George Chen

Beijing debates the yuan

December 30, 2010
There’s apparently growing debate in Beijing over the possibility of interest rate reform next year. The latest opinion was voiced by a senior central bank official, who said the government should lift the ceiling on bank deposit rates to help rein in accelerating inflation in the world’s second-biggest economy. Will this happen in 2011? It seems much more likely than the possibility of a fully convertible yuan anytime soon. “China should allow deposit rates to float upwards. It would gradually enable the market to price in expectations of interest rate rises,” Sheng Songcheng, head of statistics at the People’s Bank of China, said in an article published on the central bank website late on Dec. 29. “That would help change negative real deposit rates and curb inflation,” he added. If Sheng had published the article as a commentary in a local newspaper, it would more likely have been considered his personal opinion, but posted on the central bank’s website, the top headline on the front page no less, it’s certainly something to be taken very seriously. In my view, Sheng’s article was published not only for the market to analyze but also as a pitch to the top leaders in Beijing for more serious consideration. Beijing controls China’s interest rate market by setting a ceiling on deposit rates and a floor on lending rates. This protects banks from competition and ensures they have a decent interest rate margin, which is around 3 percentage points now — that’s partly why banking jobs in China are very popular and considered one of the most stable jobs, in particular with big state-owned lenders. Many people say working for a bank in China means you have an “iron rice bowl”. The interest rate margin provides a safe and stable channel of profit for banks. Whatever they do, they have the “3 percentage points” to make money. However, given that the rate is fixed by the central bank, it may also explain why local people often complain about the service they receive at big banks in China. How bad? You should consider it normal if you are stuck in a long queue for about 30 minutes or even an hour before you reach the teller. The central bank usually raises both loan and deposit rates, like the newest rate increase on Christmas Day, which leaves the profit margin of banks unchanged. If interest rate reform really takes place next year, we should see a lot of interesting stories about the banking industry. At least, I do hope more competition can bring Chinese financial consumers better service. In fact, any move towards a more market-oriented interest rate reform is not just about the banking industry. Such moves will also affect the foreign exchange rate of the yuan, which may well explain why some officials at the State Administration of Foreign Exchange don’t really like the idea of a free interest rate market. They say it may encourage more speculative money inflows to bet on faster yuan appreciation, making the foreign exchange regulator’s job more difficult or less important to some extent. Why less important? You might think they would be busier fighting a faster rising yuan. Yes and no — if you have some decent central bank sources in Beijing, you may come to know that there’s always a strange tension between the PBOC and the SAFE, similar to the tension between interest rates and the foreign exchange rate. I remember a SAFE official once privately told me that the day the yuan becomes fully convertible may be the same day the offices of the SAFE are closed. This may sound extreme but think — the SAFE’s job is to control the yuan, the more convertible the yuan becomes, the less controls you need. Then that will also affect many people’s jobs, promotions and even their political careers. Does this explain the unique relationship between the SAFE and the PBOC? Currently, the SAFE is one rank lower than the PBOC as foreign exchange regulation is considered a function of the central bank in China. The current head of the SAFE is Yi Gang. He is also a deputy governor of the PBOC and reports to central bank chief Zhou Xiaochuan. However, some SAFE officials believe SAFE should play a more important and independent role in making foreign exchange policy and related matters, given the significance of the yuan, which often has a major impact on China’s diplomatic relations such as the ties with the United States. To some extent, some market observers say the unique tension and internal bureaucracy between the SAFE and the PBOC actually serve to slow currency reforms and the internationalisation of yuan. So, who’s going to have the final say? The State Council, China’s cabinet led by Premier Wen Jiabao and President Hu Jintao of course. Hu is going to meet U.S. President Barack Obama next month and the two gentlemen will for sure touch upon the yuan issue. From all the signs I can see here, China is ready to let the yuan rise faster next year, so our American friends should be happier. In return, at least Hu deserves a better reception during his visit. Remember Hu’s last visit to the United States? It was not considered a very successful or happy trip by some political observers. Meanwhile, the yuan debate will continue at home, but this time The central banks seems determined to push forward interest rate reforms first to make Chinese people feel happy. Then Hu and Wen should be happy too. Some people say central bankers are the real politicians in China, and I sense their counterparts at the Federal Reserve are going to perform a similar role. Do you agree?

ZhouBy George Chen
The opinions expressed are the author’s own.

