Sunday, July 26, 2009
The Straits Times (Singapore) July 25, 2009 Saturday Peh Shing Huei
China's corporate world ruled by princes;
About 90 per cent of China's billionaires are the children of high-ranking officials
BEIJING: It has been days since news first broke of a graft probe in Namibia into a firm formerly run by the son of Chinese President Hu http://w3.nexis.com:80/new/images/IconInfo.gifNews, Most Recent 60 Days
Jintao. Yet, in China, hardly anyone knows of the case. Nuctech - which makes security scanners and was headed by the 38-year-old Mr Hu Haifeng until last year - is being investigated over a lucrative contract it had won to deliver equipment to Namibia. It is not known if the case, which happened last year, took place while Hu junior was still in charge. There has been nothing to suggest that he is involved in any way in the probe, but Namibia's Anti-Corruption Commission has requested an interview with him and senior Nuctech management.
In China, discussions about the business dealings of the 'princelings' or taizidang - offspring of political leaders - are considered taboo. People might whisper about them over dinner tables, but will never discuss them in public. Some princelings, such as Vice-President Xi Jinping, become public figures after being drawn into politics, but their counterparts in the corporate world shy away from the limelight. Nevertheless, they are a force to be reckoned with. A 2006 study by several Chinese research institutions showed that almost 90 per cent of the country's top leaders in sectors encompassing finance, foreign trade, property development, construction and stock trading were princelings.
And about 90 per cent of China's billionaires are the children of high-ranking officials. Princelings have fared far better in business than in politics, observed analyst Zhang Hua, who commented on the phenomenon in Hong Kong's Apple Daily in 2007. 'Not a single (princeling) family has been left behind,' he said sardonically. The various families have carved out territories in various industries. The family of former premier Li Peng, for example, controls the country's energy sector. His daughter Li Xiaolin is chairman of China Power International Development, an electricity monopoly. His son Li Xiaopeng used to head Huaneng Power, another energy heavyweight.
The family of former Chinese president Jiang Zemin has moved into telecommunications, while the offspring of former premier Zhu Rongji are strong figures in banking. His son Levin Zhu is the chief executive of China International Capital Corp. The princelings began staking out their dominions in the business world in the 1980s when China was opening up its economy. Armed with their fathers' connections, they were able to exploit the opportunities thrown up by China's economic transformation.By the 1980s, this economic revolution had led to much public disquiet, and when students staged protests at Tiananmen Square in 1989, much of their anger was initially directed at what they saw as rampant corruption by senior officials and their families.
The bloody crackdown that followed left deep scars in the political psyches of most Chinese. For the princelings, Tiananmen provided further incentive to move away from politics into business. 'After 1989, princelings in politics suffered. They were very unpopular within the Chinese Communist Party,' explained analyst Bo Zhiyue, an expert on China's elite politics at the National University of Singapore's East Asian Institute. 'It was very hard for them to get into the Central Committee. They were not chosen at internal elections because of their family names, so many left politics and jumped into the corporate world.'
After Tiananmen, their business dealings became even more politically sensitive. A bad slip could see their fathers stepping on that proverbial banana skin and tumbling from power.
For President Hu President Hu -Search using:
http://w3.nexis.com:80/new/images/IconInfo.gifBiographies Plus News who has repeatedly pointed out that the battle against graft is 'a matter of life and death' - the timing of the Nuctech case could prove awkward. In just three months, on Oct 1, the nation will celebrate the 60th anniversary of the founding of Communist China - at which glorious occasion he is expected to be conferred the rare honour of a military review on Tiananmen Square.
Unsavoury rumours about the princelings' business activities do damage the image of the leaders concerned, said Hong Kong-based analyst Joseph Cheng. Still, he feels that any fallout from the Nuctech case will be extremely limited and that Mr Hu's political rivals are unlikely to use it against him because almost all the top leaders have family members with substantial stake in the corporate world.
Princelings have fared far better in business than in politics, observed analyst Zhang Hua in Hong Kong's Apple Daily in 2007.
Five princes and their business ties
HU HAIFENG, 38 Son of Chinese President Hu President Hu -Search using: http://w3.nexis.com:80/new/images/IconInfo.gifBiographies Plus News http://w3.nexis.com:80/new/images/IconInfo.gifNews, Most Recent 60 Days
Jintao Chief of Tsinghua Holdings, the group which controls Nuctech and 30 other companies. Nuctech is one of the world's top providers of security scanning equipment, supplying to about 50 nations. It has 90 per cent of the Chinese market for scanners and X-ray systems.
WINSTON WEN YUNSONG, 35 Son of Chinese Premier Wen Jiabao CEO of Beijing-based Unihub Global Networks, a telecoms services provider which he set up in 1999. The company mainly deals in setting up telecommunications facilities and networks for banks, stock agencies and insurance companies.
