A Few Thoughts on Currency

by Edythe Huang

Lately, I’ve been a bit obsessed over a comment that Geitner made about China’s currency manipulation. Yes, I know it’s old news, and yes, I know that I’ve already blogged about it. But, I can’t seem to get past the accusation.

During a recent trip to China I got in the habit of asking people I met there what they thought of Chinese currency. I was starting to get a better picture of the big picture. Essentially I came to the conclusion that everyone manipulates their currency by indirectly buying and selling in the market, China is just an easy target because they do it a bit more than everyone else. I was just beginning to understand a small part of the very large and complex market that is Chinese currency. . . and then, China called for alternative currency. When I first watched the announcement on CCTV, I was a bit shocked.

Why in the world would China call for an alternative currency? After all, they are the largest holder of United States hard currency. Their incredible power created through holding so much hard currency reserve would essentially vanish . . . unless they used their hard currency reserve to buy the alternative currency. Their current account balance is much higher than any other country (by $100 trillion) and they aren’t burdened with the level of debt which saddle most western countries. It completely makes sense why China would want an alternative currency: they would have more of it than anyone else.

As for me, I was even more shocked in the hour when Geitner was agreeing with China. Thank goodness he changed his mind fast. Why would the United States want the rest of the world to lose confidence in the dollar? I do not know much about the intricacies of currency exchange and rates, but I do know that the only thing the dollar rests on is the confidence that the world places in the currency. Why would our finance guy say that we want a competitor? I have the upmost respect for Geitner’s intelligence and ability, but that short-term agreement with China did make me step back and wonder about his judgment for a moment.

China Wants to Divorce the Dollar

by Julia Zhu

Just over one week before President Barack Obama and other world leaders met in London for a summit focusing on the global recession, China was making clear it wants a greater say in managing economic policies worldwide. The latest blast from Beijing: a call by China's top central banker, Zhou Xiaochuan, to dump the U.S. dollar as the world's most important currency.

Zhou: reserve currencies based on a single issuing country just doesn’t work:

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. On the one hand–the monetary authorities can not simply focus on domestic goals without carrying out their international responsibilities. On the other hand–they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they tries to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand.

The goal, Zhou writes in a paper released on the website of People’s Bank of China on Mar. 23, is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."

Zhou suggested the IMF's Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency.

The idea of an international currency is worth considering. We do have a global economy. To facilitate trade, we need an international currency. I mean, how can we have a global economy unless we also have a global currency?

However, pretty much everyone agrees replacement of U.S. dollars with an international currency is not going to happen any soon. Here’s why:

First, the U.S. isn’t welcoming the idea and will fight against it. Speaking on Mar. 24 at a congressional hearing in Washington, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke both said they categorically oppose the change. Obama came out with support of the US Dollar and to reply to the Chinese he stated, “I don’t believe there is the need for a global currency.”

Second, the U.S. dollar is already established as a medium of exchange. To replace US dollars, the new currency would have to be adopted worldwide by private companies for international trade transactions, a tremendous challenge.

No matter what, Chinese are now nervous holding U.S. dollars. Taxi drivers in big cities such as Beijing and Guangzhou don’t take U.S. dollars as they did before. I think many of us are nervous holding dollars and maybe rightfully so. Maybe we should learn from Jim Rogers, who walk around with gold coins in his pocket (see Bloomberg.com Jim Rogers video with Bernard Lo) in case the whole financial system collapses.

