Competition — and coordination — within the Chinese state as China goes forth
Today’s Financial Times has an important article by Geoff Dyer and Sundeep Tucker examining the overseas expansion of Chinese companies in general, and Chinese state companies in particular.
It is an important topic. One of my main conclusions my recent trip to Beijing was that the Chinese Investment Corporation (China's sovereign wealth fund) is going to a somewhat smaller force in global markets than many expect and Chinese state firms and banks a somewhat bigger force.
Dyer and Tucker offer two key insights:
First, Chinese state enterprises compete among themselves.
The best example: the different Chinese banks have all apparently expressed interest in buying Temasek’s stake in Standard chartered:
“Three Chinese banks – China Construction Bank, Industrial and Commercial Bank of China and Bank of China – have approached Temasek of Singapore in recent months to discuss buying its stake in Standard Chartered.”
The deep irony here is that all three are share the same large shareholder: the China investment corporation bought Central Huijin’s stake in these three banks (Huijin received equity in return for the reserves the PBoC provided the banks back in 2003 and 2005). If all three compete against each other to bid up the price of Temasek’s stake, Temasek wins and the CIC loses –
Second, the interest of China’s state and the interest of China’s state-owned firms are often not identical. The evidence: Chinese state oil companies often prefer to sell their offshore oil in the global market at the world market price, not domestically at the controlled China price:
“About two-thirds of the oil from China’s overseas assets is sold into the global market at the spot price rather than shipped back to China, where the companies would have to sell it at heavily subsidised rates. Even in Sudan, Chinese companies have at times sold much more of their oil production to Japan than they have sent home.”
I would bet that there is a bit of gamesmanship going on here. By selling their oil globally, Chinese state-oil companies put a bit of a pressure on China’s government to push up the administrative price of oil. This may also reflect competition among China’s state oil companies. China ultimately does have to import oil, so if one part of China, Inc sells some of its oil to Japan at the market price, another part of China, Inc has to pay the market price to import oil. One hand wins, the other hand loses. But the state oil company selling to Japan may not be the same state oil company that has to import more. Or the foreign division of a single company may get to book the profits while the domestic division has to take the losses.
If taken to its extreme, the conclusion of Dyer and Tucker’s analysis – particularly in conjunction with comments from Stephen Green (the first to predict China would add $500b to its reserves this year) indicating that “The coming wave of deals is less national strategy, more chaos theory in action” – is that competition among Chinese state-owned firms will more or less replicate competition among private firms.
This is part of a broader intellectual trend (even among investment bankers) to view state ownership of companies in a much more positive light than before.
I am not fully convinced.
Let me provide two examples why.
The first concerns Chinese state ownership of offshore oil fields.
Dyer and Tucker argue that the interest of state firms – especially state firms that have listed on the stock exchange and that care about their profit margins – are not the same as the interest of the state. That is clearly the case. Chinese state oil companies would like to sell all their oil, whether produced domestically or abroad, at the world market price. China’s government has resisted allowing domestic petrol prices to rise by that much. That helps China's gasoline consumers, but hurts the oil companies — unless they create supply shortages by refusing to import oil, they have to feed the domestic distribution network that supplies gasoline at the domestic price.
The core tension here is real. It applies to domestic oil production China, but it applies with even more force to offshore oil production. I would still argue though that Chinese “state” ownership of resources abroad provides the government with more financial options that it would have if it had to buy all its imported oil on the world market.
Suppose a Chinese state oil company has secured access to oil in Africa – with the help of cheap loans from China’s Exim bank – at a per barrel cost of around $40 a barrel. Oil now sells globally for about $90 a barrel. To simplify the analysis, let’s assume the oil company with the potential $50 a barrel profit is fully owned by China’s government.
The gains – if China’s government actually got dividends from its state companies – from selling oil on the global market could then be redistributed to Chinese consumers of gasoline. Or to avoid favoring those with cars, the gains could be distributed more broadly. Alternatively, the government could insist that the oil company sell its African oil domestically at a $70 a barrel price even though the global price is $90 a barrel. The company wouldn’t like it – its profits are reduced. But the state oil company is still making money. And China Inc wouldn’t need to show any loss; the subsidy to domestic consumption just comes from a lower profit than otherwise would be the case on state investment abroad rather than from high profits and a rebate to Chinese consumers.
