Monday, November 28, 2005

One of my colleagues defended the avian flu emergency loans. Again, I agree that the purpose of these loans is commendable. However, there are ways to provide the liquidity without damaging the bank commercialization process. For example, loans through the policy banks and direct injections from the treasury. We are not talking about too much money here, and the treasury should be able to take the hit. The second problem is that whenever they have a policy loan program, local officials would pressure banks to provide "policy" loans which are in reality diverted to local construction projects....etc. Banks are willing to do this because the central government has given the green light on these loans. If borrowers default, banks are not held responsible. Again, I don't think we are talking about a lot of money, but much of this will become NPLs.

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We now see that policy loans are alive and well....Apparently, the PBOC just issued an emergency edict ordering banks to provide liquidity to firms in the poultry industry during the avian flu crisis. Okay, I know that it's an emergency, but there are other ways to provide liquidity. For example, why aren't the State Development Bank and the Agri Dev. Bank providing liquidity; they are policy banks after all. In fact,they are rarely used for such emergency policy purposes. The government can even set up special treasury accounts in the Big 4 banks for them to distribute the money to distressed firms. Why order banks to bear the burden? I don't think we are talking about that much money, perhaps a few billion RMB, so why not just do it through the treasury.....it's puzzling.

FX News Limited
China requires banks to support poultry industry during bird flu outbreak
11.28.2005, 03:23 AM

BEIJING (AFX) - The People's Bank of China, the central bank, has issued a
statement requiring all banks to provide financial services to poultry
farmers to help them fight against bird flu.

The People's Bank said in a statement on its website that banks should
provide the services that are needed for key poultry-sector enterprises to
maintain their liquidity and thus basic production and operations.

Repayment periods should be lengthened if warranted, and some companies
could be exempted from penalties in the case of default or late payment, the
central bank said.



银发 〔2005〕 346号













Excuse me, but doesn't the document say "国家财政按现行一年期流动资金贷款利率的一半对符合国办发〔2005〕56号文件规定的防疫贷款给予贴息支持。"?
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Saturday, November 26, 2005

Dear Readers, I am in China now and find that my blog is no longer blocked by the Chinese government. Someone somewhere apparently thought that my discussion is too trivial to be blocked. Whoever did this, thank you (not that I care that much about it.....). Anyway, much more about my trip to China when I return to the US, which might get this site blocked again! In the mean time, here is my new piece at Far Eastern Economic Review:

China's Uphill Battle
For Stronger Banks

November 21, 2005

While the road to hell is paved with good intentions, China's road to financial reform is paved with political ambition and bureaucratic rivalry. A case in point is the China Banking Regulatory Commission, which is having positive effects on financial regulation and the monitoring of nonperforming-loan ratios. Although the CBRC continues to struggle under the shadow of its increasingly powerful elder brother, the People's Bank of China, it now seems that the decision at the end of 2002 to create a separate agency to monitor China's banks was crucially important because it created a bureaucratic voice in favor of constraining NPLs in China.

The formation of the CBRC was based as much on political considerations as economic ones. In 2002, researchers at the now-abolished Central Finance Work Committee and the State Council Development and Research Center called for the establishment of an independent agency to regulate the banking sector. The main rationale was the need for specialized regulation of an increasingly complex financial system that is soon to be enlarged by an influx of foreign financial institutions. The stock market and the insurance industry already had their own watchdog organizations by 2002, but the banking sector was still overseen by the central bank.

Although the PBOC had the organizational capacity and human capital to fulfill this mission, its incentives were not aligned with the goals of financial regulation. As one of the proponents of an independent agency, CFWC researcher Qian Xiaoan, hinted in an article at that time, financial monitoring lacked "authoritativeness" and "independence," meaning that financial regulation had to struggle for attention among the PBOC's multiple agendas.

For much of the reform era, the PBOC's missions included inflation prevention, growth maintenance, bailing out illiquid financial institutions and finally regulating depository institutions. Time and again, the last task took a back seat to inflation prevention and growth promotion.

By contrast, an independent regulatory agency could single-mindedly carry out regulatory functions and-perhaps more importantly-lobby the central leadership on the importance of regulating financial institutions. With a clear mission, this agency would also defend banks' rights to resist political pressure to provide loans and lobby on their behalf in the central government. In some ways, the most important contribution of an independent ministerial-level financial regulator is the creation of a powerful political lobby for financial prudence.

