Monday, August 29, 2005

A reporter friend asked me what Hu Jintao is likely to say on economic issues while in the US. I just think he will try every way to avoid confrontation, but who knows. Perhaps he wants to build up a tough-guy attitude, but I think it might be a bit too late for that:

On the Hu trip, I think he himself will not raise any economic issues that might anger the US. It is in his interest to make this trip a great success, since he needs to establish his foreign policy credentials. Therefore, I would not expect him to raise the Unocal issue himself, unless someone asks him about it. In response to any questions about Unocal, he will probably say something like "Chinese companies now make decisions according to market principles....etc." He will not raise the currency issue himself, but I am sure someone will ask him about it. To this sort of questions, he will emphasize that China acted independently in switching to a basket peg and will continue to follow an independent foreign exchange policy, guided by market principles....etc. In sum, he will deflect any critical comments with his usually mild and cautious manner. He will probably emphasize friendship, cooperation (in the war on terror), and mutual benefits.

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Wednesday, August 24, 2005

A reader asked a good question of "You didn't refer to the carrot Zeng is (purportedly) being offered: the position on the CMC he missed out on last September when Hu ousted Jiang. So, the question is, does Zeng sacrifice a rook (Chen Liangyu) for the bigger prize of a knight (vice chair position on the CMC to go with the vice presidency)?"

If he takes Hu's offer, Hu would most likely promise him that position until the 18th Party Congress in 2012. However, if he confronts Hu Jintao now, Hu might gain enough power by the 17th Party Congress to force Zeng Qinghong into retirement, using the “too close to 70” argument that Jiang had used against Qiao Shi. However, if Hu was cold-blooded (ie if he was like Zeng himself), he could promise Zeng CMC vice-chairmanship until 18th PC but renege on that promise at the 17th PC or soon afterward using the retire at 70 rule. In sum, I think Zeng's decision will be based on A) whether he thinks Hu will force him to retire at the 17th PC or soon afterward and B)his relationship with Liu Yandong. I think that Zeng wants to maintain a base in Shanghai, a rich metropolis in which he can carry out all kinds of nefarious dealings. If the family bond between Zeng and Liu is indeed deep, he might, as you say, take Hu's offer and sacrifice Chen.

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Sunday, August 21, 2005

Dear Readers, I think things are about to get interesting again. When I was in Shanghai last month, someone told me that the entire Shanghai government was abuzzed with rumors that Chen Liangyu, the incumbent party secretary of Shanghai and a long-time protege of Zeng Qinghong, might be removed from power and that a "woman comrade" would replace him. When I heard the rumor, I thought it would either be Liu Yandong, the head of the United Front Department, or Shen Yaoyao, the vice head of the Central Organization. Recent reports (see below) reveal that Liu Yandong, who worked closely with Hu during his Youth League days, is the favorite candidate. This makes total sense since Liu is much more senior than Shen and is a minor princeling herself (father was a vice minister of agriculture) with extensive connections.

Moreover, as a vice-chairman of the CPPCC, she can easily transfer to the Shanghai party secretary position without a bureaucratic rank promotion. The position of Shanghai party secretary is typically held by a Politburo member, a position that is superior to the typical provincial/ministerial rank. Therefore, rotating another provincial party secretary (with the exception of those who are already in the Politburo) to Shanghai might raise protest that this would require giving the person a large promotion. However, it is much more reasonable to promote someone who is already the vice-chairman of the CPPCC, which though honorary is bureaucratically a national level position. Granted, Liu would still need to be inducted into the Politburo, but bureaucratically it would be a lateral transfer, though in reality, it would constitute a major gain in authority.

Another reason why Hu picked her is because she has a long history with Zeng Qinghong's family. Zeng Qinghong's mother, Deng Liujin, was one of few women who completed the Long March. In the 40s and 50s, Deng was put in charge of a special school for senior cadres who are off fighting. Among the students who attended the school are Chen Yi's son Chen Haosu and Liu Yandong. According to official press reports, the students at that school still visited Deng during holidays until her death in 2003. Therefore, Hu might have picked Liu precisely because she is acceptible to the Shanghai faction, at least the Zeng Qinghong side of it. If the article below is correct, Jiang probably is probably more against Liu than Zeng is. However, there is another layer of irony in this. Liu Yandong's father Liu Ruilong was a veteran revolutionary in Jiangsu and was the one who inducted Jiang Zemin's martyred uncle Jiang Shangqing into the party. Without Jiang Shangqing, Jiang Zemin's career would not have prospered.

