Kicking off reform
Tan Wei

RUMORS had been swirling since the beginning of 2007 that China Development Bank (CDB) would set off on the path to become a commercial lender. After a lengthy wait, confirmation finally came from the People’s Bank of China, the central bank, on the last day of 2007. With the approval of the State Council, the Central Huijin Investment Co. Ltd. (Central Huijin), a subsidiary of China Investment Corp. (CIC), sealed an agreement with CDB in Beijing. Accordingly, Central Huijin immediately injected $20 billion into CDB, creating high hopes for the implementation of its reform plan in 2008.
Born at the right time
CDB came into being in 1994 together with another two policy banks, namely the Export-Import Bank of China and the Agricultural Development Bank of China. The move was intended to separate policy-related business from commercial business and relieve state-owned commercial banks burdened with dual tasks. As outlined by the State Council, CDB, with a start-up fund of 50 billion yuan ($6.8 billion) appropriated by the Ministry of Finance, would mainly serve as a vehicle of long-term financing for the development of national infrastructure and key projects of pillar industries.
According to public financial data, CDB has boasted sound asset quality and a low ratio of non-performing loans for a long time, overshadowing many commercial banks. By the end of 2006, the outstanding balance of its assets topped 2.27 trillion yuan ($311 billion), with its non-performing asset ratio and non-performing loan ratio standing at 0.73 percent and 0.72 percent, respectively. In 2006, the bank raked in total profits of 29.1 billion yuan ($3.9 billion), turned over 18.5 billion yuan ($2.5 billion) of tax and generated a net profit of 16.5 billion yuan ($2.3 billion). All these statistics indicate that CDB is capable of functioning healthily without government subsidies. Endowed with a solid financial foundation, the commercialized reform will empower the bank to become one of the best financial institutions of China in terms of asset quality.
Central Huijin is a wholly state-owned investment corporation, approved by the State Council on December 16, 2003. With registered capital of 372.47 billion yuan ($50 billion), it exercises the right and performs its obligation as an investor in many key financial institutions, such as Bank of China (BOC) and China Construction Bank (CCB). Its helping hand has already been extended to the Industrial and Commercial Bank of China, CCB, BOC and China Everbright Bank, smoothing their paths in going public.
As disclosed earlier by Vice Minister of Finance Li Yong, Central Huijin will commit nearly $67 billion, one third of the capital fund of CIC, to help financial institutions such as CDB and the Agricultural Bank of China. This will greatly assist CDB in lifting its capital adequacy ratio and strengthening its risk-resistant ability, laying a solid cornerstone for its planned reform.The reform of CDB had been put on agenda at the National Financial Work Conference held in January 2007, but stalled due to a capital blank to fill. Annual reports of recent years indicated that the capital adequacy ratio of CDB had been taking a hit. The ratio dipped from 11.58 percent at the end of 2002 to 8.05 percent at the end of 2006, barely crossing the threshold of 8 percent required by the China Banking Regulatory Commission.
In its annual report 2006, CDB attributed the drop in its capital adequacy ratio to a surging balance of loans. However, financial institutions engaged in long-term financing are more vulnerable to deficit and even bankruptcy, as the mid- and long-term credit risks and market risks are harder to control. As a result, the pressure is on them to maintain a much higher capital adequacy ratio than other commercial banks. Bai Qinxian, Director of the Research Institute of International Finance at Liaoning University, said, “After reorientation, China’s policy banks should report a capital adequacy ratio comparable with that of comprehensive development banks of developing countries, such as the 16.2 percent of Korea Development Bank and the 14.3 percent of the Brazilian Development Bank. Generally, 15 percent-20 percent is an ideal range.” It’s estimated that the $20-billion capital injection will push CDB’s capital adequacy ratio up to or even slightly above 15 percent, a landmark step toward the reform target. Reform prospects
