Showing posts with label Politics. Show all posts
Showing posts with label Politics. Show all posts
Tuesday, 18 August 2015
Friday, 28 June 2013
China's banking mess: It's the politics, stupid
By Minxin Pei
FORTUNE -- The worst credit squeeze in China in recent memory seems to be over. After the People's Bank of China (PBOC), the country's central bank, issued a reassuring statement on June 25 that dispelled investors' worries about the lack of liquidity in China's interbank loan market, Chinese stock markets halted their plunge, and the rates of China's interbank loans fell from over 20% to around 6% (still two to three times greater than the average rate before the recent panic). China's Lehman moment, for now at least, appears to have been averted.
However, many questions remain, both about the causes of the recent turmoil in China's banking system and the implications for the Chinese economy.
As for what prompted the recent seizing-up of China's interbank loan market, there is no shortage of theories. The PBOC, widely perceived as having engineered an artificial credit squeeze to crack down on China's shadow banking sector, has come out with innocent but not very credible explanations. It blames the panic on a set of coincidental factors, such as the June deadline for banks to report their numbers (a requirement that forces many banks to reduce outstanding loans and embellish their risk profiles), tax due dates at the end of May and middle of June (tax payments suck cash out of the circulation), and increased demand for cash before a traditional Chinese holiday.
An alternative explanation, popular mainly among economists and investors, is that the PBOC was engaged in a high-stakes game with players in China's shadow banking system, all with the blessing of China's new political leadership. Because interbank loans constitute the bulk of funding for borrowers in the shadow banking system, making such loans less available sends a powerful message that the central government will no longer tolerate risky behavior and keep inflating China's credit bubble. Some analysts went so far as to suggest that this is the first shot fired by the Chinese government to signal the start of a deleveraging process.
MORE: Fed's Bernanke talk tab: $151 billion and counting
There is a third explanation, which is simpler and perhaps more reasonable. This incident is most likely a botched response by the Chinese monetary authorities to a problem that has been long in the making but exploded without warning and caught them completely by surprise.
The growth of China's shadow banking system (with estimated outstanding credits equaling roughly 10-15% of the balance sheet of the formal banking sector) has long been flagged as a source of risk in China's financial sector. Chinese policy-makers are fully aware of the risky activities within this sector but have opted to do nothing because the system serves several useful functions and has powerful interest groups. Local governments, real estate developers, and private entrepreneurs unable to obtain loans from the state-owned formal banking sector can tap this system for funding by paying a higher interest rate. State-owned banks and investment companies pocket lucrative transaction fees by peddling wealth management products (WMPs) issued by borrowers to depositors chasing high yields. When this game is going well, a lot of rich and powerful people make money while risk builds up in the financial sector.
As with similar instances of financial recklessness, confidence can evaporate quickly, setting off a panicked exit from the market. Even sophisticated and capable regulators are often ill-prepared for such unforeseen and highly disruptive events. If we analyze the recent gyrations in China's interbank loan market from this perspective, we may gain a better understanding of the causes behind the short-lived panic and avoid overreacting to or over-interpreting this event.
Granted, the opacity of the decision-making process, the lack of a free press, and the insensitivity of policy-makers to the need to communicate their intentions to market participants all contribute to the difficulty in making the right call on China. To avoid making mistakes in the future, analysts should do themselves a favor by focusing more on political factors than on economics. In the case of the recent upheaval in China's financial system, the idea that the squeeze was deliberately engineered by the PBOC to crack down on the shadow banking system makes little political sense. Only the Politburo Standing Committee, the ruling Communist Party's most powerful body, could have made such a decision. But the Politburo would not likely authorize such a move at this delicate moment.
The Communist Party is scheduled to hold its third central committee plenum in the fall, when its most important economic initiatives will be unveiled. It is inconceivable that the party's leadership would risk economic turmoil and disrupt its plans with a bold move on the shadow banking system before they head to the beach for the summer.
To implement any kind of meaningful reform to the shadow banking system, Chinese leadership will first have to reach a consensus at the top, overcome resistance from interest groups, and devise complex plans to address the consequences of reform. All this takes time and fierce bargaining. Based on the quick retreat sounded by the PBOC, it is quite obvious that the top leadership has no such plans in place for now.
MORE: Big Law has a shrinkage problem
However, this does not mean that Beijing can delay dealing with the massive risks in the banking system for very long. If anything, the recent bloodbath in the Chinese financial sector should prompt China's top leaders that they must have a more comprehensive plan for financial deleveraging when they meet in the fall. Otherwise, they are almost certain to face a bursting of China's credit bubble that will make last week's turmoil look insignificant.
