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GNOSIS 4/2008
The Chinese economy between development and pragamatism

articolo redazionale

photo Ansa
The present world financial crisis is being characterized also by the involvement, in the international decision making, of new protagonists, until now considered as “emerging”. In this sense, the European Union has asked China for an active participation in the international counteraction to the crisis and a commitment to the drafting of new regulations of conduct for the world financial system. On China’s part, the President, Hu Jintao, has underlined the importance, for both sides, of collaboration between Asia and Europe, even though, according to the Prime Minister, Wen Jiabao, the contribution that China can give to the global crisis, today, is tied to maintaining its stability and internal economic development.
The modality with which Peking intends to “participate” and contribute” to the global financial crisis is, therefore, in caution and pragmatism and in the sustainability, at the base of the politics adopted up to the present. Priority is attributed to the stability of the economic-financial system, with the intention of reducing its strong dependence on foreign countries. China’s principal contribution to the solution of the global financial crisis consists in shifting its growth dynamics from the excessive dependence on exportation to a higher level of internal consumption. In the meanwhile, within the Central Authorities of Peking remains strong anxiety relative to the slowing down of the internal economy.
An increase in unemployment would, in fact, heighten the risk of social disorder. For this reason Peking’s participation, also financially, in the re-order of the international system is likely to be only a gradual commitment, limited to general and possibilist declarations which reinforce its political influence. But concentrating, instead, its real attention on the effective national policies in the attainment of the internal macro-economic objectives (policies in the management of foreign exchange, of the international reserve and of liberalization of the banking-financial sector).
The development of the Chinese banking-financial system is analyzed in this article. The measures adopted can be taken as an indication of the willingness of China to resolve its internal fragility in order to face, with more security, an outside crisis. In relation to a participative choice of Peking in “large world decisions”, also its sense of “global responsibility” assumes importance, which is influenced by the solidity of its fundamental internal economics.

The present world financial crisis is being characterized not only for the modification in the distribution of the world wealth, but also for the involvement of new protagonists in international decision-making which, up to now, have been considered “emergent”. In particular, the European Union has highlighted the role of China with the proposal for a greater participation of Peking in the international financial decisions (1) . In search of coordinated global response, the President of the European Commission, Jose Manuel Barroso, asked Peking for a commitment to actively participate in both the fight against world economic imbalances and the drafting of new regulations of conduct for the world financial system.
The declarations of the Chinese Prime Minister, Wen Jiabao, made in reply to Barroso’s request, were echoed in occasion of both the World Economic Forum of Tianjin (27th-28th September, 2008) and of the VII Asia-Europe Meeting (ASEM) of Peking (23rd-24th October, 2008) (2) , in which it was underlined that the “greatest contribution that China can give to the global economic crisis is to maintain China’s stability and its internal economic development”. After Wen the Vice-Governor of the Central Bank, Yi Gang spoke: “we shall participate with resolution to the rescue activities of this financial crisis”, then the Chinese President, Hu Jintao, who reiterated the willingness of China to give active and constructive collaboration, underlining how the Asia-Europe collaboration, in the present circumstances, would represent a “win-win option for the two Continents”.
The Europe-China direct dialogue, should it result in united positions on the management and on the future ordering of the international financial markets, would give them a competitive advantage with respect to the United States, in the delicate moment of the change-over in Washington, which would not permit the new President, Barack Obama, to adopt strong positions. For Europe it would mean: to see confirmed the proposals of greater regulatory measures of the banking system and of the rating societies, of greater international coordination and of a more assertive role of the International Monetary Fund (IMF), until, having greater resources at its disposal, can intervene in situations of emergency. For China, which plays on the contribution that its potential enormous cash flow can give, and on the influence of its economy at world level, it would mean: to see an important role recognized for itself in the governance of the IMF.
The way in which Peking intends to “participate” and “contribute” to the solution of the global financial crisis is implied in the position “cautious, pragmatic and sustainable” expressed, more than once, by its Authorities.
The priority is attributed to the stability of its own economic-financial system (assuring a minimum growth of 8%) and to the guarantee of assistance at a regional level (to profit from expansive effects of return).
China is aware of the risk of a social disorder that a systemic slow-down and an increase of unemployment could cause within the country and is unlikely to expose itself, in an excessive manner, in its activity in the international ambit.
China represents one of the most “courted” Countries and, at the same time, “feared” by the West for its capacity of capital investment abroad, for its enormous availability of liquidity and the huge quantity of international reserve administered by its Central Bank: the People’s Bank of China.
For the greater part of the Western Countries, China represents both an opportunity (for its financial power and its inclination to invest directly or indirectly) and a threat (owing to the levers of power which can be used by this financial force, at a strategic, political and economic level).
Be that as it may, in view of a participatory choice of Peking in the “great world decisions”, apart from its economic power, it assumes importance also for its sense of “global responsibility”, which is influenced by the solidity of its fundamental internal economics. Among these, given its primary role in guaranteeing the necessary balance between savings and investments, we shall analyze the national financial-banking system.

