Author Archives: Andrew Collier

A China Crash in the Making

 South China Morning Post
A China crash in the making?

Tuesday, 23 July, 2013, 12:00am Business › Economy

‘Financial pressure on local governments is only likely to build’

President Xi Jinping has ambitious plans to reform the economy. Ending the land grab among local governments should be top of his list.

For years, escalating land sales have been a valuable source of revenue for cash­strapped local governments. Each time Wenzhou , Fuzhou or other cities agree to a licence for a new high­rise apartment block, the local government earns a hefty chunk of cash for the land that is sold to the developer.

Land sales now account for an average of 40 per cent of local government revenue, up from 10 per cent just a decade ago. In some cities, the sale of land is the main source of income. That free income is beginning to decline as governments run out of land and the property bubble runs out of steam.

There is a reason for the giant land grab: local governments are desperate for new sources of revenue to pay for local social services and to keep the engines of the economy churning at high levels.

Local governments are responsible for everything from retirement income to health care for their citizens. Since fiscal reforms in 1994, local governments’ share of the tax revenue has decreased to 40 to 50 per cent but they have been responsible for 70 to 80 per cent of expenditure. Outside fees – mainly from the sale of land – account for the difference.

Take Zen township in Zhejiang, studied by Lynette Ong of the University of Toronto. During one recent fiscal year, the town gave most of its 319 million yuan (HK$400 million) in revenue back to Beijing, keeping just 15 million yuan. To pay for the lion’s share of its 88 million yuan budget, which included urban and rural development, education and health care, the town earned 71 million yuan selling land.

Another big incentive for local officials to sell land is to create glamorous projects to aid their

 

 

 

 

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1/14/14 A China crash in the making?

chances of promotion. According to Victor Shih from Northwestern University and researchers at Peking University, drawing in revenue from outside the province boosts an official’s chances of being promoted more than increasing gross domestic product. And what better way to show off leadership qualities than a new stadium or the proverbial “bridge to nowhere”?

Now, though, many of the best pieces of land in the city centres have been sold. According to a study by the National University of Singapore, by 2007, the average tract of land sold was 50 per cent farther from the city centre than it had been just four years earlier. That trend has accelerated.

This year, according to local developers, Guangzhou is trying to double revenue from land sales to 48 billion yuan. Guangzhou is now offering three new central business districts, but they are located in less valuable areas on the outskirts of the city centre. Xi’an is asking developers to prepay tax on land the developers haven’t even bid on. “The government is mortgaging against future land sales,” the chief executive officer of one Xi’an developer told me in March. Also – and a bigger concern for China’s economy – there are hints that the escalation of property values and thus land prices is easing. Home prices on the mainland rose for the 12th straight month in May, but the pace of growth continued to fall.

More ominously, the revenue gap is increasingly being filled by China’s growing shadow banking system

The average price of new residential properties in 100 cities rose
just 0.81 per cent from April, to 10,180 yuan per square metre. That compared to a 1 per cent gain in April and March’s 1.06 per cent rise.

No one can say for certain whether China is suffering from a property bubble or when it may collapse. But land is not an endless resource. That revenue must come to an end.

What can replace it? Beijing has been testing local property taxes. Apart from bringing much needed income, these taxes would impose a cost of ownership on property, crimping the use of flats as a cheap “bank account”. Owners are baulking but these taxes would be a rational source of income for local governments.

More ominously, the revenue gap is increasingly being filled by China’s growing shadow banking system, in which companies and individuals feed their excess savings into everything from residential buildings to white elephant projects, many backed by local governments through side companies called local government financing vehicles. While it’s nice to see Chinese capital escape the claws of the state sector, the lack of regulation is a real concern.

The past decade’s big land boom has been bad news for rural homeowners forcibly evicted from their ancestral villages. At a recent conference at Sun Yat­sen University, activists called for greater protection of the rights of homeowners.

“The effects of urban development, demolition and eviction on tens of millions of Chinese citizens have been profound,” notes Eva Pils, a lawyer and expert on land rights at Chinese University of Hong Kong.

Until there is a new revenue system in place, the financial pressure on local governments is only

likely to build. That means more dangerous financial games by local governments and more

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1/14/14 A China crash in the making?

residents evicted from their homes.

Andrew Collier is the former president of the Bank of China International’s US office. He is currently an independent analyst based in Hong Kong

 

Business

WASHINGTON — As the Syrian opposition neared a decision on whether to attend an international peace conference next week, Secretary of State John Kerry offered a public assurance on Thursday that the Obama administration had not pulled back from its goal of establishing a transitional government that would not include President Bashar al-Assad.

