<![CDATA[Finance & Economics_English_财新网]]> http://english.caing.com/finance_economy/index.html UTF-8 http://english.caing.com/finance_economy/index.html www.caing.com 60 <![CDATA[China Economy to Grow 9% in 2010]]> By staff reporters Hu Shuli and Han Wei

China's economy is expected to grow by 9 percent in 2010, and has already overtaken Japan to become the world’s second largest economy, said State Administration of Foreign Exchange (SAFE) Director Yi Gang.

In an interview with Caixin Media's China Reform magazine, Yi said that China's economy has achieved a 9.5 percent average annual growth since it began market reforms in 1978. Now, he adds, China must focus on the quality of economic growth, which requires adjustments in the economic structure and growth model.

As China's annual growth rate had exceeded 10 percent in the last 10 years, China will naturally witness a gradual slowdown of economic growth figures, said Yi, who expects the country's GDP growth to fall to about 7 percent to 8 percent this decade.

The forex regulator said that, based on the country's economic condition, China will also be diversifying its massive foreign exchange reserve.

The full interview appears in the August issue of China Reform.

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]]> Sat, 31 Jul 2010 16:57:42 +0800 <![CDATA[Central Banker Calls for Prudent Yuan Expansion]]> By staff reporters Hu Shuli and Han Wei

China should be cautious about transforming the yuan into an international reserve currency, despite ready market demand, warned Yi Gang, a deputy governor for China's Central Bank.

Yi, who also directs the State Administration of Foreign Exchange, said in an interview with Caixin Media's China Reform magazine that "there is still a long way to go" before the yuan can become an international reserve currency.

In answer to speculations from the international community of the yuan’s transformation into an international reserve currency, Yi said that it will eventually be decided by the market. As such, China, which is still a developing economy, should simply remain cautious about the expansion of the yuan.

According to Yi, the push to transform the yuan into an international reserve currency is not only dependent on the country's economic capacity, but also its cultural influence, and political and military power.

Yi also calls for a more open financial market, in light of China’s eagerness to participate in decision-making within the international monetary system. "If China's financial market is liberated, more open to international investors, Chinese regulators will certainly have more influence in the global market," said Yi.

Yi also expressed confidence in the capacity of the U.S. and Europe to bounce back after the crisis. He said that the U.S.’s newly approved financial regulatory reform measures, the UK's financial regulatory framework, as well as international efforts to build financial stability have laid the grounds for international financial regulation for at least the next ten years. Given this, Yi believes that the U.S. and Europe are expected to see quick recovery.

The full interview appears in the August issue of China Reform.

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]]> Sat, 31 Jul 2010 16:41:28 +0800 <![CDATA[Forex Chief: Inflation Relieved Yuan Pressure]]> By staff reporters Hu Shuli and Li Xin

Inflation in China over the past decade has taken pressure off the yuan's foreign exchange rate, bringing the rate closer to equilibrium than 10 years ago, said Yi Gang, the head of China's State Administration of Foreign Exchange.

China lacks a foundation for wide exchange rate fluctuations but can maintain a flexible exchange rate mechanism, as well as keeping the exchange rate stable at a reasonable level, said Yi, whose agency manages the country's foreign reserves.

An appreciation of the yuan can rein in imported inflation, Yi told Caixin Media's China Reform Magazine on July 15.

Yi, 52, who is also a deputy governor of the central bank, said the currency's recent appreciation has benefited the general public in China. For example, he said, prices for soybeans and soy products "did not rise in tandem with international commodity price hikes” thanks to yuan appreciation and because soybeans are denominated in U.S. dollars.

The same could be said about prices in China for everyday commodities such as oil and iron ore.

In an exclusive interview at the People's Bank of China, Yi also said that the 20 percent increase in China's exports between 2005 and 2008 offered clear evidence that exchange rate adjustments do not hurt exports.

China adjusted its exchange regime in 2005 by introducing a managed float based on a basket of currencies.

Yi brushed aside the idea that yuan appreciation has a negative impact on the nation's foreign reserves.

"Losses can only occur when we exchange our foreign reserve from U.S. dollars to yuan,” Yi said. “We haven't exchanged. So we can't call it a loss.

"If we look at paper value, we have to calculate how much China's assets will appreciate if denominated by U.S. dollars,” he continued, adding that the value of “China's financial and real estate assets amount to 200 trillion yuan (10 times foreign reserves)."

Yi said inflation in the United States has reduced the buying power of China's foreign reserves, but the return rate on forex investments is higher than the U.S. inflation rate.


The full interview appears in the August issue of China Reform Magazine and www.caing.com

 

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]]> Sat, 31 Jul 2010 15:28:02 +0800 <![CDATA[Central Banker: China's Macro Policies Work]]> By staff reporters Hu Shuli and Li Xin

China has built an economic miracle over the past 30 years and its macroeconomic policies are nearly optimal, said central banker Yi Gang.

Since 1994, China has maintained high growth without significant inflation, Yi said July 15 in an exclusive interview with Caixin Media's China Reform Magazine.

Responding to questions about whether the nation's exchange rate reform program is moving too slowly, Yi, a deputy governor at the People's Bank of China, said "overall, the macroeconomic policies are very successful."

China returned to a managed floating system for the yuan's exchange rate in June after a de-facto peg to U.S. dollar that began in 2008. Yi said the latest decision was mainly based on China's domestic conditions.

At home, the effects of the global financial crisis are wearing off, he said, noting that the nation's 2009 GDP growth rate was adjusted recently to 9.1 percent from 8.7 percent by the National Statistics Bureau.

Overseas, the general forecast for economies in the United States, Europe and Japan point to 2010 as a recovery year, said Yi.

"Now is the right time to resume the exchange rate's flexibility," he said. "Although we can't say the crisis is behind us, and this year there is a European sovereign debt crisis, the overall economic condition is much better."

Criticism is mounting in the U.S. Congress over China's exchange rate. Lawmakers on Capitol Hill have blamed the yuan's valuation for America's trade imbalance.

"Historical experiences show that exchange rate is important, but it's not a decisive factor” in trade imbalance, said Yi. "What if after (the yuan's) appreciation, I buy things from you at a much cheaper price and meanwhile the trade surplus doesn't go down?"

The full interview appears in the August issue of China Reform Magazine and www.caing.com

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]]> Sat, 31 Jul 2010 15:24:17 +0800 <![CDATA[Central Bank Unwavering on Yuan Reform]]> Yi Gang, a deputy governor for China's Central Bank, said a convertible yuan remains the ultimate goal for the nation's currency exchange rate reform. Yi did not give a timetable, but instead emphasized that the central bank has been steadily reforming the yuan since 1994, noting that it has been convertible for current accounts since 1996.

Yi made the remarks in an interview with Caixin's China Reform magazine. "It takes seven to 10 years for most currencies to advance from current accounts convertibility to capital accounts convertibility," he said. It has been 15 years since China opened its current account. Yi admitted that the timeframe is certainly longer than the international norm, but explained this against the country's size and unbalanced development.

Yi, who also directs the State Administration of Foreign Exchange, said the best forex policy option is a managed floating exchange rate regime based on market supply and demand, with reference to a basket of currencies.

China resumed a de-facto peg against the U.S. dollar in July 2008, and up until June 22, 2010, the value of the yuan ranged from 0.1462 to 0.1466 cents, or from 6.82 to 6.84 yuan to the dollar. From July 2005 to July 2008, the value of the yuan strengthened from 0.1205 to 0.1462 cents.

On China's ambition to make the yuan an international reserve currency, Yi said that it requires not only economic power, but also a culture and value system that can be accepted by most other countries and regions.

Responding to speculations on the Chinese economy facing a "double dip," Yi said the probability is small. Nevertheless, he said that the growth rate will inevitably slow down, given the current size of China's economy as well as environmental restraints.


The full interview appears in the August issue of China Reform.

