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Marginalia: China is Doomed.

by Cat Wed Jan 7th, 2009 at 02:36:59 PM EST

Nekkid "Bad [FDI] News Out of China"

Read a collection of finance advisories for Westworld institutional investors. Notice the conspicuous absence of named foreign banks operating as their agents  ("cross-border capital flow") and supercilious substitution of "hot money" for "speculation" arising from liberalization of money marketing required of China by free trade agreements. Pettis and Wright -- apparently close personal friends of Setser-- attribute a (unofficial)(foreign currency) "reserve" bubble to Chinese criminals packing euros and USD like Columbian coke mules, because apparently the authors prefer, actually, not estimating legitimate "cross-border" commercial banking and brokerage activities apart from Anglo treasury swaps. And sales to PRC state-owned suckers, of course, that demonstrate national obligations or political subjugation to aliens.


There is no technical definition of hot money and of course, with much of it entering the country  illegally, it is tough to measure, but it is possible to obtain through proxies for speculative inflows and to track their change over time. In every case the proxy, however it has been derived, shows a startling increase over the past 12 months. [noooo, three years] The fact that in recent months the authorities have taken increasingly desperate measures to staunch the inflows confirms this interpretation of soaring hot money proxies.

Because they know the PRC restricts renminbi (once, briefly distinguished ForEx Certificates, now de facto convertible certificate) and corporate equities trade by broker license and by share class (HK, Shanghai, and Shenzen exchanges) and purchase of domestic assets such as real estate and yuan. Yuan not renminbi is the currency in circulation.

Foreign households (individuals) trading yuan, jiao and fen denominations in-country? No, I don't think so. Foreign households trading renminbi in open market? Yes, perhaps in shares of ETF vehicles marketed by commodity arbitrageurs but not likely. Chinese households converting yuan to renminbi to trade in open market? Through their retail Barclays or Citibank broker? Possible, but who's counting?

Back to Nekkid who also linked to this presumed sympathetic commentary: Oh, btw, the damage is done. Olympics are over! Boils are weeping! Time to exit!

And separate from the flight of hot money, we may be seeing a reversal of FDI investment as newly needy multinationals unload their stakes in Chinese companies to shore up their balance sheets, as Bank of America has. ...

As it happens Bank of America and UBS headline today's news.  Merrill Lynch, FRB primary dealer and recently acquired BoA brokerage unit handled the placements. Understanably, the US-based financial services firm is dumping 52.6B, or 13%, of its shares  in a JV known as China Construction Bank Corp. valued at HKD 3.92 each --that is neither euro or USD or remnibdi, signaling doubt in appreciation of the currencies. UBS sold its entire stake in Bank of China "31 Dec,  the day a three-year 'lockup period' ended."

[Mr] Li's Magnitico [Holdings Ltd] was part of a group of investors led by [bottom-feeding residential RE lender] Royal Bank of Scotland Group Plc that bought 20.9 billion shares in Bank of China in 2005, before the lender went public. Magnitico owned 24 percent of the group, giving it about 5 billion Bank of China shares, according to Bloomberg calculations based on the Chinese bank's 2006 Hong Kong initial share sale prospectus. ...

Bank of America plans to be "a long-term and significant strategic investor in CCB," the U.S. lender said in a November statement. The stock Bank of America bought in 2005 became eligible for sale in October, prompting analysts to suggest the U.S. lender would sell part of its stake. ...

Excellent example of financial capitalists' colonizing tactics, modified shock 'n' awe shall we say: Every territory needs a Millionaires' Club.

Bank of America canceled a December offering partly because of a Chinese securities law banning investors holding more than 5 percent of a locally incorporated, publicly traded company from selling shares within six months of buying the stock, two people familiar with the matter said at the time.

The U.S. bank decided to try again on expectations the rule doesn't apply to Chinese shares traded in Hong Kong, a person with knowledge of the matter said, declining to be identified. Bank of America spokesman Scott Silvestri declined to comment on the latest sale. [emphasis added]

Officially, if I recall correctly, total FDI in any one PRC-domiciled asset is limited to 50% ownership. This constraint may have tightened, if anything, since 2003. Back to motley blogger who's forgotten to mention that Royal Bank of Scotland owns 8.5% of Bank of China and Goldman Sachs, among others, owns 16.5B shares in Industrial & Commercial Bank of China Ltd.

