China bank fraud shock - not

When I saw the headline that the Royal Bank of Scotland was investigating fraud at its China operations my initial thoughts are "what took so long".

All banks in China have to accept fraud as an occupational hazard. This is a problem that will not go away quickly.

If UK and US banks expect bank workers to have the same ethos and culture as their UK counterparts then they have a lot to learn.

Each bank should have a specialist fraud team working continuously. The costs will more than compensate. Banks also need to ensure that the anti-fraud team is changed every three years otherwise you can all guess what will happen.

Foreign banks cannot say they have not been warned.

RBS investigates ‘irregularities’ in its China unit [FT]

Royal Bank of Scotland is investigating suspected fraud in its China unit after recently discovering “potential irregularities” in its commercial banking business.

The bank on Wednesday said the probe related to a small number of accounts within the small and medium size banking business at ABN Amro China.

Local media reported last month that the alleged fraud may have resulted in client losses of up to Rmb20m ($3m).

ABN Amro China declined to comment on the scale of the potential losses. The bank has reported the matter to China’s banking regulator, which is also investigating.

People familiar with the matter said that the individual concerned had been suspended pending the outcome of the inquiry.

“Any dishonest behaviour by bank staff is completely unacceptable... and will be taken extremely seriously,” one person close to the bank said. “Safeguarding the interests of our clients is our top priority and, as an international bank, the controls we have in place are in line with the widely accepted industry standards.”

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Banks in China have suffered a number of fraud cases in recent years, leading to frustration among regulators.

The AFP news agency this month reported that Yan Qingmin, head of the Shanghai branch of the China Banking Regulatory Commission, had criticised foreign banks during a recent meeting for ignoring risk in their local operations and urged them to carry out better internal checks.

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"Open cities", pollution and FDI in China

Matthew Kahn and co-authors have published an interesting paper in Regional Science and Urban Economics. Matt Khan is a fellow blogger and does very good work on the urban-environment nexus (he is also the author of the excellent "Green Cities".

To cover FDI, pollution and house prices in one 10 page paper is impressive.

I am skeptical that migration patterns will be influenced by pollution at this stage of China's development. The paper does point out the impediment caused by the "Hukou" system. I think they underestimate the importance of hukou as a distortion on migration and the speed by which cities can develop.

The "housing bubble" during this period also distorts the market especially in Beijing.

Finally, this paper is related to the standard Kuznet's curve literature (as acknowledged in the paper). This literature suggests that China has yet to reach the turning point for many pollutants. The conclusions of this paper are optimistic although I am not sure I share this optimism. It is unlikely that any Chinese city in the next 10 years will move from a "producer" to a "consumer" city. The authors are right to state in the last line of the paper that any improvement will be part of a "long term trend".

Towards a system of open cities in China: Home prices, FDI flows and air quality in 35 major cities

Siqi Zheng, Matthew E. Kahn and Hongyu Liu

Abstract

Over the last 30 years, China's major cities have experienced significant income and population growth. Much of this growth has been fueled by urban production spurred by world demand. Using a unique cross-city panel data set, we test several hypotheses concerning the relationship between home prices, wages, foreign direct investment and ambient air pollution across major Chinese cities. Home prices are lower in cities with higher ambient pollution levels, and the marginal valuation for green amenities is rising over time. Cities featuring higher per-capita FDI flows have lower pollution levels. These findings may indicate that major Chinese cities are making the transition from “producer cities” to “consumer cities”, which raises the prospects of sustainable economic development in China.

Keywords: China; Urban growth; FDI; Air pollution; Quality of life

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Copenhagen: "Neither a lender nor a borrower be"

I have kept my Copenhagen coverage to a minimum given that I have covered these issues throughout the year.

However, it is interesting to note the recent spat between the US and China. First, or was it second, we have the US saying that they will not give money to China to combat climate change and then we have China saying that they do not want any money anyway or did they say they didn't want it first.

It could be argued that this is just both countries playing to their domestic audience as part of the negotiations but it marks a significant change in China's stance. China is still very poor in terms of GDP per head but it has grown up fast and is not prepared to flex its muscles on the international stage.

I am impressed by China's position. It shows China makes a major concession and yet appearing more powerful on the international stage. Top marks.

The arguments have been rehearsed in many other articles but the fact remains:

1. Developed nations caused the current high CO2 levels
2. Developing countries will suffer the most from climate change
3. Developing countries have the same right to grow and to develop as the West did
4. Developing country pollution levels are increasing rapidly (due to the scale effect).
5. A proportion of the pollution in developing countries is caused by Western multinational companies producing to export back to the West or domestic firms producing to satify the consumerism of the West.

Any solution will be very difficult to find. The environmental problems in China are severe. China is acting and acting quickly in terms of regulation and enforcement but a lot remains to be done.

The world needs an agreement but I have very low expectations.


China signals climate funds shift [FT]

China signalled on Sunday that it had abandoned its demand for funding from the developed world to combat climate change, the first apparent concession by one of the major players at the Copenhagen climate talks.

