Download - Stalinism Comes of Age: Crony Capitalism, State Repression, and the Communist Party of China
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IMPORTANT DISCLAIMER:
THE FOLLOWING PRESENTATION REPRESENTS MY PERSONAL OPINIONS AND DOES NOT REPRESENT A COMPRHENSIVE ANALYSIS OF THE CHINESE ECONOMY. ALTHOUGH THE INFORMATION CONTAINED HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE ACCURATE I CANNOT GUARANTEE ITS ACCURACY, COMPLETENESS, OR FAIRNESS. OPINIONS INVOLVE NUMEROUS ASSUMPTIONS WHICH MAY OR MAY NOT PROVE VALID AND WHICH MAY BE CHANGED WITHOUT NOTICE.
THIS PRESENTATION IS INTENDED FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUE INVESTMENT ADVICE, A RECOMMENDATION, SOLICITATION, OR OFFER AND IS NOT THE BASIS FOR ANY CONTRACT TO PURCHASE OR SELL ANY SECURITY OR OTHER INSTRUMENT.
I, AS WELL AS PERSONS ASSOCIATED WITH MYSELF, MAY MAINTAIN POSITIONS IN SECURITIES, INSTRUMENTS, AND/OR MARKETS REFERRED TO BY THIS PRESENTATION.
Questions, comments, and all other inquiries should be directed to [email protected]
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MacroeconomicReview GrowthDrivers MonetaryPolicy&theCurrency SocialImplications
Banking&Finance TheRoleoftheCentralBank Regulatory&MarketStructure
Party&State OutlineofPoliticalSystem ABriefHistoryofReform
Industry&theState
StructuralVulnerabilities
Summary&Conclusion
Ren Xiong (18231857)LateQingdynastypainterofthe
Shanghaischool
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Sincereformbeganin1978,Chinahasachievedspectaculargrowth:
9.8%annualgrowthsince1978 Worlds2nd largesteconomyin2010 Worlds18th largesteconomyin1978
IMFpredicts: ChinaGDPUSAGDPby2016 PPP
Notabledivergencefromdevelopedworldin20082009
Consensusview Gradualistschool
ChinaisincrementallyconvergingwithWesterneconomicandpoliticalnorms
ChinawillovertaketheUSasglobalconsumerandeconomicleader
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In billions of USDSource: IMF
GDP
Chinasgrowthrecordisimpressive,evenwhencomparedtootheremergingmarkets:
0
2000
4000
6000
8000
10000
12000
14000
16000
1980 1985 1990 1995 2000 2005
China
US
Euro Area
Canada
Japan
India
Brazil
Korea
Indonesia
Malaysia
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Howhasthisbeenachievedsoquickly?
Source: IMF
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
ChinasShareofWorldGDP 19782010
HowhasChinagonefrombeinganeconomicbackwatertothreateningAmericansupremacyinjust30years?
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HowdoesChinamanagethisseeminglyimpossiblebalance?
WeaddresseachofthesepointsinturnbeforereviewingChinasfinancialandpoliticaleconomy:
Maintain weakrenminbi RMBtopreserveexportcompetitiveness
Restrain inflation
Achieveconsistentgrowth 78%explicittarget
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Chinesemacroeconomicpolicyattemptstobalance:
Open capitalaccount Necessitatedbyrelianceontrade Porouscapitalcontrols Opentoforeigndirectinvestment(FDI)withlimitedportfolioflows
Fixed exchangerateManagedpegtoUSD
Independentmonetarypolicy
Theorysuggeststhisisimpossible 1,2,3TheImpossibleTrinity
Thisbalancehasbeenachievableonlyduetothestatescoercivepoweranditsdominanceofdomesticmarkets
1 R.A.Mundell,CapitalMobilityandStabilizationPolicyunderFixedandFlexibleExchangeRates,CanadianJournalofEconomics&PoliticalScience29(1963)2 M.J.Fleming,DomesticFinancialPoliciesunderFixedandFloatingExchangeRates,InternationalMonetaryFundStaffPapers 9(1962)3 A.Rose,ExchangeRateVolatility,MonetaryPolicy,andCapitalMobility:EmpiricalEvidenceontheHolyTrinity,NBERWorkingPaper 4630(1994)
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HavingYourCake Exportssubsidizedbycentralbank,thePeoplesBankofChina(PBOC)
Monetaryauthority,actsinbroadlysimilarfashiontodevelopedmarketcentralbanks
Normally,Chinaspersistenttradesurpluswouldcausetherenminbi(RMB)tostrengthenagainstthedollar(USD)
ThePBOCpreventsthetradebalancefromadjustingbyinterveninginFXmarketstomaintaintheweakRMB:
PrintsRMBtobuydollarsinopenmarketoperations Transactedasmuchas$1.8bn/dayin2007!1 Inherentlyinflationary;impactmustbecompensatedfor
Impactsterilizedbyremovingcurrencyfromcirculationby: Purchaseofforeignassets(i.e.USdebt) Direct&indirectbankreservehikes
9705 ChinaformallypeggedRMBagainstUSD
0508 Managedfloatallowsfor~20%appreciation
08 Present DefactoUSDpeg@~6.80RMB/USD globalslowdowncallsforhalttoappreciation
ABriefHistoryofChineseCurrencyManipulation
1 J.Greenwood.TheCostsandImplicationsofPBOCSterilization,CatoJournal Vol.28,No.2(2008)
Sterilizationcausessignificantlocalandinternationaleconomicdistortions Sterilizationcanonlypostponeinevitableadjustments
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andEatingItToo
Themechanicsofsterilization:
ChineseexportersreceiveUSDfromUSbuyers ExportersellsUSDtoPBOC ExporterreceivesnewlycreatedRMBfromPBOCinreturn
PrintingRMBoffsetsnaturalcurrencyadjustment/balancing
PBOCaccumulatesUSDreserves,RMBsupplyincreased
ReservesparkedlargelyinUSTreasuries Lackofsufficientlylarge/liquidalternatives
Reservesdeployedincreasinglyaggressivelyviasovereignwealthfundsetc.
NewlyprintedRMBsterilized Requiresfinancialrepression:
Restrictionsonbankingsector/generalpopulace UltralowyieldingsecuritiesforcedondomesticbanksbyPBOC effectivereservehikes
ABriefHistoryofChineseCurrencyManipulation
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0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
14,000.0
US M2
China M2, USDUS YoY
China YoY
US&ChineseMonetaryAggregates
AsighttohumbleevenHelicopterBen
Source: Federal Reserve, PBOC
Massivefiscalstimulus 14%ofGDP!(USstimulus 6%)
ImportedUSmonetarypolicyisinappropriateforafastgrowingemergingeconomy,particularlyonewithahistoryofproblematicinflation
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Freefromtheruleoflaw,Chinahasusedfinancialrepressiontolimittheinflationaryimpactofaggressivemoneyprinting:
PBOCsetsdepositandlendingratesartificially
PBOCimposeslendingquotasonbanks
PBOCissuesSTnotesandSpecialBillstobanks Lowyieldingbondsforceduponbankstoimmobilizebankassets belowmarketcoupons Defactoincreaseofbankreserverequirements 5.1%ofdomesticassetsat12/31/101
Bankreserverequirements 23.5%ofdomesticassetsat12/31/102
~30%ofbankcapitalimmobilized Inflationarypressurescontinuenonetheless
1,2 PBOC2010AnnualReport,ChinaBankingRegulatoryCommission
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Explicitcostsofsterilization: Spreadbetweencostsofspecialbillsandreturnonforeignassets Sizeofspecialbillsrelativetosizeofforeignassets
1 PBOCStatistics&Figures2010
Implicitcostsofsterilization: Lendingshiftstoshadowbankingsystem
Offbalancesheetleverageandundergroundbankingsystem
Distortscapitalallocation PBOCbalancesheetexpansioncrowdsoutconsumption
Balancesheetmustgrowwitheconomytomaintainpeg 12/31/10 PBOCislevered1,180x!1
Inflationcanonlybesuppressedtemporarily: LiquidityoverhangremainsonPBOCbalancesheet Significantobstacletodeployingreservesdomestically
Ultimateadjustmentfiltersthroughvia: Domesticprices Exportsectorviaresourceprocurement
Significantbuyerofcommodities
0
500
1,000
1,500
2,000
2,500
3,000
3,500
12/1/1999 12/1/2001 12/1/2003 12/1/2005 12/1/2007 12/1/2009Billions of USDSource: China Economic Information Network, Bloomberg
ForeignExchangeReserves 19992011
CurrentPBOCGovernorZhouXiaochuan ()
At6/31/11Chinasreserveswere:3.4x2005reserves17.7x2001reserves
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RaisinginterestrateslastresortforPBOCtocontrolinflation: Raisescostsofcurrencysterilization depositrate+1% costs+~5%1 Attractsspeculativecapitalflows(hotmoney) Inflictslossesonbankingsectorviabondholdings
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Household Savings Deposits 1 Yr. RateChina 1 Yr. Lending Rate
Deposit Reserve Ratio
1 Christer Ljungwall,Christer,YiXiong,andZou Yutong.CentralBankFinancialStrengthandtheCostofSterilizationinChina.CERCWorkingPaper8(2009)
Source: PBOC, Bloomberg
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Mercantilisttradepolicy/sterilizationhasledChinatoshareJapansburdenofunderwritingAmericanprofligacy Chinaisaforcedbuyer:
Source: US Treasury, billions of USD
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
US Debt, Held by Foreigners
US Debt to China
US Debt to Japan
China, % of Tot.
Japan, % of Tot.