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]]> Sat, 31 Jul 2010 00:17:00 +0800 <![CDATA[Nimble Exporters Add Weight to Forex Reform]]> Not only did China's crucial export sector survive recent foreign exchange adjustments but some overseas traders actually came out ahead, according to a central bank deputy governor, adding weight to initiatives for rate reform.

Exporters, many hard-hit by the global financial crisis, have been among the fiercest opponents of currency reform moves, including a recent decision that strengthened the yuan against the U.S. dollar for the first time since 2008.

But the bank's Hu Xiaolian, in an exclusive interview with Caixin, said the adjustments "did more good than harm" as exporters bargained with overseas clients, raised prices or found other ways to compensate for currency fluctuations.

"Many companies negotiated with foreign customers and succeeded," she said. "Looking back, people overvalued the negative impact of reform and undervalued the ability of companies to be nimble and make timely adjustments."

The coping ability of exporters has been a key concern for years. Hu said a "golden age for foreign trade" in China ended after exports soared 23 percent and imports rose 19 percent between 2006 and 2008.

China's economy is now shifting to greater domestic consumption with less reliance on export-based industries, especially those whose western markets have withered. Companies that sell overseas are tapping Chinese markets, Hu said, while importers have been helped by yuan appreciation.

"Those that sell to both domestic and foreign markets can increase the domestic share to alleviate losses," she said. "Companies having both export and import businesses can benefit from the yuan's appreciation."

China plans to move forward with currency exchange rate reform pending a future mechanism that reflects market supply and demand, Hu said. She considers the current fluctuation span of plus or minus 0.5 percent appropriate for the time being, but said the central bank would not rule out widening that spread in the future.

"Overall, advantages of exchange rate reform outweigh disadvantages," Hu said. "Our evaluation of the impact of exchange rate changes shouldn't be limited to the competitiveness of an individual export company, but to view the competitiveness of the whole manufacturing sector in foreign trade."

China halted a three-year project that let yuan exchange rates float in 2008 to counter a possible global recession. A similar policy had been adopted in 1997, when the Asia Financial Crisis began and China pledged not to depreciate the yuan.

Also in the interview, Hu suggested public disclosure of China's fluctuating nominal effective exchange rate, which is calculated against a basket of currencies, to de-emphasize the yuan's rate against the U.S. dollar.

The full interview appears in the August 2 issue of Century Weekly.

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]]> Fri, 30 Jul 2010 20:32:12 +0800 <![CDATA[How to Shore Up Local Financing Platforms]]> A Wuhu Construction Investment Co. bond tender July 22 was the third for a local government financing platform in less than 10 days, triggering speculation that the central government had backed off from tightening platform credit rules.

But in fact, a senior analyst at a rating company said, Wuhu and the other project sponsors had gotten green lights for their tenders shortly before the State Council's June 10 clampdown on borrowing and investment vehicles.

The order silenced urban investment bond activity for a full month. And despite the recent flurry in July, local financial platforms across the country have continued to show no signs of a true revival.

Moreover, said the rating agency analyst, who evaluates local platforms, none of the latest projects were tied to pledges from accounts receivable sources, which were often used to pay bond investors in the past.

Bonds issued by Shangrao Urban Construction and Development Investment Co. on July 15 were backed by government land-use rights, while the Maanshan City Construction Investment Co. tender July 20 included a third-party guarantee that was not a financing platform but, rather, local steelmaker Masteel.

Xu Lin, director of fiscal and financial affairs at the National Development and Reform Commission (NDRC), told Caixin that platforms with recent bond offerings had standardized projects according to the State Council's order. The move was designed to prevent hidden government guarantees, such as accounts receivable financing, "mainly for the purpose of preventing formation of a direct relationship between an enterprise and the government," Xu said.

Maanshan signed a build-transfer cooperation agreement with the Maanshan city finance bureau, through which the construction company would build on behalf of the local government, which would ultimately repurchase the project. But the paperwork did not include an accounts receivable pledge.

Zhou Yuanfan, a director at Pengyuan Credit Rating Co. Ltd., said under current rules build-transfer agreements can provide revenues for financing platforms but cannot be used to increase credit. For that reason, previously completed bond applications from many platforms are now being adjusted.

Only a handful of the more than 8,000 financing platforms nationwide are qualified to raise funds through corporate bond offerings. Banks were the most widely used credit source for platforms during their explosive borrowing growth period in 2009, before the State Council clampdown.

Now, banks are more cautious about lending to financing platforms. The head of the loan management department at a state-owned bank told Caixin "lending will definitely not be like it has been."

Loans generally will only be extended to projects already under way, and repayment guarantees are mandatory through more reliable schemes such as expressway tolls.

Clean-Up Strategy

Local governments and banks are also eyeing possible ways to clean up existing loan books at financing platforms.

Naturally, banks don't want to be stuck with unpaid loans. Thus, according to a loan management chief at a state-owned bank, banks are "unlikely to significantly ease the extension of loans to financing platforms over the next few months."

He said the latest State Council document made no explicit statements about repayment sources for loans that financed ongoing public works projects that have yet to or may never generate revenues. So some fear local governments might seek debt relief by merging investment platforms.

The next few months could determine the course for local governments and lender risk, the loan department chief said. "The end of the year will be a critical time," he said.   

A Shanxi Province finance official told Caixin his department is now formulating a related provincial scheme that should be announced before September. "Investment growth in the second half of this year will surely be affected," he added.
   
Nationwide, government-led infrastructure investment in the first half 2010 slowed, pacing moderating investment growth overall. Investment in infrastructure in June grew 14.9 percent from a year earlier. Growth in June 2009 had been 30 percent year-on-year.

Yet central government investing has picked up. On July 5, NDRC announced 23 new project starts for the 2010 Great Western China Development program with a total investment of 682 billion yuan.

Niu Li, macroeconomic department director for the economic forecasting division of the State Information Center, told Caixin most of these development projects had been planned earlier but implementation was slowed earlier this year due to concerns of economic overheating.

Now that nationwide economic growth is expected to decelerate in the second half, these projects may accelerate.

The Ministry of Finance said at a conference in early July government spending must accelerate in the third quarter, and that governments should strive for significantly higher spending through November compared to the same period last year.

To that end, central government projects have received matching financial support from local governments that issued bonds in recent weeks through a finance ministry program. Between June 18 and July 16, for example, the ministry offered three tranches of local bonds worth a total 67 billion yuan.

An official at the ministry's economic development agency said investment progress has accelerated, and any clean-up of local financing platforms would not affect projects included in the central government's 4 trillion yuan economic stimulus program, launched in 2009 in response to the global financial crisis.

Local government matching funds are guaranteed, the ministry official said. "Resolving funding issues on a wholesale basis is a cinch" through measures such as local debt offerings, he said.

The national treasury's deposits for all governments in China topped 3.03 trillion yuan at the end of May, according to the People's Bank of China, with the central government likely controlling the bulk. But urban government fixed asset investment totaled 9.8 trillion yuan in first half, and the proportion going toward central government projects slipped to 7.6 percent.

A large volume of new local projects will likely be needed if goals for accelerated government investing are to be reached in coming months. And local projects usually rely on local financing platforms.

1 yuan = 14 U.S. cents

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]]> Fri, 30 Jul 2010 17:45:09 +0800 <![CDATA[Control at Stake as Everbright Bank Preps IPO]]>
(Beijing) - A tough debate over who deserves the controlling stake has apparently been put on ice as China Everbright Bank prepares to become the second Chinese bank to launch an initial public offering this summer.

Everbright is expected to raise some 20 billion yuan through an IPO on the Shanghai A-share market in August, and later float stock on the Hong Kong exchange.

"After the A-share offering is complete, we will immediately begin to prepare for the H-share IPO and strive to make an H-share offering as soon as possible," an Everbright source said.

