China prepares to liberalise finance as hedge funds and estate agents salivate

Beijing is making prepartions to let its money off the leash, and the repercussions will be felt everywhere

It's a long way from Beijing to Belgravia but London's upmarket estate agents would be well advised to keep a close eye on developments in China over the next 10 days. The price of a mansion in London's more fashionable districts is rising fast. Cash buyers from overseas have snapped up houses with little or no regard of the cost, creating a property microclimate divorced from the rest of the market.

The Bank of England is keeping tabs on the boom, concerned that the flood of foreign cash pushing up the price of mansions could – if left unchecked – herald the start of the next bubble.

Well, you ain't seen nothing yet. The freeing up of China's economy over the past 35 years has been methodical. First it was agriculture. Then it was industry. Now, the next phase of liberalisation planned by the ruling cadre of the Communist party includes finance.

A host of possible reforms are being considered. These include offering higher interest rates for domestic savers backed up by deposit insurance for savings accounts and making China's currency, the renminbi, convertible.

Unfettered movement of capital out of China is not going to happen overnight, but it could happen within five to 10 years. That's why George Osborne was in China last month seeking to make London the global hub for dealings in the renminbi. That is why fund managers, hedge funds, private equity firms and property specialists in Britain are licking their lips.

China's leaders have encouraged speculation that radical change is afoot by talking about a "masterplan" for the economy. There have been signs that Beijing is prepared to sacrifice quantity for quality: accepting that growth needs to be slower but more sustainable.

Although living standards have risen sharply, China's economic model is investment-intensive. There has been a rapid expansion of industrial capacity to provide goods for export. Heavy debts have been incurred in the process, particularly by local government. The sluggish recovery in the global economy that followed the financial crisis of 2007-08 means that demand for China's manufactured products is growing less quickly than it once was. Hence the feeling that the economy needs more of a domestic focus and that capital should be used less wastefully.

The internal debates about the future of the economy will come to a head next weekend when the central committee of the Communist party meets in its third plenary session since it was elected for a five-year term in 2012.

Historically, the so-called third plenum has been the occasion for the party hierarchy to focus on the economy, followed by big shifts in policy. It was at the third plenum in 1978 that Deng Xiaoping announced the opening up of the Chinese economy: the move that triggered 35 years of stupendous growth.

Fifteen years later, Deng said the economy needed more investment and had to become more export-focused. Within a decade, the country's success in breaking into western markets was crowned by admission into the World Trade Organisation. WTO membership, together with a period in the early 2000s when the global economy was expanding at its fastest rate since the late 1960s and early 1970s, meant there was little pressure to reform China's economy. It was hard to argue with growth rates of 10% and record rates of poverty reduction. Now, though, expectations are high that President Xi Jinping and Premier Li Keqiang will act.

Analysts at Capital Economics say the third plenum will come up with a direction of travel rather than a detailed policy programme. But they expect the new leadership to address three key issues: the low share of national income going to average households; the dominant role of the state in much of the economy; and the inefficient use of capital.

Xi and Li are likely to proceed with caution. There will be strong opposition to reform from vested interests who like the status quo. What's more, China's fragile financial sector needs handling with care. The balance sheets of commercial banks and the shadow banking sector are bloated with loans to state-owned enterprises and real estate companies. Many of these loans are non-performing, and there are enough parallels between China today and the United States half a dozen years ago if Beijing wishes to observe the consequences of over-hasty or badly sequenced reforms.

Even so, the feeling seems to be that ducking the need for change will merely store up even bigger problems for the future. Deregulation, land reform and a strengthening of the social security system are on the agenda.

But it will be financial reform that will be of most interest to the outside world. There has been liberalisation in this sector but Capital Economics says this is set to accelerate by allowing the renminbi to operate in a wider trading band, allowing full private ownership of banks, facilitating the development of the corporate bond market and loosening curbs on cross-border capital flows.

In the US, there has been much agonising over the emergence of China as a rival economic superpower. America's trade deficit with China has been a particular cause of concern, with Beijing accused of manipulating the renminbi exchange rate to dump goods in the west. Fears have been expressed that America is vulnerable to a financial Pearl Harbor: a sudden decision by Beijing to stop buying US Treasury bills.

In the light of what is going to be discussed later this week, such fears look overblown. That's not just because such a move would be a pyrrhic victory for China, since it would destroy the value of its assets. It's also because bit by bit, China's economy – if not its political structure – is being reshaped along the lines sought by Wall Street and by American-owned transnational corporations.