A Good Week for Chinese-Americans and Chinese-American relations

The Obama administration was off to a shaky start in US-Chinese relations when Treasury Secretary Timothy Geithner directly called China a currency manipulator. The Administration seems to have switched directions this week after that gaff when it named its second Chinese American, Gary Locke, to lead the Commerce Department. (The first to be named was Steven Chu, Secretary of Energy.) The decision to name Secretary-designate Locke after two failed nominations marks a move toward positive Chinese-American relations.
Gary Locke was a partner of Seattle-based law firm Davis Wright Tremaine, where he worked on issues involving China, energy and governmental relations. He then became the first Chinese-American to hold the position of U.S. Governor when he became governor of Washington State in 1997. While Governor, Locke became known as a pragmatist who focused on international opportunities. After he stepped down in 2005, Locke worked on Chinese President Hu Jintao’s visit to Seattle in 2006.
Locke’s history of a close relationship with China (and his comparatively scandal-free resume) no doubt put Locke on Obama’s radar for Commerce Secretary. But what does it mean for the future for the future of the commerce department?
When Locke accepted the nomination, he said “Our nation's economic success is tied directly to America continuing to lead in technology and innovation and in exporting those products, services and ideas to markets around the globe. The Department of Commerce can and will help create jobs and the economic vitality our country needs.”
Although these seem to be words for words sake, there is something more in the nomination. The Commerce Secretary works toward increasing jobs at home; opening global markets for US companies and eliminates trade barriers, and expands export opportunities. Locke already has a good relationship with Chinese officials. It has not been any secret that the US has had a large trade deficit with China. Perhaps I’m being a bit optimistic, but it seems like Locke has been nominated because he may be one of the few people who have the ear of China and the ability to talk to them about “increasing their domestic consumption” and balancing trade in a way that they may be willing to listen. Obama may be trying to bait China with honey by having a person they trust go to talk to them. There’s nothing wrong with a bit of good diplomacy and negotiation.

Chinese Spending…or Lack Thereof

The World Bank’s Quarterly Report, published last Tuesday called for China to boost its domestic demand. This is not the first time the World Bank has urged the Chinese government to encourage its people to consume. The World Bank has made the same recommendation in just about every other quarterly report on China. And yet, this time, it’s a bit more striking because it begs the question, what more can China do?
First, let’s go to the 800 pound gorilla in the room. There’s been an economic crisis that has rocked the world since Sept. 15, 2008. For the first time, China’s government is not the only government that must urge its people to spend money and consume products, especially at a time when unemployment has risen, 67,000 small businesses in China fell into bankruptcy, and economic growth has slowed.
Second, the Chinese government just launched a Rmb4,000bn ($586 billion) stimulus plan aimed at upgrading infrastructure, expanding social welfare, and reforming rural land. About $123 billion of the $586 billion will be spent on a universal health insurance for the next three years. Some experts say a universal health care plan will create the foundation of a broad Chinese middle class who will have more of an appetite for world goods. However, it will take time for the wealth to accumulate.
Third, the Chinese government wants people to consume. It just wants to make sure that exports continue at a higher rate than imports. Unfortunately for the Chinese, export growth is shrinking. The only way for China to keep up the extraordinary economic growth rate it has enjoyed is to increase domestic demand. The Chinese government understands this and has put in much effort to restore consumer confidence to this country of savers through, let’s face it, economic propaganda.
I took the opportunity to look at quarterly reports of other countries to see if those countries were admonished the same way or to see what other countries do to deter the recommendation. What I found was pretty surprising. . . or not. Mongolia (it’s the only other quarterly report that came out in Feb. 2009 which discusses domestic demand) was praised for their domestic demand. The reason? Mongolia’s imports are greater than their exports. Therefore, one desired equation is imports > exports = good domestic demand.
China’s solution if they want to satisfy the World Bank (and the rest of the world): start importing more than they export. Not to state the obvious, or actually, to state the obvious, I do not see the Chinese government being so thrilled about the strategy.

Will the Year of the Bull inspire a Bull Market?