Inflation, the new civil war in China

December 28, 2010
Mao Zedong led his Communist comrades to defeat the Chinese Nationalists in a civil war, founding a “new” China in 1949. Today, the Hu Jintao administration is fighting a new civil war and the enemy is inflation. Beijing announced the latest interest rate rise — the second of 2010 – on Christmas Day, effective on Dec. 26, also the birthday of Chairman Mao. I suspect, central bankers in Beijing didn’t really want to celebrate the holiday, they just wanted to give the market a surprise Christmas gift. I asked some friends in the financial industry if the rate increase was a surprise. The responses were very mixed. The 0.25 basis point increase for the benchmark deposit and lending rates was a sort of uniform move. If the central bank had gone for a 50 basis point rise, that would have been a very big surprise. The timing of the increase was a surprise, especially after Beijing raised bank required reserve ratios about a week earlier. We thought Chinese officials also needed a break after a very busy month but they have proved themselves to be unpredictable one again, not to mention tireless. Just one day after Beijing raised the interest rate, Hu Xiaolian, deputy governor of the People’s Bank of China, published an article on the PBOC’s website, saying the central bank would make good use of a combination of monetary policy tools next year, including interest rates, bank reserve ratios and open market operations, to make interest rates more market-oriented. How often will these tools be implemented? She didn’t say in the article, but now many analysts are predicting the next rate increase could take place in two or three months – within the first quarter. Clearly, China has entered a new cycle of rate increases. Many economists believe the newest rate rise shows Beijing’s determination to curb inflation, giving that task greater priority than maintaining economic growth. Some analysts also said the cabinet and some ministries were finally on the same page for tackling inflation after earlier disputes over how to balance the interplay between GDP and CPI. To be honest with you, I am not a big fan of interest rates. If you really rely on interest rates to improve living standards, it’s almost like living in a daydream. Hong Kong broadcaster TVB interviewed some residents of nearby Guangzhou city after the announcement of rate rise. Most of them the move and even the prospect of more increases in 2011 would not do much to help them feel better about inflation, which is rising much faster than the pace of rate rises. Can Beijing raise interest rates once a month? I don’t think so. Will inflation continue to rise above 5 percent in coming months? That’s my guess. The core cause of China’s high inflation is food but people are also very interested to see how much property prices can fall. Premier Wen Jiabao does realise that curbing property prices is much harder than controlling food prices. In a rare state radio interview yesterday, Wen acknowledged that the measures Beijing took this year to cool the property market were “not very well implemented” and changed his tone on getting housing prices to return to “a reasonable level”. Previously, he was usually more straightforward in his statements about wanting to see prices under control during his final term, which ends in 2012. Besides inflation, it will also be interesting to see how Beijing deals with yuan appreciation. With higher deposit rates for yuan, a hopefully more bullish stock market in 2011 and prices of houses and villas rising across the vast nation regardless of policy curbs in 2010, do the factors sound perfect for seeing the yuan increase in value too? In fact, as many economists have already pointed out, a stronger yuan can also allow China to import commodities and other items more cheaply, helping  the government get to grips with inflation. My grandmother, more than 80 years of age, once told me there were still many old people in China who miss the days when Chairman Mao was the leader and the distribution and balance of wealth were considered by some to be better shape than they are nowadays. Deng Xiaoping wanted to “let some people get rich first”, and today we see more and more people complain of feeling increasingly poor. It was not easy for Chairman Mao to win the civil war for control of mainland China, and the new civil war on the economic front is going to be a real test of the intelligence and strength of the younger generation of Chinese Communists.


