China says US has 'responsibility' to resolve debt ceiling row

Vice-finance minister Zhu Guangyao outlines concern over 'safety of Chinese investments in the United States'

A senior Chinese government official on Monday publicly warned Washington about the dangers of the current row over the US’s debt ceiling.

In the Chinese government's first public comments on the deadlock Zhu Guangyao, the vice-finance minister, told reporters in Beijing: “The United States is totally clear about China's concerns about the fiscal cliff. We ask that the United States earnestly takes steps to resolve in a timely way before 17 October the political [issues] around the debt ceiling and prevent a US debt default to ensure safety of Chinese investments in the United States and the global economic recovery. This is the United States' responsibility.”

China is the largest foreign holder of US debt, owning about $1.277tn of US Treasury bonds at the end of July, according to the Treasury. For bond holders, economists and other investors, the row over the debt ceiling is likely to have a far greater impact than the current government shutdown.

The US Treasury secretary, Jack Lew, warned again on Sunday that by 17 October the US will be left with about $30bn in cash to meet its obligations – which are about $60bn a day – unless Congress acts soon to increase the US’s borrowing limit. “Congress is playing with fire,” Lew told CNN”s State of the Union. “If the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default. There is no option that prevents us from being in default if we don’t have enough cash to pay our bills.”

Republican House Speaker John Boehner said at the weekend that his colleagues would not agree to raise the debt ceiling unless any deal included measures to rein in public spending. President Barack Obama has accused Republicans of “blackmail” in their attempts to kill his healthcare reforms, known as Obamacare.

Zhu said China and the US were "inseparable". "The executive branch of the US government has to take decisive and credible steps to avoid a default on its Treasury bonds," he said. "It is important for the US economy as well as the global economy."

"We hope the United States fully understands the lessons of history," Zhu added, referring to a similar row over the debt ceiling in 2011 that led to a historic downgrade of the US's AAA credit rating and panic on stock markets worldwide.

Zhu’s comments came as US stock markets fell following the continued impasse over the shutdown and debt ceiling over the weekend. The Dow Jones Industrial Average fell 136.34 points, or 0.9%, to 14,936.24, below the 15,000 mark it reached for the first time last May. All the other US markets closed down, with the S&P 500 dropping 37.38 points (0.98%). Most European and Asian markets closed down as rises were seen in US Treasury notes and gold prices, both traditionally seen as safe havens. The dollar lost ground against the yen and the euro.

Daniel Rosen, founding partner of the research firm Rhodium Group, said political infighting in Washington was likely to have a profound impact on Sino-US financial relations.

“I believe that in the final analysis the US is going to pay its debts and is not going to default on its obligations,” he said. “Even assuming that case, it is politically untenable for the government of China to be in a position, whether frequently or occasionally, where the life savings of the country are going to eroded by the political shenanigans of another country.”

Rosen said China was looking at ways to move its huge dollar denominated investments into the private sector and out of the government’s coffers before the current crisis began. “But for the moment they are trapped and they have to deal with the portfolio they have,” he said.

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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GlaxoSmithKline CEO: London HQ knew nothing of China scandal

Sir Andrew Witty said the drug firm had 'no sense' of the 'shameful' allegations that some GSK China executives bribed doctors with cash and sexual favours worth £320m

The chief executive of GlaxoSmithKline has insisted the British drugs group had no knowledge of the alleged cash and sexual favours bribery scandal which has engulfed the company in China before the police arrested four of its senior Chinese executives last week.

Sir Andrew Witty, GSK's chief executive, said the company's headquarters had "no sense" of the "shameful" and "deeply disappointing" allegations that some GSK China executives are the "godfathers" of a criminal scam, bribing doctors with cash and sexual favours worth £320m.

Witty, who was speaking publicly about the "fraudulent behaviour" for the first time, said: "It appears that certain senior executives in the Chinese business have acted outside of our processes and our controls to both defraud the company and the Chinese healthcare system."

He said the company has "zero tolerance" for the alleged behaviour, which is "totally contrary" to GSK's values.

However, he repeatedly refused to say if he would hand back some of his bonus this year if the company was found to have broken the law in China. He said the level of his bonus – which totalled £2.7m last year – is "really a matter for the board".

Witty added that he was "absolutely committed to rooting out corruption and we are absolutely committed to getting to the bottom of what has happened".

The GSK boss, who was paid £3.9m last year, said he was "absolutely willing and ready" to go to China to head up the company's investigation. However, he is leaving the day-to-day handling of the crisis to Abbas Hussain, GSK's head of emerging markets, who flew out to China take control of the situation last week.

He refused to provide details of how the alleged fraud operated, but said the Chinese policeinvestigation is focused on the four Chinese nationals already detained by the police. He said they appear to have been "potentially defrauding GSK and also at the same time allegedly doing some things in the market which are clearly inappropriate and illegal".

The Chinese investigators have "no allegations" against Mark Reilly, the British head of GSK China, or Steve Nechelput, its finance director in the country, Witty said. He said Reilly, who has left China for the UK, and Nechelput, who the Chinese have banned from leaving the country, have been helping GSK with its investigation.

GlaxoSmithKline (GSK) headquarters in London. CEO says HQ was unaware of the alleged bribery in ChinaWitty said GSK's head office in London had no knowledge of the alleged fraudulent activity until the Chinese police raid its offices in Shanghai earlier this month. "As far as headquarters, we had no sense of this issue."

This is despite GSK declaring last month that a four-month internal investigation into allegations of bribery and corruption in China found "no evidence of corruption or bribery in our China business".

Witty said the previous allegations raised by a whistleblower were "quite different" to the new charges. "They are two completely different sets of issues: we fully investigated the first and of course this has now surfaced in the last couple of weeks," he said.

GSK has already pumped in extra cash into its investigations team in China to help them to get to the bottom of the scandal, Witty said.

Despite the apparent serious breach of compliance, Witty said GSK's controls and audit systems are "extremely robust", but promised the company would "learn from this and make changes".

It comes a year after Witty promised a company-wide overhaul to prevent a repeat of a scandal in which GSK staff tricked and bribed doctors into prescribing dangerous antidepressants to children in the US. "We're determined this is never going to happen again," he said last summer after GSK paid a record $3bn (£1.9bn) fine to settle the claim.

GSK has "reached out" to regulators in the UK and the US and has "consulted with the UK government" about the Chinese investigation.

He warned that the allegations are likely to have "some impact" on GSK's future performance in China, but said it was "too early to quantify the extent".

GSK reported a 2% rise in second-quarter sales to £6.6bn. Its drug and vaccine sales in China rose 14% to £212m. China accounts for just over 3% of the company's global sales.

China indicated that its investigation into the "rampant" bribery scandal will be extended to other foreign and local drug companies. "It will not be surprising if more pharmaceutical companies and hospitals, domestic or international, are to be involved in probes in the days to come," the Chinese state news agency said yesterday. "Big international firms should shoulder [their] due responsibilities to bid farewell to malpractice, setting a good example and serving as a wake-up call for domestic pharmaceutical companies."

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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