- G.Bin Zhao: Asian Infrastructure Investment Bank faces many hurdles. May 1, 2015
On May 1, CEP executive editor G. Bin Zhao's article "Asian Infrastructure Investment Bank faces many hurdlest" was published on South China Morning Post. This article can be download for free.
At the recent Asian-African Summit held in Indonesia, Indonesian President Joko Widodo said that those who still insisted that only the World Bank, the International Monetary Fund and the Asian Development Bank can solve global economic problems were adhering to outdated ideas, and establishing a new international economic order open to the emerging economies was imperative.
Although he did not directly mention the Asian Infrastructure Investment Bank, his views are highly representative of those held in Asian countries.
Earlier, when Britain, Germany, France, Italy and other major developed economies applied to join as founding members, the significance of the bank was greatly enhanced, but also exaggerated. For example, former US Treasury secretary Lawrence Summers claimed that "I can think of no event since Bretton Woods comparable to the combination of China's effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it". More extreme, some people think it marks the economic and political decline of the US and the end of the American century.
Although the potential role of the infrastructure bank has been touted and highly praised, it is important to remain calm and think objectively as the institution is still in its infancy. Particularly worthy of attention is the fact that China has no experience in independently creating and leading any large international organisations and therefore there are likely to be many difficulties and challenges at the outset. Specifically, in terms of corporate governance, organisational structure, management teams, business models and the like, the slightest mistakes may lead the bank to become an "abandoned child". Undoubtedly, learning from the successful experiences of existing international development banks may be the way forward.
I serve as the China consultant for a successful regional development bank - the European Bank for Reconstruction and Development. This experience allows me a unique perspective to examine several strategic choices that will be required as the Asian Infrastructure Investment Bank is established.
First, the key for the bank to be competitive and successful lies in adhering to market-oriented operations and achieving a triple-A credit rating as soon as possible to keep the cost of financing low. This is likely to be a relatively difficult task in the short term. China's own sovereign credit rating is only AA-, while the bank is a new institution, with the majority of its shareholding countries relatively less economically developed.
On the one hand, the guarantees provided by the shareholders might be considered relatively weak, on the other, with most of the infrastructure investment targets located in economically underdeveloped areas, the projects themselves can be expected to have high risks and unstable returns.
For this reason, finding a way to deal with the existing rating standards may require a considerable amount of planning. For example, before the formal establishment of the bank, it would be wise to establish regular communication with the world's three major ratings agencies to actively solicit their views and develop a full understanding of their ratings requirements. In this regard, the experiences of shareholders from developed economies must be solicited to help facilitate the process.
Second, the choice of Beijing as the headquarters is not necessarily the best option. The severe air pollution, which has become a subject of growing concern in recent years, has made it a real challenge to entice multinational executives. In addition, if other issues are taken into account, such as the financial environment, the availability of international talent, the challenges of traffic, the rule of law, as well as other factors, Hong Kong may prove a better and more acceptable choice.
Furthermore, must the president of the institution be Chinese? According to multiparty sources, since the bank is to be established under Chinese leadership, then the top leader should also be Chinese. As a result, some people may ask, what does this imply about China-led international institutions and other agencies in the future? Must other international organisations promoted by China also select Chinese people as leaders?
In addition, in the English language, the word "Chinese" may refer to people on the Chinese mainland as well as those from Hong Kong, Macau, Taiwan and overseas Chinese residents. How do we define a "Chinese" leader?
This reminds me of a painting in a museum in Xian , which depicts foreigners as senior government officials during the Tang dynasty. If our ancestors could make foreigners senior officials in the domestic government more than 1,000 years ago, and if the vision of the "China Dream" is to restore the prosperity seen during the Tang dynasty, then do we also need to be more tolerant?
Finally, the establishment of the Asian Infrastructure Investment Bank is only the prelude to the regional development of China's "one belt, one road", and also marks the beginning of Beijing's intention to accelerate its deeper integration into the world economy. The initiative is of great significance to the global economy, which is still very weak. Perhaps China will benefit, but dozens of developing countries within the region and the world economy may prove to be the biggest winners.
So, for those people who speak highly of the Asian Infrastructure Investment Bank, should they consider more far-reaching issues, or is it more realistic to merely offer some constructive suggestions at this time?
- G.Bin Zhao: China's property market has reached a turning point. February 23, 2015
On February 23, CEP executive editor G. Bin Zhao's article "China's property market has reached a turning point" was published on South China Morning Post. This article can be download for free.
During the past year, Beijing has taken moderate measures to control the property bubble, as I expected. As a result, large developers have accelerated their international investments.
Today, some worry that as China's economic development continues to slow, the government may make more changes in the property sector to maintain growth. While last year's GDP figure of 7.4 per cent was way ahead of other economies, it was the lowest rate in 24 years, and many industries saw a slump in business.
In addition, European economies are still stuck in a quagmire, the US recovery is weak and the Ukraine crisis has potential to expand. Thus, you could say that China's domestic macroeconomic situation is fraught with internal and external troubles. The monthly economic indicators also show that China's growth is likely to continue on a downward trend.
Wang Shi , chairman of Vanke Group, the godfather of the Chinese real estate industry and for many years the country's biggest developer, said recently that although there is a domestic real estate bubble, whether it will burst depends for the moment on if more stimulus measures are implemented.
Shortly after Wang spoke, the People's Bank of China announced that the deposit reserve ratio would be cut by 0.5 percentage points from February 5, a move expected to release 700 billion yuan of liquidity into the banking system. This is the first time the central bank has dropped the deposit reserve ratio since May 2012, and the second recent measure designed to increase liquidity after the cut in interest rates by 0.25 percentage points last November. This year, more easing measures are likely as pressure from a slowing economy continues.
However, these moves are not enough to give the real estate industry any illusion, let alone expectations, that the government will introduce bailout policies. Wang's conclusion only told part of the story. The Chinese property market bubble will not burst in the short term because everyone knows that a collapse would be a huge disaster, more lethal to China and the global economy than the 2008 financial crisis in the United States.
Furthermore, the speed of development in the real estate industry is an economic issue, but a burst bubble is a political issue strong enough to affect China's social stability. For example, when the largest real estate company in Shenzhen, Kaisa Group, was recently on the verge of bankruptcy, the first reaction of many affected property owners was to go to the city government to protest. While the company's troubles continue to mount, can the Shenzhen municipal government really afford the social cost if the company goes bust, not to mention the potential country-wide range of disasters that may be triggered?
Wang's comment was also a warning that monetary policy stimulus will further inflate the housing bubble. This fear seems redundant, because the current control policies are mainly based on purchase and credit limitations designed to inhibit investment behaviour, rather than to temper demand for housing as a place to live. Although a partial easing will tend to stimulate investment, its impact will be limited.
Furthermore, a unified property registration system is expected to be implemented in some areas this year, which will lay the groundwork to not only combat the multiple property holdings of corrupt officials, but also implement future tax policies on investment property.
Gradual improvements to these policies will fundamentally curb the property bubble, and enable the market to return to normal supply and demand.
With sales dropping, and developers diversifying, it seems that China's property market has reached a turning point.
- G.Bin Zhao: China should welcome Catholic Church and other faith traditions. January 30, 2015
On January 30, CEP executive editor G. Bin Zhao's article "China should welcome Catholic Church and other faith traditions" was published on South China Morning Post. This article can be download for free.
Last week, as Pope Francis passed through Chinese airspace after his visit to the Philippines, he sent a telegram to Chinese President Xi Jinping , it was reported, to again express his willingness to visit China. This is an important indication that the Vatican is trying to improve relations with China. Perhaps more significantly, the news was widely reported by mainland media and not blocked, unlike a lot of other sensitive information.
Although China has made great progress, gradually reducing poverty and increasing prosperity as the economy grew to be ranked one of the largest in the world, in terms of gross domestic product, there is general agreement that the moral quality of the population is falling as fast as living standards are rising.
Examples abound: when an elderly person fell in a public place, no one dared help for fear of being blamed or blackmailed; car thieves strangled an infant they discovered in the vehicle they stole; food producers sold poisonous goods to obtain higher profits. Such tragic events, among many others, provide anecdotal evidence of the country's falling moral standards.
In recent years, as this descent has become more obvious and alarming, the issue has been a cause for much reflection and discussion in society. The main problems can be summarised as follows.
Serious long-term corruption has distorted the concepts of equity and justice in society, and eroded the integrity of business and personal relationships. The growing wealth disparity has led to social discrimination and class contradictions.
Feelings of "hatred against the rich" and "hatred against government officials" are common among ordinary people, feelings that have grown to the point where apathy and low levels of morality are the result.
Furthermore, moral education, unable to adapt to the rapid pace of social change in China, is lagging. For more than 2,000 years, including in more contemporary times, ideology and morality in China have mainly been influenced and dominated by the thoughts and teachings of Confucius, the Buddha and Lao Tzu.
Unfortunately, since 1949, the doctrine of Marxism-Leninism has taken up much of the ideological space. The reform and opening-up process, from its start in 1978 through to the time of Deng Xiaoping's southern tour speech in 1992, focused almost solely on economic development.
Current mainstream moral education is still locked in with the teachings of socialist ideology, ideas that are thin and weak, and incapable of improving people's moral qualities in the modern era of economic prosperity.
After over 2,000 years of heritage and development, the traditions of Confucianism, Buddhism and Taoism are deeply rooted in the blood of Chinese people. Yet, they are neglected today.
Although civil society has started to gradually bring attention to this issue in recent years, the government has not emphasised it enough, despite the fact that the promotion of these traditional and religious beliefs would not only have no negative effect on society but would probably be an effective complement to the nation's development.
Since such traditions have not been given due attention, how could the Catholic Church, which was only introduced in recent history, hope to have any influence?
It is precisely for this reason that Beijing needs to improve relations with the Vatican. The moral decline in China requires immediate and drastic action. The Chinese government should encourage and develop the traditional thinking of Confucianism, Buddhism and Taoism, while also welcoming Catholicism, Christianity and other religions.
It should improve its relationship with the Vatican and help liberate freedom of religious belief for Chinese people, an area where the government has repeatedly been criticised.
The new leadership, which has garnered the attention and applause of people around the world with its extraordinary fight against corruption, would find that opening the door to such initiatives would ease many social problems associated with China's ethical and moral decline.
If the top leadership can be more open-minded and find a way to embrace and respect - even propagate - Confucianism, Buddhism and Taoism, as well as welcome Western religions to China, the country's culture, values and social systems will develop and become more refined in just a few years.
It would therefore be a joyous and vital moment if President Xi were to shake hands with Pope Francis - in Beijing, the Vatican, or indeed anywhere in the world.
- G.Bin Zhao: Google must not give up on the Chinese market. January 7, 2015
On January 7, CEP executive editor G. Bin Zhao's article "Google must not give up on the Chinese market
" was published on South China Morning Post. This article can be download for free.
The blocking of Gmail in China has caused heartbreak and despair for hundreds of millions of Chinese users. I know this because I am one of them. I started to use Gmail at the invitation of a Spanish friend in 2004, having become familiar with Google, based on a recommendation from a professor in Canada, about two years earlier.
Such memories have become an indelible part of my life.
Today, it is extremely difficult if not impossible to access Gmail in China. In fact, in the past year, it has often been a very painful process to log in, or even to use Google. So, in the hope of changing things, I write an open letter to the CEO of Google, Larry Page:
Ni hao! This open letter comes from an ordinary Chinese Gmail user. It is hard for me to accept the reality that I cannot use Gmail in China any more. This problem can only be solved through sincere communication with the Chinese regulators, so Google has a decisive role to play.
Whether the communication could be effective largely depends on Google's attitude towards the Chinese market. I would like to bring the following points to your attention, with the hope that Google will not give up on the Chinese market.
First, although Google has been extremely successful, completely giving up on the Chinese market would be irresponsible to your shareholders. Being isolated from the world's second-largest economy, as well as 20 per cent of the global population, means that many future opportunities would be missed.
A recent news report in The Wall Street Journal might provide some perspective - the net profit of General Motors in China is expected to account for 58 per cent of the company's entire net profit in 2014. Think about what it would mean to your shareholders if Google could be as successful as GM in China. Perhaps the possibility of an increase in wealth is of little significance to you, but what will shareholders think?
Second, I am sure you know that although Google ranks first among all global internet companies according to market value, there are four Chinese companies among the top 10. Oh, wait, my mistake - the recent US$45 billion valuation of Xiaomi Technology now means that number could be five.
This huge market, which Google seems willing to abandon, is giving birth to some of the world's most dynamic internet companies.
In other words, you will not only miss a great opportunity, but you will also hand the opportunity to your competitors. What does this mean for Google?
Third, please use this opportunity, while Gmail is blocked, to re-examine your China market strategy, and seize this occasion to turn things around.
Although Google announced its retreat from China in early 2010, I would like to remind you that the new leadership, which came to power in China in early 2013, has launched the most ambitious reform programmes in more than 30 years, reforms which are intended to provide businesses, especially internet companies, with a more relaxed and friendly operating environment.
Fourth, for the future of Google, and for loyal users like me, please come to visit China at a convenient time. Public information seems to show that you have never been here, and if this is true, it is simply unbelievable.
This may also be one of the reasons for the poor relationship between Google and the regulatory authorities - it simply seems that you are not paying enough attention to the country which could be your second-largest market.
Best wishes, Bin
- Yang Tao attended the Macroeconomic Situation Forum organized by the NDRC, January 6, 2015
Dr. Yang Tao was invited to attend the Macroeconomic Situation Forum organized by the National Development and Reform Commission (NDRC) and chaired by Wang Yiming, the Deputy Secretary-General of the NDRC. Other participants included Zhu Baoliang, the director of the Economic Forecasting Department of the State Information Center, Hong Liang, chief economist at China International Capital Corporation, Professor Chen Qiqing from the Economics Department of the Central Party School, and a researcher from the Development Research Center of the State Council, Wu Qing.
- G.Bin Zhao: Saputo Should Eye M&A In China. December 30, 2014
On December 30, CEP executive editor G. Bin Zhao's article "Saputo Should Eye M&A In China" was published on Seeking Alpha.
The time is right for Saputo to make a strategic move into China while there is a product supply shortage.
We have made Huishan Dairy the subject of a case study evaluation of a potential partner for Saputo.
Both parties can be expected to benefit for many years, collectively realizing approximately RMB 9 billion ($1.51 billion) from Huishan’s side alone.
While the dairy industry in the US and Canada is stagnant, the Asian dairy industry, especially in China, is expected to continue its strong growth as a result of rising incomes and increasing populations. In spite of the two recent scandals in China involving foreign brands, there is still strong demand for foreign names on the supermarket milk shelves, which further demonstrates the strength of the market.
The time is right for Saputo (OTCPK:SAPIF) to make a strategic move into China while there is a product supply shortage and a surplus of government subsidies and programs aimed at expanding milk production. Navigating the complexity of entering the milk industry in China will require resources and knowledge that can best be obtained through a partnership in the country.
