Banks bust open
Lan Xinzhen

Officially, December 11 marked a turning point for the Chinese financial sector. Under China’s commitments to the World Trade Organization (WTO), beginning December 11, foreign banks must be fully allowed to participate in the Chinese market. Practically speaking, that means they can enter the renminbi retail business.
Banking, insurance and securities are the three pillar sectors of China’s financial industry. The insurance sector was fully opened to foreign companies two years ago and the securities industry has also shown signs of international market life.
But banking was the sector that everyone’s eyes were watching on December 11.
“The opening of the banking industry internationalizes the competition in the Chinese financial market,” said Liu Fuxiang, professor with the University of International Business and Economics.
Ahead of schedule
Judging by the current situation, China has not only fulfilled its WTO commitments, but is going far beyond its commitments.
As a matter of fact, China completely opened its foreign currency business in 2001. In December 2003, foreign banks were able to conduct renminbi business for Chinese enterprises. Thirteen cities allowed foreign banks to operate renminbi businesses.
But all along, China had been pushing the envelope to open up the financial sector in other ways as well, Liu said. For instance, a single foreign company can take as much as 20 percent of the stock of a Chinese bank, an increase from the committed 15 percent. As of December 2005, renminbi business in 25 cities was opened to foreign banks, with seven cities ahead of schedule. Meanwhile, 25 foreign banks have acquired stock in 20 Chinese banks.
In the insurance sector, the foreign stock holding should not be above 50 percent in life insurance companies. Apart from that, the insurance sector has been opened to the outside world on a general basis.
In the Chinese securities sector, perhaps the biggest indicator of market progress is QFII (Qualified Foreign Institutional Investor), which provides foreign capital an opportunity to participate directly in the Chinese domestic stock market. By October 27, 51 foreign institutional investors became QFIIs, with investment quota of $12.6 billion.
Zhou Zhengqing, Vice Director of the Finance and Economic Committee of the National People’s Congress, once a participant in WTO negotiations, noted that China has vigorously opened its service trade and has fully fulfilled its WTO commitments in many important service sectors, including finance.
More competition
Liu stated that there are two highlights of the foreseeable competition among financial institutions.
The first is that the financing ability of small and medium-sized enterprises (SMEs) will be improved.
Liu noted that there is currently over 9 trillion yuan of superfluous liquidity in the Chinese banking system. If the more than $1 trillion in foreign exchange reserves are added to the mix, the total idle capital accounts for about 46 percent of the total financial assets.
“The waste of financial resources is huge,” noted Liu.
Ironically, many SMEs cannot get sufficient support from banks. The reason for this often cited by banks is that they fear that they cannot get their loans back if SMEs fail. But as Liu contended, the true reason is that the operational mechanism of domestic banks is immature. Several years ago, they were all state owned.
“As for SMEs, foreign banks’ involvement in renminbi business provides them another way to raise money,” said Liu.
The other highlight is that Chinese people will have more investment opportunities. Many financial services, including housing mortgage loans, medical insurance, car loans and educational loans, are not well developed. People tend to determine how much to spend in the future based on their current income.
Now, faced with foreign investment ideology, more and more Chinese will turn into investors rather than mere depositors.
Su Ning, Vice Governor of the People’s Bank of China, believes the opening of the financial market will push financial institutions to create new services for consumers.
After China’s accession to the WTO in 2001, China’s financial industry was forced to innovate to provide new financial products like credit cards and housing loans.
“The opening up of the financial industry brings us advanced financial technology, financial service and financial product designs,” Su said.
“In addition to the opportunities and benefits, foreign financial institutions have also brought about a negative impact, which cannot be neglected,” said Xu Hongcai, professor with the Capital University of Economics and Business.
Xu contended foreign financial institutions could drain the talent of domestic institutions.
According to Xinhua News Agency, Peter Wong, Executive Director of HSBC, said HSBC planned to add 2,000 more employees on the Chinese mainland. By the end of 2007, the number of HSBC employees on the Chinese mainland will surpass 4,000. Meanwhile, Standard Chartered, Heng Seng Bank and Bank of East Asia are also rapidly expanding and recruiting more people.
“Foreign financial institutions must localize, and so must their employees. As a result, more talented financial personnel will be lost to foreign institutions,” said Xu. “The real challenge will be in the few years ahead.”
Wang Zhao, a researcher with the Development Research Center of the State Council, noted that the entry of foreign financial institutions imposes difficulties on managing financial institutions. “First of all, it will be hard to coordinate monetary policy,” said Wang.
Further, he said, in 1997 China successfully overcame the Asian financial crisis because its financial market was not fully opened to the world. Under the current situation, any tiny fluctuation in the world financial market will affect the Chinese market.
Future development
From now on, the Chinese financial system will undergo significant change, said Xu Mingqi, an economic researcher with the Shanghai Academy of Social Sciences.
Xu believes that the competition among financial institutions will change the operational model of Chinese banks.
Xu noted that in the short term, despite the fact that the market share of foreign financial institutions is incomparable to that of Chinese financial institutions, fierce competition would still arise.
“One element should not be neglected: Foreign financial institutions’ advantage in terms of mixed operation will win them a competitive edge in the Chinese financial service competition,” said Xu.
His view is echoed by Huang Yanfen, a business professor with the Guanghua School of Management of Peking University. Huang pointed out that mixed operation is the focus of competition in the future Chinese financial sector.
Huang noted that for a long period of time, the Chinese financial industry has been operated separately, which means that banking, securities and insurance operate on their own. Although this separated pattern is helpful to control financial risks, mixed operation should be adopted by the Chinese financial industry, which will ease its disadvantages in an open market competition. Therefore, breaking down the current separated operation pattern is the key to China’s financial restructuring.
“Mixed operation is a trend for the financial industry,” said Huang.
Huang believes that competition makes the domestic financial market more globalized.
The lifting of restrictions in the Chinese financial market is helpful for foreign companies’ entry into China’s market, and at the same time cultivates domestic financial institutions to become stronger in an environment full of international competition.
“The opening up of China’s financial market also stimulates the integration of Chinese laws and regulations into common international practice,” Huang said.