The China Securities Regulatory Commission (CSRC) received the bank's A-share IPO prospectus for review July 22. It says Everbright plans to offer no more than 6.1 billion shares with an option to float another 900 million shares. Eventually, the bank plans to trade no more than 40.4 billion shares.
 
Details of the proposed H-share offering have not been released.

The bank's fund-raiser has already been delayed for two years and would begin just a few weeks after a dual listing that raised about US$ 20 billion for Agricultural Bank of China (ABC) in Shanghai and Hong Kong.

In addition, according to statements from other state-owned banks, Industrial and Commercial Bank of China hopes to raise about 60 billion yuan, Bank of China is shooting for more than 60 billion yuan, and China Construction Bank is seeking 75 billion yuan from investors on the Shanghai and Hong Kong stock markets by the end of 2010.
 
Amid this scramble for funds, the speed and apparent smoothness of Everbright's IPO project points to the bank's confidence in investor appetite while suggesting that it has, at least temporarily, suspended a tussle between its majority shareholder Central Huijin Investment and former owner Everbright Group.

Central Huijin took over the bank through a debt bailout several years ago. But the original parent Everbright Group, which is now a minority shareholder, wants to regain control.

Paper Trail

CSRC temporarily halted its reviews of all IPO plans, including Everbright's, nearly two years ago after the A-share index, reacting to the then-unfolding global financial crisis, plunged nearly 70 percent in September 2008. The bank had submitted financial documents for a flotation in June that year.

Everbright's initial application with CSRC last year was based on third-quarter 2009 financial statements "in hopes we would able to be successfully listed by the first half" 2010, said the bank's information chief Shen Chunhuan.

But when it became clear that Everbright would have to wait, a new IPO prospectus had to be drafted based on the bank's  2009 annual report. The papers were submitted to CSRC at the end of 2009.

In May, regulatory authorities determined ABC's IPO would be launched in July and be "closely followed by Everbright," a source said.

"Unfortunately, ABC squeezed Everbright out of the listing window," said a member of the IPO underwriting team. "A June listing was impossible."

The bank's financial report point to explosive growth in new lending this year, following a jump in lending in 2009. From January 1-20, for example, new loan volume was highest among all of China's joint-stock banks. And by the end of the first quarter, new borrowing had grown by 42.7 billion yuan, up 6.6 percent year-on-year – the sixth fastest growth rate among joint-stock banks.

Like similar banks in China, Everbright has also experienced rapid growth of total assets, which totaled 1.2 trillion yuan at the end of 2009, up 34 percent, or 349.5 billion yuan, from the beginning of the year.

These financial conditions have put pressure on the bank's core capital adequacy ratio. Despite a private placement of 11.5 billion yuan last year, Everbright's core capital adequacy was only 6.8 percent and its capital adequacy ratio just 10.3 percent at the end of last year.

But since the bank needs a core capital adequacy ratio greater than 7 percent to meet requirements for subordinated debt offerings, according to one analyst, a rapid listing was inevitable.

"For the market, the symbolic significance of Everbright's listing is greater than the substantive pressure," said the analyst.

Battle Lull
 
A signal that its debate with Central Huijin had reached a lull came in May when, according to a source close to CSRC, Everbright Group submitted an application to adjust the shareholding structure. The proposal, which dovetailed with the IPO prospectus, also went to the State Council.

Central Huijin expressed no opinion. "This change in shareholding application was a unilateral move by Everbright Group," a source said.

Since no resolution to the conflict between the group and Huijin appears in sight, and any change will require State Council action, group executives have decided to accept existing conditions and focus entirely on the IPO.

Everbright Group was the controlling shareholder until 2007, when the government approved Everbright Bank's reorganization and Central Huijin injected 20 billion yuan in U.S. dollars, giving it a 70.9 percent stake in the bank.

If not for the injection, the group could have gone bankrupt. "It is not an exaggeration to say Huijin was the only savior for Everbright," a market analyst said.

But even after the injection, the group continued to dominate the bank's board, supervisors, management and organisational relations. And group Chairman Tang Shuangning frequently described an intention "to take over Huijin's stake" in the bank.

Central Huijin currently has a 64 percent stake in the bank, having invested more than 40 billion yuan.

Questioned by Caixin after the group submitted the reorganization proposed, a senior official at Central Huijin refused to say whether it would withdraw as the bank's largest shareholder anytime soon. But several analysts said they do not expect an easy transition.

"Huijin would not withdraw easily," said one analyst. "After all, this involves a relatively large amount."

Everbright Group last year posted total assets of 14.8 billion yuan and negative net assets of 353 million yuan. Net profits for 2009 topped 4.9 billion yuan. Thus, for now it appears the group is in no position to acquire majority control. But that has not stopped it from trying or pursuing the dual IPO.

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]]> Fri, 30 Jul 2010 15:22:51 +0800 <![CDATA[ICBC to Raise 45 Bilion Yuan via Rights Issue ]]> China's largest bank by assets will raise 45 billion yuan this year from the Shanghai and Hong Kong stock markets to replenish its coffers.

Current shareholders of Industrial and Commercial Bank of China will have the right to buy 0.6 share per ten shares they hold, according to a July 28 statement by the Beijing-based lender.

The plan is subject to shareholder approval and relevant regulatory bodies. 

As of the end of 2009, core capital adequacy ratio at the lender dropped to 9.9 percent from 10.75 percent at the end of 2008 after a lending binge last year. Its capital adequacy ratio slid to 12.36 percent at the end of 2009 from 13.36 percent at the end of 2008.

China Construction Bank and the Bank of China have announced their plans to raise up to 75 billion yuan and 60 billion yuan, respectively, in Hong Kong and Shanghai stock markets.

Central Huijin Investment Ltd., a major shareholder in the three banks, has pledged to buy additional shares with cash.

Bank of Communications raised 32.7 billion yuan by issuing additional A-shares and H-shares on July 15.

The A-share of ICBC rose 1.87 percent on July 28 from the previous trading day to close at 4.36 yuan.

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]]> Thu, 29 Jul 2010 19:01:43 +0800 <![CDATA[Farmers Allowed to Use Land as Collateral]]> Farmers in nine provinces have been using farm and residential land rights as collateral for loans through a trial project since 2008, and now the program is likely to expand to farmers across the country.

“Financial products designed for farmers and innovations (for rural development) will be offered across the country” starting in the second half of this year, said a July 27 statement on the website of the People’s Bank of China, the central bank.

The pilot kicked off in October 2008 with little fanfare. Three provinces in the northeast and six provinces in central China were selected. Affected farmers were allowed to use farmland, homes and agricultural equipment such as tractors as loan collateral.

Since then, all 88 counties targeted by the project have reported surging loans to farmers. By the end of June 2010, outstanding loans related to rural development had reached 2.6 trillion yuan nationwide, up 24.2 percent from a year earlier.

The latest project statement on the central bank’s website is entitled Further Promoting Financial Products and Innovations for Rural China. It was jointly released by the central bank, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission.

Analysts say the central bank and the regulators want farmers to be more engaged in financial markets, which have long shut them out.

The statement said farmland that can serve as collateral for individual loans will still be owned collectively by all farmers in a village. And the use of land for collateral is voluntary, the statement said.

Breakthrough Policy

Agriculture officials around the country may be surprised by the latest announcement, which represents a major breakthrough for farm credit policy. But Wang Guiqin, an official at the Shandong Provincial Agricultural Department, said she couldn’t believe her eyes in May 2008 when she read a document declaring farmers in selected areas could use land as collateral.

Until then, the national Law on Collateral had clearly banned the use of farmland as collateral.

Since the 1980s, farmers have had the right to cultivate land individually and sell harvests on their own. Before that, farmers worked together in the People’s Commune system and evenly divided the harvest.

But fearing farmers might lose their most important source of income by defaulting on loans, the government had until 2008 declared farm and residential land off-limits for loan collateral.