To put our research into practice, we have taken Huishan Dairy Holdings Co. (CHDUF) (HDHC or Huishan, a public company listed on the Hong Kong Stock Exchange; HKG: 6863) as the subject of a case study evaluation of a potential partner for Saputo. If a deal can be negotiated with the proper valuation, oversight, and agreement execution, both parties can be expected to benefit for many years, collectively realizing approximately RMB 9 billion ($1.51 billion) from Huishan's side alone (our valuation of RMB 28.61 billion vs. Huishan's market cap of RMB 19.59 billion).
For the rest, please visit, http://seekingalpha.com/article/2778315-saputo-should-eye-m-and-a-in-china
- G.Bin Zhao: China is not quite ready to rewire global finance. December 29, 2014
On December 29, CEP executive editor G. Bin Zhao's article "China is not quite ready to rewire global finance" was published on South China Morning Post. This article can be download for free.
A recent Financial Times commentary titled "China: Turning Away From the Dollar" has led to many heated discussions. It is interesting that the Chinese edition of the paper translated the title as "China Will Rewire Global Finance", based on the main theme of the article. Oh, really? Although many indications show that China seeks to influence, or at least modify, the world financial order - as this is seen as an important way to maximise national interests - it is definitely premature to conclude that China intends or has the ability to reshape the current global financial system.
In the writers' estimation, Shanghai will one day be the centre of the world and the renminbi the currency of choice. For the people of China, who are in a transition from high-speed growth to a relatively slower rate of economic development, these words are very encouraging. Leaving aside whether or not it is realistic, the key question is how long we need to wait for this future. Even the blueprint of the "Chinese Dream", as depicted by President Xi Jinping , does not seem to include such beautiful scenery.
Does China really have the ability to reshape the current global finance?
First, can China reduce its massive holdings of US Treasury bonds? The concern is that such a move may affect US debt financing and global interest rates, thus increasing corporate financing costs and further curbing economic growth in the West. But this worry is alarmist. Although there has been no recent increase in Chinese holdings of US Treasury bonds, there is only a slim possibility that China can reduce its huge holdings in the future.
The truth is that US Treasury bonds actually accounted for only about one-third of China's US$4 trillion foreign exchange reserves (about US$1.25 trillion) at the end of October. Although US debt has had poor performance in terms of preservation and appreciation in recent years, it is difficult to find a safer product with stronger liquidity for an investment of this size within the global market. Note that Japan, a much more developed country than China with a far more advanced financial sector, also holds US$1.2 trillion of US debt.
Second, is China's current financial strategy sufficient to have an impact on the global system? On the one hand, outward direct investment from Chinese companies is expected to reach US$120 billion by the end of this year, while the domestic market continues its integration with the global economy. On the other hand, it has become apparent that China's growing financial needs cannot be satisfied through existing institutions such as the World Bank, the International Monetary Fund, the Asian Development Bank and so on.
This explains the need for other options, such as the creation of other financial entities such as the BRICS development bank, the Asian Infrastructure Investment Bank and the Silk Road Fund.
China's investment in these initiatives is estimated to be US$100 billion to US$200 billion, but the initiatives' ability to smoothly serve and promote the foreign expansion of China's economy is still unknown.
By contrast, the World Bank, which started its operation nearly 70 years ago, had a total value of US$52.6 billion in loans, grants and equity investments last year; how long will it take for the development banks established under China's lead to be so extensively influential? How long will it take for the BRICS development bank and the Asian Infrastructure Investment Bank to reach the World Bank's AAA rating level, which enables it to finance at lower costs, making its long-term development initiatives so competitive?
Third, when will the renminbi actually compete with the US dollar? Some believe the process of internationalising the renminbi is going faster than many people expected, because in October, more than 22 per cent of China's trade was settled in renminbi, which has become the seventh largest common currency of payment. But clearly, this ranking does not correlate with the country having the world's second-largest economy.
The internationalisation of the renminbi is currently lagging behind Chinese overseas investment and economic globalisation. As evidence, the Chinese government, which is often good at developing grand plans, still does not have a timetable for one of the basic steps in the internationalisation process - free conversion of the renminbi. If it will happen in 2020, as some unofficial sources say, then now is not the time to worry about when the renminbi will compete with the dollar.
Finally, China must always keep a clear understanding that the current US dollar and US-centric world financial system is closely related to the core economic interests of the United States, and avoiding large confrontations with the US is one of the preconditions for China to continue to develop its economy.
By annexing Crimea and getting militarily involved in Ukraine, Russia incurred economic sanctions from Western countries, which led to a drop in oil revenue, an almost complete collapse of the rouble, and enormous economic difficulties. This is not just a living lesson, but also a warning for China.
The reality is, although China is the world's second-largest economy, the "quality" of its economy still does not match those of the US, Japan and Germany. China will still be at the low end of the international industrial chain in many aspects for a long time. The Apple-Foxconn comparison is a typical example: on one side are hundreds of thousands of skilled Chinese workers who frequently work overtime to earn an annual salary of only a few thousand dollars, while on the other side is one of the world's most profitable and influential companies and served by a much smaller number of the most talented people from all over the world. How, on such a fragile and rather backward basis, can China rewire the global finance?
- Yang Tao participated in a forum sponsored by the NDRC, December 27, 2014
Dr. Yang Tao was invited to participate in the 2014 China Urbanization Investment Forum hosted by the NDRC at the Beijing Conference Center, where he delivered a keynote speech entitled The New Trend of Financial Reform and Investment and Financing in the Process of Urbanization.
- G.Bin Zhao: Creating A Trainmaker Monopoly Is In Conflict With China's Reform Ambition. December 22, 2014
On December 22, CEP executive editor G. Bin Zhao's article "Creating A Trainmaker Monopoly Is In Conflict With China's Reform Ambition" was published on Seeking Alpha & FT Chinese.
The integration of the two corporations would add another Chinese central enterprise member to the list of the world’s top 500 in 2015.
What is more important, artificially creating a monopoly in the domestic market or adding a member to the Fortune 500?
Private Corporations such as Huawei, Lenovo, Alibaba, all rose from fierce competition in the domestic market, which helped them develop into global leaders in their industries.
Keeping market competition mechanisms in place will be critical for accelerating the development of market economy in China.
It has been reported that the government-led merger proposal between China's two top train manufacturers, CSR (HKG:1766) Corporation (China South Locomotive & Rolling Stock Corporation Limited) and China CNR (HKG:6199) Corporation (China CNR Corporation Limited) has been submitted to the State Council, and will be approved within a few weeks if all goes well. In this round of reform, the government has constantly emphasized that "the market should play a decisive role in the allocation of resources," so there was some questions whether the administrative intervention in the merger proposal was contrary to that stated goal.
Can it be argued that the post-merger monopoly in the train manufacturing market, along with the government's active intervention, runs counter to the true intention of deepening reform? Are there any deeper considerations behind this? If the plan is approved by the State Council, how can they avoid leaving the outside world with the impression that they are inconsistent in their words and deeds?
For the rest, please see, http://seekingalpha.com/article/2767035-creating-a-trainmaker-monopoly-is-in-conflict-with-chinas-reform-ambition
Read the Chinese version "南北车合并考验北京改革意志" at FT Chinese, http://www.ftchinese.com/story/001059680
- Yang Tao participated in the 2015 China Circum-Bohai-Sea Investment and Financing Forum, December 21, 2014
Dr. Yang Tao was invited to attend the 2015 China Circum-Bohai-Sea Investment and Financing Forum jointly organized by the China Investment Association and the Small and Medium-sized Enterprises Association. He made a keynote speech entitled Coordination of Investment and Financing in Circum-Bohai-Sea Under the New Trend of Financial Reform.
- G. Bin Zhao was invited to speak at China Corporate Debt Forum 2014. November 1, 2014
On November 1, Co-founder and Managing Director of our firm and Executive Editor of China's Economy &Policy, Mr. G. Bin Zhao was invited by PEI Media Group Ltd. to host two panels at China Corporate Debt Forum 2014 on Thursday, 6 Nov, 2014 in Hong Kong. The related files can be downloaded for free 1 & 2.
His counterparts include,
Louis Kuijs, Chief Economist, Greater China, The Royal Bank of Scotland;
Shaun Roache, Resident Representative in Hong Kong SAR, International Monetary Fund;
Yifan Hu, Chief Economist and Head of Research, Haitong International Securities Group;
Yan Jiang, Chief Investment Officer, Manager in Fixed Income, Chang’an International Trust;
Dilip Parameswaran, Founder and Chief Executive, Asia Investment Advisors;
The keynote speaker will be Mr. Liu Mingkang, BCT Distinguished Research Fellow, Institute of Global Economics and Finance, Chinese University of Hong Kong and former chairman, China Banking Regulatory Commission (CBRC).
- Yang Tao participated in the Assessment Meeting held at the China International Economic and Exchange Center, October 23, 2014
Dr. Yang Tao was invited to the China International Economic and Exchange Center to attend the project assessment meeting for the Pilot Program of the China Development Bank on Innovative Financial Strategies and Financing Strategies and A Monographic Study on Stabilizing the Source of Capital of CDB. Other participants were the vice chairman of the China International Economic and Exchange Center, Zheng Xinli, the executive vice president of the Research Institute of China Development Bank, Guo Lian, the director of the Central Policy Research Office, Bai Jinfu, and many others.
- G.Bin Zhao: The Change Of PBOC Governor A Signal Of Financial Reform In China? October 7, 2014
On October 7, CEP executive editor G. Bin Zhao's article "The Change Of PBOC Governor A Signal Of Financial Reform In China?" was published on Seeking Alpha.
If the central bank is very likely to replace its leadership, then what influence will the move have on China’s economic policies, in particular on the financial and capital markets?
China’s national governance is different from Western countries and “leadership” is often the decisive factor.
Zhou Xiaochuan has been working as the central bank governor for nearly 12 years. Under the background of deepening financial reform, the replacement of the central bank leader is significant.
The substitution of the central bank governor will bring about multi-level changes, which are expected to affect a number of policies.
It was reported by the Wall Street Journal that China's central bank governor Zhou Xiaochuan will soon be retiring, and the main candidate to take his place is the incumbent governor of Shandong Province, former China Securities Regulatory Commission (CSRC) chairman Guo Shuqing. As the news spread, Chinese investors cheered and some even crowed: "No wonder the stock market has recently rallied!" The question then arises: What is the influence of a change in the central bank's governor?
First, we have to ask about the authenticity of the news. Currently, the replacement of China's ministerial officials does not follow a formal, official, written form of clear process. In most cases these changes are led by customs which have been formed within the party. The new top leaders of the central government follow and abide by these customs, but they often also make flexible adjustments. For example, about two years ago, when Zhou Xiaochuan was approaching the retirement age of 65 for ministerial officials, he continued to chair the central bank after being elected Vice Chairman of the national CPPCC, and thus being listed among the national leaders whose retirement age boundary is 70.
In addition, even if Zhou Xiaochuan does not continue in his role as the central bank governor, he is likely to continue to exert a significant amount of influence in the financial area as the Vice Chairman of the national CPPCC. For example, another Vice Chairman of the CPPCC, former chief executive of China Development Bank, Chen Yuan, is responsible for preparing for the creation of the BRICS Development Bank, and the China-led and initiated Asian Infrastructure Investment Bank also needs a strong leader, so this could be an excellent place for Zhou Xiaochuan to continue to keep his hands on the financial levers.
Since the current appointment program for key officials is not transparent, this is not the first time that similar messages have been disclosed by the foreign media earlier than their Chinese counterparts.
If the central bank is very likely to replace its leadership, then what influence will the move have on China's economic policies, and in particular on the financial and capital markets?
Dr. Nicholas Lardy, a Chinese issue expert, said that the governor substitution will not cause any major changes in monetary policy, implying that this move is insignificant. I see it as the Chinese central government sending a powerful signal of financial reform to the outside world. The reasons are as follows:
First, China's national governance is different from Western countries and "leadership" is often the decisive factor. Although the independence of the central bank has often been questioned, the governor plays a pivotal role.
Second, Zhou Xiaochuan has been working as the central bank governor for nearly 12 years. Under the background of deepening financial reform, the replacement of the central bank leader is significant. Many people say Guo Shuqing is more ambitious in terms of reform based on the fact that in the year and a half he served as the Chairman of the CSRC by the end of 2011, he vigorously carried out reforms and intensively introduced new policies, which were widely praised by investors.
Third, the substitution of the central bank governor will bring about multi-level changes, which are expected to affect a number of policies. Specifically, the primary responsibility of the People's Bank of China is similar to the Federal Reserve, except for the responsibility for "elaboration of financial sector reform and the development of strategic planning." Then how did it perform in this respect over the past decade?
Next, monetary policy can be said to be the most controversial area, mainly in the over-excessive issuance of currency, high levels of inflation, and the long-term negative interest rate policy. In particular, negative interest rates, which mean the interest rates on bank deposits are below the rate of inflation, lead to a decrease in the size of people's bank deposits over the years. This is equal to providing a subsidy to the state-owned capital users with public wealth, thus it would not be an overstatement to say the policy is "stealing from the poor to benefit the rich."
Also, in terms of the regulation of financial institutions, the achievements are that large banks do not now have the massive bad debt-loads that they suffered before the joint-stock reform 10 years ago, and profits are now very lucrative. This means that the performance of the central bank seems quite good, but it has also caused an erosion of the wealth of the entire society by financial institutions. Large state-owned banks make profits in the hundreds of billions, which put many companies to shame. In fact, bank profits are not made by improving operational efficiency, but rather by relying on central bank policy support, which is extremely unfair for the real economy, and also distorts the configuration of production and social resources.
Undoubtedly, thanks to some of the wise policies introduced by the central bank, China's financial condition is more stable than many other countries. Meanwhile, among a number of policies which seriously favor bank-based financial institutions, the first duty of the central bank, the "elaboration of financial sector reform and the development of strategic planning," as mentioned above, means it is difficult to be fair and just. One can only imagine the results of financial reform conducted on this basis. The reforms would be utterly inadequate.
Furthermore, the central bank's monetary policy has been at the forefront in influencing China's capital markets. China has had the world's most impressive economic growth, but it also has one of the least impressive stock markets, which completely fails to follow the basic economic laws and offers a very low rate of return. These are the reasons why investors cheered when they heard about the change in the central bank governor.
It is well known that the People's Bank of China must report to the State Council on major policies. In most cases it is the executor rather than the maker of the central policies, so it does not have too much power, and many of the pros and cons of policies cannot be assessed in a short period of time. Therefore, I have no intention of evaluating the merits and demerits of Zhou Xiaochuan because his tenure carries a heavy historical responsibility.
Finally, the Chinese people have high emotional expectations for deepening reforms, as they know that only by reforming can opportunities be created and society gradually move towards fairness and justice, therefore the replacement of the central bank governor generates a lot of attention. Financial reform can be regarded as the core of economic reforms. If in the future the new governor can give up the interests of the banking sector, carry out radical reforms, and make corrections and adjustments to many of the existing policies, the substitution will have a far-reaching effect on the country's overall economic development in the future.
