Monthly Archives: January 2011

ICBC Comes To America

As President Hu Jintao was leaving the U.S. after his four-day state visit, Industrial & Commercial Bank of China announced plans to move in. ICBC, the world’s largest bank by assets, has agreed to take control of Bank of East Asia’s U.S. operations, which include 13 retail bank branches in New York and California. ICBC is to pay $140 million for an 80% stake, subject to approval from Chinese and American regulators, Hong Kong-based Bank of East Asia says. The two struck a similar deal last year with ICBC taking 70% of Bank of East Asia’s six Canadian branches.

Chinese investments in American financial services firms by taking minority stakes in the likes of Blackstone and Morgan Stanley have a hapless record, mostly because the last round came before the global financial crisis of 2008 which made a nonsense of the valuations. Buying a network of retail branches is a new tack, and echoes what Chinese banks having been doing elsewhere in the world, if not yet in the U.S.

Jiang Jianqing, ICBC’s chairman, says:

This unprecedented acquisition of a controlling stake in a U.S. commercial bank by a mainland bank is strategically significant. The successful completion of this transaction will not only establish a good foundation for the provision of holistic financial services by a mainland bank in the U.S., but also will mark a new era of open-market co-operation between China and the U.S., and have a positive impact on Sino-US trade relations.

A previous attempt to buy a bank in the U.S. was torpedoed by Washington’s Committee on Foreign Investment in the U.S. (CFIUS), which reviews proposed foreign acquisitions of U.S. firms on national security grounds. The committee will be among the regulators weighing in on ICBC’s deal because ICBC is state-owned. The bank already has a securities business in the U.S., bought from BNP Paribas last year, but the purchase of retail banks comes under closer regulatory scrutiny. That is as much an examination of the acquiring bank’s home regulatory regime as it is of the bank itself.

ICBC can expect to wait a while. It took the bank two years to get a license for its existing commercial banking branch in New York. Whether the process is swifter in this case would be a good barometer of the state of Sino-American relations in the wake of Hu’s visit.

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Mr Hu Leaves Washington Unruffled

President Hu Jintao’s four-day visit to America was so uneventful it must be declared a success. As expected there were no significant policy advances or position changes by either side. There was less to Hu’s public remarks on human rights than met the eye, on North Korea he reiterated a position Washington has already rejected, and on trade issues even Hu’s statement that Beijing has abandoned its policy of favoring “indigenous innovation” won’t necessarily mean that U.S. firms will find doing business in China will change much.

Yet what mattered was the tone. We said before the visit that both leaders would have to ensure that relations between the two countries didn’t deteriorate further, and that the areas in which their national interests overlap, from climate change to Iran, North Korea and the international financial system, are stable and expanding. On the whole the pair achieved that goal. Emollience was the order of the day. Hu, in particular, stuck doggedly to his well-worn message that China’s wasn’t a threat to anyone and sought only a partnership based on mutual respect. And with no gaffes, unlike on Hu’s first visit in 2006 during the Bush administration, there was little grist for the hawks of either country. Both leaders’ hands were strengthened in pursuing engagement rather than confrontation between the two (not that that means that there won’t be a series of tension points between the countries; there will.)

In addition, Hu got to be seen at home as participating in a meeting of equals. U.S. President Barack Obama got to be seen at home as a gracious, not supplicant host of a nation that, for all China’s rise, is still a superpower.

 

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Six McKinsey Predictions For China In 2011

Gordon Orr, a director in the Shanghai office of McKinsey, a firm of management consultants, makes six predictions for China in 2011.

  1. Inflation in food prices will take longer than expected to control.
  2. Middle-class bankruptcies will expand dramatically.
  3. Minimum wages will rise, but productivity gains will outstrip labor costs.
  4. China’s economic growth will be lower than expected.
  5. China will step up its “invest out” program in the new five-year plan.
  6. The state will again try to reduce its ownership role in business.

This Bystander likes (in the sense of agrees with) 1, 3 and 5 (though this one is a bit of a cheat for 2011), but is less convinced by 2, 4 and 6. The short-term social disharmony they imply wouldn’t be tolerated in what is looking to be a critical and not always easy year for China’s development. What do you think?

