Future of challenges
Lan Xinzhen

AFTER the China Investment Corp. (CIC) was officially launched and the decision-making team finally posed for the media in Beijing on September 29, how the state-owned investment corporation will manage the $200 billion in capital is the biggest question mark.
The CIC, solely state-owned, got its registered capital of $200 billion from China’s huge foreign exchange (forex) reserves-the Ministry of Finance issued 1.55 trillion yuan ($206.7 billion) of special treasury bonds to buy $200 billion in forex reserves and invested the money into the corporation.
With one of the world’s richest investment funds at its disposal, challenges lie ahead for the CIC about whether it can earn higher returns than investing in safe but low-yielding U.S. Treasury bonds and ease overseas worries concerning its investment directions.
Dream team
It was announced that Lou Jiwei, former Deputy Secretary General of the State Council, was appointed the company’s board chairman, Gao Xiqing, Vice Chairman of the National Council for Social Security Fund, is the general manager and Hu Huaibang, Commissioner of Disciplinary Inspection of the China Banking Regulatory Commission, took the post as chief supervisor.
The board of directors consists of 11 members including three executive directors-Lou Jiwei, Gao Xiqing and Vice Minister of Finance Zhang Hongli; five non-executive directors from the People’s Bank of China, the National Development and Reform Commission (NDRC), the Ministry of Finance, the Ministry of Commerce and the State Administration of Foreign Exchange; two independent directors-Liu Zhongli, former Minister of Finance, and Wang Chunzheng, Vice Minister of the NDRC; and one director who will be elected from the company’s employees.
According to Lou, the company will focus its overseas investments mainly on a portfolio of financial products to maximize the proceeds via long-term investments within a range of acceptable risks. It will also invest in domestic financial institutions so as to retain and increase the value of state-owned assets.
The CIC will operate in a completely commercial way despite its government backing. “We will maintain transparency of company operations on the premise of safeguarding our commercial interests,” said Lou. “We will deal with the forex investment business independently by persisting in the principle of separating government functions from company management.”
The state-owned Central Huijin Investment Corp., founded in 2003, was merged into the new company as a wholly-owned subsidiary company. Central Huijin will continue to inject capital into domestic financial institutions to support their reforms, such as shareholding reforms of China’s state-owned banks, while the CIC will focus on overseas investment projects.
There is no shareholders’ meeting as the CIC is solely owned by the state. As a result, a management committee of seven was formed to be responsible for the daily operation and decision making on overseas investments. Besides Lou, Gao, Hu and Zhang, the committee includes Yang Qingwei, head of NDRC’s fixed assets investment department, Xie Ping, General Manager of the Central Huijin Investment Corp., and Wang Jianxi, Vice Board Chairman of the Central Huijin.
The management committee of seven for the CIC seems to be a stable decision-making organization, guaranteeing the reasonability and feasibility of decisions as well as the security of the fund.
Yet, some are worrying that the multiple backgrounds of the committee members could be the biggest challenge the CIC faces. “The committee involves too many ministries which may affect the efficiency of the investment decision making process,” said He Fan, a researcher with the Institute of World Economics and Politics of the Chinese Academy of Social Sciences (CASS).
Where to invest?
In May, the new company, still in preparation, made its first investment in non-voting shares, valued at $3 billion, in the U.S. private equity firm The Blackstone Group, which got a lot of publicity.
According to the design of the State Council, CIC’s major task is to inject excessive forex reserves into combined investments in overseas companies and financial markets in order to increase proceeds of forex assets. Its operation covers investment in overseas financial markets and domestic financial institutions, as well as overseas equity investments. The CIC will come up with more strategies like the Blackstone investment.