Minxin Pei is the Tom and Margot Pritzker '72 Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States
Follow me on Twitter @sajilpl
FORTUNE -- The worst credit squeeze in China in recent memory seems to be over. After the People's Bank of China (PBOC), the country's central bank, issued a reassuring statement on June 25 that dispelled investors' worries about the lack of liquidity in China's interbank loan market, Chinese stock markets halted their plunge, and the rates of China's interbank loans fell from over 20% to around 6% (still two to three times greater than the average rate before the recent panic). China's Lehman moment, for now at least, appears to have been averted.
However, many questions remain, both about the causes of the recent turmoil in China's banking system and the implications for the Chinese economy.
As for what prompted the recent seizing-up of China's interbank loan market, there is no shortage of theories. The PBOC, widely perceived as having engineered an artificial credit squeeze to crack down on China's shadow banking sector, has come out with innocent but not very credible explanations. It blames the panic on a set of coincidental factors, such as the June deadline for banks to report their numbers (a requirement that forces many banks to reduce outstanding loans and embellish their risk profiles), tax due dates at the end of May and middle of June (tax payments suck cash out of the circulation), and increased demand for cash before a traditional Chinese holiday.
An alternative explanation, popular mainly among economists and investors, is that the PBOC was engaged in a high-stakes game with players in China's shadow banking system, all with the blessing of China's new political leadership. Because interbank loans constitute the bulk of funding for borrowers in the shadow banking system, making such loans less available sends a powerful message that the central government will no longer tolerate risky behavior and keep inflating China's credit bubble. Some analysts went so far as to suggest that this is the first shot fired by the Chinese government to signal the start of a deleveraging process.
MORE: Fed's Bernanke talk tab: $151 billion and counting
There is a third explanation, which is simpler and perhaps more reasonable. This incident is most likely a botched response by the Chinese monetary authorities to a problem that has been long in the making but exploded without warning and caught them completely by surprise.
The growth of China's shadow banking system (with estimated outstanding credits equaling roughly 10-15% of the balance sheet of the formal banking sector) has long been flagged as a source of risk in China's financial sector. Chinese policy-makers are fully aware of the risky activities within this sector but have opted to do nothing because the system serves several useful functions and has powerful interest groups. Local governments, real estate developers, and private entrepreneurs unable to obtain loans from the state-owned formal banking sector can tap this system for funding by paying a higher interest rate. State-owned banks and investment companies pocket lucrative transaction fees by peddling wealth management products (WMPs) issued by borrowers to depositors chasing high yields. When this game is going well, a lot of rich and powerful people make money while risk builds up in the financial sector.
As with similar instances of financial recklessness, confidence can evaporate quickly, setting off a panicked exit from the market. Even sophisticated and capable regulators are often ill-prepared for such unforeseen and highly disruptive events. If we analyze the recent gyrations in China's interbank loan market from this perspective, we may gain a better understanding of the causes behind the short-lived panic and avoid overreacting to or over-interpreting this event.
Granted, the opacity of the decision-making process, the lack of a free press, and the insensitivity of policy-makers to the need to communicate their intentions to market participants all contribute to the difficulty in making the right call on China. To avoid making mistakes in the future, analysts should do themselves a favor by focusing more on political factors than on economics. In the case of the recent upheaval in China's financial system, the idea that the squeeze was deliberately engineered by the PBOC to crack down on the shadow banking system makes little political sense. Only the Politburo Standing Committee, the ruling Communist Party's most powerful body, could have made such a decision. But the Politburo would not likely authorize such a move at this delicate moment.
The Communist Party is scheduled to hold its third central committee plenum in the fall, when its most important economic initiatives will be unveiled. It is inconceivable that the party's leadership would risk economic turmoil and disrupt its plans with a bold move on the shadow banking system before they head to the beach for the summer.
To implement any kind of meaningful reform to the shadow banking system, Chinese leadership will first have to reach a consensus at the top, overcome resistance from interest groups, and devise complex plans to address the consequences of reform. All this takes time and fierce bargaining. Based on the quick retreat sounded by the PBOC, it is quite obvious that the top leadership has no such plans in place for now.
MORE: Big Law has a shrinkage problem
However, this does not mean that Beijing can delay dealing with the massive risks in the banking system for very long. If anything, the recent bloodbath in the Chinese financial sector should prompt China's top leaders that they must have a more comprehensive plan for financial deleveraging when they meet in the fall. Otherwise, they are almost certain to face a bursting of China's credit bubble that will make last week's turmoil look insignificant.