The Ministry of Finance and Central Huijin will each hold a 50-percent stake in CDB, in the aftermath of the agreement. But its strategic planning is still far from the destination. Other strategic investors will also be introduced in the future. CDB’s reform plan is scheduled for implementation in 2008, but its tone was already set at the 2007 National Financial Work Conference. Its dedication to mid- and long-term credit business remains unchanged, and issuing financial bonds is still its major financing source. It will moderately add an investment banking business, absorb enterprise deposits, and be involved in businesses like securities, trusts and funds, but will be barred from retail business.
In initial years after its inception, CDB was subjected to the principle of no branches and entrusting CCB with credit business. In recent years, it has been allowed to open 33 branches and four offices in key areas to meet demand. No retail business means CDB will still rely on issuing bonds and securities products in the future to raise money, instead of widely pooling the deposits of individuals. It will further function as a wholesale bank granting mid- and long-term loans to enterprises and institutions.
After the reform, CDB will install a parent-subsidiary corporate system with independent legal entities. The parent company expresses the national strategic intentions with the state as its absolute controlling shareholder. Two subsidiaries will be developed. One is an investment corporation and the other a commercial bank specializing in mid- and long-term credit business. Thus CDB will erect a governance structure like other modern commercial banks. The parent and subsidiary companies will be allowed different ownership and governance structures. They can maintain the current operational model of integrating policies and the market while being separate in organization, administration and financial affairs. Besides this, the subsidiaries are eligible for a shareholding system.
Guo Tianyong, Director of the Research Center of Chinese Banking Industry at the Central University of Finance and Economics pointed out that the separation can clearly differentiate CDB’s policy-related and commercial businesses. This will be conducive to realizing a real market-oriented operation. In addition, CDB has been enjoying a much lower synthetic fund cost than commercial banks in issuing bonds, taking advantage of its unparalleled national credit. This is an object of condemnation from commercial banks. For a long time, CDB has been the country’s third largest bond issuer, only after the People’s Bank of China and the Ministry of Finance. This is largely due to the vigorous demand of bonds ensured under its quasi-government status as a policy bank. The low cost of financing has also contributed to its success. However, commercialization may deprive it of these advantages. “Real commercialization means the bank would assume sole responsibility for its profits and losses,” Guo said. “It’s self-evident that the bonds issued will by no means be immune to defaults if bankruptcy occurs.” CDB will therefore be running the risk of losing the favor of institutions.
As a double-edged sword, the reform of CDB will expand its business, but at the same time may raise financing costs, posing a major challenge to its reorientation. Compared with other banks after joint stock reform, CDB’s disadvantages such as a deficient grassroots network, unitary business lineup and narrow financing channels will all add to the uncertainties hanging over its path of reform. In July 2007, CDB spent 1.5 billion pounds (2.2 billion euros) to buy into Barclays Bank at a price of 7.2 pounds per share, a new record for overseas expansion of a domestic financial institution. This also came to the global banking industry as a huge shock, but an illuminating avenue for the future commercialization of Chinese banks.
“This will benefit the commercialization and globalization awareness of China’s policy banks, as they can draw on the advanced management expertise of international banks with long histories,” Guo said. “With the help of the capital injection, CDB can diversify its financing to better grasp the opportunities of overseas investment and further accelerate its pace of overseas commercialization,” echoed Bai.