JIANG MIANHENG, 57 Son of former Chinese president Jiang Zemin Co-founded Shanghai-based Semiconductor Manufacturing International Corporation (SMIC), which became one of the leading semiconductor foundries in the world. Mr Jiang also sits on the board of many major Chinese companies, ranging from telecommunications and airport management to TV manufacture.
LI XIAOPENG, 50 Eldest son of former Chinese premier Li Peng The former general manager of energy giant Huaneng Power became vice-governor of Shanxi province last year. Huaneng develops, constructs, operates and manages large power plants throughout China.
LEVIN ZHU, 52 Son of former Chinese premier Zhu Rongji Chief executive of China International Capital Corp (CICC), a state-owned company which is one of China's largest in the field of investment banking and research. Headquartered in Beijing, CICC, among other things, offers advice to fund managers and corporate clients on corporate restructuring, mergers and acquisitions.
How do you think about the provincial and local governments in China also taking the responsibilities of financial stability and development over the years? There is a website (in Chinese) for your reference.
Those lower level governments have their own financial management offices. They use fiscal income to buyoff banking officials as lending incentives.
Is that a good thing or bad thing or both?
Wednesday, July 22, 2009
Dear readers, my new op ed at the AWSJ
China Takes the Brakes Off
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By VICTOR SHIH
The official Chinese press recently issued a series of stories celebrating an apparent recovery of the country’s growth rate to 8%. By all appearances, China has once again deployed its enormous state capacity, including state control of the banking system, to ward off a recession. However, unlike the last major stimulus program in the late 1990s, this stimulus relies on an unconstrained credit expansion and is generating much fewer marginal benefits to the economy. Quite the opposite: Out-of-control credit expansion contains the seeds of future financial problems.
A decade ago, as now, China faced a serious economic downturn. At the beginning of 1998, growth had sunk briefly below 7% from the robust growth of nearly 9% in 1997. The trigger was the Asian financial crisis. In response, the central government first launched a 200 billion yuan (roughly $24 billion at that time’s exchange rate) rescue package for ailing state-owned enterprises in 1998, followed by investment of nearly one trillion yuan in western China from 2000 to 2003 to help maintain growth rates at 7%.
Although these programs appear similar to the current package, there are some significant differences. Most importantly, the previous stimulus was not accompanied by a spectacular increase in bank loans. Increases in lending between 1998 and 2001 never went above 20% per quarter compared to the same quarter in the previous year. For most quarters, lending increased by less than 15%.
In sharp contrast, the first and second quarters of 2009 saw credit expansion well above 30% compared to the same quarters in 2008. The reason for this disparity is that the late ’90s stimulus was under much stricter guidance from the central government. First, although the state-owned enterprise rescue plan and the Go West campaign were large for the time and in some respects not very efficient, the stimulus investment boom was kept under the relatively firm grasp of the central authorities.
In contrast, the current central stimulus package of four trillion yuan ($586 billion) is a side show compared to the 20-plus trillion yuan in investment planned by local governments. For some reason, Beijing has shown little willingness to constrain fantastical local investment plans. The National Development and Reform Commission (NDRC), previously a bastion against uncontrolled local investment, has shown nothing but great enthusiasm for approving local construction projects. The NDRC even has devised ways to allow local governments to borrow more by using long-term loans from policy banks or bond issuance as the 30% required initial capital. Local governments then can borrow the rest from commercial banks, effectively financing some projects entirely with debt.
As a result, banks are asked to finance projects with dubious commercial viability. This despite the fact that the local authorities guaranteeing construction-related loans in many cases will have a hard time repaying the debt with their own fiscal income. Unlike in the late ’90s, the central government this time has done little to shield banks from local political pressure. Instead, regulators are only asking banks to bolster their bad-debt provisions in anticipation of the inevitable rise in nonperforming loans.
Another difference between the previous package and the current one is the net benefits to the economy. In 2000, there were only 96,000 miles of expressway and well-built Class 1 and 2 highways. In 2008, after eight years of intensive building, China had 248,000 miles of higher-grade highway, an increase of more than 200%. Construction of other infrastructure has seen similar pace in the past few years. The marginal benefit of additional trillions of yuan in infrastructure investment is likely limited. Although lower-level technocrats and some government think-tanks have pointed this out, the higher authorities seem to pay little heed to the economic benefits of such a torrential pace of investment. The central government simply has approved the construction of more highways, bridges, airports and dams.
But not all the money may end up going toward infrastructure anyway. State Council researcher Wei Jianing estimates that at least 20% of the new credit has gone into the stock and real-estate markets instead of generating real benefits to the economy. This is leading to a revival of speculative investment in these markets. The Shanghai composite stock index has increased by well over 50% from the beginning of the year, while real estate prices in several major markets have climbed back near previous highs. This robust recovery took place in the face of still-declining exports and a relatively modest recovery in the growth rate. Given that result, the 20% figure may be a conservative estimate.