This past week Chinese families have gathered to celebrate the beginning of spring, often referred to as the Chinese New Year. Everywhere, upside down “fu” (luck/prosperity/fortune/ happiness) signs hung on doors and walls to ring in the Year of the Bull. The character “fu” hangs upside down every year (the Chinese word for upside down sounds like the word for “to come” or “to arrive”); but this year, the signs seem to be asking for something more. In the economic downturn, everyone is hoping that the year of the bull will usher in a bull market.
The question is how? How do we inspire investor confidence, especially when cash and credit are both dwindling? The media continually points out that nobody seems to know anything about anything in the financial market or where the problems come from. And yet economists are having a field day with their theories on how to fix the problem. Interestingly enough, many of there theories go back to economics 101: is it better to spend or to save our way back into economic prosperity?
China and Japan have been well known for following the “saver” mentality, while the United States and many other western economies have preferred to spend there way into a good economy. Even after the September 11 attacks on the World Trade Center, former-President Bush told the American people to go out and consume. It was probably not the most practical response, but it was consistent with seventy years of American economic policy. What is wonderful is that we got away with it for a quite some time: America has managed to spend its way into more than $10 trillion dollars worth of debt. There are many factors that contributed to the current crisis; one of the biggest is also based on one of our most closely held beliefs: consumerism. Our consumer mentality resulted in a reliance on credit and the overextension of our liabilities on a micro and macro level.
When I finally took a step back to examine my very “American,” capitalistic belief in spending, I realized that it violates common sense. There are many complex economic theories and charts demonstrating why spending is great and will save the economy, and yet, at the end of the day, the bill still comes and someone has to pay for it. So how are we going to pay yesterday’s bill?
Even though alarm bells may be ringing in your head along with words “unpatriotic” or “communist,” perhaps it is time for Americans to start learning from the Chinese and the Japanese. It might be time to start thinking about saving instead of spending.
Let me be clear in what I am proposing. I do not believe that spending and saving are mutually exclusive. What I advocate is for Americans to spend within their means and put some money away for tomorrow as opposed to spending tomorrow’s money today.
Although I do not have the intellectual prowess or credentials of John Maynard Keyes or Befekadu Degefe, I do have a credit card and I know how to shop. Shopping has taught me that if I buy a widget, I will have to pay for it. For a while, I could put off payment of the widget by putting it on my credit card, but I’ll probably accrue interest payments on top of the cost of the widget if I do not pay off the credit card immediately. However, if I wait a while to buy the widget while earning some money, I can pay for the widget in full and not accrue any interest payment, keeping more money in my pocket that I can spend elsewhere, invest, or save for a rainy day. That money will eventually funnel into the economy.
Some economists warn that saving will lead to absolute job loss and further the economic doom. To suggest such a result relies on a proven assumption: we have put ourselves in a vicious cycle. Our entire economy is inflated because we have been spending tomorrow’s money. If we stopped spending tomorrow’s money today, there will be no money today because we already spent it all yesterday. What these economists propose is that we continue to be the rat in the wheel. The credit bubble has already burst and we are seeing the result. It would seem counterintuitive to follow the same path and create another credit bubble, run in another wheel, which will eventually burst and lead to a similar result.
It’s time to try something different. I understand that there would be a difficult period during the transition from a spender economy to a saver economy. In the long term, it seems like a better policy to spend what you have instead of risking spending what you hope to make. Will saving start a bull run tomorrow? No; but it may inspire market confidence in the future, maybe even enough for a bull run. And, then, there might just be real money to back it up.

Western and Chinese Perspectives of Corporate Social Responsibility (“CSR”)

In early November I was asked by Professor He Zhiyi, the Director of the Management Case Center of Peking University, to prepare and present a paper entitled: "Western and Chinese Perspectives of Corporate Social Responsibility" at the Global CEO Forum in Beijing on November 15 and 16, 2008.

While researching and preparing the paper, I came to believe the concept of social responsibility, which has many contemporary definitions but is most often considered to be responsible business behavior, was historically founded in Chinese cultural and currently accepted more by the Chinese government than Western governments.

My attendance at the conference validated this belief. All of the speakers representing the government emphasized the Chinese government's commitment to the concept, codified in Chapter 1, Article 5 of the Company Law of the People's Republic of China. This concept mandates that a company shall not only comply with the laws and the obligations of business and social morality but shall also bear social responsibility as well.

Cheng Siwei, a UCLA alumnus, the Chairman of the organizing Committee for the conference, and the Vice Chairman of the Standing Committee of the 10th National People's Congress gave the welcoming address. While recognizing the current global economic crisis, which he defined as a crisis of confidence in Western governments and financial systems, he stated long term climate change is more important to the world than the current crisis. He closed his comments by saying we only have one earth and we need to protect it together.

While it is easy to be skeptical of statements made by representatives of “beautiful laws" passed by the Chinese government, my attendance at the conference convinced me that both the government of China and the major multinational corporations from China, influenced by the recent earthquake and its effect on Chinese society, are serious about implementing corporate social responsibility in China.

Unfortunately, the event was not as well attended as expected due to the current economic crisis. The chief executive officers of multinational corporations need to diligently attend to their corporate affairs and the heads of both the Chinese and Western governments were attending the G20 summit in Washington hastily convened by President Bush.

Notwithstanding the absence of a strong Western presence at the forum, it was worth attending and definitely confirmed my belief that the government of China, at all levels, realize that the future of sustainable development in China and the world requires recognition and implementation of responsible business behavior emphasizing people, the planet and profits.

Censoring Obama

“Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions.”

- Barack Obama,
Presidential Inauguration,
January 20, 2009

It seems that some Chinese state media got a little snip happy with President Obama’s speech. Not only was the “C” word above cut out, but so was another line: “To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist."