Back to Nekkid's frequently cited "brilliant" editorial on money marketing -- missing the finer points such as   USD to EURO rates and either's exchange in renminbi.

ChinaStakes gives an update on the Chinese housing market that makes the US seem almost balmy [meaning, crazy? or placid?]. Note that in China, consumers mortgages are not common [because PRC restricts private credit and investment!] and even when they are used, loan to value ratios are very low, so a fall in real estate prices does not lead to the sort of large scale foreclosures that we see here [too funny]. However, Chinese banks [e.g. People's BoA Branch #25, People's GS Broker #18] are very exposed to developers [e.g. Peoples Blackrock-Archstone #4], and the article discusses how a very high percentage of new development is unsold (enough to constitute a three year overhang in Beijing, for instance).

Sinofile, your "China business matrix," reported bubble remediation strategy as early as Jan 2008. Kiss of death to anticipated rents.

I would be surprised to find an article or power point presentation that reproduced US Housing and Urban Development (HUD) "public-private" partnership benefits in Mandarin. I imagine these would be by now scrubbed by the PRC Google, if not SBA "champions."

Shanghai to stop non-local residents from buying houses to ease housing difficulties for urban low-income families

Xue Jianxiong, director of Youwei Real Estate Research Center, an institute for real estate research, says: "In fact, the purchasing power of foreign investors is focused in the high-end market. As a result, restrictions on foreign investment in real estate speculation will merely stabilize the housing market. But if non-local residents are not allowed to speculate in the real estate market, a vital dampening effect will affect currently excessive demand in Shanghai." ...

He says it can be predicted from this data that Shanghai will create a huge impact on the city's housing market by restraining non-local residents from buying local real estate through the Residence Permit System or other methods.

Who knows what the future holds: Stone-cold confiscation in 2009 or a "repurchase" program funded by official PRC reserves? Perhaps neither. China is doomed.

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European Tribune - Comments - Marginalia: China is Doomed.

Yuan not renminbi is the currency in circulation.

Foreign households (individuals) trading yuan, jiao and fen denominations in-country? No, I don't think so. Foreign households trading renminbi in open market? Yes, perhaps in shares of ETF vehicles marketed by commodity arbitrageurs but not likely. Chinese households converting yuan to renminbi to trade in open market? Through their retail Barclays or Citibank broker? Possible, but who's counting?

As far as I know, the Renminbi and the Yuan are the same thing. ForEx Certificates have been abolished in 1995.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Wed Jan 7th, 2009 at 03:39:16 PM EST
As far as I know, your (wiki) understanding is incorrect. Renminbi trades in global ForEx. Yuan does not. Yuan is a denomination of marketable renminbi. If you've been to mainland, you would know reniminbi is not domestic currency. People handle, save and spend yuan and its denominations. Renmnbi is a financial instrument, intermediate stock or denomination of yuan subject to state capital controls and demand parameters. Yuan is consumer currency. If renminbi does not circulate in-country, renminbi trade is categorically secondary market unlike USD or EURO. That barrier to consumer market entry is precisely the control Paulson et al lobbied to eliminate.

Very many commentators do not address this crucial factor on FDI "investment" in market making China schemes, because the state insulates yuan, not renminbi, valuation.

If you look up today's ForEx (for example), you'll find USD must trade to EURO in order to profit from HKD or CNY. Because HKD devaluation only favors CNY, ergo yuan assets.

Diversity is the key to economic and political evolution.

by Cat on Wed Jan 7th, 2009 at 04:12:12 PM EST
[ Parent ]
Honestly, I've done (small) business with Chinese, Singapore, Vietnamese firms but never calculate or operated currency hedges. I set my USD price, then left settlement to vendors.

FDI would like to believe all of China's economic development is dependent on renminbi conversion. Except for that yuan "savings glut" which could support structural investment and ROI on 1.B consumers IF renmnbi trade fails. Of course, this "planning" requires astute memetic manip by Chinese politicians.