The restructuring of the banking system in China

In the regime of planned economy, the Chinese banking-financial system has been characterized by a pervasive control by the State which, guaranteeing a large quota of banking financing to public societies (so-called State-Owned Enterprises (SOE), aside from the profitability of same, has contributed to bolster the fragility of the system. The priority accorded to political and social needs and the scarce competitiveness of the public societies – including the banks – have increased the rigidity of the system, already represented by the undercapitalization, by the absence of best practices and by the inadequacy of analyses of risks. Of particular gravity is the preferential ‘fast-track’ granted to the SOEs, supported also through generally incomplete information on their liabilities, making the loan figure as an option of contained risk. The financial weakness of the SOEs – always considered the principal clients of the banks – and the presence of loans with “special denomination” in the budgets, (meaning, classified as collectable, but in which the conditions of the borrower were deteriorative) has had a key role in worsening the problems of the Chinese banking and financial system.
The first results of this fragility of the system were, principally, the increase of the ratio between insolvent loans and total loans (so-called Non-Performing Loans – NPLs-ratio), the quantitative deterioration of the profitability of the banking system, as well as a diffused weakness in the corporate governance of the Chinese loan banks.
The progressive alteration of the system and the necessity of having to face new market needs – internal and international – among which, the need of regulatory adjustments necessary to the adhesion, in December, 2001, to the World Trade Organization (WTO) required, since the first half of the 80’s (3) , a massive reorganization of the banking system with the objective of increasing the efficiency of the credit institutes and to introduce incentives to prepare the exit of the State from the capital, gradually freeing the banks from the role traditionally subordinate to the central planning.
With the reform of 1983, the Chinese banking-financial circuit started to be the primary channel of financing of the entire economic system, leading to the institution of a two-tier system, with the Central Bank on one side and the ordinary banks on the other (4) . The ordinary banks were divided in four groups:
1) State-owned Commercial Banks (SOCB) or the so-called “Big Four”,Each one with its own specific role: the Industrial and Commercial Bank of China (ICBC), specialized in the financing of infra-structural capital to State industries; the Bank of China (BOC), specialized in commercial financing and transactions in currency; the Agricultural Bank of China (ABC), specialized in loans to the agricultural sector; and the China Construction Bank (CCB), specialized in financing at fixed capital (particularly, constructions) (5) ;
2) banks of national interest (so-called policy banks), allocators of loans according to the plans of industrial policy employing funds coming from State budgets (among these, the State Development Bank of China, the Import-Export Bank of China and the Agricultural Development Bank of China);
3) commercial banks constituted in form of societies of capital (so-called second-tier commercial banks or Joint Stock Commercial Banks), with budgets generally more elevated in terms of quality of the assets and of profitability, and with a much lower NPLs ratio compared to the “Big Four”, (among these, the Bank of Communications, the CITIC Bank, The China Investment Bank, the China Everbright Bank, the Hua Xia Bank, the China Minsheng Bank, the Guangdong Development Bank, the Shenzhen Development Bank, the China Merchants Bank, the Shanghai Pudong Developement Bank and the Fujian Industrial Bank);
4) 190 City Commercial Banks and 40,000 local rural banks or rural cooperative credit, among which, the most important is the Rural Credit Cooperative of China with 30,000 branches, dedicated to the support of rural development.
With the first reform, the scarce control by the Government over the banking sector allowed the banks to enjoy greater autonomy in their own affairs. The new Bank Law of 1995 was issued to permit the Chinese banking system to start a concrete process of reinforcement of the capital budgets of the commercial banks and of the banks of national interest, in particular, with the transfer – with regard to the SOCBs – of a conspicuous part of Non-Performing Loans (NPL) to State managed societies (6) .
In 1999, four management societies were created, the so-called Asset Management Companies (AMC), one for each of the four SOCBs (7) , with the job of easing the “restructuring” of the NPLs. These societies were placed under the supervision of the Chinese Central Bank, the China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), as well as the Ministry of Finance. Contemporaneously, circa 169 billion dollars of NPLs were ceded by the “Big Four” to the AMCs which, in their turn, issued bonds, obtaining from the Central Bank, financing and guarantees for the reimbursement of the interests on bond loans.
China realized the importance of resolving the problem of the NPLs, with the Asiatic financial crisis of 1997-98. The institution of the AMCs was the first concrete measure to operate the “removal” and the “recycling” of the NPLs and begin, in part, the re-capitalization of the State banks (8) .
However, the transfers of NPLs to the AMCs did not eliminate the presence in the system: they still result in the budgets of the commercial banks, in those of the AMCs, in non-commercial banking institutions and non-banking financial institutions.
The AMCs (which belong to the Ministry of Finance) are, by far, the least transparent institutions of the Chinese financial system. Enormous financial organizations, whose accounting is not public and which, not being subject to external auditing, are not obliged to communicate the availability of incorporated NPLs and what procedures and mechanisms are being used for their collocation (9) .