Conversely, if China, Inc doesn’t own any overseas assets it will have to pay the current market price (or whatever long-term price it has negotiated) for its imported oil. The subsidy is much more obvious.
China's government may not always opt to force its state oil companies to take lower profits in order to achieve its domestic goals (stable prices, limited political turmoil). The state companies would no doubt argue this reduces their incentive to go forth. But so long as Chinese state firms own resources abroad and are sitting on potential windfall profits from a rise in the global market price China's government at least has the option of cutting the profit margin of its oil companies rather than raising prices or providing an on-budget subsidy.
Now you might say that China never could coordinate policy to force state firms to take lower profits. Different institutions have different interests. Policy coordination is hard.
That is no doubt true. But policy coordination doesn't seem to be impossible — even when the issue is how to distribute losses.
That brings me to my second example: China’s banks. And specifically the banks' role financing the China Investment Corporation. The issues involved in the sale of sterilization bills by the People's Bank are similar, but the financing of the CIC is a more current issue: China just announced that its Finance Ministry will sell about RMB 750 of bonds (roughly $100b) to a large state bank — the Agricultural Bank of China (ABC) — to "fund' the China Investment Corporation.
The ABC will, in turn, buy foreign exchange from the PBoC which it will then sell to the Finance Ministry. And the central bank will use the cash it raised from the sale of foreign exchange to buy the bonds the Finance Ministry sold to the ABC. The net result, of course, is that the PBoC ends up the Finance Ministry’s bonds and the Finance Ministry ends up with the PBoC’s dollars. The ABC is involved solely to avoid a legal prohibition on direct PBoC financing of the government.
Forbes – drawing on Market News International — reports that these 15 year bonds will carry a coupon of 4.45%.
That seems like a rather low coupon for a country with 6.5% or so CPI inflation, particularly given widespread expectations that the PBoC will need to raise short-term rates to contain inflation — though right now the PBoC seems to be relying (once again) on administrative controls, perhaps because of concerns that higher rates would bring in more hot money).
4.45% for 15 years is less than the 5.6% coupon the Railway Ministry paid for a far smaller ten year issue, or the 6.34% coupon the Finance Ministry recently paid on a five-year bond issue directed at retail investors. Data on interest rates comes from Michael Pettis’s blog.
Now it is possible that inflation expectations are so well contained that 4.45% is the right price for 15 year money. But I rather doubt it.
Remember, these bonds were supposed to be a sterilization instrument for the central bank, so it wants something that it can sell into the market (read sell to the state banks) at close to the price it paid for the bond (The PBoC doesn’t particularly want to take losses … ). And I would be willing to bet a lot of money that no bank would prefer to buy – at par – the Finance Ministry’s 15 year/ 4.45% coupon bond rather than the Finance Ministry’s 5 year/ 6.34% bond.
The PBoC looks to be buying a bond at par that it cannot sell in the market at par.
So what will happen? Well, The PBoC could hold the low-yielding bond as an assets on its books for a long time (it initially replaces a bunch of fx) and sell still more short-term sterilization bills to offset ongoing reserve growth. But avoiding losses — given the low-yield on the PBoC's long-term bond — likely means forcing the banks to buy yet more low-yielding sterilization bills.
Or the PBoC will ultimately end up forcing the banks to buy the 15 year/ 4.45% bond from it (avoiding the need for new bill issuance) at par.
The banks won’t be required to mark this to market. I kind of doubt their owner (the China Investment Corporation) will insist. But they are, in effect, being asked to cut into their profits – they could make more lending or buying other bonds on the open market at a market price – in order to help the Chinese state achieve its policy objectives.
Kind of like what China might ask the state oil companies to do in some circumstances.
No doubt this big bond issue has raised plenty of friction inside China – the People’s Bank and the Finance Ministry seem to have a relationship not unlike the US state and defense department under Powell and Rumsfeld. But at the end of the day, the government still seems able to use the state owned banks to achieve its policy objectives — in this case, low-cost sterilization – at the expense of their profits margins.