China has spent its huge forex reserves buying U.S. Treasury bonds for quite a long time and began to invest its reserves in other foreign currencies such as euros and British pounds, agency bonds, and high-quality and high-yield corporate bonds.
The launch of the CIC is conducive to the professional management of forex reserves. It was disclosed that the CIC would continue to invest in private equity funds and hedge funds and to provide financial support to state-owned enterprises in overseas investment and financing.
The capital in hand for the CIC will be more than the current $200 billion because China’s forex reserves are increasing. By the end of July 2007, China had $1.4 trillion in forex reserves, which is expected to exceed $2 trillion by 2010.
How will the CIC allocate its investments and what are the influences each of its moves will bring to the global financial market? These questions are of great concern to many in global financial institutions.
“The Chinese Government decided to found a special institution to manage its excessive forex reserves more actively, shoulder more risks, realize more diversified asset portfolio and reap higher returns on investments, which is very important and beneficial to China,” said Fred Zuliu Hu, Managing Director of Goldman Sachs (Asia) in an interview with Xinhua News Agency, who considers the CIC a new model for managing China’s gigantic forex reserves.
The CIC with huge capital at its disposal also gives rise to worries. It was reported by China Business that the German authorities have paid special attention to CIC’s investment in Blackstone. German Chancellor Angela Merkel said on July 18 that Europe should adopt the same method to check the merger and acquisition activities conducted by foreign state-holding investors and called it “her priority” in the second half of her tenure.
Jin Renqing, former Minister of Finance, said in March that the CIC is modeled after the Temasek Holdings Pte Ltd., the investment arm of the Singaporean Government. This indicates that the Chinese Government hopes to augment external direct investments, especially equity investments in foreign companies.
Established in 1974, Temasek Holdings is solely owned by the Singaporean Ministry of Finance. The state-owned investment agency has contributed to a large portion of the country’s forex reserves.
Capable of profiting?
The CIC is facing high cost pressure upon its inauguration. The registered capital of $200 million was from the sales of special treasury bonds. The interest rates for the 10-year and 15-year special treasury bonds are around 4.3 percent and 4.5 percent, respectively. Besides this, the CIC will suffer from foreign currency exchange loss of around 5 percent every year when taking into consideration the yuan’s appreciation. Adding in the operation and management costs, the CIC will have a combined cost ratio of nearly 10 percent. In other words, the CIC will run at a loss if the annual average return on investment is lower than 10 percent.
With the high threshold for profiting ahead, whether the new investment corporation will retain and even increase the value of the world’s largest forex reserves worries too many people. The government and the people expect it to profit despite global financial market stumbles led by the weakening U.S. economy.
Besides, overseas politicians feel uneasy, fearing that the Chinese Government will seize overseas assets through the CIC, which is among many problems the company has to solve.
Hu hence believes the CIC should first establish a corporate governance structure within the company before working on any investment project. “The Blackstone project is an exception which is a signal of the CIC’s debut,” said Hu. “The most pressing task for the company at present is to build an internal mechanism consisting of investment principles, a competent team as well as the IT system solutions.”
He Sheng, a researcher with Changjiang Securities, believes the greatest contribution of the CIC at this stage is not the money it will make, but that it will help curb excessive liquidity and reduce the impact that excessive liquidity has on interest rates in bond markets. Furthermore, the imbalance in international payments will be eased if the CIC imports directly from or invests in overseas markets, said He.