photo Ansa

The NPLs were acquired from the banks at book value, that is: without a promissory note contract procedure. The purchase was made, partly, in cash (loaned to the AMCs by the Central Bank), partly, by means of bonds issued by the AMCs (through the Ministry of Finance) to be underwritten by the banks. The partial use of debits to pay the loans meant, however, that the banks were still exposed to the risks of credit of the AMCs (equivalent to the original value of the uncovered sum of the NPLs). To compensate for this problem, the Central Bank guaranteed the bonds of the AMCs, shouldering, at this point, the credit risk (10) . These transfers all came about in the ambit of institutions referable to the Ministry of Finance, therefore, without transaction costs and which simply transferred the credit risk, inherent in the NPLs, from the ordinary banks to the Central Bank through the AMCs (and, therefore, the Ministry of Finance). The result of the process was an extraordinary reinforcement of the budgets of the ordinary banks, while the AMCs, which, according to plans should have had a life of 10 years, saw their duration extended and their mission and function widen to more commercial objectives (11) .
From 2003, the Peking Authorities have started up a further recovery plan based on modifications in the proprietor structure of the banks and improvements in the incentives, in the management and in the internal control systems. The new organization has subordinated any decision of refinancing to the banking vigilance, a function transferred from the Central Bank to the China Banking Regulatory Commission (CBRC), officially constituted at the end of April, 2003.
Between 2003 and 2005, the Central Bank employed 60 billion dollars in a plan of recapitalization (12) of three of the four commercial banks of the State. The BOC (13) and the CCB each received 22.5 billion dollars at the end of 2003, while the ICBC received 15 billion dollars in April, 2005, becoming majority shareholder of each of them.
As far as the ABC is concerned (the only one among the “Big Four”, as of today, not yet quoted), the 21st of last October, the State Council approved a refinancing plan of 19 billion dollars (14) . The following 1st of November, the operation was completed with an agreement on the basis of which, after the increase of capital, the Central Huijin (15) and the Ministry of Finance both hold 50% of the ABC (16) . To improve the structure of the capital (NPLs are present in its budget to the value of 115 billion dollars) also the issuance of subordinate bonds was provided (17) to the value of circa 10-15 billion dollars.
With regard to the foreign presence in the sector – always considerably reduced – from the 1st August, 2008, with the coming into force of the anti-monopoly Law, China regulated, with its Art. 31, the acquisition of Chinese businesses (direct or mediated) on the part of foreign capital. So, when the concentrations (18) are considered to be too high for the security of the Country, a joint examination of the regulations of the competition, and of the regulations on the national security is anticipated. The deferring to the specific regulations in matters of national security suggests that, in the future, in light of a hoped for entry of foreign protagonists in its economic-financial system, Peking will maintain the problems of national security separate from those of antitrust (19) .

The management of the monetary reserves

a) Monetary Policy
The monetary policy of China, exercised by the Central Bank, has always been a function of support of the strategic objectives and planning of the Government. For years, it has been characterized by the pegging guarantee at fixed rate of the Chinese currency (Renminbi) to the United States dollar. This has represented the instrument of competitiveness used by Peking to the benefit of its own exportations, assuring growing surpluses of current operations.
The maintaining of a fixed value of Renminbi has obliged, obviously, the Central Bank to intervene continually (with operations of open market, purchasing dollars) to “sterilize” the natural levelling downwards of the dollar and upwards of the Renminbi, caused by the world demand (in dollars) of Chinese products. The result was, over time, a strong undervaluation of the Renminbi. The consequent depreciation in real terms of the Renminbi, combined with the strong rate of internal growth in China, determined, contemporaneously, a progressive increase of the monetary reserves which, between 2003 and 2004, reached almost 12% of the GDP.
In the international economic theory, explaining the concept of efficacy of the monetary policy, in his “Impossible Triangle”, the Nobel Prize winner, Robert Mundell, identifies the impossible co-existence of [1] an independent monetary policy and [2] a fixed rate of exchange, in the presence of [3] full mobility of capital.
In this regard, also for the Chinese Authorities, the fixed peg of the Renminbi to the dollar was, over time, unsustainable (for the problems that it created for the financial system and internal economy, and for the growing external pressures in relation to a Renminbi held artificially undervalued). Therefore, to guarantee independence (in the sense of effectiveness) to its own monetary policy, two fundamental steps were carried out:
- the modification of the exchange regime, passing to a regime of controlled fluctuation (“basket peg”);
the introduction of the convertibility in capital account.
The long process of detachment from the needs of central planning and the progressive and cautious liberalization of the change began at the end of the 80’s. A first important step was made in 1988 with the creation of the centre of semi-official exchange to allow the businesses to begin trading on the Renminbi at a market rate. In 1994, the official exchange was aligned with those quoted in the exchange centres, thereby effecting an official devaluation of the Renminbi equal to 33% (bringing it to 8.7:1 with the United States dollar). In the same year, an inter-banking market was created (“Foreign Exchange Trade System”) at Shanghai, which sanctioned the institution of a “regime of managed exchange”.
The 1st of December, 1996, the convertibility for the current operations was introduced, preparatory to entrance to the World Trade Organization (1st December, 2001). In this phase, China assumed the commitment of further liberalizing the exchange regime, starting an assessment on the substitution of the pegging fixed to the dollar with a “basket” on which to “hook” the Renminbi.
Starting from 2004, the accumulation of monetary reserves began to generate also increases in the offer of money, for which “sterilization” the Chinese Central Bank had to increase the sales of securities denominated in Renminbi, as well as introducing administrative controls to limit the increase of bank loans.