Back in the late 1990s, US multinationals demanded that China accept more stringent conditions than had been imposed on other developing countries in order to secure WTO membership. Beijing accepted. Now America wants two things: China's financial sector to be opened up to US banks and the country's savings to boost western capital markets. More than likely, Washington will get its way, perhaps not immediately but with profound effects.

Why? Well, consider this. America, the world's biggest economy, has savings of $2.8tn (£1.7tn); China has more than $4tn. As a result, the impact of financial liberalisation in China will make the flow of funds into the west from Russian oligarchs look inconsequential.

As Diana Choyleva of Lombard Street Research notes, China's elite already sends its children to Britain to be educated. The money is about to follow. Which is why the hedge-fund owners of Mayfair and the estate agents of Belgravia have every reason to be cheerful.

Article Source : http://www.guardian.co.uk
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George Osborne opens doors to rich Chinese with new visa system

British chancellor moves to improve relations with Beijing after rift over David Cameron's meeting with Dalai Lama

George Osborne has heralded the "next big step" in Britain's relationship with Beijing, unveiling a new visa system to make it easier for Chinese business leaders and rich tourists to visit the UK.

In a sign of Downing Street's determination to reset relations with Beijing, which unofficially downgraded Britain's status after David Cameron met the Dalai Lama last year, the chancellor told an audience in the Chinese capital that no country in the west is more keen to attract Chinese investment than Britain.

Osborne, who began a five-day trade mission to China at the weekend, told students at Beijing University: "I don't want us to try to resist your economic progress, I want Britain to share in it.

"And I want, this week, us all to take the next big step in the relationship between Britain and China. Because more jobs and investment in China mean more jobs and investment in Britain. And that equals better lives for all."

As a first step the chancellor announced Britain will make it easier for Chinese business leaders to visit the UK by introducing a 24-hour "super priority" visa service.

In the biggest step, a separate pilot scheme will allow selected Chinese travel agents to apply for UK visas simply by submitting the application form used for the EU Schengen visa.

The scheme is aimed specifically at the high-end tourism market, after figures showed that wealthy Chinese tourists are not bothering to apply for a UK visa after applying for a Schengen visa, which allows them to visit 22 out of the 28 EU member states plus Iceland, Liechtenstein, Norway and Switzerland.

Ministers were understood to be alarmed when one study found that Chinese tourists were buying vastly higher numbers of expensive designer handbags in Paris than in London. The chancellor said: "These changes will streamline and simplify the visa application process for Chinese visitors, while ensuring the system is strong and secure. This is good news for British business and tourism."

The Foreign Office has no difficulty with the relaxed visa system, which will be administered through its embassy in Beijing and consulates in Shanghai and other high-growth cities.

But concerns have been voiced to the chancellor and the prime minister from within the Foreign Office that Britain needs to tread with care in the light of China's human rights record and its aggressive cyber-attacks.

Cameron is understood to have heard the Foreign Office's concerns with sympathy. But he is determined to open a new chapter in Britain's relations with China after declaring that the "Bric" countries – Brazil, Russia, India and China – would be a priority. He has led two trade missions to India but has visited China only once as prime minister, three years ago.

Ed Davey, the energy and climate change secretary, who has recently returned from Beijing, spoke of a "massive Chinese investment" worth tens of billions of pounds in nuclear power and other sources of energy in Britain.

Davey told the Andrew Marr Show on BBC1 that there would also be major energy investments from Japan and South Korea. The China General Nuclear Power Group has been in talks with EDF Energy about taking a stake of up to 49% in the deal to build a nuclear power plant at Hinkley Point.

Osborne's trip – in which he is being accompanied in part by the London mayor, Boris Johnson, and four other government ministers – is designed to pave the way for a long-awaited trade mission to China by the prime minister.

Cameron was forced to abandon a visit to China earlier this year when Beijing punished him for meeting the Dalai Lama, the spiritual leader of Tibet, at St Paul's Cathedral in May 2012 with Nick Clegg.

The prime minister abandoned tentative plans for a trip to China in April after Beijing indicated that he was unlikely to be granted meetings with senior figures. The UK government said no plans had been finalised and the new Chinese leadership, which only took over in March, needed time to bed down.