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Chinais~10%ofWorldGDPbutitsshareofglobalcommodityconsumptionismuchhigher:
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Cement Iron Ore Coal Steel Lead Zinc Alumninum Copper Nickel Pork Eggs Rice Soybeans
Source: GMO, 4/11 Quarterly Letter
ChinasresourceintensivegrowthisstretchingglobalsupplyFurthergrowthwillproveincreasinglycostlyandpressuredomesticprices
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0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
10/8/2006 4/8/2007 10/8/2007 4/8/2008 10/8/2008 4/8/2009 10/8/2009 4/8/2010 10/8/2010 4/8/2011
SHIBOR 3 Mo.
Deposit Rate 3 Mo.
Chinahasmadecappingpricerisesthepriorityofmacroeconomicregulationandintroducedahostoftargetedpolicies.Thesehaveworked.Weareconfidentpriceriseswillbefirmlyundercontrolthisyear.
Wen Jiabao (),6/23/11FinancialTimeseditorial
Interbankrates(SHIBOR)understatetruemarketrates anecdotalevidenceofratesinshadowbankingsystem>20%in2011
Source: PBOC, Bloomberg
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-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
CPI, YoY
CPI, Urban, YoY
CPI, Rural, YoY
Previousinflationarysurgesmanagedbyextraordinaryfinancialrepression(i.e.totalhaltofbanklending,sweepingcentralizationoffinancialandfiscalauthority,etc.)
Unclearifcurrentapparatusiscapableofrepeatingsuchdrasticaction
Source: PBOC, Bloomberg
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LikeAsianpeers,Chinahasutilizedtheexportgrowthmodel:
Arbitrageadvantagefromlowcostlabor 2035%/GDPfromexports
Ultimateimpactislarger: Proceedsareleveredthroughstate
financialsystem&reinvesteddomestically
4050%ofGDPfromfixedassetinvestment
Primarydestinationsforfixedassetinvestment1:
Exportproductioncapacity Realestate
Significantleveragetoglobaldemand
Investmentincreasinglycompensatingforweakglobaldemand:
~70%of2008growth ~90%of2009growth2
1 MoodysAnalyticsReportChina:FixedAssetInvestment.Published6/13/2011.2 PivotCapitalManagementReport ChinasInvestmentBoom:TheGreatLeapintotheUnknown(2011),NationalBureauofStatistics
Chinalacksmeaningfulgrowthdriversoutsideofexportsandstatedriveninvestment
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Exports&GrossCapitalFormation/GDP 1981 2009
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1981 1986 1991 1996 2001 2006
Gross Cap. Form. (Fixed Asset Investment)
Exports
Combined
Globaldownturnliterallypavedover:
Source: World Bank
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1 HSBCGlobalResearchCurrencyWeekly,06/07/2010,p.52 DavidPearson,InChina,RealEstateFeverisRising,LosAngelesTimes,04/26/2010.Accessed8/24/11.http://articles.latimes.com/2010/apr/26/business/lafichinarealestate201004263 Pivot,p.7.Chartsexcerptedfromsamereport.
Realestateisanothersignificantdestinationforfixedassetinvestment:
HSBCestimatestotalvalueofresidentialpropertyat3.27xGDP1 Almost2xlevelinUSbeforesubprimecrisis ClosetoJapanesepeaklevelof3.8x
Japanese89GDP/Capita=14.4xChina09GDP/Capita(ConstantUSD)
Price/incomelevelstopglobalmarketsatpeakofcreditcycle
Price/Income 1520xinmajorcities,~10xinregionalcities 9xinLondon,12xinLosAngelesin2007
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CompensatingforSomething? Morethan100supertall(>300m)buildingsinplanningorunderconstruction
Currentlyonly70buildings>300mglobally Significantnumberofprojectsfinancedandinitiatedbylocalgovernments Historically,projectsofthisscalehavemarkedmarkettops1:
PingAnInsurancesnewShenzenheadquarters 115floors,648m under
construction
Goldin Finance117,Tianjin 117floors,597m underconstruction.Masterplanalsocallsfor270storytowersandresidentialhighrises
1 AndrewLawrence, TheSkyscraperIndex:FaultyTowers,PropertyReportDresdnerKleinwortWassersteinResearch (1999)
TheGuangzhouUrbanPlanningBureausproposedcenterpiecefortheplannedBaietanCBD 118floors,650+m.Thedistrictwillhavemorethan10mmsq.metersoffloor
space.
ForthebenefitofAmericanreaders,ChicagosWillis(Sears)Towerisonly527mwhenits85mantennaeareincluded
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DubaiX1000? Tianjinisplanninganespeciallygrandiosecentralbusinessdistrictwhichiscurrently
underconstruction:
ConstructionofPhase1ofprojectisunderway Thetoweringbuildingvisibleatcenterleftistobe~600m,whichwouldbetheworldssecondtallestifitstoodtoday
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Chinaisindireneedofstructuralreform: Dependentonexporteconomy&fixedassetinvestment
Exportimpactsmalleronanetbasis,butprovidescriticalsourceofforeignexchange
Macroeconomicmanagementdistortingcapitalallocation Mountingleverageandinflation Partyremainsdominantplayerinbusinessandfinance
Stateusesmarketmechanismsselectively&onitsownterms
1 BarryEichengreen,Donghyun Park,&Kwanho Shin.WhenFastGrowingEconomiesSlowDown:InternationalEvidenceandImplicationsforChina,NBERWorkingPaper 16919(2011)4
ExperienceofotherAsiantigerssuggestsgrowthwillslowirrespectiveofinternalobstacles1 MiddleIncomeTrap Export&investmodelprecludesbalancedgrowth&formationofconsumersociety
TemptingcomparisonstoJapanbutrealitiesofChinaareevenstarker
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Consensus:ChinawillrebalanceandreplaceUSasglobalconsumer
McKinsey ChineseurbanmiddleclasswithspendingpowerequivalenttoJapanesehouseholdsby2025$2.4trn
Problemsrecognized,butstructuraltransitiontakenasagiven
Reality:Chinacannot becomeaconsumernationwithoutsignificantstructuralreform
Govt.recognizesproblemsbutweddedtostatistsolutions Softinfrastructureneeded,notmorehardinfrastructure
Statemustwithdrawfromcapitalallocation Stateremainsdominantplayerinfinance&industry Stateinvestmentcrowdsoutprivateentrepreneurs Nonstatesectorstarvedofcapitalandresources
PBOCmustcurtailitsmarketoperations Economymustrebalanceawayfromexports/investment Massivebalancesheetexpansiontakesplaceofincreased
domesticspending,createsdangerousliquidityoverhang Benefitsofexportsaccruelargelytoforeigninvestorsand
stateownedenterprise
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Populacehasnotsharedingainsfromgrowth: Personalincome/capitaseverelylagsGDP/Capita
growth,whichitselflagsGDPgrowth1
Wagesqueezeworsenedbyinflation/assetbubbles
2nd largesteconomy,but93rd inGDP/CapitaIMF BetweenMacedonia(92nd)&Algeria(94th) GDP/Capitaoverstatesincomeasonly~40%flows
throughtolabor
Laborssliceofthepieisshrinking2: 1997Wages/GDP:53% 2007Wages/GDP:40%
Largewealthinequality 0.4%ofChinesecontrol4050%ofwealth3 Gini coefficient:47in2010accordingtostateests.4
Understated,excludeshiddenincome Concentrationofwealthreflectsconcentrationof
poweramongstpoliticalelites
HowsuccessfulcantheChinesemiraclebewhensofewhaveenjoyeditsbenefits?
Source:WorldBankDevelopmentIndicators,19752008.
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
S. Korea Singapore Brazil Hong Kong Mexico China
2008Avg.HourlyWage
1 A.R.KhanandCarlRiskin,IncomeandInequalityinChina:Composition,DistributionandGrowthofHouseholdIncome,1988to1995,TheChinaQuarterly 154(1998)2 RichardMcGregor,TheParty (NewYork:HarperMacMillan,2010,3 VictorShih,HighWealthConcentration,PorousExchangeControl,andShockstoRelativeReturn:TheFragileStateofChinasForeignExchangeReserve,PresentationattheInstituteofNewEconomicThinking,BrettonWoods,NH(2011)4 ChenJia,CountrysWealthDividePastWarningLevel,ChinaDaily,05/12/10.Accessed08/23/11.http://www.chinadaily.com.cn/china/201005/12/content_9837073.htm
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Sincetheearly90s,Chinasurbanpopulacehasbeenfavoredattheexpenseoftheirpoorer,lesseducatedruralcompatriots:
Percapitaincome1: Urban $2,000 Rural $605
Limitedjobopps. 40%ofruralpopulationun orunderemployed2
Limitedpublicservicesinruralareas Cutofffrombankcredit,reliantoninformalcredit/loansharks Functionofconcentrationofwealth/politicalpowerincities
Huoku ) rural/urbanclassregistersystemexacerbatesdivide Ruralcitizensliterallysecondclasscitizenswithrestrictedmobility Createsmarginalizedclassof150mmmigrantrurallaborers Ruralworkerscanmovetocitiestoseekjobs,butlackaccesstobasic
publicservicesduetoruralcitizenship
Oftenforcedtoworkininformallowpayingjobs SocialpositionanalogoustoillegalimmigrantsintheUS
1 Yasheng Huang,CapitalismwithChineseCharacteristics:EntrepreneurshipandtheState (NewYork:CambridgeUniversityPress,200)251.2 JasonGale&BretOkeson.ChinaDoctorsEarning$300aMonthFlocktoDrugCompanies,BloombergBusinessweek,7/10/11.3 Carsten Holz,ChinasEconomicGrowth19782025:WhatWeKnowTodayAboutChinasEconomicGrowthTomorrowHongKongUniversityofScience &Technology,2005.