I may have some the details here wrong. All this isn’t exactly transparent. I share my friend Dan Rosen’s view that a lack of transparency adds to the concerns associated with China’s outward expansion. Rosen, in the FT:
“The problem with China is not its size or growth but the lack of transparency,” says Mr Rosen at China Strategic Advisory. “The world can handle its magnitude but what it cannot handle is the uncertainty all the time about motives and about how the system actually works.”
I am though a bit – more than a bit actually – more concerned that Mr. Rosen about the “magnitude” of China’s outward flows given that all, more or less, come from different parts of the Chinese state.
$500b a year – and $500b a year for the foreseeable future – of foreign asset growth by one single state is unprecedented. Splitting the flows up so they are not all coming from a single institutions (SAFE) helps, but it also raises the very real possibility that one part of the state (the CIC, the state banks) will subsidize outward flows from another part of the state.
Indeed that seems almost certain to happen.
The CIC is already helping state firms (China rail) raise money abroad. Through fx swaps with the banks, the central bank can also increase the foreign exchange the state banks have available to lend out even as domestic dollar deposits shrink.
And I suspect that China has encouraged the state banks and state firms to hold on to more foreign exchange – unhedged — to reduce pressure on the central bank. It recently lifted a legal requirement that Chinese firms sell the foreign exchange from their export earnings to the government (a so called surrender requirement). It now is probably doing a bit more than allowing firms to hold on to their foreign exchange earnings.
The net result is pressure to go out (see Michael Pettis). Dollars that cannot be converted to RMB need to be put to work. Otherwise they will depreciate in value.
The government doesn’t even really need to tell Chinese firms what to buy – by forcing firms to hold more foreign exchange, the government can change their incentives. They in effect have no choice but to overpay for foreign exchange, and then have to make the best of a bad situation.
Or course, they would far rather sell their foreign exchange to the state and hold RMB — especially if they can then borrow dollars from another part of the state (say the state banks, which in turn can borrow dollars through the swaps market with limited foreign exchange rate risk) if a juicy target comes along. No one in China really wants to take foreign exchange rate risk right now if they can avoid it.
UPDATE: RGE's Rachel Ziemba provides more detailed analysis of the coupon and maturity structure of the CIC's various bond issues. My bet is that a lot of the smaller bond issues sold to the public (as opposed to the large bond issues sold to the PBoC) were in fact bought by the state banks.
“Suspended and under review. It’s not going to be up before 2010 in any case. One good thing about Hu-Wen is that it has moved away from the use of prestige projects of dubious benefit that Jiang seemed fond of.” - Twofish
Oh really, there is already the first 300 km/hr segment of the Beijing-Shanghai track under construction between Beijing and Tianjin to be completed by 2008. Between Hong Kong and Shenzhen, the tracks and trains have already been upgraded for 250 km/hr service. Want to see pictures?
http://www.railwaysofchina.com/dongchezu.htm
I can personally assure you that China’s high-speed railway program hasn’t been cancelled or delayed since I personally rode in the CRH-1 Bullet trains over the summer in Guangzhou.
I share my friend Dan Rosen’s view that a lack of transparency adds to the concerns associated with China’s outward expansion. - Brad
The lack of transparency that Western pundits criticize the Chinese is entirely hypocritical. There was no financial transparency under Clinton Administration officials during the late 1990’s Asian Economic Crisis. Both Robert Rubin and Alan Greenspan received direct phone calls from Thailand’s Central Bank requesting information on the foreign exchange positions of US Hedge Funds based in the Carribean, but were rebuffed by then US Treasury Secretary Robert Rubin. By contrast, the European Central Bank promised to investigate any financial irregularities of Europe’s banks involved in any Thai baht financial transactions. The US Hedge Fund attacks on the Hong Kong dollar peg to destabilize China’s monetary system represented a de facto declaration of economic warfare against the Government of China. There is doubt Dan Rosen is another card carrying member of the China-bashing Neo-cons.
bsetser: China’s government at least has the option of cutting the profit margin of its oil companies rather than raising prices or providing an on-budget subsidy.
No it doesn’t. Chinese SOE’s are sufficiently insulated from the State Council so that having the Chinese government tap SOE’s for profits is about as difficult as the US tapping money from US oil companies by raising taxes.