photo Ansa

As a first phase, the 21st July, 2005, the Central Bank decided on a revaluation of the Renminbi, equal to 2.1%. The variation of the regime of exchange modified:
the parity of exchange with respect to the dollar (from 8.28 to 8.11);
the regime of exchange, from fixed peg on the dollar (anchored at fixed rate) to basket peg at spurious fluctuation (anchored to a basket of currency with band of oscillation of 0.3% with respect to the closure of the preceding day (20) .
In August, 2005, The Central Bank authorized the banks with licence (including the foreign banks) to negotiate, on the inter-banking market of exchange, ‘forward’ and ‘swap’ contracts in Renminbi, allowing the banks to establish the ‘forward’ rates of exchange in an independent way.
From the point of view of “decentralize and re-distribute”, the activity of safeguarding the exchange, in January, 2006, the State Administration of Foreign Exchange (SAFE) (21) , the department of the Central Bank responsible for the management of the monetary reserves, authorized the constitution of a system of “market makers”, constituted of Chinese and international banks (22) , which would have assured (and still assure today) a continual quotation of the Renminbi on the inter-banking market on the basis of orders of marketing of Renminbi against foreign currency. With this system, over time, the Chinese Central Bank has been able to “delegate” to the “market makers” the execution of the operations of “sterilization” of fluctuations of the Renminbi.
As a second phase, a confirmation of the theory of the “Impossible Triangle”, on the 14th April, 2006, the Chinese Central Bank introduced the convertibility in capital account. This decision had, among the first effects, that of increasing the mobility of capital, creating an inflow to China of capital with short term expiry (favoured by a positive spread between the rates of interest on the bonds in Renminbi and those in dollars) with consequent demand for Renminbi against dollars. A demand which, to avoid an upward spiral of the exchange, the Central Bank had to “sterilize” with operations of purchase of dollars and a consequent growth of the currency reserves.
The competing factors to the accumulation of international reserves in China can be, therefore, ascribable to structural aspects (the monetary policy of Peking) and relative to the economic situation (presence of excessive current surpluses, as well as strong flows of ‘hot money’, or rather, speculative investments) (23) .
b)International reserves and management bodies
Over the years, the accumulation of the reserves has reached such a high level that it could shield China from any financial shock. According to the most recent data diffused in the reviews of the sector, at October, 2008, the amount of the reserves were above 1,900 billion dollars (24) with an average monthly growth of circa 40 billion dollars.
Already in the first half of the 90’s, the Central Bank assigned the task of the management of the monetary reserves, as well as their storage, to the State Administration of Foreign Exchange (SAFE), which started operating at international level through its “agencies” of Hong Kong (25) , Singapore, London and New York. The operative model of these agencies was (and still is) the same as the central direction of Peking: to make allocative choices of the holdings in foreign currency, preferring the bonds and State securities of other Countries. The brokerage of these agencies on the international markets has contributed, thus far, to allowing the investments operated by the SAFE and its modus operandi, to escape the direct scrutiny of the mass media and the experts of the sector.
For the execution of its investment activities, above all, within China, the SAFE availed itself of the Central Huijin Investment Company Ltd. (26) , placed under its direct control by the Central Bank. Later, under the control of the Central Huijin the China Jianyin Investment Ltd., was added - operating in the investments sector; the re-capitalizing of large State companies; securities societies; as well as, banks and brokerage activities for their fusion, partnership and investments abroad. In 2007, both the societies passed from SAFE to be under the control of what is generally defined as the Chinese sovereign fund, the China Investment Corporation (CIC), of which we shall speak in the following paragraph.
During the course of 2008, the existing incompatibilities between Huijin and Jianyin led to a rationalization of the respective expertise to harmonize their activity with the mission of the CIC and with the new rules of control on the securities societies (27) and on the banks. In the new organizational phase, the Central Huijin becomes a policy institution for the financial investments and structural support in the control of the larger State banks, while Jianyin must abandon its plans of becoming a financial holding to become a platform finalized to facilitate the investments of the Chinese societies. As a consequence, the ICI has begun the redistribution of many financial assets (including societies and trust funds, controlled by Huijin and Jianyin (28) .
c) Management of the reserves: evolution and internal confrontations
In general, it is thought that the solution adopted by Peking to diversify the employment of the abnormally high quantity of international reserves was the constitution of the sovereign fund, China Investment Corporation (CIC). This reasoning is partially true and merits more clarification.
Starting from 2005, the alarming and continual growth of the reserves has caused strong debate at the level of the Chinese Central Bodies with respect to the necessity of diversifying the instruments of investment from a more modern and profitable point of view, also considering the idea of investing in strategic sectors, not exclusively financial, as for example that of the hydrocarbons, with returns which are not only financial.
At the Council of State level, the hypothesis was put forward of providing a specific instrument, adopting, for example, the portfolio model of the sovereign fund of Singapore Temasek Holdings. At first, the intentions seemed to be that this new vehicle of investment should be placed under the management of the SAFE (in the capacity of being in charge of the operative management of the international reserves), but this was ultimately strongly impeded by the Ministry of Finance, for a long time in opposition to the Central Bank with regard to the subject of the reserves. In response, in 2006, the Ministry of Finance put forward the idea of constituting a fund of economic assets under its own control, to dedicate to diversified investments. This idea of the Ministry of Finance gained consensus within the Government and, at the end of 2006, the creation of a new subject was decided – in the form of a sovereign fund – dedicated exclusively to the Chinese financial investments abroad. The Central Bank remains always in open contrast with both the Council of State and the Ministry of Finance, continuing to put up resistance to the project.
According to the Central Bank, in presence of Central Huijin, the investment instrument already existed; only an enlargement would have been enough in the ambit of its activities to have a fund of sovereign investment. But the argument of the Central Bank did not stop the political manoeuvres already in act.

