped the financial sector. But change is afoot elsewhere as well, and it isn't always positive. In particular, Chinese banks are currently under enormous pressure to change their business practices in ways that represent a serious step backward.

A year ago, many of us were ready to be impressed with China's banking system. To be sure, banks were still mainly state-owned, and the Chinese Communist Party continued to be omnipresent. However, the average bank managers were extremely risk conscious, and regulators from the China Banking Regulatory Commission (CBRC) swooped down on bank branches conducting surprise inspections every so often. Bankers were extremely hesitant to make uncollateralized loans to any firm except for the largest corporations.

This was an enormous change from just 10 years ago, when bankers doled out large sums at the slightest urging of the local governments and when banks were considered the "second treasury" by central policy makers. At that time, the nonperforming loan ratio was estimated to be nearly half of all loans outstanding. By January 2008, the official NPL ratio was less than 6%. This transformation wasn't cheap or easy -- it required hundreds of billions of dollars from the government to buy bad loans off bank balance sheets and recapitalize the institutions, and also the participation of Western "strategic partners" brought in to lend their expertise in best practices.

However, risk-prevention institutions built up over the past decade are now under enormous pressure to forgo prudence in the interest of maintaining economic growth. There have been two triggers for this. First, the global recession caused a plunge in demand for Chinese goods -- in November, Chinese exports fell for the first time in nearly a decade. At the same time, the property market continues to shrink in many major Chinese cities.

Anticipating a declining economy, in November the central government announced a four trillion yuan ($586 billion) stimulus package to be carried out in the next two years. At the same time, the National Development and Reform Commission was ordered to approve fixed asset investment worth 100 billion yuan before the end of the year. As of mid-December, much of the money has been doled out. This forceful injection of funds into the economy will be the dominant method of generating growth in the next two years.

Banks are trapped in the middle, because they will finance much of the stimulus package. Of the four trillion yuan stimulus, only about a quarter will be financed by the government's central budget. At a time when local governments are strapped for cash due to falling land prices (land sales are a common form of municipal cash-raising), banks are expected to finance much of the remaining three trillion yuan in the package. This isn't a matter of choice. Most banks must follow the government's lead because senior bankers are appointed by the Party.

It gets worse. Local governments have announced a further 20 trillion yuan in investment to "supplement" the central package. Assuming both Beijing and the local governments stick to these spending targets, banks will be under enormous pressure to finance trillions in state-sponsored projects in the next two years. With so much money to push out the door, risk management will almost inevitably take a back seat. Banks that had made enormous strides toward global best practices were compelled by central pressure to greatly boost credit in the last two months of this year.

Prudence is not completely out the window yet because of continuation of CBRC monitoring, but risk management is increasingly a second priority. The CBRC has sent subtle signals to banks to not worry about profit too much and to exclude more risky loans to small- and medium enterprises from their main balance sheets.

Partly as a result, banks are increasingly compromising between risk prevention and political pressure by boosting lending through bill financing instead of writing outright loans. In theory this limits risks because bill financing tends to be short-term and can be easily transferred to another bank. Of the 477 billion yuan of new loans made in November, half were in bill financing. The rise of bill financing may increase systemic risks in the future because banks tend to be less careful when they discount these bills due to their transferability. Loans, on the other hand, are stuck on banks' balance sheets.

Meanwhile, if the economy worsens in the first quarter the government may be tempted to abandon prudent regulation altogether. Beijing could order the CBRC to disregard risk targets or even abolish the CBRC. This would plunge China back into the old days when the only risks that bankers faced were political ones.

Without a global financial crisis, the global financial community might have criticized such a giant step back toward the planned economy. The criticism might have at least triggered some debate in China. However, with the rest of the world suffering a severe credit crunch that has seen free-market governments bailing out their own financial institutions, there are few people left who can credibly criticize China's actions.

Western central banks have conducted operations that once were monopolized by the Chinese central bank and drew scoffs and snorts from the global banking community. For example, the People's Bank of China, the central bank, used to conduct "relending" operations to inject funds into distressed banks to pay creditors or to write off distressed assets. Now, the Federal Reserve is doing the same by buying or accepting as collateral questionable assets from banks.

In any event, everyone is too preoccupied with their own losses to comment on Chinese policies. Which is a problem, not least for China itself. With enormous political pressure from the central government to pump money into the economy and silence from the rest of the world, much of the work in the past decade is being undone.