(The Daily Mail-Beijing Review Articles Exchange Item)


Is plebiscite no longer possible?
Amjed Jaaved

Several options have been offered to solve the Kashmir issue. The suggested solutions pre-suppose that it is no longer possible to hold a plebiscite to know Kashmiris’ will. Even a section of intellectuals in Pakistan have been influenced by those who believe plebiscite to be a Utopian solution. For instance, a patriotic Pakistani like Mushahid Hussain, also, believes that ‘the United States no longer supports a plebiscite in Kashmir’. Mushahid’s view is contained in his article “Kashmir Issue: The International Dimension” (cited in Gul Mohd Wani’s book Kashmir Issue: From Autonomy to Azadi, 1996, Valley Book House, Srinagar). Mushahid was naively misguided by misspoken Congressional testimony, given by John Kelly, former secretary for Near Eastern and South Asian Affairs, in Washington D.C. on March 6, 1990. In his testimony, Mr Kelly, in reply to senator Solarz’s question, inadvertently admitted that the United States was no longer in favour of a plebiscite to be held in Kashmir.
The US state Department corrected Mr Kelly’s faux pas in 1993 _ John R. Mallot, the US State Department’s point man for South Asia told the House Foreign Affairs Sub-Commmittee on Asia and the Pacific on April, 28 1993 that John Kelly ‘misspoke’ in 1990 when he said that the United States no longer believed a plebiscite was necessary in South Asia. Mallot clarified that Kelly made his comment after ‘continued grilling’ by the panel’s chairman, Stephen J. Solarz of New York.
A reference to Solarz-Kelly conversation and correvtive policy action taken by the US State Department finds mention in Mushtaqur Rehman’s book Divided Kashmir (pp.162-163), published by Lynne Reinner Publishers, London in 1996. Nevertheless, the correction remained un-noticed by most people misguided by Kelly’s speech. The biased nature of Solarz’s questions is obvious from the following extract of Solarz-Kelly conversation:
‘Mr Solarz: What is the position of the United States with respect to whether there should be a plebiscite?
Mr Kelly: Well, first of all, we believe that Kashmir is disputed territory, and we believe that since the two countries_India and Pakistan_ agreed in Simla in 1972 to try to resolve the issue between the two of them, we would endorse efforts for them to try to resolve it between themselves.
Mr Solarz: Well, how did we vote upon that resolution at the U.N. back in 1949?
Mr Kelly: In favor, Mr Chairman.
Mr Solarz: Right. So at that time we favored a plebiscite. Do we still favor a plebiscite, or not?
Or is it our position now that whether or not there should be a plebiscite is a matter which should be determined bilaterally between India and Pakistan?
Mr Kelly: Basically, that’s right, Mr Chairman’.
The above extract is given on page 239 of Robert G. Wirsing’s book India, Pakistan, and the Kashmir Dispute, published by Macmillan Press Limited, London in 1994.
Madeleine Albright, former US Secretary of State, also believes that a plebiscite is the only way to ascertain the wishes of the Kashmiri people. She expressed this view in her concluding address to the Peace Conference held in New Delhi on December 13, 2003. In response to Omar Abdullah’s question, whether there was an alternative approach to the plebiscite, she replied that she knew of no other option except plebiscite or referendum. A practical framework for holding the plebiscite is contained in Sir Owen Dixon’s proposal submitted to the United Nations in 1950.
A plebiscite administered with a non-partisan procedure is a valid and the most practicable option. Shelving the plebiscite obligation amounts to capitulating to India’s point of view. Kashmir still exists as an unresolved question on UN desk. The Security Council had informally decided on July 30, 1996 to delete dormant questions from the Council’s agenda. However, India could only temporarily get the dormant ‘India-Pakistan’ question’ deleted. Indis pushed the deletion action during temporary absence of Pakistan’s representative from the United Nations. Upon Pakistan’s intervention the question was restored to the agenda. India is bound to hold a plebiscite under UNCIP Resolution of August 13, 1948 (Para 75, Serial No 110, Part II) and UNCIP resolution of January 5, 1949 (Para 51, Serial No 1196).
India should abide by the cardinal principle in inter-state relations, that is pacta sunt servanda ‘treaties are to be observed’. Even if disinterested, India cannot disown her plebiscite obligation as Under UN charter, self-determination is Kashmiris’ legal right. There are fifteen UN’s resolutions that acknowledge Kashmiris’ right of self determination. Self determination is a jus cogen (peremptory norm) of international law, enshrined in Article 1:2 of UN Charter. Simla Accord also binds India to the plebiscite. Paragraph 1(i) of the Simla Agreement provides ‘The principles and purposes of the Charter of the United Nations shall govern the relations between the two countries’.
India claims that she is absolved from the plebiscite responsibility under doctrine clausula rebus sic stantibus (theories de l’imprevision), ‘things thus standing’. This principle postulates that a treaty becomes inapplicable owing to a fundamental change of circumstances. But, India cannot take advantage of the rebus-sic principle for reason that this doctrine cannot be invoked in the case of boundary treaties, vide Article 2(4) of the Charter of the United Nations. Besides, the Article prohibits unilateral renunciation of treaties.
Termination of a treaty requires consent of all parties under Article 59 of the Vienna Convention on the Law of Treaties. Article 1 of the aforementioned Convention titled ‘Termination or Suspension of the Operation of a Treaty Implied by Conclusion of a Later Treaty’ stipulates ‘A treaty shall be considered as terminated if ALL the parties to it conclude a later treaty relating to the same subject matter’. The Article 1 codifies the principle lex posterior derogat priori, that is ‘later treaty abrogates the earlier one’, subject to a mandatory sine qua non _ unanimous consent of all signatories.
To conclude, both India and Pakistan are bound to hold a plebiscite to determine future status of the disputed state of Kashmir. The demand for plebiscite is well supported by bilateral and multilateral agreements, besides the UN charter and jus cogens of international law. The alternative options or figments of imagination peddled on Track II are nullities in the eyes of law. Non-compliance of an agreement does not antiquate it. Aside from legal considerations, all religions call for abiding one’s promises.
India is a ‘unique country’ nowadays hobnobbing with the USA as the world’s largest democracy. Does the unique democracy has no respect for its promise or morality?