In a quickly arranged appearance before reporters, Mr. Kerry criticized “revisionism” and attempts to “muddy the waters” over the reasons the peace conference has been organized.

“Any names put forward for leadership of Syria’s transition” at the conference, Mr. Kerry said, “must be agreed to by both the opposition and the regime.”

“This means that any figure that is deemed unacceptable by either side — whether President Assad or a member of the opposition — cannot be a part of the future,” Mr. Kerry said.

Mr. Kerry did not take any questions. But State Department officials said his aim was to reassure moderates among the Syrian opposition, which is expected to decide as early as Friday whether to attend the peace conference.

Crisis in Syria

The conference is scheduled to begin on Wednesday in Switzerland.

The moderate Syrian opposition has long been concerned that its already limited influence among rebel fighters may be further diminished if it is drawn into open-ended talks with a government that does not intend to hand over power.

Those worries have been heightened by a recent letter from Walid al-Moallem, the foreign minister of Syria, to the United Nations’ secretary general, Ban Ki-moon, that appeared to challenge the conference’s purpose.

Mr. Moallem, who is to lead the Assad government’s delegation, wrote that “certain points” in the United Nations’ official invitation were “in conflict with the legal and political position of the State of Syria” and did not “meet the supreme interests of the Syrian people.”

The letter said nothing about arranging for a transitional administration to govern Syria, and it suggested that the Assad government’s main concern was to “fight terrorism.”

The letter has not been officially released by the United Nations, but diplomats have confirmed the authenticity of a translated copy that has been circulated by the Syrian opposition.

Oubab Khalil, the chief of staff of the opposition’s Washington office, said the letter shows that the Assad government does not accept that the main point of the conference is to negotiate a transitional government.

Jen Psaki, the State Department spokeswoman, told reporters that Mr. Moallem’s letter was an example of the “revisionism” that Mr. Kerry had criticized.

But the State Department also appeared to be at pains to dispel rumors within the ranks of the opposition that the Obama administration might be tempted to cut a deal with Mr. Assad so it could better contain the militants affiliated with Al Qaeda who have joined the civil war in Syria.

Mr. Kerry said on Thursday that it was the Assad government that had turned Syria into a “magnet for jihadists and extremists” by brutally cracking down on its opponents.

“And so on the eve of the Syrian opposition coalition general assembly meeting” on whether to attend the conference, Mr. Kerry added, the United States “urges a positive vote.”

As the United States sought to rescue the conference, Russia and Iran, who have each given military and political support to the Assad government, were also strategizing.

While Russia agrees that the purpose of the conference is to establish a transitional government by “mutual consent,” it has not acknowledged that Mr. Assad has to give up his post.

Iran has not formally accepted the terms of the conference, and has not been invited to attend, but it has been consulting with Moscow and the Assad government.

In an unusual three-way meeting in Moscow on Thursday, Russia’s foreign minister, Sergey V. Lavrov, talked with Mr. Moallem and the Iranian foreign minister, Mohammad Javad Zarif.

The gathering spurred speculation that the three nations were devising a common strategy that would enable Mr. Assad to maintain his hold on power.

“We have nothing to hide,” Mr. Lavrov said in a joint news conference with Mr. Zarif. “We have no hidden agenda.”

State Capitalism or Rule of Law in Myanmar?

The Diplomat

The country is experiencing a tug of war between military dominance and a more open democracy.

By Andrew Collier

December 23, 2013

Myanmar is facing a stark choice – open the doors to the rule of law or slide into Chinese­style state capitalism run by the military.

So far it looks like the country could go either way. The
military is guaranteed 25 percent of the seats in parliament,
giving it a strong position to dominate the country’s political system. The military also has a growing presence in theeconomymainlythroughlocallandgrabsandacozyrelationshipwithglobalcorporations. Formerheadof state Than Shwe was replaced in 2011 by the first civilian president in nearly 50 years, Thein Sein. Though the nominal civilian government is still backed by the military, Than Shwe has seen the power of his supporters diminished.

“We are a hybrid democracy with many factions. We have all the ingredients for an unsuccessful transition,” says a Myanmar official with an international peace group based in Yangon.

Amidst the shifting political sands, there is a surprising secret weapon in Myanmar’s arsenal: a cultural affinity for grassroots democracy. After spending a week in Myanmar in December with the Mansfield Foundation preparing for a rule of law conference at Hong Kong University next year, I was astonished at the gut level instinct for freedom of expression and assembly. It’s all over the country.

For example, there is a group actively training local lawyers in 14 districts across the country how to fight illegal activities to press the local governments to return illegally acquired land. “Many of these cases have been won,” a representative said.