Mr. Shih, an assistant professor of political science at Northwestern University, is author of "Factions and Finance in China" (Cambridge University Press, 2008).


Very accurate description of whats going on. Except for the CBRC abolition scenario (outlandish to say the least - there are many other ways to neuter the cat) you have it spot on.
Thanks, but if they go ahead with the super ministry concept of combining CBRC, CIRC, and CSRC, then NPL prevention would only be one of its many goals, like in the old days.
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Sunday, December 07, 2008

The pretense is over; China is now playing the role of a vigilant creditor. Last week at the SED in Beijing, Wang Qishan lectured Paulson that the US should "stabilize the economy." But what did he mean by that? Haven't we done enough already, recapitalizing all the major banks at the heart of the financial system? In a recent report written by Yu Yongding, a leading thinker of foreign exchange issues at CASS, he warned that the recent spade of printing money will one-day lead to the crash of the dollar. I think this was also Wang's message to Paulson and Bernanke--do not cave too much into short-term political needs to print massive amount of money. Nations of the world will one-day lose faith in the dollar. Well, the problem is that if we stopped printing money, banks and firms will go bankrupt, further decreasing our demand for Chinese goods. Is that really what China wants??

China lectures US on economy
Source: The Financial Times | Updated: 12-04-2008

The US was lectured about its economic fragilities on Thursday as senior
Chinese officials urged the administration to stabilise its economy, boost its
savings rate and protect Chinese investments.
The message went to Hank Paulson, the US Treasury secretary, in Beijing for the
strategic economic dialogue he helped launch to discuss long-term issues
between the two countries.
As expected, Mr Paulson urged Beijing not to abandon efforts to let the
renminbi appreciate, said US officials, amid fears China might want to let its
currency weaken to help local exporters weather the global slowdown.
But Mr Paulson also found himself facing calls for the US to address its own
economic problems. Wang Qishan, a vice-premier and leader of the Chinese
delegation at the two-day talks, called on the US to take swift action to
address the crisis.
"We hope the US side will take the necessary measures to stabilise the economy
and financial markets as well as guarantee the safety of China's assets and
investments in the US," he said.
The dialogue was dominated by the global crisis. Zhou Xiaochuan, governor of
the Chinese central bank, urged the US to rebalance its economy.
"Over-consumption and a high reliance on credit is the cause of the US
financial crisis," he said. "As the largest and most important economy in the
world, the US should take the initiative to adjust its policies, raise its
savings ratio appropriately and reduce its trade and fiscal deficits."
Although China also faces a rapidly slowing economy and rising unemployment,
the tone of the comments reflected an underlying shift in power.
Eswar Prasad, a senior fellow at the Brookings Institution, said: "One result
of the crisis is that the US no longer holds the high ground to lecture China
on financial or macroeconomic policies."

Hello Victor,

I have been looking for the "21 century Economics Herald" that you mention in some of your posts, but for some reason it is impossible to get a link to it on the internet. Is it only a paper publication?

Or is it the same as the 21 century business herald? I have found that one 21世纪经济报道 at www.21cbh.com, but I am not sure it is the same since I cannot find the author that you mention Wu Hongying.

I would be grateful if you can tell me how to access.

PS great blog by the way
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Friday, December 05, 2008

I don't usually do social commentary, but this is just too funny. So now kids in Beijing are forming gangs to beat each other up. In this case, the "black cloth" gang....I think they are watching too much TV or movies. The funniest thing about the article is that it keeps referring to the defendant as 帮主! Isn't this a bit too honorary--I think the irony was intentional. In any event, if the economy gets worse, such gangs may proliferate.