Privatizationsof90sendedIronRiceBowl)socialsecuritynet SOEsusedprivatizationstojettisonlowproductivityworkerswhohadpreviouslyenjoyedguaranteedjobs&benefits
RestructuringcarriedouttoenhanceprofitabilityofretainedSOEs Createdlargegroupofunemployedwithlimitedmarketableskills/experience structurallyunemployed ~100mmterminatedworkersfrom90sstreamliningremainlargelyunemployedwardsofthestate
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Localgovernmentsnowresponsibleforeducation,healthcare,andsocialsecurityafterlate80sreforms:
Createdproblematicconflictsforlocalleaderswithsignificantsocialconsequences:
Newresponsibilitieswereunfundedmandates Localofficialsperformancestillassessedbynominalgrowth
Incentivizedtofavorshorttermeconomicgrowthoverlongtermsocialinvestment
Increasingdemandsonlocalleaderspaidforthroughunsustainablefinancingpractices:
Landsalesofexpropriatedpropertyfrequentlyusedassourceofcashflow
Arbitraryseizuresofpeasantfarmland,propertyresoldtodevelopersbylocalgovernment
70mmfarmershavelosttheirlandinthiswayinthepastdecade!
Aggrievedcitizenshavelittlerecourseasthelocalgovernmentswordislaw
Seekingjusticehigherupthestatehierarchydifficultanddangerous
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Healthcare 2000WorldHealthOrganizationstudyrankedChinas
healthcaresystem144th globally,behindBurundibutaheadofMongolia
~40%ofsickruralresidentsdidnotseekmedicalcareduetoitsunaffordability1
~60%ofruralresidentsrequiringhospitalizationdidnotseektreatmentduetounaffordability1
1publichealthprofessional/7,000peopleUS 1/6352
Education Statewithdreweducationfundingin90s Expensedumpedonlocalgovts.andsubsequentlypassedonto
parentsinformofincreasingschoolfees
EducationcostsgrewfasterthanCPIby10%in90s3 Inequalitycontinuestorise:4
Lackoftrainingdrivesinequalityinwages5
Illiteracyincreased64.3%between2000and2005 Equivalentto30%ofruralschoolcohortsfrom1990s6
Ruralsecondaryschooldropoutrates 43%in00037
1 Yasheng Huang,CapitalismwithChineseCharacteristics:EntrepreneurshipandtheState (NewYork:CambridgeUniversityPress,2008)251.2 JasonGale&BretOkeson.ChinaDoctorsEarning$300aMonthFlocktoDrugCompanies,BloombergBusinessweek,7/10/11.3 Carsten Holz,ChinasEconomicGrowth19782025:WhatWeKnowTodayAboutChinasEconomicGrowthTomorrowHongKongUniversityofScience &Technology,2005.4 RaviKanbur &Xiaobo Zhang,FiftyYearsofRegionalInequalityinChina:AJourneythroughCentralPlanning,Reform,andOpenness,ReviewofDevelopmentalEconomics 9(2005)5 Z.Liu,TheEffectsofEconomicReformsonWageInequality:SomeEvidencefromChina,AppliedEconomicsLetters,8,(2001)6 Huang,437 Ibid,248
Patientsawaitingtreatment
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Chinesefinancespeakstothefundamentallypoorprospectsforstructuraltransitionwithoutreform
Chinasgrowthislargelyinternallyfinanced FDIislimited&largelyfocusedonexportindustries
i.e.offshoring/outsourcing
Highsavingsratefinancesinvestmentglut Saversunwillinglyunderwritegrowth BankingsectorprovidescheapcapitalforSOEs,localgovts.
Statesetsinterestratesandlimitsinvestmentoptionsforsavers
Fixeddepositrates,fixedlendingratesFixedNIM Createscheap,captivecapitalforstatebanks
Realdepositratesfrequentlynegative Alternativesforsaversrestrictedtoinvestmentin
realestateandequities encouragesspeculation
DefactotaxonChinesesavers
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0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
1982 1987 1992 1997 2002 2007
FDI, % of GDP
Gross savings, % of GDP
Source: PBOC, Bloomberg
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1 Saez,Lawrence,BankingReforminChinaandIndia,(NewYork:PalgraveMacmillan,2004)2 CarlWalter&FrasierHowie,RedCapitalism:TheFragileFinancialFoundationofChinasExtraordinaryRise,(NewYork:JohnWiley&Sons,2011)
Inourcountryscurrentlevelofmacroeconomicdevelopment,wemustmaintainalevelofmacroeconomicgrowthofaround8%perannumandthiswillinevitablyrequireacorrespondinglevelofcapitalinvestment.Ourcountrysfinancialsystemisprimarilycharacterizedbyindirectfinancing(viabanks);thescaleofdirectfinancing(viacapitalmarkets)islimited.
YangKaisheng (),CEOofIndustrial&CommercialBankofChina
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1 Saez,Lawrence,BankingReforminChinaandIndia,(NewYork:PalgraveMacmillan,2004)2 CarlWalter&FrasierHowie,RedCapitalism:TheFragileFinancialFoundationofChinasExtraordinaryRise,(NewYork:JohnWiley&Sons,2011)
CapitalRaisingActivity 1993 2009
Source: PBOC Financial Stability Report 2010
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bonds
Bank Loans
Equity
Thesubsidizeddomesticbankingsystemfinancesalmostalleconomicactivity1:
Bankloans&bondsaccountfor~90% ofcorporatefinance2Equityfinancing immaterialForeignbanks 2%offinancialassets
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1 Walter&Howie,86.
Chinasrelianceonitsstatebankingsystemisunderstatedascorporatebondsarenotmateriallydistinguishablefrombankloans :
70%heldtomaturitybystatebanks1 22of24primarydealersarestatebanks1
Underwritingbondandretainingcreditrisk effectivelyaloan
TheChineseyieldcurveisaconstructionofthestate:
Usesstatesetbank1yeardepositrateasabaseline Tradingvolumeisinsignificant yieldcurvecanbedrawnarbitrarily
Bondsissuedandsoldprimarilytogovernmentcontrolledentities Soldatbelowmarketcoupons Sellingunattractiveforholders createslossesduetobelowmarketissuance;politicallyunappealing
IllustrativeofPartysselectiveadoptionofmarketinstitutions
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ThebankingsystemisChinasdefactosecondtreasury:
Capitalallocationsystemfundamentallyunchanged since70s
Partyviewsbankingsystemaspolicytoolandvehicleforpersonalenrichment
ThePartycontrolsthebankingsystem
Thebankingsystemfundsalmostalleconomicactivity
WenowwillbrieflyreviewthecurrentstateofChinesebanking:
o Capitalisoftenpoliticallydirectedandusedbylocalofficialstoaccomplishthepartyseconomictargets
o Seniorbankofficials&SOEmanagersselectedbynomenklatura system
o Partyretainsmajorityequityownership&ultimatecontrol
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1 Bankannualreports,various,PBOCAnnualSurvey&Statistics2010.
CorporatebankinginChinaisdominatedby4largestatecontrolledbanksTheBig4andtheiremergingrivalBoCom:
Primarytoolsofstateinmanagingtheeconomy: Asecondtreasury despitepurportedcommercializationandpubliclistingsgovt.influenceremainssignificant
Listedwithshareofdomesticfinancialassetsasof12/31/101:
BankofChinaBOC17.0%ChinaConstructionBankCCB17.6%Industrial&CommercialBankofChinaICBC21.9%AgriculturalBankofChina ABC16.8%BankofCommunications BoCom6.4%
EmergingrivaltoBig4
Initiallyformedasstatepolicybanks,latercommercialized Politicized government.retainsmajorityownershipandcontrolsboardsofdirectors;personnelmustbegovernmentapproved
79.7%ofdomesticfinancialassets
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5- Year Asset CAGR
ROA RE Loans/Total LoansOBS Commitments/
Total Loans NPL RatioTier 1
Capital
China Development Bank 21.9% 0.8% N/A N/A 0.6% N/A
Agricultural Development Bank 15.5% 0.0% N/A N/A 1.1% N/A
Export-Import Bank 44.9% N/A N/A N/A N/A N/A
Postal Savings Bank N/A N/A N/A N/A N/A N/A
Bank of China 17.2% 1.1% 29.1% 84.2% 1.2% 10.0%
China Construction Bank 18.7% 1.4% 8.9% 44.0% 1.3% 10.3%
Industrial & Commercial Bank of China 15.8% 1.3% 27.0% 54.3% 1.2% 9.7%
Agricultural Bank of China 16.7% 1.0% 26.6% 14.1% 2.3% 9.6%
Bank of Communications 22.7% 1.1% 9.8% 75.5% 1.1% 9.2%
CDB figures as of 12/31/09 (most recent), NPL figure reflects provision for loan losses as NPLs are undisclosed. Export-Import Bank figures as of 12/31/09 (most recent). Source: Bank annual reports (various), Bloomberg.
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1 BankAnnualReports,PBOC.
Thecoreofthebankingsystemisroundedoutbytheexplicitlystatistpolicybanks:
Listedwithshareofdomesticfinancialassetsasof12/31/101:
ChinaDevelopmentBank CDB8.3% AgriculturalDevelopmentBankofChina ADB2.8% ChinaImportExportBank CIE1.4% ChinaPostalSavingsBankCPSBUndisclosed
Formedin1994totakeoverpolicyloansfromnewlycommercializedBig4aspartoflargerfin.sectorrestructuring
Despitestatedmission,majorityofactivityisindistinguishablefromoperationsof commercializedBig4
ChinaDevelopmentBank(CDB)
Particularlyimportantinrecentyears: LedbyRevolutionaryprinceling sonofChinasformersupremestateplanner,ChenYun
Lendingvol.onparwithMinistryofFinance 12/31/2010loanbook2XWorldBanks
Sovereignwealthfund,butmajorityofinvestmentisdomestic 70%fundedbycommercialbanks(Big4)
Shifttouniversalbankstrategyhasledstatecompetitorstosimilarlydiversifybusinesslines
IntroducednewsecuritizedproductsExemplifiesexpansionandambitionofstatecontrolledfinancials
Financierofstateegoprojects ThreeGorgesDam,ShanghaiPudong Aiport,BeijingOlympicprojects,etc.