Minxin Pei is the Tom and Margot Pritzker '72 Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States
Follow me on Twitter @sajilpl
Wednesday, 26 June 2013
Australian Politics Are A Full-Contact Sport
Kevin Rudd, the incoming prime minster, and Julia Gillard, the outgoing prime minister, in happier times.
While Americans often lament the state of politics in Washington, spare a thought for Australians, who will wake up Thursday morning under a different prime minister than the one they went to bed with.
Just as Australians were preparing for national elections in September, former Prime Minister Kevin Rudd took back the reins of power from Julia Gillard, the woman who had deposed him three years before.
Gillard became Australia's first female prime minister by challenging Rudd for the leadership of the ruling Labor Party, as Rudd was floundering in the polls. It was the first time a sitting first-term prime minister had been deposed in Australia.
"Knifed in the back" was how some commentators described it.
Such is the system in Australia, where people don't vote directly for the prime minister but for local members of Parliament; the majority party elects its leader and thus the prime minister.
The U.S. Electoral College has its critics, but at least it provides a certain amount of stability. Love him or hate him, Americans know that, barring any high crimes and misdemeanors, a sitting president will be around until the next election.
In Australia, things can be a bit more abrupt and dramatic.
Rudd might have been down, but he never went out. In a script Machiavelli couldn't have written better, Rudd remained in Parliament, gaining sympathy from the public over his surprise ouster and biding his time until he could once again take the reins of power.
His detractors in Parliament blamed him for leaks that undermined Gillard's government, and the ever-present specter of Rudd's possible return to power was blamed for Gillard's slow decline in popularity.
With an election just two months away and polls showing Labor set for a historic defeat, Rudd's opportunity for a return was at hand. Those same polls showed that if he was in charge, Labor would at least have a fighting chance at the election.
And so, to paraphrase Yogi Berra, "it was déjà vu all over again." Rudd moved against Gillard in a late-night leadership challenge, and Gillard went out the same way she came in. Having broken through the glass ceiling for women in Australia, Gillard says she's now quitting the political arena.
Australian politics have often been described as a full-contact sport. There is little sense of the decorum and respect usually seen in the U.S. House or Senate.
While two members of Congress may wildly disagree on an issue, on the floor it's always "the gentleman from Ohio" or the "gentlewoman from California." When Rep. Joe Wilson called President Obama a liar during a 2009 speech to Congress, the rebuke by the House of Representatives was swift.
But on the floor of Australia's Parliament it's not unusual for the party leaders to call each other "liars," "brain-damaged," "gutless," "vermin" ... and worse.
During a fiery debate last October, Gillard labeled the leader of the opposition a misogynist.
The state of Australian politics even led one of the country's most famous exports, actor Russell Crowe, to speak out. During a recent interview with the Australian Broadcasting Corporation, Crowe complained:
While Americans often lament the state of politics in Washington, spare a thought for Australians, who will wake up Thursday morning under a different prime minister than the one they went to bed with.
Just as Australians were preparing for national elections in September, former Prime Minister Kevin Rudd took back the reins of power from Julia Gillard, the woman who had deposed him three years before.
Gillard became Australia's first female prime minister by challenging Rudd for the leadership of the ruling Labor Party, as Rudd was floundering in the polls. It was the first time a sitting first-term prime minister had been deposed in Australia.
"Knifed in the back" was how some commentators described it.
Such is the system in Australia, where people don't vote directly for the prime minister but for local members of Parliament; the majority party elects its leader and thus the prime minister.
The U.S. Electoral College has its critics, but at least it provides a certain amount of stability. Love him or hate him, Americans know that, barring any high crimes and misdemeanors, a sitting president will be around until the next election.
In Australia, things can be a bit more abrupt and dramatic.
Rudd might have been down, but he never went out. In a script Machiavelli couldn't have written better, Rudd remained in Parliament, gaining sympathy from the public over his surprise ouster and biding his time until he could once again take the reins of power.
His detractors in Parliament blamed him for leaks that undermined Gillard's government, and the ever-present specter of Rudd's possible return to power was blamed for Gillard's slow decline in popularity.
With an election just two months away and polls showing Labor set for a historic defeat, Rudd's opportunity for a return was at hand. Those same polls showed that if he was in charge, Labor would at least have a fighting chance at the election.
And so, to paraphrase Yogi Berra, "it was déjà vu all over again." Rudd moved against Gillard in a late-night leadership challenge, and Gillard went out the same way she came in. Having broken through the glass ceiling for women in Australia, Gillard says she's now quitting the political arena.