- G.Bin Zhao: Ukraine crisis a reminder to West that biggest threat is from Russia, not China. September 17, 2014
On September 17, CEP executive editor G. Bin Zhao's article "Ukraine crisis a reminder to West that biggest threat is from Russia, not China" was published on South China Morning Post. This article can be download for free.
American political risk expert Ian Bremmer recently wrote that the US and Europe had been evasive on the Russian aggression in Ukraine. Although Nato recently held a summit to address the emergency, support for Ukraine was far too little to counter the Russian action, leaving many questions unanswered.
For example, how will the military conflict develop? What are Russia's goals? How should China respond?
Relations between Ukraine and Russia go back thousands of years. Ukraine became independent from the former Soviet Union only in 1991, and historically its eastern areas have been more intimate with Russia. Its national destiny has always been under Russia's shadow.
The current military conflict is more complex than a fight between pro-Russian and pro-European factions. Following the annexation of Crimea by Russia, several of Ukraine's eastern regions have indicated their intention to follow suit.
Militarily, with Russia's intervention, it is not an equal fight. But direct military intervention by Nato is unlikely. The worst outcome, and maybe the most probable one, is that the regions of Donetsk and Luhansk will join Russia. Meanwhile, Ukraine continues its pro-European policies, possibly even joining Nato and the euro zone down the line.
Russia undoubtedly considers Ukraine's pro-European policies a "betrayal of brothers". We should also remember that Putin's dream is to revive the Russian bear. The EU and Nato's eastward expansion in recent years has eroded Russia's influence in the region and Moscow cannot be expected to abandon its core areas of traditional domination.
If Russia manages to absorb several eastern areas of Ukraine into its territory, Putin may see this as a satisfactory trade-off. If the situation worsens, Nato boots on the ground could lead to an expansion of the war, which Nato fears most.
Europe and the US are content to see Ukraine seek refuge in the EU, as this will further dilute Russia's influence. But a war over the territory would benefit no one. Further, many European nations have balked at economic sanctions, fearful of the effect they would have on their fragile economies.
So how does all this affect China? Some years ago, the idea of a "G2" was proposed , in which China and the US, as the two major economic powers, would work together to deal with pressing global issues.
It was not universally popular, but some Chinese people see it as a sign that the West attaches great importance to China's rise. This may be a flattering assessment; in fact, the advantages of such a pact would far outweigh the disadvantages for China, given that it still has a way to go to match the US in global strength and reach.
In addition, the US "pivot to Asia" is based on the premise that China is now its biggest adversary. The Ukraine crisis could be seen as Russia's counter-response to the idea of a G2 and the US pivot. The crisis clearly indicates that Russia is still the West's biggest adversary, not China.
It is also a reminder of the triangular nature of the current international order: the West (plus Japan); Russia; and China. Western nations remain the most powerful. But although Russia has the smallest economy of the three, it is also much less dependent on Western economies than China, and is well known for its hegemony.
Finally, the Ukraine crisis could make Western politicians reassess the global situation, and decide to upgrade Nato's importance while reducing the intensity of the US pivot to Asia.
A triangular framework will ultimately have a positive influence on world stability; a triangle is, after all, the most stable geometric shape. In this case, Lao Tzu's saying that "misfortune may be a blessing in disguise" would be very apt.
- Yang Tao attended a seminar at the Stanford Center at Peking University, August 25, 2014
Dr. Yang Tao was invited to participate in a seminar on China's Urbanization and Its Impact on Domestic Consumption organized by the Stanford Centre at Peking University, and he made a keynote speech entitled Innovation in Electronic Payments and Its Function in Stimulating Consumption.
- Yang Tao attended the 2014 Seminar on the Development of China’s Credit Card Industry, August 15, 2014
Dr. Yang Tao was invited to participate in the 2014 Seminar on the Development of China’s Credit Card Industry and he made a speech. The standing vice president of the China Banking Association, Yang Zaiping, the executive vice president of China UnionPay, Chai Hongfeng, and the heads from the credit card centers of various banks attended the meeting which led to heated discussion on the innovation and development of the banking industry under the impact of Internet banking.
- G.Bin Zhao: A Modern Management Theory Perspective Of The Chinese Dream. July 24, 2014
On Jul. 24, CEP executive editor G. Bin Zhao's article "A Modern Management Theory Perspective Of The Chinese Dream" was published on Seeking Alpha. This article can be viewed here. The following is the summary of this article.
The Chinese Dream has now become the common goal of the country, and its basic goal is to enhance the happiness of the people through national prosperity and renewal.
From a more pragmatic point of view, the Chinese Dream actually embodies the dreams of all the descendants throughout many generations – the dream of becoming a powerful nation.
Although the Chinese economy is now the second-largest in the world, the country still has a long way to go to become a true world power.
In November 2012, Xi Jinping, who had just assumed the leadership of the ruling Chinese Communist Party, proposed the vision of the "Chinese Dream," which was mainly defined as achieving the great rejuvenation of the Chinese nation. Introduced as the great modern dream for Chinese citizens, its basic goal is to enhance the happiness of the people through national prosperity and renewal. Since formally becoming president in early 2013, Xi has continued to actively promote this ideal, and as a result, the Chinese government, the official media, and numerous academic agencies have discussed the topic from different angles and on a number of levels, making it clear that striving to achieve this dream has now become the common goal of the country.
- G.Bin Zhao: Chinese dream will become reality only if China learns to manage change. July 14, 2014
On July 14, CEP executive editor G. Bin Zhao's article "Chinese dream will become reality only if China learns to manage change" was published on South China Morning Post. This article can be download for free.
There has been much analysis already of President Xi Jinping's vision of the "Chinese dream". One thing has become clear: striving to achieve the dream is a common goal.
From the perspective of modern management theory, the process of achieving the dream falls under the category of change management. Indentifying the stakeholders and relevant environments will provide a better viewpoint to foresee the coming changes.
So who are the core stakeholders? The Politburo has given us the answer by introducing the "mass line" campaign, which proposes "doing everything for the masses, relying on the masses, from the masses, to the masses".
We must also assess the external stakeholders.
On the political front, US-China relations will continue to experience friction, given that many Americas see China's rise as a threat to their nation's world leadership. In addition, there is Japan's alliance with the US, wedging China in. Therefore, it's clear that the international political environment for creating the Chinese dream is full of turbulence.
The economic environment is also in a state of turmoil. Though China's economy may be facing difficulties, its growth and size mean it has been dominant in recent years. This will provide a solid foundation for the Chinese dream.
The social environment involves a complex range of factors, such as population growth, age distribution, health status and class structure, as well as lifestyle and social values. Globally, there is a significant gap in this sphere between developed and developing countries, and China is still very backward in many ways. Increasing the quality of China's social environment is particularly important, and will be a lengthy process.
The technological environment is not conducive to achieving the dream. Problems with internet security, for example, have sparked heated debate, following the revelations by Edward Snowden. American technology has long been used in industries in China, and this dependence makes the country very vulnerable.
The environment is an area of serious concern, globally as well as in China, where many cities are choking from smog, and soil and water pollution is a problem. Many see the Chinese dream as simply being able to enjoy blue skies, clean air and water, and safe food.
From a strategic viewpoint, China's decision to propose that the state and all people should have a common dream or goal is laudable. Without a goal, we can achieve nothing. The realisation of the Chinese dream will lead to an improvement in people's lives; thus, it is a far-sighted strategy that unifies all.
In terms of leadership, the West often criticises China for its lack of democracy and for being a dictatorship, but this does not mean that outstanding officials do not get promoted to core leadership positions.
Human resources are today about knowledge and skills. China's college entrance examination system has long been of concern and recent reforms that focus on making it more scientific and rational are inspiring initiatives.
At the same time, some employees of state-owned enterprises have been accused of "inheriting" jobs, thus diminishing the concept of social fairness. Making the Chinese dream come true depends on promoting world-class people to critical positions and implementing a fair and equitable employment system. This will certainly require more reforms and improvements.
Chinese civilisation has a long and colourful history and the impact of a country's culture is an important soft power. The realisation of the Chinese dream will also allow China's culture to gradually spread around the world.
In terms of technology, there is a wide gap between China and developed countries, mainly reflected in the technological capabilities of a large number of companies, as well as the strength of research institutions and universities. Closing the gap is one of the difficult tasks in achieving the dream. Nevertheless, the speed of China's development has been amazing; just take the aerospace industry as an example.
We should remember it took the US more than seven decades to move from a position of economic dominance to become the international powerhouse it is today, if we regard the end of the second world war, in 1945, as the landmark (the US became the world's largest economy in the 1870s). In terms of gross domestic product, America's economic aggregate in 2013 was twice that of China.
When using the US as the benchmark, the achievement of the Chinese dream will certainly be a long and difficult journey. Yet, as Lao Tzu said, "A journey of a thousand miles begins with a single step". At least for now, there is a common dream for all Chinese.
- G.Bin Zhao: Chinese Internet giants demonstrate growing strength of nation . June 3, 2014
On June 3, CEP executive editor G. Bin Zhao's article "Chinese Internet giants demonstrate growing strength of nation " was published on Global Times.
Recently China's largest online direct sales company Jingdong, or jd.com, successfully launched its initial public offering and raised $1.8 billion on the Nasdaq. Very soon, its domestic rival, Alibaba, the largest e-commerce company in China, as well as in the world, will go public in the US. It is expected that the IPO will raise $20 billion, surpassing the total generated by Facebook to make it the No.1 among listed Internet stocks.
The fantastic figure has caused an uproar on Wall Street. The coverage in the English-language media is overwhelming. And some people have gone so far as to express, with astonishment, "When has a Chinese company ever become the world's No.1?"
It is true that of all the industries around the globe, it is rare for Chinese companies to become industry leaders.
Reports show that Alibaba's websites had a turnover of $248 billion in 2013, more than the sum of both eBay and Amazon. Leaving other data aside, this alone is enough to declare its "Big Brother" position in the field of e-commerce.
In the past I have stressed that for China to really express her power, it is not necessary that the GDP ranks first, nor that there are flowers and skyscrapers everywhere in the cities, but instead that the country has a large number of invincible multinational companies across the globe.
Today, the comprehensive ability of a native company is a symbol of the international strength of a country, and it serves as an indication of the resilience of a nation's backbone.
With Alibaba landing in US capital markets and rewriting the financial records for international Internet companies, it is announcing to the world that if all companies begin from the same starting line, Chinese companies can also come to the fore.
When Chinese companies compete against the giant US companies such as Coca-Cola, Boeing, General Electric, Procter & Gamble, Pfizer and Apple, the gap between Chinese enterprises and these giants will be evident both in global and their home markets. There are many deep-seated reasons for this phenomenon.
To begin with, most US companies have a long history; some even have a history of well over a century.
In other words, when China was still in the feudal era known as the Qing Dynasty (1644-1911), and its people were struggling just to meet the requirements for basic survival, many of these US companies were already in existence and thriving.
Second, the properties and management mechanisms of the largest State-owned Chinese enterprises are also primary factors which constrain development and growth.
State-owned enterprises, which are shielded by national policies or are reliant on their monopoly positions, are mostly large in scale but lack comprehensive strength.
Due to the fact that the international Internet industry has only recently been developed, it has been able to prosper in China at a time when the domestic economy has really been booming, the overall business environment has been improving, and venture capital funding has really emerged.
The most basic business elements, which are commonly found in US companies, have gradually been formed in China, enabling Chinese Internet companies and their US counterparts to basically stand together at the same starting line. And it should never be forgotten that US companies are generally more advanced in innovation and technology.
In addition, the development process for Chinese e-commerce providers and Internet companies, represented by Alibaba, can be traced back to a process in which foreign rivals initially staked out the leading positions, mainly by virtue of their more advanced technology, but then eventually went into a period of decline.
As time elapses, history has shown that Chinese companies can grow and gradually penetrate the market, pushing the foreign companies aside. For example, Google has almost been completely squeezed out of China. As another example, Yahoo, one of the primary shareholders in Alibaba, now falls far behind the Chinese company.
In response to the phenomenon that foreign Internet companies are waning and domestic ones have been booming in recent years, the US media and most of these companies instead attribute their failures to the strict supervision and interference by the Chinese government.
If this is true, though, why can other US-funded enterprises, especially those mentioned above in other industries, manage to find success in China?
According to a study conducted by the World Bank, Chinese purchasing power will soon overtake that of the US, making it the world's largest economy, and it has been reported that this event will occur 10 years earlier than many expected.
My view is that despite the fact that an elephant is huge, it is most often the lion or tiger that has the final say in the wild. The success of enterprises like Alibaba can be likened to the concept of genetic variation - only when there are a wide variety of successful companies can China's voice be compared to the true roar of the dragon.
- G.Bin Zhao: Direct conversion between yuan and euro is on the way. May 14, 2014
On May 14, CEP executive editor G. Bin Zhao's article "Direct conversion between yuan and euro is on the way" was published on South China Morning Post. This article can be download for free.
Direct conversion between the renminbi and the yen, which began about two years ago, has been an important milestone in the process of internationalising the Chinese currency.
Although there has been a lot of progress towards the free conversion of the renminbi over the past two years, the outcome has yet to meet market expectations. Direct exchange with major Western currencies is a necessary component of this process and there is no doubt that the euro will be another important option.
China has recently overtaken the US to rank first in global trade and many countries maintaining large trading relationships with China want direct currency exchange with the renminbi, to reduce foreign exchange costs and boost bilateral trade.
Yves Mersch, a member of the executive board of the European Central Bank, said recently that the direct conversion of the euro with the renminbi would be conducive to growth in both economies. Although neither side mentioned the possibility of direct convertibility when President Xi Jinping visited Europe in March, expanding financial cooperation was undoubtedly a key reason for his visit.
As evidence, the Chinese government granted France a quota of 80 billion yuan (HK$100 billion) for its renminbi Qualified Foreign Institutional Investor programme, and the central banks of China and Germany signed a memorandum of understanding on establishing a renminbi clearing and settlement mechanism in Frankfurt.
In fact, once this business begins in Frankfurt, it could mean direct exchange between the euro and the renminbi would start in Germany. However, this would not necessarily signal the official start of direct convertibility in the entire euro zone.
Direct conversion between the renminbi and the euro is likely to be launched after consultations between the Chinese government and each sovereign European state, rather than being decided by the European Central Bank and the People's Bank of China.
China and the EU are major trading partners, with Germany being the largest euro trading partner. Thus, it is entirely reasonable to expect direct exchange to begin in Germany, to be gradually expanded to other countries.
Among these other countries, Britain has historically managed to reap significant profits as a US dollar offshore centre, so it is expected that direct conversion of sterling and the renminbi may happen soon. Within the EU, Britain has made the strongest effort for offshore renminbi business. These efforts have yielded fruitful results, as demonstrated by the 200 billion yuan currency swap agreement signed in mid-June last year.
Direct conversion of the renminbi and the euro would benefit both sides. In addition to the trade benefits, it would more importantly accelerate the free conversion process for the renminbi while enhancing the international status of the euro.
In the long term, it would help create an international financial and monetary system consisting of three pillars - the US dollar, the euro and the renminbi - thereby contributing to the formation of a multipolar world order.
