There were two interesting and related articles Wednesday, both suggesting that the CBRC continues to be worried about the lending boom and is making what attempt it can to slow the growth of future problems. The first article, from Bloomberg, was about the CBRC’s plan to tighten rules for personal loans:
China’s banking regulator said it plans to tighten rules on personal loans, seeking to prevent the misuse of funds and curb “irregularities,” especially in lending for auto and real-estate purchases. The regulations, now being circulated in draft form, are aimed at ensuring loans enter the real economy rather than for speculative purposes, according to a China Banking Regulatory Commission statement posted on its Web site today.
This story has already drawn so much cynical comment from Chinese and foreign observers that I won’t say much more about it. The second article has Liu Mingkang, head of the China Banking Regulatory Commission, worrying about “blind” expansion among the smaller city banks. In my last entry I discussed the fact that the bulk of new lending seems to be occurring at the level of city banks and cooperatives, perhaps because they are more easily controlled by cash-strapped local governments, and this may have the result of increasing distress among these banks in the event of an economic downturn.
Perhaps policymakers agree. According to Xinhua:
Chinese city commercial banks should avoid aiming to expand in terms of size and speed, and ranking among peers, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in a statement posted on the commission’s website Wednesday. The foundation of the country’s economic recovery was not yet solid, and city banks should pursue prudent growth and pay more attention to and prepare for economic changes, he said.
China’s 136 city commercial banks achieved an average capital adequacy ratio of 13 percent by the end of 2008. Non-performing loans ratios stood at 2.3 percent and the provision coverage ratio was 114 percent. By the end of June, total assets of city commercial lenders hit5 trillion yuan (732 billion U.S. dollars), up 37.9 percent from a year ago.
Neither of these concerns is especially new, but I have to add that it is becoming harder to go more than a day or two without seeing yet another announcement by the authorities warning about the consequences of the mad dash in credit expansion. I am not an insider, of course, but it seems to me that we have been getting a rising crescendo of rumors about conflicts and disagreements within policy-making circles about the ultimate consequences of the fiscal and credit stimulus, and it is pretty clear that a lot of people in senior positions are very worried.
Part of the worry, of course, is about rising protectionism. Today Vice Premier Wang Qishan, who by the way has not turned out to be nearly as visibly active in economic affairs over the past two years as I expected, met in Hangzhou with U.S. Trade Representative Ron Kirk, Commerce Secretary Gary Locke, and Secretary of Agriculture Tom Vilsack. According to an article in Bloomberg:
The governments of China and the U.S. must “stand firmly together against trade protectionism,” Chinese Vice Premier Wang Qishan said today at a meeting with U.S. officials in eastern China’s Hangzhou city. His comment underscores an effort to resolve disputes between the two economies, which have $409 billion of trade between them.
Ron Kirk’s more neutral response was that trade frictions are a “normal part of a growing, mature relationship” that should not derail broader bilateral ties. I don’t want to read too much meaning into these comments, but they do seem to symbolize the growing distance between the perceived interests of the two countries.
Matters weren’t helped by reports of a largely symbolic upcoming launch, by China, of an investigation into whether US carmakers are being unfairly subsidized by the government. I say this is largely symbolic because I think most US cars sold in China are made here in China. The Financial Times article on the subject referred to the investigation as Beijing’s “turning the tables” on Washington. It may well be, but I would imagine that if each country started investigating export subsidies in the other country China would have a hard time winning the argument, and as the trade surplus country most reliant on export markets to absorb its exess capacity, it would be the more vulnerable to trade disputes. This is not a good argument in which to engage.
Meanwhile, and perhaps as a reaction to the sense that too much of the burden of growth is being borne by the government, directly or though the banks, it seems that policymakers want to diversify the funding source. Wednesday’s People’s Daily has this to say:
China will take more measures to encourage private investment in the next stage of its 4-trillion-yuan ($585 billion) stimulus package, an official with the National Development and Reform Commission (NDRC) said Tuesday. The NDRC, the country’s top economic planner, will allocate 3 billion yuan of government investment for small and medium-sized enterprises (SMEs) to promote their innovation capability, energy saving and emission reduction, and production condition improvement, said the official.
The government will roll out policies to shore up private investment in expanding market threshold and improving administrative service, according to the official. The official added that the stimulus investment will support more livelihood projects, and promote innovation and environment protection though he did not elaborate on any specific investment plans. The NDRC will also strengthen supervision over investment programs to avoid fund abuse and overcapacity, according to the official.
If they are able to decentralize investment decision-making I think that will mostly be positive, since the more we push decision-making down into the hands of people closer to the ground the more informed and intelligent the decisions are likely to be. I am not convinced however that this is going to happen very quickly. Previous attempts to diversify decision-making – for example the much-vaunted governance reform of the banks – ended up creating more heat than light. It is not easy to give up control.