In an interview with Oriental Outlook, a magazine affiliated with the official Xinhua News Agency, rural development expert Gang Guoying said farmers and banks still have to be cautious about signing up. He noted that farmers unable to repay loans could lose their land rights.

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]]> Thu, 29 Jul 2010 18:37:45 +0800 <![CDATA[China, Singapore Sign Currency Swap Pact]]> (Beijing) – Singapore has become the latest addition to the list of countries to sign currency swap agreements with China. China's central bank and Monetary Authority of Singapore recently signed a three-year swap agreement valued at 150 billion yuan.

The eighth of its kind since December 2008, the swap agreement aims to facilitate trade and direct investment between the two Asian nations. The agreement can be extended upon the mutual agreement of the two sides, according to a statement on the People's Bank of China's website.

China had signed 653.5 billion yuan worth of swap agreements with South Korea, Hong Kong, Malaysia, Belarus, Indonesia, Argentina and Iceland.

Singapore, one of China's major trading partners, witnessed a 37 percent year-on-year increase in trade with China in the first half of this year. The trade with Singapore accounted for two percent of China's total foreign trade in the first six months of 2010.

In July 2009, China launched a trial program of cross-border trade settlement in the yuan, linking Shanghai and four Guangdong Province cities to Hong Kong, Macau, and the Association of Southeast Asian Nations. After nearly one year of trial, the scope of the yuan settlement was expanded to 20 provinces, autonomous regions municipalities and all of China's trading partners. 
 
The currency swap agreement will give Singaporean companies access to the supply of yuan bill notes, facilitating cross-border yuan trade transactions.

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]]> Wed, 28 Jul 2010 18:55:56 +0800 <![CDATA[Policy Hits Target as Economic Growth Cools]]>
Experts say second-quarter statistics reflecting a slower pace of GDP growth illustrate the effectiveness of recent Chinese government macroeconomic policies in areas ranging from heavy industry to real estate development.

In general, according to government and financial analysts interviewed by Caixin, second-quarter data suggests the economy is cooling exactly as macroeconomic planners had hoped. They also say the data supports calls for staying the policy course.

Moreover, many analysts were surprised to find that government policies worked so well that GDP growth decelerated faster than expected, and alongside unexpectedly low consumer price inflation.

Industrial production and the rate of fixed investment growth also declined beyond expectations.

The government said the nation's GDP expanded 10.3 percent in the quarter compared to the same period 2009, slipping from the 11.9 percent year-over-year growth posted in the first quarter.

And the deceleration is expected to continue. Wang Tao, chief China economist for UBS Securities, said she expects to see 8 percent GDP growth in the fourth quarter, which would bring full-year growth to between 9.5 and 10 percent, on the back of a slower growth for heavy industry.

"Going forward, the slowdown will continue," Wang told Caixin.

The latest figures came as no surprise to Sheng Laiyun, spokesman for the National Bureau of Statistics (NBS). On July 15, he said the economy would continue chugging along within an expected growth range, noting that second-quarter GDP growth was quite high yet in line with second-quarter averages between 2000 and 2009.

But other analysts failed to forecast many of the statistics pointing to such rapid deceleration, such as a 2.8 percentage point decline from May to 13.7 percent for industrial added value of large companies in June. The average growth rate in this area forecast by 18 economists previously surveyed by Caixin was 15.1 percent.

Zhang Weihua, deputy director at the NBS Statistics Industrial Statistics Division, told Caixin the June slowdown reflected government macroeconomic tightening and a comparatively good performance in June 2009.

Government policymaking for energy and emissions was cited as a linchpin by Wang Yuanhong, a senior researcher at the State Information Center Economic Forecasting Office.

Policies encouraging energy conservation and emissions cuts "expanded, and more effort was made to close and transform energy intensive enterprises, thus impacting industrial growth," Wang said.

Electricity data reflected the one-two punch of the government's energy-emissions policies. Although nationwide electricity production rose 11.4 percent year-on-year in June, down from 18.9 percent in May. Heavy industry electricity consumption grew 16.1 percent from a year earlier, down 8.9 percentage points from May's figure.

May marked a step-up in central government pressure on industries to reduce energy consumption and pollution. Policymakers reacted to a first-quarter increase in nationwide energy consumption per unit of GDP, which ran against the grain of government plans for power and emissions reductions outlined in the 11th Five-Year Plan.

Pressure tactics included more government controls on new industrial projects, accelerated shutdown schedules for outdated plants, and electricity price adjustments.

Wang Qing, Morgan Stanley's Greater China chief economist, said the nation's energy-saving and emissions-reduction policies pulled down June's industrial added value growth by 1.5 percentage points.

The year-on-year added value growth rate for China's energy-intensive industries was 4 percentage points lower in June than in May, according to NBS. This decline contributed directly to an overall 1.5 percentage point reduction in industrial value-added growth for June, year-on-year.

Investment Impact

Meanwhile, China's urban fixed asset investment grew 25.5 percent in the first half, while the growth rate for planned investment for existing projects declined 1.7 percentage points to 27 percent, suggesting an ongoing slowdown for investment.

Nevertheless, real estate investment continued to climb at a brisk pace: Property development investment grew 38.1 percent in the first half over the same period 2009.

How long will the property party last? Perhaps not much longer, said Shi Lei, an analyst for Bank of China's Global Financial Market Department.

Shi expects government real estate control policies to trigger a decline for new development projects in the fourth quarter, adding that the sector's investment cycle is six months to a year.

Shen Jianguang, chief economist for Mizuho Securities Greater China, said real estate controls have slowed China's overall economy at a time of weaker demand from Europe importers and the government's push to save energy and reduce emissions.

And based on these factors as well as the central government's stricter controls on local government fund-raising platforms, Shen says, growth will continue to slow until it reaches a sustainable level. He's also counting on the rising influence of Chinese consumers.

"Growth in exports and investment will slow," he said. "Going forward, only (domestic) consumption can maintain stability."

And the latest economic data suggests that the economy may be clearing a path for consumption via unexpectedly weak inflation.
The government said the consumer price index grew 2.9 percent year-on-year in June, but that was down 0.6 percent from May. Economists previously surveyed by Caixin had forecast an average  3.3 percent CPI in June.

Overall, Sheng explained, the government in the first half emphasized inflationary expectations and liquidity issues. Lower prices for food dragged own CPI as vegetables and fruit flooded the market in June.

The State Information Center's Wang said this year's tight money supply and a significant decline in investment, as well as relatively low world commodity prices, helped ease inflationary pressures.

And although inflationary pressure eased from the perspective of CPI, significant uncertainty remains.

Sun Mingchun, chief economist for Nomura Securities Greater China, said prices for grain, pork and other foods, as well as housing rents, will increase in the weeks to come in response recent flooding in some parts of the country. He expects a sharp increase for inflation in July.

NBS said the nation's grain harvest this summer was down 0.3 percent from the previous year, ending six consecutive years of bumper harvests. The autumn grain crop, which comprises more than 70 percent of the nation's harvest, may be impacted by recent flooding in Jiangxi and other provinces.

CPI also could nudge higher in the second half because energy price reforms for water, electricity and natural gas were delayed during the first half.

Researchers at Huatai United Securities predict future inflation will be tied to supply shocks rather than demand growth.

Yet in the face of higher inflation forecasts and the second quarter slowdown for GDP growth, government planners are expected to stick to their current policy direction.

UBS' Wang predicts no changes for macroeconomic policy over the next few months: 11 percent GDP growth and a more than 40 percent increase in exports during the first half of the year are good reasons not to relax policy or try new incentives.

In the real estate industry, policymakers may wait for control measures to take full effect before deciding whether to introduce new policies or change direction.

Besides, the government has more macroeconomic tools in its bag, ranging from government investment projects and local bond issues, to fiscal revenue and spending arrangements. These leave room for more possible responses if the economy slips in the second half.