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A Lot Still Needs To Be Done To Narrow The Perception Gap

Hu, Obama Press Conference, Washington, January 2010

“A lot still needs to be done in China in terms of human rights,” was President Hu Jintao’s well rehearsed answer at his joint White House press conference with U.S. President Barack Obama (above) to the question he rarely has to face in public. There is more news in the fact that he had to give an answer than in the substance of what he said (his earlier European hosts didn’t trouble him with the inconvenience of press conferences). Hu’s full response, as read by his translator:

“China is a developing country with a huge population, and also a developing country in a crucial stage of reform. In this context China still faces many challenges in economic and social development, and a lot still needs to be done in China in terms of human rights.”

What has been lost in translation is that the primary human right in China is viewed as the right to an improving standard of living for all Chinese. In this regard, a lot unquestionably needs to be done to lift even more Chinese out of poverty and to close the widening wealth gaps. Questions of political rights in, say, Tibet or Taiwan, are questions of national sovereignty. Questions of rights to, say, free speech or religion aren’t even questions.

It has long been Beijing’s position, reiterated by Hu on his visit to Washington that China respects the universality of human rights, but as the president also repeated that “we need to take into account the different national circumstances”.  As with so many moments of his Frenemies tour so far, Hu avoided coming off as browbeating, without anything actually changing.

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China’s Economy Kicks On Into 2011

Those who believe that China’s economy won’t slow in 2011 by as much as consensus forecasts, including this Bystander, see confirmation of that belief in the latest GDP figures. The economy grew at a faster than expected 9.8% year-on-year in the fourth quarter, giving a 10.3% GDP growth rate for the year as a whole, the National Bureau of Statistics says. That is up from 2009′s 9.1% and ahead of the widely forecast 10%.

To our eye that gives the economy some significant momentum going into this year, particularly from investment spending. Fixed asset investment rose by 23.8% in 2010, down from 2009′s stimulus-fueled 30% growth but still a substantial number despite a raft of measures being introduced to rein in the capital funding property investment. These constraints will be tightened further as the year progresses, mainly through more interest rate rises and higher capital reserve requirements being imposed on banks, but they won’t slow the momentum of the heavy investment spending to the extent needed if consensus growth forecasts of 8.7%-9% for 2010 are to be met.

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China: Shrinking Power, In Soccer At Least

China may be a growing power in the world of superpowerdom, but in the global game of football, it is a diminishing one, despite its ambition to host a FIFA World Cup. Its national team ranks a lowly 79th in the world and it now has no representation on FIFA’s executive committee (ExCo), the top table of world football’s governing body.

In that it shares the fate of Japan and South Korea, two nations with legitimate claims to be footballing powers. At elections earlier this month, all three failed to win places among the Asian Football Confederation (AFC) representatives to FIFA’s ExCo. Power within the AFC is tilting towards West Asia, symbolized by Qatar winning hosting rights for the 2022 World Cup, the emirate’s Mohamed Bin Hammam being re-elected as the AFC’s president and Jordan’s Prince Ali bin Hussein’s upset defeat of South Korea’s Chung Mong-joon for the FIFA vice-presidency.

There has been some talk within footballing circles of the 46-nation AFC splitting into eastern and western confederations, though AFC vice-president Zhang Jilong, China’s most senior representative at the confederation and who was one of the unsuccessful candidates for FIFA’s ExCo, plays down to possibility in an interview with World Football Insider. FIFA would not necessarily look favorably on an upstart break-up of the AFC, and Chinese football still has plenty to do in cleaning up its own scandal-plagued game before a World Cup bid is feasible.

 

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Hu Says China Has Hopes For Korean Reunification

The currency issue, particularly the internationalization of the yuan, has taken the headlines from President Hu Jintao’s pre-U.S. visit Q&A with two U.S. newspapers (here via the Wall Street Journal), even if there was nothing new of substance in his answer. But this Bystander’s eye was caught by Hu’s endorsement of unification on the Korean peninsula.

As a close neighbor and friend of both the DPRK and the ROK, China hopes that the North and the South will improve relations and achieve reconciliation and cooperation through dialogue and consultation and eventually realize independent and peaceful reunification, and we support their efforts in this regard.