There was another interesting bit in Xinhua Wednesday, this time about industrial profits.
Industrial enterprises in China’s 22 regions reported a combined profit of 1.55 trillion yuan (227.5 billion U.S. dollars) in first nine months, down 9.1 percent year on year, the National Bureau of Statistics (NBS) said Wednesday. NBS statistics showed the decline was 4 percentage points less than that of January-August period.
Altogether 35 of the 39 major industrial sectors realized profit growth or smaller profit declines compared with the first eight months, said the NBS. Core business revenues of those companies reached 28.8 trillion yuan in the first nine months, up 3.4 percent from a year earlier. The growth rate was 1.5 percentage points higher than that of the first eight months. The accounts receivable of enterprises in the 22 regions stood at about 3.56 trillion yuan at the end of September, up 10.6 percent year on year.
A number of my economist friends are very puzzled that furious economic growth seems to come hand-in-hand with declining profitability. I am not sure I fully understand why this might be happening, but I will add that to me profitability is not a very useful measure of economic value-added in China since, as I see it, there are huge subsidies provided to manufacturers in China in the form especially of low interest rates – as well, of course, as other things such has controlled prices for land, energy and other commodities. In that case changes in profitability are at least as likely to reflect changes in the nature of the subsidies as they are to reflect changes in underlying economic conditions.
To return to a subject carried in my last two posts, the People’s Daily also had an interesting comment (titled “Metal stockpile sell-off unlikely”) on commodity stockpiling, probably in response to the increasing discussions on that topic.
Chinese investors holding metal inventories are unlikely to sell them quickly because of adequate levels of cash on hand, a senior executive at Sucden Financial Ltd said yesterday. The downside risk to metals prices is limited due to high liquidity, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, said in an interview at a Hong Kong conference. Copper prices may rise to record levels sometime next year, said Goldwyn.
Inventories of copper at warehouses monitored by the Shanghai Futures Exchange are more than five times the level at the beginning of the year after 4 trillion yuan in stimulus spending and State stockpiling boosted imports to a record. Prices in London have more than doubled this year on record Chinese imports. “The view is that China has seen high imports and that these inventory levels were maybe getting excessive and maybe forming a downward pressure on imports and demand,” Martin Squires, executive director at JPMorgan Securities Ltd in London, said.
Consumer stockpiles of copper, excluding government inventories, could be as much as 600,000 to 700,000 metric tons, said Squires. Inventories of copper at Shanghai warehouses stood at 95,976 tons last week, up from 17,822 tons at the start of the year. China’s copper imports more than doubled in the first nine months to 2.6 million metric tons, according to customs data.
Private Chinese investors may have stockpiled more than 50,000 tons of copper and as much as 20,000 tons of nickel, Goldwyn said on Sept 17. Chinese smelters may have between 200,000 and 300,000 tons of lead stockpiled, he said then. Gauging metals demand in China is notoriously difficult amid increased speculation by retail investors. A possible overhang in supply amid high imports and production threatens to damp demand, Chen Hongzhou, vice-manager of the marketing department at Chinalco Luoyang Copper Co, said.
Finally, and this is on a completely different subject, although one that interests me a great deal and might interest readers looking for some color on China, People’s Daily Tuesday hailed the creation of “China’s Ivy League”.
China‘s Ministry of Education voiced on Monday its support for the formation of C9, an academic conference comprising nine domestic prestigious universities and referred to as China’s Ivy League by some experts.
Xu Mei, the ministry’s spokeswoman, said the establishment of the conference is a “helpful attempt that is conducive to the country’s construction of high-quality colleges, cultivation of top-notch innovative talents and enhanced cooperation and exchanges between Chinese universities and their foreign counterparts.”
On October 12, nine institutions of higher learning including the elite Peking University and Tsinghua Univerisity signed cooperative agreements that featured flexible student exchange programs, deepened cooperation on the training of postgraduates, and establishment of a credit system that allows students to win credits through attending classes in member universities of C9.
Other universities are Zhejiang University, Harbin Institute of Technology, Fudan University, Shanghai Jiao Tong University, Nanjing University, University of Science and Technology of China, and Xi’an Jiaotong University.
For those not familiar with the hierarchy within Chinese university system, there are two schools that are considered without reservation to be at the pinnacle of China’s universities, Peking University (known popularly as Beida) and Tsinghua University. Both are in Beijing’s northwestern Haidian district (also known as the university district since most of Beijing’s most famous schools are located here) and in fact across the street from each other. I was lucky enough to teach at both, my first four years at Tsinghua and now, for four years and counting, at Beida, and I have to say that they probably have on average the smartest student bodies in the world.