The National Development and Reform Commission recently announced 23 new projects for developing western regions worth a total 682 billion yuan. These sorts of investment projects may pick up speed in the third quarter.

1 yuan = 14 U.S. cents

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]]> Wed, 28 Jul 2010 14:10:11 +0800 <![CDATA[H1 Net Profits for Brokerages Fall 33.1%]]> China's securities firms reported a 33.1 percent year-on-year decline in net profit for the first half of this year due to weak stock markets.

The decline was the worst since 2007, according to financial reports released by 57 securities companies.

Of the 57 companies, only nine brokerages witnessed positive growth in net profit for the first half of 2010. Among the 48 brokerages with negative growth, four posted losses in net profit.

Amid a downswing in A-share stock markets in the first half, securities firms saw the heaviest losses. Against the 27.51 percent drop of the Shanghai-Shenzhen 300 Index, the weighted capital stock of the securities section slumped by an average of 47.01 percent.

The ratio of commission revenues to total revenues was 0.10 percent, down from 0.12 percent in 2009, according to the Securities Association of China.

Among the brokerages which issued their semiannual reports, Haitong Securities posted the highest sales revenue at 3.36 billion yuan. Guotai Junan came second with 3.42 billion yuan in revenue, followed by China Galaxy with 3.20 billion yuan. In terms of net profit, Haitong reaped the largest gains at 1.77 billion yuan, followed by Guotai Junan at 1.40 billion yuan, and China Galaxy at 1.37 billion yuan.

This year, China has seen an unprecedented wave of initial public offerings. As of June 30, 178 companies launched IPOs and raised a total of 213.2 billion yuan. Seventy-one other listed companies raised 193.4 billion yuan, among which 1.38 billion yuan came from additional share issuances and 55 billion yuan from rights issuances.

The colossal volume of new shares issuances brought in huge underwriting commission fees for securities companies. In the first half, underwriting income reached 7.25 billion yuan.

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]]> Mon, 26 Jul 2010 18:07:30 +0800 <![CDATA[Securities Probe Traces a Shaanxi Rat Pack]]> In the month before Shaanxi Construction Machinery unveiled a major shareholder restructuring, the company's stock price doubled. And that ascent continued for months.
 
Now, more than two years later, the China Securities Regulatory Commission (CSRC) has accused a coal company president as well as executives at the machinery manufacturer and five other concerns with violating securities laws.

The executives were charged with "rat trading," a type of insider trading in which one or more managers with private company information likely to affect future stock prices secretly and profitably controls "rat accounts" for relatives and friends.

In addition, a separate Caixin investigation has found that companies tied to a firm called Tomorrow Group received insider information about the share reshuffle in 2007, which involved Shaanxi Construction Machinery and Shaanxi Coal Chemical Group, before the public announcement.

Tomorrow Group is a controlling or minority stakeholder in six listed companies. Caixin's probe uncovered evidence that Rongfenghang Investment Company Ltd., which served as a financial adviser to Shaanxi Coal between September 2005 and March 2007, is probably a member of the group.
 
CSRC investigators say the machinery company announced on March 26, 2007, that its controlling shareholder Shaanxi Construction Engineering Group Corp. was transferring its shares to Shaanxi Coal.

The coal company's president, Gao Yangcai, knew about the share transfer before the public announcement and, according to CSRC, illegally bought a large number of shares through a personal account and accounts held by his relatives.

Having received CSRC's investigative report, law officials are now deciding whether to press criminal charges against Gao, who was hired as the coal company's president in 2006 and has retained that post throughout the probe.

So far CSRC has withheld many case details, including the size of Gao's alleged trades. An informed source in Shaanxi said his holdings likely exceed 300,000 shares. But other insiders may have bought shares illegally as well.

"How many shares could Gao himself buy?" asked one source. "In one month in 2007, the company's share price rose more than 100 percent. Clearly, there was another heavyweight behind this."

Market Project

The coal company had started planning for a public listing in February 2007 at a time when Shaanxi Construction Machinery, due to three consecutive years of losses, was in danger of delisting.

At the urging of the provincial government, Shaanxi Coal scrapped the IPO plan and decided to pursue a backdoor listing through the machinery company. Backdoor listings were common at the time, and provincial officials supported it as a way to protect the machinery company as a shell, while saving time and money for Shaanxi Coal during its listing project.

In addition, the backdoor process apparently laid the groundwork for Gao's insider trading moves.

Gao later transferred his shares to a nephew – the son of an older brother he felt indebted to for raising him. By transferring shares to the relative, Gao apparently hoped to avoid legal impunity and repay his big brother.

"Gao just doesn't understand the law," a Shaanxi Securities Regulatory Bureau official said.

Shaanxi Coal managers led by Chairman Shen Hao supported the provincial restructuring plan.

Provincial officials then arranged for Shaanxi Construction Engineering to sign an asset transfer agreement with the coal company. The deal transferred 910 million yuan worth of group assets, including machinery company shares, to Shaanxi Coal in exchange for 128 million yuan, making the coal company the controlling shareholder of the machinery firm.

Six days later, the provincial government formally changed management at the coal company. Shen was moved to a job as chairman of Shaanxi Yanchang Petroleum (Group) Co. Ltd., while Yanchang's President Hua Wei was named Shaanxi Coal's new chairman.

Gao supported the backdoor listing plan, but Hua was opposed. In April, the two men clashed; Gao is said to have pounded the desk in Hua's office.

"Hua and Gao's disagreement was over divergent ways of thinking about the restructuring," said a Shaanxi Coal source. "Hua wanted to maintain the shell resources of the listed company and a dual A-share and H-share listing for Shaanxi Coal. Gao insisted on a backdoor listing for Shaanxi Coal's major business."

The coal company had planned to raise 8 billion yuan through a secondary offering and share allotment from the listed company. Policy restrictions made the plan look impossible, apparently turning Hua and other executives against a backdoor listing and in  favor of a partial injection of assets.

But while the restructuring plan was taking shape, the machinery company's stock was on the move. Between February 26 and March 23, 2007, its price shot up 114 percent.

The period before Hua's appointment and the conflict with Gao saw a numbers twists and turns for company shares. The price rose to about 15 yuan per share in May from 4 yuan in February, then started tumbling. By July, the share price had fallen to 8 yuan amid rumors that Hua would resign. But it soared to around 19 yuan by September.

The dispute ended with both executives getting what they wanted: A backdoor listing followed by an overall listing for Shaanxi Coal, which pursued a dual listing on Hong Kong and mainland markets, while at the same time injecting assets into the machinery company.

1 yuan = 14 U.S. cents

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]]> Mon, 26 Jul 2010 15:14:53 +0800 <![CDATA[Regulator Vows Insider Trading Crackdown]]>
(Beijing) – The China Securities Regulatory Commission reiterated its resolve in combating insider trading during the restructuring of listed companies, at a CSRC accountability meeting on June 21.

CSRC Chairman Shang Fulin said that there have been many recent cases of insider trading, particularly in the field of mergers and acquisitions.

Shang said the CSRC will work with the State Assets Supervision and Administration Commission to raise awareness on insider trading among state-owned companies.

In the first half of this year, the regulator opened probes into 121 cases, 59 of which were insider trading cases and 14 were market-rigging cases.

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]]> Thu, 22 Jul 2010 18:11:02 +0800 <![CDATA[Speculation May Be Fertilizing Farm Prices]]> Like other farmers in China's farm belt, Cao Yongfang held back from selling the winter wheat he harvested in early July, even though he usually sells crops as soon as they're picked.

This harvest season, Cao decided to wait for higher prices. And thanks to a wave of speculation and farm commodity-flipping in China's agricultural market, his waiting game was likely to pay off.

"The price of new wheat this year has risen to 1.04 yuan per half kilogram," said Cao, who plows the land in Hebei Province's Zhengding County. "It was only a little more than 0.8 yuan last year, and it will likely go higher in coming days."

