Thursday, June 29, 2006

Newly released PBOC data indicate that M2 growth in May remains a robust 19.1% from last year. Although the PBOC managed to maintain it below the 20+% earlier this year, it is nonetheless alarming. A main question is why doesn't the PBOC raise rates further. In a new Standard Chartered report, Stephen Green and company point out that the PBOC typically tries to maintain a 3% gap between PBOC rates and Fed overnight rates to discourage hot money inflows. The gap is now over 50 basis pts above that gap, so the PBOC should be able to raise rates further from its current 1.7% without attracting too much hot money. I think one explanation is political. In essence, Zhou is basically trapped between a rock and a hard place. On the one hand, it would solve his (excessive) liquidity problems, but on the other hand, he finds it politically unpalatable to increase the cost of financing for powerful SOEs and local governments before a Party Congress, where he wants a promotion to the State Council.

Thus, we will see more sterilization through PBOC note issuance and more adjustments in reserve requirements and cut-backs on excess reserve rates. If M2 continues to grow above say 18% in the next month or two, we might see 25 basis points increase in PBOC rates, but probably not much more.

I don't think that the explanation works because Zhao Xiaochuan, as head of the PBC, is already a member of the State Council. Even if he wants a promotion to vice-minister or state councilor, he'd have to wait until at least next year or more likely 2012, as this year is not an "election year." (Note the quotes.)

The real reason I think that the PBC isn't raising interest rates is that that doesn't cool down the economy as well as reserves and light administrative controls. The rise in interest rates in 10/2004 actually seem to cause M2 to accelerate.

My pet theory is that because the rates that banks lend out is set by the market whereas the rates that the banks pay out is fixed (and very low) that raising interest rates might actually cause banks to lend out more money.
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Tuesday, June 27, 2006

Look, I am one of the few people today who believes that serious inflation is possible in China. I have also spent much of my short career examining inflation hawks in China. Nonetheless, I find it amusing when people periodically "discover" a monetary over-hang in China, even though it has existed since 1981. Besides underreporting of GDP figures, there are two further factors that explain this inflationless (relatively) over-hang. First, as more and more commodities and goods in the economy are monetized, the economy simply needs more money to deal with the increasing volume of transactions. But as government officials have told me, we are now in the final stages of monetization, with land being the final good to be monetized. So, people in the government are a bit worried about this. Furthermore, there is still a sizable amount of capital flight, especially from corrupt officials. I have no idea whether today it is statistically significant, but it once was very significant.

I do agree with the author of the following article that the political price of stopping inflation, at least in the old way of "one-knife cut" lending freeze, is likely to be higher today than previously. Before, state provision of housing, food, and jobs provided a cushion for many city dwellers during monetary contractions. This is likely not the case today. However, the PBOC has at the same time developed many more tools to fight inflation beyond just lending freeze. As current policies demonstrate, measures like raising interest rates, reserve requirement, and sterilization are somewhat effective, although we cannot rule out lending freeze at some point if inflation really picks up.

Trouble Is Coming to Beijing

By David Frum

National Post (Canada)
Publication Date: June 24, 2006

At a financial conference in the Rockies a few days ago, a leading American economist presented a simple formula to attendees:

Over the past 12 months, China's money supply (cash plus bank deposits) has grown by 17%.

Over that same period, China's economy has grown by no more than 10%, and probably less.

If we assume that Chinese people have no greater willingness to hold Chinese cash today than they did a year ago, it follows that China's reported inflation of 1.4% is dramatically understated. The real inflation rate must be at least 7%, probably more. And indeed, the signs of inflation in China are widely reported: surging real estate prices, shortages of gasoline and other basic goods, intensifying wage disputes.

Too bad for them, you might be tempted to say.

But the problems of the world's biggest country have a way of becoming problems for the whole planet. And so it is with China's inflation.

China's inflation, like all inflations, has been created by China's government. The government of China wants a cheap currency, to keep the exports growing, the factories turning--and the workers quiet.

But in the self-balancing international financial system, a country that exports a lot will sooner or later see its currency go up--just as a country that imports a lot will sooner or later see its currency go down.

The Chinese Central Bank has invested hundreds of billions of dollars to build a seawall against the economic tides. Rather than let the yuan rise, it has printed hundreds of billions of dollars worth of them and used them to buy US dollars. That keeps the dollar up, American interest rates down--and American consumers buying.

It is a vast transfer of wealth from China's poor to America's rich.

The side effect of this export-friendly policy however is to create much more Chinese money than anybody wants inside China or outside. And when you have too much of something … its value declines. When that "something" is money, that decline in value shows up as inflation.

China could stop its inflation anytime by printing fewer yuan--but only at a political price. The currency would begin to appreciate against the dollar. China would export less, and Chinese real estate would decline in value. Workers would lose their jobs; recent purchasers of apartments would see their investments decline in value. Chinese citizens--80% of whom now tell pollsters that they are satisfied with the way things are going in China--would suddenly begin to express anxiety, discontent, and ultimately dissent.