Cutting the reference to communism is understandable. After all, China is still arguably “communist,” but cutting the second line is troubling. Steven over at Lost Lao Wai Blog (http://www.lostlaowai.com/blog/2009/01/21/obama-speech-censored-in-china/) asked, does this mean that the authorities in Beijing think that they are “corrupt”, “deceitful”, of actively “silencing dissent?” Although Steven may be that cynical, I cannot join him on that proposition. Instead, I agree with his other proposition, that the removal of the select lines was knee-jerk paranoia.

By watching the video and the reaction of startled journalist and commentators, the decision to cut those lines was not a decision from “above” (a.k.a. the Government). Instead, the decision seemed to be an immediate reaction by whoever was in control of the video feed. That man or woman was not likely to be a governmental official. Instead, it was probably some media director/executive who did not want to get the state station in trouble for broadcasting rhetoric that was not agreeable to the Party: Better safe than sorry. Just this once, I believe the Chinese Foreign Ministry when they said that they did not have anything to do with the editing.

Furthermore, I doubt that there was reason to cut the lines. The editing of the speech illustrates the beliefs and self-awareness of Chinese executives’ more than it demonstrates American views of China. Just yesterday, the Chinese Ambassador to the United States, Zhou Wenzhong, congratulated Obama on his inauguration, and said in a speech at NYU, "It is the common aspiration of the Chinese and American peoples, and it serves our fundamental interests, to ensure healthy and steady development of the China-US relationship in the coming years and beyond.” Perhaps it’s a little naïve, but this time, I think that the American media is just having a field day over another Chinese censorship issue.

Plus, I don’t think the lines were meant to be insulting to China. Maybe I’m still in mindset of Obama Mania and he still can do no wrong in my eyes, but I don’t think Obama meant the line to be a cheap shot at China. US-China bilateral relations will be too important for his presidency to start it off on the wrong foot. Plus, he doesn’t seem to be one to proclaim fighting words meant to insult another nation.

Happy Chinese New Year!!

Happy Chinese New Year from USA China Law Blog!!

A New China? Ethnic Minorities, Immigrants, and Hapas

Sam Crane at The Useless Tree posted two very interesting articles on multiculturalism in China, available at http://uselesstree.typepad.com/useless_tree/2008/09/can-a-black-man-be-chinese.html and http://uselesstree.typepad.com/useless_tree/2008/09/can-a-black-woman-be-chinese.html. This newly vibrant topic is not limited to the blogging world. The Economist also pointed to the growing Brazilian population in Dongguan in its article “Brazilians in China” at http://www.economist.com/business/displaystory.cfm?story_id=12209081.

Crane highlights several different issues of multiculturalism: (1) The existing nationalities within China including the Han Chinese and the 56 officially recognized minorities. (2) People of mixed race who will likely appear in the future. These include the children of “mail order brides” from neighboring countries which has started to become popular to a growing, male-dominated population, as well as those children with a parent from the West or Africa and a parent from China. (3) The increased immigration of laborers, for example, the Brazilians discussed in the Economist article. In a culture which separates within its rhetoric the ‘people of the Middle Kingdom” (Chinese) and “outside people” (foreigners), the thought of acceptance might seem difficult. Crane asks the question, “How will China deal with the pressure to expand the racial and cultural definition of Chinese-ness?”

I am reminded of a book by Pearl S. Buck, Peony, wherein the famous writer tells the story of a Jewish merchant family who had made its way to China after the Diaspora. The novel tells the story of a young Chinese servant in the house, watching as the Jewish son assimilates with the Chinese population against the wishes of his mother, who is disparately attempting to keep the family separated from their Chinese neighbors. The son must make a choice. He chooses to be part of the only culture he knows while retaining parts of his mother’s culture. As time goes on, the son and his sons become more and more Chinese, mixing with the Chinese around them until they have almost forgotten their own history. Peony is based on the true story of Jewish merchants who entered China as early as the 8th century via the Silk Road.

Although well written, the articles at The Useless Tree make it sound as if multiculturalism in China is something of a novelty that should be expected to become common place in the future. Although the population of multicultural people might be growing or expected to grow at a faster rate than it has in the past, the Chinese have had immigrants come to their country for thousands of years. The interesting aspect of historical immigration to China is that it has usually ended with the foreigners’ assimilation into Chinese culture. This is what has happened in the past, and this is probably what is expected to happen in the future.