Farm product prices across China started climbing quickly in April, beginning with vegetables and followed by spikes for mung beans, garlic and other goods.

Speculation was considered the main reason for the sudden increases, so the government responded by introducing new price controls along with penalties for hoarding. Officials also pursued a general crackdown on speculation.

These policies, however, failed to prevent prices for rice, corn, wheat and other staples from continuing to climb.

Wang Yuanhong, a senior economist at the State Information Center, said market demand is rigid for non-staples such as mung beans as well as staples such as wheat. That makes these goods vulnerable to short-term stockpiling and speculation.

Wang also thinks investment liquidity is driving up prices for bulk products such as wheat and cotton. Government controls aimed at discouraging investment in polluting, energy-intensive industries has encouraged investors to shift money to new arenas, such as farm product speculation.

Speculation tied to excess liquidity cannot be ruled out as a factor affecting agriculture prices, complementing basic factors such as labor, supply and demand, said Zhang Hongyu, director of the Ministry of Agriculture's Policy and Regulation Department.

The market climate is affecting more than food. For example, prices for cotton – a textile industry staple – have been surging.

Wang Aifang, information director for the China Cotton Association, said domestic cotton prices have climbed since autumn 2009 to their highest levels in a decade. "Cotton prices are up 30 percent compared to the average for 2008 and 2009," he said.

And textile companies are feeling the pinch as speculators place bets on the cotton market. Zhao Lanning, president of Huate Textile Co. Ltd. in Shijiazhuang, said prices for the yarn his company needs have risen by nearly one-third since February.

"Traders are making a fortune off flipping goods," Zhao sighed. "We wish we had bought more before the price surge."

Speculation Yarn

When cotton prices rise, the higher costs are passed down through a long industrial chain in China that includes cotton gins, yarn makers, weavers, dyers, finishers and exporters. About 95 percent of the domestic cotton crop is spun into yarn.

The cotton association recently reported high prices are cutting profits for garment companies. Many textile makers have temporarily shut down plants, while clothing companies are being more cautious when placing orders.

A salesperson at a Tianjin textile exporter said sales have fallen in response to rising costs and exchange rate fluctuations. So exporters have scaled back, handling "less than 50 percent" of levels seen in 2008, the salesperson said.

Overall, however, the textile industry has improved since the first quarter, when its industrial added-value rose 13.4 percent compared with the first quarter 2009. Exports have been growing, and the domestic market is strong. 

But the cotton portion of the industry has not fared as well as others. The sudden shriveling of demand for textiles and apparel during the financial crisis cut demand for cotton. And then prices started climbing.

"We haven't been producing cotton cloth since Chinese New Year" in February, Zhao told Caixin. "We've been operating exclusively in polyester cloth, where the price is relatively stable.

"Factories working exclusively with cotton are retaining only a small number of looms to produce cotton cloth and maintain their customer base," he said. "The rest have switched to production of other fabrics."

Farmers reduced the acreage dedicated to cotton in 2009 after prices fell to the lowest levels in years, averaging 12,159 yuan per ton in 2008. And as domestic output declined, cotton imports – equal to about one-third of domestic production – also slid.

This year, weather factors have also influenced market expectations of a delayed cotton harvest.

But figures compiled by the Cotton Trade Information Network suggest additional factors are affecting prices, which have stood at about 18,000 yuan per ton since March. The network says the cost should be around 15,400 yuan per ton, based on the 2009 market.

"One can clearly feel that the industry thinks this year's cotton price has risen too fast," said Wang, adding that the increases have been "outrageous" perhaps because speculative investors are targeting the industry as they have with real estate in China.

He Yongtao of the China International Futures Ltd. Mid-Term Research Institute said he cannot rule out the possibility that traders are hoarding cotton. Cotton traders don't share the fears of downstream textile and clothing makers who, he said, are now buying supplies on an as-needed basis so that they don't lose money if prices fall.

Regardless of price fluctuations, He said, traders are almost certain to sell their warehoused cotton eventually. Traders stockpile when overall demand for cotton is high, even though textile and garment-maker demand is stable.

A source at the Ministry of Agriculture's Plant Products Industry Department said recent price increases have mainly benefited traders, not farmers.

Agricultural analyst Ma Wenfeng of the BOABC consulting firm says there has been considerable price manipulation in the markets for cotton as well as wheat and other bulk farm products affected by tight supplies and reduced supply expectations. These markets, he said, have attracted investment capital.

And in farm areas such as Cao's Hebei, as well as Anhui and Jiangsu provinces, wheat prices are continuing to swing upward. This has led buyers to criss-cross provinces in search of sellers willing not to wait for even higher prices. But few can be found.

"Buying companies are unable to buy enough wheat," said He. "Farmers are generally holding out for better prices."

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]]> Thu, 22 Jul 2010 16:24:54 +0800 <![CDATA[Snapshot of Xiang Junbo]]> The 53-year-old chairman of China's largest, farm-focused financial institution learned about rural lifestyles as a young man, when he was sent for a mandatory experience in the Chinese countryside.

Xiang Junbo later became an instructor for the People's Liberation Army and, in the 1980s, attended People's University. He also learned to write poetry, a skill that helped him compose a television screenplay that won him a national television award in 1999.

Switching careers, Xiang got a job as an official auditor, eventually rising through government financial agency ranks to become a deputy governor at the People's Bank of China. He left that post in 2007 to take his current position as president and chairman of Agricultural Bank of China.

Before joining ABC, Xiang typically kept a low profile and rarely granted interviews. One bank insider called him a workaholic who often spent weekends and nights on the job.

Now that ABC has completed an historic IPO, Xiang's status at home and abroad has soared. Investors worldwide know his name. And he's also more willing than ever to interact with the media.

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]]> Thu, 22 Jul 2010 16:03:00 +0800 <![CDATA[ABC's Top Banker Trains an Elephant to Dance]]>

(Shanghai) – It took Agricultural Bank of China executives three years to complete internal reforms, restructure the state-owned giant and launch an initial public offering.

ABC Chairman Xiang Junbo, for whom the arduous process climaxed in July with a dual listing in Hong Kong and Shanghai, notes that certain animal trainers need similar patience.

"Making elephants dance," Xiang said with a smile, "is really not easy."


Xiang's wit and Sichuan humor accented a nearly two-hour interview with Caixin about the rise of ABC and its historic IPO, the world's largest. He spoke on the evening of July 14 in a Shanghai hotel just hours before ringing the morning bell at the Shanghai Stock Exchange to begin the bank stock's first trading day.

The following day, Xiang did it again by ceremonially opening the Hong Kong Stock Exchange as ABC's H shares hit the trading floor.

ABC was China's last, major state-owned bank to go public. Its restructuring began in 2008, but the global financial crisis delayed IPO plans. Moreover, the bank has been embroiled in scandals over the years and once led the nation's banking giants in bad assets.

Xiang throttled a reform train. He typically spent Mondays through Thursdays at the bank's headquarters in Beijing, then traveled to far-flung bank outposts across the country for field inspections Friday through Sunday.

By April, the smoke finally had cleared and ABC started preparing for the Shanghai and Hong Kong markets.

Xiang spent three, grueling years on the ABC overhaul. "This is the hardest work I've ever done," he admitted during the interview.

But the payoff was huge: The dual listing raised about US$ 19.2 billion amid a general slump for global capital markets.

When Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and Bank of China (BOC) went public in years past, Xiang noted, domestic capital markets and economic situations were better. Yet each of these big banks needed a half-year to prepare for an IPO.

"ABC's IPO preparation period was shorter, only two or three months, which means ABC completed the world's biggest IPO during the most complicated economic conditions and most difficult market situation in the shortest amount of time," he said.