photo Ansa

To avoid fuelling friction and institutional rivalry, the solution of the Central Government was that of placing the new subject, to be called the China Investment Corporation, under the direct control of the Council of State, keeping it independent of both the Ministry of Finance and the Central Bank. In this regard, also all its acquisitions (including banks) would be formally taken away from the Ministry of Finance and the Central Bank. As a consequence of this “formal” independence, representatives of the Ministry of Finance and the Central Bank would be able to enter the Council of Administration and the Executive of the CIC, with the scope of conditioning the strategies and policies of investment.
Until the creation of the CIC, the Central Bank had always exercised absolute power over the reserves and foreign investments and in the contrasts – not always explicit – with the Ministry of Finance, it had always managed to prevail, thanks to its autonomy and authority, and to its high reputation (reinforced by successes of various interventions in the Chinese banking institutions) (29) . As we shall see, the Central Bank has managed to affirm its own jurisdiction in the management of the reserves even after the constitution of the CIC.

China in the re-organization of the
international financial system

In occasion of the World Economic Forum (WEF) of Tianjin, the Chinese Prime Minister, Wen Jiabao affirmed that “the largest contribution that China could give to the world economy, in the present circumstances, is to maintain the internal growth sustainable and stable, and to avoid excessive fluctuations” (30) .
Wen placed the emphasis on the “sustainability” of the internal growth of China, attributing importance to the aspects tied to employment, infrastructural development and to the environment. In this sense the solidity of the Chinese internal economic “fundamentals” could have a positive influence on the “sense of global responsibility” of Peking, when it is included in the “great choices of the world”.
In occasion of the ASEM, and subsequently during the G20 of Washington, Peking appealed to a “spirit of global sharing of responsibility” on the part of all the Countries, including the emerging ones, to be reached through the coordination of the internal macro-economic policies. A coordination and a sharing that has always been sustained by the Chinese Authorities and put into action in October, 2008, with the reduction of the interest rates “coordinated” between China and the Central Banks of the G7.
As far as relations with Washington are concerned, crucial for the banking-financial system of Peking, China is interested in the stability of the United States economy. This was rendered evident also in a recent statement made by the spokesman of the Chinese Central Bank (“China and the United States share common interests in the stabilizing of global financial markets and a greater coordination and a more profitable collaboration is hoped for with the United States”) (31) .
The Chinese interest in the United States economy is connected to the close ties existent between the two economies. This makes Peking aware of the consequences that a substantial diversification of its own investments in securities/assets from the United States dollar towards different currencies could have at a socio-economic level within its own Country and in the United States (32) .
On the other hand, the new President of the United States, Barack Obama, has already cautioned, affirming that “the commercial exchanges with China will proceed along positive lines only if Peking respects the rules.
Replying in an electoral campaign at the National Council on Textile Organizations, a United States lobby directly interested in the relations between Washington and Peking, the then Senator Obama pointed out how, to guarantee sustained growth rates “China must entrust less to exportations and more to the internal demand” also “modifying its own exchange policies” (33) . The affirmation of Barack Obama in North Carolina, where the textile industry constitutes a great part of the local economy, represents a strong reason to believe that, in the future, the new Administration will stand by the internal claims against the presumed manipulations of the value of the Renminbi by Peking.
As compensation for its active role in the solution to the crisis, China, therefore, needs a greater contractual power in the operational mechanisms of the international financial Institutes. In this way, Peking intends to move the choices and judgements of the international financial community in its favour, and to be stronger also in the polemics with Washington (34) .
A point of discussion could be a compromise between a Chinese participation in the multilateral financing (35) against an increase of voting shares in the IMF ambit (36) and a stronger voice in the decisions of the World Bank and the WTO. In the face of the global financial crisis, China although also experiencing difficulties of its own (caused by the negative repercussions on the commercial inter-exchange of the global inter-dependence and not from endogenous factors in its system) could play an important role, starting from itself, or rather, from the realization of objectives of sustained internal growth (circa 8%) and of monetary stability (equilibrium between growth and inflation).