Consequently, I've never thought to offer a ForEx opinion until today. Which is not to say, I had no idea how my suppliers broke even. Or I have often wondered why "experts" pretend renminbi and yuan are equivalent currency species. I assumed I was ignorant. But this is not the case.

Diversity is the key to economic and political evolution.

by Cat on Wed Jan 7th, 2009 at 04:29:27 PM EST
[ Parent ]
China faces serious internal issues right now.  For the most part, they relate to the collapse of industry in Guangdong.

This collapse has started in the early summer, when the factories in the heart of Shenzen started to close down.  At the time, the story was that China was moving up the manufacturing ladder, and that industrial production needed to be shifted to less expensive real estate further inland.

But, the financial crisis has intervened, and there is serious labor unrest in Guandong factories and elsewhere.  Now, the image of the "docile" Chinese factory worker is getting the same workover that happened when Korean workers took to the streets in the 1980s. Labor protests are going through the roof all over China.  In the near future, the CCP is going to face a difficult decision.  Abandon power, or resort to one of two difficult choices.  Use a heavy hand to stop protests in their tracks like in 1989, or, more likely, turn to nationalism after a breaking labor protests.

There's a nasty strand of racism that runs through Chinese nationalism that gives the Nazis a run for their money.  Textbooks from the 1950s showed much of East Asia including large parts of Russia,Mongolia,  South Korea, and all of Southeast Asia as "Chinese territories lost during the old democratic period."



And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Jan 7th, 2009 at 07:42:07 PM EST
Well, this pair of feature stories (BBC 4?, MNBC) do a decent job to convey perpetual Anglo-American interest in China Doom, wouldn't you agree?

Rather than address the question, How does unemployment "all over China" relate to FDI in China's capital market? Particularly the market penetration by multinational financial services firms into thousands of enterprise zones -- this is a topic I would have expected you to address, given your interests in US labor history, class conflict (hold that thought!), union organization, and union political agencies.

Here is one scheme I captured at china-strategies.com to emphasize the obvious economic topology BBC and MNBC roll over. (I've no idea about china-strategies' business.) Look! Guangdong is the southern-most mainland province (hold that thought!) of the coastal SEZs. And there's Shenzhen, one of the three finance centers!

Here is a report (pdf, 50pp) published by researchers, Fu and Gao, for the ILO, 2007. I found it and the map instantly by searching key phrase "enterprise zone." This is a very helpful paper as it details structural developments nation-wide since my introduction to the Shanghai Stock Exchange (a narrow perspective on "open zones" and Export Processing Zones (EPZs) to be sure, hosted by native academics and investment bankers). Fu and Gao depart from where my experience in China ended by postulating three waves of capital stratification: "The first stage began with the establishment of SEZ of Shenzhen, which is the first 'experiment' that China tried, to open its door to the world. The sign of the second stage was Shanghai Pudong New Area, which includes one ETCZ, on BZ (Waigaoqiao), one EPZ (Jinquiao) and one Financial and Trade Zone (Lujiazui).  Pudong was thought of as the first stone of China to cross the river of market economy. The third stage was triggered by China's entry into WTO and from 2005 a new type of 'National Integrated Support Reform Pilot Area' was founded in Pudong and Tianjin Binhai New Area. ...Several financial deregulations are being introduced there exclusively and Binhai could be a potential financial rebalancing act against the existing centers of Shanghai, Hong Kong and Singapore." [emphasis added]

Will that assumption hold in 2009?

There's a nasty strand of racism that runs through Chinese nationalism that gives the Nazis a run for their money.

Is there? Or is this "nasty strand of racism" embroidered by Anglo-American literary conventions in the genre of China Doom since the "Opium Wars"? China's demography and history are complex, to say the least, an observation buried by the purge of Sino-geopolitical "expertise" from the US state department and universities throughout the '40s and '50s. It's dangerous I think to accept at face-value as authorative analysis offered by MSM vignettes and post-Kissinger diplomatic instructions for handling oblique propaganda. For example by MSNBC: "The Outlook report also stressed the nation's strains were about more than growth rates. Protests were increasingly politicized, making it harder for officials to douse them by force or cash hand-outs, the report said.