(The Daily Mail-Beijing Review Articles Exchange Item)

Micro industries and FBR tariff policy
Hamid Sultan

Open and participatory budget making is imperative for good governance and economic development, yet by comparing with international standards our budget making need professional experts, budget making is more or less an exclusive affair of the executives. The budget making team is not accessible to the civil society, media, and technocratic groups. Government does not consult people, industrialist, organization, except to some ostensible extent with Chambers of Commerce and other big trade associations those are mostly dominated by trade classes and mostly the aspects of industrial promotion matters related to lower segments of economy are ignored, particularly all the required parameters for the micro industrial developments are on negative myths.
FBP regularly convene meetings with Tax Officials but has never held any meetings with such associations or consultant those are working for economic development and poverty alleviation in the country. For a self-sustainable economic development throughout the world priority is being given to micro industries. According to the industrial pyramid, in every economy there are only few large enterprises followed by medium enterprises and on the bottom there is a very large number of micro and small-scale enterprises. Social partnership, human resources, technical skills are our economic drivers and they can he called as economic clusters, In the last six years our development in these sectors are not rapid resulting which we lost our share very badly our exports of cottage industry handicrafts decreased 78 percent whereas global export of these commodities increased from 187 billion dollar to 235 billion dollar per year, China exporting 71 billion dollar products, India 3 billion dollar and our exports are only few million dollars. The adverse results are due to lack of coordination among provinces, our financial system, banking system, economic polices all are controlled by Federal Ministers and the task of small industries development is given to provinces those are not involved in the policy framework at any level.
‘Micro Industries typically make a large contribution to manufacturing by generating employment for thousands people, presently there is no any state organization who could help, boost, develop, micro industries culture in Pakistan. Activities of Smeda are not result oriented for minor industries. Indian government diverted highest priority to micro industries to develop social sector and for achieving fruitful results presently Bill for the Development of micro Industries 2002 and Micro Small Medium enterprise development Act 2006 are playing strategic role in the policy frame work for these industries particularly the Federal Ministry of Micro Industries Development’s role is torch bearer for other developing counties. Ministry of Engineering, Ministry of Commerce, and Ministry of Finance are key players for policy framework in our country and in our annual economic survey report we cannot find any detail on the development of micro industrial sector.
If we look upon the reforms of F13R no doubt this department achieved remarkable results under the Chairmanship of Mr. Abdullah Yousaf who worked with objectivity for a transparent tax culture in Pakistan, in the taxation history of our country his enthusiastic working proved FBR as a partner of industrial growth, our Customs department deserves appreciation for his good working to bring competitiveness industrial manufacturing scenario allowing the import of industrial raw materials even at zero rate but unfortunately due to market mechanism benefits could not reached to buyer class. We feel proud FBR provided speedy environment for doing good business through TARIP, INTRA, ECTTO, ACCESS facilitations those are well appreciated by World Bank IMF and other financial sectors, having progressive working it is anticipated due attention for micro industrial sector will given by FBR in the near future. The culture of cottage industries has now diverted towards micro industries in the era of globalization, for the protection, growth, development, of this sector there is no mapping which could help our policy makers for positive working and due to this short-sightedness every year after budget announcement so many cases of anomaly arise. In Pakistan sewing machine industry is borne to micro fitness and can be called as most deprived industrial sector of the country. According to the Bureau Of Statistics data, production of sewing machine in the informal sector as well as non-informal decreased at large to say, 1995-2002-2003 84000, 61000, 36000, 28000, 27000, 24000, 31000.
Last year Officers of Engineering Development Board conducted a country wide survey of sewing machine industry and compiled a detailed report of this sector which illustrates, majority of work places are lanes and mohallas, use of vintage type out dated machines, lowest investment cost, week management, technology employed old, high cost of utilities, lack of long term visionary policy by state department, lack of product design, poor research & development, totally non competitive in competition with China, lack of new investment, not a single unit got minor or other banking facility, high cost of raw material, roll back of industrial development under WHO regime, in danger of collapse with invasion of cheaper Chinese machines & parts. All these characters show the adverse position of this sector.
In the budget 2007-2008 sales tax @ 15% on the import of sewing machines was lifted and import duty on sewing machine in CKD position was fixed @ 5%. Assembly of sewing machine is a zero technology job, by hand tools machine can be assembled easily, this phenomena made the local industry entirety non competitive under 5% tariff protection edge they are not in this position to compete with Chinese sewing machines and parts. Tiny home-based units are purchasing their raw material from open market and they are financially not linked with sales tax input output procedure. It is more interesting there is 15% sales tax on the manufacturing of sewing machine parts those are 100 percent made by artisan mistri where value of part made by them range from Rs.10 to 20 approximately and complete machine is exempted having high value.
Rapid technical change, shrinking economic distance, new forms of industrial organization, tighter links between national value chains and wide spread policy liberalization now competition arises with great intensity and we have to compete the situation with use of new technologies and organizational methods at best practice and link up to global value chains. The experience of the Tigers of Asia indicates that coherent and carefully crafted policies can accelerate shifts in competitiveness promote entry into very complex and high technology. UN0, OECD, EEC, EU, Economic agenda recommends that Ministries of Finance in developing countries should be encouraged to establish an’ incentive and tax analysis’ unit to develop the analytical capacity, organized arrangements and institutional procedures necessary within the; Ministry of Finance to conduct a professional review on tax policies, including international comparisons and each incentive and tax analysis unit should develop a standardized set of analytical shills.
Sewing machine Micro industry need sympathetic attention of FBR high officials for smooth polices to check and control under invoicing persisting in the import of sewing machine and parts There is no Association of tiny sewing machine parts makers or assemblers in the country who could represent their grievances in higher state departments, apart from it mistri engaged in sewing machine part making are afraid to contact with any department saying they will tax them heavily, this hindrance was common years before in traders but new tax reforms cleared the position but still small artisan mistri although pay income tax but he is still afraid with state offices. Micro Industries Development Resource Centre Pakistan worked a lot for the development of micro sewing machine industry in collaboration with Engineering Development Board it should be appreciating if a Committee by FBR be formed comprising with Engineering Development Board Officials to rectify the grievances faced by this sector particularly the issue of imposing 15% regulatory duty on CKD import of sewing machines which was decided by FCC on 290 August 2007 and control of manipulation in the imports of sewing machine and parts.
The working of FBR for smooth level play to micro industries will correct the mind of a common man who think that policies are biased in favour of big industries, elites of society because they own representation in policy formation whereas others feel constraints in judicious formation of coherent approach for masses. Self-sustaining economic growth based on strong international compositeness, innovation, productivity, and flexibility of resource use a full employment economy that provide a decent standards of living and quality of life for all citizen, elimination of poverty, and provision of adequate opportunities for young people, constituting an alternative to emigration are basic needs, we cannot develop without social equity, social justice, social cohesion, and personal secure , transparent and participatory governance.