In order for Hu to get an oil company to distribute assets to the state, he would have to order Wen Jiabao to order the state council to order SASAC to order the state holding company to order the the board of directors to order vote a distribution to the state. At each level, there would have to be a lot of convincing, arguing, screaming for this to happen. The big problem is that forcing someone to give you money is always very tricky.
bsetser: But they are, in effect, being asked to cut into their profits - they could make more lending or buying other bonds on the open market at a market price - in order to help the Chinese state achieve its policy objectives.
This is different since the PBC has the legal authority to force a bank to buy bonds. By contrast the PBC doesn’t have the legal authority to force a bank issue a dividend. As far as politics, forcing an oil company to disgorge profits very obviously reduces the wealth of the oil companies management. Forcing a bank to buy bonds doesn’t have that effect.
The problem with these examples is that one assumes that because the Chinese government can do thing A that effectively makes it possible for it to do thing B that appears to be functionally identical. This isn’t the case. Chinese government actions are regulated by a series of laws and regulations which exists within a political framework, and you need to understand those laws and regulations to see what is possible and what is not.
The big thing is to not see the “Chinese state” as a monolithic entity. It consists of a lot of different actors with different and often very conflicting interests.
bsetser: I may have some the details here wrong. All this isn’t exactly transparent. I share my friend Dan Rosen’s view that a lack of transparency adds to the concerns associated with China’s outward expansion
It’s very transparent if you can read Chinese and follow the discussions.
DC: I can personally assure you that China’s high-speed railway program hasn’t been cancelled or delayed…..
But these are all standard high speed trains. No maglev’s. That seems to be a dead project.
The goal for the last few years has been to have Chinese SOE’s act as autonomous companies within a market economy, and CIC is pretty obviously part of that plan. Central planning just doesn’t work, and the economic structure of Chinese companies tends to avoid the problems of central planning.
The State Council probably has about has much control over most SOE’s as the US government has over most large industrial companies. In order to do anything really major, they have to have the National People’s Congress pass a law, and that is rather difficult.
2fish –
Chinese domestic gasoline prices have been below world market prices for much of this year (still are as far as I know). Chinese state oils cos would be better selling domestic oil globally — but they do not. And they take a loss on any oil they buy globally and process for sale in China, yet they still do so (the gov gives an offsetting subsidy). That suggests to me the ability to exercise some control.
i agree that the chinese state isn’t monolithic and different parts have competing interests. But at some level, those interests have to be reconciled. Either you raise domestic prices or you don’t. either you fully offset the costs of importing oil at the world market price and selling the oil at the domestic price or you don’t ..
and so on. my sense is that some of the cost of below-market retail gas prices have been absorbed by the state oil companies. is that wrong? (I cannot read chinese by the way, so i have a bit of trouble following the discussions … )
bsetser: And they take a loss on any oil they buy globally and process for sale in China, yet they still do so (the gov gives an offsetting subsidy). That suggests to me the ability to exercise some control.
This is correct. The National Development and Reform Commission has authority to issue price controls and production targets on oil companies (whether state owned or not). They don’t have the legal authority to force an oil company to transfer profits directly back to the state. The State Asset Supervision Commission probably does have that authority, but it is unlikely to use it.
bsetser: and so on. my sense is that some of the cost of below-market retail gas prices have been absorbed by the state oil companies. is that wrong?
Yes, but the fact that the oil companies are state owned is irrelevant. For price controls to work they have to be applied to all sellers of oil. If you force only the state owned oil companies to sell oil at $70 and the non-state oil companies are selling at $90, then you make a huge amount of money by buying at $70 and selling to a non-state company at $85.
So in regulating the price of oil in China, the fact that the oil companies are state owned is irrelevant. The regulations that have been issued would apply equally to state-owned and non-state owned companies. I don’t think that there are any pure private oil companies, but there are joint ventures, and the regulations that the Chinese government issues regarding oil prices applies to them too.
Similarly the regulations that the PBC issues on to state owned banks also apply to non-state owned banks.
One important point here is that none of the powers that the PRC government are using are unique to the PRC. The US government has the authority to issue price controls on oil, set interest rates, and force banks to buy bonds, and has used that authority in the past.
One other point is that the price controls that the Chinese government has on oil aren’t caps. During the 1990’s, the retail price of oil was much higher than the world market price, which led to massive smuggling of oil.