Beijing’s Christmas gift to Europe

December 23, 2010
Beijing’s Christmas gift to Europe If the heavy snows engulfing London’s Heathrow Airport are the last thing Europe wants to see, then a big cheque from Beijing could be the best Christmas gift the continent — once the centre of the world, but apparently no longer — could receive this year. The Chinese government is ready to buy 4-5 billion euros (US$5.3-6.6 billion) of Portuguese sovereign debt to help the country ward off debt market pressure, the Jornal de Negocios business daily reported on Dec. 22. Without citing any sources, the paper said a deal reached between the two governments would lead to China buying debt via auction or in the secondary market during the first quarter of 2011. The news of Beijing seeking to invest in Portuguese bonds soon helped the euro gain ground against the U.S. dollar and bounce up from an all-time low against the Swiss franc on Wednesday. It also boosted U.S. investor confidence in bank stocks at home. The potential new credit crisis in many European nations such as Greece, Spain, Portugal, Ireland and even Italy has been a growing global concern for capital markets. Beijing’s help could certainly ease such worries to a large extent if the news can be officially confirmed. China’s central bank has chosen to remain silent on the report, so far. Premier Wen Jiabao, often dubbed Grandpa Wen at home for his easy-going personality with ordinary people, visited a number of European countries including Portugal and Greece earlier this year. At the time, Wen’s trip was already considered a new sign of China’s growing influence in Europe, with Beijing expected to help with its national debt problems as nobody would think of turning to the United States for such a role in the wake of the financial crisis. Will Portugal be the last European nation to get Beijing’s help? Unlikely. Greece is also understood to be on the waiting list to for capital for its new sovereignty bond issue. However, if such aid continues, Beijing may face twin pressures from the United States and its own people. Beijing has complained about the U.S. government’s so-called “carrot and stick diplomacy” since the days of Mao Zedong, the country’s first Communist state head, Now it’s becoming less arguable whether China will take the same approach with so-called “friendly countries”. The United States may monitor Beijing’s financial aid for Europe closely to check for links between the money and human rights issues. Domestically, Beijing is concerned about social stability, in particular after inflation hit repeated highs this year. Some local media reports suggested that university students in some third- and fourth-tier cities had started to protest about increasingly expensive food bills on campus. Does this remind you of anything from more recent Chinese history? On the other side, the Chinese economy itself is far more open than when “New China” was founded by Chairman Mao in 1949, as the country still relies heavily on external trade. When we look forward to 2011, the global market environment to a very large extent is clearly linked to developments in the European debt issue. Beijing is helping Europe extricate itself from this potential new credit crisis as it also wants to avoid any negative external impact on its own economy next year. Something pretty interesting I found out this week about China, which I also take as a good sign of Beijing’s more open-minded attitude towards the world: When China’s top banking regulator Liu Mingkang met a group of Hong Kong reporters briefly in Beijing just few days ago, Liu said “Merry Christmas” and asked the Hong Kong media types to pass on his wishes to the people of Hong Kong. Liu studied in London for some years in the late 1980s, so he must know what Christmas means in the West, even though Chinese Communists should not believe in any religion. Just five or six years ago, Chinese media were still very careful about reports concerning Christmas. Even if they mentioned it in articles, it should not be carry any religious overtones. Not so many years ago, a Communist official could even be sacked or demoted for speaking about Christmas or related matters in public if he was not careful. Today, Liu wishes you all a merry Christmas and Beijing is actually offering the whole of Europe a Christmas surprise via its commitment to support Portugal’s debt issue. Clearly, the world has truly changed within just few decades. So, are the rules of the game now being set by global politics and markets?


Journalist, or analyst?

December 21, 2010
We all know how hot the job market is these days in the Chinese financial industry, and with almost every hirer facing the question of where to find enough smart people to fill  those openings, some banks are trawling an alternative talent pool — financial journalists. In fact, the media industry has been a talent source for fund houses and investment banks for some time, but mostly for public relations- or marketing-related roles. Talk to a spokesperson for a big bank such as Citigroup or Morgan Stanley, and you shouldn’t be surprised to learn she or he once worked for a leading media organisation before moving to the so-called “dark side”. More recently, some banks are starting to realise that journalist can handle more than PR. What about  as economists or analysts to study monetary policy and capital markets for big global banks in China? The head of China research at a British bank recently sent an email to his friends advising that the bank was looking for a China economist and researcher to join his fast-expanding team in Shanghai or Beijing. Besides a basic financial and economics-related educational background, the notice highlighted one condition that the ideal candidate would meet. “We are looking for candidates with either a decent advanced (i.e. post-graduate) degree in economics and/or with a strong background in journalism/industry research in China. We view a journalist’s eye for a story and ability to work out how particular policies work in practice in China as strengths,” the hirer said in the note, which was widely distributed among financial journalists in China this week. Separately, at almost the same time, the China research team leader at a big European investment bank also published a new job notice for China stock analysts, and asked his colleagues to spread the word, especially among their financial media friends. Among the requirements, the hirer pointed out that the applicant should demonstrate excellent writing skills, especially for analytical articles. As far as I know, not too many journalists have MBAs, which are often considered an entry ticket for a career in investment banking or asset management. For roles such as economist at a big bank, a PhD used to be a basic requirement, but in a developing market such as China, do people really want to make things a bit easier? Given China’s immature market environment, the right information and fast access to key economic data are becoming more important for economists and analysts, whose reputations rely on the credibility of their forecasts and a sensitivity to market trends (ahead of their competitors). Such work often relies on an extensive network of contacts in different industries and ministries across the vast nation. Meanwhile, in China’s capital markets, rumours are often proved to be true. For example, about two weeks ahead of the release of official data early this month, the stock market in Shanghai was already full of talk and speculation that inflation November would reach a new high of 5.1 percent. Guess who is usually among the first to hear these rumours? Good financial journalists with strong ties with government sources. Some industry watchers have observed that economists in China are becoming more like newsbreaking, investigative journalists. Remember Beijing’s surprise announcement of a 4 trillion yuan (about 586 billion U.S. dollars at that time) stimulus package in late 2008 to help maintain economic expansion amid the global financial crisis? To some clients of a big U.S. bank, the announcement may not have been very surprising as they had learned of the plan from the bank’s economist, who had tapped well-placed sources in Beijing for intelligence. Perhaps  a good China economist can someday teach at Columbia Journalism School when he feels he earns enough money? By the same token, a financial journalist could also teach MBA students how to develop a source network in China.