The Osborne and Cameron trips, which have been pencilled in for the autumn for some months, have been the subject of intense negotiations in Whitehall. The chancellor is said by some ministerial sources to be adopting a gung-ho approach and is keen to explore every opportunity to boost trade links with China. "With George it all comes to pounds, shillings and pence at the end of the day," said one ministerial source.

Britain's nervousness about the Dalai Lama was highlighted when Johnson declined on five occasions on Sky News to say whether he would like to meet Tibet's spiritual leader. On the fifth occasion an exasperated mayor told Dermot Murnaghan: "This is the fifth time, I'm coming up for air again, Dermot, I'm just repeating that it's not my job as mayor to insert myself into controversial areas of international dispute. My job is to promote the interests of the city."

In his speech Osborne said: "There are some in the west who see China growing and they are nervous. They think of the world as a cake – and the bigger the slice that China takes, the smaller the slice that they will get. I totally and utterly reject that pessimistic view. If we make the whole cake bigger, then all our peoples will benefit. That should be the basis of our relationship with China."

In addition to Beijing Osborne will visit Shenzen, Guangzhou and Hong Kong.

Article Source : http://www.guardian.co.uk

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GSK ran hospital bribery programme, say Chinese police

State media report claims wrongdoing was part of GlaxoSmithKline's corporate strategy and not caused by rogue salespeople

Chinese police claim to have found evidence showing GlaxoSmithKline organised a bribery programme targeted at major hospitals at a company level in China, dismissing suggestions that abuses may have been the result of overenthusiastic or rogue sales staff, according to a state media report.

An increasing number of individuals reputedly involved in corrupt payments are said to have made confessions, according to the Xinhua news agency. "As the investigation is moving on, it is becoming clear that it is organised by GSK China rather than drug salespeople's individual behaviour."

GSK issued a statement denying that wrongdoing had been part of a sanctioned corporate strategy. "The issues identified would be a clear breach of our corporate values and we have zero tolerance for any behaviour of this nature."

GSK accepted in July that some of its executives appear to have "acted outside of our processes and our controls to both defraud the company and the Chinese healthcare system". The drug firm is accused of funnelling up to 3bn yuan (£312m) to travel agencies to facilitate bribes to doctors and officials.

The GSK chief executive, Sir Andrew Witty, told investors the company's headquarters had "no sense" of the "shameful" and "deeply disappointing" allegations.

Tuesday's report from the Xinhua news agency quoted Huang Hong, a general manager for GSK in China and one of the detained executives, saying the company had set goals for annual sales growth as high as 25% – 7% to 8% higher than the average growth rate for the industry.

"Huang admitted that the growth rate of sales could not reach such a high number only by the efforts of the salespeople themselves if there was no dubious corporate behaviour," Xinhua reported.

Chinese police reportedly claim to have evidence that GSK China "went through the motions in internal auditing so as not to discover these violations".

The Xinhua report followed an article in the official People's Daily newspaper that quoted Guo Jianhua, head of recruitment at GSK China, saying the company had turned a blind eye to illegality.

"When the problems were exposed, the company pushed all responsibilities to individual employees," Guo said. It was unclear to which problems Guo was referring or if he was one of the detained executives.

Official media routinely get access to detainees in China. Other detained GSK executives have been interviewed on state television.

Bribes in China's drug industry are reportedly commonplace, fuelled in part by low salaries for doctors. A number of other multinational drugs firms are facing investigations similar to the GSK inquiry as whistle-blowers have come forward.

GSK's continuing controversy in China comes after the drugmaker last year reached a $3bn (£1.9bn) deal with criminal prosecutors in the US, pleading guilty to a raft of offences linked to the illegal promotion of drugs. Many of the allegations related to extravagant travel provided to doctors whose business GSK was courting.

Article Source : http://www.guardian.co.uk

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Credit crunch confusion sends China's stock market on wild ride

Down 6% in the morning, up 6% in the afternoon. The wild ride in the Chinese stock market on Tuesday tells the tale of confusion about the depth of the China's credit crunch and the authorities' ability to control events.

China's lending almost doubled last year from the year before to 200% of economic output The trigger for the afternoon rebound was comments from the central bank that it would guide interest rates to "reasonable levels" and that cash in the financial system would be managed flexibly. In normal circumstances, such a statement would be regarded as woefully vague, almost meaningless. But the People's Bank of China traditionally runs its communications in a near-vacuum. Two statements in two days counts as an outbreak of verbosity. Investors took that as reassuring evidence that the authorities are at least aware of the risks as they attempt to defuse a credit boom.