Personally, I just do not see the China Investment Corporation functioning in a way that is different from the way the California State Pension Fund operates. Theoretically CIC could try to act as a agent of the Chinese state, but theoretically CALPers could act as an agent of the California state government and function primarily to invest in companies that invest in California which the state of California would try to control.
Practically, neither is likely to happen.
But wait….. Doesn’t the PRC government have a history of central planning and administrative direction of state industry. Yes, and that is *precisely* why its unlikely to use CIC as a tool of central planning.
While the Chinese stock market, as measured by the China Securities Index 300, is down 18% since October 16, that follows a period of almost two years, since January 1, 2006, during which the CSI 300 soared 535%. Chinese economic growth is currently running at more than 11% and the big money is convinced that it will continue. At the same time, the country’s foreign exchange reserves have grown to US$1.4 trillion, the largest in the world.
A crash would appear to be imminent!
To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporation, the US$200 billion sovereign wealth fund set up by the Chinese government in September. Now $200 billion is a fair chunk of cash; you could almost buy all but three US corporations with that (at today’s prices, ExxonMobil, General Electric, Microsoft - there are four or five others including Google that barely top the bar.) Six weeks ago, the power of sovereign wealth funds was celebrated and China Investment’s moves into the market were awaited with bated breath.
Well, so much for that. A third of China Investment’s portfolio is to be invested in Central Huijin Investment Company, a purchaser of bad loans from the Chinese banks, and another third will recapitalize China Agricultural Bank and China Development Bank, to shape them up for privatization. About $3 billion of the fund was invested in the private equity manager Blackstone in May - that may have bought China useful political contacts, but it is now worth $2 billion. And the remainder is being invested very carefully, primarily in US Treasury securities - which are also losing money steadily in yuan terms.
The lackluster investment strategy of China Investment exposes a central flaw in the Chinese economy, its lack of a rational system of capital allocation. For more than a decade, Chinese state-owned companies have made losses and have been propped up by the banking system. Since 2004, loss-making state-owned companies have been joined by overbuilding municipalities, erecting white-elephant office blocks in attempts to turn themselves into the next Shanghai. None of these losses have resulted in bankruptcy; instead the cash flow deficits have been covered by the Chinese banks. As a result, these banks have an enormous volume of bad loans $911 billion at May 2006, according to a later-withdrawn estimate by Ernst & Young, which must surely have ballooned to $1.2 trillion to $1.3 trillion now.
That explains why China Investment is somewhat unaggressive in its international investment strategy. China’s $1.4 trillion of reserves will in fact almost all be required to prop up the banking system when the inevitable liquidity crisis occurs. If the banks are to survive, China Investment will have to be followed by six more sovereign wealth funds of equal size, each of which will have to abandon its attempts to take over Exxon or Google and pour its money down domestic rat-holes.
A $1 trillion problem in subprime mortgages has caused even the US money market to seize up and has required frequent applications of sal volatile by the Fed. Since China’s economy is around one fifth the size that of of the United States, the Chinese banking system’s bad debt problem is in real terms about five times that of the United States, or about 40% of its gross domestic product.
Guest on 2007-12-05 15:20:10,
You basically copied a big part of an article without mentioning the source.
http://www.atimes.com/atimes/China_Business/IL05Cb02.html
About the “coming crash”, I don’t think it deserves any comment. It cites “a later-withdrawn estimate by Ernst & Young”. Should the estimate be more trustworthy than S&P’s open remarks, which called the state owned banks “technically insolvent” ?
Guest: As a result, these banks have an enormous volume of bad loans $911 billion at May 2006, according to a later-withdrawn estimate by Ernst & Young, which must surely have ballooned to $1.2 trillion to $1.3 trillion now.
The E&Y report was a marketing article in which Ernst and Young was pitching its expertise in selling distressed debt. The really embarrassing thing is that E&Y added two sums together twice, and it was really obvious that they couldn’t add if you read the article.
Also, a lot of the Chinese banks are worthless were written at a time in which Western companies were trying to invest in said banks. Hmmmmmmm…..
Finally, you need to be careful with data. What if you think the situation is bad, then each time you hear a number you make it slightly worse until finally everyone is talking about what a disaster things are because everyone is just repeating everyone elses statistics and adding a bit of pessimism.
The bank problem has been fixed. The big banks are solvent. The SOE’s are profitable. End of that problem. Move on to the next set of problem (environment and health care).