This promotion, because it is now so widely publicized, will serve as a litmus test to the extent to which Jiang and his faction still hold power over Hu Jintao. I dare not predict the outcome of this struggle, but I am ready to say that this is perhaps more Zeng Qinghong's fight than Jiang's fight. Chen Liangyu is an old underling of Zeng Qinghong from his days as the head of the Shanghai Veteran Cadre Bureau. Chen Liangyu took over this plush position from Zeng after Zeng was promoted into the city leadership. Chen was later "adopted" by Jiang when Jiang served as Shanghai secretary and later party secretary general. Zeng will have to consider the extent to which he can still trust Liu Yandong and whether it is worth a fight with Hu Jintao over this issue.

Monday, August 22, 2005
Meeting a litmus test for Hu's grip on the reins

REUTERS in Beijing

A Communist Party meeting in October will provide a litmus test of whether President Hu Jintao has fully consolidated his power, political sources said.

Mr Hu, 62, emerged from the shadow of his predecessor, Jiang Zemin , last September when he became chairman of the party's Central Military Commission.

But Mr Jiang, 79, still wields residual influence through political allies who dominate the all-powerful nine-member Politburo Standing Committee headed by Mr Hu.

A focus of the fifth plenum of the elite 354-strong Central Committee will be whether Mr Hu, who is also party chief, has the political clout to replace one of Mr Jiang's men from a senior position with one of his own.

He was eyeing Liu Yandong , 60, vice-chairwoman of the Chinese People's Political Consultative Conference and minister of the party's united front department, which seeks to win over non-communists, to replace Jiang ally Chen Liangyu , 58, as Shanghai party chief, said four sources with ties to different factions in the party leadership.

If promoted, Ms Liu would be the first woman to become party chief of one of China's 31 provinces and municipalities.

Ms Liu failed to land the same job last year.

"Jiang Zemin blocked Liu's rise," a source familiar with the inner workings of the party said. But another said of Mr Jiang, who rose from Shanghai party chief and lives there in retirement, said: "His influence is waning."

In one indication of this, one of Mr Jiang's sons failed to wrest control of the top job in a state-owned telecommunications company, a source said.

Mr Chen was likely to retain his seat on the party's 24-member decision-making Politburo, sources said, adding that he would be given a largely ceremonial job in Beijing.

Mr Chen's troubles started when he confronted Premier Wen Jiabao , a Hu ally, at a Politburo meeting last year over macroeconomic controls to try to cool an overheating economy.

Mr Hu has been moving key allies to ministerial-level positions as he consolidates power, but the Shanghai party chief's job would be the most senior personnel change engineered by Mr Hu since he replaced Mr Jiang as party chief in 2002 and president in 2003.

Ms Liu's ties to Mr Hu date back to her 1982-91 stint with the Communist Youth League, Mr Hu's power base and the Communist Party's "helping hand and reserve army". It boasts 71.9 million members.

In return for Ms Liu getting the Shanghai job, a key Jiang ally, Vice-President Zeng Qinghong , 66, could be named as a vice-chairman of the military commission.





You didn't refer to the carrot Zeng is (purportedly) being offered: the position on the CMC he missed out on last September when Hu ousted Jiang. So, the question is, does Zeng sacrifice a rook (Chen Liangyu) for the bigger prize of a knight (vice chair position on the CMC to go with the vice presidency)?
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Saturday, August 20, 2005

The newest issue of the Economist contains an article observing the emerging conservatism of the Hu Jintao. I could've told you a long time ago that Hu was no "liberal." Though he was promoted to the center during Hu Yaobang's time, he certainly was not one of Hu Yaobang's favorites, Hu Qili and Wang Zhaoguo were. Also, you have to remember that Hu and others like him grew up entirely under socialism. Unlike Jiang, Hu's generation of leaders have no memory of the pre-revolutionary days. They grew up entirely under socialism, and their reflexes are all derived from socialist China. The new campaign to "preserve the advanced nature of CCP members" is a perfect example. When the party faces declining morale, corruption, and defection, what do you do? You launch a political campaign; this is what Chairman Mao would have done. I recently went to an investment company, a subsidiary of the Shanghai SASAC, and guess what I found at the entrance? A huge, red banner trumpeting the advanced nature campaign.