To get an idea of their dominance, every year the national exams produce two “provincial champions” for each of mainland China’s 31 provinces, municipalities (the four that have provincial status), and autonomous regions – one for each of the two high-school study tracks, hard sciences and humanities. Of these, on occasion you might get one of the “provincial champions” choosing to go to a school other than Beida or Tsinghua, but most years every single one will choose to attend either of the two premier universities. Beida tends to get more overall, and Tsinghua tends to get more of the hard science champions, although in recent years the discreet competition between the two has suddenly burst out into the open and the gloves taken off. They have been much more aggressive about offering scholarship money to the top candidates in an effort to affect their choice (by the way, you cannot apply to more than one school).
Below these two there are a number of highly selective universities that compete for the rest of the students. I was pretty aware that all the named schools except the last two were part of China’s “Ivy league”, but of course there are other highly selective schools that might have had Ivy pretensions. In particular I was under the assumption that Sun Yat Sen University, the Foreign Service University in Beijing (although perhaps too specialized), and Nankai University in Tianjing might have qualified as being among the most selective, along with one or two others, like Wuhan and Jilin and maybe even People’s University in Beijing (popularly known as Renda). For those interested, CASS ranks the top schools, although I am not sure about the criteria.
Beida versus Tsinghua
Because I spent so many years in both I am often asked about the differences between the top two schools, and I have to say that to me the differences are not nearly as great as are popularly supposed. They both draw from nearly the same pool of students but there have been and still are some small cultural differences that seem to be wearing away over time. Tsinghua has historically been heavily male while Beida historically had a slightly larger percentage of females, probably reflecting the fact that Tsinghua was for a long time primarily an engineering school (MIT is often invoked as a model) whereas Beida specialized in arts and pure sciences. Both are moving towards a more balanced student body and academic orientation although Beida is where you still are more likely to find a philosopher or a physicist and Tsinghua an engineer.
I am very involved in helping my students get jobs in the financial services industry and so I know that Beida is by far the favorite school among global investment banks – probably placing more students in these highly-desired jobs than the next two schools combined (Tsinghua and Fudan). Finance is the top major at each school, or one of the top two, meaning that it has the highest minimum required admission score for students who have taken the all-important gaokou, the university entrance exam that most high-school seniors take. To give an example of how popular it is, last year 24 “provincial champions” chose to enter the Guanghua School of Management at Beida, the most prestigious of the three faculties in Beida that offer economics/finance majors. I suspect that the School of Economics and Management at Tsinghua has a similar number, implying that around two-thirds of China’s stop students want to be bankers.
I like to think that Beida’s success in placing students in these jobs is because of my influence, but I suspect that it is more because Beida is in the front line in China in liberalizing and reforming education. Beida students are far more likely, for example, to be required and able to take courses outside their major than students from other schools, including Tsinghua, and tend to have much more varied resumes. You are more likely to meet a Beida finance major chattering excitedly about his philosophy or literature class than one from Tsinghua. They also tend to be more encouraged to have outside activities and internships. Given the extremely narrow specialization and heavy course burden of Chinese universities I think this is unquestionably a good thing, and creates more well-rounded students with greater leadership potential.
Beida is famous in modern Chinese history as being the cradle of Chinese cultural and political change. In my first year there I asked one of my students, a sophomore from Shandong province, why he had decided to come to Beida rather than Tsinghua. He smiled shyly but also a little proudly and said: “Because Beida is the edge of history.” What a great answer!
But even there I suspect that the differences between the two schools are more apparent than real. In my experience Tsinghua students are as likely to be politically active (and even fairly radical) as Beida students, and I have political discussions at equally high levels of sophistication at both schools, although perhaps my sample is heavily distorted because at both schools I dealt mostly with economy and finance majors. Tsinghua’s engineers on average may be less politically sophisticated than Beida’s philosophy or government majors.
There is by the way, and perfectly in line with conventional views about philosophers and engineers, a wide-spread perception that Beida-educated leaders are more imaginative and Tsinghua-educated leaders more effective. A Tsingua professor even told me two years ago that given the risky changes China is undergoing, the Standing Committee needs more Beida graduates and fewer Tsinghua graduates.
Most of these kids at these two schools, however, are amazingly bright and hard-working, a description I would extend to the students of any of China’s top universities. With such a huge population all so eager to get into the top schools (and China is so hierarchical that everyone pretty much ranks the schools in exactly the same way – although recently there has been a rankings scandal), you can be sure that students at any of the listed schools are pretty impressive.
This is part of the reason I have stayed so long in China – for me there are few things as much fun as teaching very bright kids. Unfortunately I think the quality of education is pretty low, and especially inappropriate for the brightest students. Such bright kids need less rote work and memorization and more opportunities to think outside the box – a practice frowned upon within the educational system. In that sense I think Beida is a real leader, moving Chinese elite education in a much better direction overall.