Briefing: financial scams in China, why so many?

Scams in China’s finance industry is a trend I think will continue for a long time. Quartz has done this great compilation of financial scandals in China:

http://qz.com/576389/a-banner-year-financial-scams-in-china-nabbed-at-least-24-billion-in-2015/

Here are a few highlights:

E Zubao and other P2P financing platforms—at least $11 billion

Fanya Metal Exchange—about $6 billion

MMM social financial network—beyond calculation

Zhuoda Group—about $1.6 billion

GSM Financial Group—about %6.2 billion

And it also discusses why these schemes succeed, or why investors keep falling for them:

First off, opportunities in real estate and of course the stock market seem dubious, and new financial companies, especially peer-2-peer lending firms present an attractive alternative.

But of course, while rule of law has much to catch up on this new and upcoming industry, presenting a great opportunity for crooks with a bit of brains to come in and attract innocent investors looking for swift gains.

Indeed, many of these firms lie beyond the scope of supervision. P2P lending platforms often go beyond their normal role as sole information brokers and provide services and products that only licensed banks or lending companies offer. Many of them are not even registered with the State Administration for Industry and Commerce.

And investors will just go for these seemingly shady companies for really quite simple reasons: i)friends recommended it,

ii)just believed in their marketing campaign promising incredibly high returns (in some cases, people know it’s a ponzi scheme but still go for it confident they can get out with some gains before it all collapses),

iii)some famous investor spoke well of it (eg.,

iv) some local government has backed them like in the case of Fanya. People just expect the government will have their back once things go south. Nothing more than the trusting soul of man under authoritarianism.

v)And another unique feature on mainland:

image

Put these all together: it’s a lack of experience in investments. Mainland has arrived to capitalism late and so investing habits are also in its teenage years. So all of this will take time to develop, but it will also require reform on all fronts, law, regulation, supervision, general education, and availability of information etc. But most importantly, my view is that it is the enforcement of law, as always, they can make most difference in the short-term.

深夜的经济学|Late night economics: what did the People’s Bank of China do to the offshore RMB market?

The background:

China has two currency rates. One is onshore, which trades within a narrow band dictated by a central bank daily rate (the yuan is allowed to rise and fall by 2% of this fixed rate). The other is offshore, where the yuan floats freely and serves as an indicator of what markets think about the Chinese economy.

Since last August, when the PBoC declared a change to how it fixes daily yuan rates, which they say reflects market value, the yuan was expectedly devalued. But it was depreciating at much quicker pace than people had anticipated.

Caixin’s details on the change:
The new method, which officials said better reflects market value, links the daily rate to the currency’s closing price for the previous trading session. The fixing is a reference the central bank provides to interbank forex market traders based on the perceived value of the yuan. It is a mid-point from which daily spot trading prices for the yuan are allowed to deviate by 2 percent in either direction.

Dreading further depreciation of the yuan, those with offshore yuan holdings started selling. Then you had speculators who sought profit from the weakening yuan by short-selling their yuan holdings, and the gap between onshore and offshore yuan widened to a record. (Besides the fact that offshore is free floated and onshore isn’t, the fact that capital can’t come out freely from mainland once in, has contributed to the widening gap).

Details on short-selling CNH (offshore RMB in Hong Kong):
Known as “carry trading,” it has become popular practice for speculators to swap borrowed offshore yuan for dollars, then rebuy RMB when it has depreciated, pay off the loan and keep the remainder. Only made possible since August when the RMB started depreciating.

All this had led offshore RMB to become significantly more devalued than onshore RMB, with the gap widening to over 1,300 basis points (in November it was about 300).

What the PBoC has done is to stop short-sellers by raising the interest rate at which they can borrow CNH. It has done so by selling its massive foreign exchange reserves and buying up offshore RMB through state-owned banks in Hong Kong. Hibor (Hong Kong Inter-bank Offered Rate) went to record highs of 66.8% on January 12.

The RMB has now stabilized at 6.58 against the dollar.

But the move has not been without costs. Countering short-selling in such a manner reduced FOREX reserves, which last year shrank for the first time by 500 billion USD to 3.3 trillion. At a time when, Chinese companies are still saddled with 1.53 trillion dollars in foreign debt, most of which are also short-term.

But as China’s economic transition continues (as well as the ups&downs of the stock market), the expectation is further depreciation, and that means more intervention of that nature is likely.

Chinese Gov’t ‘Causes an Investment Gap with U.S.’

(Beijing) – There is a widening gap between Chinese investments in the U.S. financial sector and those heading the other direction, mainly caused by the Chinese government’s restrictions on market access against foreign investors, an expert from the U.S. research firm Rhodium Group says.

Chinese merger and acquisition deals in the U.S. financial services this year are expected to break a record, reaching more than US$ 2.8 billion, up from last year’s US$ 100 million, data from Rhodium show.