There’s also the Myanmar Business Executives, with a membership that includes many female business leaders. It trains small businesses and has even set up a micro finance operation. Making capital available to small businesses that operate outside the formal banking system expands economic rights and is a sign of declining state control.

The government began relaxing limits on media censorship in 2011 but last year officially unblocked most banned content, including the websites of foreign media outlets that criticized the government. As a result, the English press – and to a lesser degree the Burmese press – routinely runs stories about ethnic rights and political opposition. Reporters are still thrown in jail, along with protestors under Myanmar’s Article 18 against freedom of assembly, but they tend to be treated better than in the past – although the jury is still out on their future.

Earlier this year, a nationwide protest backed diverse groups was able to force the government to cancel a dam project funded by China Power International. Although the lead campaigner was later thrown in jail, the dam “united many different groups because the river runs through the country,” observes one human rights worker.

An independent environmental group called Ecodev is teaching villagers in 42 of 330 townships – soon to expand to 72 – how to push the local authorities to follow environmental laws already on the books. Yangon has already declared 189 buildings as heritage sites.

It’s not just the actual work, though. It’s the sense that, unlike some countries where the state presence is felt everywhere, human rights workers aren’t always looking over their shoulders when they discuss plans for political activism.

There are two major flaws in the picture that explains why many rights activists say they are only “cautiously” optimistic: the continued strength of the military, and strife surrounding ethnic groups. There’s a lot of nervousness about how much power the military intends to control after the elections in 2015 – and how much they control now. Apart from the guaranteed 25 percent of parliamentary seats, the military is widely accused of taking advantage of a booming economy to grab land. I was standing outside an outdoor restaurant in Yangon waiting for a taxi and across the street spotted two new eight­story residential buildings – whose windows were completely dark. “One is owned by a drug dealer who was arrested and the other by the military,” the restaurant’s doorman said.

The military has been a big supporter of the Chinese­backed pipeline that will run from the Bay of Bengal into China’s Yunnan Province – despite widespread concerns about pollution, corruption, and land acquisition. “We are looking at the gas pipeline but I don’t want to cause a diplomatic incident,” says one environmental rights worker.

The second issue is the knotty problem of ethnic rights. There are 134 ethnic groups assigned to eight official races, although scholars such as Yale University’s James Scott argues that most of them are not ethnically separate but have chosen to leave or have been forced out of the Burmese State. They are losing access to land that is increasingly valuable as Myanmar’s GDP growth tops 6.5 percent.

The biggest loser in this battle thus far has been the Rohingya, a Muslim group that the government does not believe are citizens. Even many citizens accuse the Rohingya of being expatriated Bangladeshis and not really part of Myanmar.

There is a forceful opposition in the form of Aung Sang Suu Kyi, the charismatic former éminence grise who is now actively pursuing office. Yet after twenty years of isolation, and with no active political experience, Suu Kyi needs to organize a strong team and build a political party capable of governing.

Despite these myriad problems one can’t help but feel a forceful current of passionate opposition bubbling to the surface, arguably a legacy of British rule. This year, Yangon University launched a human rights program. A Christian group comprising ethnic minorities even held a large religious meeting in Yangon earlier in December with the tacit approval of the government. “We are watching and waiting,” says a Christian representative of the Lisu minority who is helping to organize the meeting.

Andrew Collier is a Senior Fellow with the Mansfield Foundation.

 

 

China’s Shadow Banking Tug-of-War

1/17/14 China’s shadow banking tug of war | East Asia Forum

Sara Hsu, State University of New York, and Andrew Collier, Orient Capital Research

The party is over for Chinese banks, who have for the last few years enjoyed record profits. Since the end of 2008, the Chinese leadership’s desperate bid to keep the wheels of growth turning has let a flood of credit into the banking system and led to an unprecedented US$6.2 trillion of bank loans to state-owned companies and local governments.

 Many of these loans bypassed the banks’ books entirely, going through the so-called ‘shadow banking’ market made up of everything from giant financial trusts to mum and dad mini-banks. After a while, even the state banks joined the game. While the regulators turned a blind eye, the four state banks and the smaller city banks took customer deposits, wrapped them into neat little financial tools called ‘wealth management products’, and sold them on to eager buyers. These included wealthy people chasing yield, real estate developers signing property deals, and even importers short of ready credit.