PolicyBanksex.CPSB 12.6%oftotalfinancialassets
Big4BOCOMPolicyBanksex.CPSB92.3%oftotalfinancialassets
Concentrationhasincreasedinpastdecade Centralizationoffinanceaidsandabetspartycontrol
Ifitdoesnthaveaccesstoastableandsufficientsourceofcapital,theChinaDevelopmentBankwillbeunabletooperatenormally
Anonymous,TreasuryDepartment,CDB.Quoted01/11/10inTheEconomicObserver ()
-
Withaggressiveloangrowthandweakcashflowgeneration,Chinesebankingisunusuallycapitalintenseandrequiresconstantrefreshment.
>50%of0510&95%of0710newequitycapitalpaidindividends!
Thisoddityismoreexplicablewhenwerecallthatvastmajorityofbankdividendsaccruetothestate
(300,000)
(200,000)
(100,000)
0
100,000
200,000
300,000
400,000
2005 2006 2007 2008 2009 2010
Proceeds from Sale of Common Stock
Dividends Paid
Source: Bloomberg, Bank annual reports
EquityOfferings&DividendPayouts,Big4Banks,20052010
-
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Dec-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10
Domestic Credit
GDP
Source: PBOC, Bloomberg, billions of RMB
CreditisgrowingfasterthanGDP
-
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
Total Loans of Fin. Institutions, YoY (L. Axis)
NPL Ratio (R. Axis)
Loangrowthhasslowedbutremainsdangerouslyhigh
Source: PBOC, Bloomberg
NPLsappearminimalbutareabackwardlookingindicatorinaloosecreditenvironment
Stimuluswall:banksgivengreenlightforgrowth:
-
Chinasstatefinancialsystemhashistoricallyfaredpoorly&hasapoortrackrecord1:
2majoreventssince1978:
Late80s/Early90s ProvincialgovernorscontrolledPBOCbranches Localofficialsovercookgrowth 20+%inflation Inflationaryspikeforcedtotalhaltofbanklending Sparkedhardlanding realestatecrashinHainan
Late90s/Early00s InducedbyAsianFinancialCrisis(AFC) UnresolvedNPLsfrompreviouscrisiscompoundedimpactofnewwaveofbadloans Govt.responseproducedcurrentmarketstructure
Historicalrecoveryratesinthe1020%rangeonbadloans Comparetorecoveries~60%atpeakofUSS&LCrisis
Suggestslackoftrueprofitmotiveinlending,likelihoodoffraudandtheftatthemargin Withoutexternalshocks(i.e.AFC)statecandelayreckoningindefinitely
Incompletereforms Previouscrisesresolvedbycreativeaccountingtoppedupwithsmallinfusionsofforex reservesandcapitalraisedfromIPOs Perceivedsuccessofbankrecaps.andsubsequentcollapseofWesternfinancialsystemhasreducedperceivedneedforreform
1 VictorShih,Factions&FinanceinChina:EliteConflictandInflation,(NewYork:CambridgeUniversityPress,2007
-
1 ThomasBottini,BankruptcyPerilsinChina:TheGITICTale,MultinationalBusinessReview 115(2003)
GITIC Forerunneroftodaysbankingsector? EngagedinpracticescommoninmodernChinesefinancei.e.offbalancesheetvehicles,growthofnoncorebusinesslines,politicizedlending FirstandonlyChinesefinancialallowedtofail
Lenderandsecuritiesco.effectivelycontrolledbylocalgovernment HongKonglistedsubsidiaryissuedbondsinUS
Govt.providedcomfortlettersforGITICsinternationaldeals Explicitassurancethatstatestoodbehindthebank
Enormousexpansionin90saidedbyWesternbanks OneofChinasfirstinternationalplayers
WentbustinwakeofAsianfinancialcrisis January1999 NPLratio:90.0%1 Recoveryrate:12.5%1
FirstandonlybankruptcyofmajorChinesefinancial: Assets:$2.6bn Claims:$5.6bn $4.7bn toforeigncreditors
InternationalexposurepromptedlargerconcernaboutChinassolvency Necessitatedimmediateactionandatransparentliquidationprocess:
AppointedKPMGtobuildcredibilitywithwesterners
GITICSformerheadquarters;3rd
tallestbuildinginAsiaattimeofconstruction
-
1 Walter&Howie
PriortoGITIC,PBOCclosedfailingbanksandmadeforeigncreditorswhole Comparativelysmallscaleoffinancialsector/limitedinternationalexposureallowedgovt.toeasilysettlethebill Reflectedinbondrisk:
8mos.beforecollapse,GITICbondsyielded240bpsoverTreasuries1
Underbankinglaw,bankswererequiredtoregisterdebtstoforeignerswithgovt. Intendedtoprotectforeigncreditors;unregistereddebtunenforceable GITICusedHongKongsubsidiariestohideoverseasdebtsDiversifiedintowidevarietyofoperatingbusinesses:
Manufacturing,textiles,hotels,etc. Originallythoughttohave66domesticand66overseassubs. 105domesticand135overseassubs.uncovered
ScaleofdebtsledtoclosuresofmanytrustcompaniesandrecentralizationofBig4undercentralgovt.
PostGITICreformssoughttorecentralizecontroloverthefinancialsystem Not aboutenhancingcapitalallocation No intentionofallowingtrulyprivatebankingorfloatinginterestrates
-
WhiletheprovincialGITICwasallowedtofail,Chinapursuedmoreinnovativesolutionstoresolvingthebanksunderthedirectcontrolofthecentralgovernmentinthelate90s/early00s
ParticularlyimportanttotherecapitalizationandunderpinningChinasfinancialsystemarethe4assetmanagementcos.AMCs:
Chinas4AMCs:Orient,Huarong,GreatWall,andCinda
Badbanksusedtoremoveproblemloansfrombankbalancesheets Createdtodealwithprimarilylate80s/early90s vintageNPLsthatremainedfrompastcrisis
Govt.delayedresolutionuntilexogenousshockofAFCdemandedaction40%ofpre2000loansnonperforming AMCsacquiredRMB2.4trnofbadloans
AMCsfundedbyPBOC AMCspurchaseNPLsatfacevalue 100sonthedollar AMCsresembledevelopedworldbadbanksi.e.RTCinUSS&Lcrisis,butcriticaldifference:
BanksreceivedAMCbonds anunfundedreceivable nocash intobanks Accountingsolution;banksretainexposuretobadloans
-
Intendedastemporaryinstitutions,theAMCs1999mandaterenewedin2009forafurther10years:
Thinlycapitalized;inevitablyinsolvent Negligiblecapitalbaseandinflatedpurchasepriceforloansmadeprofitableoperationimpossiblefromthebeginning Significantoperatingexpensesexacerbatedearthofloanrecoveries Governmenthashadtoprovidecomfortletterstoauditorstoassuresolvency
MorerecentlytheelegantAMCsystemhasbeenabandonedinfavorofdirectissuanceofunfundedreceivablesbytheMinistryofFinanceMOF
Mechanicsremainthesame:banksreceiveunfunded,evergreenIOUs
AMCbondsandsubsequentMOFreceivablesaresignificantstateliabilitiesnotreflectedinheadlinesovereigndebt figures
-
AMCslikeCinda haveopportunisticallyusedthelicensesoftheirseizedportfoliocompaniestoenterawidevarietyofbusinesslines,significantlyexpandingbeyondtheiroriginalmandate:
Seizedoperatingbusinessescontinueasgoingconcerns
Employ12,000people
Badbanksnowdiversifiedconglomerates
Operatinglossesworsenalreadyweakfinancialposition
Cindas operatingsubsidiariesspanlifeinsurance,P&Cinsurance,securitiesbrokerage,equipmentfinance,futurestrading,investmentmanagement,realestateinvestment,trustmanagement,propertydevelopment,construction,andevenincludeindustrialbusinesses.
AselectionofsomeofCindas publicallyacknowledgedsubsidiaries
-
AMCbondsandlaterMOFreceivablescompriseasignificantportion oftheBig4scapitalbase:
Big 4 Banks - Big Balance Sheet Holesin billions of RMB BOC CCB ICBC ABC
1998 MOF Bond 42.5 49.2 85.0 93.3 1999 AMC Bonds 160.0 247.0 313.0 0.0 2007 MOF Receivable 0.0 0.0 62.3 635.5 2004 PBOC Special Bills 0.8 63.4 434.8 0.0 2006 PBOC Target Bills 113.5 0.6 0.0 0.0 2007 PBOC Bills and Bank Sub-Debt 14.6 57.1 237.1 0.0 Total: 331.4 417.3 1,132.2 728.8
Total Assets: 8,748.2 9,623.0 11,785.1 8,882.6 Total Capital: 608.3 492.0 586.4 342.8 AMC Bonds/Total Capital: 26.3% 50.2% 53.4% -Source: Audited financial statements. 12/31/2009 values.