Although the birth of the CBRC was colored by bureaucratic politics and quite possibly elite politics, the CBRC has taken a much more hard-line stance with respect to lowering banks' NPL ratios. The newly appointed head of the CBRC, Liu Mingkang, had a reputation of being a strong proponent of banking commercialization.

Perhaps more importantly, the new agency no longer had a mixed mission. Its mission was clear: lower the NPL ratios of Chinese banks. If Mr. Liu failed to do so, his career would suffer. This kind of transparent assignment of responsibility has been the key to the CCP's ability to achieve momentous outcomes in the past, and it once again served the regime.

In classic central-planning fashion, the first thing that Mr. Liu did as the head of the CBRC was to impose a hard NPL reduction target on the Big Four banks, in addition to liquidity and capital adequacy targets on all banks. Although these targets were imposed via administrative decrees, they did have the effect of changing bankers' incentives.

Nearly three years after the agency's creation, the NPL ratio in China has dropped to just above 10% from more than 25%. Although the lowering of the NPL ratio is due primarily to recapitalization from the foreign-exchange reserves and the off-loading of NPLs to the asset management companies, the fact that NPL creation did not speed up to a significant degree in the midst of an investment boom probably had something to do with the CBRC's vigilance.

Whereas the PBOC had been ambivalent about banks bending to local political pressure to lend, the CBRC unambiguously chastised local politicians for intervening in bank decisions. From CBRC head Mr. Liu down to the local CBRC chiefs, if the NPL ratio rises, their jobs will be jeopardized.

Despite a focused mission and improved incentives to regulate banks, the CBRC's regulatory capacity suffers from both internal problems and external intervention. Internally, the hard targets imposed by Mr. Liu on banks and on CBRC branches forced many bankers and local CBRC officials to submit false NPL figures to the headquarters. This is a perennial problem of the command economy, and the CBRC is no exception. Externally, although the CBRC in theory takes the helm in banking regulation, in reality it contends with a host of agencies for regulatory supremacy in the banking sector.

The CBRC's regulatory authority is further diluted by the existence of disciplinary committees and supervision committees in all major financial institutions. Because these institutions are either wholly or partially state-owned, they have Communist Party committees with propaganda, organization, and discipline and inspection sub-committees.

To make matters worse for the CBRC, the PBOC under Zhou Xiaochuan by no means gave up the fight to regain regulatory power from the CBRC. After taking the helm at the central bank, Mr. Zhou successfully argued that money laundering and counterfeiting are monetary phenomena that should fall under PBOC supervision. This is significant because the antimoney-laundering portfolio affords the PBOC and the State Administration of Foreign Exchange great latitude with which to examine the books in all financial institutions, not just in banks.

Finally, the CBRC's regulatory power has been threatened by the PBOC's assertion of its role as "investor" in an increasing number of financial institutions through the Central Huijin Company. By serving as an investor, the Huijin board of directors-dominated by PBOC officials- has a large say in the appointment of senior bankers, and Huijin has exercised that power a few times since its formation.

Thus the prospects for a truly independent financial regulator in China remain dim. The Party is unlikely to relinquish its hold on vital financial and regulatory institutions. And the central leadership repeatedly has found ways to bail out China's ailing financial sector instead of fixing it. The problem with easy fixes is that they give agencies with access to ample funding, including the PBOC, MOF and NDRC, more power over cash-deprived regulatory bodies. Despite its well-aligned incentive structure, the CBRC faces an uphill battle to create a more robust financial system.

Mr. Shih is an assistant professor of political science at Northwestern University. Excerpted from the November issue of the Far Eastern Economic Review. Futher information is available at www.feer.com

Two small comments:

* I was under the impression that Central Huijin was owned by the Ministry of Finance and the PBC doesn't have any ownership authority.

* I doubt that the actual appointments are being made by the PBC. It seems to me far more likely that the people that are actually making the appointments are the Organization Bureau of the CCP.

Joseph Wang
Also, you do see the same sorts of PBC/CBRC turf wars in the United States between the Federal Reserve Board, Office of the Controller of Currency in the Department of Treasury, and the state banking regulators.