So, what is different now? Has technology changed the way that individuals identify themselves? Has a global society changed the way that individuals identify themselves? I would argue that nothing has changed in the department of immigration.

Although Crane says that China’s experience will be different from the experience of western colonial powers who have allowed the immigration of their colonized people, I would argue that China is not very different when it comes to immigrants because the immigrants are not very different. History will repeat itself. As time goes by and families stay in a country, they will become more and more “Chinese.” We could take America as an example. You could ask most people in New York City, “What are you” in reference to their ethnicity. You might get “Italian”, “Irish”, “Egyptian”, anything really. However, if you ask, “have you ever been there?” The person might get offended, but the truth is many have not been to the country from which they state they come. Or if they have traveled there, it is typically a quick visit where they had the experience a typical American tourist would appreciate. (I am not only generalizing, but I am speaking of people whose families have been in America for two or three generations.) Although they have held onto bits of the culture within the family, the truth is they have become American and do not really know anything else.

There are people who have moved to China with no plans to return, who have children who are born in China and plan to stay in China. Those children are Chinese. They will no doubt hold on to pieces of their parents’ culture, which will get handed down, but they are culturally Chinese. Even if one parent is American, European, African, or Middle-Eastern, their children will be Chinese if China is all they know as home.

What the government classifies as “Chinese” is always different than the cultural expectation. However, even if classified as a “minority” in China, strictly legally, that individual should not be treated any differently than a Han Chinese. The Constitution of the PRC guarantees equal rights to all ethnic groups in China. It also promotes the economic and cultural development of ethnic minority groups. It might even be a perk not to be labeled a Han Chinese because ethnic minorities are not subject to the One Child Policy.

The point is that China is no different than other countries in their experiences with immigrant populations. There are some immigrants that will come and go. There are some that will stay. Most of those that will stay will most likely assimilate. The level of the assimilation might make a difference to the government when it comes to how “Chinese” one must be before the One Child Policy is applied. However, that is a policy that the Chinese will no doubt come up with when it is time for it to be considered. Perhaps China will take its turn with the 1/16th rule.

Commercial Banks Got an OK for M&A Lending

China Banking Regulatory Commission (CBRC) issued Guidelines on Risk Management of Loans Extended by Commercial Banks for the Purpose of Acquisition (the “Guidelines”) on December, 9th, 2008. The Guidelines overturn a long-standing restriction on the granting of bank loans for equity investments in China. The initiative will expand the financing channels available to Chinese enterprises and is expected to boost both onshore and outbound mergers and acquisitions (M&A) activity.

“Chinese government has announced a series of macro-adjustment measures recently, promoting industrial upgrade and encouraging promising M&A transactions. More and more companies are involved in M&A activities recently with greater demand for M&A financing. Commercial banks also demonstrate their willingness to make M&A loans. In the meantime, Chinese government has promulgated more policies on boosting domestic demand, and extending stronger support to M&A transactions. It’s just the right time for CBRC to introduce such guidelines. The main idea of the guidelines is to require qualified commercial banks strike the balance between the market demand and their risk appetite. For commercial banks, M&A financing is not only a credit tool to support strategic M&A, but it should also be put under sound risk management framework.” China Banking Regulatory Commission, December 2008.

Under the Guidelines, a commercial bank is required to establish its loan management procedures and information system for the acquisition loan business based on the principle that such procedures and system for the acquisition loan business must be more stringent than other types of loan business.

CBRC stipulates that the following requirements must be met for banks to be qualified for M&A lending: good risk management and internal control mechanism; adequacy ratio of loan loss provision not less than 100%; capital adequacy ratio not less than 10%; and professional teams on M&A due diligence and credit risk assessment.

The Guidelines point out that commercial banks must require the borrower to provide adequate guarantees, including but not limited to asset-backed, equity pledge, and third-party guarantees and other forms of security in compliance with the law.

The Guidelines are expected to be a boost to the local M&A market and would help domestic companies undertake overseas M&A activities. Industry insiders explain that an M&A loan is similar to a bridge loan, which is used as a short-term transition loan. The issuing of an M&A loan is to promote “small risk to large”. The “snake eating the elephant” approach to M&A transactions contends that once it is backed by funds, is more likely to be successful. However, the actual implementation of the Guidelines remains to be seen.