BondsrolledwithAMCmandate
EvergreenNPLs: Oldestunderlyingloansreportedlydatetolate80sandearly90s Continuedpresenceonbankbalancesheetsspeakstokickthecanapproachtorestructuring
Bankingsystemrestsonshakyfoundationofaccountingtrickery
InvestorsawareofpotentialbalancesheetholesbutbelieveinPBOC/MOFput
Confidenceinthebankingsystemreflectsinvestorconfidenceintheabilityofthestatetorecapitalizefinancialsystem largeforex reservesprovideillusorycomfort
-
th
ThePBOCevenhasitsownbadbankusedtohidedebts&disguiseitsprobableinsolvency:
Huida AssetManagement Createdin2005inordertoremoveproblemloansfromPBOCbalancesheet
FundedbyCinda AssetManagementCo. UtilizedduetoclosepoliticaltiestoPBOC
Opaque,nodisclosureonoperationsasportfoliohasnotbeenmarketedtooutsideinvestorsincontrasttomoretransparent1st generationAMCs
OfficialdocumentssuggestedHuida wastoacquirerealestateloansfromHainan/GuangxiandportfoliosfromtheGITICbankruptcymidlate90svintages
BeliefamongmarketparticipantsisthatHuida acquiredPBOCsoriginalAMCloanstoeasepressureoninsolventAMCs1
Thiswouldimplyaroundtripinvestmentthatwouldoffsetanddisappeariftheentitieswereconsolidated
Unaudited,offbalancesheetvehicleforPBOCandCinda UnlistedandunmentionedonCindas website;fiscalblackhole 1
1 Walter&Howie
-
StateCouncil
MinistryofFinance
PBOC
FinancialRegulatorySoup(NDRC,CBRC,CSRC,CIRC)
StateOwnedAssetsSupervision&Administration
Commission(SASAC)
SOEs
ChinaInvestmentCorp.(CIC)
CentralHuijinInvestment
CentralSAFEInvestment
AssetManagementCos.(Huarong,Orient,GreatWall,Cinda,Huida)
Big4andChinaDevelopmentBank
TheMinistryofFinance,operatingdirectlyundertheStateCouncil, liesattheheartofthecontemporaryChinesefinancialsystem:
ThePBOChasbeenrelegatedtosecondaryroleaftersufferingasignificanterosionofitspowerinearly/mid00s PBOCformerlycontrolledBig4&CDBviaCentralSAFEInvestment
DivisionsbetweenthePBOC&MOFreflectalternatecareerpathswithintheparty: Generalists:Rotatedbetweenministriesandlocalities Technocrats:AdvancethroughsilohierarchyofPBOC
-
Thecurrentownership®ulatorystructureofChinasfinancialsystemistheproductofstillbornreform:
PBOCledreformandrestructuringprocessinlate90s/early00s InstitutedAMCsystem&initiatedIPOsofBig4inHongKong
PBOCintendedtoproceedwithfurtherprivatizationandfinancialliberalization MOFactedopportunisticallytoseizecontrolofmostimportantleversofpowerbeforethePBOCsreformscouldbecompleted
MOFspoliticalascendancyeliminatedthepossibilityoffurtherlegitimatereform
WenowbrieflyreviewthepoliticalstrugglebetweenthePBOC/MOF:
RegulatoryreformhasbeenhamperedbyinternalconflictsbetweenthetreasuryMOFandthecentralbankPBOC
ThisconflictisreflectedinthecountrysduelingsovereignwealthfundsSWFs: ChinaInvestmentCorporationCIC CentralSAFEInvestmentSAFE
ThenondescriptentrancetoMOFheadquartersinBeijing
-
PerceivedsuccessofrestructuringviaAMCsimpededfurtherreform: Mediaoutcryaftersubsequentsalesofminoritystakesinprizedstateassetstoforeigners
9%ofCCBsoldtoBankofAmerica,5%toTemasek SingaporeanSWF Mediaconsensus:ifthebankshadalreadybeensuccessfullyrecapitalized,whyselltoforeigners?
ExacerbatedalreadyhostileelementsintheMOFandotherrivalstateministriesstemmingfromthePBOCsindependentcreationofacommercialpaperCPmarket:
PBOChadpreviouslycededregulatorypoweroverfixedincometoaStatePlanningCommission CreatingCPmarketunderminedthisauthority,generatedresentment
SuddendeathofPBOCsupporterHuangJu frompancreaticcancerin2007shiftedbalanceofpowertowardsMOF:
ProminentsupporterofJiangZemin andtheShanghaiclique,swornenemyofHu Jintao PolitburoStandingCommitteemember oneofthemostinfluentialpoliticiansinChina
HadfavoredcentralizationandsupportedPBOCinitsreform/centralizationefforts Reflectssignificantinfluenceofindividualpoliticiansindeterminingcriticalpolicyoutcomes
PartycommitteegrantedMOFapprovalin2007tofoundChinaInvestmentCorporationCIC,aSWFtorivalSAFE,thePBOCsexistingsovereignwealthfund MOFblamedPBOCforrisinginflation,accuseditofpoormanagementofreserves
-
ItisthroughCICthattheMOFhasenforceditsdominanceoverthePBOCandtakencontrolofthestatebanks:
CentralSAFEInvestmentsSAFE CreatedbyPBOCtotopoffBig4withforeignexchangereservesintandemw/AMCbonds
2003 $45bn toCCB/BOC 2005 $15bn inICBC
Filledremainderofgaptoolargetobepluggedbyaccountinggimmicksi.e.AMCbonds FormercontrollingshareholderofBig4,majorityrepresentationonboardsofBig4/CDBviaHuijin InvestmentHuijin
ChinaInvestmentCorporationCIC FundedbyRMB1.55trn SpecialBondsoldbyMOFtoPBOCin2007 PBOCthenforcedthesebelowmarketcouponbondsonbanks MOFusedproceedstobuy$200bn inforeignexchangereservesfromPBOC
USDreservesusedtocapitalizeCIC ~1/3ofproceedsusedforSWFinvestment RemainderusedtorecapitalizeABC/CDBandtopurchaseofHuijin andtheBig4&CDBinturnfromthePBOC
AfterCICsacquisitionofHuijin,MOFdirectlycontrolsBig4andCDB Bankingsystemisnowdirectlyownedbystatetreasury
-
Thepartynotonlyretainssignificantinfluenceinallocatingcapitalbutcontinuestodominateindustrybyfavoringstateownedenterpriseandinfluencingpersonnelappointments
Westernconsensus:Directionofreformsince1978hasremainedconstant Gradualreformandliberalization;increasingembraceofprivateeconomyandmarketmechanismsamidstadismantlingofStalinistcentralplanningapparatus
Reality:ManystructuralreformshavelargelybeenreversedpostTiananmen Incrementalreformhasoccurred,butefficacyislimitedbygovt.sdistrustofmarketmechanismsandbytheabilityofvestedintereststocircumventreformsatthelocallevel
Understandingthepoliticaldynamicsince1978iscriticaltounderstandingthecurrentandfuturedirectionofreform:
WebrieflyreviewthestructureoftheChinesegovernmentbeforesummarizingthedecadessincereform:
Thelastthirtyyearshavebeengreatononelevel.Theeconomyhasadvanced,butculture,society,andpoliticshavenot.Inessence,itisthesameoldsystem.
WangXiaofang,formerpartybureaucrat1
1 Hongru Liu,TheFormationoftheThinkingandReformProposalsforChinasFinancialSystemReforms,2000.
-
ChinahasbeenruledbytheCommunistPartyofChinasince1949: ThePartyexistsabove thelawandthegovernment:
Truelocusofpoliticalandeconomicpower Authorityofthepartysupersedesallothers
Accordingly,prominentpoliticianstypicallyholdconcurrentroleswithingovernmentandparty:
e.g.Hu Jintao isbothGeneralSecretaryoftheCommunistPartyofChinaandPresident ofthePeoplesRepublicofChina
Partyretainspowerofappointmentwhile partyagenciesi.e.CentralOrganizationDept.et.al.monitorperformanceofappointedofficials
TheHammer&SickleoftheParty
Partyledby25personPolitburo NominallyappointedbyPartyCentralCommitteebutselfperpetuatinginpractice AgendadictatedbyGeneralSecretary,decisionsachievedbyconsensus Meetsmonthly
ThePolitburoisinturndominatedbytheitsStandingCommittee: Consistsof8mostpowerfulmembersofPolitburo Chinasboardofdirectors CurrentmembershipdominatedbydisciplesofJiangZeming
Createsbiastowardsstatiststatusquo Meetsweekly
-
Unrestrictedbytheruleoflaw,Chinesegovernmentisinefficientandinequitable:
Chinasconstitutionisamissionstatementratherthanalegaldocument:
4versionssince49,mostrecentversionadopted~30yearsagoandmodified4timessubsequently
Unpredictablepolicyenvironmentwithfrequentlychangingrules°reesofenforcement
Withoutchecksandbalances&effectiveenforcementmechanisms,policymaking&implementationarefrequentlyindistinguishable
Regulatorystructuresoftenreflectinternecinepoliticalconflictsi.e.MOFvs.PBOC
1 WangJingqiong.BeijingtoCloseThousandsofLiaisonOffices.ChinaDaily,01/25/2011.
Petitionerspleadforrelieffromthecorruptionoflocalofficials
Chinasgovernmentisnotafederalsystem:
Thegovernmentreliesonnegotiatedrelationshipsbetweenawiderangeofindividualpoliticians,agencies,andorganizations:
Particularlymarkedinrelationshipbetweencentralandlocalgovernments: Policyisadhocandnegotiableascentralgovt.haslimitedabilitytoenforcepolicyatlocallevel Abilityoflocalgovts.tonegotiateconcessionsfromcentralgovt.reflectedin10,000liaisonofficesi.e.localgovernmentlobbiesinBeijing TheChineseKStreet1Powerfullocalleaderscanrunjurisdictionsaspersonalfiefsi.e.ShanghaiCliquein90s,Chongqingin00s
Abusescanonlybestoppedbyconcertedeffortfromcenteri.e.corruptionscandals/scapegoating ofproblematicofficialsviaCentralCommitteeforDisciplineInspection
-
Nominally3branchesofgovernment:
Executive StateCouncil Sourceofpowerandauthority Composedofheadsof26statecommissionsandministriesi.e.
MinistryofFinance,MinistryofRailways,MinistryofStateSecurity,etc.