"Social conflicts have already formed a certain social, mass base so that as soon as there is an appropriate fuse it always swiftly explodes and clashes escalate quickly," said Huang."

The temptation to simplify Chinese "nationalism" into north-south ethnic conflicts or to lever recent militancy against Tibet and Burma/Myanmar to an issue of race rationale is a powerful palliative for Anglo-American audiences. A people indifferent to the cultural and class distinctions between Cantonese, Mandarin, the scores of mutually unintelligible languages in between, Hoch Deutsch or Japanese for that matter.

Finally, I have to wonder about the plight of the young bio-engineer profiled by the BBC. Are his employment opportunities, his militancy and political oppression any different than that of recent graduates in the US or UK?

Diversity is the key to economic and political evolution.

by Cat on Thu Jan 8th, 2009 at 03:50:37 AM EST
[ Parent ]
The problem with labeling stories that detail the reality of widespread factory closures in Southern China "China is Doomed" propaganda is that it tries to create a false mythology that ignores both the scale of these closures (recent reports suggest that something like half the factories in Guangdong will close by the Spring of this year) and the political situation in China (the CCP is now a party dominated by native capitalists, Capitalism without Democracy and Red Capitalists both give detailed accounts of how this happened.)

What's changed is that anger had previously been directed at the employers or local officials that workers felt responsible for a situation, now it's boiling over into anger at the Beijing government.

China faces the very real threat of a worker's revolt.  And Chinese elites are really good about twisting popular anger into a nationalist response, see for example what the Empress Dowager pulled off during the Boxer Rebellion.

As for Chinese nationalism, there's a great deal of writing about this, but I think that the best book to get a grasp of what's happening is Vamik Volkan's Bloodlines.

You are absolutely right that China suffered during the Opium War, but this history has constituted what Volkan calls a "chosen trauma", that's repeated again and again.  Japanese nationalism developed from something similiar, e.g. the forced opening of Japan by Commodore Perry.

Because part of the process of "modernization" was the suppression of the native identity in favor of modernity, which was largely Western, you have this building up of intense resentment at work.

If you really want to understand the intellectual debates going on in China, read What does China Think? by Mark Leonard.  For nationalists in China, the only way to resolve the sense of humiliation that they feel the "West" imposed on them is to denigrate Western culture as inferior, immoral, and lacking humanity.  This matched with the memory of China's previous regional economic hegemony, create a powerful cocktail.


And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu Jan 8th, 2009 at 07:29:47 AM EST
[ Parent ]
Thank you for a thoughtful reply. Some day I'll get to the  library to read the books you recommend. The synopses, altogether, illustrate how --even in China!-- profit motivation is firstly a catalyst of "decentralized" market activity. Then a solvent of political economy, or as one reviewer minces the Blagojevich Effect, "discreet collaboration with local officials, entrepreneurs have created a range of adaptive informal institutions."

I think, I understand your concerns about a "threat of a worker's revolt" and objection to the title of this post "China is Doomed", because it seems to trivialize social and political conflict there, the "intellectual debates"?

The problem with labeling stories that detail the reality of widespread factory closures in Southern China "China is Doomed" propaganda is that it tries to create a false mythology that ignores both the scale of these closures

But my commentary does not detail widespread factory closures in southeast China. The political reality and organization of workers in opposition to the CCP in Guangdong --or in any of the other thousands of enterprise zones created since 2003-- is the article you will write. I indeed offer no objections to every form of private property. And the "scale of closures" in Guangdong --compared by value, size, labor composition-- to the other 80% of the economy deserves the CCP's public policy respect but perhaps not my solidarity in hysteria. I noticed Fu and Gao data suggest Guangdong "workers" represent some kind of professional vanguard.


My post concerns the reproduction of "stories" collected by a casual advocate  of globalization that purport to qualify foreign direct investment and divestment in China's structural economy and capital structure (a three-year "overhang" in new residential construction for godssake! While NPR periodically broadcasts documentaries on appalling factory worker "dormitories") and Anglophone marketing which immediately seeks to exculpate "capital flight" from yet another failed developing nation to the (illusory) safety of savings, i.e. not spending on corporate debt, public utilities, or living wages.