Should this pace of credit expansion continue for the remainder of the year, China may well face a difficult trade-off down the road. The economy is unlikely to face a financial crisis because most of the debt is owed to domestic investors and depositors and China can still prevent large-scale capital flight. However, if inflation spikes next year, the central government will have to choose between shutting off credit, which will reveal a massive nonperforming loan problem currently obscured by a torrent of new loans, or an unprecedented level of inflation. High inflation is destabilizing, as it has caused major runs on the banks before. If additional credit expansion in the face of rising inflation is not an option, the greater the extent to which lending is uncontrolled at the moment, the bigger a nonperforming loan problem the central government will face in the future.
An often overlooked ingredient to China’s success story is that generations of top-level central technocrats like Chen Yun, Yao Yilin and Zhu Rongji time and again used their political influence to constrain local investment bubbles, thus forestalling high inflation and major financial crises. Past retrenchment campaigns were unpopular and controversial, but senior technocrats nonetheless maneuvered to stop uncontrolled local investment. As credit continues to rocket toward the stratosphere, China is in increasing need of such leadership again.
Mr. Shih, an assistant professor of political science at Northwestern University, is author of “Factions and Finance in China:” (Cambridge University Press, 2008).
Monday, July 20, 2009
Dear Readers, apologies for my long absence. I was in China and didn't want to post anything provocative, even though there was plenty provocative that took place. Anyway, I would like to juxtapose a couple of items below. The first item is a an excellent story by the Telegraph (bravo!) on a Namibia probe into a Chinese tech firm recently run by Hu Jintao's son Hu Haifeng. The second item is a story in the People's Daily about a recent promotion ceremony in which three PLA general received promotions to full generals, including the son of Liu Shaoqi Liu Yuan. I am not at all sure that these two items are related, but clearly to ward off such attacks as a corruption probe against one's son, Hu needs ultimately the support of the army, which in recent years is purchased by promoting a group of generals to replace generals promoted by one's predecessor. It will be interesting to see if this probe continues and actually get Hu Haifeng into trouble. I think this will get interesting.....
Hu Jintao's son linked to African corruption probe
The eldest son of the Chinese president Hu Jintao faces questioning in connection with a multi-million pound corruption investigation in Namibia.
By Sebastien Berger Southern Africa Correspondent And Malcolm Moore In Shanghai
Published: 5:25PM BST 17 Jul 2009
Three people have been arrested in the country on charges of fraud, corruption and bribery involving a government contract with the state-owned Chinese company Nuctech, a world leader in scanning technology.
Hu Haifeng, 38, was the president of the firm until last year, when he was promoted to being the party secretary of Tsinghua Holdings, the group which controls Nuctech and 30 other companies.
The investigation centres on a £34 million deal Namibia signed with Nuctech to provide it with scanners for its ports and airports.
Under the deal, the Namibian government was to make a £8 million down payment, with the balance coming from a loan Beijing has provided Namibia, on condition that it is spent with Chinese companies.
But according to Namibia's Anti-Corruption Commission, within weeks of the ministry of finance making its payment to Nuctech, the company signed contracts for an identical sum with a Namibian consultancy called Teko Trading.
The money was allegedly then disbursed to Teko's co-owners, Teckla Lameck and Kongo Mokaxwa, and Yang Fan, a Chinese national described in court as Nuctech's African representative.
All three are being held in custody while the investigation continues.
The director of the Anti-Corruption Commission, Paulus Noah, said the matching sums going to and from Nuctech had raised suspicions.
"It's very strange," he said. "We are suspecting that corruption might have been involved."
He said he would like to question Nuctech's management, including Mr Hu.
"Of course if he can make himself available I will be happy," he said. "I would like to know how they do business in China."
He said Mr Hu was not a suspect at this stage and he would be interviewed as a potential witness.
It is potentially a huge embarrassment for Hu Jintao, as popular discontent with Communist Party corruption has grown in recent years – with some officials executed on conviction – but publicised cases have tended to involve local and provincial figures, rather than national ones.
His son usually keeps an extremely low profile, and has been nicknamed the "Teflon princeling" for his ability to keep out of the media.
Nuctech, previously known as Nuclear Technology Company, was spun out of Tsinghua University, the elite university often referred to as China's MIT which both Hu Jintao and his son attended.
It claims to have world-leading technology for scanning the inside of containers and has 90 per cent of the Chinese market for scanners and x-ray systems. Its machines are also used in British ports and it has held talks with the airports operator BAA, although the company will not confirm whose machines it uses for security reasons.
Hu Haifeng graduated from Tsinghua with a master's in engineering physics and joined Nuctech directly as assistant to the general manager.
Contacted for comment, a man who answered the telephone at Nuctech's Hong Kong office said: "There is no need to verify anything, and we are out doing business."
In its international business division in Beijing a woman who would not give her name would not say if it had a spokesman.
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Rich Kuslan, Editor