Two years ago, China and Japan worked together to pioneer direct exchange of the renminbi and the yen, leading to deeper economic and financial integration, which reflected the far-sighted strategic vision of the two leaderships.
Unfortunately, due to disputes over the sovereignty of islands in the East China Sea, historical troubles, or perhaps because of a wedge driven in by external forces, the two sides have become isolated from each other politically.
There are no potential geopolitical conflicts between the EU and China, so the direct exchange of currencies can be expected to enhance deeper all-round economic and financial cooperation, including prompting Chinese enterprises to increase investment in the EU, facilitating the purchase of more euro-zone government bonds by China, and even enabling China to hold more euros in its huge foreign exchange reserves.
Finally, China still does not have a fully developed goal or schedule for implementing free convertibility and internationalisation of the renminbi. The Communist Party's third plenum guide for reform talked only of accelerating market-oriented financial reform and gradually implementing capital account convertibility. Therefore, it is difficult to judge the worldwide role the renminbi will play in future.
Some people are concerned that the renminbi will challenge the global dominance of the US dollar in future. That won't happen before direct exchange with the euro is comprehensively established. As a result, the free convertibility of the Chinese currency is at best only halfway there, and remains a lengthy process. It's too early to jump to conclusions.
- G.Bin Zhao: A Chinese perspective on Pfizer’s AstraZeneca bid. May 4, 2014 (Chinese/中文)
- G.Bin Zhao: Will Pfizer-AstraZeneca deal go through? May 1, 2014 (Chinese/中文)
- Yang Tao was awarded National May Day Labor Medal, April 29, 2014
The May Day Labor Medal is an honorable award given by the All-China Federation of Trade Unions to the individuals who made outstanding contributions to national development. The honorable title is awarded once every five years and is one of the highest awards for members of the Chinese working class.
- G.Bin Zhao: China's Macro-Economic Landscape, Prodygia Video Interview. April 24, 2014
- G. Bin Zhao & David Hale: China reform dividend emerges while US & Europe recover. April 18, 2014 (Chinese/中文)
- G. Bin Zhao: How a small Chinese mobile phone maker leaped to top three in France? March 10, 2014 (Chinese/中文)
- G.Bin Zhao: China's Economy In A Jiawu Year: When It Rains, It Pours. March 7, 2014
On Mar. 7, CEP executive editor G. Bin Zhao's article "China's Economy In A Jiawu Year: When It Rains, It Pours" was published on Seeking Alpha. This article can be viewed here. The following is the summary of this article.
For the more pessimistic, China may face internal and external “troubles” in 2014 which could include a slowdown in economic growth.
Also an issue: Mass defaults and/or exposure to the risks inherent in the shadow banking industry,
And more seriously, there is the possibility that continued provocations may force China to fight a war against Japan.
For the more pessimistic, China may face internal and external "troubles" in 2014 which could include any or all of the following: a slow-down in economic growth, mass defaults and or exposure to the risks inherent in the shadow banking industry, the spread of real estate market problems such as those that occurred in Wenzhou and Ordos, struggles by local governments and state-owned enterprises in promoting investment in fixed assets, and more seriously, the possibility that continued provocations may force China to fight a war against Japan at the same time as a small number of domestic interest groups take the opportunity to launch an attack on the current central leadership. As the saying goes, when it rains it pours!
- G.Bin Zhao: Beijing takes gentle approach to deflating real estate bubble. February 11, 2014
On Feb. 11, CEP executive editor G. Bin Zhao's article "Beijing takes gentle approach to deflating real estate bubble" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao says the Chinese government will adopt a quiet approach to deflating the dangerous real estate bubble, given the huge impact a crash could have on the economy.
Despite increasingly strict regulations, investment in China's real estate industry, as well as sales totals and prices, still achieved high levels of growth last year. During the Communist Party's third plenum, the new leadership announced reform measures in a number of areas, but many people were left puzzled by the fact that the real estate sector - the source of the most vocal public complaints - didn't appear to fall within the scope of these new policies.
The real estate bubble continued to grow last year, furthering the unequal distribution of wealth and increasing social tension, and leading many to question the determination of the government to build a more just and equitable society.
The latest official figures show that, last year, national investment in real estate development hit 8.6 trillion yuan (HK$11 trillion), an increase of 19.8 per cent over 2012, accounting for about 20 per cent of investment in fixed assets.
It is well known that the real estate bubble is harmful to the Chinese economy because it attracts and holds capital, talent and other resources that could be better used to develop other important industries, adding to the difficulties of transforming the nation's economy. In some ways, it's like an unexploded bomb; handled carelessly, it could cause economic devastation or, at the very least, lead to an incident similar to the US subprime mortgage crisis.
Many people are concerned that the new leadership has introduced very few important regulatory measures to deal with this impending crisis. The third plenum said little on the regulation of real estate, save for the need "to speed up real estate tax legislation and introduce timely reforms".
Previous leaders tried hard to regulate rising real estate prices, without success. By contrast, the current leadership seems intent to downplay the importance of this issue. Li Keqiang has never publicly mentioned the real estate industry since he became premier, while President Xi Jinping only briefly discussed the core rules for real estate policy last October during a Politburo study. Still, some of the government's recent policies do provide clues about these core rules.
Overall, the government aims to build a market-based system for housing to meet multiple levels of demand, while ensuring the provision of basic housing. This is consistent with the main thrust of the third plenum, that "the market must play a decisive role in allocating resources". The objective is to ensure that everyone's basic housing needs are met.
In other words, the government will not directly intervene in the market, but it will provide basic housing for low-income groups through the development of public rental housing, low-rent housing, and the transformation of various shanty towns.
In addition, the government will work to establish a standardised and stable housing supply system. While increasing supply, it will be necessary to make adjustments as people's needs change. Meanwhile, the total supply of land for housing should be increased, with priority going to building affordable housing.
Clearly, real estate policy has undergone a fundamental change. However, many developers and investors believe leaders are not really talking about "regulation", and therefore mistakenly think policies are becoming looser.
I believe senior leaders realise the significant dangers of a property bubble, and this will be reflected in real estate policies for this year.
Leaders will seek to avoid causing a massive shock to the market with the implementation of any new policies, considering the impact property has on the overall economy. Last year, for example, income from real estate and related land sales and construction was 6.6 trillion yuan, accounting for 36.5 per cent of national public finances, also contributing more than 50 per cent of local government revenue. Therefore, new policy implementation will be gradual and modest. This has contributed to some of the misunderstanding among the public.
Second, once the overall objectives are formally determined, that is, to meet the basic needs of the public, investment behaviour in the market will be limited. The core reason for China's real estate bubble lies in the fact that the market has deviated from the basic demand and supply relationship and become an investment market. Thus, the most effective policy will be to let the market return to its fundamental state; this explains why Xi said regulating housing demand is important.
Also, one should not underestimate the power of the decision during the third plenum to accelerate the introduction of property tax legislation and other measures. Property taxes are implemented in many countries and have proved very effective. They not only inhibit investment behaviour, but also create a substantial income base for local governments. Pilot tax schemes have been running in Shanghai and Chongqing since 2011. Expanding the scope, and the level of tax, will have a profound impact on the market.
In addition, some analysts believe that the plan to create a nationwide unified real estate registration system may lead some people to sell their real estate holdings, particularly those obtained through unlawful activities.
Finally, while the three super-tall skyscrapers in Shanghai's Lujiazui financial district may dwarf those in New York, London or Hong Kong, we should remember the reality: China is still a developing nation no matter how many tall buildings it constructs. Real estate's sole purpose should be to meet the people's basic need for living and working; there are many other, more important issues that need our attention before we can move towards a higher level of civilisation.
- G. Bin Zhao: Is Microsoft’s new CEO qualified for the turnaround? February 5, 2014 (Chinese/中文)
- Yang Tao: Assessment of the Tianjin Binhai New Area Comprehensive Reform Pilot Area, December 5, 2013
Commissioned by the Department of Economic System Reform of the NDRC, Dr. Yang Tao organized and headed a research group on The Assessment of the Tianjin Binhai New Area Comprehensive Reform Pilot Area. After in-depth research and data analysis, the group submitted an overall report and five individual experience reports on the assessment of the Tianjin Binhai New Area to the NDRC.
- G. Bin Zhao: Deepening Reform during Economic Transition: Outlook for the Third Plenary Session. November 7, 2013 (Chinese/中文)
- G.Bin Zhao: Can China's economic planners rise to the challenge? November 7, 2013
On Nov. 7, CEP executive editor G. Bin Zhao's article "Can China's economic planners rise to the challenge?" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao surveys the obstacles to growth ahead of key Beijing meeting
Five of the Communist Party Central Committee's past seven third plenums have discussed macroeconomic policies relating to reform and opening up, and economic development.
Thus, it can be expected that Xi Jinping and Li Keqiang will continue along the same path. This time, the main theme will probably be the "adjustment and regulation" of policies. To predict the areas of focus, we need to look at the major obstacles to growth over the next five to 10 years.
First, the current economic system has seriously hampered sustainable development. Even after 35 years of refinement and improvement, the pace of change is still not well co-ordinated; in particular, a system that favours public ownership over private enterprise is totally inconsistent with the trend towards a market economy.
In addition, numerous complex and inefficient regulations interfere with the basic laws of the market. For example, the slow development of China's stock market has made it impossible for a large number of companies to list. Data released last month shows 754 companies were awaiting approval for an IPO; that could mean some 7.5 trillion yuan (HK$9.5 trillion) of capital requirements are not being met.
Restricting companies' financing activities will retard growth. Improper supervision is the main problem; too much government power and too many regulations only create the conditions for corruption.
Second, there is an urgent need to tackle the high levels of pollution; industrial and economic development based on high energy consumption and a deteriorating environment is unsustainable.
According to official statistics, since the beginning of the year, pollution has affected one quarter of China's total land area and about 600 million people. Air quality is now a serious threat to the health of millions of people and so the need to address environmental pollution is now actually greater than the need for more economic development.
Third, the income divide is growing, leading to increasingly acute social conflicts. Asset and resource allocation remains opaque, irregular and uneven; at the same time, there is a huge amount of hidden income which affects real income distribution.
Through their access to power, the privileged minority gains enormous wealth while the middle class and low-income people continue to suffer from the high costs of housing, health, education, pensions, and so on.
Fourth, the overall economic structure is irrational. Some core areas are inefficient, which impedes industrial upgrading and restructuring. As a result of monopolies and policy interventions, some key industries have excessive control over production materials and large amounts of capital, thereby limiting the ability of competing industries to develop.
Other obstacles, such as the ageing population, also restrict development. The demographic dividend that has been helping to drive economic development will gradually disappear; in fact, future labour shortages will become a bottleneck for growth.
Then there is China's overdependence on exports, the lack of domestic demand, regional development imbalances, and the central and local government fiscal and taxation disparities, to name but a few more hurdles.
Clearly, the only way to tackle these issues, and ensure China's sustainable development, is to deepen reforms.
- G.Bin Zhao: New Silk Road starts with Xian, October 30, 2013
On Oct. 30, CEP executive editor G. Bin Zhao's article "New Silk Road starts with Xian" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao says a Silk Road economic belt, with Xian at the centre, should be part of a long-term strategy to bring economic prosperity to China's underdeveloped western region
President Xi Jinping has again repeated his desire to create a Silk Road economic belt following a recent visit to Kazakhstan, where he proposed the idea as a way for European and Asian nations to promote closer economic ties.
In addition to its international strategic significance, the creation of the Silk Road belt would enhance economic development in western China, and have a far-reaching impact on regional development in general.
As China gradually moves forward with a new round of reform and opening up, the recent overall slowdown in economic growth has led to expectations that the development of western China will become the next great economic growth point. Furthermore, at the national level, there is a clear need to create a regional economic centre in western China.
Therefore, the creation of this so-called economic belt, with Xian as the leading city, has become a priority. It will promote the western region and transform it into the fourth national economic pole along with the Yangtze River, the Pearl River Delta Region, and the Beijing-Tianjin-Hebei Economic Zone.
The creation of the Silk Road economic belt should be included as a part of the long-term development strategy for China, and the Greater Xian area - a region covering more than 12,000 square kilometres - should be designated as the core of this economic region.
Years of experience have shown that large-scale urban development and construction can have a significant effect in leading regional economic development. Xian, the historical starting point of the ancient Silk Road and the economic centre of northwest China - as well as a world famous historical, cultural, and international tourist city - is the best choice to be at the core of this economic belt.
In June 2009, the State Council issued the Guanzhong-Tianshui Economic Zone Development Plan, which stated that the area would be developed as a "strategic high ground for national economic development and opening up". Xian, as the largest city in this economic zone, was to have had an important role to play. Since that time, however, the region has not gained any significant policy support at the national level.
Without the strong support of the central government in promoting the balanced development of the region, capital and technology cannot be expected to automatically converge in the more economically backward regions, and this is especially true in the market-oriented economy we strive to build.
Without economic development in the western region, a vast country like China cannot successfully modernise. Without significant improvements in the conditions in western China, especially in the unstable frontier regions, the country's security, stability and unity will be affected in the long run.
The Silk Road economic belt will bring development to the poorer western China. The implementation of the Western Development Plan in 2000, though fruitful, did not significantly narrow its gap with the eastern coastal areas, and the regional imbalances in the country's economic development were not effectively mitigated.
Currently, 12 provinces, autonomous regions and municipalities are involved in the plan, and three economic zones - the Guanzhong-Tianshui, the Chengdu-Chongqing, and the Guangxi-Beibu Gulf - have been identified. The creation of the Silk Road economic belt would horizontally strengthen the western region's development. Practical experience has proved that regional development requires both the driving force and the dissemination effect of a strong central city along with an overall plan.
The Greater Xian area is an obvious choice to lead the Silk Road economic belt, and Xian is in a unique position to act as a bridgehead, ready to welcome industries that transfer from eastern China and to play its part in opening up western parts of the country.
The total economic output of Xian places it at the top of the cities in northwest China, and it is the largest city, with a current resident population of about 8.5 million. It is an important base for scientific research, higher education, defence, and other hi-tech industries.
As one of the world's four ancient capitals, it has the distinction of being the capital during the greatest number of dynasties in Chinese history, and as a result it has many cultural relics and tourist attractions. The city also has many research institutions and universities, placing it among the most developed areas for technology and education in China.
The Greater Xian area will be a centrally placed international city in the northwest comparable with Chongqing . In the current context of a new round of reform and opening up, combined with the recent economic slowdown, the time is right to develop this economic belt, in order to create the fourth national "economic star region" - along with the Shenzhen special economic zone, the Pudong new area, and the Tianjin-Binhai new area.
Finally, in order to more efficiently develop the Silk Road economic belt, balance the efforts directed at western development, and gather more resources in key cities, the feasibility of designating Xian as a municipality - and relocating the capital of Shaanxi province - should be studied.
As President Xi proposed, it is certainly reasonable to hope that the development of a Silk Road economic belt, with Xian at the forefront, will recreate the prosperous era that existed during the time of the ancient Silk Road, restoring the city to a position as one of the world's leading cultural and economic centres, driving economic development in northwestern China and boosting economic prosperity in the other western regions of the country.
