"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

07 January 2007

YUAN REVALUATION ALERT: China sizes up the 'enemy'

China Contemplates How the West Can Bail Out its Banks ASAP at its First Economic Summit Since 2002. Can they count on Hank Paulson to Deliver their goods??

China is now taking its $1.1T in $ reserves to the next level. They are engaged in a serious hunt to buy up natural resources in public and privately traded companies FAST, before the dollar depreciates 25-35% in 2007. Look at the interesting detail in this article from Asia Times. The first major summit on economic policy since 202 and it's "unclear" whether YUAN revaluation will be discussed.
HONG KONG By Olivia Chung, ASIA TIMES- Top Chinese leaders and financial policymakers are expected to get together next month to discuss how to strengthen the competitiveness of the country's financial institutions in the face of increasingly aggressive competition from their foreign rivals. With the end on December 11 of the five-year [transitional period for its entry to the World Trade Organization (WTO), China has fully opened its banking sectors to foreign investors and further relaxed its restrictions on overseas investment in the insurance and securities industries.

To cope with new challenges brought up by the opening, an all-important Central Conference on Financial Affairs is scheduled to be held around the Lunar New Year period, according to Chinese media reports. The Chinese New Year falls on February 18 this year. This will be the third meeting of its kind over the past three decades. Its agenda will include the restructuring of the Agricultural Bank of China (ABC), the last of the "Big Four" state banks to be turned into a joint-stock enterprise. For this purpose, the government will have to inject huge capital into ABC to boost is capital adequacy and lower its non-performing-loan ratio.

Only the bailout of CDB is on the agenda, with the remaining Western money that can be mustered. MUST BUY ALL CHINESE STOCKS ! (Is there a regulator over there?? Not one here anyway...HMNNN)

Restructuring of the China Development Bank (CDB), the country's policy bank, will also likely be on the agenda of the upcoming meeting. It is also expected that policy principles will be set to grant domestic financial institutions greater flexibility in operation. Currently, the Chinese government bans domestic financial institutions from engaging in so-called "cross-sector" operations. For example, a bank cannot run insurance or securities brokerage businesses, and vice-versa. Such a ban has seriously restricted the growth of domestic institutions. Calls have been on the rise in China that the current restriction puts domestic institutions in an unfavorable position in competition with their foreign rivals, which operate with much greater flexibility.

However, it is so far unclear whether the yuan's exchange regime will be discussed at the upcoming meeting.YEAH, NO CHANCE !
Under the current political system, the Central Conference on Financial Affairs has been created as a venue for handling such important policy changes.

The first such conference was held shortly after the Asian Financial Crisis in 1997. It was during that meeting that Chinese leaders made the decision not to devalue the yuan despite the sharp decline of nearly all other Asian currencies. Then-premier Zhu Rongji used to boast that it was China's great contribution to help stabilize the situation in the region. It was also during that meeting that the decision was made for the Ministry of Finance to inject 270 billion yuan (US$32 billion) into the Big Four state lenders - the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB), as well as ABC - in 1998. Another decision was to allow the Big Four to write off 1.4 trillion yuan worth of bad debts and to set up four asset-management companies - Huarong Asset Management Corp, Cinda Asset Management Corp, China Orient Asset Management Corp and Great Wall Asset Management Corp - to handle these bad assets.

The second Central Conference on Financial Affairs was held in 2002, after China joined the WTO, with a focus on how to strengthen supervision on commercial banks and how to prevent a financial crisis from sweeping the country. The 2002 meeting decided to kick off a restructuring of ICBC, BOC and CCB, with an aim to turn them into joint-stock enterprises for public listing. For this purpose, the Chinese government had once again to inject huge funds, $60 billion in total, into the three lenders. By now, CCB is listed in Hong Kong while the other two sell stocks in both the Hong Kong and Shanghai bourses. After a decision of the conference, the China Banking Regulatory Commission (CBRC) was set up to enhance supervision on commercial banks. THE CHINESE PLUNGE PROTECTION TEAM !

The upcoming third conference is also likely to discuss whether a single super-financial supervision body will be created to oversee jointly the operations of the three financial industries, banking, insurance and securities, according to the 21st Century Business Herald, a leading business newspaper based in Guangzhou. Currently, the three sectors are separately supervised.