Long before his accomplishment, Xiang was warned about the dangers. "If you don't work off three layers of skin at ABC," he remembers a government official saying,  "you'll never make it."

But ABC's reform process worked, Xiang indeed made it, and now the elephant can dance. Excerpts from the interview follow:

Caixin: In light of dismal market conditions recently, what's the biggest difficulty you faced when deciding to go public?

Xiang: The hardest part was how to assess whether to go public. To me, market conditions are ideal when the A-share market is stable at around 2,500 points. But on June 29, when I was in Edinburgh during a (pre-IPO) roadshow, the Shanghai index fell 4.27 percent in one day. I really felt the pressure.

To go against the trend and list involves big risks, and they are not only ABC's risks. They concern the entire reform process for state-owned commercial banks. This isn't my personal problem; it concerns the confidence capital markets around the world have in China's government, and it concerns the effect of future economic development. And it affects judgments of ABC's fundamentals.

Once I calmed down and thought about it, I realized I couldn't put it off. I have the kind of personality that says if you start something that's right, you have to finish it. So I wrote a report to central government leaders and high-level authorities expressing my personal view. They gave me their full support and enthusiastic help.

Caixin: What is it like to be put under the microscope of international capital markets?

Xiang: When we first started the international roadshow, the pressure was intense. At that time, The Financial Times and The Washington Post wrote very harsh articles, saying the world's worst bank was launching the world's biggest IPO.

During the non-deal roadshow, we went to Los Angeles, Denver, Omaha and New York. Then when the official road show began, I brought the team to Hong Kong, the Middle East, London, Edinburgh, Frankfurt and Australia.

Most institutional investors had very positive reactions. After talking with international investors one-on-one, our order ratio surpassed 80 percent, which is quite high. Some relatively large long-term funds in the international capital market were very interested in ABC's investment story after the roadshow, and they all placed big orders. This was an acknowledgement of ABC's investment value, and an acknowledgement of ABC's management. I felt very comforted.

To raise US$ 10 billion or US$ 20 billion is really not easy. Why should people pull money out of their wallets? Their questions were very tough. Some didn't have good answers. For example, state-owned commercial banks have paid dividends over the past few years, and growth wasn't a problem. But they wanted me to explain how ABC, in the next three to 10 years, can maintain continuous growth.

Ninety-five percent of the people asked me about local government-backed financing platforms and real estate regulation. In the end, we used numbers to dispel their worries and help them recognize ABC's strengths. I would say we were very successful in selling ABC's shares to cornerstone investors and the long-term portfolios of large funds.

Caixin: What was the turning point? Did you feel success was assured?

Xiang: From a philosophical view, success is never assured. Some international investors had doubts, too. For example, I spoke with one international investor three times. After he heard the ABC investment story, he felt ABC's room for future development and growth was very big. He felt very confident. He told me not to worry, that price has no limit. His fund invested more than US$ 1 billion.

His investment had an infectious effect on other investors. Standard Chartered Bank and Rabobank have a strategic partnership agreement with us, and they invested US$ 500 million and US$ 250 million, respectively, as cornerstone investors. Having these strong international banks sign cornerstone and strategic business agreements shows their strong acknowledgement of us, and set an example for other investors.

Caixin: What is your assessment of ABC's pricing? Is the current price too high or too low?

Xiang: Our pricing is reasonable, fully taking into consideration ABC's internal value, future growth, other banks, supply and demand. We believe it's a win-win price for us and investors.

Caixin: You just mentioned investors would ask you how you'll maintain growth in the next three to 10 years. How would you describe your strategy for development?

Xiang: This is also a question international investors would ask a lot. The urbanization process is the biggest opportunity for China's development. Urbanization in Britain, Germany and other European countries essentially took 30 years. China still needs to struggle through 30 or 50 years before we reach Europe's level. New York didn't become what it is until 80 or 100 years ago. Major cities such as Beijing and Shanghai have only had their infrastructures in place for the past 10 years or so.

Historically, because of a division by specialization, ABC's target market and network arrangement have been different than those of its competitors. Outlets in large and medium-sized cities are relatively few, and the foundation of big clients is a bit weaker. Over the past few years, we have been pushing into large and medium-sized cities to catch up with our competitors, expand the scope of our network, and develop new client resources. And we've already become a mainstream commercial bank in large and medium-sized cities.

But at the same time, we've also noticed that in prefectural cities, especially in the countryside, we have a clear advantage. With this in mind, I pushed three years ago to take advantage of the opportunities in the countryside's economic development and urbanization, especially in small cities. In the next three to 10 years, ABC's development will largely rely on this economic area. This is our development positioning. When that happens, we'll have to see who will be China's and the world's most competitive bank.

Caixin: Because costs are high and profits low, ICBC, CCB and BOC have been withdrawing from the countryside while ABC's withdrawal has been forcibly halted. To some extent, you've been compelled to stay in the countryside. How can you turn this to your advantage?

Xiang: This question needs to be looked at from the perspective of development. As I just said, urbanization is China's biggest development opportunity, and this is focused in the countryside.

Currently, China has more than 2,000 county-level cities and 34,000 towns. As the urbanization process moves forward, a rural population of more or less 10 million a year will become an urban population, which brings employment to the countryside's youth and college students. These county-cities and towns need to attract this working population. This is the next focus of development. In these county-cities and towns, ABC is the primary major commercial bank. The urbanization process is going to create all types of financial demands. This is the embodiment of ABC's advantage.

Now, most of ABC's profits come from business in cities  concentrated in the Bohai Sea, Pearl River Delta and Yangtze River Delta regions. But over the next three to 10 years, profit contributions from counties, central China and western China will grow at a relatively fast rate. In fact, this trend has become apparent over the past two years. After several years of development, ABC has completed large-scale investments in counties, and central and western China. As the national economic development strategy changes, it can be said that it is now ABC's turn to reap benefits.

Caixin: Some have suggested you change your name to Bank of Urbanization. Is this the primary reason for going public in the face of a down market?

Xiang: The main factors are, first, the fundamentals of China's economic growth have not changed. Rapid growth such as China's will always attract global attention. Second, as I said, China's biggest, future economic bright spot is urbanization, and ABC's market positioning is closely in line with China's future economic development model, and will receive the most benefits from it.

One basis for the success of this IPO is the dispelling of the market's traditional impression that the "agricultural" part of our name means low growth, high costs and high risks. Investors have realized ABC's intrinsic value and prospects for growth, as well as its interconnectedness with China's future economic development.

Caixin: How do you handle basic risk control?

Xiang: On my second day on the job at ABC, I represented the bank before the China Banking Regulatory Commission during an investigation into the Handan, 50 million yuan theft case. Because ABC has a relatively large number of outlets, risk management is always a formidable task. So all you can do is try harder.

In recent years, we have been building a comprehensive risk management system. After coming in, my first task with regards to strengthening risk management was creating a specialized risk management department to centralize risk management for the entire bank and strengthen credit management. At provincial and lower-level branches, I also posted risk inspectors or managers. It can now be said that ABC's risk management situation has been fundamentally improved.

Caixin: As just one man, how did you push through changes in behavior among hundreds of thousands of ABC employees?

Xiang: Some investors raised this question during the roadshow. They said, "The chairman and other senior managers were brought in from the outside, but most of the management team and staff haven't changed. Supervisors and lenders are still the same people. How do I know if you're doing well?"

My answer was that within a country, a company or a system, the most important thing is not to use people to manage, but to use a good system to standardize management.

Take credit approvals as an example. Before, each bank's basic-level branches made loans, and the lender had the final say. Later, back-end and front-end systems were separated, and then authorized credit systems were put in place.

Now, we've established an independent approval system. ABC's credit approval system and process are now very strict and tight. Seventy percent of approval authorizations for corporate loans are held by province-level banks or the main bank. Retail lending is primarily concentrated at each city's branch, each of which has adopted a centralized, online approval method.