Meanwhile, doing business in China would become more costly and the flow of foreign investment dollars would slow--as would China's overall economic growth and its hope of gaining ground on the United States.

Thus far, China's future looks very like Japan's recent past. Like China, Japan chased growth in the 1970s and 1980s with an artificially cheap currency. Like China, Japan suffered accelerating inflation in the 1980s: at one point, the 250 acres of the imperial palace complex in Tokyo were estimated to be worth more than all the land in California. It all came to an end in 1989. The yen rose, real estate values crashed, exports slumped, workers lost their jobs, and the Japanese political system unraveled.

But Japan possessed one great resource China lacks: democracy. The Liberal Democratic Party, which had governed Japan since 1955, lost power in the election of 1993 after Japan's free press exposed a huge party-financing scandal. The shattering defeat forced the LDP to embrace economic and political reforms.

China's press, however, is not free. Chinese scandals (at least those involving the ruling elite) go uncovered. Chinese citizens are offered no peaceful avenue by which to change rulers whose policies fail. Which likely means that China will remain politically stable only so long as its rulers succeed.

So far, those rulers have delivered success--almost uninterrupted success over a decade and a half. And who know? Perhaps they will continue to succeed. But if and when they fail--expect trouble.

Indeed, the trouble may already have started. The Chinese government reports a rising number of disturbances in the country: 58,000 protests or strikes involving more than 100 people in 2003, 74,000 in 2004, 87,000 in 2005. Exactly why the repressive Chinese state has decided to publicize this number cannot easily be understood. Perhaps it wishes to frighten an anxious middle class into rallying to the Communist party as a bulwark against disorder. Perhaps it wishes to frighten economic elites into accepting policy changes. Or perhaps it wishes to obtain international acceptance of harsher internal policing.

Whatever the motive, the conclusion seems apparent: There is trouble coming in the world's largest country. And it will affect us all.

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The NAO has apparently discovered another series of frauds and illegal lending in the ABC. That in itself is not surprising. At the end of 2005, ABC still had NPL ratio of over 26%, much higher than that of the other Big Four banks. What is really disturbing (okay, maybe not) about this is that this comes on top of an additional 1.5% in NPLs discovered during an internal audit last September. In fact the results of this audit had been circulating in official circles since the end of last year, and the government finally decided to release the report. As there is mounting lobbying by the ABC to push forward restructuring, the State Council might be using the release of this report to slow down the impetus for restructuring. This is partly because ABC is far from ready to restructure, much less list. Moreover, the State Council likes to keep the ABC in its current form, completely controlled by the state. This is because the current administration continues to see the ABC as a powerful instrument to provide liquidity for rural development. Although the vicious cycle of government intervention and bank moral hazard is present in the other banks, it is the dominant force that drives ABC.

China Reveals $1.1B Bank Fraud
Corruption Threatens Foreign Investment

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, June 27, 2006; 11:10 AM

SHANGHAI, June 27 -- The Chinese government's disclosure this week of $1.1 billion worth of fraud at one of the country's largest state-owned banks underscores the risks confronting foreign investors and the precarious nature of China's corruption-ridden financial system.

China's National Audit Office on Monday announced that an examination of records at the Agricultural Bank of China -- one of four state-owned giants -- uncovered 51 cases of criminal wrongdoing involving 157 people during 2004. The state audit also found evidence of $1.8 billion in improperly handled deposits, and $3.5 billion in illegal loans.

The latest details of fraud come as China presses to eradicate the taint of corruption from its state-owned banks as it courts foreign capital in a bid to improve management practices. China's leaders are particularly keen to fix its ailing lenders ahead of next year, when foreign banks will finally be allowed to conduct business inside China in local currency. That is expected to pose a grave challenge to domestic lenders, whose managers have been nurtured by decades of state capital infusions and a system governed more by personal connections than consideration of the bottom line.

The most recent additions to a lengthy roster of bank-fraud cases brings to the fore a basic question about the future of China's financial system: Are the state disclosures a sign that the government is indeed serious about fixing the troubles, or just another indication of the extent of the problems in a fundamentally shaky system? Analysts saw a little bit of both. While the state is indeed intent on a fix, the challenges are deep.

"This case that has emerged at the Agricultural Bank of China is just a minor one among the overall problems with China's state owned banks," said Yi Xianrong, a director at the China Academy of Social Sciences' financial research institute in Beijing. "Lots more such cases are not discovered and will be discovered sooner or later, as the most serious problems involve medium- and long-term loans."

He cited deep institutional problems at the banks, including a lack of internal controls. "More fundamentally, the system appoints bank leaders based on administrative power rather than on market performance," Yi said. "Real changes have yet to come."