I don't think its serious enough to be a major cause for concern.

Joseph Wang
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Wednesday, November 09, 2005

Back to elite politics. A friend of mine recently had a chat with a section chief (sizhang) at the NDRC, and he heard the following comments from this section chief:

"Jiang Zemin has not retired to Shanghai as is always reported. He only spends
Chinese New Year there. The rest of the time he is in Beijing, where he supposedly calls all the shots from behind the scenes ("as a pupettier, just like Deng Xiaoping" said my informant). When I asked who on the politburo is the mouthpiece for Jiang, this guy said "who was Deng's mouthpiece after he retired? Hu Yaobang, not really and he got purged; Zhao Ziyang, definitely not; Chen Yun, no way. Jiang does not need a mouthpiece because he directly personnally controls ALL PERSONELL APPOINTMENTS at the Juzhang level and above! Thus, all high-level officials are directly beholden to him.""

This goes even too far for me. It is just not true that Jiang has been able to call all the shots on personnel decisions. Hu has clearly installed many of his minions in important positions. There was a spectacular failure recently when Jiang's faction failed to appoint Huang Qifan, currently vice secretary of Chongqing, to the head of the CBRC. There are two possibility for his comment:
A. He is lying. Because he is a member of Jiang's faction and wants foreigners to think that his declining faction is still powerful.

B. He thinks it's true. Since long-time Jiang loyalist Zeng Peiyan (now vice-premier) basically still controls the NDRC, Jiang might have a say on senior NDRC appointments. If this is true, I still don't think Jiang completely controls the process. I think Zeng comes up with a list and submits it to Jiang, who signs off on it. It is basically be an act of respect; I don't think Jiang would veto Zeng's choices in most cases, nor do I think the Organization Department would raise issues with Zeng and Jiang's choices. Nor would Hu Jintao and Wen Jiabao raise issues. It's just not worth it for them. NDRC's fortune is declining anyway. So, from his perspective, it seems that Jiang is still all-powerful, but it's probably a manifestation of Zeng's loyalty more than anything.

I think usually "section chief" refers to "Chuzhang". "Sizhang" might be bureau chief or something. In Ministry of Commerce, a Sizhang is usually translated as "Director General".

Anyway, there are so many "sizhang"s in Beijing that we shouldn't take a random sizhang's casual comments too seriously. A joke in Beijing is that if you throw a stone onto the street, chances are you have hit a minister (buzhang).
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Wednesday, November 02, 2005

On to the next interesting topic: resistence to foreign holding of bank shares. The article below echoes a Caijing article which states that the board at Huijin voted against giving Temasek a further 10% stake in the Bank of China because Temasek's extensive ownership of Chinese banks might jeapardize "financail stablility."

Here, we basically see the resentment of rival agencies bubbling to the open against the PBOC's wheeling and dealing of late. From the Caijing article, it becomes clear that the MOF board members led the charge against granting Temasek further stakes in the BOC. But I highly suspect that CSRC and CBRC members also wanted to take a stab at the PBOC. For the past two years, Zhou Xiaochuan, with blessing from Vice Premier Huang Ju, has used the PBOC and later Huijin as a vehicle to gain control over some of the most important financial institutions in China. This has greatly angered the MOF, the traditional "owner" of financial institutions in China, as well as the CSRC, which ran the major brokerages in China until the PBOC began bailing them out through equity stakes. The BOC deal would not have come even this far if BOC had not received blessing from Zhou Xiaochuan, so clearly the other agencies wanted to embarrass Zhou with this unexpected vote.

Finally, Wen Jiabao might even be behind this one, as he tries to regain some control over Huang Ju's "independent kingdom": the financial sector. Wen's followers are mainly in the CBRC, which took over staff from the Central Finance Work Committee, where Wen had cultivated a group of young technocrats (eg Qian Xiao'an). Thus, it is not surprising that the limitation on foreign ownership now comes out of the CBRC, pointing directly against the PBOC, which is much more eager to speed up listing. This limitation will surely slow down the pace of listing (since the most eager investors are taken out of the running), which is exactly what Wen and others intend. If Huang Ju manages to list all four state banks before the 17th PC, he might gain enough "administrative merits" to hang on to power for another five years. Wen wants to avoid that at all costs. By deflating the baloon of bank listing, I expect banking reform will mire in the mud of elite politics for the next few years. While no one in Chinese politics is purely interested in reform, at least it is in Zhou and Huang 's interests to list the banks as quickly as possible. Now they have been stopped....