However, in the same interview with the Financial Times, the most senior Chinese negotiator accused rich countries of preparing to blame a failure at Copenhagen on Beijing.

As the talks entered their critical final week, He Yafei, Chinese vice-foreign minister, said financing from rich countries should be directed to poorer countries.

“Financial resources for the efforts of developing countries [to combat climate change are] a legal obligation,” he said. “That does not mean China will take a share – probably not.

“We do not expect money will flow from the US, UK [and others] to China.”

China has committed itself to cut emissions per unit of gross domestic product by 40-45 per cent by 2020 but had demanded financing from the developed world to take further steps to tackle climate change.

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Wolf on the China currency problem

The US and the EU continue to moan about the heavily managed exchange rate. So why is it such a problem?

Martin Wolf explains. He correctly points out that China resents the continuous Western pressure. However, the extent of the undervaluation is main clear - this cannot go on.

Is increased protectionism inevitable? I am not so sure. China still imports vast quantities and pays more for these goods as a result of a devalued currency. A managed ER is a subsidy to exporters that is true but I think outright protection is some way off.

Wolf does a good job of highlighting some of the problems that lay ahead. There is no simple solution.

Why China’s exchange rate policy concerns us [FT]

A country’s exchange rate cannot be a concern for it alone, since it must also affect its trading partners. But this is particularly true for big economies. So, whether China likes it or not, its heavily managed exchange rate regime is a legitimate concern of its trading partners. Its exports are now larger than those of any other country. The liberty of insignificance has vanished.

Naturally, the Chinese resent the pressure. At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”

We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.

Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.”* He is right.

What we are seeing, as Mr Carney points out, is a failure of adjustment to changes in global competitiveness that has unhappy precedents, notably during the 1920s and 1930s, with the rise of the US, and, again, during the 1960s and 1970s, with the rise of Europe and Japan. As he also notes, “China’s integration into the world economy alone represents a much bigger shock to the system than the emergence of the US at the turn of the last century. China’s share of global gross domestic product has increased faster and its economy is much more open.”

Moreover, today, China’s managed exchange rate regime is quite different from those of other big economies, which was not true of the US when it rose to prominence. Thus, China’s managed exchange rate is shifting adjustment pressure on to other countries. This was disruptive before the crisis, but is now worse than that in this post-crisis period: some advanced countries, notably Canada, Japan, and the eurozone, have already seen big appreciations of their currencies. They are not alone.

Unfortunately, as we have also long known, two classes of countries are immune to external pressure to change policies that affect global “imbalances”: one is the issuer of the world’s key currency; and the other consists of the surplus countries. Thus, the present stalemate might continue for some time. But the dangers this would create are also evident: if, for example, China’s current account surplus were to rise towards 10 per cent of GDP once again, the country’s surplus could be $800bn (€543bn, £491bn), in today’s dollars, by 2018. Who might absorb such sums? US households are broken on the wheel of debt, as are those of most of the other countries that ran large current account deficits. That is why governments are now borrowers of last resort.

Chinese exchange rates

For the external deficit countries, the concern is how to lower fiscal deficits without tipping their economies back into recession. That will be impossible unless they are either able to get their private sectors spending and borrowing as before, or they enjoy rapid expansion in net exports. Of the two, the latter is the safer route to health. But that in turn, will only happen if surplus countries expand demand faster than potential output. China is the most important single player in this game.

Fortunately, these adjustment are in the long-term interests of both sides, including China. As a recent report from the European Chamber points out, China’s external surpluses have been a by-product of misguided policy.** Thus, capital was priced too cheaply in the 2000s, via cheap credit and low taxes on corporate profits, while foreign exchange was deliberately kept too expensive by currency interventions. In the process, income was transferred from households to industry. The result was an extraordinary surge in exports and capital-intensive heavy industry, with little job creation. Household disposable incomes fell to an extremely low share of GDP, while corporate investment, savings and the current account surplus soared. The short-term response to the crisis, with soaring credit and fixed investment, while successful in sustaining demand, reinforced these tendencies, rather than offset them. Another round of huge increases in excess capacity and current account surpluses seems inevitable.

China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.

Neither answer is acceptable; we need co-operative adjustment. Without it, protectionism in deficit countries is inevitable. We are watching a slow-motion train wreck. We must stop it before it is too late.

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The "Chinaistation" of Africa

Whilst the word "Chinaisation" is objectional as a word in the English dictionary the topic of the Chinaisation of Africa is an interesting one and something I want to work on in the near future. The word "Chinisation" of Africa is even worse.

Which do people prefer?

The World Economy have an excellent special issue.