Deals that are expected to be completed next year totaled nearly US$ 1.6 billion.

Meanwhile, U.S. investments in the Chinese financial sector are expected to reach only US$ 115 million, down from the US$ 163 million last year, the data show.

An important factor behind the decline is restrictions on investment imposed by the Chinese government, said Thilo Hanemann, research director at Rhodium. He said the limitations amounted to a protectionist barrier that does not affect Chinese investors in the U.S. financial sector as much.

The major restriction on U.S. companies is a limit on the equity stakes they can hold, he said.

Chinese investors are far more likely to be allowed to hold majority ownership in companies they invested in the U.S. financial sector than U.S. firms seeking partners in China, and this was caused primarily by Chinese government restrictions, Hanemann said.

Investments worth US$ 4.4 billion from China to the U.S. financial sector, where Chinese investors hold bigger stakes than their U.S. partners in a co-founded venture, have been made or are expected to be completed from 2000 to the end of next year, Hanemann said.

Meanwhile, only US$ 731 million worth of investments heading the other direction have majority U.S. ownership, he said. In deals worth US$ 3.2 billion, U.S. investors’ ownership fell in the range of 10 to 50 percent.

Chinese government restrictions on market access are “particularly acute in the most attractive sectors under the new growth model, including high-tech manufacturing and modern services,” Hanemann said.

In sectors like communications and financial services, China scored 0.75 on the OECD FDI Regulatory Restrictiveness Index. The United States scored 0.11 and 0.042, respectively. Lower figures signify fewer restrictions.

The U.S. business community has been one of the most important drivers of an American policy of engagement with China, Hanemann said. If it is being excluded from attractive sectors of the Chinese economy, he warned, that could “tip the scale in favor of less engaging” policy toward China.

Round II of China’s financial turf war with U.S.

 

David Pilling of the FT has written a great column about US’s response to China’s AIIB, which many countries–including U.S. allies–against U.S. pressure jumped on. So I will summarise the mainpoints.

US’s countermove is the Trans-Pacific Partnership. It will be a major trade initiative since the WTO’s 2001 Doha round. It will bind US and Japan into a bloc covering 40% of global output. It is the commercial equivalent of US military engagement of the region–“trade pivot”.

Obviously, China is not invited to take part, which as Pilling points out, is a big piece of cake to miss out, but is precisely the point. The excuse is that China’s economy is still not market enough. Just maybe it is aimed to urge further economic reforms, but China may not be interested, already engaged in Regional Comprehensive Economic Partnership.

Will the TPP be successful?
It has already upset people in both participating countries and America itself for its intrusive policies:
“which
goes beyond tariff reduction to deal with “behind the border” issues
thought to impede trade and investment. These include tendering
processes, financial regulations, data protection rules and intellectual
property laws.”

Ian
Bremmer, president of the Eurasia Group consultancy, says the vote on
trade promotion authority will be “razor thin”, though he believes
ultimately Mr Obama will prevail.

Even if TPP is finally concluded, the chances are it will be too
watered down to satisfy trade purists and too intrusive to please
Washington’s Pacific partners. For Beijing, fresh from its triumph over
the infrastructure bank, the whole spectacle must be quite amusing”

With money, your political problems automatically solve themselves–China shows.

As China has reared its head on Asia-pacific, most countries in the region of Northeast and Southeast Asia have gone for a similar strategy of military alliance with U.S. and continued economic engagement with China.

But as the case of Taiwan makes clear, as China’s financial power rears its head in the region in the shape of AIIB, China’s own political troubles in the region seem to be solving themselves.

As Ricky Yeh, an Economic Analyst at the Japan Center For International Finance, points out for the Diplomat, Taiwan’s decision to join the AIIB via the mainland’s Taiwan Affairs Office (TAO)–and directly through AIIB as is conventional for any application to a multilateral body–signals Taiwan’s concession to Beijing. It demonstrates that TAO “can act as an agent of China on Taiwanese affairs.”

Moreover, Taiwan’s status as soveriegn country is gradually being eroded before the international audience, as it joins multilateral institions which either China is part of, or it controls entirely. For instance, as Yeh pointed out, when it joined the Asian Development Bank, a U.S.&Japan-led institution, Taiwan was compelled to switch from “Republic of China” to “Taipei, China” when the PRC joined in 1986. Taiwan has yet to reveal the name under which it applied to join the AIIB(!)

South Korea, too, is a case that illustrates China’s financial power is capable of solving political problems. The South Korean government has for now been trying to balance between the U.S. and China, maintaing military alliance with the former, but also increasing economic, cultural and diplomatic ties with the latter. Such “two-legged” effort, however, resulted in dilemmas–for instance, under Chinese pressure, it still struggles to decide whether to install the U.S.-proposed, THAAD missiles. But, in the case of AIIB, despite U.S. pressure not to, South Korea, like other countries like Britain and Australia, have decided to join.