- Yang Tao: A Study on How the APEC Financial System Will Support the Development of the Real Regional Economy, October 21, 2013
In October 2013, commissioned by the International Department of the Ministry of Finance, Dr. Yang Tao carried out research on this project which examined how the financial system will support the development of the real economy, which was the theme of the 2014 APEC Finance Ministers’ Meeting hosted by China. The issues studied were related to improvements in the financial systems of the APEC economies designed to better support the development of the real economy. Other areas of research were related to the experiences gained when these countries improved their financial systems, especially in terms of agricultural insurance, financing for small and medium-sized enterprises, Internet banking, and so on; finally, specific suggestions were put forward for managing these issues.
- Yang Tao: A Study on the Modern Financial Industrial Cluster in Shijingshan District of Beijing, October 21, 2013
Commissioned by Shijingshan District in Beijing, Dr. Yang Tao carried out research on this project with an aim to study how to take advantage of the construction of the Chang’an Avenue West Extension to develop a modern financial industry by building a “wealth avenue” in Shijingshan District and a “financial gathering area” along the Chang’an Golden Axis.
- Yang Tao: Research on How the Export-Import Bank of China will Support International Economic Cooperation and Development, October 10, 2013
Commissioned by the Export-Import Bank of China, Dr. Yang Tao undertook a research project to examine its development strategy. The research mainly studied the development trends, opportunities, and challenges of domestic and foreign policy-based finance; the main focus areas are on strategic positioning and the innovative development path that the Export-Import Bank of China, as a policy bank, should choose against the background where China’s economy is upgrading and accelerating its transformation, the open economy is developing, and the environment for international economic cooperation is becoming increasingly complicated.
- G.Bin Zhao: China's crackdown on corruption is Communist Party's 'New Long March', September 23, 2013
On Sep. 23, CEP executive editor G. Bin Zhao's article "China's crackdown on corruption is Communist Party's 'New Long March'" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao says China's crackdown on corruption will be a long, hard battle but it must be fought openly and with integrity to avoid social and political turmoil and damage to the economy
These days, the phrase "anti-corruption" is perhaps among the most common to be found in the Chinese media, and it echoes through all levels of public discussion. The GlaxoSmithKline bribery scandal has created panic among some multinational executives in China, particularly within the pharmaceutical industry. A number of government officials at various levels, as well as senior managers of state-owned enterprises, have been greatly concerned too, fearful that they might be next in line as top leaders strive to build a corruption-free government.
The anti-corruption campaign's achievements have garnered muted praise from the public, yet this is just the prologue to a "New Long March" that the Communist Party will have to endure.
The original Long March, which started in 1934, was without doubt the bitterest struggle the party has ever faced but, fortunately, it enabled it to recover from the brink of failure.
In the eyes of many, the ongoing war against corruption is also a life-and-death matter, not only for the party, but also for the country as we know it. But it is worth noting that there is concern, both domestically and internationally, that the anti-corruption campaign might create another uneven playing field in China's business and political environments.
As an example, GlaxoSmithKline has admitted that its executives did indeed bribe some doctors and health care officials in order to boost its sales in China. Nobody would argue about the legality of such behaviour; it definitely violates Chinese law. Bribery is top of the list as a means of facilitating corrupt activities worldwide, and it cannot be tolerated in any country.
However, as one informed analyst, with the backing of many others, has said: "In reality, who does not bribe the doctors and officials in the Chinese pharmaceutical industry? It is a very common practice and many companies are doing it. Compared to the multinationals, local enterprises are even worse because they have poor products and barely conduct any research and development on new drugs."
So, it seems that GSK's behaviour is not an isolated case but, sadly, an industry practice which has existed for years. So, why has it been singled out for investigation? Why has it become the "lamb to the slaughter" in the current anti-corruption campaign? And why has this case received especially intensive coverage from CCTV, the most influential and popular state-owned broadcaster, boasting more than one billion viewers? Such coverage is rare in the extreme.
There are a few possible reasons, but they might not paint a complete or concise picture. First, the whistle-blowing by a former GSK executive - plus the fact that it is a large drug manufacturer - makes it the perfect target for the anti-corruption campaign in its bid to fight both "tigers and flies". Second, health care costs have surged in recent years, and it is well known that corruption is one of the major causes of increasing expenses in the sector. Third, some pharmaceutical multinationals have blatantly disregarded, or at least did not take seriously, the directions from regulatory authorities to reduce prices as a part of health care reform.
Nevertheless, given that bribery is a common practice, many executives from both Chinese and foreign-owned pharmaceutical companies could face jail terms if the investigations spread.
And it's not just the health care sector; the whole Chinese business world is heavily polluted with corruption, in the form of bribes, kickbacks, patronage and back-door deals. Thus, as the anti-corruption campaign continues, it is generating a great deal of fear throughout many parts of society. In a worst-case scenario, this could create social unrest, and may even drive the country into chaos.
Furthermore, there are fears that the crackdown targeting government officials and party members might be used to strike down political enemies, such as may have happened in the case of the disgraced former Politburo member, Bo Xilai - and as may be happening now with the investigation of former State-owned Assets Supervision and Administration Commission head Jiang Jiemin - rather than being used to reinforce strong and honest governance.
The campaign itself is a double-edged sword: on one hand, it will alleviate corruption and hopefully ease social inequality and conflict; on the other, its misuse could create unforeseen disasters especially in the event of mass political dogfights and wild accusations. Therefore, China should urgently develop a more mature anti-corruption mechanism.
It seems top leaders are serious in their fight against corruption, and they appear determined to strictly execute their measures to combat the scourge, both now and in the long term. Given how deeply ingrained corruption is in the country, it will take years of hard and sometimes harsh work to deal with the problem. At this stage, the whistle-blowing mechanism is probably still an effective tool, but it is definitely not a long-term strategy.
The whole world is watching to see what the next move will be in the campaign, as this affects more than just Chinese and international business leaders and entrepreneurs. It is vital to be fair, keep all action open and above board, and ultimately bring evil to justice. Unreasonable action could threaten a large group of elite and would most likely result in huge capital flight, damaging China's economic accomplishments and possibly pushing the nation into an abyss.
Fortunately, as we have seen from the high level of openness in Bo's trial, key leaders seem to realise that preserving transparency and integrity is crucial in anti-corruption cases.
It can only be hoped that there will be no great surprises and the anti-corruption campaign will follow a steady and persistent course. That way, we can expect China to play a leading role in the global economic recovery well into the future.
- Yang Tao: China steers middle path of stable growth, August 2, 2013
On Aug. 2, CEP chief economist Yang Tao's article "China steers middle path of stable growth" was published on South China Morning Post. This article can be download for free.
Yang Tao says Beijing's determination to maintain stable development will mean steering the economy above a 'floor' of 7 per cent growth but below the 'ceiling' of runaway inflation.
At the Politburo meeting on Tuesday, China's top leadership said the country's 7.5 per cent growth target this year would be achieved, and affirmed that the world's second-largest economy would seek to maintain steady growth.
China's economy has entered a new stage of development, with more emphasis to be put on upgrading through transformation. As Premier Li Keqiang said at a State Council forum held in July: "We must adapt to the new situation, and give consideration to the promotion of steady growth, structural adjustment and reform, so as to develop a scientific macroeconomic policy framework."
In this regard it is clear that the challenges facing China's economy must be revisited, and the country must adapt to the reality of an economic slowdown while improving its transformative capabilities.
China has a huge economy with growing labour costs and increasingly scarce important resources, so continuous rapid growth is clearly unsustainable. In common terms, China's economy has bid farewell to the adolescent period featuring leaping rates of growth, and has entered a mature period with more robust but slower development; this is the law for the stages of development. In addition, the country faces many problems related to differences in income distribution, resource availability, environmental sustainability, institutional degeneration, and so on, none of which can be easily resolved by economic growth alone.
When growth was surging, there was little urgency to resolve these contradictions, but they can't be postponed any longer. Too much reliance on "doping" to stimulate economic growth will ultimately lead to serious consequences.
Premier Li has stressed repeatedly that the main purpose of macro controls is to avoid abrupt economic fluctuations and to keep the economy running within a reasonable range. Their "lower limit" function is to maintain steady economic growth and a stable employment rate, and their "cap" is to prevent inflation.
In this regard we can see that the so-called lower limit underlines the need for coping with the slower pace of economic development. For example, the gross domestic product growth target this year is 7.5 per cent, while the average growth target for the period of the 12th five-year plan is not less than 7 per cent.
In fact, compared with the growth rate, employment is the more important "lower limit". In a sense, the focus of macroeconomic policies should be gradually shifted to be more employment-oriented, so that the so-called quality of growth can improve and be measured by the ability of the economy to provide more new jobs.
At the same time, emphasis needs to be placed on the "cap" because there are many factors that can lead to rising prices, including increases in labour costs and material costs resulting from resource pricing reform, as well as the pressure being brought to bear by global monetary easing and so on. Therefore, there is the need to guard against inflation expectations and price hikes.
The focus on both the "cap" and the "lower limit" is required to prevent the Chinese economy being trapped in the dilemma of stagflation, and to find a way for the economy to develop with only modest fluctuations.
In addition to promoting economic restructuring, the Chinese economy will also have to deal with the negative impact of "hot money" in the short term. First of all, most of the attention should be given to the domestic capital disguised as hot money rather than the real hot money attributed to the abundant monetary supply in developed economies.
For example, the data related to imports and exports in the first half of the year sparked controversies about trade data distortion. One issue that cannot be ignored is arbitrage based on false trade practices. The most typical example of this practice is making money by taking advantage of the differences between onshore and offshore renminbi interest rates and the exchange rates against the US dollar on the mainland and in Hong Kong.
In essence, bank loan capital is transferred out and then into mainland China with the support of "artificial" trade practices. This almost risk-free arbitrage not only artificially inflates the trade data, but also squeezes the ability of honest businesses to carry out their activities.
Admittedly, the overemphasis on fast economic growth is the result of the government orientation towards performance evaluation, competition among local governments, and many other factors. It takes time to actively adapt to the slower pace of growth, but reform and adjustments should be made as soon as possible in order to accept a healthy slow-growth era.
This is the only way China can gradually usher in a sustained and vibrant pattern of economic growth, and confront the challenges presented by a variety of bearish expectations.
- G.Bin Zhao: A China crash in the making? July 23, 2013
On July. 23, CEP executive editor G. Bin Zhao's article "A China crash in the making?" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao says China's current economic difficulties, including the scale of its government debt, are not as severe as many fear, and are to some extent a temporary result of reforms.
Short-term problems will neither hold up nor distort China's sustainable development
Each time China's economy faces difficulties, talk of a collapse tends to surface. Some voices are driven by concerns about their investments; some are looking for speculative opportunities; others might just be following the trend, unable to draw their own conclusions. In any case, it's always necessary to think critically and deeply when absorbing new information, regardless of how authoritative the source may be.
So, what is the true picture of China's current economic situation? Will the country's stretched bank credit lead to a financial crisis? How severe are the debts accumulated by local governments and the shadow banking sector?
As I have said before in these columns, I expect China's economy to face a rough ride in the next few years as the new leadership introduces major changes. The current policy transitions, which are the root cause of the recent pain, combined with slower growth, have exposed major problems, such as the cash crunch in banks. But these short-term problems will neither hold up nor distort China's sustainable development, because at the core of these changes are reforms which are designed to facilitate a much healthier and better economic future.
China's top leadership has decided to follow a slower path; however, local officials, and even some ministries, as well as executives of the major banks and other state-owned enterprises, have demonstrated they are not yet ready to adapt. This is the root cause of the current tensions related to bank liquidity, shadow banking and local government debt.
More specifically, gross domestic product growth averaged 10 per cent for the past three decades; now the official target is 7 per cent. A reduction of nearly one-third can mean a lot for many industries, not to mention provinces and municipalities.
As an example, during the recent bank liquidity shortage, there were many concerns raised, mostly from the international media and various foreign institutes, that this may lead to a financial crisis in China. But these doomsayers are too pessimistic.
Chinese banks might not be as efficient as their peers in the US and Europe, but, despite the slight increase in non-performing assets due to the economic decline over the past year, they are far more healthy and profitable than many would believe.
Though many banks are public companies, the state owns most of the major ones and government policy still steers their commercial activities. For instance, the senior executives of the big four are appointed by the government and they tend to bear more of the political responsibilities, while mid-level managers are more performance-driven.
Additionally, China faced a lack of liquidity in the inter-bank market, not a real credit crunch, as many said. One of the most important reasons for the crisis was that the People's Bank of China refused to provide more liquidity when the banks expected it. Bankers underestimated the determination of the top leaders to enact policy changes, which means there would be no stimulus for the real economy and the banking industry. Banks must be prepared for market adjustments.
Some argue that the surge in shadow banking in China is threatening its economy. According to estimates, the value of funding in the shadow banking sector reached approximately 20 trillion yuan in 2012 (HK$25 trillion), not inconsequential when compared to a 52 trillion yuan GDP and 130 trillion yuan in total bank assets.
Among all the banks directly engaged in the shadow banking sector (with more than 90 per cent of the shadow banking activities), wealth management products accounted for 7.5 trillion yuan, 5.7 trillion yuan were entrusted loans, and 6 trillion yuan were bank accepted bills. Due to its huge size, the shadow banking sector has indeed challenged China's financial stability and diluted the effectiveness of the central bank's monetary policies, but we cannot neglect the fact it is the result of market demand for diversified financial products. Shadow banking has generated a large amount of profit for the banks; in the meantime, it has also promoted the real economy. For instance, the majority of wealth management products are converted into loans, trust products and bonds, and flow back to businesses.
To minimise the potential hazards, Chinese regulators have strengthened the supervision and monitoring of shadow banking since the beginning of the year. As Dr Li Yang, vice-president of the Chinese Academy of Social Sciences, recently pointed out, shadow banking represents the emergence of innovation in the financial sector and will not draw China into a financial crisis; but the real challenge for regulatory authorities is how to provide effective and gentle management.
Finally, China's local government debt became a major concern after the downgrading by Fitch and Moody's. I wonder whether these rating agencies ever notice local debt risks in the US, especially since Detroit has recently filed for bankruptcy with debts of at least US$18 billion. Will these agencies downgrade the triple-A rating of US government bonds, which is much higher compared to China's? Chinese government debts, both centrally and at the local level, are much less than those in the US. Consequently, the credibility of these rating agencies must be doubted.
Nevertheless, Detroit's bankruptcy is an alarm call for all governments, including those in China. While there is no comprehensive updated official data for local government debt, according to the latest sample data collected in June by the National Audit Office, in 2012 there was a total debt of 3.85 trillion yuan owed by 15 provinces and their capitals, as well as the three municipalities of Shanghai, Tianjin and Chongqing , and three of their municipal districts.
Clearly, this figure might disappoint many analysts who believe local government debt is a major risk. Furthermore, 78 per cent of these debts are loans from the banks, and 12 per cent are bonds. So how bad can it be?