Stateministriesthoughttoemploy10mmbureaucrats Complicatedmanagementstructure localbureausreporttolocal
govts.aswellastoministry/commissionsenioroffice Furtherhindersefficientregulation/administration/
enforcementoflocalitiesbythecenter
Judicial SupremePeoplesCourt Norealindependentpower existssolelytoapplypartypolicy
tospecificcases/incidents
Legislative NationalPeoplesCongress Historicallyarubberstamplegislature,conceivedofprimarily
asanarenawhereregionaldelegatescouldlearnandunderstandthepartyline
Delegatesnowactingwithincreasingindependencei.e.abstainingfromvotes/votingindissent,butstillwithoutanyrealindependentlegislativeauthority
Theviewfromthetop
-
InadditiontotheStateCouncilandtheoverarchingPartysuperstructure,thereisafurtherlevelofhierarchicalgovernmentinChina localities:
Politicalcapitaloflocalofficialsdeterminesrelativeindependencefromcenterandothergovt.bodies
Officialsatonelevelcontrolthelevelimmediatelybelowthemvia: Powerofappointment Powertodraftbudgetsandlevytaxes Controlovertheallocation&redistributionofresources
Since2008,permittedtorunfiscaldeficits Localofficialsincentivizedtogenerateshorttermgrowthatallcosts Debtsalreadyest.atRMB10.7trn bycentralgovt.inJune20111,2
23provincialgovernments,furtherdividedinto: 300Prefecturesincludingnumerousprefecturelevelcitygovts. ~2,9000CountiesAvg.pop.of~500k ~650Cities furtherdisaggregatedinto:
~175,000Townships 950,000Villages CountlessDistricts,Neighborhoods,andUnitsdanwei
Eachoftheseunitsexistsinvariousforms,reflectingtheadhocandirregularstructureoflocalgovernments:
ShanghaiMunicipalGovernmentBuilding
PeoplesGrandHallinChongqing,seatofthelocalmunicipalgovernment
1 FitchWarnds OverChinaLocalGovernmentDebtBBCNews,09/08/11.Accessed09/27/11.http://www.bbc.co.uk/news/business148363862 YinNongzhing,DeputyDirectorofFinanceCommittee,NationalPeoplesCongressstatedthatRMB10trn wasaconservativeestimateoflocalgovernmentdebt.QuotedininterviewwithReuters,02/02/11.Accessed8/23/11.http://www.reuters.com/video/2011/02/02/chinafacingahiddendebtcrisis?videoId=183875158
-
DireneedforreforminaftermathofCulturalRevolution Economyintatters,partyscredibilityshotafterbloodbathledbyRedGuards
Chinacameclosesttoachievinglegitimatemarketorientedreforminthe80s:
ZhaoZiyang andHu Yaobang ledpragmaticreformmovement DisciplesofDengXiaoping,rosethroughCommunistYouthLeague
Everysingleimportantpoliticalreformoccurredinthe1980s1 Mandatoryretirementofofficials,reformofPartyCongress,legalreforms,etc. Effortstoincreaseadministrativeautonomyoflocalgovernments
Allowedprivatecredit &floatinginterestrates Limitedprivatebanking,statebanksbenchmarkedagainstprivatefinancials
Partybrieflyflirtedwithrelinquishingcontrolovercapitalallocation
Reformandsubsequentgrowthpredominantlyrural AreasmostaffectedbyGreatLeap/CulturalRevolutionledreform Drivenbypragmaticlocalofficialswhofrequentlywereacting
independentlyofthecenter,particularlyinthepoorestprovinces CitiesremaineddominatedbySOEsandcentralplanners
1Minxin Pei,ChinasTrappedTransition:TheLimitsofDevelopmentalAutocracy,(Boston:HarvardUniversityPress,2006)11.
Zhao(top)&Hu Architectsofreform
-
Town&VillageEnterprises TVEsledruralgrowthspurt: Ledbyprivateentrepreneurs,whoweregivensignificantaccesstocredit
fromlocalitiesandRuralCredit/FinanceCooperativesRCC/RFCs RCCs ~75%ofagriculturalloans,~50%ofallloanstoTVEs
DespiteWesternacademicconsensusStiglitz et.al.,successfulTVEswereprivately owned&controlled:
Output,profit,andwagesofprivateTVEs5070%higherthanstatemanagedTVEs1
Localgovts.expropriatedbestprivateassetsin90s
Economicgrowthmatchedbywelfaregainsformajorityofpopulation Ruralhouseholdincome12.2%realgrowthfrom78882
1 Qisong Lin,PrivateEnterprises:TheirEmergence,RapidGrowth,andProblems,InChinasRuralIndustry,editedbyWilliamA.Byrd.(Oxford:OxfordUniversityPress,1990)181.2 Huang117.
Nian Guangjiu foundedIdiotsSeedssunflowerseedsin1982andisrepresentativeofthedynamicentrepreneurialclassthatemergedasthestatelooseneditsgrip.
Nian wasoneofthegreatestTVEsuccessstoriesofthereformera,earninga1mmRMBprofitin1986.Inthe90shewasjailedwhilehisbusinesswasseizedandsubsequentlyrunintothegroundbytheprovincialgovernment.
ABrilliantIdiot:
-
Inflationarysurge&subsequentaggressivemonetarytightening,risingyouthunemploymentculminatedinTiananmen
Jarringforregimebutbroaderunrestwaslimitedduetomaterialprosperityofruralcitizensunder80sreforms
Tiananmenandsubsequentleadershipchangesledtomanyreformsbeingreversedinthe1990s Hu Yaobang forcedoutin86followingsupportofstudent
protests;hisdeathin89wasapartialtriggerforTianamen ZhouZiyang purgedforsupportingTiananmenstudents ReplacedbyJiangZeming/ZhuRhongji TheShanghaiClique
PostTiananmenlesson liberalizationmustnotentaillossofpoliticalcontrol
Focusshiftedfromruralentrepreneurshiptostatedominatedurbaneconomy
Foreigncapitalsystematicallyfavoredoverindigenousentrepreneurs1
1 Pei(2006)
-
Inthe90sChinaembracedstatecapitalismunderJiangZeming &ZhuRhongji Partysuperficiallyembracedsomemarketinstitutionsbutincreasinglyencroachedonenterprise
andfinancethroughsweepingcentralizationandreversalofearlierreforms
FavoredurbanSOEsandforeigncapitalistsoverindigenousentrepreneurs
Ruralandurbanincomegrowthstalled Administration/fiscalmanagementofrurallocalitiesrecentralized,lostfiscalautonomy Ruraltaxburdengrewsignificantly,subsidizedurbangrowth Ruralhouseholdincomegrewjust3.8%from8901 GDPannualized16.5%sameperiod1
Govt.bureaucracy~2xduringdecade Govt.payrollupfrom20mmintheearly90sto46mmin20042
Significantrecentralizationoffinancetocontrolinflation,favorurbanSOEs3 RFCscurbedin93,bannedin98,stronglylimitingaccesstofinanceinruralareas Post1994,RCCloansrequiredlocalandregionalapproval localautonomyrestricted Post1998,allRCCloans requiredconsentofPBOC
1 Huang,117.2 AlbertPark&Minggao Shen.JointLiabilityLendingandtheRiseandFallofChinasTownshipandVillageEnterprises.DepartmentofEconomics,UniversityofMichigan(2001)3 Shukai Zhao,Bianju Zhong DeZiangzhen Jigou [ChangingTownshipOrganizations],StateCouncilInvestigationandResearchReport 168(2004)
Chinesepeasants,yournameismisery SunDawu,ruralentrepreneurinHebei province
-
4th generationleaders Hu Jintao &Wen Jiabao 1st generationtoinheritruleaspickedsuccessors Reflectsincreasingbureaucratizationofparty
Recognizechallengesbutremainweddedtostatistpolicysolutions:
18th 5YearPlanreflectsthisapproach: $1.5trn ininfrastructurespendingand
targetsthedevelopmentofspecificindustrialsectors
Unfundedcommitment willlikelybefinancedbybankingsystem
Emphasisonhardinfrastructure;realproblemsoriginateinlackofsoftinfrastructurei.e.freemarkets,ruleoflaw,definedpropertyrights,etc.
Pendingtransitionto5th generation Needtomaintainstabilityandgrowth Potentiallydestabilizingpoliticaldynamic
Hxi shhuHarmonioussociety
-
WhatisthecurrentstateofChineseindustry?