The notion that China is becoming more open to the idea of reunification surfaced earlier in the U.S. diplomatic cables made public by Wikileaks in November. One quoted then South Korean vice-foreign minister Chun Yung-woo saying  that the younger generation Chinese Communist party leaders no longer regarded North Korea as a useful or reliable ally. They suggested that Beijing would even accept a unified Korea under South Korean leadership provided it was not hostile to China. Hu didn’t go that far, but that he went even any distance at all in that direction suggests the sands may be shifting however slowly under China’s long-standing policy towards Pyongyang.

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Mr Hu Goes To Washington

President Hu Jintao’s state visit to the U.S. this week is a fine balancing act in several dimensions for both him and his host, U.S. President Barak Obama. Both men have to play to domestic audiences, particularly increasingly antsy hawks on both sides. Both have to reassure public opinion in the other’s country that the nation they lead should not be seen as a threatening power. Yet both leaders have to make substantive progress on ensuring that relations between the two countries don’t deteriorate further, and that the areas in which their national interests overlap, from climate change to Iran, North Korea and the international financial system, are stable and expanding.

At the fulcra of these complex balancing acts are Chinese assumptions that the U.S. is in decline as it rises, an assumption reinforced by the relative ways in which the two countries’ economies have weathered the global economic crisis, and by an assumption that U.S. President Obama is a less formidable president, by nature and politically, than his predecessors. This latter perception has encouraged Beijing to push on security issues, such as its territorial claims in the waters off its coasts, its military build-up and North Korea, and to stand pat on economic ones such as trade and exchange rate policy. These, in turn, have elicited a tougher response from Washington to rebuff Beijing’s greater assertion of its power in Asia, a direct challenge to the U.S.’s strategic domination of the region.

So nuanced and important will the public messages conveyed be to both leaders that this will be a carefully managed visit. Hu will want his visit to be seen as a meeting of equals, yet at the same time appear the deferential guest. He will want Americans to understand China’s economic and social vulnerabilities, but in a way that is clear at home — but not abroad — that he is doing so only to strengthen Beijing’s negotiating position, rather than he actually believes it. Similarly he will be visiting industrial plants in the U.S. in which China has invested, an attempt to show that China is creating American jobs not just taking them away. For his part, Obama has to be seen to be reasserting American leadership, to be playing a stronger U.S. hand in the growing Sino-American strategic rivalry, and to be getting some concrete evidence that he is stopping Beijing being so obdurate on the trade and foreign exchange issues.

These are complex messages to pitch. A Chinese ad campaign on American TV may attempt to create some background mood music for Hu. Yet on one side of the Pacific, an army of American human rights protestors and half the U.S. political elite, notably the part of it that resides in the U.S. House of Representatives, stands ready to turn perfect pitch into cacophony. So, too, an army of nationalists and netizens on the other side. It is a crucial four days for maintaining political equilibrium during which neither leader dare put a foot wrong.

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China’s Property Prices Still Rising, If More Moderately

The arc of rising property prices is flattening if not inverting in response to the measures introduced last year to cool the market by controlling credit. Home prices in China’s 70 largest cities rose 6.4% in December year-on-year, the National Bureau of Statistics says. That was the eighth consecutive month of slowing year-on-year growth rates since April’s 12.8% peak.

December’s month-on-month rise was 0.3%. The continuing growth suggests buyers are racing to beat new residential property taxes. Chongqing is due to start a pilot scheme shortly and Shanghai has just confirmed it will follow suit.

The new taxes are unlikely to have much short term impact. Cutting off credit for new development will continue to be the policy priority. Real estate investment rose by a third in 2010 to 4.8 trillion yuan ($730 billion). Beijing will want to see that number come down in 2011 and the mix of spending favoring affordable housing in inland areas over high-end properties towards the coasts.

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China Raises Banks’ Reserve Ratios Again

China’s liquidity sponge just keeps on dabbing. The central bank has raised banks’ reserve requirements ratio again, by half a percentage point, taking it to 19% for most banks. It is the first such move of the year, but follows six increases in 2010. December’s consumer price inflation numbers, due out next week and expected to show a 4.7% year-on-year rise, are likely to show that inflation peaked in November at 5.1%. But with the money supply, on its broadest measure, M2, increasing by 19.7% last year and new bank lending getting off to a brisk start to the year, there is plenty of mopping up still to do.

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