China's president is increasingly revealing himself to be an authoritarian. We report how in this article, and in another

Get article background

IN THE nearly three years since Hu Jintao assumed the leadership of the Chinese Communist Party, his image has changed markedly. Mr Hu was once seen by many as a potential liberal reformer—admittedly an assessment drawn from limited evidence. Now, he is widely regarded as a conservative authoritarian. Many Hu-watchers had seized on signs that he might be determined to open up China's secretive bureaucracy. Now, he is said to be holding up Cuba and North Korea as examples of how the party should keep its ideological grip. While Mr Hu has probably changed far less than his mercurial portrayal might suggest, it is increasingly clear that China under his leadership has wavered over economic reform and shunned political liberalisation.

Mr Hu's (in fact, fairly consistent) conservatism has been evident in his belief that the Communist Party, riddled with corruption and other abuses of power, is quite capable of cleaning up its own act without the need for any checks or balances. This year, for instance, he has ordered millions of party officials to take part in many hours of mind-numbing ideological training designed to tighten party discipline (known as the “education campaign to preserve the advanced nature of Communist Party members”).

Free speech

More seriously, advocates of bolder economic reform have worried about a campaign against “neo-liberal” economic theories that sputtered into life early last year. This apparently stemmed from the worries of party leaders, including Mr Hu, that the cause of free markets and small government could, if given too free a rein, cause an economic meltdown in China similar to that seen in some Latin American countries. On the orders of senior officials, the Chinese Academy of Social Sciences formed a research team and in June last year published a book of essays that proclaimed on its cover that Latin America and the Soviet Union had been “major disaster areas of neo-liberalism”. It said reforms of state-owned industries should be guided by “Marxist theory”.

Publicly, Mr Hu's comments have been moderate in tone. But he has been tougher at closed-door gatherings, such as during a meeting of the party's Central Committee last September. The plenum was of crucial symbolic importance for Mr Hu. It appointed him as the supreme commander of China's armed forces, thus completing his takeover of the country's three top positions, following his appointment as party leader in November 2002 and president in March 2003. The contents of Mr Hu's maiden speech have not been published in full. In the still secret portion, Mr Hu reportedly railed against “Western hostile forces” and “bourgeois liberalisation”. It was a worrying throwback to the paranoid language that suffused official rhetoric in the wake of the Tiananmen Square protests of 1989.

Yu Jie, a dissident writer in Beijing, says the authorities have stepped up harassment of liberal intellectuals in recent months. Dissidents who have expressed their views online have been particular targets. Mao Yushi, a liberal economist, says public discussion meetings held by his privately run public-policy think-tank, Unirule, have been banned, as have his writings. Unirule has been stripped of its official registration.

Cao Siyuan, another liberal economist who runs a private consultancy, says the attacks on neo-liberalism have coincided with a marked slowdown in the pace of state-owned-enterprise reform. He points to a campaign this year against management buy-outs of such enterprises, a once common form of privatisation in China. The government feared the practice was leading to rampant asset-stripping and was fuelling public resentment. Mr Cao, whose calls for political reform have earned him constant surveillance by the police (he skilfully evaded them to meet your correspondent), says the drawbacks of management buy-outs have been exaggerated by conservatives.

Yet for all Mr Hu's rhetoric, he has yet to strike out at perceived wayward tendencies with anything like the vigour shown by Mao Zedong, Deng Xiaoping or even Jiang Zemin, whose crackdown on Falun Gong, a spiritual movement, in 1999 sent many thousands to labour camps. The complaints of Beijing's intellectuals are offset by other signals that China's economic reforms are continuing, even if government enthusiasm for the kind of mass privatisation of state-owned enterprises that occurred in the late 1990s and early this decade may have abated. In February the government issued new guidelines for private investment in areas hitherto the preserve of the state. This month it issued a draft of China's first law on property rights, aimed at protecting individuals and companies from arbitrary appropriations by the state. Many say the new law is inadequate, but it is still something of a concession to a growing middle class.