Chinasliberalizationinthe90sproceededaccordingtotheblueprint: Letgoofthesmall,takeholdofthebig 15th PartyCongress,1997 Largecorporates remainundergovernmentcontrol
Divestedsmaller,inefficientSOEs,concentratedonrestructurednationalchampions: SmallSOEs ~20%ofsectorin97butcomprisedmajorityofoperatinglosses SmallSOEsprivatized,laidoff3040mmworkers RetainedSOEslaidoffafurther50mmworkerstoenhanceprofitability SOEsgiventaxanddebtrelief,importlicenses,accesstodomesticandforeignlistingfacilities,
andreducedoperatingrestrictions
Policyof2Guarantees Guaranteedaccesstofinancingandrawmaterialsfor234SOEs Stronglylimitedneedtoremaincompetitive
Nottrueprivatization restructuringusedtosolidifystatecontrolandenhanceprofitabilityofremainingSOEs
Partyretainsequityownershipandcontrolviacorporateboardsandpersonnelappointments Partycommittees politicalsleepercellsestablishedwithincorporationsprovidefurtherlayer
ofcontroltobeactivatedintimesofcrisis
-
Privatesectorsignificantlysmallerthanheadlinefigureswouldsuggest: Officialdefinitionsareproblematic:
Nonstateincludesmanycollectiveenterprisescontrolledbylocalgovernment MajorityoflistedSOEsareclassifiedasnonpublic
However,stateretainsmajority ownershipandcontrolofcorporateboards
2005OECDstudysuggestsprivatesectoris~70%ofeconomy1 Confusionregardinglegalpersonshareholdingfirms~40%ofprivatesector OECDviewsasprivate,butmajorityoflegalpersonfirmsareownedbystateanddirectly
supervisedbystatecouncil OECDlistincludessubs.ofrecognizedSOEslikePetroChina andChinaNationalPetroleum
CorporationaswellasstatechampionslikeSAICMotor
75%havezeroindividualsharecapital,45%aremerelyproductionsubsidiariesofotherSOEs2
Correctingforthis,trueprivatesectorisonlyaround40%ofeconomy2 Evenifweacceptthe70%numberatfacevalue,shareisstilllow: ComparabletoIndira Ghandis Indiawithnationalizedbankingsystemandthelicenseraj
Privatesectorprimarilyconcentratedincapitalextensiveservicesector Reflectslimitedaccesstoofficialsourcesoffinancing
1 SeanDougherty&RichardHerd,FastFallingBarriers&GrowingConcentration:TheEmergenceofaPrivateEconomyinChina, OECDEconomicsDepartmentWorkingPapers 471(2005)2 Huang3 Ibid,p.124
-
Majorityoflistedcos.arestateowned: Only7%of19902003listingsfromprivatecos.1 Statesectorgivenpreferentialaccesstocapitalmarkets
Mostcompetitiveoftrulyprivatecompaniesremainprivate,HKdomiciled
Manynationalchampionsdidnotexistbeforetheirpubliclistings Westerninvestmentbankersfacilitatedcreationofnationalchampionsaspartof
restructuring/consolidationofSOEsduringlate90s2
ChinaMobile particularlyegregiousexample3: Createdbyrollingupassortmentofpoorlymanagedprovincialtelcos.after1997IPO ProceedsfromNYSElistingsupplementedwithbankloans,usedtopurchasetelcos.in
6provincesownedbyitsownparent Prospectusreferredtoaproformaentitynotyetoperationallyintegrated Followedbysecondaryofferingin2000,proceedssimilarlyusedtoexpandina
further7provinces
Weakestpubliclistingsbackstoppedbystrategicinvestors Statedominatedfinancials,financialsubsidiariesofSOEs,andothergovernment
entitiesAMCs,militaryindustrials,etc.materialinvestorsinIPOs 2010ABClisting 50%ofallocationstostrategics4
Highlightsotherwiselukewarmmarketreception,partyscloseinvolvementin/backstoppingofmarketlistings
Partyretainsmajorityownership&controlofboards Partynolongerindirectcontrol,butabletoexertsignificantinfluenceindirectly
1 Huang2 Walter&Howie3 ChinaMobileProspectus(SECFormF3),filed10/04/004 Walter&Howie,178181.
-
1 McGregor(2011),85
Govt.haslargelywithdrawnfromdirectmanagementbutassertsequityownershipindirectlyviapersonnelappointments:
2primaryleverstocontrolappointments:
CentralOrganizationDepartmentCOD
ChinasstateHumanResourcesorganization DictatesallmeaningfulleadershipappointmentswithinPartyandenterprisesystem Thoughttocontrol70mmjobs SeniorbankmanagersmustbeapprovedbyCODaswellasPBOCandspecialbankingcommittee
CommitteeonDisciplineInspection Usedopportunisticallybycentertocontrolproblematiclocalofficials Lackstrueindependence
overseetheappointmentsofUSstategovernorsandtheirdeputies;themayorsofbigcities;headsoffederalregulatoryagencies;thechiefexecutivesof GeneralElectric, ExxonMobil, Walmart and50oddoftheremaininglargestcompanies;justicesontheSupremeCourt;theeditorsof TheNewYorkTimes, TheWallStreetJournal and TheWashingtonPost,thebossesofthetelevisionnetworksandcablestations,thepresidentsof Yale andHarvard andotherbiguniversitiesandtheheadsofthinktankssuchasthe BrookingsInstitution andthe HeritageFoundation.1
AhypotheticalAmericanequivalentoftheCODwould:
TheCODsdiscrete,featurelessBeijingheadquarterslacksanysignage
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1 TheodorGroves,Yongmiao Hong,JohnMcMillan,andBarryNaughton,ChinasEvolvingManagerialLaborMarket,JourneyofPoliticalEconomy 103(4)87392(1995)
ExecutivesatSOEsarefrequentlyrotatedbetweenpostsattheCODsbehest:
AverageSOEexecutivetenure 5.5years1 Personneltransferscontravenecorporategovernancerequirementsofpubliclistings
Wherepartyandindustryintersect,legalobstaclesaremereformalities
Selectedpersonnelappointmentssince2000:
ChinaMobile,ChinaUnicom,&ChinaTelecom CEOsswitchedplaceswithoutwarningtobreakupemergingcentersofpower
Headsof3airlinesrotatedtoreducepricecompetition
Vicegov.ofPBOCmadeCEOofChinaConstructionBank
AsifJanetYellen wasgivenJamieDimons job
CNOOCschairmanappointedgovernorofHainanChairmanofHuaneng Powermadedep.gov.ofShanxiChairmanofChinalco electedtocabinetadvisorypost
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54of100SOEsoncentralnomenklatura list1 Chairman/CEOsholdministerialrankandselectedbyCOD LesspowerfulStateOwnedAssetSupervision&Administration
CommissionSASACselectsCFOs/VPs EspeciallyinfluentialinBig4banks
PartyCommitteesformedwithinlargecompaniestoinsurepoliticalcorrectness/policyimplementation Committeesactiveeveninforeignbusinesses/JVs SleepercellsintroducedpostTiananmentobeactivatedduringcrises
Politicizationofmanagementcreatesproblematicconflicts:
Canabankmanagerrefusealoantoanexecutivewithgreaterstandingintheparty?
No
SOEsusedtopropupfailingcos.viastrategicinvestment3 ChinaMobile Purchased20%ofShanghaiPudong Devleopment Bankfor$5.8bn ChinaUnicom RumoredtohaveinvestedinBoCom viaopaquesubsidiary
TheRedMachine TopexecutivesatlargestSOEsreportedlyreceiveanencrypted,4digit
telephonelinetheRedMachine Communicationslinkbetweenpartyelite
Symbolicofsymbioticstate/bigbusinessrelationship
1 Walter&Howie,169.2 McGregor(2010),783 Walter&Howie 192
Theultimatestatussymbol?
Zhongnanhai,theChineseKremlin
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Source:WorldBank,BloombergReflectsROEofNikkei225,DAX,CAC40,HangSeng ChinaEnterprises,KOSPI,MICEX,FTSE100,BOVESPA,SENSEX,IBEX35,S&P100,JakartaCompositefirms,exfinancials.
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
3
Y
e
a
r
A
v
e
r
a
g
e
G
D
P
G
r
o
w
t
h
3 Year Avg. Return on Equity
DespitesignificantlyhigherGDPgrowthChinesefirmslagemergingmarketpeersaswellassomedevelopedmarketsinreturnonequity
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1 Madar,Daniel,BigSteel:Technology,TradeandSurvivalinaGlobalMarket,(Vancouver:UBCPress,2009)116.Assumesminimumefficientscaleat5mmt(conservative)2 WorldSteelAssociation
Chinassteelindustryisindicativeofthedangersofthestatecontrollingenterprise:
Industrydemandsscale,butincreasingfragmentation: Top5producers 1/3rd in88,only1/5th in08 Contrastswithglobalconsolidationtrend Fragmentationdrivenbymeddlingoflocalofficials
Highlyfragmentedandinefficient Economiesofscalelimitedduetostatepricecontrols Estimatedthatonly0.3%ofChinesesteelmillsareofefficientscale1
Surpluscapacityandcontinuingirrationalgrowth CapacityEUJapanRussiaUScombined2
SignificantidlecapacityOnly5%ofsteelexported
Predominantlylowgradelongproducts Limitedvalueadd,mustimporthighergradeflatproducts
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Inefficientindustryaidedandabettedbypervasiveaccountingfraud
Sloppyduediligence,weakdisclosure,limitedscrutinybyunderwriters
RegulatoryreportissuedinlateMarchcriticized17banksforlistingpractices
RecentfraudsunnoticedbyhighprofileauditorsandinvestorsinthewestLongTop,ChinaMediaExpress,SinoForest,etc.
ReflectiveofundueWesternoptimism?
Bankscomplicit infrauds Cashholdingssignificantlyoverstatedby
corporate brazen,easilyfalsifiablemisrepresentations
17SOEshaverecentlyadmittedmisreportingfinancialdata1
HongKongStockExchangeacceptsChineseauditorsasoflate2009
ChinesefraudshavepassedmusterwithsomeoftheWestsmostrespectedauditorsandexchanges
1 JamesGrant,GrantsInterestRateObserver,6/3/2011,NationalAuditOffice.
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1 NewYorkTimesDealbook ChineseReverseMergerCompaniesDrawLawsuits,7/26/11.Accessed8/23/11,http://dealbook.nytimes.com/2011/07/26/chinesereversemergercompaniesdrawlawsuits/
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Chinese Rev. Merger Index
Russell 2000
TheInfamousChineseReverseMerger
PervasiveaccountingfraudinUSlistedChinesestocks ExchangeshavehaltedtradingpendingoutcomeofSECinvestigations Accountedforalmost50%offederalsecuritiesclassactionlawsuitsin2011YTD1
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Laxaccountingstandardsfacilitatealargemarketforoffbalancesheetfinance:
EntrustedLoans Corporate/householddepositorscontributefundstotrustsmanagedbybank Proceedsloanedto3rd partyborrowers Circumventsinterestratecapsandlendingquotasimposedonbanks
Bankearningsincreasinglydrivenbyoffbalancesheetvehicles
EntrustedOBSloansest.at~8%ofalllendingin20101 OBSloansup110%YoY in20112
Reportedly40%ofentrustedloansgotopropertydevelopers3 FiguresrepresentonlyofficiallyrecognizedOBSvehicles
BogusTradeFinance Phonyinvoicesusedtoimportcommodityassetsthatcanbe
levered Favoredbypropertydevelopersmaxedoutinaboveground
domestic/offshoremarkets Alsousedtocircumventcapitalcontrols
Copperfavoredpreviously,Soyincreasinglypopular
Enormouscontingentliabilities UndrawncreditcommitmentsatBig4 RMB7.4trn 18%of
GDP!4
Loandocs.fora36mo.entrustedloanforRMB300mmtermloanwithRMB
3,000mmrevolverfortheconstructionofacoalgasificationplant.