The process is very strict. ABC now checks each level of management for three targets: a profit target, a risk target and a sustainable development target. We look at the company's interests, management skills and managers' personal interests. And after three years, if they've had no bad accounts, they're entitled to a bonus. If they've had a bad account, then they take responsibility for that, including me. These are ABC's supervisory and incentive systems.

Therefore, although the people are the same – it's still these managers – the system has changed. The method of management has changed. There will be a fundamental change in the consciousness of risk. Risk can be brought under control.

Caixin: In 2008, after you'd been on the job for one year, you dismissed your entire Shanxi branch management team. This had rarely been seen in the history of Chinese finance. Why did you come down so hard?

Xiang: Although the Shanxi case wasn't big, the branch was heavily bureaucratic and management was porous. The main bank did a blanket audit and found a lot of problems. The actual situation was completely different from what the management team was saying. So, according to the supervisory department's requirements, we replaced the entire management team.

Another example is the Huludao case in Liaoning Province, which involved falsified loans. This attracted a lot of attention. ABC again basically replaced the entire management team. Not doing so would have sent an insufficient message to the rest of the bank about changing the atmosphere.

Caixin: I heard that ABC's efforts toward internal audits in recent years have been quite extensive (with) fly-in inspections, midnight raids on vaults, and so on. Has this instilled fear in the staff?

Xiang: ABC has a lot of outlets, and the chain of command is quite long. We face a lot of risk pressure, especially operational risk. Our efforts to instill a culture of conformity are quite heavy.

When I first came to ABC, in reaction to the problems that arose from the Handan robbery, we used some unusual methods to bring risk under control, and the results were very noticeable.

The first line of defense was establishing the aforementioned risk management department, which unified the entire bank's risk planning, policy drafting, supervision and evaluation efforts.

The second line of defense was audits. I worked in auditing for 22 years, rising from a regular official to a deputy governor. So I had the right to be heard in this respect. ABC set up 10 audit departments throughout the country and formed a team of more than 2,000 professional auditors that reported to the board of directors. They conducted unscheduled audits and risk monitoring assessments.

The third line of defense was the internal compliance department, which was responsible to management and oversaw daily operational compliance risk management and control.

The fourth line of defense was the risk management dispatch system. Risk managers were gradually sent from the main bank to provincial banks, from provincial banks to city banks, and from city banks to county sub-branches to independently monitor and evaluate risk.

The fifth line was a complete shift for the inspection system. Provincial banks temporarily set up a professional inspection team of 15 to 20 people who go into an outlet and conduct a mandatory takeover for seven days while inspecting potential risks.

The sixth line is the earmark inspection system. The main bank has a specialized task force for unexpected inspections, such as on vaults, for example. I once braved torrential rain to go on a vault inspection in Lankao County.

Finally, ABC has many outlets, and the management radius is rather unique. So of course the best way to manage operational risk is to rely on a complete IT system and on staff members to develop a consciousness for long-term compliance. But the last two lines of defense also generate a good demonstration effect (by) educating and guiding staff members to do their work by the rules. Also, we bring in third parties to conduct independent evaluations of our outlets to improve the quality of our service.

Caixin: After you came to ABC, there was controversy over a regulator plan to split ABC to truly serve agriculture, rural development and farmers. Why did ABC not follow through on this plan? Weren't there good reasons to split?

Xiang: The National Financial Work Conference approved guiding principles for ABC's reform: serve agriculture, rural development and farmers, completely restructure, operate commercially, and go public.

At that time, China required that serving agriculture, rural development and farmers organically link with commercial operations, and that we strengthen our self-autonomy and control risk. If we broke up ABC, not only would it break up the Agricultural Bank of China brand built up over nearly 60 years and the advantages we hold across towns and cities, but the internal staff's reaction would have been fierce. Splitting up would make them feel abandoned and affect the stability of the workforce. In addition, management and supervisory costs of split-ups are very high, and internal transactions would be very complicated. After taking a comprehensive look, it was decided that, on the whole, going public was better.

Caixin: Seventy-five percent of ABC's business is in the cities. Only 25 percent involves agriculture. Even so, is the nature of your business for agriculture, rural development and farmers different than your city business? Is this a difficult issue for management?

Xiang: Based on assets, currently about 37 percent of ABC's assets are located in the countryside. All ABC business activity in the countryside has a driving function, a radiating function and direct service function for agriculture's development, rural economic prosperity and the well-being of farmers.

Currently, farm loan risk not terribly high. The financial environment in the countryside has changed a lot. Farmers are highly likely to pay back loans on their own. The interest earned on loans to farmers is higher than in the city by dozens of basis points, meaning the combined profit margin in rural lending is higher than in the city. Our branch in Heilongjiang Province hands out a relatively large number of loans, and the profit we earn on a 10 billion yuan loan there is equal to the profit we earn on a 16 billion yuan loan in Beijing. If you do it well, you can make money.

Concerns about agriculture, rural development and farmers are prejudiced. In the process of urbanization, many farmers have become quite well-off. Take our clients in the countrysides of Zhejiang and Jiangsu, for example. Our profits from them are more than our profits from our city clients.

Caixin: To promote agriculture, rural development and farmers, ABC set up an agriculture, rural development and farmer financial services department. But it's actually a countryside service department. Is this divided by region and not by service?

Xiang: The establishment of the agriculture, rural development and farmer financial services department was an internal framework meant to provide commercial service to agriculture, rural development and farmers. Its purpose is to clearly examine and calculate each service's cost and profit. From the main bank to the provincial banks to every county and every person, it should clearly show how much was spent. So, the agriculture, rural development and farmer financial services department system is a type of management framework, the key to which is to transform our thinking.

Caixin: Of all the many reform initiatives over the past three years, which do you think were most critical?

Xiang: The most important was the reforming of ABC according to a modern commercial banking model, framework and thinking. The closest to the core was the construction and transformation of corporate culture and thinking. If thinking remains closed, no matter how you change, it's useless. If you don't have a good corporate culture, a good system won't work for long. Only if you instill a culture of risk management into every staff member can you encourage them to act on their own.

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]]> Thu, 22 Jul 2010 15:45:24 +0800 <![CDATA[Interest Rate Swaps Approved for Insurers]]> (Beijing) – China's insurance regulator has expanded a selected list of insurers eligible for interest rate swaps to include all insurers, according to a recent notice by the China Insurance Regulatory Commission.

The regulator clearly stated that the interest rate swaps were used for hedging risks, rather than for speculative gains.

The notice stipulated that the nominal principal of an insurer's trading in interest rate swaps is not allowed to exceed 10 percent of the fixed-income assets at the end of the previous quarter.

China Life Insurance Co., PICC Life Insurance Co., China Ping An Insurance (Group) Co., Taikang Life Insurance Co., China Taiping Insurance Holdings Co. and American International Assurance Co. were the first batch of insurers to trade interest rate swaps.

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]]> Wed, 21 Jul 2010 18:16:35 +0800 <![CDATA[Chinese Funds Lose Big in Q2]]> (Beijing) – Sixty fund management companies lost a total of 351.37 billion yuan in the second quarter of this year, nearly four times as much as that in the first quarter, according to financial reports by those firms.

First quarter total losses for fund companies were 88.4 billion yuan.

Equity-investment funds lost 247.7 billion yuan and hybrid funds lost 97 billion yuan.
In the second quarter, the benchmark Shanghai Composite Index dropped 22.86 percent.

From April to June, fund companies increased their investment in pharmaceuticals, food and beverages, and retail sectors while decreasing their holdings of financial services, steel and machinery shares.

ChinaAMC Money Market Fund fared the best among all funds, reaping 519.4 billion yuan for investors. Fullgoal Tianxiang Fund ranked second with 474.3 billion yuan in second quarter profits, up 2.17 percent from the first quarter.

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]]> Wed, 21 Jul 2010 18:13:25 +0800