There are indeed many signs that China's economy is at a difficult point, but the country is still in much better shape than the US and Europe. The European economy is shrinking, and there are many hardships holding back the recovery in the US. Therefore, it is clear the global economy cannot afford a Chinese collapse. So, why do so many people want to see the dragon fall?
- Yang Tao: A Study on the Financial System Matching the Structure of the Real Economy, June 1, 2013
On June 1, Dr. Yang Tao was commissioned by the Department of Economic System Reform of the NDRC to do research which focuses on the characteristics of China's financial system. More specifically, the research examines development trends, analyzes the typical commercial banking and securities systems, and studies key reform tasks in the financial system development based on the structure and needs of the real economy.
- CHINA'S ECONOMY & POLICY speaks at Kellogg School, June 1, 2013
On June 1, Mr. Nikolai Tagarov delivered a speech on China's Trade and Investments Relations with CEE and Russia at the Kellogg School of Management in Evanston, Illinois, focussing on energy issues.
In addition to his key topic, Mr. Tagarov also presented Mr. G.Bin Zhao's recent outlook of China mid-term and long-term economic development and trend.
Mr. G.Bin Zhao was also invited to speak at Kellogg School, yet unfortunately he was unable to attend due to conflicts with other engagements.
Founded in 1908 in downtown Chicago as the business school of Northwestern University, Kellogg has historically been ranked as one of the top business schools in the world.
- Yang Tao: Research on the Five-Year Financial Plan of Quanzhou, Fujian, May 27, 2013
On May 27, Dr. Yang Tao was commissioned by the Finance Office of Quanzhou, Fujian, to develop the Five-Year Financial Plan for Quanzhou.
- G.Bin Zhao: China's economy faces a rough ride in the next few years, May 07, 2013
On May. 27, CEP executive editor G. Bin Zhao's article "China's economy faces a rough ride in the next few years" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao says China's economy faces a rough ride in the next few years as the new leadership introduces major changes but the nation will emerge as a global powerhouse in two decades
The world couldn't hide its disappointment when China's first-quarter GDP growth dropped to 7.7 per cent, slightly lower than market expectations. Unfortunately, this might just be the start; worse news could be just around the corner. Indeed, there are a number of reasons why the Chinese economy faces a downturn over the next few years. So, just how bad can it get?
First, the current leadership transition is an issue. It is clear the new Chinese leaders will introduce many changes, because they understand there is absolutely no alternative to secure China's long-term growth. Without major policy adjustments, any notion of turning the nation into a real superpower over the next few decades will just be an unrealistic dream. Certainly, the transition process will lead to social pain, particularly for the economy. In the meantime, the world needs to be aware of this so that another severe slide in China's gross domestic product will not come as a big blow to the global economy.
Second, economic growth is no longer the top priority on the Chinese agenda. Since the growth target is set at 7.5 per cent, the market should not expect any stimulus plan when it fluctuates to around seven per cent, or goes lower. As President Xi Jinping recently emphasised, the days of "ultra-high-speed" growth in China are over. Thus, policymakers will tolerate further economic decline.
China no longer needs double-digit growth. Other issues, such as environmental protection, industrial upgrading and economic restructuring, have become more prominent. As a government policy-driven economy, it is important not to underestimate the negative effect this will have on overall growth. In the worst case, China may experience a brief deadlock.
Third, the therapy for the real-estate tumour might be painful. Over the past decade, the property market has inadvertently acted as a major driver of China's hypergrowth, which has created deep-rooted systematic problems for sustainable development in the future.
The new government has no choice other than to provide progressive measures to deflate the property bubble. This will affect many industries, not only in China, but internationally; for instance, weakening Chinese demand will probably mean the end of the bullish global commodity market.
Fourth, the new leadership seems very serious about dealing with corruption. Fighting corruption is a brutal and complicated long-term commitment, and this initiative is very likely to last for the decade of Xi's term in power. The fact is that some people will eventually lose some or all of their economic interests.
It will be astonishing if there is no resistance, and this could lead to some short-term instability. As a result of these domestic struggles, China could face a temporary political predicament at home.
Fifth, there are growing concerns about the outbreak of territorial disputes in the near future, given the new leaders' focus on a slightly "stronger" foreign policy. The South China Sea and Diaoyu Islands are potential areas of hazard for China, while the perennial troublemaker, North Korea, might also stir regional unrest.
These issues will be more difficult to solve than any of China's domestic problems, especially given the stalemate in the conflict with Japan over the Diaoyus. Confrontations in the vicinity of the islands have become routine since last year, and the possibility of an accidental outbreak of hostilities in the East China Sea will increase significantly if the situation continues. China and Japan should consider working towards a sincere resolution before it is too late.
Clearly, under any one of the above scenarios, China faces the possibility of a transition crisis that would interrupt economic growth, albeit temporarily.
However, I still believe China is on track to become a global powerhouse in 20 years even though the harsh realities it faces in the next few years cannot be ignored.
Still, we should not forget that the Chinese word for "crisis", weiji, is composed of the characters for "danger" and "opportunity". The transition might be painful, but for the sake of a brighter future, China needs to undergo many more major transformations.
The world looks forward to a better China, as do its 1.3 billion people.
- Yang Tao: A Comparative Study of the Maritime Financial System in Foreign Marine Powers, May 2, 2013
Commissioned by the Department of Regional Economy of the NDRC, Dr. Yang Tao conducted this research project.
- G.Bin Zhao: Lenovo might be a perfect choice for Blackberry, March 7, 2013
On Mar. 7, CEP executive editor G. Bin Zhao's article "Lenovo might be a perfect choice for Blackberry" was published on Forbes China.
Last month, the CFO of Lenovo said at the World Economic Forum in Davos, Switzerland, his company may consider Research in Motion, or RIM, the maker of Blackberry as a takeover target. Many Canadians might be shocked to hear the news that the company Prime Minister Stephen Harper once described as a national "crown jewel", might now be acquired by another Chinese company, so soon after the recent acquisition of Nexen by the state owned enterprise CNOOC. Whether or not the Canadian government will approve the deal is not an issue at this stage. But, from a realistic point of view, should RIM consider a purchase if Lenovo makes an offer? What alternatives are there for RIM?
Lenovo is the world’s largest PC vendor since last year, and its lines include a family of mobile internet devices, including smart phones, tablets, etc. The smart phones are mostly sold in China, and in 2012 it enjoyed a market share of nearly 15% in the world’s number one market, second only to Samsung.
Lenovo is also facing serious challenges from Apple’s iPAD and Mac as the demand for PCs slows down. It is one of the company’s long-term strategies to expand the smart phone business.
RIM, as one of the leading vertically integrated smart phone makers with know-how in both building hardware and developing operating systems, is very likely a perfect acquisition target for Lenovo.
Additionally, RIM recognizes its main competitors include Apple, Google, HTC, Huawei, Microsoft, Nokia, Samsung, LG, and ZTE. As a faded industry leader, RIM is in great danger. Sooner or later, it will be the next Motorola if it is resistant to a big transition.
First, it is extremely difficult for RIM to fight against the current dominance of Apple and Samsung, with Google and Microsoft also joining the battle. The market is very fierce and only very few companies will survive, and this is especially true for hardware makers such as Nokia and RIM.
Second, the major competitors are mostly diversified high-tech conglomerates, because presently not only is the smart phone hardware fully integrated, but also the software such as operating systems, apps, and many other quickly innovating technologies is as well. Smaller and more specialized companies will be confronted with many technical problems in producing multi-functional products.
Third, RIM’s Chinese counterparts such as Huawei, HTC, and ZTE produce a variety of low price smart phones that will eventually divide the market into different segments. This might compel Blackberry into a niche market, where safety is required.
In a word, perhaps RIM is not yet aware of the worsening market situation, or does not recognize its severity. At this stage, the dilemma for RIM is not how to grow the company, but how to stay alive now and for the future.
Furthermore, compared to its peak value of over $130 per share, currently RIM’s stock is trading at around $14 per share. The official launch on January 30 of its long-delayed new products, BlackBerry Z10 pushed down the share price more than 10% from the day before. The big decrease in the stock price is an apparent reflection that the new products did not meet market expectations. A Wall Street analyst wrote that RIM has been left for dead for the last two years, their handsets deemed obsolete, and their only option is to sell what remains of the company.
In my opinion, during this turbulent time, RIM’s leaders need to make a brave and bold decision. Creating a spinoff, and or the outright sale of the company must be seriously considered. For the sake of the shareholders and employees, it would be better to sell before the company is run to the edge of insolvency.
Among RIM competitors, in terms of cooperating, only the Chinese are very likely to take any action. According to what I know, HTC is struggling and ZTE is short of cash. Huawei as one of the most successful and internationalized telecommunications companies is privately owned and lacks transparency. Furthermore, there is no evidence to suggest that Huawei has any interest in RIM.
Finally, only Lenovo has courted RIM, although informally, so far. I believe, for the best interest of RIM, cooperation with Lenovo is not necessarily a bad choice. Lenovo is a vigorous company which is full of vitality, and one of the few flourishing Chinese multinationals without state ownership. Lenovo has also effectively managed and extended IBM’s ThinkPad brand after that acquisition. It also can provide a huge untapped smart phone home market for RIM in China. Most important, Lenovo has many technologies that are at the forefront of its industry, and they have a mission to become one of the world’s great personal technology companies. Therefore, in many aspects, RIM and Lenovo are alike.
Since RIM is regarded a national "crown jewel", the Canadian public might have strong emotional ties to the company. Therefore, it is likely that any takeover will have to deal with resistance from different stakeholders in the general public, as well as government authorities, and the court of public opinion.
Alternatively, a "merger of equals" between RIM and Lenovo will be accepted much more easily; DaimlerChrysler, for example, was created on this basis. Otherwise, RIM may consider spinning off the Blackberry brand to Lenovo, and shifting its core business to wireless and mobile software, thereby transforming itself into a service and solution provider, in the same way as IBM has done in the PC business.
- G.Bin Zhao: CNOOC will face serious challenges managing Nexen, February 20, 2013
On Feb. 20, CEP executive editor G. Bin Zhao's article "CNOOC will face serious challenges managing Nexen" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao says decisions must further the oil giant's globalisation
How CNOOC integrates and manages Nexen will provide a noteworthy example for major state-owned enterprises to follow in the future.
CNOOC's acquisition of Nexen is being watched closely, given that it is China's largest overseas investment acquisition to date. How the China National Offshore Oil Corporation integrates and manages Nexen will provide a noteworthy example for major state-owned enterprises to follow in the future. It will also challenge the wisdom, talent and courage of CNOOC's executives.
There are many differences between CNOOC and Nexen in corporate hierarchy, employee incentives, and national and corporate cultures, but perhaps the core difference is in the ownership system.
First, Nexen's organisational structure is similar to the one at CNOOC, so integration in the early stages should be relatively easy. But CNOOC needs to optimise its hierarchical structure to adapt to its new global position.
The first step is to incorporate all of Nexen directly into CNOOC as a subsidiary with independent management. Next, Nexen's projects in the North Sea, the waters of Nigeria and other places will be gradually taken over by either existing or newly established independent subsidiaries.
Nexen, as the headquarters for North and Central America, will manage projects that fall under its administration, and assist CNOOC in upgrading and establishing its oil sands and shale gas divisions in Beijing to enhance the core competitiveness of the entire company. In addition, Nexen will greatly strengthen the international management and operations of CNOOC.
Second, CNOOC needs to create a more flexible employee incentive system, neither going beyond the nature of a state-owned enterprise nor losing the enthusiasm of its international management team. For example, although Nexen is much smaller, its core management team was paid much more than the team at CNOOC; therefore, it will be difficult to determine what payment standard will prevail after the merger.
In the transition phase, the high payments for Nexen's management team may be continued, within reason. In the long run, though, to keep and attract top international talent, the CNOOC incentive mechanism must also be made globally competitive. Boldness and courage is not only needed from CNOOC executives, but also from the Chinese authorities. Furthermore, public opinion and the attitude of the media are also crucial.
Third, CNOOC needs to properly integrate Chinese culture with corporate culture to attract international and domestic talent. This is not only for the future integration of Nexen; it must also form their long-term globalisation strategy. The first difficulty in managing Nexen will be the significant differences between Chinese and Canadian culture; CNOOC will have to cope based on the international experience the company has accumulated over the years.
Finally, in comparison to the hierarchical structure and incentive mechanism, it will be far more difficult to handle differences in national and corporate cultures, and it will require a great deal of time and patience. As long as CNOOC strictly adheres to the principle of "seeking common ground while respecting differences", its international road should be smooth.
- G.Bin Zhao: End State-Owned Dominance Now, January 25, 2013
On Jan. 25, CEP executive editor G. Bin Zhao's article "End State-Owned Dominance Now" was published on The Wall Street Journal. This article can be download for free.
G. Bin Zhao says if Xi Jinping truly wants bold reform, he must allow private enterprise to drive China's economic growth.
In his push to ensure China's future development, incoming leader Xi Jinping recently called for "bold experiments and brave breakthroughs" to deepen the reform and opening up process. Without this spirit of reform, he stressed, there would be no China today or in the future.
If Mr. Xi is serious about such statements, then his party should direct reforms toward an outcome that, while inevitable in the long run, will nevertheless involve major institutional transformation. The present time provides the best opportunity to change the socialist economic system's reliance on public ownership.
The difficulty of making such a change only underscores the need to start work now. The primacy of public ownership has long been a cornerstone of the Chinese system. China's constitution clearly states that the state-owned economy is "the leading force in the national economy."
The process of amending the constitution to alter this concept will be complex and difficult. But it should not dismissed as impossible or undesirable. Reformers should explain that the proportion of the state-owned economy in the national economy is not the only embodiment of the socialist economic system. Giving up public ownership as the mainstay of China's economy need not lead to comprehensive privatization. Reform will simply help to establish a stronger, more market-oriented economic system.
Reformers should also remind their peers that earth-shaking changes have already taken place in China during the process of moving from a highly planned economic system to the socialist market-oriented economic system "with Chinese characteristics." This shift has prompted a boom in economic development that has lasted for more than 30 years.
As China gradually advances its market-oriented economy and pursues more comprehensive development, the contradictions between public ownership and marketization have become increasingly obvious. Now that the goal of market-oriented reform has been further clarified, it is time to rethink whether China should still adhere to the economic foundation of public ownership.
In theory, public ownership refers to a model in which ownership belongs to all people. But this concept has proven to be incompatible with the basic principal-agent relationship in economics.
In China, citizens are the real shareholders of state-owned enterprises, but the people entrust the government to administer ownership. Enterprises are supposed to use reasonable care and skill in performing the duties to maximize shareholders' benefits. But in reality, government officials supervise the enterprises, and the shareholders have no rights and don't receive a fair return.
In other words, the government and enterprises are not in a true principal-agent relationship, but rather in an agent-agent relationship. This can lead the government to fail to exercise its oversight responsibilities as an owner, and is the root cause of severe corruption.
What's more, the fact that state-owned enterprises have a monopoly in many industries is the main obstacle to sustainable economic development. The industries with the lowest efficiency and most economic contradictions are those with a high proportion of state ownership: health care, railways, energy, banking and education, for example.