Art HK 09By George Chen
The opinions expressed are the author’s own.

Moutai, the stronger spirit of China?

December 17, 2010

moutaiBy George Chen
The opinions expressed are the author’s own.

Have you ever tried Kweichow Moutai, the Chinese liquor also known as baijiu? If not, I am afraid some people may say you don’t really know China that much.

LePad, China’s answer to the iPad

December 14, 2010


By George Chen
The opinions expressed are the author’s own.

If Apple calls its tablet computer the iPad, what will China’s Lenovo name its new rival product? The answer: LePad. No kidding.

Shenzhen, new home for Hong Kongners?

December 10, 2010
When people from the southern Chinese boomtown of Shenzhen began rushing to neighboring Hong Kong to buy cheaper daily necessities just few months ago as mainland inflation rose high and fast, some Hong Kong residents were apparently unhappy. This time, it may be the turn of Shenzhen residents to complain about the buying power of Hong Kong people. For what? Real estate. Hong Kong media including the Chinese-language, pro-Beijing newspaper Wen Wei Po reported that average prices for new properties launched for sale in Shenzhen last month rose more than 16 percent on year, partly driven by buyers from Hong Kong after the former British colony, now led by Chief Executive Donald Tsang, issued special tax in early November aimed at curbing property price rises by targeting short-term speculators. Some Hong Kong housewives have already complained of a surge in local dairy product prices after more Shenzhen parents went to Hong Kong to buy baby formula and  related products. A large package of baby formula may be about 100 yuan (about US$15), but a new apartment in Shenzhen is now worth several million yuan. If you talk about luxury villas, prices are closer to 10 million yuan or even above, yet still much cheaper than the equivalent space and location in Hong Kong. Some people may argue the trend of Hong Kong people going to Shenzhen and other second-tier cities in nearby Guangdong province to buy property is nothing particularly new, but the recent tigtening property policy move in Hong Kong has certainly given the phenomenon greater impetus. Since the new tax policy was implemented, local media have reported a drop in new property transactions in Hong Kong, while the number of Hongkongers going to Shenzhen for property has surged. According to one agent interviewed by local broadcaster Phoenix TV, if you have visited Shenzhen in recent weekends, you are likely to have bumped into many visitors from Hong Kong scouting locations with their property agents. Technically, it could become more difficult for non-mainland Chinese to buy property in Shenzhen as the local government is also planning its own price-curbing policies to ensure affordable flats for local residents. But many sales agents apparently have a different view. Property agents are encouraging rich Hong Kong people to purchase real estates in Shenzhen for one simple reason — as the Hong Kong government is asking for an additional 5-15 percent tax if you sell your property within 6-24 months of purchase, why not just go to Shenzhen to buy something and bet on the fast appreciation of the yuan. In 24 months, how much further will the Chinese currency have risen? And the Hong Kong dollar? Could be a sound strategy? Many Shenzhen developers even organize virtually free weekend trips for Hong Kong people “to enjoy a day in Shenzhen”. You pay just HK$100 (about US$13), basically to cover the bus ticket, and join a group with a professional property guide to tour some of the newest developments in Shenzhen. Post-tour dinner or massage, which the city is really famous for? It’s your call!