To prepare for the upcoming meeting, about a dozen special groups have been formed and led by ministerial-level officials to study issues to be discussed in the conference. For example, a study group on rural financial reform is led by People's Bank of China vice governor Wu Xiaoling, a study group on insurance issues is led by the China Insurance Regulatory Commission and a study group on securities by the China Securities Regulatory Commission.

Another top concern in financial reform to be discussed in the meeting is to separate executives in state-owned or -controlled financial institutions from the government hierarchy. Currently, executives in state financial institutions hold ranks in the government hierarchy. For example, the Big Four are regarded as vice-ministerial organs and their chiefs vice ministers.

To separate senior executives from official hierarchy is perhaps a final step to push state financial institutions into completely commercially operated organs, independent of government intervention. The leaders of the State Council have time and again said the criterion to judge the operation of a state institution should be its performance, not its rank. "To scrap executives' official ranks is to make the financial institutions 'real enterprises' and encourage the heads of the enterprises to do better jobs in their posts,' said Hu Weitao, chief analyst at United Securities in Shenzhen.

He said the reform idea aimed to break the "iron rice bowl" mentality among executives in financial institutions who afterward would be awarded based on their performance and not by their ranks. Executives of foreign financial institutions do not hold government ranks. Hu also said scrapping administrative ranks for bank governors will help normalize the relationship between the government regulators and the institutions under their supervision.

Currently, as the state financial institutions hold ranks, the strength of supervision by government regulators, which may be just at the same rank or just a little bit higher, would normally be reduced. For instance, the administrative rank for the chief of CBRC's provincial bureau is at the sub-minister level, the same as governors of provincial branches of the Big Four. "A new rank system should be introduced to hire executives through market-oriented principles, in order to nurture a team of 'real bankers'," he said.

The Chinese call his the "full opening of their financial market" - if only there were one million Michele Leders over there to crack this convenient liquidation open.

At present, banking supervisory functions are divided among the central bank and the CBRC, while bureaus under the central bank also monitor the securities sector. The reform of the ABC, the last of China's Big Four lenders yet to undergo a joint-stock reform, and the commercialization of the policy bank CDB will also top the agenda at the financial meeting. To deal with challenges brought by the full opening of the financial market, the nation's biggest banks have been encouraged to restructure and sell shares, putting themselves in line with international disclosure and accounting standards to improve their competitiveness, Hu said. "The success of the three of the big four state-owned commercial banks' shareholding reform have become a catalyst for the reform of the Beijing-based ABC,' he said.

As for the restructuring of the ABC, CBRC chairman Liu Mingkang last month said it was very likely that the ABC will get a government cash injection before seeking public listing as a whole. Among the Big Four, ABC has the worst debt quality and the largest number of employees, caused by massive unprofitable lending to the agricultural sector. Its bailout may need $100 billion for bad-debt disposal and a shareholding revamp, Xinhua News Agency quoted an official from the Central Huijin Investment Co as saying. ONLY A QUARTER AS DISCLOSED, MAYBE HALF??? ABC's bad loans accounted for 24.06% of its total lending at the end of June. By comparison, reforms of the BOC, CCB and ICBC have made progress in reducing bad-loan ratios, with respective ratios dropping to 4.19%, 3.51% and 4.10% by that time.

The details of restructuring of the policy bank, CDB, will also be discussed at the upcoming meeting, which will focus on whether the bank will operate both as a policy lender and a commercial one, the 21st Century Business Herald said.

Barrons says it's time to sell Chinese stocks. Maybe they are right this time.

China Stocks Look Ready for a Correction
By Leslie P. Norton
IS THE BIG CORRECTION IN CHINA SHARES starting at last? Late Friday, China boosted its bank-reserve requirements for the fourth time since June, and it could raise interest rates by mid-year to rein in its boom. In trading later in New York, Chinese shares fell sharply. The ishares FTSE/Xinhua (ticker: FXI) exchange-traded fund was down 6%, while big-caps like PetroChina (PTR), China Life (LFC) and China Mobile (CHL) swooned. Quite a reversal from last year's enormous gains, which took place as China reformed its share markets, economic growth climbed, the currency snapped higher.


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