With the exception of the Agricultural Bank’s balance sheet, which will still require a state funding infusion before an IPO of shares, the other 3 major SOE banks are now profitable (ie. the “big four” - CCB, Bank of China, Agricultural Bank of China and China Industrial and Commercial Bank). The Bank of China reported a potential $10 billion loss on US Subprime bonds, but none of the other state-owned Chinese banks are involved in the US Subprime fiasco.
The Bank of China is currently the only Chinese state-owned bank with a license to operate in the United States with full consumer banking services. The Bank of China primarily services the ethnic-Chinese communities in New York and San Francisco. A Chinese NGO that I am associated with extensively uses the Bank of China to wire transfer money from New York to different towns in rural Chinese regions.
re: the Asian times. Foreign exchange reserves cannot really be used to support/ prop up the domestic banking system. If a lot of current investment goes bad, creating a new round of bad loans, the logical way of addressing the problem is by issuing RMB denominated bonds.
fx reserves are helpful if there is a run from the banks to the “safety” of the rest of the world — i.e. to finance a capital outflow. but given that China can finance a $350b capital outflow from its current account, that isn’t an obvious concern.
recaping the banks with fx actually creates as many problems as it solves — since it creates a mismatch ( a currency one) in the capital structure. china solved with a sleight of hand; the reserves were combined with a hedge, so the banks were not exposed to the fx risk. And eventually the central bank will in effect by the fx it injected back — leaving the banks with rmb and the central bank with the fx. (this is all done through swaps, so there is an off balance transaction that turns the fx on the state banks balance sheet into rmb).
bottom line — foreign exchange is far more useful for buying things outside china than buying things inside china.
I am a little surprised that my argument that china’s government has in effect coordinated a new push for Chinese SOEs to go out by forcing them to hold more fx/ leaving the banks with more fx by doing more swaps hasn’t produced a stronger reaction. it goes against a lot of the arguments in the very good FT article, and a lot of arguments from China watchers whose work i highly respect.
Most of the west is never going to trust china unless they become more transparent and democratic. A currency revaluation would probably help smoot things over a bit. Otherwise they are going to get stuck with blackstone investments and increasingly worthless bonds.
The world has never seen a communist/capitalist economy like China. I suppose Russia is in a similar category. We dont have rules or guidelines and dont know what the risks are.
bsetser: I am a little surprised that my argument that china’s government has in effect coordinated a new push for Chinese SOEs to go out by forcing them to hold more fx/ leaving the banks with more fx by doing more swaps hasn’t produced a stronger reaction.
There is a term which has been used in Chinese circles called “storing foreign reserves among the people.” Basically the idea is that allowing people other than the PBC to hold foreign exchange will allow those reserves to be invested much more efficiently. So this does seem consistent with that idea, and I’m not sure why it’s considered controversial.
One term that has been used among Wall Street banks is “Great Leap Outward”
I love the term storing foreign reserves among the people (tho in this case, the people are state banks and state firms) …
the controversy is that i suggest, in some sense, that there is still a plan, and it isn’t Stephen Green’s chaos, even if state firms/ state banks are competing to to put the foreign reserves stored among the (rich) people most effectively …
shrek: Most of the west is never going to trust china unless they become more transparent and democratic.
I don’t think that democracy is going to change things much. Look at US attitudes toward Japan in the 1980’s. Also, I do disagree with the idea that the Chinese government is “non-transparent” and find in fact to be rather bizarre.
What does the CCP want? To stay in power. How to they plan to do that? By making people rich. How to they plan on making people rich? By any means possible. The Chinese government is usually pretty clear about what it wants and how it plans to get it, and if they aren’t clear, it’s usually because they don’t know.
shrek: The world has never seen a communist/capitalist economy like China. I suppose Russia is in a similar category. We dont have rules or guidelines and dont know what the risks are.
First rule is that the Chinese economy is what it is. Second the world has seen a lot of authoritarian market economies. ( Vietnam is one). Third, don’t try to fit it into old categories or conflate political and economic categories. The structure of the Chinese economy is very different than the United States, but the difference between China and the United States I think is on the order of the difference between either and Japan or Germany. In some key respects (the big one between the relationship between banks and industry), China’s economy is actually more similar to the United States than Japan’s.