China setting new limits on bank ownership
Bloomberg News

SHANGHAI Bank of America and other foreign institutions that have
invested a combined $13 billion in China's banks will be required to
hold their shares for at least three years and will not be allowed to
buy stakes in more than two lenders, an official of the banking
regulator said on Wednesday.

The restrictions, in addition to an existing cap of 25 percent on
foreign ownership, are aimed at safeguarding financial stability and
preventing overseas dominance of the banking industry, Tang Shuangning,
vice chairman of the China Banking Regulatory Commission, said in a
speech in Beijing.

"We must set limits because we don't want foreign banks to gain control,
which may hurt our financial system," Tang said. "We must beware of
market monopolies."

China's government defines a foreign strategic investor as one that buys
a stake of more than 5 percent, he said, adding that such investors will
be expected to transfer management and technology expertise and will be
entitled to board representation.

China is seeking overseas capital and expertise to help strengthen
domestic banks before opening the industry to increased foreign
competition. The government will lift restrictions on overseas banks at
the end of 2006, allowing HSBC Holdings, Citigroup and other lenders to
compete for China's $1.69 trillion of local-currency household savings.

"Chinese banks need strategic investors who can bring in know-how and
improve corporate governance, rather than short-term investors such as
private equity funds," said Tang Chuan, a Hong Kong-based banking
analyst at KGI Securities. The rules disclosed on Wednesday were
"already in place but not public," he said.

A total of 18 foreign institutions have invested in 16 Chinese lenders,
Tang of the China Banking Regulatory Commission said. Joint-stock banks
like China Minsheng Banking have attracted $2.6 billion of investment
and city commercial banks $1.2 billion, according to the regulator.

In September, Bank of America paid $2.5 billion for a 9 percent stake in
China Construction Bank, China's third-largest lender.

Temasek Holdings, Singapore's state-owned investment company, paid $1.5
billion for 5.1 percent of China Construction Bank, which raised $8
billion selling shares in Hong Kong last month.

Besides its Construction Bank stake, Temasek also holds 4.55 percent of
Beijing-based Minsheng.

In August, Royal Bank of Scotland Group, Merrill Lynch and the Li
Ka-Shing Foundation agreed to pay $3.1 billion for 10 percent of Bank of
China, the second-largest lender in China, which aims to raise about $8
billion selling shares to the public in the first half of next year.

Temasek, which already has stakes in two Chinese banks, also agreed in
August to pay $3.1 billion for 10 percent of Bank of China.

However, Caijing magazine, a Beijing-based business publication,
reported on Tuesday that Central Huijin Investment, the state-owned
shareholder that now owns 100 percent of Bank of China, opposed the size
of the investment, saying it might destabilize the banking system.

In August 2004, HSBC paid $1.75 billion for 19.9 percent of
Shanghai-based Bank of Communications, China's fifth-largest lender. The
investment was the second in a Chinese lender by London-based HSBC,
which already owned 8 percent of Bank of Shanghai.

A classical example of the other side of the debate:

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First, a quick note on what Huijin will do with the money. I finally found the CCB perpectus in the HK Stock Exchange's highly user-UNfriendly website. First, Huijin does not get the money raised by the IPO since the IPO involved the issuance of new shares rather than the sale of existing shares. The money will go to the CCB. Huijin, as the majority share holder, can decide what happpens to the money. It seems that the money will be used to shore up the capital base and presumably to write-off some of the remaining NPLs in the bank.

By State Council rule, holders of state shares at the time of the IPO must give 10% of the receipt from the IPO to the social security fund. Instead of handing over 10% of the money raised from the IPO to the social security fund (which they can't since they are primary shares), Huijin and other holders of the original state shares promise to give CCB dividend equivalent to the 10% of the money raised from the IPO to the social security fund for the next two calendar years.

This has been confirmed by someone close to the deal.

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