You understand, such a self-serving, spiteful rationale for WTO-lubed profiteering is itself the same politically "conservative," financially "liberal" chestnut lobbed by FT aristocrats toward free market skepticism expressed in EU resistance to finance deregulation? EUROPE IS DOOMED.

ALL OF AFRICA IS DOOMED BECAUSE, WELL, CHINA IS DOOMED. VENEZUELA IS DOOMED. BOLIVIA IS DOOMED. ALL OF SOUTH AMERICA IS DOOMED. CUBA IS DOOMED. SPAIN IS DOOMED. IRAN IS DOOMED... and so on and so forth with the curses.  

Capitalism without Democracy. "explodes the conventional wisdom about the relationship between economic liberalism and political freedom."

Red Capitalists in China. "Westerners hoped that the emergence of a new civil society led by the newly empowered Chinese business class would help transform China into a democracy. "

Bloodlines. "a world-renowned psychiatrist specializing in international relations, explores ethnic violence by examining history and diplomacy through a psychoanalytic lens."

As for the the "Opium Wars" in decontructions of modern Chinese republican ideology:  I confess that I'm no historian, but I think your your irony meter is busted.

African Americans are still agitating for reparations, a'right?

Diversity is the key to economic and political evolution.

by Cat on Thu Jan 8th, 2009 at 02:39:25 PM EST
[ Parent ]
Thanks so much for the insight and the bibliography.
China is a no-knowledge zone for me, and for a long time I've felt a sense of real danger in that fact, and a hunger to fix it. Would you suggest a good starting place, for an only moderately sclerotic geezer?

My son chose to study chinese as his third language--actually fourth, since he speaks some Zulu- don't know which of the many language possibilities he focused on.

Again, great exchange.

Some diaries need 90 comments to be valuable. Some need ten.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Sat Jan 10th, 2009 at 05:32:30 AM EST
[ Parent ]
Heavens to Betsy! Don't thank me. Thank that man from "Middletown" for a bibliography. Thank Fu and Gao for making public their research with bibliography appended. Always, always include the reading footnotes and bibliography in one's literary journey. In this way, the path to comprehend the magnitude of political errors and  human tragedy continues to unwind.

As I mentioned, my sympathy for and knowledge of Asia's societies is narrow and derives from particular personal relationships and business experience in situ. (The dreaded anecdote!) Neither do I speak nor read these languages myself.(My child who is 10 is completing her second year of instruction in Mandarin. This I refer to fondly as her "piano lessons." :)

If I had to recommend a body of historiography --and I'm pleased that you inquired!-- I would begin with the work of Martin Bernal, I say to myself. Why not? I have tremendous respect for this man's intellectual honesty and talents and prodigious bibliographies, although I haven't read one volume of his on this subject matter. The goal is to acquire associative and synthetic ability, to assimilate ethical technique, and to exercise my philosophy and scrutinize all things profane, is it not? I have learned a great deal about myself and the sociology of knowledge from his abrupt and controversial rebellion from the ranks.

I begin my interboobz search for information thus, "Martin Bernal" ...
Chinese Socialism to 1907.
The Chinese abandonment of Marxist Social-Democracy and the triumph of Anarchism 1906-1907
China in Revolution: the First Phase, 1900-1913

Then there is... oooh
Hobson, John, The Eastern Origins of Western Civilisation : "It does not merely provide a thoughtful response to recent Eurocentric world histories. It is also certain to play a central role in the new wave of studies demonstrating the substantial contributions to modern `civilisation' made by so many non-European peoples." Martin Bernal

apotheosis? ...

Schwartz, Benjamin, In Search of Wealth and Power: "His book is an analytical biography of Yen Fu (1853-1921) the essayist and translator of Spencer, Huxley, Mill, Montesquieu and others...For an understanding of the unresolved conflict between Chinese civilization and the outside world this study is no less illuminating and important than his analysis of Mao.--Times [Murdoch Alert?]; "Probably the most important cross-cultural study of ideas published in the last twenty years. It is not surprising that a brilliant and subtle scholar like Professor Schwartz should choose Yen Fu.--Martin Bernal

and apostasy ...