For foreign investors, the stakes tied to reform are high. Last year, Bank of America paid $3 billion for a 10 percent stake in the Bank of China, with the Royal Bank of Scotland taking another 10 percent of that lender. This month, Bank of China raised some $9.7 billion through a stock offering of stock in Hong Kong, following a $9.2 billion stock offering there by China Construction Bank.

Last August, Goldman Sachs Group Inc. sank $3 billion into China's largest lender, the Industrial & Commercial Bank of China, capturing a 10 percent stake. The bank has said it will pursue a stock offering worth some $12 billion in Hong Kong sometime this fall.

Foreign investors are eager to lock up stakes of banks in China's huge, sizzling economy. With stock and bond markets still in their infancy, China's four largest state banks essentially dictate where capital goes in China. But the foreigners are sinking their money into a financial system that has traditionally functioned more as an artery of cash for companies owned by the Communist Party-led government then as careful arbiters of risk and reward.

Private economists estimate that China's banks are now choked with $500 billion in bad loans, making the system vulnerable to a shock. Those worries have heightened in recent weeks with the release of government data showing a surge in lending during the first five months of the year, despite government caps on investment in red-hot sectors such as real estate and automobile manufacturing.

On Tuesday, the debt rating agency Standard & Poor's underscored those concerns, declaring that China's banks face "increasing vulnerability" from the widening volume of lending. The agency credited China's banks with some improvements in their governance, but stressed that "their developing credit and risk management systems are likely to be severely stretched by rapidly changing economic conditions."

The Agricultural Bank has long been seen as the most flawed of the four state-owned giants. Four years ago, bank officials announced plans to embrace consumer finance as a way of weaning itself off more politically motivated lending. The bank moved aggressively into the fledgling business of auto finance, seeking to profit as China's growing middle class embraces the family car.

In interviews, bank officials then acknowledged that credit checking systems were virtually non-existent in China. They said that so long as would-be borrowers accurately disclosed their addresses and incomes, few applicants would be turned away.

This week's disclosures added to the evidence that the resulting consumer finance frenzy has turned sour: The state auditors said that among the biggest areas of fraud in the cases it discovered were car loans and home mortgages.

"The banks have been desperately expanding loans including consumer loans and real-estate loans," Yi said. "The problem won't be visible until real estate prices fall dramatically, which will happen sooner or later. The problem with individual consumer loans is serious."






  (一)违规经营问题比较突出。主要反映在三方面:一是违规办理存款业务142.73亿元。主要问题是违规使用存款科目、违规开立存款账户,个别单位甚至违规动用客户存款。如,黑龙江分行营业部中山支行利用银行特种转账凭证擅自动用客户存款1.81亿元,用于为其他企业开具银行承兑汇票的保证金和提供虚假出资证明。二是违规发放贷款276.18亿元。主要表现在汽车消费贷款、土地储备贷款和扶贫贴息贷款等方面。如,北京昌平区支行在明知北京日泽丰成经贸有限公司不具备汽车消费贷款担保资格,而且所提供的申请贷款资料内容虚假的情况下,发放个人汽车消费贷款达4.6亿元,其中部分资金被该公司法定代表人霍民挪用到异地投资,截至2005年9月已形成不良贷款1.21亿元。三是违规办理票据业务97.18亿元。农业银行一些基层分支机构对票据业务审核把关不严,存在大量违规操作。如审计抽查河南信阳市分行2004年办理的贴现业务额24.7亿元,其中无真实贸易背景业务额达21.9亿元, 比例高达89%。



  此外,审计还发现农业银行违反财务会计制度问题金额12.67亿元,其中会计核算不实11.82亿元,私设“小金库” 8492.8万元。






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Saturday, June 24, 2006

Hope springs eternal. This is definitely the case for foreign banks wanting to get a slice of the China-market. US bankers always come home optimistic after they talk with CBRC or PBOC officials because these officials always claim that momentous change is just around the corner. In the case of increasing the cap on foreign ownership of Chinese banks (from current 25%--20% per investor), the rumor has been circulating for years, prompted by "remarks" by CBRC officials. I have no doubt that many in the CBRC support raising the cap, which makes their job easier, but they do not make these decisions. The State Council does. I just don't see the right political environment in which a major policy like raising the cap can be implemented in the near future, at least not until after the 17th Party Congress.

Dow Jones
China May Raise Caps on Banks
June 23, 2006; Page C4

BEIJING -- Chinese officials have indicated they are considering raising limits on foreign investment in the country's banks, though restrictions on smaller banks will likely be relaxed more rapidly than on the five biggest state-owned institutions, a U.S. industry executive said.

Donald Evans, a former U.S. commerce secretary who now heads the Financial Services Forum, an industry group, met with Chinese officials this week to urge them to allow foreign banks to take a more significant level of control in domestic institutions. He said he believes China is "moving in that direction."

"It's under discussion. But my impression is that the caps for equity ownership by foreign investors will move up at a quicker pace for the provincial banks than for the big five state-owned banks," Mr. Evans told reporters on Thursday.