World Economy

TABLE OF CONTENTS
Volume 32 Issue 11 , Pages 1499 - 1655 (November 2009)

The Asian Drivers and Africa: Learning from Case Studies (p 1538-1542)
Andrea Goldstein, Nicolas Pinaud, Helmut Reisen, Dorothy McCormick
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01248.x

The Chinisation of Africa: The Case of Angola (p 1543-1562)
Renato Aguilar, Andrea Goldstein
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01249.x

The Developmental Impact of the Asian Drivers on Senegal (p 1563-1585)
Eric Hazard, Lotje De Vries, Mamadou Alimou Barry, Alexis Aka Anouan, Nicolas Pinaud
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01250.x

The Developmental Impact of Asian Drivers on Kenya with Emphasis on Textiles and Clothing Manufacturing (p 1586-1612)
Paul Kamau, Dorothy McCormick, Nicolas Pinaud
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01251.x

The Developmental Impact of Asian Drivers on Ethiopia with Emphasis on Small-scale Footwear Producers (p 1613-1637)
Tegegne Gebre-Egziabher
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01252.x

The Asian Drivers and SSA: Is There a Future for Export-oriented African Industrialisation? (p 1638-1655)
Raphael Kaplinsky, Mike Morris
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01253.x

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Chinadialogue does Copenhagen

Instead of endless Copenhagen coverage I point readers to Chinadialogue who are providing excellent coverage from a "China perspective".

CHINA AND THE WORLD DISCUSS THE ENVIRONMENT [ChinaDialogue]

Hello from Copenhagen, Beijing, London and San Francisco and welcome to The Daily Planet chinadialogue’s unique bilingual blog of the Copenhagen climate change summit. Over the next two weeks we will post blogs, video and links to the best articles on the talks in Chinese and English.

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Global warming and the Chinese grain harvest

On the eve of the Copenhagen conference on climate change it is timely to remember that the countries that will suffer the most from climate change and developing countries. Whilst China and India may protest, quite correctly, that they did not emit the greenhouse gases that are now causing the world's temperatures to increase, they will be the ones to suffer the most.

Regular readers of this blog will be aware of this difficult position that China is currently in. They need to make some very tough decisions and are the key player at Copenhagen in my view.

This is while China is making great strides despite taking over as the world's largest emitter of CO2.

China and India need a deal but they also need to be allowed to grow. There will be no agreement at Copenhagen and the poker game will continue.

Planet Ark have an interesting article on the impact of climate volatility on potential grain harvests in China.

Global Warming Threatens China Harvests: Forecaster [Planet Ark]

BEIJING - Droughts and floods stoked by global warming threaten to destabilize China's grain production, the nation's top meteorologist has warned, urging bigger grain reserves and strict protection of farmland and water supplies.

Extreme weather damage can now cause annual grain output in China, the world's biggest grain producer, to fluctuate by about 10 to 20 percent from longer-term averages.

But with global warming intensifying droughts, floods and pests, the band of fluctuation in annual production could widen to between 30 and 50 percent, Zheng Guoguang, head of the China Meteorological Administration, wrote in a new essay. He did not say how long it might be before that could happen.

A stretch of especially bad weather for farming conditions could be disastrous for the world's most populous nation, Zheng wrote in the latest issue of Seeking Truth (Qiushi), the ruling Communist Party's main magazine, which was published on Tuesday and reached subscribers on Wednesday.

"If extreme climatic disasters occur twice or more within five years -- for example, major drought over two or three years -- then the impact on our country's economic and social development would be incalculable," wrote Zheng, who plays a role in developing China's climate change policies.

Zheng's warning appeared days before governments gather in Copenhagen seeking to forge the framework of a new agreement on fighting global warming.

As the world's biggest greenhouse gas emitter, China will be a crucial player in those talks. Last week the government announced emissions goals for the next decade.

Zheng's blunt words underscored the hard choices facing Beijing, as both a big polluter and a vulnerable victim of global warming. He is a member of a "leading small group" charged with developing the government's policies on climate change.

FARMING POPULATION

A vast developing country with a farming population of some 750 million, China is also one of the nations most vulnerable to global warming, wrote Zheng. He urged greater attention to adapting to unstoppable shifts in temperatures, rainfall and extreme weather.

China should make a priority of "reducing the impact of global warming on the country's food security, and strengthening the capacity of agriculture to withstand climatic risks," wrote Zheng.

China's grain production has recently reached record levels, despite damage from droughts, floods and frost. In 2008, China enjoyed a fifth straight year of bumper harvests, with grain output at a record 525 million tonnes. U.S. output over the 2007-08 growing year was 412 million tonnes.

Citing previously published research, Zheng wrote that by 2030, China's crop productivity could be 5 to 10 percent lower than it would be without global warming.

While rising temperatures may extend potential growing times and areas for some crops, especially in northeast China, the accompanying rise in evaporation rates is likely to reduce water supplies, undercutting any increases in crop yields, wrote Zheng.

Without adequate adaptive measures, in the second half of the century wheat, rice and corn production could fall by as much as 37 percent of recent averages, he wrote, citing earlier research.

But China "cannot depend on the international marketplace" to make up for these potential shortfalls, because global warming would also erode farming productivity in many parts of the globe, Zheng wrote.

Instead, the government should focus on expanding domestic grain reserves, protecting farmland, developing water-saving technology for farms, and boosting farmers' productivity, he wrote.

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