Even in the realm of privatisation, the government continues to experiment. In May, a new attempt was launched at off-loading state-owned shares in the 1,400 companies listed in China's stockmarkets. The government has indicated that the reform plan will not mean selling off its controlling stake in “key enterprises”. But it will relinquish at least some of its firms.

Given the increasingly conspicuous inequalities emerging in China as a result of the country's embrace of capitalism, it suits Mr Hu to appear to pour cold water on the idea of laisser-faire economics, blamed for a growing gap between rich and poor, between regions and between urban and rural areas. In the past couple of years there has been an upsurge in the number of protests triggered by these disparities, as well as by rampant corruption. Mr Hu is trying to strengthen the party's legitimacy by stressing its sympathy for the disadvantaged.

Mr Hu's catchphrase is “balanced development”. This will be a central theme in a new five-year economic plan (a still cherished relic of the central-planning era) due to be discussed by the Central Committee in October and ratified by the legislature next March. It will be Mr Hu's first opportunity to put his stamp on a long-term economic strategy. But rapid growth will remain his first priority. Mr Hu has shown no sign of retreat from the core belief of party leaders since the early 1990s: that growth is essential to social stability and thus the party's survival. If redistributing wealth were to jeopardise that, even the conservative Mr Hu would back off.

sort of surprised to find Yu Jie listed together with other liberal economist. He was in essence no more than a cynic university student appearing to be different, but he actually knows nothing about liberalists per se.
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Thursday, August 18, 2005

As a follow-up, a reporter read my piece and asked to what extent is Huijin really a "subsidiary" of the PBOC. This is a good question, and I provide my answer below:

Strictly speaking, Huijin is a subsidiary of SAFE, which is the sole "investor" in Huijin, but SAFE is an entity subordinate to the PBOC. In operational terms, it answers directly to the State Council Leading Group on Restructuring the State-owned Banks, which is headed by VP Huang Ju, but the daily affairs of the LG is handled by the head of the main office, Zhou Xiaochuan. Also, I am not a 100% sure, but I think Guo Shuqing still doubles as the chairman of the board at Huijin, while Xie Ping serves as CEO. Both spent years in the PBOC/SAFE network. Granted, there are MOF officials on the board, and the vice chairman of the board has deep MOF experience. Nonetheless, I think MOF influence took a big hit when Xu Fangming, a board member and head of the MOF financial department, was arrested in suspicion of corruption. Thus, I think the PBOC, through Zhou, has the dominant influence over Huijin.

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My new piece for the Jamestown Foundation on Huijin came out yesterday; here is the full text. I don't really like their title, so I put my original title in parenthesis:

(Progress in Reform or More Beijing Power Politics: Central Huijin Company Acquires More Financial Institutions)

By Victor Shih

In the spring and summer of 2005, the Chinese government successively announced that Central Huijin Company (China State Administration of Foreign Exchange Investments) will recapitalize Galaxy Securities (Yinhe Zhengquan), Southern Securities (Nanfang Zhengquan), Huaxia Securities, Shenyin Wanguo Securities, and Guotai Jun’an Securities. [1] Besides brokerages, Huijin is likely to recapitalize other joint-stock and state-owned banks in the future as they prepare for listing. It provided Bank of Communication with additional liquidity before its Hong Kong listing, and China Everbright Bank is currently negotiating with the State Council for a Huijin bailout. [2] Quite simply, Huijin has become the “savior” of the troubled financial sector in China. Bailouts in general create a moral hazard and encourage risky behavior, but given that the Chinese government is prone to bailing out financial institutions anyway, the formation of Huijin is a step forward toward greater discipline in the financial sector. Moreover, Huijin’s takeover of an increasing number of financial institutions allows the People’s Bank of China (PBOC) to regain some of the authority it lost when the China Banking Regulatory Commission (CBRC) split off from the PBOC.