Hsia, Tsi-an (1916-1965) The gate of darkness : studies on the leftist  literary movement in China: "It would not be true to say that this important literary critic from Taiwan had no sympathy for the spirit that drove these writers to participate in the Communist revolution. However, his agenda is clear nonetheless: he aims to expose the deep conflicts between the writers' own ideas and aspirations and the constraints placed on them by the ideology and policies of the Communist Party. In so doing, he destabilizes PRC claims about the political roles and artistic merits of several of its most revered literary heroes."

at which point appears a fork in the path where that man from Middletown stands.

Diversity is the key to economic and political evolution.

by Cat on Sat Jan 10th, 2009 at 12:43:05 PM EST
[ Parent ]
Alluding to "some kind of professional vanguard" in Guangdong, here is a timely lesson plan, courtesy of Asia Times, on CCP barriers to democratizing (horrible word) intellectual debate and "reform" -- an impulse having quite another meaning among Western politicians and their "worker" constituents. Meet Chinese opinion makers:

While expectations for policy changes are not high as Beijing marks the 30th anniversary of the reform era, a clutch of forward-looking cadres and intellectuals are taking advantage of the occasion to press for bolder measures, particularly in political liberalization. ...

The Hu-led Politburo's hard-line attitude toward political reform was evident in the harsh treatment meted out to some of the approximately 300 intellectuals, including scholars, writers and journalists who signed Charter 08, a petition demanding that Beijing honor the 60th anniversary of the UN Universal Declaration of Human Rights by introducing systems and principles including elections, judicial independence and freedom of speech and religion....The authorities responded by detaining the leaders of the campaign, including well-known writer Liu Xiaobo and political scientist Zhang Zuhua. ...

 As the country is buffeted by austere economic realities, the relatively reformist mood of late 2007 and early 2008 seems to have been forgotten. About a year ago, Peking University Politics Professor Yu Keping, deemed an advisor to Hu, caused a stir by penning an essay called "Democracy is a good thing." Moreover, a group of officials in southern China, including Party Secretary of Guangdong Province Wang Yang, spoke enthusiastically about a "third wave of thought liberation". ...

However, much stronger - and increasingly impatient - calls for thorough-going reform, particularly liberalization of the political structure, are being made by retired officials and senior academics who are often referred to as "public intellectuals" (gongzhong zhishi fenzi) in the Chinese media. Given that many joined the CCP in the 1930s and 1940s, senior public intellectuals are given more leeway by censors and state security agents to speak up. Among the most vociferous is respected economist Wu Jinglian, a one-time confidante of former premier Zhu Rongji. ...

Hu Fuming, a renowned political philosopher, also railed against further procrastination about political reform. A retired professor, Hu was widely credited for having fired the first salvo for "thought liberation". In mid-1978, he published the article "Practice is the sole criterion of truth," which indirectly laid into the blind worship of "Mao Zedong Thought" popularized by Chairman Mao's chosen successor Huo Guofeng. Reminiscing about his audacious gesture, Hu told the official media that "I was psychologically prepared to go to jail" for running afoul of the powers-that-be. ...

In his article on the 30th anniversary of reform, which was published in the Guangzhou-based Southern Weekend newspaper, Hu Deping focused on the liberal pronouncements of Marshal Ye Jianying (1897-1986). Ye, also a former chairman of the National People's Congress (NPC), played a pivotal role in smashing the Gang of Four in 1976. Hu quoted Marshal Ye as scolding the CCP leftists [bwah!]: "It's as though implementing democracy amounted to a restoration of capitalism ... Some of our comrades become very nervous once they hear the word 'democracy.'



Diversity is the key to economic and political evolution.
by Cat on Sun Jan 11th, 2009 at 06:23:43 PM EST
[ Parent ]
After all is settled, the Friedmannian free market episode in China is nothing else than just another Cultural Revolution, or yet another Great Leap Forward. It's always interesting times in China...
by das monde on Wed Jan 7th, 2009 at 10:40:36 PM EST
And When WTO Tax Breaks End | IHT | 8 Jan 2009

China manages its reserves with considerable secrecy, but economists believe about 70 percent is in dollar-denominated assets and most of the rest in euros. The country has bankrolled its huge reserves by effectively requiring its entire banking sector, which is state-controlled, to hand nearly one-fifth of its deposits over to the central bank. The central bank, in turn, has used the money to buy foreign bonds....