This explosion into new markets was a change for the state banks. Up until 2010 they had ‘toed the line’, making loans to safe borrowers such as state firms, and following strict rules on interest rates. But a tug of war was going on in the upper levels between more conservative elements such as the People’s Bank of China (PBOC), which was worried about risky loans, and the more aggressive politicians in the State Council, who feared an economic slowdown. In the end — at least until recently — the spenders won out.

Although regulators banned products that allowed banks to move loans off balance sheets, the desire for greater yield on the part of banks and their customers eventually prevailed. Real estate developers previously rejected by banks suddenly discovered they could obtain loans from trusts or, even more riskily, from what the banks like to call ‘entrusted loans’ handed down from one lender to another.

As a result, bank profits boomed. Return on equity (profits based on the equity the banks hold) climbed from less than 5 per cent in 2004 to 21 per cent in the first quarter of 2013.

While the banks have done well, so too have many customers. Interest on typical three-month wealth management products stayed in line with the deposit rate until the fall of 2010. But as credit rose, and the banking system devised ever more complicated wealth management products, the three-month rate soared above deposit rates.

But in June, even the more aggressive camp got nervous and there was quiet talk about a crackdown on the shadow banking market. That rattled the nerves of the banks and suddenly the interbank lending rate known as the shibor tripled to 13.44 per cent. The PBOC, which traditionally hasn’t paid much attention to the interbank market, refrained from immediately jumping in with fresh cash — and the markets panicked. Suddenly it looked like the policy allowing banks to ‘chase yield’ was quickly reverting to ‘toeing the line’.

The banks are now at a crossroads. A crackdown on shadow banking means tightening credit and a slower economy. But beyond this ‘stimulus or no stimulus’ debate, the de facto liberalisation of interest rates has created an uncomfortable atmosphere of competition in the banking system. State banks accustomed to a cosy relationship with depositors and borrowers are now competing with local city banks.

Meanwhile, new rules that would allow local governments to issue municipal bonds will likely cause city governments to withdraw support from the local banks. Why pay the bank a fee for a loan when the city can go to the markets directly? And the fact that Beijing is experimenting with a private-placement bond program for small and medium companies is another sign of progress for the capital markets — to the exclusion of the banks.

Scrambling for deposits, stuck with growing non-performing loans from their aggressive expansion, and declining support from their government backers, the smaller banks are going to be forced to consolidate. This will create cross-provincial relationships new to China’s historically regional banking system. Other changes are likely as banks respond to the unintended consequences of the free credit era. One thing is clear: the days of easy money are over.

Sara Hsu is Assistant Professor of Economics at the State University of New York.
Andrew Collier is the Managing Director of Orient Capital Research and was previously the President of Bank of China International.

Where Beijing Can’t Shed Light – Wall Street Journal Opinion

Wall Street Journal

June 11, 2011

The liabilities of China’s shadow banking system are unknown and uncontrolled

By ANDREW COLLIER

In October, I sat down in Nanjing with a senior banker for one of China’s “Big Four” state banks. I asked him about the new regulations just put in place by Beijing to restrain the growth in lending. “There are ways around these rules,” he said.

Despite a consistent crackdown on bank lending by senior officials in Beijing, it’s not clear that local governments are listening. A two-week tour this month through Fuzhou, Shanghai, Beijing and Chengdu highlights the extent to which local banks and governments are devising new and clever ways to supply money to capital-starved businesses without going through official channels. These new sources of capital raise doubts about Beijing’s control over the financial system, as well as its ability to reduce inflation and forestall a crash in the property market.

One property developer in Fujian Province explained his method for raising capital. To build a nearly 2 billion yuan ($308 million) building, he has raised 1 billion yuan through presales of apartments, but is still short about 800 million yuan to complete construction. Banks won’t lend to this sector owing to recent Beijing efforts to cool the property market. Instead, the developer is looking for an innovative source of capital: pledges of future personal mortgage loans as collateral, a collateral that doesn’t yet exist. Although this type of financing is unusual and the details aren’t completely clear, the developer requires future residential buyers to purchase their mortgages through the bank that provides the developer a loan.

Banks in several provinces have found another way to circumvent the rules. Two years ago, the banks started packaging project loans, often for new property developments, and selling them to wealthy investors as investment trusts. Despite high interest rates of 12% to 20%, there was demand among the borrowers due to a shortage of capital. However, the China Banking Regulatory Authority (CBRC) got wind of this tactic, and banned it last year. To get around this, the local bank branches have begun to arrange “meetings” between their corporate borrowers and their high net worth clients, where the lenders put together the same loan packages. The bank provides “implicit” support for the loan but it never shows up on the books.