The People’s Bank of China traditionally bailed out troubled financial institutions through the re-lending (zaidaikuan) process whereby the central bank lends money either directly to distressed financial institutions or indirectly through a major state bank. In the reform period, trillions of RMB in re-lending were provided to distressed financial institutions, constituting a major source of monetary expansion and inflation. The ready availability of central bank funds also encouraged local governments to pressure banks into financing wasteful regional developmental projects, causing more financial institutions to lapse into illiquidity.

With the formation of Huijin, the government found a less costly and arguably more market efficient way of bailing out financial institutions. Huijin was formed at the end of 2003 when the foreign exchange reserve injected $45 billion into the newly formed Central Huijin Company, which promptly “invested” the money into the China Construction Bank and the Bank of China respectively. [3] On that basis, Huijin became a state-owned investment company that held roughly 85% of China Construction Bank and 100% of Bank of China shares. [4]

Due to this bailout, Huijin became the claimant of healthy returns from the two giant state banks and stands to profit handsomely from the initial public offerings of these two banks in the near future. In 2004, Huijin was entitled to roughly 50 billion RMB in after-tax profit from the two banks and from other financial institutions it owns. [5] Although it did not take full advantage of this income stream in 2004, future dividend income and sale of shares will provide enough to bail out smaller financial institutions, which usually require recapitalization of a few billion to a few tens of billions RMB. Thus, the initial capital injection from the foreign exchange reserve created a “multiplier effect,” in which dividend income from the initial investment can be used to bail out other distressed institutions which can in turn generate further dividend income.

How is this bailout instrument better than the traditional re-lending method? First, the recipients of Huijin recapitalization do not have to pay back any loans or interest payments, as recipients of re-lending were nominally required to. Recipients of Huijin “investment” benefit from heightened capital ratios rather than more liabilities from re-lending, which at times pulled distressed banks further into trouble. The central bank also does not have to worry about defaults by distressed institutions. Recapitalization thus maintains the balance-sheets of all the involved parties much better than re-lending does.

More importantly, Huijin officials are nominally not government officials and are paid by Huijin, which almost certainly means that their salaries are substantially higher than that of civil servants. The State Council can potentially increase Huijin officials’ market incentive by giving them extra bonuses for improving the performance of financial institutions under Huijin’s charge. Thus, unlike government officials, Huijin officials have an incentive to maximize returns in hopes of increasing their personal income and, more importantly, to prevent re-assignment back to low-paying government positions. This of course would not work on officials who have political ambitions, but they would want to improve performance to fulfill their political mission as well.

Reformers within the government are also using Huijin as a means to lessen administrative intervention in the financial sector. Foremost in the reformers’ agenda is the movement toward appointing senior bankers and financial executives through market mechanisms rather than through party channels. Indeed, the CEO of Huijin, Xie Ping, stated recently that “the banks in this country have long been under the sway of various ‘leadership groups,’ which report false information, act without internal constraints, use funds for various exchanges, which result in many (corruption) cases and high non-performing loan ratio.” [6] He wants to change the current system through giving shareholders more power to appoint.

While Xie Ping, a long-time reformer within the PBOC, wants shareholders to take control of banks, this also happens to coincide with the corporate interest of the PBOC. With the formation of Huijin and its acquisition of a healthy portfolio of financial institutions, the PBOC shifted appointment of senior financial managers away from the party organization system and from the Central Banking Regulatory Commission to the People’s Bank of China via its subsidiary, the Central Huijin Company. After the abolition of the Central Finance Work Committee (CFWC), which had controlled appointment for most major financial institutions, the Central Organization Department and the CBRC took over appointment power for most major financial institutions, leaving the PBOC with only limited power to appoint regional governors of the PBOC itself. [7]

With the formation of Huijin, however, the PBOC stands to regain substantial clout in the appointment arena. Huijin itself is directly answerable to the Central Leading Group on Reforming State-Owned Commercial Bank, and the person running the daily affairs of the Leading Group is none other than Zhou Xiaochuan, the governor of the PBOC. Moreover, most of Huijin’s management comes from the PBOC/SAFE bureaucracy and dares not anger Zhou Xiaochuan. As Huijin becomes a majority shareholder of an increasing number of financial institutions, it can weaken if not deprive altogether the appointment power of rival agencies.