The price that China might have to pay for its greater international interventionism could have high internal social costs. The potential damage that could befall Peking due to lack of attention to internal challenges is certainly greater than damage caused through a reduced participation in the international decisions, insomuch as by not fully attending to internal affairs, China could jeopardize the solidity of the fundamentals of its economic system.
The announcement of the financial package of 586 billion dollars, in the two-year period, 2009-2010, for projects of development of new airports,
for the restructuring of railway networks, for nuclear and hydro-electric centres, and social assistance (37) , is understood in the sense of a modification of the previous orientation of economic policy (prudent fiscal policy and restrictive monetary policy) in a new more aggressive scheme (proactive fiscal policy and moderately accommodating monetary policy). In the future, therefore, the priority of Peking will certainly be the maintaining of an internal macro—economic equilibrium, with the objective of an increase of the internal demand and of consumer goods.
During the ASEM, Wen Jiabao affirmed that in China “the impact of the crisis is limited and under control”, but the fear of repercussions of the crisis on the Chinese socio-political system is strong, to the point of prevailing against a practical and active commitment at international level.
The necessity of maintaining social order, and therefore, the internal economic growth could, in consequence absorb a good part of the Chinese financial resources (38) . The socio-political cost for China of an internal crisis or of a loss of trust by the population in the development of the Country would be extremely high.
The power and the legitimacy of the Chinese Communist Party (CCP) lies, in fact, also in its capacity to guarantee an economic growth and to re-equilibrate the distribution of the wealth between the developed coastal zones and the still backward internal zones. The slowing-down of employment (already manifest in recent months with the closure of numerous manufacturing companies, due to lack of orders from abroad) (39) create motives of serious preoccupation for the Chinese leadership. The official forecasts for 2009 are at the limit of tolerance for the Chinese system (between 5% and 8%) (40) and require urgent intervention by the Central Authorities. Relative to the financial package, for example, notwithstanding the strong media attention received, the real significance of the packet still remains to be understood, insomuch as neither the mechanisms of the financing (who finances what and, to what extent?) nor the choice of the included projects are clear. The official declarations indicate as sectors to be financed, the same sectors which, quite recently, have already received help and which they would have received anyway. It remains to be clarified how many of the projects included in the package really represent new investments and how many were already foreseen in the allotments of the budget: estimates of the China Economic Review indicate, as actual value of the incentive, the figure of 191 billion dollars (and not 586). The quota financed by the Central Government, furthermore, would be, in reality, equal to only 25% of the value of the financial package, leaving the rest dependent on the discretion of provincial authorities, private investors and banks.

photo Ansa


The principal contribution of China to the solution of the global financial crisis lies in the re-equilibration of its own economy, moving it dynamics of growth from the excessive dependence on exportations towards a greater contribution of internal consumer goods.
The necessity of concentrating its efforts on measures to maintain an internal growth not inferior to the 8% and on the need to maintain its socio-political stability, suggests that China will tend to limit – initially, its contribution at an international level – to generic and possibilist declarations which reinforce its political influence, in order to concentrate its activity on the national policies that are more directly effective in the attainment of the macro-economic objectives. Among which are the policy of management of the exchange, of the international reserves and the policy of liberalization of the banking-financial sector.
It is the very measures adopted in the banking-financial field that show China’s willingness to resolve the internal fragilities in order to approach, with more security, an outside crisis.
This requires a strengthening of the national financial bodies, the adoption of adequate policies of allocation of credit and of evaluation of the merit of credit, the improvement of the controls on the banks and on their exposure to risk, the assurance that the banks have sufficient reserves, all of this finalized to construct a financial system that expresses trust and protects the interests of the investor.
Certainly, the Chinese policy will be cautious and progressive since it will require a constant balancing between its ambition to acquire international power and its awareness of not yet having either a stable and independent socio-economic situation, or a consolidated financial-banking system.