There pretty clearly is a plan, which was finalized over the summer. China is pushing hard to open up means of pushing foreign reserves outside of China by any means possible in the hopes that it will reduce pressure on the RMB. When there is chaos then you see the government moving in five different directions whereas the current situation is that people are moving in the same general direction.
2fish — how do you know it was finalized over the summer? your argument fits a fair amount of data, but i want a bit more supporting evidence …
There are a number of news stories about high inflation in China and especially the shortage of afordable pork, a staple of the Chinese diet. I find it amazing to discover how little alert US pork exporters seem to be to this fact. Indeed Chinese tastes run to cuts of pork that are largely discarded in the US, so the fit would seem perfect. Yet whether US exporters are doing much to take advantage of this potential market is unclear. Of course if the Chinese let the RMB appreciate, US pork would be cheaper. But even so, one wonders why there is not a larger trade in pork between the US and China.
Brad,
Recapitalising Chinese banks with dollars is not the most efficient for a bank with a largely renminbi balance sheet, but, when you have $1.5tn to “store”, it seems like a reasonable idea.
I am not an expert on bank capital, but my understanding is that it is essentially the net worth of the bank, and is important to have enough to ensure that the net value does not fall below zero (ie that the bank does not become insolvent). Sure, dollar capital is not ideal when most of the balance sheet is renminbi, but it is not worthless. The recapitalisation in renminbi has to be larger, but given that it is supposed to represent a buffer that will ideally never be drawn on, and given that the state is looking to store foreign reserves, that is not much of a problem for China. Still less if the bank has some international ambition, and wishes to grow the dollar part of its balance sheet anyway. As I recall, the Japanese did something like this in the 1990s.
No doubt Twofish will tell us that such shifting between state owned institutions is all terribly politically difficult, but if the Chinese government need any lessons in cynical presentation of state finances, they can seek advice from our British politicians!
Let us not forget their biggest, boringest sector. Pimco’s EMW says it will all work out in China: non-tradeables investment sustains Asian demand as urbanization encourages RMB appreciation. Meanwhile, though, RMB appreciation spurs urbanization. You can see that happen now in the CFA franc zone, with more and more farmers squeezed off the land. So once urbanization gets going, you’re in a self-reinforcing feedback loop, one step ahead of the next jacquerie. So let’s show some empathy for once. Let’s say you remember Tienanmen not like we do, in those mawkish vox pop video clips, but like China’s old men remember it, as a very close call, the public face of real instability. Say you got all this american monopoly money burning a hole in your pocket. One bad dream of torches and pitchforks coming down the road, and your reserve management strategy will instantly change to Come & Get It, destabilizing portfolio shifts be damned. That would be some fun. The catalyst might not be too obvious, but any new domestic or trade rule that hurts the old specialized households, or any little climate blip that stresses the dry farmers, and oh boy. Who knows, some commodities might come to correlate with capital markets in new and dismaying ways.
“Hundreds of police with semi-automatic weapons raided a hotpot restaurant… in one of the biggest crackdowns on crime syndicates seen in mainland China, the domestic media reported yesterday. The alleged gang boss, Lin Guoqin, a local politician and senior figure in the local business community, was among those arrested in the operation, which has highlighted the growing problem of organised crime in China… Lin was reportedly a member of the local People’s Congress - the Communist-controlled council - as well as being vice-chairman of the chamber of commerce, a travel association and a group of leading entrepreneurs. He is said to have used intimidation to expand his business to 20 companies, covering cement production, dredging, seafood distribution and petrol sales…” http://www.guardian.co.uk/china/story/0,,2222665,00.html
“…New York City has become the hub for Chinese criminal operations…” http://query.nytimes.com/gst/fullpage.html?res=940DE1DE1E3DF937A35752C0A96E948260
“…because of price rises, some are for the first time finding they can no longer put meat on their table…” http://news.bbc.co.uk/2/hi/business/7128797.stm
Beijing plan to require SOE oil firms to stockpile crude
http://www.marketwatch.com/news/story/beijing-plan-would-press-oil/story.aspx?guid=%7B6DD02C79-4132-4490-860A-CA3A7B2DB8B7%7D
HONG KONG (MarketWatch) — China’s plan to require its oil companies to maintain their own crude-oil reserves to supplement government stockpiles left unclear whether the companies’ earnings would be hurt by the measure, analysts said.