Returning to an inferno
Eric Margolis

ON THURSDAY morning, former Pakistani prime minister Benazir Bhutto arrived in Karachi, as she told me she would two weeks ago in London. Huge crowds in the Bhutto family’s traditional power base received her with rapture and adulation. Her enemies greeted her with two horrific bombs that killed more than 130 and wounded hundreds more, underlining the growing violence now consuming Pakistan.
While Washington and even the First Lady Laura Bush have been blasting Burma’s military junta for brutal repression, Pakistan’s US-backed military junta, which receives $1 billion monthly in covert US payments, is waging war against its own restive people, thousands of whom have been killed by the armed forces. Shooting and beating rebellious Buddhist monks is evil; shooting and beating rebellious Muslim religious leaders is anti-terrorism.’ I wished Benazir a bon voyage just before she left Dubai for her historic return home, and cautioned her that my extensive reader mail from Pakistan was running very much against her because of the deal she had made with military ruler General Pervez Musharraf to allow her return.
The widespread view among Pakistanis is that Benazir’s return and impending political power-sharing with Musharraf was engineered by Washington to add a veneer of legitimacy of democracy to his discredited military regime. Unless Bhutto can quickly and decisively distance herself from Musharraf and his Bush Administration sponsors, and show she is really in charge as prime minister, she and her cause may be gravely tarnished. As reported in my recent columns, the US has filled all senior positions in Pakistan’s powerful military and intelligence service, ISI, with pro-American generals approved by the Pentagon and CIA. Even if Musharraf is ousted or blown up, the US believes it can retain firm control over Pakistan and use its armed forces to wage war there and in Afghanistan against nationalist and Islamist forces battling western influence.
The military rules Pakistan. Musharraf and his American patrons run Pakistan’s military. So what is left for future prime minister Bhutto? If Pakistanis conclude she is being cynically used, her political career could founder. If she can somehow push Musharraf and his generals back to their barracks, she will emerge triumphant. Given the dizzying current political confusion between Musharraf, Bhutto, the supreme court, and exiled former PM Nawaz Sharif, it’s impossible to predict what will happen next. But one thing is certain: recent polls show a majority of Pakistanis believe America under President George Bush has launched a war against Islam, and that Musharraf is America’s agent in Islamabad. These disturbing beliefs could easily lead to increasing violence, even full-scale civil war. Even if Musharraf and Bhutto eventually agree on some form of power-sharing, they will find themselves riding a tiger. America’s 2001 invasion and subsequent occupation of Afghanistan, and Washington’s ongoing efforts to control Pakistan’s government, have ignited a spreading regional insurrection against western influence.
If the simmering civil war in nuclear-armed Pakistan blows into a wider conflict, the result will be an exceptionally dangerous world crisis in which nuclear-armed India could quickly become involved. The growing threat of a US attack on Iran will only deepen and spread the danger. An explosion in Pakistan would also isolate US and NATO forces in Afghanistan. Pakistan’s most important national institution, the armed forces, has failed its duty to the nation. Instead of allowing itself to be rented like the sepoys in the mercenary armies of Britain’s 19th century Imperial Indian Raj, Pakistan’s military should be assuring its commanders serve the interest of the nation, rather than foreign powers. $1 billion a month rents a lot of cooperation, it is true. But Pakistan’s once proud soldiers have sold their honour cheap.

—Khaleej Times