Chinese banking giant ICBC may be about to get a run for its money from small band of minority investors. Its plan to take full ownership of Hong Kong subsidiary ICBC Asia makes sense. But the unit’s minorities are in a strong position to make ICBC pay top whack.
ICBC already owns 72 percent of the unit. But it can’t grow its offshore business significantly without having 100 percent. Meanwhile, ICBC Asia needs more capital. For ICBC, the required investment doesn’t look like a problem. It’s the world’s biggest bank by market value and will soon get $6.6 billion from a rights offering.
Evidence that China is slowing sounds like fodder for double-dip doom-mongers. But investors have taken a fall in the manufacturing index to a 17-month low in their stride. With further cooling measures now looking unnecessary, they are probably right to be sanguine.
Continued Chinese expansion is a critical support for the troubled global recovery, but some deceleration is helpful. Gross domestic product rose by 11.9 percent and 10.4 percent during the first and second quarters respectively, much higher than the official 8 percent growth target for 2010. That prompted Beijing to introduce a string of measures targeting the hot property market and credit growth, in turn prompting investors to fear that tougher intervention may be in prospect.
Who will be a bigger driver of global trade rebalancing – the People’s Bank of China or the country’s migrant workers? The PBoC guides the yuan exchange rate, which U.S. politicians and investors are fixated on. But other factors, including labour costs, are probably doing more to increase the cost of exports from China.
China’s yuan reforms got off to a slow start on Monday. The central bank set the daily mid-point for yuan trading at Friday’s level. The currency strengthened slightly thereafter, rising by about a third of a percent in the afternoon to its strongest level since late 2008.
Chinese banks have got in the habit of lending more than is necessary to keep up the nation’s growth rate. This year, they may not be able to lend enough.
The constraint comes from the banking regulator, which sets an annual target for new lending. This year’s is 7.5 trillion yuan ($1.1 billion), or 18.7 percent growth of the loan base. At first glance, the rate of increase looks reasonable: the expected nominal GDP growth rate plus about 4 percentage points to account for the greater financial intensity that comes with economic development.
Several foreign banks have recently sold their strategic stakes in Chinese banks, but Deutsche Bank is putting down a bigger bet. The German lender is spending $840 million to increase its stake in Hua Xia Bank. Chinese bank stakes may have some scarcity value, and Deutsche wants to diversify away from investment banking. But its ability to influence Hua Xia looks limited.
Hua Xia bank is one of the most capital-hungry banks in China. Before the fundraising, its Tier 1 capital ratio was 6.8 percent, below that of most Chinese banks, which have capital ratios of 10 percent of more.
Goldman Sachs faces a difficult choice in China. Last April, the Wall Street firm pledged not to sell most of its 5 percent stake in Industrial and Commercial Bank of China for one year. That year ends on April 28. It must be tempting to sell, before the market is flooded with new bank stocks. But certain clients might not like that one bit.
The Wall Street bank won goodwill in China last year when it stuck by 80 percent of its holding in ICBC which is now worth $9 billion. Other Western financial groups, such as capital-starved UBS and Royal Bank of Scotland , unloaded shares in Chinese banks as soon as they had the chance, leaving a sour taste in the mouth of Chinese regulators.
Singapore might just be a dot on the map, but it has long been viewed as a leader in economic policy by other Asian countries, including China. That’s why investors took so much notice when the city-state revalued its currency by about 1.3 percent.
Singapore shifted its currency band to contain imported inflation. This approach is not open to China, whose inflationary pressures are home-grown, and whose exchange rate looks more undervalued. Nevertheless, Beijing can learn from Singapore’s model, which offers a better balance between stability and flexibility.
Google chose morals over profits in shutting down its China portal — and has already paid a hefty price as a result. Yet the search engine will keep a toehold in the world’s biggest market of internet users, re-routing searches to Hong Kong and keeping on staff. That means it won’t be starting from scratch if Beijing’s censors relax their grip in future.
Google threatened in January to stop censoring politically sensitive searches at Beijing’s behest. But it has only half pulled out. For now, users can still use its Hong Kong site — although there have been reports that the Chinese authorities are censoring sensitive searches such as the crackdown in Tiananmen Square in 1989.
Some U.S. Congressmen want to slap duties on Chinese goods unless Beijing revalues the yuan. Yet China’s premier Wen Jiabao insists the currency isn’t cheap. Goldman Sachs also thinks the yuan may be fairly valued. The argument that the renminbi may be less undervalued than it appears is persuasive.
The yuan has a fair value of 6.856 to the dollar, according to Goldman’s chief economist, Jim O’Neill. That would make it 0.4 percent overvalued. That view pits Goldman against the International Monetary Fund, the World Bank, and the oft-cited Peterson Institute, which claims the yuan is undervalued by as much as 40 percent.
The signals coming from Beijing about the yuan have been mixed. Who should investors listen to? Whoever ranks highest in the party. That’s not the central bank.
Western economists like the People’s Bank of China, in part because many of its officials are trained in conventional monetary economics. But inside the government’s complex hierarchy, the situation is quite different.
In the official list of the 28 ministries which sit under the State Council, the PBOC is ranked 27th, just after the National Population and Family Planning Commission and ahead only of the National Audit Office. The central bank is four seats behind the pro-export, anti-currency appreciation Commerce Ministry. And there are reasons to believe that even the State Council is not the final authority for a decision as significant as de-pegging the yuan. That will be made by the Communist Party’s nine-member Politburo Standing Committee.
Investors should listen closely to Premier Wen Jiabao, head of the State Council and member of the Politburo Standing Committee. Wen said on March 14 that he doesn’t believe the yuan is undervalued and called U.S. demands to revalue protectionist. He vowed Beijing will steer its own way on currency reform.
The top party leaders probably haven’t heard of the Balassa-Samuelson effect, which explains that currencies rise as countries get richer. In fact they are more inclined to believe that yen’s sharp appreciation after the Plaza Accord is the culprit for two decades of slow Japanese growth.
The PBOC may be equally powerless when it comes to the policy interest rate. Some say that higher authorities actually make the call. But really, in a country where capital can’t move fast, the price of the money doesn’t matter much.
The central bank does set loan quotas for banks and gives them advice on who should get loans. But even on these matters it shares that power with the banking regulator. As the Chinese economy evolves, the central bank may become more important. For now, though, it is largely, in Chairman Mao’s phrase, a paper tiger.