A draft of the plan, published Monday on the National Development and Reform Commission’s Website, would require oil companies to bolster reserves and provide a buffer against potential shortages, according to reports.
The Communist Party of China is one large bureaucracy and a lot of its habits make sense to people who work in large bureaucracies. Reading the People’s Daily to figure out what Hu Jintao thinks is a lot like reading an internal corporate newsletter to figure out what the CEO thinks.
Anyway bureaucracies like to move according to a fixed schedule. The Party Congress was in October, therefore all of the real decisions would have had to have been made a few months ahead of time. In the case of exchange rate and monetary policy, you have a lot of announcements about QDII and CIC which were made in September, which meant that the high level decisions would have had to have been made in July and August. In the case of CIC, the timing had to do a lot with the Party Congress. The Party Congress is where the new “management team” gets announced, and before that gets announced, you have to have agreement in the bureaucracy about what the positions are.
About transparency….. The perception of lack of transparency that I can see is because news coverage of the Chinese economy is just awful. You just had a major party conference, the government just presented the top eight economy tasks for next year, and there isn’t anywhere that I’ve seen in English that document or any analysis of it.
There are three interesting parts of the document. The first is that it seems that the PRC is going to try to control inflation with monetary policy. This would mark the first time in PRC history that the government tries to deal with inflation solely through monetary policy rather than by direct orders to SOE’s to reduce investment. Second, the government is concerned overwhelming with rural employment. Third, the government will likely take steps to reduce the trade surplus. Point seven in the document talked about increasing the quantity of imports and increasing the quality of exports.
What happens next is that those abstract goals are going to be converted into a set of “opinion” documents that express what needs to be done more concretely and then the “opinion” documents get changed into “measures” which are fairly concrete.
Brad - if you could provide your own definition of china’s “transparency” problem as compared to standards elsewhere. what is it that you seek from ‘china’ which tends to be generally available from other market participants. and if you might speculate as to why China’s disclosure problems may exist/persist and whether this culture may also excerbate information problems elsewhere as ‘China’ expands outwards.
Let’s see (regarding transparency), China could meet for a start the IMF’s SDDS standard for the timely disclosure of accurate reserves data. Many countries release data weekly with a one week lag, most release data monthly with a week lag. China formally releases its data quarterly with an uncertain lag. China could be as transparent about its portfolio allocation as Switzerland. The CIC could also post monthly data on its size on a web site, like Norway’s fund — and provide quarterly data on fund performance and portfolio allocation. Ted Truman has put forward a good scorecard for SWF transparency; the CIC could aim for the top not the bottom.
Even so the sheer scale of outflows — and the close ties between the state, state banks and state firms — from China poses problems. But a bit more transparency would help.
2fish — alas, post-Party Congress, China has opted to use administrative controls on bank lending rather than int. rate hikes to curb the economy (contrary to your analysis of the text of the government presentation on economic policy)
bsetser: alas, post-Party Congress, China has opted to use administrative controls on bank lending rather than int. rate hikes to curb the economy
True, but they haven’t used administrative orders on individual industries which they did in 2003-2004. Getting things to the point in which they try to control things through the banking system rather than issuing production orders to individual enterprises is a major improvement.
The trouble with issuing orders to individual enterprises is that while it will cool the economy, it results in a lot of imbalance. The second problem if it is macroeconomically necessary to manage the economy by administrative orders, then this means that you have another issue to consider when you make decisions on what sectors the state should own.
Also, I include “administrative controls on the volume of credit” as monetary policy. Getting to the point where the PRC can control the economy through credit allocation is no small thing.
As far as transparency, the big complaints I’ve heard aren’t about quantitative data but rather about investment strategy and governance, and CIC has been pretty open about that.
CIC has been more open than SAFE about its investment strategy, but that is in some sense easy as right now it hasn’t really decided on a (portfolio) investment strategy … but it lags global best practices.
And China’s record on reserve data disclosure is abysmal. take a look at the data Norway releases about Norges Bank, or the data released by the Swiss National Bank. basically only the Gulf countries disclose less — and even there, some countries (kuwait) are better than China.