China property

What the iPad means for China

December 8, 2010
What does the iPad mean for Chinese consumers? Let me offer you a choice before you read this column – do you want the good news first, or the bad news? In fact, it’s the same story. For those who recently bought a first-generation iPad, here is the bad news – Foxconn Electronics, manufacturer of Apple Inc products, plans to begin shipping a new version of the iPad tablet, known as iPad 2, by as early as the end of February, according to a Dec. 7 news report by DigiTimes. The report, citing unnamed sources from the Taiwan-based components maker, said the iPad 2 would mainly be supplied by plants in Shenzhen belonging to Foxconn, parent of Hon Hai Precision Industry. An initial shipment of 400,000 to 600,000 units is expected. And the good news? Of course Hon Hai investors and those who want an iPad but have yet to buy one should be happy. For Apple fans in China, the next big question is of course when the new iPad 2 will arrive in the world’s No.2 economy. Consumers there have already complained about long back orders for the iPad and iPhone 4 since the two products were launched earlier this year. As such, specialist “Apple smugglers” from Hong Kong to mainland China should be happy to see new arbitrage opportunities! Chinese gadget makers may soon catch up with this opportunity to add whatever new functions the iPad 2 may have to their own “iPad killers”. Hong Kong- and Shenzhen-listed ZTE Corp launched a  tablet PC in October that sells for a far lower price than its Apple counterpart, and we should expect more Chinese competition for Apple in 2011. Or should I say innovation? Despite fast-rising inflation, Chinese consumers have yet to stop buying new gadgets, as higher salaries means more disposable income. Products such as the iPad also fit the show-off culture of the so-called “new money” class in China — those who are much richer than the middle-class and who become rich within just a few years for various reasons, such as successful property speculation — so Apple should not be worried that Chinese consumers will tighten their budgets for non-necessities and high-tech devices next year. During a recent visit to my hometown Shanghai, I was told by a senior Shanghai government official that the iPad was a very popular Christmas and New Year gift within government and business circles. Hardly a surprise. To those who have already bought an iPad, don’t be too disheartened – pass it on to your son or even grandson. Like a Qianlong dynasty vase is now worth tens of millions of dollars, first-generation iPads may someday be a national treasure too!


China, still a command economy?

December 6, 2010
By George Chen The opinions expressed are the author’s own. What happens in China will soon affect the whole world – inflation being a case in point. Just last month we saw news that U.S. fast-food chain operator  McDonald’s had decided to raise menu prices in mainland China by 0.5-1 yuan. McDonald’s was fast to react to China’s growing inflation. Others may feel it’s already too late to raise prices because of the government‘s increasing price control policies. According to an official announcement posted on a Kunming government website, one of the largest cities in southwestern China, five retailers including Wal-Mart and Carrefour have been ordered to report any price adjustments with clear reasons for the changes in advance, with the final decision in the hands of the local government. The order is part of newly imposed temporary price controls to help Kunming fight fast-growing inflation. The notice said the controls would take effect immediately and remain in place until Feb. 28. I’m not sure how shareholders and investors of Wal-Mart and Carrefour will feel if news of the move spreads to Europe and the United States. French people are known for their deep love of freedom and now the two companies will have to think of ways to maintain profit growth in China as the cost of sales rises. More importantly, how will you balance your economic interests in the short term and your relationship with the Chinese government in the long run? Even the CEO of Wal-Mart gets the point: it’s still a tough job to get investors on the same page, otherwise the share price might have to take a hit. Kunming is not alone. Soon after the State Council, China’s cabinet, asked mayors to take serious steps to address inflation, many local governments started work on policies to control prices. In Guangdong province, one of the country’s richest, where local media have reported that three dairy makers raised retail prices for milk products by about 10 percent last week, the local government is also mulling similar policies. The powerful economic planner NDRC talked with major food product makers, asking them not to raise prices for daily necessities such as cooking oil for the next four months at least, local media reported. China has applied price controls during previous bouts of inflation with mixed results. As my Beijing colleague Zhou Xin noted, in 2007, Lanzhou, capital of rural Gansu province, capped the price of beef noodles. Although the move was initially popular, some residents soon complained that restaurants had in turn cut portion sizes. Oops! This round of price controls, from the central government to local government, level may last until the spring, when Beijing will hold the country’s most important annual political meetings, some analysts said. The controls should help Beijing cap the CPI level but it’s far from a sustainable situation. Before foreign companies such Wal-Mart become frustrated, state companies such as COFCO, the country’s No.1 food importer and exporter, have already shown signs of impatience — some COFCO officials have privately complained that price controls will eat into profitability, and their employees will not be happy to see a smaller year-end bonus, local media reported. The situation will be the same at other enterprises. Employees are also consumers. At the end of the day, who’s going to boost domestic consumption to maintain economic growth? George Chen is a Reuters editor and columnist based in Hong Kong. Photo: People carrying groceries walk along a street in Hefei, Anhui province November 18, 2010. REUTERS/Stringer

China inflation

Ferragamo for Morgan Stanley, a good match?

December 2, 2010
By George Chen The opinions expressed are the author’s own.

Salvatore Ferragamo

By George Chen
The opinions expressed are the author’s own.

Hong Kong is a real shopping paradise where people in the financial industry apparently have privileges not just because they can probably afford to buy more top brands, but they can also buy them exclusively and at a discount, at least for this Christmas.