In contrast, Chinese industries that are highly market-oriented are dynamic and develop rapidly. These include home appliances, textiles, automobiles, food and retail. Companies working in these areas will drive sustainable growth.
Look at regional development. The regions that have a well-developed private economy, such as the Yangtze River Delta and Pearl River Delta, have already become the heart of the Chinese economy. They have taken a leading role in national economic development over the years.
Nevertheless, today state-owned enterprises enjoy many privileges in the distribution of the means of production, market competition and legal protection. These advantages have created many inequalities in the country's market economy. Private enterprises, which are expected to lead the way in the ongoing growth of China's economy, struggle to survive and develop.
Based on recent speeches delivered by Xi Jinping, one can conclude that the new leaders have realized that if the country does not adhere to the process of deepening reform and opening up, sustainable development will face serious challenges. As Mr. Xi said himself, it is time to be bold and brave. It is time for China say good-bye to over-reliance on public ownership.
- G.Bin Zhao: CNOOC-Nexen deal opens Canadian investment door, December 15, 2012
On Dec. 15, CEP executive editor G. Bin Zhao's article "CNOOC-Nexen deal opens Canadian investment door" was published on South China Morning Post.
G. Bin Zhao says both sides stand to gain from the energy partnership.
After careful consideration, the Canadian government has finally approved the acquisition of Nexen by the China National Offshore Oil Corporation (CNOOC). The decision, twice delayed because of significant opposition, has cleared some important hurdles for China's largest foreign investment project and for Canada's second-largest foreign acquisition in history.
However, because Nexen has exploration and production projects in the Gulf of Mexico, the deal also requires US approval. That may be a difficult nut to crack, though, fortunately, the Gulf of Mexico assets are not a large proportion of Nexen's operations, so Washington's role may be limited. In any case, CNOOC and Nexen may well find a way to get round any US veto attempt.
This large investment will undoubtedly contribute to the diversification of China's oil imports while increasing its energy supply security. With the second-largest oil reserves in the world, not only will Canada become an important source of energy for China, but the acquisition will also enhance the Sino-Canadian strategic partnership and have a far-reaching impact on relations.
During Prime Minister Stephen Harper's visit to China in February, a consensus was reached to improve the nations' business relationship. Steps such as "improving the bilateral investment mechanism, deepening economic and trade co-operation, and expanding co-operation in oil and gas, nuclear energy, renewable energy, forest products, minerals and other fields of energy and natural resources" were all cited as important components.
The Nexen deal can be seen as the most pragmatic and effective step and should open the door to more comprehensive energy co-operation. As China continues to develop its domestic economy, overseas investment will increase. With the advent of global inflation, foreign investment in energy and resources gives Beijing a better option for converting a large amount of its foreign exchange reserves into capital investments that will retain their value. Therefore, more Chinese enterprises can be expected to seek opportunities for investment, mergers and acquisitions in the Canadian energy industry after the Nexen deal.
Mining and other natural resources will also be hot areas for future Chinese investment in Canada, which boasts a number of the world's leading mining companies. Industry production ranks highly, and features a variety of resources, high yields and a large proportion of exports.
The acquisition of Nexen is an important milestone for CNOOC; the deal should help the company become more international while giving it the strength to compete better with PetroChina and Sinopec. At the national level, this will enable China to not only import oil from all corners of the globe in the future, but also have its own worldwide crude oil domain, thus solving its basic energy security and supply problems.
During Harper's visit to China this year, Premier Wen Jiabao proposed discussing the feasibility of signing a free-trade agreement. Zhang Junsai , China's ambassador to Canada, has said that although Sino-Canadian bilateral trade and mutual investment have developed rapidly in recent years, bilateral trade volume accounts for only about 1 per cent of total foreign trade in China and 6 per cent in Canada - figures that do not match the economic position and strategic partnerships of the two countries.
There is still a lot of room to develop economic and trade co-operation. The acquisition of Nexen by CNOOC can be expected to enhance the strategic partnership and further promote development of bilateral trade and economic co-operation.
- Yang Tao: The growth dividends of an international renminbi, November 8, 2012
On Nov. 8, CEP chief economist Yang Tao's article "The growth dividends of an international renminbi " was published on South China Morning Post. This article can be download for free.
Yang Tao says having an international currency will ease the flow of Chinese people across borders and provide a lift to its financial market, both of which can help drive economic growth
In terms of trade clearing, the renminbi has become a regional "hard" currency, and has a large and growing influence with neighbouring trade partners. Meanwhile, a number of Asian, African and Latin American countries already regard renminbi products as reserve assets. And, in addition to accelerating innovation in Hong Kong's offshore renminbi products, New York, London and other traditional financial centres are now conducting an impressive volume of renminbi-denominated investment business.
In the long term, however, if the renminbi is to truly become an international currency, it will need to be used more freely in other countries so that overseas residents and enterprises have easy access to the currency when they need it, and domestic residents and businesses can easily use it for consumption and investment. To achieve this goal, two problems need to be solved: how to make the renminbi "go global", and how to make it flow back into the Chinese market.
First, there are two ways for the renminbi to enter the global market. One is through a trade deficit. For example, in the era of the Bretton Woods system, the United States provided ample dollar liquidity to the world through its current account deficit, which depended on strong domestic demand, but which also caused a serious disequilibrium in the international balance of payments.
The second method is by promoting the export of renminbi capital, and this seems to be more effective. Experience has shown that in the gold standard era, Britain provided a substantial amount of pounds to other countries through capital exports; more recently, Japan provided yen to countries through massive foreign direct investment in the 1980s.
Next, how can we encourage the renminbi to flow back into the Chinese market? This depends on capital controls and the vitality of the domestic market. Financial markets in China are not advanced; capital projects are not yet fully convertible; contact with overseas parties in the financial market has lagged behind the overall reform process; and there are no financial instruments that support active trading.
Based on the dollar's experience, large-scale dollar exports created "oil dollars", "Europe dollars" and "Asia dollars". When these dollars came back to America through the US financial markets, the markets not only provided the necessary funds to support the development of the US economy, but they also provided the investment and hedging channels that these funds required. China's financial markets cannot provide the necessary support for renminbi internationalisation unless the country promotes innovation and development.
How does the internationalisation of the renminbi fit into the growth trajectory of China's economy? The biggest challenge now is whether a sustained and stable transition can be achieved in the context of a long-term decline.
Short-term growth depends primarily on demand. As urbanisation reaches a tipping point, investment demand is likely to fall and it will be difficult for household consumption to take the lead in stimulating demand; global trade protectionism and economic restructuring will also lead to a weakening demand for exports.
Although the short-term appreciation of the renminbi through internationalisation will not benefit exports, it will reduce trade costs and, because of changes in the exchange rate, encourage many businesses to pay more attention to developing the domestic consumer market. It is conducive to boosting imports and thus domestic consumption, and it makes it easier for medium- and high-income earners to allocate assets and invest overseas, thereby increasing the level of income and the power of consumption.
Long-term growth depends on the supply side, which includes capital, the labour force, technology and human capital. The decline in the amount of capital and cheap labour is inevitable; human capital and technological advances will become the focus of long-term growth. So, with its far-reaching significance, renminbi internationalisation has an important indirect impact on both demand and supply.
First, through greater interaction between China and the rest of the world. An international currency will make it easier for Chinese to study and live abroad, and draw more talented professionals to return to the mainland, thus improving the internationalisation of human capital in a continuous flow.
Second, it will promote innovation and development in the domestic financial market. The market can provide significant financing and risk control support for technical progress, promote the adoption of financial service models from developed economies, and lay a financial foundation that spurs technological advances and raises productivity.
Of course, the impact of renminbi internationalisation is complex, but the essential goal is to get China to form a more international and market-oriented development model. Therefore, it can become a new driving force for economic growth. However, this impetus has not yet been fully realised. Only when strategic thinking is clarified, a good domestic foundation built and the right path selected can renminbi internationalisation provide the power for China's economy to take off once again.
Yang Tao is chief economist at the publication China's Economy & Policy, and director general of the research base for industrial finance at the Chinese Academy of Social Sciences
- G. Bin Zhao: Diaoyus fallout sees China refocus RMB push to Australia, Canada, October 22, 2012
On Oct. 22, CEP executive editor G. Bin Zhao's article "Diaoyus fallout sees China refocus RMB push to Australia, Canada" was published on South China Morning Post. This article can be download for free.
On June 1, direct trading began between the renminbi and the Japanese yen, a step which will play a significant role in the process of China's monetary internationalisation. However, the recent Sino-Japanese dispute over the Diaoyu Islands has affected economic and financial co-operation between these two countries, as well as the process for renminbi internationalisation.
Therefore, it has become necessary for China to seek direct exchanges between the renminbi and other major currencies. This means the Australian dollar and Canadian dollar will become significant priorities. China is an important trading partner of both Australia and Canada; at the same time, Canberra and Ottawa have been hoping to strengthen their financial co-operation with Beijing.
The direct trading of the Australian dollar and the renminbi has more economic significance for Australia than China. Since 2007, China has been Australia's biggest trading partner; today, it tops the charts for both Australian exports and imports. Last year, bilateral trade amounted to A$114 billion (HK$913 billion), accounting for about 23 per cent of Australia's total trade, two-thirds of which was Australian exports to China.
Therefore, when China allowed direct trading between the renminbi and the yen, parties in Australia immediately expressed hope that the Australian dollar would be the third currency to be used for direct transactions, after the US dollar and the yen. Wayne Swan, Australia's treasurer, said at a meeting in Hong Kong in July that it was hoped the Australian dollar would realise an early direct exchange with the renminbi, thus greatly reducing bilateral trading costs. In a subsequent visit to Beijing, he expressed this wish to China's senior leaders.
Compared with the volume of Sino-Australian trade, the volume of Sino-Canadian trade is smaller, at US$47.5 billion last year. At the same time, China has become Canada's second-largest trading partner and third-largest export market.
From 2009 to the end of last year, investment by Chinese enterprises in Canada totalled C$16billion (HK$126 billion), and it will reach more than C$30 billion if the China National Offshore Oil Corporation acquisition of Nexen is approved. With China's rising demand for energy and resource products, investment in Canada must continue to increase; if its currency can be directly traded, Canada will become more attractive to Chinese investors.
In addition, China and Canada can consider promoting the establishment of an offshore renminbi business in Toronto. One of the reasons Japan is willing to conduct direct yuan-yen trading is that Japan, in addition to trade and investment demand, is looking forward to boosting the Tokyo financial market and nurturing an offshore market for renminbi financial product transactions.
Hong Kong is already an offshore renminbi centre; London and Singapore have also shown great interest and have implemented a number of positive measures. Compared with London and Hong Kong, Toronto has a unique location advantage, as well as many other benefits such as being in a time zone which makes it convenient to do business with all of South and North America, a large international population capable of speaking Chinese, many financial institutions, and developed and efficient financial markets.
The local financial industry will benefit from great opportunities if offshore renminbi businesses are developed in Toronto. As renminbi internationalisation starts off, Toronto will create more opportunities for the local financial industry while strengthening its international capabilities.
During his visit to China in February, Canadian Prime Minister Stephen Harper mentioned strengthening financial co-operation with China, and Premier Wen Jiabao proposed exploring the feasibility of a Sino-Canadian free trade agreement.
Therefore, there would seem to be a sound political basis for the direct exchange between the Canadian dollar and the renminbi, and neither the Chinese nor the Canadian governments have reason to oppose the development of an offshore renminbi market in Toronto.
Canada is a G8 member while Australia is also a major developed country; their economies play a vital role in the global market. If China's economic development is to be sustained, Australia and Canada will need to provide it with numerous resources, energy and hi-tech products over the long term. Directly traded currencies will not only reduce the costs of trade, but will also promote bilateral co-operation and development in trade, finance, investment and so on.
The first landmark target for renminbi internationalisation is free convertibility worldwide. To trade directly with the currencies of major developed countries is an important step in reaching this target. In other words, after the US dollar and Japanese yen, the renminbi should aim to realise convertibility with the world's major currencies including the euro, the British pound, the Swiss franc and so on. Once this is managed, the goal of free convertibility will be largely achieved.
If direct trade with the Canadian dollar and the Australian dollar can be implemented quickly and smoothly, worldwide renminbi convertibility may be realised in three to five years. Optimistically, 2015 is not impossible.
- Yang Tao: China must ensure the financial health of its elderly, September 22, 2012
On Sep. 22, CEP chief economist Yang Tao's article "China must ensure the financial health of its elderly" was published on South China Morning Post. This article can be download for free.
As China’s population ages, finding ways to meet the needs of the increasing numbers of the elderly is becoming its greatest challenge. The usual measures would be to use fiscal and financial instruments. But in a country where the state financial system cannot adequately meet demands, more innovative financial services and products will be needed as a supplement.
A well-established financial system for the elderly should meet their demands for security, consumption and investment.
First, in terms of security, there is an urgent need to improve the various types of contractual savings institutions, including insurance and fund providers. Furthermore, new financial products need to be developed, such as reverse mortgages, where senior citizens can get loans from banks or other financial institutions by using their property as collateral.
Admittedly, considering the defects in the Chinese housing system, the real estate bubbles, as well as cultural factors such as the fact that houses are traditionally handed down to children, there are many practical difficulties in launching reverse mortgages in China. Still, the ageing population brings new opportunities for financial institutions, and governments and regulators should guide institutions and agencies to provide a wide range of banking and non-banking products.
Second, the “silver” economy will have a profound influence on worldwide consumption patterns and product structures. Given China’s gradual shift to being more reliant on domestic demand for growth, consumption by senior citizens will become a focus for the real economy.
Consumer finance has always been a weakness of the Chinese financial system. For example, one kind of product, operated mainly by insurance companies that target older people, has proved controversial: it offers a “rebate” transferred into a person’s pension fund when they buy it. However, the scheme can be confusing as not everyone realises they will receive the “refund” only after they retire. But as long as such products are reliable and regulated, they should be seen an innovative.
Third, pension investments must be a focus for financial innovation. During different phases of their life, investors’ appetite for risk and philosophies change, creating ongoing demand for new products. Both long-term institutional investors – who make investments with pensions and annuities – and elderly individual investors need stable returns. China needs to develop fixed-income products, such as bonds, and make them an important component of the financial markets.
Senior citizens also have huge wealth management needs. Services provided by Chinese financial institutions rarely emphasise customer relations and there is a dire shortage of specialised products. Because senior citizens have a small sphere of financial activity, they require increased convenience to encourage them to choose financial products; they have higher requirements for security, liquidity and easy access to cash; they are very sensitive to service prices; and, they require more psychological and emotional care than younger investors.
Thus, the financial sector must tailor-make “silver” investment products. For example, employee stock ownership plans currently being promoted by the regulators will enable retired employees to gain stable returns if the listed company performs well, thus better serving their investment needs.
Policy-based financial institutions and commercial institutions both need to provide financial support for the elderly. Policy-based finance should dominate when it comes to providing security, while commercial finance can act as a supplementary service, by being responsible for consumption and investment. Both types of institutions will need to work together to tackle financial issues, risk management and other pressures brought about by an ageing society, in order to create a silver financial system that matches the caring culture for the elderly that already exists in China.