(1) Ben Blanchard, Gernot Heller – EU presses China to show leadership in crisis, 23.10.2008
(2) At the VII Asia-Europe Meeting, 45 Member Countries participated, including the 27 Countries of the European Union, the Presidency of the EU, 16 Asiatic Countries and the ASEM Secretariat.
(3) Ref: Ellena Beccalli – The Restructuring of the Banking System in China - in Mondo Cinese. No. 127, 2006
(4) Up to that moment, the People’s Bank of China performed contemporaneously the role of both the Vigilance Authority and the Body of financing of the System.
(5) In recent years, the sectorial specialization of the “Big Four” has ceased its official character, although continuing a strong preference for internal assets in their loan portfolios.
(6) In 2004 the Chinese Regulatory Banking Commission (CRBC) estimated the weight of the NPLs at 20% of the total loans.
(7) Great Wall for AMC for Agricultural Bank of China; Orient AMC for Bank of China; Huarong AMC for Industrial and Commercial Bank of China; Xinda AMC for China Construction Bank
(8) AMCs and the Ministry of Finance, and operations of refinancing.
(9) Ref: China Brief Vol. 6. 24.2006
(10) V. Reusens – “The Chinese Banking System”: Survival or Collapse? Fortis Bank 2002.
(11)Ref: “AMCs and NPLs Activity in China” in “The Second Forum for Asian insolvency Reform”. Bangkok, 16th-17th December, 2002. See also “China NPLs: Trends and Future Issues” on .
(12) The operation of recapitalization effected in 2003 was strongly desired, planned and realized by Lou Jiwei, Xie Ping and Wang Jianxi (today, all at the summit of the Chinese sovereign fund, China Investment Corporation CIC and has employed reserves in foreign currency.
(13) Bank of China was entirely controlled by the Central Government for the shares of the Central Huijin Investment and for the National Council for Social Security Fund. In 2005, in preparation for its IPO of 2006, (3.1 billion dollars, less 10% of shares), UBS and Temasek Holdings, entered into its capital – the Royal Bank of Scotland. Its public offer at the Hong Kong Stock Exchange, (1st June, 2006) was one of the biggest IPOs that one can remember at a world level since 2000, with a yield of 9.7 billion dollars.
(14) Ref: Zhang Dingmin, Luo Jun, Agricultural Bank of China gets 19 billion bailout. 2008
(15) Created in 2003, administered by the Ministry of Finance and initially controlled by the Central Bank, Central Huijin was conceived as an instrument of investment by the Government for re-capitalizing and stabilizing, through purchase, management and control of shares the “Big Four”.
(16) Ref: Luo Jun. China caps bank overhaul with Agricultural Bank aid. 2008. Also see -11/6/content
(17) The category of the subordinate bonds comprises the bonds which, in case of insolvency of the issuer, are reimbursed after all the others. They entail a greater risk to the investor and offer a reduced level of guarantee compared to other securities. In view of the greater risk, the investor is given the possibility of benefiting from a rate of interest (or of a yield) superior to that foreseen for the ordinary bonds of the same duration.
(18) The law defines (Art 3) as monopolistic behaviour, the monopolistic agreements between economic operators; the misuse of dominant positions of the market by these economic operators; the concentrations between economic operators who have or could have the effect of eliminating or limiting the competition. The “economic operators” are defined (Art. 12) as the physical person or legal entity or other organization which are engaged in production and commerce of goods or the supplying of services. Analogously, the “significant markets or markets of reference” are represented by the products (or by territorial area) within which the economic operators compete among themselves for a certain period of time for specific goods or services.
(19) A similar approach to the United States one of Exon-Florio, maintained separate by the revisions on the concentrations estimated by the Hart-Scott-Rodino, Ref: Nicholas Pettifer “Baffling Rules”. The implementing regulations for concentrations guarantee confusion, International Financial Law Review, September, 2008.
(20) On the 23rd September, 2005, China enlarged the band of oscillation of the Renminbi compared to the currencies different from the dollar up to 3%.
(21) SAFE was constituted in Peking, in March 1979 by the Council of State and placed under the control of the People’s Bank of Chine until August, 1982. It has its central offices in Peking and another 36 administrative offices, and 298 sub-branches spread throughout the Country.
(22) The system is constituted by 21 commercial banks, of which 13 are Chinese. (Bank of China; China Construction Bank; China CITIC Bank; China Merchants Bank; Industrial and Commercial Bank of China; Bank of Communications; Agricultural Bank of China; Industrial Bank; Shanghai PuDong Development Bank; China Everbright Bank; China Minsheng Banking Corporation Ltd., Huaxia Bank Company Ltd. And China Development Bank) and 8 foreign the filial of Guangzhou of the Bank of Montreal Ltd.; the filial of Shanghai of Citibank; the filial Shanghai of the ABN Amro, N.V; the filial of Shanghai of Hong Kong and Shanghai Banking Corporation - HSBC; the filial of Shanghai of Standard Chartered Bank; the filial of Shanghai of the Bank of Tokyo-Mitsubishi UFJ; the filial of Shanghai of the Sumitomo Mitsui Banking Corp; Deutsche Bank AG).
(23) A study published by the IMF, in 2005, indicated that almost 75% of the variation of capital flows were based more on categories of flows sensitive to the expectations of the market than on t he future tendency of the rate of exchange Renminbi/U.S. dollar.
(24) Ref: “Q&A with Zheng Bingwen, Senior Research Fellow at the Chinese Academy of Social Sciences”, (2008).