For example, after the abolition of the CFWC, the Central Organization Department held sole appointment power of the senior management in the Big Four banks. [8] However, in March 2005, after the sudden removal of Zhang Enzhao from the posts of chairman of the board and the party secretary of the China Construction Bank (CCB), Huijin sent its own chairman Guo Shuqing to serve as chairman of the board at CCB. While the Central Organization Department doubtless needed to approve Guo’s appointment since he also serves as party secretary, the PBOC, through Huijin, gained a direct voice in the selection process and most likely recommended Guo directly to the State Council. If Huijin injects capital into China Everbright Bank, it will likely obtain similar power with respect to the appointment of senior Everbright managers. With the recent bailout of a series of securities companies, the PBOC has even obtained appointment power over securities companies, an area traditionally controlled by the China Securities Regulatory Commission (CSRC). For example, Huijin subsidiary Construction Investment (Jianyin Touzi) successfully installed its favorite candidate as the CEO of the newly constituted Southern Securities over the CSRC’s favorite candidate. [9]

Clearly, Huijin has greatly upset the distribution of appointment power worked out in 2003, and various rival agencies, including the CBRC, the Ministry of Finance, and the Central Organization Department, are putting up a fierce fight against the PBOC’s empire-building efforts. For example, in March 2005, Huijin injected only 15 billion USD into the Industrial and Commerce Bank of China (ICBC), far short of the 22.5 billion that BOC and CCB had received despite being a much larger bank. It is likely that the MOF, which traditionally “owned” the major financial institutions in China, balked at the prospect of the PBOC gaining control over another major state bank through Huijin. Thus, with only a limited Huijin injection, the MOF retained control over 50% of ICBC shares. The CSRC, however, seems less able to fight back because it does not control its own source of funding.

Should foreign investors be weary of the Huijin’s emerging clout in the financial sector? On the one hand, if reformers like Xie Ping have their way, Huijin is merely a way-station to a fully commercialized financial sector in China. In this scenario, Huijin would first “acquire” distressed financial institutions. Then, it would do what other leverage-buyout firms do—repackage the firms and sell them off to private investors over time. However, given that financial institutions, especially the major banks, are vital elements of the national economy and the source of an endless supply of funds, the government is extremely reluctant to cede control. The recent acquisition of major securities companies, for example, might set the stage for a coordinated government effort to keep share prices up while non-tradable shares are released into the market. If the managers of banks and brokerages expect government interventions, however, they will continue to make decisions according to political rather than to market signals. If things go wrong, guess what, the Chinese state will be there with yet another bailout scheme.

1. In the case of Southern Securities and Huaxia Securities, Huijin recapitalized these entities through its wholly owned subsidiary Construction Investment (Jianyin Touzi). See Ming Liu, "Chongzheng Quanshang, Huijin Jianyin Zai Xingdong (Huijin and Construction Investment Are Acting to Restructure Brokerages)," Jingji Ribao (Economics Daily), 8/11/2005 2005.
2. Haiyan Hu, "Zhongyang Huijin Gongsi Jinrong Bantu Qiemi (Unveiling the Secret Design of the Central Huijing Company)," Zhongguo Qiyejia (Chinese Entrepreneur), 7/7 2005.
3. China Economic Quarterly, "Understanding China's Bank Bailout," china Economic Bulletin 2004, no. 1 (2004).
4. Hu, "Zhongyang Huijin Gongsi Jinrong Bantu Qiemi (Unveiling the Secret Design of the Central Huijing Company)."
5. Author’s calculation based on Huijin’s share ownership of the two banks and widely available net profit figures for the two banks.
6. Caijing Magazine, "Xie Ping, Zhu Min, Wang Jun, Li Chuguang Siren Tan (a Chat with Xie Ping, Zhu Min, Wang Jun, Li Chuguang)," Caijing (Finance and Economics) 2005.
7. Sebastian Heilmann, "Regulatory Innovation by Leninist Means: Communist Party Supervision in China's Financial Industry," China Quarterly, no. 181 (2005).
8. Ibid.
9. Qing Li, "Quanshang Chongzuzhong Panzhan: Quanshang Wenze Yiding Yao Zhuijiu Zerenren (the Strategy in Restructuring Brokerages: In Order to Hold Brokerages Responsible, One Must Hold the Responsible Person to Account)," Caijing (Finance and Economics), 8/7/2005 2005.