- G.Bin Zhao: Brighter days ahead for China's economy, September 17, 2012
On Sep. 17, CEP Executive Editor G.Bin Zhao's article "Brighter days ahead for China's economy" was published on South China Morning Post. This article can be download for free.
G. Bin Zhao says the pervasive gloom today over the Chinese economy is obscuring the positive longer-term trends that suggest the nation is on track to become a powerhouse in 20 years.
The Chinese economy is in decline, the stock market remains in a downturn, the property market faces strict macro controls, and the purchasing managers' index for August has fallen to a new nine-month low, all of which is causing widespread concern. Many people at home and abroad have started to worry about China's economic prospects. For example, there is heated debate over whether China will suffer a "hard" or "soft" landing.
I would echo the comments of Stephen Roach, the former chairman of Morgan Stanley Asia, who wrote recently: "These worries are overblown. Yes, China's economy has slowed. But the slowdown has been contained, and will likely remain so for the foreseeable future."
I can't predict when the economy will rebound, but perhaps it is time for analysts to look at the longer term. Where will China stand in 20 years?
First, let's examine the prediction that its gross domestic product will become the largest in the world within a decade, and its economy will continue to improve over the next two decades. The Economist expects Chinese GDP to surpass America's by 2018, and even if China's growth rate were to drop to 5 per cent, this transition would only be delayed until 2021. Therefore, there is little need to worry about current GDP growth falling to 8 per cent. Other forecasts of when the transition will happen include 2016 (the International Monetary Fund) and 2020 (the Chinese Academy of Social Sciences). However, even if China's total economy exceeds that of the US, it will not mean China is stronger economically - it is harder to predict when China's comprehensive national strength will surpass that of the US.
Second, the renminbi is forecast to become freely convertible within 10 years and possibly will be competing with the US dollar in two decades. In recent discussions, it was thought this first step could be realised in five years. I believe it will probably happen by 2020, or when Chinese GDP becomes the largest in the world. The renminbi will surpass the euro and the yen to become the second-strongest global currency within three to five years after it becomes freely convertible. But there are too many uncertainties to predict whether it can challenge the dollar as the international reserve currency in the next two decades.
Third, it is said that Hong Kong is likely to exceed New York as a global financial centre within 20 years. As China's economy continues to grow and develop, the realisation of the first two predictions will provide a great boost for Hong Kong, and it is expected to gradually become the dominant global financial centre. To prepare for this, Hong Kong needs to deepen its co-operation with Guangdong, promoting Shenzhen as Hong Kong's "backyard", and, within five to 10 years, cancelling the restrictions on mainland residents who want to travel to Hong Kong, or, if necessary, retain only the work permit system.
It also needs to continuously enhance the level of financial co-operation with the mainland. For example, renminbi- denominated stocks need to be issued in Hong Kong as soon as possible.
Fourth, some predict that Chinese enterprises will make up more than half of the Fortune Global 500 companies in two decades, and China will be a global manufacturing power. This year, there are 73 Chinese companies (79 if Taiwanese companies are included) on the list, a significant increase from only 11 a decade ago. Unfortunately, many of these Chinese enterprises have only an advantage of scale and are not real industry leaders; there are not many world-renowned brands within this select group. However, quantitative change can lead to qualitative change; these enterprises can be transformed into truly leading multinational companies within two decades.
Fifth, China is expected to make significant progress in the field of science, technology and education, and the University of Hong Kong is likely to be ranked among the top 10 in the world within two decades. According to a study by the science and technology think tank Battelle, China currently accounts for about 15 per cent of the total share of global research and development spending, and it will surpass the US spending within a decade. In addition, according to figures from the State Intellectual Property Office of China, total patent applications were more than those of Japan and the US in 2011.
In 20 years, China will almost certainly have made significant progress in science, technology and education. Research institutions and universities are the cradle for scientific and technological development. Hence, the international stature of Chinese universities should rise: The University of Hong Kong can surely rank among the top 10 in the world, while Beijing's Peking and Tsinghua universities are likely to be among the top 20.
Finally, China can narrow the gap with the US in the aerospace industry within two decades.
Without strong scientific, technological and industrial strength, progress in this industry will not be possible. It also needs strong support from communications, electronics, equipment, materials, chemical, metallurgy and other industries. Although China's achievements in the aerospace industry have been impressive in recent years, experts say it is still at least 30 years behind the US.
This is changing, and along with the updating and upgrading of related industries, as well as continuous national investment, China will become a space power second only to the US in 20 years. China may not be able to surpass the US, but it will surely be getting closer.
Thus, there is every reason to be optimistic about China's economic prospects over the next two decades.
- G.Bin Zhao: A CNOOC-Nexen deal would foster trade, August 03, 2012
On Aug 03, CEP Executive Editor G.Bin Zhao's article "A CNOOC-Nexen deal would foster trade" was published on South China Morning Post. This article can be download for free.
- G.Bin Zhao: Who's next in renminbi internationalisation push? from South China Morning Post, June 22, 2012
On June 22, CEP Executive Editor G.Bin Zhao's article "Who's next in renminbi internationalisation push?" was published on South China Morning Post. This article can be download for free.
- CEP Chief Economist will head research for VISA, March 01, 2012
On March 1, CEP Chief Economist Dr. Yang Tao was appointed as Director of the Research Center for Payments and Settlements within the Chinese Academy of Social Sciences. In addition, it was also announced that the Center and VISA, the global payments technology company had reached a preliminary three-year strategic cooperation agreement, according to which the two parties will cooperate on research regarding the theory and practice of payments and settlements, as well as the reform of the payment and settlement system.
- CEP Chief Economist gave lectures to governors of Jilin Province, February 23, 2012
On February 23, at the invitation of the Jilin Provincial Party Committee Organization Department, CEP Chief Economist Dr. Yang Tao attended a training class for governors (heads of counties and districts) in Changchun City, and gave a lecture entitled “How Can County Government Build a Diversified Financing System.” More than 80 governors from Jilin participated in the classes.
- CEP Chief Economist talks with officials of the China Securities Regulatory Commission, February 16, 2012
Commissioned by the Chinese Academy of Social Sciences, CEP Chief Economist Dr. Yang Tao met in conference with members of China’s Listed Companies Association, which was established by the China Securities Regulatory Commission on February 16. The two sides discussed issues related to jointly establishing a Research Institute for Listed Companies.
- German Chancellor Merkel speaks at CASS ,February 2, 2012
German Chancellor, Angela Merkel is delivering a speech at the Chinese Academy of Social Sciences in Beijing Feb 2, 2012, after arriving in China Thursday for a two-day visit, According to Xinhua News Agency. This is the Chancellor’s fifth visit to China since she took office in 2006. The speech is on "financial and currency policy issues". (Dr. Li Yang, Vice President of CASS hosted the event, Dr. Yang Tao, Chief Economist of CHINA'S ECONOMY & POLICY also attended it.)
Merkel will also meet with President Hu Jintao and Premier Wen Jiabao today, and will meet Chinese and German businessmen to discuss financial policies and the stability of the euro.
Experts say Merkel’s visit in the midst of the European Union’s debt crisis is to seek support from the world’s second largest economy. Chinese businesses, such as Sany group which has just acquired German firm Putzmeister, are looking forward to more cooperation between the two sides.
On the second day of her stay, Merkel, will visit Guangdong where nearly 500 German companies have a presence. She will be accompanied by corporate executives from the energy, chemicals, engineering, banking and electronic sectors.
- China’s Economy & Policy and FactSet Reach Distribution Agreement, November 10,2011
China's Economy & Policy (CEP) has announced today that it has reached an agreement with FactSet Research Systems Inc. (NYSE:FDS) (Nasdaq:FDS), a premier vendor of financial information, to include CEP research publications within the FactSet platform.
China's Economy & Policy and FactSet Reach Distribution Agreement
China's Economy & Policy offers unparalleled economy and industry analysis, policy insights and expert advice about China market. CEP is providing FactSet with high quality research reports among a wide coverage of industries and topics (e.g. finical services, energy, strategic emerging industries, healthcare, etc.) in the Chinese market as well as their impact around the globe.
According to the Managing Director of China's Economy & Policy, G.Bin Zhao, the agreement provides a professional platform for both existing clients and potential clients to access authoritative and up-to-date intelligence in China, “As we all know, China is the strategic emerging market which no investor would afford to lose. China's Economy & Policy will be one of the best advisors for clients to understand China and tackle the challenges.”
“Our top-class team of economists and experts with rich research experience and solid government background ensure the clients to get the first-hand, accurate and timely insiders' insights about China,” commented by Dr. Yang Tao, Chief Economist of China's Economy & Policy, Director General of Research Base for Industrial Finance (RBIF); Chinese Academy of Social Science (CASS).
- Market Publishers Ltd and China's Economy & Policy Sign Partnership Agreement, September 29, 2011
LONDON--(BUSINESS WIRE)-- Market Publishers Ltd and China's Economy & Policy signed partnership agreement for quality market research promotion on Internet. MarketPublishers.com is now authorized to distribute and sell China's Economy & Policy research reports.
Commenting on the agreement Tanya Rezler, Assistant Manager at Partners Department, said: “We are pleased to announce that we have recently partnered with China's Economy & Policy – the company offering high quality research reports and customized consulting projects on a wide range of China’s industries and topics, including finical services, energy, high-tech, healthcare, government relation, and more. Beyond all question, the services provided by China's Economy & Policy will be a great asset to our multinational clients in terms of business decision-making in China.”
In-demand research reports by China's Economy & Policy:
The “Going Global” Strategy for Large Chinese Banks. The report features current overseas location choices of large Chinese banks, analyzes the reasons for their placement decisions, and examines the regional strategies for future international expansion of the Chinese banking sector …
Inherent Problems in China’s Monetary Policy. As China’s financial system developed, more and more attention was attracted to the effects of monetary policy. The public have hanged hopes in the instruments of monetary policy, believing that they will solve multiple problems. The study analyzes and thoroughly discusses China’s monetary policy and its specific characteristics …
The Current Situation and Existing Problems for Private Capital in China. The focus of the study is the present situation and problems concerning private capital in China. The report explains the reasons of the government’s interest in private capital, significance and status of, as well as development prospects for private capital in China …
Systemic Risks in China’s Bond Market. Currently, the bond market in China has a wide sphere of influence and significant importance for financial stability. The report gives true insights into systemic risks in China’s bond market, providing in-depth analysis of the impact of systematic risks in the sector within the current cycle of rising interest rates …
More details on China's Economy & Policy and their research reports can be found at
- CEP Chief Economist speaks at the China Ocean Economic Forum, September 16, 2011
On September 16, 2011, the China Ocean Economic Forum was held in Xiangshan County, Zhejiang Province. The theme of the summit was focused on the implementation of the maritime strategy and the creation of a marine civilization. Experts and scholars worldwide were invited to conduct an in-depth study of the marine development strategy, marine industries, island protection and development, integrated coastal development, and other topics. Dr. Yang Tao attended the summit and made a keynote speech entitled Strategic Thinking on Developing Financial Support for the Marine Economy.
- Dr.Yang opened the China Forex Forum in Shanghai on 8 September, September 8, 2011
"The inaugural China Forex Forum in Shanghai on 8 September was a great success. The Forum attracted over 230 delegates, including corporate treasurers, world-class forex professionals, institutional investors, risk managers and economists. A host of expert speakers filled the day with lively debate and stimulating discussions on the internationalisation of the renminbi and the latest developments in and future forecasts for the forex markets.
Dr Tao Yang from the Chinese Academy of Social Sciences (Chief Economist, CHINA'S ECONOMY & POLICY) opened the conference with a stimulating and insightful presentation on China’s monetary and exchange rate policy. He provided the perfect platform for the first panel of experts who focused their discussion on the internationalisation of the RMB and the challenges and opportunities that this crucial issue presents to both corporates and investors, inside and outside China. Focus then shifted to the movements within emerging market currencies more broadly, in both Asia and Latin America, with economists, FX strategists and asset managers debating the major themes of the day. The dollar and the euro then became the focus of attention, while panellists raised questions over the future of the currencies, the economic health of both the US and the Eurozone, and whether or not investors would be forced to find alternative safe havens in the wake of recent turmoil. After lunch focus shifted from the macroeconomic themes of the day as HSBC presented a workshop on how to hedge FX risk, and a panel of experts discussed how to most effectively trade FX in highly volatile markets. The day closed with an animated debate on future macro challenges, including those presented by high levels of inflation, current account surpluses and capital controls. The day was full of engaging and lively debates, and provided valuable insight into the foreign exchange markets for all those who attended......."
(Source: http://www.euromoneyconferences.com/EventDetails/0/4279/The-China-Forex-Forum-2011.html ) Euromoney is the world’s leading organiser of conferences for cross-border investment and capital markets for portfolio and direct investors, financial intermediaries, corporations, governments, banks and financial institutions. Since the late 1970s, Euromoney Conferences has run events in more than 60 countries.
- Dr. Yang Tao Presided over the "International Financial Centre and Shipping Center" News Conference, August 9, 2011
August 9, the press hall of the Shanghai municipal government: Chief economist of CHINA'S ECONOMY & POLICY, Director General of Research Base for Industrial Finance, the Chinese Academy of Social Science, Dr. Yang Tao presided over the "International Financial Centre and Shipping Center Construction" news conference. Dr. Yang Tao and Ningbo vice mayor Su Limian answered reporters' questions together.
Besides, Dr. Yang Tao released a report entitled "Financial support for the marine economy" as one of the research results of the Chinese Academy of Social Sciences, gave an in-depth analysis of the domestic financial support for the status of the marine economy, and explore cooperation between Shanghai and Ningbo in the financial and economic area.
- Dr. Yang Tao Participated in the Sino-German Financial Stability Forum, July 12, 2011
Chief economist of CHINA'S ECONOMY & POLICY, Director
General of Research Base for Industrial Finance, the Chinese Academy of Social
Science, Dr. Yang Tao made a speech for The Sino-German Financial Stability
Forum on 12 Jul 2011 in Frankfurt am Main.
“Today, the People’s Bank of China and the Deutsche
Bundesbank organised a conference in Frankfurt am Main on topical issues of
mutual interest concerning financial stability. Dr Yi Gang, Deputy Governor of
the People’s Bank of China and Dr Andreas Dombret, Member of the Executive
Board of the Deutsche Bundesbank, jointly addressed the conference. Both
of them emphasised the importance of an open exchange of ideas and experience,
in particular between advanced countries and emerging market economies and they
underscored the shared intention of the People’s Bank of China and the Deutsche
Bundesbank to strengthen their cooperation in the area of financial stability.”
“The Sino-German Financial Stability Forum is an
important outcome of the Sino-German strategic partnership pushing forward. It
is part of an agreement on an intensified dialogue on key policy areas reached
by German Federal Chancellor Angela Merkel and Chinese Premier Wen Jiabao in
Beijing last summer. The establishment of this mechanism has now been written
into the Sino-German joint communiqué as a cooperative outcome of the first
intergovernmental consultation in Berlin in June 2011.”