2008年12月06日04:48 来源:人民网-《京华时报》
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Wednesday, December 03, 2008

It's official, there will NOT be Chinese money to the rescue

In remarks to the Clinton Global Initiatives, Lou Jiwei, the head of CIC, siad that CIC will not invest further in Western financial institutions in the future due to "uncertainty facing Western banks, and the lack of certainty in the government policies that determine their fate." Also, "due to the lack of continuity in the governments that support Western banks, he has lost confidence." Here, this is a veiled threat to President elect Obama. Well, I am a bit indignant here of Lou's remarks. It's not as if the Chinese government is the paragon of transparency. At least when we have disputes about bailing out banks, they are all out in the open. In China, outsiders cannot observe when the NDRC is trying to screw the PBOC.

http://www.sina.com.cn 2008年12月03日 13:17 每日经济新闻





  楼继伟表示,考虑到西方银行前途未卜,关乎他们命运的政府决策存在不确定性,目前不适合对他们进行投资。他周三在香港的克林顿全球倡议 (Clinton Global Initiative)会议上表示,我们不知道发达国家政府何时会对这些机构进行投资。我们必须等待,直到金融机构不会再出现大规模崩溃的时候。



  中投公司已经对美国金融领域进行了诸多颇为引人瞩目的投资;随着金融危机的加剧,这些投资也遭受了严重损失。2007年5月,中投公司收购了百仕通集团(Blackstone Group)30亿美元的股份,又于当年12月斥资56亿美元收购了摩根士丹利(Morgan Stanley)近10%的股权。这两笔投资的价值已经大幅缩水,中投公司管理层因此在国内遭受了强烈批评。


  克林顿全球倡议是由美国前总统克林顿(Bill Clinton)组织的一个论坛,旨在为慈善以及从消除贫困到应对气候变化等的诸多项目寻求支持。

i dont read.on this site.
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Tuesday, December 02, 2008

Dear All, new post for RGE Monitor

Workers are angry; the (central) government pays

Victor Shih | Dec 2, 2008

The Chinese press these days are filled with fascinating stories. One story from Sina details what the Zhangmutou Township government in Dongguan had to do to placate some 7000 angry workers laid off by a toy factory without pay. To placate the workers, the township government decided to pay the August, September, October wages of these workers along with over-time. Fine, but anyone with cursory knowledge of Chinese public finance knows that cash strapped township governments with few revenue sources, even if they are located in prosperous Guangdong, do not have the means to pay this amount. Some simple math: suppose each worker is paid USD 150 a month and overtime is 10% of total wage bill. The township government would have to pay 150*3*7000 + 0.1 (150*3*7000), which is a whopping 3.5 million dollars (roughly 23.5 million RMB). Of course, the Dongguan government has the means to pay this amount. However, if we bear in mind that wage arrear is cropping up in all the townships of Dongguan, the Dongguan government is clearly facing an unmanageable problem.

Of course, the buck can stop at the provincial level, and the Guangdong government has the means to pay three month wage arrear of even millions of workers (3 million workers' 3-month wage arrear would cost around 1.35 billion USD). However, since wage arrear is a "stability" issue, local governments are likely blackmailing the central government for money. In a paper that Mingxing Liu, Luke Qi Zhang and I did on fiscal transfers in China, we found that the central government is most prone to increase transfers to county governments out of stability concerns. In the past, local governments blackmailed the center using wage arrears of government officials, which threatened the entire functioning of local governments. Now, with protests and riots barely contained in factory towns, the provincial government certainly has strong reasons to ask the center for more funds. As I write this, I am sure the good people at the Ministry of Finance are fielding a barrage of requests for emergency funds from various local governments (as an MOF official once told me "we are the fire brigade").

The problem is that given central fear of stability, workers, factory bosses, and local governments will make the problem of wage arrear seem much worse than it actually is in order to squeeze money out of the central government. Furthermore, things actually may get worse if the Christmas season in the US turns into a bust for retailers. This would create even more unemployment and wage arrear issues. Local governments, even provincial ones, are already under fiscal constraints due to the collapse of the land market, previously a major source of local revenue. In this case, both objective forces and political incentives may conspire together to create a substantial category in the 2009 central expenditure budget. On top of the stimulus package and possible bank bailouts next year, this would increase expected deficit in the Chinese budget in a non-trivial way. How much would it be? Suppose that the central government has to pay 6 months of wages for 20 million workers (roughly 15% of all migrant workers), it would cost the central coffer 18 billion dollar or 122.4 billion RMB. It is roughly 2% of all government revenue in 2007 and 4% of central revenue in 2007, really not that trivial.

Victor, can you add permanent links to your posts? So that people can bookmark your specific posts.

BTW, Christmas orders had been made months ago, right?
if Christmas inventory is significantly undersold, retailers will order less and wait until their inventory is sold; so the effect is same.
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