Musharraf’s bold initiative on Kashmir
Nasim Zehra

There is a tempest brewing in a teapot over President Pervez Musharraf’s recent remarks allegedly indicating an abrupt change in Pakistan’s Kashmir policy. In his Dec. 5 interview to Indian television NDTV, President Musharraf merely reiterated his position how he believed progress over Kashmir was possible. A similar position was also held by former Prime Minister Nawaz Sharif but media hype and exploitation of the issue by vested interests and politicians combined to promote an uninformed and frenzied discourse on Kashmir. This also mirrors how the Indian opposition party BJP, which actually initiated the peace process and the idea of “give and take” on Kashmir, is publicly resisting any initiative the Congress takes on Kashmir.
In his Dec. 5 interview, President Musharraf again conveyed Pakistan’s willingness to take bold steps to resolve the half-century old issue. Advocating the need for flexibility in traditional positions on Kashmir, Musharraf was clear that if Delhi showed flexibility, so would Pakistan. To illustrate the point he said that were Delhi to move forward on conceding political rights concerning Kashmir, Islamabad too would give up its claim to Kashmir.
Musharraf has proactively sought to break the logjam on the lingering conflict. He has practically pushed forward the Lahore process which zeroed in on seeking a fast-paced solution to the Kashmir issue. He began with the 2001 Agra summit, where he first introduced the notion of a four-step formula, which included knocking out solutions unacceptable to Pakistan and India and to opt for only solutions acceptable to Pakistanis, Indians and Kashmiris.
Subsequently, in his Nov. 18, 2003 interview with Reuters, Musharraf first publicly conveyed the government’s readiness to go beyond “stated positions.” He was clear that a resolution would require that “both sides talk to each other with flexibility...coming beyond stated positions...coming and meeting half way somewhere.”
Finally, in the April 2005 Delhi summit, Musharraf first introduced the four-point-formula seeking a phased withdrawal of troops; local self-governance; free movement of Kashmiris across the LOC and a joint supervision mechanism in Jammu and Kashmir involving India, Pakistan and the Kashmiris. Obviously, Musharraf was not announcing changes in Pakistan’s Kashmir policy but outlined the extent of flexibility Islamabad was willing to bring in its position.
None of this is completely new. Musharraf is attempting to encourage the Indians to move forward. His moves do convey some salient features of a dynamic Kashmir policy. For example, following are five key features of Pakistan’s Kashmir policy. One: Islamabad has demonstrated that while it views the UN resolutions providing the legal framework for the Kashmiri case for the right to self-determination, Pakistan will go beyond the UN resolutions that offer the state-integration option requiring the Kashmiris to integrate into Pakistan or India.
Two: the first clear articulation in recent years of Pakistan’s actual position taken at the UN that Pakistan supports the Kashmiris’ right to self-determination, that is, the right of the Kashmiris to determine their own political future. Pakistan has sought Kashmiri integration with Pakistan.