A truck distributor on China’s coast described another tactic. The distributor’s contracts contain a clause that requires the distributor’s supplier of trucks to “help” the distributor unload unsold trucks. Rarely invoked in good times, this is a form of lending guarantee that could come back to haunt the supplier in bad times.

The local governments themselves are getting creative, too. Since they officially can’t issue bonds, they have created “platform” companies as investment vehicles, often using land as capital. But the central authorities, through the People’s Bank of China and the CBRC, have put a stop to the growth of these trusts. So the local governments are turning to non-bank sources of capital that can’t be traced by the regulators—usually state-owned firms.

“The local government can’t inject [funds] into the platforms, but they can sell state-owned shares or inject SOE [state-owned enterprises] capital,” according to the assistant general manager at a branch of a state bank. The regulators can control lending to the corporations, but there’s not much they can do once the corporates have the money.

All of these, and plenty of other tactics taken together, add up to a financial system that in some respects is running out of control. The more liabilities build up out of sight of regulators, the more serious the risk that a financial crisis could catch authorities by surprise. It’s not a question of the competence of the authorities. Both the PBOC and CBRC are doing their best to manage the situation, and appear to have a pretty good idea of the contours of all this off-balance-sheet lending. But precise data are in short supply, a fact that would stymie even the best regulators.

This problem is twofold: It is very difficult to capture information about non-bank sources of lending, which comprise everything from corporate balance sheets to unrecognized promises for future profits. Second, the bank regulators control only the banks, but not the whole economy. They are in a tug of war both with China’s planning board—the National Development and Reform Commission—and local governments, all of whom have a vested interest in spending as much money as possible.

Arguably, this shadow banking system has a positive side. It is teaching wealthy Chinese how to evaluate the costs and benefits of recycling their savings into profitable projects, instead of leaving them in low-yielding bank deposits that could be funneled into useless investments. One of my former interns said her father, a metals trader in Shanghai, constantly receives investment proposals for private projects and probably has a good sense of what is a good and bad investment.

But the downside is more frightening. There is a rampant growth of credit, uncontrolled or even incalculable by the country’s top leadership. This means the financial system is

generating liabilities that could easily turn sour and, come some kind of crisis, prove difficult to clean up. Does this remind anyone of America’s subprime crisis?

Mr. Collier is an independent China analyst and the former president of the Bank of China International’s U.S. office.

A truck distributor on China’s coast described another tactic. The distributor’s contracts contain a clause that requires the distributor’s supplier of trucks to “help” the distributor unload unsold trucks. Rarely invoked in good times, this is a form of lending guarantee that could come back to haunt the supplier in bad times.

The local governments themselves are getting creative, too. Since they officially can’t issue bonds, they have created “platform” companies as investment vehicles, often using land as capital. But the central authorities, through the People’s Bank of China and the CBRC, have put a stop to the growth of these trusts. So the local governments are turning to non-bank sources of capital that can’t be traced by the regulators—usually state-owned firms.

“The local government can’t inject [funds] into the platforms, but they can sell state-owned shares or inject SOE [state-owned enterprises] capital,” according to the assistant general manager at a branch of a state bank. The regulators can control lending to the corporations, but there’s not much they can do once the corporates have the money.

All of these, and plenty of other tactics taken together, add up to a financial system that in some respects is running out of control. The more liabilities build up out of sight of regulators, the more serious the risk that a financial crisis could catch authorities by surprise. It’s not a question of the competence of the authorities. Both the PBOC and CBRC are doing their best to manage the situation, and appear to have a pretty good idea of the contours of all this off-balance-sheet lending. But precise data are in short supply, a fact that would stymie even the best regulators.

This problem is twofold: It is very difficult to capture information about non-bank sources of lending, which comprise everything from corporate balance sheets to unrecognized promises for future profits. Second, the bank regulators control only the banks, but not the whole economy. They are in a tug of war both with China’s planning board—the National Development and Reform Commission—and local governments, all of whom have a vested interest in spending as much money as possible.

Arguably, this shadow banking system has a positive side. It is teaching wealthy Chinese how to evaluate the costs and benefits of recycling their savings into profitable projects, instead of leaving them in low-yielding bank deposits that could be funneled into useless investments. One of my former interns said her father, a metals trader in Shanghai, constantly receives investment proposals for private projects and probably has a good sense of what is a good and bad investment.

But the downside is more frightening. There is a rampant growth of credit, uncontrolled or even incalculable by the country’s top leadership. This means the financial system is

generating liabilities that could easily turn sour and, come some kind of crisis, prove difficult to clean up. Does this remind anyone of America’s subprime crisis?

Mr. Collier is an independent China analyst and the former president of the Bank of China International’s U.S. office.