Dear Chinese Banks Shareholders….

Without even a nice note to public share holders, Chinese banks are in the process of reversing years of progress and is reverting back to state banks in a planned economy.  Granted, socialism is the economic system of our time.  However, unlike elsewhere, the Chinese government, which is the majority shareholder of most of China’s […]

“Will job losses lead to social unrest?” My Take

Today, there was a note written by Wang Tao at UBS with the above title. The question is a crucial one today because bullish sentiment for China depends almost entirely on the Chinese government’s ability to prevent large scale social instability. The conclusion of the piece was that “large-scale unrest that threatens general social stability and overall investor confidence is unlikely.” The arguments sound quite reasonable:

Workers are angry; the (central) government pays

The Chinese press these days are filled with fascinating stories.  One story from Sina details what the Zhangmutou Township government in Dongguan had to do to placate some 7000 angry workers laid off by a toy factory without pay.  To placate the workers, the township government decided to pay the August, September, October wages of these workers along with over-time.  Fine, but anyone with cursory knowledge of Chinese public finance knows that cash strapped township governments with few revenue sources, even if they are located in prosperous Guangdong, do not have the means to pay this amount.  Some simple math: suppose each worker is paid USD 150 a month and overtime is 10% of total wage bill.  The township government would have to pay 150*3*7000 + 0.1 (150*3*7000), which is a whopping 3.5 million dollars (roughly 23.5 million RMB).   Of course, the Dongguan government has the means to pay this amount.  However, if we bear in mind that wage arrear is cropping up in all the townships of Dongguan, the Dongguan government is clearly facing an unmanageable problem.

Who is getting the money?

More details have emerged about the 4 trillion stimulus package that China has rolled out.  The main questions remain: who will get the money?  How will it be spent?  In a revealing article published the 21st Century Economic Herald (my favorite), reporter Wu Hongying gives a detailed account of how Chongqing (a provincial unit controlled […]

A Tour of the Stimulus Package and Beyond

A lot has been said about the 4 trillion RMB “stimulus package” already.  As a China specialist, I will just go over some details on how it is likely to be carried out and its implications.

First, a brief primer about state directed investment in China, the core of the forthcoming package.  Usually, the central government sets a ceiling on large fixed asset investment projects. If a local government wants to build a port somewhere, even if it is doing so entirely with its own money, it has to receive National Development and Reform Commission (NDRC) permission to do so.   If it is a state sponsored project, which means it is part of the five-year plan (yes, those still exist), a project can lobby the NDRC for central funding. However, even if that were the case, the majority of the financing typically comes from local government (or SOE) self-raised capital and bank loans.  Thus, the 4 trillion is not all central government money; the majority will come from local budget and bank loans.

Big Bad Banks are Back

I just saw a pretty alarming figure today from the 21st Century Economic Herald. I attach it here for readers’ reference, but unfortunately, it is in Chinese.  Let me explain though.  The rows basically show changes in non-performing loans in 100m RMB unit and in percentage for state banks, joint-stock banks, city commercial banks, agricultural commercial banks (RCCs), and foreign banks respectively.  The columns are 1Q08, 2Q08, 3Q08, and change between 1/1/08 and 3Q.  Although overall, banks were able to achieve “double declines,” an important CBRC target that seeks to decrease both NPL amount and NPL ratio.  However, as we can see on the second row with figures, much of the work is done by the joint stock banks.  For the state banks (ICBC, ABC, BOC, and CCB) shown on the first row with figures, 2Q and 3Q NPL amount actually increased by 10 billion and 14 billion RMB respectively.  As a percentage, that is a small increase, but it is the first such increase in a few years.  Overall, state banks, which control like 60% of the market, saw an increase of 2.4 billion in NPLs.  Granted, that is a tiny amount.  However, please bear in mind that the state banks are in the mean time writing off loans every quarter (if readers know by how much, please share, but my guess is 2-30b RMB a quarter).  Also, the loans that show up as NPLs now were already in trouble at the beginning of the year.  I think in most places, real estate developers didn’t get in serious trouble until June or so.  Thus, as we move toward first and second quarter next year, the loans that are currently overdue (not non performing) will become NPLs.  I think the market is reacting to this now and will continue to react as such until the true scope of the problem is known.

Incentives Faced by CIC Managers

I just finished a paper for a conference at Cornell organized by Kirshner and Helleiner.  They asked me to write a piece on the CIC, which may be timely because the fx reserve in China just increased to 1.9 trillion, as the previous post points out.  I basically evaluated whether it would be realistic for the CIC to replicate the performance of Temasek or GIC.  My conclusion was that the political incentives facing CIC managers are vastly different from those facing Singaporean managers.  I attach the executive summary below.  If you are interested in the full paper, please email me.

Bundling in China

Due to strong political pressure at the highest level and seemingly declining inflation, the State Council caved and increased the credit quota by some 200 billion RMB.  Well, that only goes so far, and much of it still goes to larger firms.  So, how are they dealing with the continual liquidity problem?  Bundling!!  Local governments, […]

Restructuring inside the PBOC

China Securities Times just reported that the PBOC will add a new department (si) in its organization to manage foreign exchange. It will be called the department of exchange rates (汇率司). At this point, its main duties will be to formulate recommendations on foreign exchange rates, monitor fx movements in and out of China, monitor […]

Michael is right: policy priority shifted

This short commentary basically echoes Michael Pettis’ last post.  Over the weekend, Wen Jiabao, Vice President Xi Jinping, and Vice Premier Li Keqiang took trips to the southern and eastern provinces to “inspect” exporters.  They assured manufacturers that they will not be squeezed between tightening monetary policies and rising RMB valuation.  In official announcements, the […]