A single foreign investor is now permitted to own no more than 20% in a single bank, while the total foreign investment in each domestic bank may not exceed 25%.

Earlier this month, Liu Mingkang, chairman of the China Banking Regulatory Commission, said the commission is studying whether to ease the limits and will publish its decision by December. On his visit to Beijing, Mr. Evans met with Mr. Liu as well as with officials from the central bank, finance ministry and other financial regulators.

Mr. Evans said no timetables for those changes, or specific thresholds of investment, were discussed, but he noted that he does expect some new developments in coming months. Mr. Evans emphasized that his assessment of likely policy changes is his own, though it is based on his discussions with Chinese officials.

A test case of regulators' willingness to bend the current rules has been the sale of an interest in Guangdong Development Bank, for which rival consortia, one led by Citigroup Inc. and one by Société Générale SA, are bidding. Both of the original proposals for taking majority control of the bank would have breached current limits. They have since been modified after languishing for several months.

Foreign banks have already poured billions of dollars into investments in other Chinese institutions, despite being restricted to minority stakes. "The CEOs of the largest financial institutions in the world...are saying that China is where the best opportunity is," Mr. Evans said. He declined to comment on the Guangdong Development Bank case.

Write to Andrew Batson at andrew.batson@dowjones.com1

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Wednesday, June 21, 2006

Dear readers, I am currently in Beijing corrupting young minds about the Communist Party. Of course, I have been catching up with friends in the media based in Beijing as well. The result is what follows.

On the Liu Zhihua issue, a few more unconfirmed second-hand rumors/ observations

According to second-hand rumor, this is the first-step in Hu's attempt to finally attack the Shanghai fortress. Basically, if Liu is removed, Hu can make an argument that Shanghai is not singled out for corruption investigation. This would allow him to finally send an army of anti-corruption investigators to Shanghai, which is what you would need to topple the Shanghai city government.

The other second-hand rumor/observation is that given the sensitivity of Liu's job as the chief Olympics building czar, he must have been watched closely. So the fact that he got away with it for a while suggests that he has strong political backing. That is partly reasonable. True, Liu Zhihua enjoyed more rapid promotion under Jia Qinglin (when he served as mayor and PS from 1996-2002), suggesting some ties between the two. By extension, since Jia is a close allie of Jiang, Liu is in the Jiang network. However, anti-corruption in China is incredibly passive, and also corruption by its own nature is a hidden transaction. Currently, the only regular mechanism for monitoring corruption is an annual audit on one's family bank accounts, which is just laughable as an anti-corruption tool.

Other than that, you rely on petition letters (jubao xin) to tell you who is corrupt. The problem with jubaoxin is that they are often false, fabricated by the corrupt officials to get the clean officials in trouble, so the anti-corruption bureau takes all evidence with a large grain of salt. If enough evidence accumulates on a senior official (probably ting/ju level or above), then it gets sent to Zhongnanhai for discussion. This is where the political backing comes into play. Because of the unreliability of evidence, if a Standing Committee member vouches for someone, his colleagues will not lightly challenge that, or risk an all-out political war. After some reflection, I do think that the foreign origin of the accusation plays an important role, since Jia's political rivals (Hu) can say that the source of the accusation is now much more credible than the usual noise. Jia in this case would have a much harder time refuting the charge.

ANALYSIS - Beijing corruption case signals political battle
Wed Jun 21, 2006 12:39 PM IST

By Lindsay Beck

BEIJING (Reuters) - When Beijing vice-mayor Liu Zhihua was sacked for corruption it looked like a warning shot ahead of the Olympics, but analysts say his fall is as much about political jockeying as it is about bad morals.

With the 17th Party Congress -- one of the Communist Party's five-yearly meetings at which key leadership appointments are made -- little more than a year away, Liu's dismissal serves notice that the political game in China's secretive elite is heating up.

"It seems to be (President) Hu Jintao putting down one more marker on his way to the Party Congress," said Joseph Fewsmith, a Sinologist at Boston University.

Liu, who had controlled the $40 billion project to upgrade Beijing's infrastructure ahead of the 2008 Games, was taken into custody on suspicion of wrongdoings that a brief official report described this month as "quite serious".

His fall was no doubt a cautionary message for the myriad ministries involved in the Olympics, which China has promised would be open and clean. But with official corruption widespread, many are wondering: why Liu, and why now?

"Either he's very unlucky or there is a political motive behind it," said Victor Shih, a Chinese politics specialist at Northwestern University in Chicago.

Hu's predecessor, Jiang Zemin, toppled Beijing party chief Chen Xitong in 1995 on what critics say was a trumped up charge of corruption.

An estimated 17,000 candidates are to be rotated ahead of the next Party Congress, and with the government also downsizing party committees, some of them will lose their jobs.