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Tuesday, August 16, 2005

A reader makes a very incisive comment on the NDRC piece "So it appears to me that the article is a stock of different (and sometimes conflicting) opinions and perspectives. Or maybe all this is just a disguise that makes the criticism on PBOC less explicit?" I think this is definitely a possibility, that criticism of MOF, which is weaker than the criticism of PBOC, was included to disguise the main target of the piece, the PBOC. The other possibility is that the criticism was aimed toward the senior technocrats in the past eight years: Zhu Rongji and Wen Jiabao. The paragraph I translated in the previous post states that macro-policy direction is really determined by the "highest level." So, if coordination isn't so good, then perhaps it is the fault of the "highest level."

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Okay, below is the actual text of the essay from the NDRC website. It is called "an overall assessement of the views regarding the coordination of fiscal and monetary policy." In it, the PBOC is criticized for not pulling its weight in support of the drive to increase internal demand during the Zhu Administration. The PBOC is further criticized for meddling in areas it should not meddle in, like the bailing out of BOC and CCB. There is also a cryptic paragraph in the middle:


Translation "the PBOC and MOF cannot change the course of monetary and fiscal policies. In brief, it should be that politics determines the direction of development, which is quite apparent in the case of China. The injection of 45 billion USD into the CCB and BOC is one such example. In fact, according to the "PBOC Law", the government (the treasury) is not allowed to directly borrow or take money from the central bank. The systematic action taken by the MOF and the PBOC include some intentions that are not altogether understood by the market. Only the highest level can protect financial stability and determine whether the economy is over-heated or needs contraction. These are not things that the MOF and the PBOC can decide. The MOF and the PBOC can only provide punches at the technical level, which sends clear signals to the public."

Okay, can we be a bit more cryptic please?? Perhaps my Chinese just sucks, but what does this mean? I am sure there is a critical element in this, but of whom? of Zhu? of Wen?? of Zhou Xiaochuan for sure. Who is behind this?
































































But a cursory reading of the text shows that it contains criticism of the Finance Ministry as well, e.g., "与货币政策相比,财政政策存在明显的认识时滞和决策时滞,而且财政时滞在两年以上。财政政策缺乏货币政策对形势嗅觉的灵敏性和政策决策的灵活性,财政政策出台需要立法机构批准是一方面原因,财政部门对时事的分辨力和决策的果断性也有待于提高。" "正是由于财政货币政策的这一“空档”,导致我国的产业结构调整缓慢,产业结构、产品结构至今仍是困扰我国经济发展的突出问题。" And a lot of the arguments in the text is about the lack of coordination between the two ministries, rather than simply that the central bank has lagged behind the finance ministry. And there are arguments about enhancing the role of the central bank rather than limiting it, e.g., "为了防范成本推动型通货膨胀,消除经济发展的不确定性,当前应加强宏观调控政策的预案研究,发挥货币政策的主导调控作用,财政政策予以适当配合". So it appears to me that the article is a stock of different (and sometimes conflicting) opinions and perspectives. Or maybe all this is just a disguise that makes the criticism on PBOC less explicit?
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Wow, the Planning Commission, or the National Development and Reform Commission, recently criticized the PBOC for empire building through Huijin on its website. This is one of the few rare instances when bureaucratic rivalries boiled into the open. Also, I am surprised that it is the NDRC and not the MOF that has criticized the PBOC. The MOF, as the traditional "owner" of major financial institutions, was the big loser with the foreign exchange recapitalization of the major state banks. Mm, I wonder who is behind these NDRC statements?? Ma Kai? or his superior Zeng Peiyan, who is opposed to Wen's bailout scheme......mmmmm

Tuesday, August 16, 2005

Economic planner criticises PBOC's reforms


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Beijing's key economic planning body, the National Development and Reform Commission, yesterday lashed out at the central bank's reform policies in an unusual display of bureaucratic infighting.