Well, it's something to cling to. Confidence, however, looks fragile. The big problem is the scale of the ramp-up in credit in recent years. Fitch, the credit ratings agency, has calculated that the total lending in the $7.3tn (£4.7tn) Chinese economy reached almost 200% of economic output last year, up from 125% five years earlier. That rate of explosive growth can be dangerous. History is littered with example of economic blow-ups and banking crises that followed massive increases in lending – Japan in the late 1980s, most famously.

China's recent credit explosion started in 2009, when Beijing reacted to the west's banking bust and recession by ordering a massive programme of investment, principally in public infrastructure, offices and flats. That succeeded in restoring strong growth to the economy – and, indeed, helped to prevent a bigger global downturn. But, for the bears, the critical point is that the Chinese credit boom never slowed down: the skyscrapers and flats continued to be built before demand could catch up.

"The excess borrowing that occurred in 2009 has never been absorbed by the real economy and now more borrowing is being piled on top of this," said Wei Yao, an analyst at the Société Générale bank, earlier this month. She thinks "the debt snowball is getting bigger and bigger, without contributing to real activity" and suspects many borrowers are rolling over loans at punitive rates in a desperate struggle to stay in the game.

SocGen's chart shows where the credit has come from – most of the extra lending is not being made by mainstream banks but by the so-called "shadow banking" system, which largely means small finance houses that have often funded speculative property projects.

Beijing has traditionally tolerated the shadow banks. They are viewed as an essential part of a financial system that is steadily liberalising, even if they have also become a way for state-backed banks themselves to bypass official lending caps. But it was these shadow lenders that the People's Bank of China seemed to want to punish last week.

Short-term lending rates between banks were allowed to soar – to 11% for one-week money. The official message seemed blunt: rein it in, apply discipline, and don't assume the state is always on hand to keep interest rates low. Having made its point, then central bank then managed rates back downwards, albeit not all the way down.

Beijing's mission seems reasonable enough – if there is excess credit in the Chinese economy, it's better to tackle the problem before a bigger bubble is blown. Mark Williams of thinktank Capital Economics comments: "The episode is arguably the strongest sign yet that the leadership is willing to suffer short-term economic pain if necessary to achieve more sustainable growth."

But Williams also calls the People's Bank's behaviour "extraordinarily reckless" since it offered no explanation for its initial inaction. Indeed. It's all very well to have a policy but surely it's better to communicate it. The risk is that confidence is damaged.

What's more, shock and awe tactics look ill-suited to the delicate task of finessing investment away from unprofitable property projects while simultaneously keeping the economy stable. Bank of America Merrill Lynch's analysts think the biggest risk lies in the central bank mishandling the situation. "In our view, dealing with banks in breach of regulations should be done by improving prudential regulations rather than engineering an interbank credit crunch which could potentially backfire should banks lose mutual trust," they said.

Viewed from outside, China's building boom also looks to rely on inherently shaky financial structures. The shadow banks attract cash in short-term products from middle-class savers keen to escape the low deposit rates on offer at state-sponsored banks. But then they lend to long-term illiquid building projects. In a full-brown credit crunch, they would be horribly exposed. We would also see the first test of how far Beijing is willing to go to protect the shadow banks.

"I would say the [Chinese] authorities have the situation well in hand," said incoming Bank of England governor Mark Carney. For now, that's the consensus view. While economists are busy trimming their forecasts of GDP growth – Goldman Sachs now expects the economy to grow 7.7% in 2014, not 8.4% – they are also praising China for acting early to prevent a bigger debt crisis.

The alternative view is that China has left it late to rein in the credit boom without risking a major slump. If Wei Yao at SocGen is right about the chronic problem of over-extended corporate borrowers, there are lots of bad debts that haven't been recognised. In the past, recapitalising banks has never a problem for China – but the economy's new reliance on shadow banks and hazy specialist financing vehicles makes events harder to predict. Given the size of the building boom, is it even possible to estimate accurately the accumulation of bad loans in the system?

China will also have to attempt the trick against an uncertain global backdrop. The US economy is growing but not everybody is convinced the recovery can withstand higher interest rates. In the meantime, recession rumbles on in the eurozone. But Beijing seems to have decided the country's credit pains have to be confronted anyway. After 12 years of boom, Chinese-style capitalism faces its biggest test – how to apply the brakes without crashing.

Article Source : http://www.guardian.co.uk

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