"Now is when the (Party's) Organisation Department is vetting candidates for the next Central Committee, so Hu has to make a statement about who is in charge," Shih said, referring to the party's elite group which has 198 full and 158 alternate members.


Liu was seen as loosely aligned with Hu's predecessor Jiang Zemin, who still wields influence through political allies in his powerbase of Shanghai and whose proteges crowd the nine-member Politburo Standing Committee that is China's centre of power.

Hu made a high-profile inspection tour of Shanghai last week, adding to speculation he is in the midst of a political push.

He also chose a meeting of Shanghai's delegation to China's annual session of parliament in March to emphasise the need to "deepen reforms and broaden opening".

"We must unwaveringly support the direction of reform and have steadfast confidence and determination in reforms," he said at the time, comments he repeated on last week's tour.

The remarks hint at the policy differences between Hu and his rivals over what observers say is an ideological rift over the pace and direction of China's market reforms, which some factions argue are leaving too many behind and weakening the party's grip.

Ji Lin, another Beijing vice-mayor who has stepped into Liu's role as head of the 2008 Project Construction Headquarters Office, rose through the Communist Youth League, Hu's power base.

Hu's public stance in Shanghai and Liu's case also serve notice to the financial capital it may not forever receive favours like cheap credit and land approvals it did under Jiang.

"Certainly Jiang Zemin's faction is on the defensive," said Cheng Li, a China scholar at Hamilton College and a senior fellow at the Brookings Institution.

But while Liu's sacking might be the first salvo in the political tussle that is likely to gather pace as the Party Congress nears, analysts say a destabilising factional battle is unlikely.

"These two factions sometimes cooperate with each other and sometimes compete for power," said Li. "That pattern still largely remains unchanged."

Hi Victor. This Reuters article certainly fuels the fire:

China's Hu orders sacking of vice mayor - source

By Benjamin Kang Lim

BEIJING, June 22 (Reuters) - Chinese President Hu Jintao
ordered the sacking of a vice mayor at a secret meeting to
prevent political patrons from protecting him, a government
source said on Thursday, in a sign Hu was determined to fight

But many analysts said the fall of Beijing Vice Mayor Liu
Zhihua this month was as much about political posturing by Hu
ahead of a leadership reshuffle at a crucial five-yearly meeting
of the Communist Party next year as it was about corruption.

Liu, 57, responsible for urban planning and awarding $40
billion worth of projects to upgrade infrastructure ahead of the
2008 Olympic Games, was replaced by another vice mayor who rose
through the Communist Youth League, Hu's power base.

"Hu Jintao personally took charge of the case. He presided
over a three-day meeting and decided to take out Liu Zhihua," the
source who has close ties to Hu's camp told Reuters.

Liu is accused of corruption and bad morals and has been
sacked from the Beijing People's Congress, or city council, the
official Xinhua news agency said last week without elaborating.

"Beijing (government leaders) did not know about it
beforehand to prevent (them from) protecting him," said the
source who spoke on condition of anonymity.

But the source dismissed speculation Hu was jockeying for
power against his predecessor, Jiang Zemin, 79, who is keen to
have a say in the upcoming leadership reshuffle. Jiang also still
wields some influence through proteges in the party's nine-member
decision-making Politburo Standing Committee.

The cabinet spokesman's office and the Beijing city
government, reached by telephone, had no immediate comment.

The scandal has unsettled China's real estate industry, which
has been hit by a series of government measures to curb

Beijing Capital Co., a property affiliate of conglomerate
Capital Group, said in a statement in the Shanghai Securities
News on Thursday that group general manager Liu Xiaoguang was
cooperating with a government investigation surrounding the
disgraced vice mayor.

"At present, company operations are normal," the announcement
said without giving details. Capital Group is one of China's
biggest real estate developers with assets totalling 45.2 billion
yuan ($5.65 billion) as of the end of 2004.

It was unclear if the two Lius were related.

The party's graft busters took Liu Xiaoguang away for
questioning from the Beijing international airport on June 16,
the online edition of China Securities Journal said.

A company spokesman has denied the 51-year-old Liu Xiaoguang
was involved in any irregularities or crimes.

Shares in Beijing Capital, which were suspended on Wednesday
as news of the incident leaked out, were down 4.5 percent at 4.72
yuan in Shanghai at 0530 GMT.

Shares in Shenzhen-listed Super Shine Co., which is teaming
up with the group to develop a residential and commercial
property project in Beijing's Olympic Centre, had tumbled 5.1
percent to 5.38 yuan.

Capital Group is also the parent of Hong Kong-listed Beijing
Capital Land, whose shares remained suspended on Thursday. The
group has interests in real estate, water and gas supply, fund
management, trading and electronics.
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Monday, June 12, 2006

As clever bloggers in China are noting, China has won one gold for the 2008 Olympics already, that of corruption. The first major arrest comes with the investigation of Vice Mayor of Beijing Liu Zhihua, who is responsible for Olympics related construction. He got into trouble when he didn't deliver a contract to a British businessman who paid a bribe. Incidentally, that fellow can never do business in China again, but anyway, this guy went quite far and blocked off an entire section of a high-priced villas for his concubines....