China may rethink energy security–argument by Matt Ferchen

Some notes on Matt Ferchen’s speech

Drop in oil sparks energy security discussion in China?

Oil “is a cause of deep anxiety, despite the drop in oil prices in China, which is helpful for China, overall it is an importer of oil. China’s exposure and dependence on oil imports will only increase: 2012-2040 consumption projection: predicted to have large increases of demand, a large growing gap vis-a-vis domestic production, which means China will depend more on oil.

China’s policy makers: China is becoming weary of U.S. energy security vis-a-vis China’s as their imports are increasing while the U.S. declines.

Before the oil price dropped, they were "looking at the primary partner/ competitor the U.S. and seeing the opposite kind of trend that exists in China, in terms of of energy security. Over the last few years, with shale oil and gas developments in the U.S., there is an overall perception in China that U.S. is becoming energy-independent, while China becoming increasingly energy dependent– that is in some general way benefitting American energy security and probably freeing up US policy tools domestically and globally in terms of affecting energy and politics that China does not have.”

In the long run dramatic drop in oil prices don’t provide China with energy security

Cheaper oil prices benefit China, in terms of being able to import them at a lower price, stock up reserves, and potentially relief pressure off CHina’s economic growth speed. But in the long run that drop in oil prices dramatically will not provide China with energy security in terms of thinkinig about how markets function, or in terms of transportation. 

China is a big element contributing to the end of the commodity boom

“I think that the oil price drop highlights how there is a new challenge for Chinese foreign policy as is related to commodity rich countries who have been a key part of Chinese of foreign policy, especially in the developing world, in LatAm, Africa, Middle East to an extent. Much of the rise of China’s relations with commodity-rich countries in Africa, LatAm, has corresponded with this commodity boom. So a ten-11 year process, where CHina has dramatically increased its imports of a range of raw materials from commodity-rich regions.

The boom is over, [pause] and the dramatic fall in oil prices captures this more clearly than anything else. But we also see it in a variety of minerals…you see a basket of commodities from commodity-rich countries…this has been the key aspect of south-south, win-win, mutually beneficial language and diplomacy that China has used as the centrepiece of its engagement with a lot of countries in these regions, and that period of at least relative high prices, as well as demand from China is over, and there is a very interesting way in which China is at the centre of the drop of these prices, or at least could be perceived as playing a major part in it… But clearly one of the elements of change in commodity demand and prices has to do with China’s own changing development model.”

This is a challenge for China: “how will China continue to talk about what are the key elements of the win-win, mutually beneficial parts of this relations?”

Venezuela:

The whole rationale for CHina’s very special relationship with Venezuela was built on this idea that China needs a raw material that Venezuela has in abundance, no country has more oil in the ground than Venenzuela, so it is a perfect idea in terms of this complimentary, win-win, mutually beneficial relations, and it just so happens that Venezuela being in Latin America, being part of the ‘south’, so it fits into all these elements of CHinese peaceful development diplomacy, so it should be match-made in heaven. There should be nothing wrong with this relationship. 

Clearly last week, with the president of Venezuela showing up here in Beijing to ask for CHina’s assistance with venezuela’s ongoing and deepening crisis that is obviously exasperbated by the dramatic fall in the prices of oil. I think if it wasn’t clear before, it should be very clear now, that something is deeply wrong, or can go wrong. China now finds itself in a very difficult position of having to either make a choice about putting more money into venezuela, to ensure that there is the possibility that it is able to recoup its investments and maintain a position in Venezuela, maybe washing its hands of the place. This is a real problem, we can’t afford to put in more money, who knows what’s going to happen, we don’t know if people we’re dealing with today are going to be there int he future. So China’ is in a very difficult position, as we saw a little bit of tap dancing happening here last week. And it’s still unclear what the actual deals ended up being. 

U.S. faced simliar turn around during the 1970s oil shock:

1970s Oil-shocks in the U.S. triggered thinking about energy security

There were interesting discussions about how multinational corporations in particular and alot of these involved in energy, but also in extractive industries. How they were effecting U.S. foreign policy. So You started to see alot of govenrment but also civil society organizations and disucssions, about how the country should think, about how its own companies abroad impacted foreign policy, also impacted energy security. And there was alot of discussion about whether or not multinational corporations, whether what they were doing in their own personal interest, was something that could have potential negative effects on the overall foreign policy or position of a country in the world. There are ways in which, China today can be thought of as facing a similar set of challenges. And its captured by some of the oil companies, and banks. And venezuela again highlights, what was originally perceived as a necessary way of having Chinese banks and national oil companies engaging, being at the forefront of securing energy resources around the world.

Photo by Flickr user “
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