Australian politics have often been described as a full-contact sport. There is little sense of the decorum and respect usually seen in the U.S. House or Senate.
While two members of Congress may wildly disagree on an issue, on the floor it's always "the gentleman from Ohio" or the "gentlewoman from California." When Rep. Joe Wilson called President Obama a liar during a 2009 speech to Congress, the rebuke by the House of Representatives was swift.
But on the floor of Australia's Parliament it's not unusual for the party leaders to call each other "liars," "brain-damaged," "gutless," "vermin" ... and worse.
During a fiery debate last October, Gillard labeled the leader of the opposition a misogynist.
The state of Australian politics even led one of the country's most famous exports, actor Russell Crowe, to speak out. During a recent interview with the Australian Broadcasting Corporation, Crowe complained:
"It's just a lack of gallantry that has crept into not just politics but the way politics is reported, and I think it gives license to a type of hater that will only further reduce the quality of our lives, you know? The better politicians we have in place, the better our society is going to be, the better all of our lives are."It's a view Rudd appeared to accept in his speech announcing his return to power:
"In recent years, politics has failed the Australian people. There has just been too much negativity all around. There has been an erosion of trust — negative, destructive personal politics has done much to bring dishonor to our Parliament but done nothing to address the urgent challenges facing our nation, our community, our families."Rudd has called for the negative politics to stop. But that comes from a master politician who is accused by Gillard's supporters of being pretty negative himself.
Monday, 24 June 2013
Silvio Berlusconi Sentenced to 7 Years in Jail, Lifetime Politics Ban
ROME -- Three-time Italian prime minister Silvio Berlusconi has been sentenced to seven years in jail with a lifetime ban from politics for having paid for sex with an underage woman and abusing his power in trying to cover it up.
The billionaire media tycoon is sure to appeal the verdict. But the case is significant as the harshest verdict yet for the 76-year-old, who has been hounded by legal woes since he first entered politics nearly 20 years ago.
The conviction is Berlusconi's third in nine months.
STORY: Berlusconi 'Humane' to Have Helped Erotic Dancer, Lawyers Say
Last October, Berlusconi was sentenced to four years behind bars on charges of tax evasion in connection with the Mediaset television and cinema giant he controls. And in December another judge sentenced him to a year in jail in a wiretap case connected to the Milan daily Il Giornale, which is run by his younger brother, Paolo Berlusconi. Both cases are already under appeal.
In this case, Berlusconi was charged with paying an underage girl, erotic dancer Karima el-Mahroug -- best known by her stage name "Ruby the Heartstealer" -- for sex and then lying to police to get her let off on minor shoplifting charges. Though the underage sex charges have attracted the most attention, the abuse of power allegations were the most serious.
Prosecutors claim they could prove Berlusconi paid el-Mahroug at least €2,000 ($2,560) each time the two met and that he also gave her a cash gift of up to €5 million ($6.4 million).
STORY: Prosecutors Request Six Years in Jail, Ban From Politics in Silvio Berlusconi Sex Trial
Surprisingly, el-Mahroug was never called on to testify in the trial, though both she and Berlusconi denied having had sexual relations and that Berlusconi made a large cash gift. At one point, Berlusconi attorney Niccolo Ghedini argued that the smaller gifts to el-Mahroug showed Berlusconi was "humane" toward a young girl with financial difficulties.
Berlusconi's lawyers also dismissed the abuse of power accusations -- Berlusconi was reported to have claimed that the Morocco-born el-Mahroug was the niece of then-Egyptian leader Hosni Mubarak -- by saying he thought the claims he made at the time were true.
El-Mahroug, along with former newsman Emilio Fede, ex-talent agent Lele Mora and Nicole Minetti a former centerfold girl and parliamentarian.
The Italian press reported the news aggressively, breaking into scheduled television programs and running banner headlines on news sites. Reaction ran along political lines, with Il Giornale calling it a "Shameful Sentence," but the left-leaning La Repubblica declaring, "Justice, Finally."
Despite the ongoing legal woes, Berlusconi has been splitting time between his defense, his role as a key supporter of the new Italian government of Enrico Letta (Letta is himself the nephew of key Berlusconi lieutenant Gianni Letta), and his stewardship of Mediaset. Berlusconi has left the day-to-day operations of Mediaset in the hands of his 44-year-old son, Pier Silvio Berlusconi, and the company has thrived with that setup. Shares closed Monday, before the verdict, at €2.43 ($3.13), down slightly on the day but more than double their all-time low of €1.16 ($1.50) from December.
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