The question is whether this investigation will widen. I think this is a play by Mayor Wang Qishan to unsettle Beijing Party Secretary Liu Qi's headquarters in Beijing. Liu Qi was of course appointed earlier by Jiang Zemin, while Wang was a recent appointment by Hu-Wen. Anyway, the central government is certainly trying to make a statement, if not launch a political campaign against corrupt officials. The Central Discipline and Inspection Commission receives thousands of tips everyday, some of them about very senior officials. You have to ask yourself why they chose to take this one seriously. Of course, complaints by foreigner, especially if this person is a major business group, tends to increase the likelihood of action.

Times Online
June 12, 2006

Sacked Olympics chief had 'pleasure palace' full of concubines

From Oliver August of The Times in Beijing

The vice-mayor of Beijing overseeing the construction of Olympic venues for the 2008 Games has built himself a pleasure palace filled with young concubines on the outskirts of the city.

Details of Liu Zhihua's colourful private life emerged today after he was sacked from his post when a foreign businessman reported him for extorting a bribe.

Mr Liu's sacking has triggered accusations of widespread corruption surrounding the Games, and highlighted a culture of graft that is said to trouble British and other foreign companies working as specialist contractors on Beijing's Olympic sites.

In the resort town of Kuangou, an hour's drive north of the Olympic Village, police have sealed off Mr Liu's multi-story development.

An unknown number of young woman, as well as waiting staff, are said to be confined to rooms there, waiting to be interviewed by investigators from the central discipline inspection commission, a shadowy anti-corruption agency inside the Communist Party.

"Liu has more than one mistress," wrote the Wen Hui Bao newspaper in Hong Kong. "He has a secret pleasure palace for himself to have fun."

Mainland media reported the sacking but no further details.

Mr Liu's palace is part of a resort complex in the hills north of the capital, close to the Great Wall. The architecture mixes classical Chinese courtyard layouts with modern glass and steel structures.

Near by is a conference centre with 150 rooms where domestic and foreign companies regularly conduct business meetings. A sports club on the same piece of land offers tennis courts, saunas and private venues for karaoke. The interior of the buildings aims to emulate high-end hotels. The carpets are thick, the sofas gilded and the chandeliers bedecked with fake gemstones.

Mr Liu was sacked after he demanded a bribe from an unnamed foreign businessman for the sale of a piece of land in Zhongguancun, a Beijing district to the west of the Olympic site. When Mr Liu refused to hand over the land despite having been paid off, the businessman reported the Vice-Mayor to the authorities.

The case is an acute embarrassment for the Government, which has vowed to "clean up" Beijing. Anti-corruption investigators moved against Mr Liu with unusual speed. He was removed from his post within 24 hours of his last public engagement. Normally, officials in his position are left in limbo for weeks or months.

The Government also took action today against online critics of its anti-corruption drive. Websites where readers can comment on news articles about Mr Liu were shut down. Nonetheless, chat rooms buzzed with allegations that China was certain to win at least one gold medal at the 2008 Games - for graft.

Someone calling themselves Sleepy Hippo wrote: "If they tell us Liu was leading a 'dissolute life' they should give us an explanation what that means. Then the other officials can compare it to their lives."

The chat rooms were also filled with allegations that the rot must be going higher than Mr Liu. In China, it is often the deputies who are punished in corruption cases while the top cadres are exonerated. "Again it is a vice-mayor? Why not punish No 1?" wrote Used To Be Intelligent.

Mr Liu was Beijing's vice-mayor responsible for city planning, land sales and sports construction. Hong Kong media reported that the investigation may yet be widened to include other officials.

Mr Liu may be executed if found to have defrauded the state of more than half a million dollars - an unofficial threshold in financial crimes for the death penalty in China. Beijing is spending $40 billion (£21.7 million) on pre-Olympic construction work.

Other officials hurried to distance themselves from the vice-mayor. "Liu Zhihua held no position with the Beijing Organising Committee for the Olympic Games," said Sun Weide, a committee spokesman.

"It is his own problem and he is being investigated by the relevant department. His case will not affect the preparations for the hosting of the 2008 Olympic Games."

The leadership of the Communist Party has embarked on a huge anti-corruption drive over the past two-and-a-half years with nearly 50,000 officials prosecuted and punished up to the end of last year.