(25) The SAFE Investment Company Hong Kong, with H.Qs. at Hong Kong was constituted in 1997, with the scope of forming, like the “agencies” in other countries, a foreign outpost of the SAFE. The objective of its creation, officially admitted by the Central Bank “is to safeguard the anchorage (peg) of the Renminbi and of the dollar of Hong Kong to the U.S. dollar to protect it from international speculations”.
(26) Its assets are estimated at 15 billion U.S. dollars.
(27) In April, 2008, the Council of State ratified new measures to impede that two closely connected societies pursue the same business without a special permit. It was the first move to encourage the two controlled of the ICI to hive off the 9 societies of securities which are presently under their control (three under Huijin and six under Jianyin, almost all of them recapitalized and restructured.
(28) In the ambit of this transformation, from the Jianyin, the Zhejiang International Trust and Investment Company, this had become one of its subsidiaries, and the shares (9%) in China Construction Bank, which was consolidated. Concomitantly, the China Everbright Industrial Group should separate from Jianyin and return to the China Everbright Group. The origin of this share goes back to the end of 2007, in occasion of the refinancing by Central Huijin, to the benefit of the China Everbright Bank. On that occasion, it was decided that from the subsidiary of the bank, the China Everbright Group would have been hived off a financial holding, the Everbright Financial Holding, (of which Central Huijin became shareholder) and an industrial holding, the Everbright Industrial (taken over by Jianyin). Always in context of the reorganization in question, the bank of investments, China International Capital Group (CICC) which will pass under the control of Huijin.
(29) From the viewpoint of opposing the initiatives of the Ministry of Finance, the Central Bank tried to consolidate, between the end of the 90’s until the end of 2007, its own positions in the Chinese Banking System, purchasing shares in the principal State banks, supplying contributions of capital for recapitalization and, above all, taking away part of the banking system from the control of the Ministry of Finance.
(30) Ref: Merrill Lynch, “What will China do in this Global Financial Crisis?” Economic Analysis, 2008.
(31) These statement, in reaffirming the support of China towards the United States, were intended also to diminish the indiscretions circulated at the beginning of October, 2008, and published in the Honk Kong newspaper, “Mingpao” of an intention of the Chinese Government to finance 200 of the 700 billion dollars allocated by the U.S. Government for the rescue of its own financial institutions.
(32) China holds circa 20% of the United States debt. In 2006, the commercial surplus of China compared to the United States was 232 billion dollars and in the same year, 105 billion dollars were invested in U.S. securities (one third of all the investments in the United States Treasury).
(33) Greg Hitt. Issue of trade with China is thrust into U.S. Races. Wall Street Journal, 2.11.2008.
(34) On first step in this direction was the withdrawal requested and obtained by China of an IMF report on presumed manoeuvres of the Chinese Central Bank to maintain low the value of its currency.
(35) At the ASEM, a fund of 80 billion Euro has been approved, which will be put at the disposition of the IMF and the contributors will be China, Japan and Korea, to help the Countries with great problems of liquidity. The sense of the contribution for China (negligible in expense compared to its assets) is strongly political, insomuch as it will permit, over time, to increase its capacity to pressure IMF, relative to certain themes held to be crucial, in primis, its monetary policy strategies.
(36) In the revision made on 1st March, 2008, a strong difference in terms of meditated evaluation on the rights of vote between China (3.7% of total rights of vote in the ambit of the IMF) and the United States (17.1%) and Asia in general (11.5%).
(37) This measure is added to other measures, such as the rates of bank interests or the reduction of the coefficient of obligatory reserve, freeing funds to employ in business financing.
(38) In confirmation of these fears, Zhu Min, Vice President of the Bank of China, stated that “the global downturn of the greater economies of the world will have an enormous impact on China and the fear is that the financial crisis is only a technical prelude to the political and economic upheaval that will come about in the next 8-12 months.. The Chinese banks although not involved in the crisis of the subprime to the same extent as their American counterparts, they are, nevertheless, exposed to the risk of the transactions in foreign currencies, which put in danger their assets abroad.”. Ref Peter Bachmann, “Downturn hits China hard”. The News BizChina Update Direct (3.11.2008). The Bank of China holds 3.3 billion U.S. dollars in securities tied to the subprime and 6.2 billion dollars in debt connected to Freddie Mac and Fannie Mae.
(39) A sudden decline in the demand for Chinese goods has caused the bankruptcy of many companies in the manufacturing sectors of the Country in correspondence with the eastern and western coasts of China. In the cities, many development projects have entered a phase of stalemate and the confidence of the consumer has abated.
(40) Credit Suisse, UBS and Deutsche Bank estimate that the Chinese GDP in 2009 will not grow above 7.5%. According to the Royal Bank of Scotland, on the contrary, the growth could reach 8%, but in a negative scenario, it could also stop at 5%. The International Monetary Fund has lowered its forecasts of Chinese economic growth in 2009, bringing it down to 8.5% from 9.7%. Ref: Peter Bachmann “Stimulus Package Approved”. The News, BizChina, Update Direct, (11.11.2008).