The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinational companies are hoarding their cash and cutting back on the construction of factories.

The second trend is that the combination of a housing bust and a two-thirds fall in the mainland Chinese stock markets over the past year has resulted in moves by many overseas investors - and even some Chinese - to get money quietly out of the country. They are doing so despite China's fairly stringent currency controls, prompting the director of the State Administration of Foreign Exchange, Hu Xiaolian, to warn in a statement Tuesday of "abnormal" capital flows across China's borders; she provided no statistics.

China's most porous border in terms of money flows is with Hong Kong, a semi-autonomous Chinese territory that has its own internationally convertible currency. So much Chinese money has poured into Hong Kong and been converted into Hong Kong dollars that the territory has had to issue billions of dollars' worth of extra currency in the past two months to meet the demand, shattering its previous records for such issuance.

A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses. ...

Many mainland Chinese companies are keeping more of their dollar revenues overseas instead of bringing them home and converting them into yuan for deposit in Chinese banks. In essence, they would not show up on the central bank's books. So, overall Chinese demand for dollars would not be falling as much as the government's demand for dollars, said Sherman Chan, an economist in the Sydney office of Moody's Economy.com. ...

But specialists in international money flows [paging Dr Setser...] caution against relying too heavily on these statistics [Treasury estimates of FHA bond purchases]. They mostly count [US treasuries] bonds that the Chinese government has bought directly, and exclude purchases made through [?] banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly.

H/T Jesse

Diversity is the key to economic and political evolution.

by Cat on Thu Jan 8th, 2009 at 04:41:34 AM EST
 Not so special any more | China Daily | 6 Sep 2007

New economic policies pose new challenges for these hubs that churn out about 10 percent of the country's total industrial output, 15 percent of exports and about a quarter of realized foreign direct investment, robbing them of the policy advantages once bestowed upon them to power national growth.

The first challenge comes from the new corporate income tax, which takes effect next year [2008]. The new system will not only unify tax rates for domestic and foreign enterprises but also deprive development zones of the preferential taxes they have come to enjoy.

For example, foreign firms located inside these zones only pay an income tax of 10 percent but at least 15 percent if located outside.

The second setback comes in the shape of land-use restrictions. Earlier, if development zones needed more agricultural land to expand, all they needed to do was apply to the government for permission, which was seldom turned down. But others weren't allowed the same facility.

What a coincidence easements on Foreign Funded Enterprise (FFEs) should end at the same time The Financial Crisis destroys FFEs liquidity for expansion!  

Diversity is the key to economic and political evolution.

by Cat on Thu Jan 8th, 2009 at 06:10:24 AM EST
[ Parent ]
... stealth policy. Make a change when it won't put any immediate crimp on the activities of most participants.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Jan 10th, 2009 at 05:59:07 PM EST
[ Parent ]
Indeed. My comment on timing is meant to be facetious. I don't imagine anyone on either side of investment into China (real capital and money markets) was unaware SEZ tax incentives are scheduled to phase out. My understanding from info in 2003, these schedules are stipulated as SEZs are authorized. So if I were inclined to track private capital movements in China and the data were available, I'd be looking, initially, for rolling divestment by zone-type, say, every three years, since 2000. (This trend apart from change in off-shore ForEx vehicles, where HKD sops mainland inflation apparently.) I'd expect the periodicity of such credit events to lengthen and volatility to regress, over all, as SEZ economies and PRC-investor "relations" mature. After all, in the US  municipal and state agents compete on tax incentives to attract investors and phatasmagoric job creation. The PRC entreprenurial class is just warming up.

As for the shocking evidence of covert financial and para-military activities revealed by Ms Klein, count me among those "conspiracy theorists" whose eyeballs rolled out of their sockets decades ago.

We're living through an era when the notional value of derivatives trade and "black pools" was (re)discovered and promptly dismissed from polite conversation of regulatory transparency.  

Diversity is the key to economic and political evolution.

by Cat on Sun Jan 11th, 2009 at 05:42:07 PM EST
[ Parent ]


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