[would any of the China Study Group members care to comment on the below?]
[New York Times] September 16, 2003 China Told Not to Relax Yuan Limits By KEITH BRADSHER HONG KONG, Sept. 15 - Credit-rating agencies strongly warned today that China should not let its currency appreciate soon or relax controls on the movement of large sums of money in and out of the country, as the Bush administration has asked. The Chinese banking system was not ready, the rating agencies said. An increase in the currency's value in foreign exchange markets "would place additional strain on an already insolvent banking system," said Paul Coughlin, the managing director for Asian government and corporate ratings at Standard & Poor's, the world's largest credit-rating company. If China allows currency appreciation and relaxes controls, the Chinese government's credit rating, "would undoubtedly be under a lot of downward pressure," Mr. Coughlin said in a conference call with reporters. Wei Yen, the Chinese banking analyst at Moody's Investors Service, agreed in a separate telephone interview that currency revaluation or a reduction in capital controls could be harmful to China's credit rating. Chinese bank depositors would eagerly invest overseas if they could, he said, and this would deprive Chinese banks of the constant inflow of fresh deposits they need to continue making new loans even as many old loans are not repaid. "Right now, the banks are held together by liquidity, by depositors," he said. China's four main government-owned banks already rank among the most insolvent in the world, failing to collect timely interest and principal payments on nearly half their loans. The possibility of a Chinese banking crisis has been rising toward the top of Western experts' lists of what could cause political instability in China, and the problem has been receiving top-level attention from China's leaders. In the latest sign of Beijing's deepening concern, the official New China News Agency reported tonight that the China Banking Regulatory Commission had sent inspectors to visit the four big banks to review the prudence of their recent loans. The People's Bank of China, the country's central bank, has been expressing worry that the bad debt problem may worsen and that sectors of the economy may overheat because of a recent frenzy of lending, often to speculative real estate projects. The news agency noted with unusual bluntness that the central bank's monetary policy department had "warned against possible high inflation" because of rapid growth in the money supply. China's banks lent more in the first seven months of this year than in all of last year. The central bank ordered banks on Aug. 23 to keep larger reserves on deposit with it, in a bid to slow the lending. But that decision is also pushing up interest rates in China's relatively small and illiquid debt markets, which makes it harder for the government to finance its large and persistent budget deficits. The finance ministry failed today to auction all of a new bond issue, with a third of the bonds left unsold after many potential buyers refused to bid the ministry's minimum price. In essence, buyers demanded a higher interest rate than the ministry was willing to pay. With American politicians increasingly blaming imports from China for unemployment in the United States, Treasury Secretary John W. Snow visited Beijing nearly two weeks ago to ask for a revaluation of China's currency, known as the yuan or renminbi, and some relaxation of China's controls on capital movement. Chinese officials repeated previous promises to pursue greater flexibility someday, but made no promises on any timetable. They did, however, offer a series of small adjustments to capital controls, like making it a little easier for foreigners to invest in Chinese securities and for the Chinese to invest in foreign securities. Finance ministers from the European Union, the United States and Japan have all been pressing for a rise in the yuan, and are expected to discuss the issue at a meeting this weekend in Dubai of the finance ministers from the Group of Seven leading industrial countries plus Russia. Government-controlled media reported today that a member of the central bank's monetary policy committee, Li Yang, had said that the government might at some point allow the yuan to trade in a somewhat wider band about 8.28 to the dollar. The central bank has been keeping the yuan very close to that level by spending hundreds of billions of yuan to buy tens of billions of dollars as they flow into the country, so as to prevent investors with dollars from bidding up the value of the yuan. Traders have already been using markets for forward currency contracts to place bets that the yuan will appreciate in the coming year despite Beijing's opposition; prices in these markets briefly touched a new record today. Zhou Xiaochuan, the governor of the People's Bank of China, said early this month that his country would consider linking the yuan to a basket of currencies including the dollar. But Mr. Coughlin said that any move to peg the yuan to a group of currencies should be done gradually, perhaps three to five years from now, so that Chinese banks could begin learning how to manage the risks associated with currency market volatility. The shift to a basket of currencies, he contended, should also be made without changing the yuan's immediate value relative to the dollar, so as to let Chinese banks adapt to currency fluctuations without trying to cope with a revaluation at the same time. The weak financial controls at Chinese banks, Mr. Coughlin warned, combined with regulators' incomplete information about the banks' international dealings, mean not only that the banks are very unlikely to be hedged adequately against a sharp move in the yuan's value, but also that their losses cannot even be estimated in advance. "You wouldn't know what the damage would be until you've done it," he said. China's reluctance to take decisive measures quickly has fueled calls in Congress for the United States to impose tariffs or take other actions to limit imports from China. But Ping Chew, the director of Asian sovereign ratings at Standard & Poor's, pointed out that while China is running record surpluses with the United States, China's overall balance of trade is only slightly positive as China runs deficits with other countries, suggesting that the trade deficit may be caused to a considerable extent by American policies and not China's. Standard & Poor's currently has a BBB rating on the Chinese government's long-term foreign currency debt, with a positive outlook, while Moody's has a somewhat higher rating of A-3, also with a positive outlook. Mr. Zhou is scheduled to deliver a rare speech here on Thursday night at a dinner sponsored by the Hong Kong Monetary Authority. His visit has sparked speculation in Hong Kong's financial sector that China might be close to authorizing limited offshore banking in Hong Kong, allowing banks here to take deposits and lend in yuan. But economists here with strong connections in Beijing have become increasingly skeptical that Mr. Zhou will announce such concessions. Hong Kong's chief executive, Tung Chee-hwa, withdrew on Sept. 5 his proposal for stringent internal-security legislation, a plan that Beijing had previously supported through a series of policy changes to help Hong Kong's struggling economy. Joan Zheng, the chief China economist at J. P. Morgan, said that even letting Hong Kong banks take yuan deposits from some mainland tourists now entering the territory could be a potential threat to China's banking system. Shanghai officials, who are trying to build a financial services industry despite a couple recent scandals, have also been publicly leery of letting Hong Kong, with its tighter regulatory system, lengthen its lead as China's financial center. Shanghai's mayor, Han Zheng, told the South China Morning Post last week that Hong Kong was decades ahead of Shanghai, saying that his city was still like a child trying to catch up with "mature and sophisticated" Hong Kong. ==================================== To this day, no one has come up with a set of rules for originality. There aren't any. [Les Paul]
