Comments on: The Economist has an excellent article on hot money inflows to China

By: Rien Huizer

Rien Huizer — Sat, 28 Jun 2008 04:19:54 +0000

Another reason why PBOC cannot own the bank shares is that it violates Pillar 2 of the new Basle II accord on bank supervision. Capitalist rationality meets post communist rivalry! But Twofish, there is still the not so small matter of managing the state’s equity stakes in the 1000 SOEs that were to be retained and grown (almost the same intention as the Singaporean state’s when it wrote the Temasek Charter), whilst the other SOEs would be more or less cast adrift (1997 NPC). So there could be a third agency…

By: Friday links: hot money mess « Abnormal Returns

Friday links: hot money mess « Abnormal Returns — Fri, 27 Jun 2008 15:51:51 +0000

[...] links: hot money mess 27Jun08 Hot money flows into China while the market tanks. (Brad Setser, FT [...]

By: Twofish

Twofish — Fri, 27 Jun 2008 15:49:25 +0000

Lou Jiwei is the eptiome of the developmental state, but Gao Xiqing, the general manager, is the eptiome of Wall Street. He has a law degree from Duke University, became the first PRC citizen to pass the New York bar exam, and worked on a Wall Street law firm for two years.

The fact that you have two very different people in charge of CIC is not an accident.

By: Twofish

Twofish — Fri, 27 Jun 2008 15:45:09 +0000

I got the sense that Huijin was more under the operational control of the MOF than the PBC. Certainly the PBC wasn’t terribly happy with the amount of control that MOF had over Huijin. A lot of the money from Huijin came from the MOF.

One reason I think that Chinese SOE’s work is that these sorts of battles between agencies of the Chinese government are very similar to the boardroom battles between institutional shareholders in private companies.

By: Twofish

Twofish — Fri, 27 Jun 2008 15:36:22 +0000

One division in Chinese politics is between “populists” and “technocrats.” Populists tend to be from the interior, more interested in state intervention. Technocrats tends to be from the coastal regions and much more skeptical of government intervention.

One way of viewing Chinese politics is that the Communist Party is a coalition of these two groups, both of which have different interests, but both of which need to work with each other within the underlying framework of the CCP.

One interesting things about government positions is that there is often a rigid division of seats between populists and technocrats. In CIC for example, the chairman is a populist, but the general manager is a technocrat.

By: bsetser

bsetser — Fri, 27 Jun 2008 15:36:11 +0000

2fish — huijin came from the PBoC. moF wasn’t happy that the use of fx reserves in the recap gave the pboc ownership of the state banks — shifting huijin to the cic was one way of getting it out of the pboc’s hands.

By: Twofish

Twofish — Fri, 27 Jun 2008 15:30:55 +0000

Competition is not always a bad thing.

Then again having two agencies that hate each other trying to do the same sorts of things may not be such a bad thing. If you structure things they right way, then both agencies can keep each other honest.

One problem with trying to coordinate things is that at this point you’ve created a third agency. The funny thing is that if the State Council tries to create a third agency to oversee all investments, I bet that CIC and SAFE will put aside their differences and try to quash the third agency.

(And the there is the fact that SAFE and PBC, CIC and MOF have complex relationships.)

A lot of the differences between MOF and PBC are cultural ones that come from the backgrounds of the people in them. MOF tends to consist more of people that are development oriented whereas PBC tends to be more technocratic.

CIC seems to be closer to MOF than PBC because Huijin came from MOF. At the time, I suspected that the reason that Huijin got moved to CIC was to reduce the influence of the MOF.

By: Rien Huizer

Rien Huizer — Fri, 27 Jun 2008 14:49:32 +0000

Brad,

Analogy may be too strong, inspiration perhaps? Mr Zhu R Z was mightily impressed when he visited Spore in 1998..Of course a city state like Singapore is under entirely different conditions.
As Marx said: we all make our own decisions, but under different circumstances.

By: Rien Huizer

Rien Huizer — Fri, 27 Jun 2008 14:35:35 +0000

Judy,
The Temasek/ GIC split seems very similar to whatever we see in China. Except, on the surface, CIC seems to be very small compared to Safe, until you start looking at CIC’s bank stakes..CIC is probably by far the largest bank holding company in the world. BTW, Rien is my first name.

By: bsetser

bsetser — Fri, 27 Jun 2008 14:27:33 +0000

Rien — I agree with your argument that the CIC isn’t going to look like the Gulf SWFs, let alone Norway. It has something of Temasek’s role (tho not entirely, as SASAC also is a holding company) and perhaps a new role of helping chinese firms expand abroad. A GIC type portfolio has in theory been grafted on to the CIC’s domestic stakes, but it isn’t at all clear that this works.

What bothers me is that China thinks it can claim the CIC is a commercial investor with a mandate to make money when it has this large domestic strategic role. Or perhaps what bothers me is that the press/ analysts tend to accept the CIC’s claims here uncritically when its portfolio doesn’t support those claims!

Judy — your point is a reasonable one. some countries do count dollar reserves on deposit from the banks at the central bank as part of their reserves. China tho didn’t want to disclose a high reserve total, so the whole system has been structured in a different way. The $ reserve requirement shows up on the pboc’s balance sheet as other foreign assets not as reserves. Write Logan Wright of stone and mccarthy and get his full report then we can talk — or look at some of Stephen Green’s stuff.

it doesn’t make total sense, i agree — but it is clear that China has wanted to mask the true size of its fx asset growth since late 05 (when it started doing swaps with the state banks — and reserve growth seemed to slow for a while).