The commission, arguably the most important body with responsibility for the economy within the government structure, sharply criticised the People's Bank of China for overstepping its mandate on two large banking and securities reform programmes.

"The monetary operations of the central bank should avoid fiscal bailouts and stop grabbing more power from the Ministry of Finance to form another fiscal distribution channel because it is distorting," the commission said on its website.

The central bank has spent US$60 billion in foreign exchange since the end of 2003, shoring up the capital bases of three of the four state-owned commercial banks.

Ratings agencies such as Standard and Poor's have said such moves raise corporate governance issues.

The central bank has also recently started rescuing the embattled brokerage industry through soft loans.

Although Beijing is rife with factional infighting, disagreements are rarely aired and then only through the published opinions of research bodies under the various ministries.

The commission also said interest rates should be raised from current levels and that the government should counteract any corresponding increase in capital controls with tougher oversight and through the buying and selling of foreign exchange.

The central bank raised benchmark deposit and lending rates by 27 basis points each at the end of October last year and has signalled that it will not raise interest rates in the near future.

Separately, the commission said Beijing needed to avoid a rise in the yuan of more than 2 per cent, arguing that any greater appreciation would make the exchange rate too volatile.

"If we control the yuan flotation exchange rate to within 2 per cent both up and down, it will avoid big volatility and, in the meantime, relieve pressure on the yuan to appreciate," it said.

The yuan was revalued by 2.1 per cent at the end of last month. Since then the currency has been allowed to float 0.15 per cent higher under a new exchange rate regime which uses a basket of currencies as a reference to set the yuan's value.

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Monday, August 15, 2005

Hong Kong's Singtao Daily reports that former board of director of China Construction Bank Wang Xuebing was released for "medical reason" from his 12-year sentence for bribery. This comes after Wang served only 4 of his 12 year sentence. In truth, he was more a victim of factional struggle between Zhu and Li Peng than a true criminal. Sure, he took a few hundred thousand to ensure that his kids went to the right schools, but that really wasn't that much in the grand scheme of things. Bankers in a similar position easily made much more than that. Perhaps this is a recognition (by Wen? by Zhu himself?) that he was a victim of politics.





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A student of mine wrote to me that he thought his parents should invest in the yuan given the impending revaluation and what I said on my blog! Please! no, don't throw mom and dad's money away based on what I may or may not say in this blog. Okay if you want to know the right way to do it, here is my two cents, but I am not responsible for any losses!!

On the yuan, I looked into it myself. There are two ways. First, you can take US dollar and try to open up a bank account in Hong Kong, which is what I had planned to do. But to do that, you will need a HK ID card and proof of HK residency, and I found that it isn't really worthwhile anyway. The HK accounts pay really low interest rates (try 0.7%) in anticipation of the revaluation and frankly, the Chinese currency isn't going to appreciate by more than 5% in any given year any way. Therefore, you are better off investing in some kind of money market fund or CD in the US, since interest rates are rising here. The other thing that your parents can do, which is more advisable, is to invest in an index fund for the Asian markets. The Asian markets in general did quite well last year, and it should continue to do well as expectation of yuan revaluation pulls up the regional markets.

Another reason to expect rising markets in Asia in the coming year is that the Chinese central bank (PBOC) revealed recently that the main currencies in the basket are USD, EURO, JPY, and KWON, two of which are Asian currencies. We don't know how much yen or won the PBOC holds, but given that the forex reserve was mostly based in dollars, there is reason to think that they will need to bulk up in the other two currencies. The main point is that if many market players think the same as I do, and it seems to be the case, they will stock up in Asian stock, which will fulfill the expectation of rising Asian markets.

Some caveats 1. I wish I had the money to test my theory, but I don't, so I have no stakes
2. the PBOC is unpredictable and might actually sell their stock of won and yen to defend the dollar. Afterall, the capital of two of their largest banks, BOC and CCB, is based in dollar. There is a hedge arrangegment between BOC, CCB and Huijin, but things will get very messy if the USD really tanks against the other currencies.

did not you have any comments on the news release by Chinese government regarding Chen Liangyu's arrest? It must be interesting...
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