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Thursday, June 08, 2006

A new theory on Huang Ju has emerged. According to the story below, Huang Ju has disappeared from public view because he is in trouble for inadvertently leaking state secret to the DPP in Taiwan through his daughter, who has a "relationship" with a pro-DPP Taiwanese businessman. I don't think this story is likely. First, even if it were true, Huang leaked state secret only inadvertently through his daughter; proving otherwise would be very difficult. Given that it was an inadvertent leak, he would only have to make a self-criticism at the Standing Committee. There would be absolutely no need to "interrogate" him for months. Even officials under suspicion of corruption continue to work until they are arrested or placed under "double rule." Also, given that he is a Standing Committee member, State Security would not dare to detain him for so long without concrete evidence of an intentional leak (which is difficult) and the full backing of Hu, Wen, and Zeng. If there was concrete evidence and full political backing, Huang would not have re-surfaced.

It still seems that he is just sick with cancer. But then the question is why does he re-surface? Why not just rest until he feels better? The problem for Huang and for the Jiang faction is that in the run-up to the 17th Party Congress, they have to show that they still have considerable clout, or junior officials will all bandwagon around Hu Jintao, leading to a complete hollowing out of the Jiang faction. He has to appear as if he is still making vital decisions. Within the next few months, the preliminary list of 17th Central Committee members will begin to circulate in the higher reaches of the party. If he does not appear in public, other politburo members and junior officials will assume that he is out of the political game and discount his preference as they deliberate the next leadership group. Needless to say, the Shanghai faction is trying desperately to prevent that outcome, even going as far as making a gravely ill man appear in public.

Chinese Official Reappears, but Mystery Persists
Long-Absent Vice Premier Has Key Roles
By Edward Cody, Washington Post Foreign Service, WP, Thursday, June 8, 2006; A16

BEIJING, June 7 -- Suddenly Huang Ju was back, with the familiar quizzical eyebrows arching from behind large wire-framed glasses, sitting alongside other members of the Chinese Communist Party's supreme policymaking body, the Politburo's nine-member Standing Committee.

Huang's return, which was broadcast on official television Monday evening and reported prominently in the next day's People's Daily, came after five months during which he had dropped from sight, generating a swirl of rumors, reports and more or less informed speculation about what had happened to one of China's most powerful men.

Huang's reemergence settled nothing about his status -- people still wondered whether he was deathly ill, under investigation for a security breach or tainted by a wife with her hand in the till. But it dramatically illustrated the secrecy behind which China's leaders work, a dark cloak that hides even the most mundane details about how they rule the world's most populous nation.

The Bush administration has repeatedly urged China's leaders to be more open about their military buildup and long-term strategic intentions. Defense Secretary Donald H. Rumsfeld voiced the demand yet again at a weekend conference in Singapore. But China's tradition of secrecy -- on military matters and nearly everything else that touches the party's senior ranks -- has proved durable over the years, rebuffing foreign and Chinese curiosity with equal resolve.

The curiosity surrounding Huang was more than idle. For one thing, Huang, a vice premier, has been the party's overseer of economic reforms, vital to foreign investors and further modernization. Moreover, his seat on the Standing Committee, Chinese and foreign analysts pointed out, is key to President Hu Jintao's attempts to solidify his party leadership before the 17th party congress scheduled for October 2007.

Huang, they noted, belongs to the so-called Shanghai Faction left behind by former president and party leader Jiang Zemin. Hu took over from Jiang as party leader in 2002 and as president the following year, but he has yet to push out all of Jiang's proteges and replace them with his own favorites. A recent attempt by Hu to appoint a loyalist as Shanghai's party secretary fell through, suggesting that Jiang's faction retains a measure of power, a veteran Western diplomat said.

So when Huang dropped out of sight in January without explanation, people started asking questions. They got no authoritative answers, however, because that is not the way China's government works. Any news about senior leaders has to come from the official New China News Agency, which, agency journalists say, submits every story dealing with such officials to the party Propaganda Department before sending it out. Nothing about Huang's situation was authorized for release.

The official media reported in April, and again in May, that Huang had sent messages to conferences that he normally would have attended. But nothing came down on his personal situation. A Foreign Ministry spokesman, asked about Huang's status, responded that he had nothing to offer.

Without information, Beijing buzzed with rumors. Journalists talked about Huang's absence over lunch. Officials confided their theories to one another. An elderly couple said their friends were even discussing it during early morning exercises in the courtyard of their Beijing apartment block.

The most believable rumor said Huang, 67, had received a diagnosis of pancreatic cancer and was undergoing therapy. This version received added credibility when a spokesman for the National Committee of the Chinese People's Political Consultative Conference said March 2 that "Comrade Huang Ju was hospitalized for treatment because he was unwell. He is currently recovering."

But other versions circulated as well. One said that Huang's wife, Yu Huiwen, was in police custody being investigated for financial irregularities and that Huang had been asked to step aside pending the investigation. Other reports said that Huang himself was under suspicion and that police were interrogating him as well as Yu.

More recently, a mid-level official said he was told, in great detail, that Huang was indirectly involved in a security leak to Taiwan and was being extensively interrogated by national security officials at a government facility in the Beijing suburbs.