1 PBOC2,3 HenrySanderson,OffBalanceSheetLoansDouble,BoostingBankDefaultRisk,BloombergNews,6/23/11,Accessed8/23/11.http://www.bloomberg.com/news/20110623/offbalancesheetloansdoubleboostingbankdefaultriskchinacredit.html4 JamesGrant,GrantsInterestRateObeserver 5/20/11.
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Corporatecreativityinaccountingmirroredinofficialgovernmentaccounts:
Govt.economicfiguresareforreferenceonly
LiKeqiang ),heirapparenttoWen Jiabao,Chinasreigningtechnocrat
Officialgovt.debt RMB6.5trn
GovernmenthassignificantOBSdebts(2010E): UnfundedMOFreceivablesandsterilizationbillsRMB2.6trn AMCdebts,20032005RMB2.7trnNonconsolidateddebtofStateMinistriesRMB~400bnNonconsolidatedlocalgovts.(largely0809vintage)RMB~10trn PolicybankdebtRMB4.5trn
Govt.retainsultimateresponsibilityforstatefinancialsystem Govt.OBSdebtlikely34xofficiallydiscloseddebtstotaldebt:~100+%ofGDP1
1 VictorShih,LoomingProblemofLocalDebtinChina.AsianWallStreetJournal,2/10/10.
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Consensusview:Govt.canrecap.financialsystemwithenormousforeignexchangereserves
Reality:Debtsvastlyunderstated,abilitytodeployforex reservesdomesticallyislimited
Investingforex reservesdomesticallywouldunwindliquidityoverhangonPBOCbalancesheet
Significantportionofreservesalreadyinvesteddomestically,includingholdingsofbankequity
Suggestsonlyafractionofreservescouldbequicklydeployedtorecapitalizethebankingsystem/arrestasystemiccrisis
Chinasfiscalpositionisacomplexwebofoffbalancesheetentitiesandunfundedcommitments
Headlinedebt/GDPgrosslyunderstatesliabilities Stateenterprisesystemdefactoliabilityofthestate
UltimateliabilitiesofChinesestatearewhollyunknowable
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Enormousinequalityconcentrateswealth 1%ofChinesehouseholds0.4%ofpopulation
controlupwardsof$35trilliondependingonassumptions1
Reallocating3040%ofthiswealthoverseaswoulddrainmajorityofdomesticreserves
Negativedepositratesandlimitedchannelsfordomesticinvestmentpromotecapitalflight
Weakeningreturnsondomesticequities,realestateshouldacceleratecapitalflight
Capitalcontrolsareporous,particularlyforwealthyandpoliticallyconnected
Undergroundbanks/moneychangers Bogustradeinvoicing Increasingcurrencyliberalization
Evidencesuggestscapitalflightisalreadyunderway IncreasinginvestmentbyChinesenationalsoverseas
RealestateinUS,westernCanada,Singapore,Australia,etc.
1 Shih(2011)2 CNTV,ChinesePeopleInvestMoreinRealEstateAbroad.4/11/2011,accessed8/23/11.http://www.china.org.cn/video/201104/11/content_22330861.htm
USrealestatebrokerscourtingChineseinvestorsChinesebuyersaccountedforalmost11%ofUSreal
estatetransactionsin20112
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Whileprogresshasbeenmade,Chinaeffectivelyremainsacommandandcontroleconomyatheart:
Nomorecentralplanners,butpartydistortsmostcriticalmarketprices/mechanisms
AChinabullmustbelieveinstateledcapitalallocationandthatitcanbesuccessfulonascaleunprecedentedinhumanhistory
Liberalizationismeaninglesswithout: Privateownership Privatecapitalallocation Ruleoflaw
Howisthisdifferentfromtheolddays?
ChinaismoreradicalTheStatewantstoleadeverything.Thisisthegreatestdifference
YuanWeishi,Zhongshan University1
1 McGregor(2010)78.2 CIA
IsChinasresilientgrowthsurprisinggiventhatitisprimarilydrivenbygovernmentfinancedinvestment?
Precedent:TheSovietUnionmanagedthesamefeatinthe50s6.8%compoundgrowthbyboostinginvestmentspending2
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AsIfAllThisWasntEnough Chinasdemographicdividendisfading:
Populationofworkingageprojectedtoshrinkat0.1%p/afrom201520251 significantreversalofdemog.trends!
Onechildpolicyhascreatedgenderimbalance 117:100male/femaleratioin2010 40mmmorementhanwomenby20202
Increasingsocialunrest 80,000massincidentsin07,upfrom60,000in06
Norecentofficialdatabutleaksdatasuggestsasmanyas125,000incidentsin083
Recentsurgeofincidencesincludingsuicidebombings Hasledtoincreasinglyviolentcrackdowns
Harassmentofforeignjournalists,arrestsofintellectualsandactivists,resurgenceofMaoism4
Statehasincreasedallocationtostatesecurity14%inlatestbudget5
1 UNPopulationDivision,StandardChartered,TheEconomist.2 ChinaFearsBachelorFuture.BBCNewsOnline,4/5/2004.3 WaveofUnrestRocksChina.TheWallStreetJournal,6/14/2011.4 Princelings andtheGoonState.TheEconomist,4/14/2011.5 ChinasSecurityState:TheTruncheonBudget.TheEconomist,5/10/2011.
Lackofconcernforhumanrights
Extensivestatecensorship
Laxenforcementofintellectualproperty
Lackofinnovation
UnauthorizedAppleStoerinKunming
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HowNowBrown(Red)Cow?
Chinahasbeforeittwoalternatepaths:1. Statusquo
Unsustainable,unfair,unbalanced,andinflationary Systemincapableofsurvivingslowglobalgrowthenvironment
Inflationwillcontinuetomount,inflamesocialtensions,andunderminepartycredibility Sheerscalecreatesupperboundtocapital/resourceintensivegrowthmodel Debtfinancedgrowth+poorcapitalallocation+lowrecoveryrates+understatedinflationrecenteconomicgrowthislikelyoverstated&perhapsaltogetherillusory
2. Structuralreform
Reformsrequiredareinherentlylongterm unlikelytoeaseimmediatepressures Wouldrequirepartytodrasticallyreshaperelationshiptostateandenterprise
Significant relinquishmentofpower&effectiveadmissionoffailurebyCCPSignificantimpediments:
Dependencyondomesticsavingsforfinancing Fundamentallyuncompetitiveindustry Entrenchedpolitical/bureaucraticincumbentsinhibitrapid/effectivereform UnresolvedliquidityoverhangonPBOCbalancesheet Significanthumancapitaldeficitfromchronicsocialunderinvestment Mountingpileofunresolvedbaddebtsstretching~20years
Stalinism Comes of AgeSlide Number 2ContentsThe Chinese Growth MiracleSlide Number 5Slide Number 6Slide Number 7What Could Go Wrong?Having Your Cake and Eating It TooUS & Chinese Monetary AggregatesKeeping a Lid on ItA Losing GameUnorthodox TighteningChina Drives Global ImbalancesChina: The Marginal BuyerDeny, Delay, DefendHistory of Problematic InflationCommunism with Capitalist CharacteristicsExports & Gross Capital Formation / GDP 1981 - 2009Export Bubble Mirrored in Real EstateCompensating for Something?Dubai X 1000?Old Dog in Need of New TricksA Tall OrderThe Wages of GrowthThe Urban/Rural DivideSocial CostsSocialism in ActionThe Great Funding Wall of ChinaBehind the WallWho Pays for All of This?Who Pays for All of This?Chinas Phony Bond MarketThe Partys ATMChinas BanksCheerleaders of GrowthPolicy BanksChurn and BurnDecreasing Marginal ReturnsPedal to the FloorHavent We Seen This Before???A Preview of Things to Come?Restructuring, Round 1Bad Bad BanksKicking the CanCinda: A Case Study in Rent SeekingBanking System is InsolventThe 5th (and Final?) Asset Management Co.The View from AboveFamily FeudThe Struggle for ControlThe MOFs Coup D'tatHow Did We Get Here?Life Under the PartyOrganized ChaosChinese Government: Graft & GroupthinkLocal YokelsThe Bureaucratic Layer CakeThe Bureaucratic Layer Cake (II)The Bureaucratic Layer Cake (III)The Reform Period 1979-1989The Reform Period 1979-1989The Tiananmen InterludeThe Resurgent State, 89-01Scientific Development, Harmonious SocietyChinas Industrial Policy StateState Owned EnterpriseNational ChampionsChinese Enterprise: The Bird in the CageThe Heavy Hand of the CODIndustry and the StateThe Costs of State InterferenceChinese Steel: Case Study in InefficiencyChinese ArithmeticChinas Latest ExportOff Balance Sheet ExplosionChinas Government is Deeply IndebtedChinas Empty War ChestCapital Flight is PossibleThe Red MachineAs If All This Wasnt EnoughHow Now Brown (Red) Cow?