Huang's daughter, the official said, had a long-standing relationship with a Taiwanese businessman whose father has ties to the pro-independence Democratic Progressive Party of Taiwanese President Chen Shui-bian. Suspicions were aroused that the relationship might have become a conduit for state secrets through carelessness or espionage, he said. Hu and his lieutenants were particularly concerned, the official said he was told, because Chinese intelligence learned that the content of a Standing Committee meeting on Taiwan policy was passed to Chen within days of its being held.

Sorting out the reports was impossible, even for relatively well-informed Chinese. Many informed people bought into the cancer theory, particularly after the spokesman's comment in March, but they were far from sure and did not know how authoritative it was.

"I've forgotten where I learned about it, maybe from my boss or colleagues," said a young official at a government ministry. "But my colleagues and I have been talking about it privately. It seems that everybody knows, but nobody knows where the news originally came from. Maybe some senior officials or people around him leaked the information. Who knows?"

A young party official, speaking with friends, laughed at their attempts to find out for sure. "You want to confirm that information?" he said. "Forget about it."

Huang appeared pale but steady during his brief appearance on China Central Television. He was shown attending a conference of scientists and engineers, sitting alongside other Standing Committee members: Hu; Premier Wen Jiabao; Wu Bangguo, chairman of the National People's Congress; Jia Qinglin, chairman of the People's Political Consultative Conference; Vice President Zeng Qinghong; Wu Guanzheng, who monitors party discipline; Li Changchun, who directs party propaganda; and Luo Gan, the security chief.

The People's Daily, the party organ, mentioned Huang on page one in his order of seniority with the other Standing Committee members. But the only photo showed Hu, prominent against a bright orange background under a bold headline saying he had delivered "an important speech" to the gathered scientists.

Researcher Zhang Jing contributed to this report.

I feel Huang Ju's situation is like most of those whom persecuted innocent people in China. His future, his well being and our understanding of what he is facing is limited only by not looking at the facts surrounding his rise to power. He came to power by robbing China of it's soul. He came to hold different positions in the CCP because he was willing to spill the blood of innocent chinese people. How could he not have cancer. How could each cell in his body not testify to the evils he particpated in. How could each breath he takes and every though he has ever give him peace and life when he has done so much damage to China, it's future and persecuted countless innocent people. thanks for the chance to share
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Monday, June 05, 2006

Well, a reader alerted me of Huang Ju's return. It has been over four months since his last public appearance, and this appearance clearly represents a strong signal to the world that Huang is still an active political participant. However, given what we know about the workload for Chinese leaders (really heavy), I am sure some of his less important portfolios are still delegated to his colleagues. He might, however, be back on the financial beat. The article points out correctly that this will not have any short-term impact on the stock market. Although he was an early proponent of the share circulation reform, this reform is going quite smoothly, which partially explains the recent performance of the Chinese stock market. One issue that might be revived with his recovery is Citibank's deal with GDB. I wouldn't be popping champagns yet; Wen has in effect announced that no foreign bank can hold over 20% of a Chinese bank, and Huang is unlikely to be able to countermand that. To get the deal, Citibank and Carlyle will have to settle for a 20%/5% split of GDB. There is perhaps room to argue for a few more percentage for the future, but I wouldn't expect too much beyond that. Huang's return will, however, put some wind in the sail for the sale of GDB.

China Vice Premier Returns To Public View -Xinhua
(Updates with background and market reaction.)

BEIJING (Dow Jones)--China's sixth-ranking Communist Party official who oversees the country's financial sector made his first public appearance Monday since being absent from key official events since January.

Vice Premier Huang Ju, 68, attended a scientific conference in Beijing along with the eight other members of the Communist Party Standing Committee, the party's highest ranking body, the official Xinhua News Agency reported.

In March, a government spokesman confirmed that Huang had been "unwell and underwent treatment in a hospital" following media reports that he had been diagnosed with pancreatic cancer. Huang was absent from the annual meeting of China's congress in March, where the body approved a blueprint for China's economy over the next five years.

During his tenure overseeing the financial sector and state enterprises, China has opened its door wider to foreign investment and pushed market-oriented reforms. China's state banks have sold over $30 billion worth of shares to foreign investors and its domestic stock market has undergone reforms to float nontradable shares.

A Shanghai-based trader said he expects Huang's return to public duties will have little effect on domestic stocks. The benchmark Shanghai Composite Index ended up 0.91% Monday at 1684.62.

Huang last appeared in public at a meeting of the China Banking Regulatory Commission Jan. 16, according to the official Xinhua News Agency.

Huang, a longtime ally of former Chinese President Jiang Zemin, was elevated to the Communist Party's top body in 2002 after serving as Shanghai Party Secretary from 1994-2002.

-By Rick Carew, Dow Jones Newswires; 8610 6588-5848; rick.carew@dowjones.com

-Edited by Andrew Bullard

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