(The Daily Mail-Beijing Review Articles Exchange Item)



The Musharraf factor influencing Pakistani politics
Nasim Zehra

TWO weeks into Pakistan’s post-election scenario the hope that the legitimately elected parliamentary forces will gradually emerge as responsible and ascendant forces in Pakistan’s power construct is still intact.
The media, reflecting the electorate’s demand that the elected parties must now manage the affairs of the state and of society in a cooperative and competent manner, is closely monitoring inter-party negotiations between the three federal level coalition partners, the PPP, the PMLN and the ANP. While the partisan and the cynics are categorical about an inevitable fallout between the PPP and the PMLN, others believe the two leaderships are clear about the need to work together.
However, a key factor that will impact on the future of the three party alliance and on the post-election political state of Pakistan is the Musharraf factor. The obvious fact is that President Musharraf, despite much political opposition, is fighting back. There is credit to be given for fighting back, for being patriotic, for being bold, for having the courage of conviction, of standing by friends, etc. So, Musharraf deserves credit for this as a person and in an individual capacity all these traits would win him admiration. Not when he heads the state and is the symbol, at least constitutionally, of a non partisan and credible head of the state.
However, as the head of the state President Musharraf has much to account for. His political experiment was a resounding failure. His actions have divided not united the nation, his actions have flowed from reaction not reflection, for his survival as president he mutilated the constitution, sent the judiciary packing. As head of the state in his battle with the chief justice he opted for conduct unbecoming.
Musharraf put the judges and lawyers under house arrest. The recent protests against the house arrest of the CJP’s children including an eight year old underscore the poverty of wisdom and credibility in the functioning of the state of Pakistan. It is unprecedented in Pakistan’s history and maybe even in recent world history that the head of state would stoop to issue a signed charge sheet against a chief justice in the form of a letter and send it off proudly to the international media and lawyers, etc. The president then called him the ‘scum of the earth’ in his interview with a British celebrity.
Every step he took beginning March 9 onwards essentially began to throw up weaknesses of the power construct he and his allies had authored. The ‘power construct’ over the years drew its strength from many missing factors that are crucial for successfully managing state, society and politics. The absent elements were supremacy of the constitution, prevalence of rule of law, the Executive’s confidence in an independent judiciary and the presence of popular political leadership.
Pakistan’s 2007 democratic journey achieved two milestones. One, peoples’ appreciation of the importance of rule of law and of constitutional democracy and two, the birth of a democratic deterrence against the exercise of unaccountable state and political power. Yet these milestones have not been able to guarantee the expected post election stability.
The Musharraf factor is a key element in the current political fluidity which can descend into political instability. If news reports must be believed, the president is tampering with the political outcome. He is trying to resuscitate his party that faced a huge electoral defeat. He has held a set of meetings with the PMLQ leadership. They insist they will support him and he insists on throwing them the lifeline.
Clearly buoyed by whatever transpired at their meetings with the president a reinvigorated PMLQ is now trying to muster a pro-Musharraf alliance. The only man within PMLQ who has the guts to say that the sword of 58(2)b PMLQ in the president’s hand must go is Mushahid Hussain. The rest despite being critical of President Musharraf play along and unfortunately Mushahid Hussain too despite his bold words earlier and even now, stays on with the party that has not gone beyond the shadow of the president.
The president also seems to be undermining the normal political process by giving political support from his camp to elected MPAs from the Punjab. According to a March 4 Daily Times report, the president told a group of visiting PMLQ MPAs not to worry about funds for the completion of their projects because he will provide them with funds. Does he want to strengthen them in their prospective battle against Punjab’s ruling party, the PMLN? Wisdom demands that the president stay aloof from all political parties but he has chosen not to. Staying aloof was exactly the position he should have proactively taken, hence his spokesman’s statement that the president meets whoever wishes to meet him is a rather bland retort.
President Musharraf has decided to not stay above the fray. Admittedly he did say after the election that he is willing to work with all the parties. But with the PMLN’s rejection of the president as a constitutionally and legally legitimate president, he has allowed himself the licence to jump into the political fray again. PMLN’s position reflects their hard stance towards a man who had personally wronged Nawaz Sharif as late as his humiliating September 10 forced exit from Pakistan. Musharraf too was wronged to some extent as Nawaz attempted on October 12 to stall the landing of his plane.
However, all those are bygones and are open to personal interpretations. Where we stand today is a point of near collective wisdom that two key controversial issues need to be settled by the parliament within the parameters of the constitution and of legality. Both related to the president; the legitimacy of the presidential election. The president himself had clearly stated that he would take a fresh vote of confidence from the new parliament. Now, in response to a changed political scene with an uncertain vote his message through his spokesman is that he is elected for five years and will not allow any anarchy over the matter.
The other issue regarding the restoration of the judiciary too will have to be settled by the parliament. Instead of bowing before the wisdom of the elected parliament the president continues to reiterate through his spokesman that the pre November judiciary can never be restored.
Musharraf’s future must be decided by the parliament and the restored judiciary, rather than street power, is what many advocate. Any move that can lead to confrontation and the eventual weakening of the elected forces must be avoided. Yet with the president ‘s personal activism on issues ranging from the legitimacy of his presidency and the restoration of the judiciary, he is contributing to the distortion of Pakistan’s post election scenario. This will also inevitably lead to the strengthening the street factor in the days to come. And with an elected government in power police violence will not be at the president’s disposal to be used freely against demonstrators.
Pakistan’s problems are galloping ahead, not least of all the all encompassing problem of terrorism-struck internal security. Yet the bulk of the political strength finds itself stuck in the business of battling the factor that represents vice-regal institutions. President Musharraf has not humbly accepted the verdict of the people. He still seems to be playing his political cards. Such play guarantees continued power battles when the only battle that is worth fighting in Pakistan is the battle for internal security and end to the growing scourge of terrorism.

—Khaleej Times






Does West’s security hinge on victory in Afghanistan?
Hassan Tahsin

THE 44th European security conference in Munich last month concluded with a pressing call to bring about an atmosphere of creative and constructive debate in the North Atlantic Treaty Organization (NATO). While the motto of the latest conference was “A World in Disarray — Shifting Powers — Lack of Strategies,” the conference ended, apparently, leaving the world wondering if the conference has succeeded in ending the disarray within the NATO, let alone bringing security to the rest of the world.
A close scrutiny of the deliberations at the conference gave the foreboding that the NATO was on the fast track to its dissolution. That is, if the United States did not stop imposing its whims on the European members. The Munich Conference on Security Policy (German Münchner Konferenz für Sicherheitspolitik) is an annual conference on international policy, held in the Hotel Bayerischer Hof in Munich, Germany. The conference was founded in 1962 by German publisher Ewald-Heinrich von Kleist-Schmenzin under the title Wehrkundetagung. Each year, some 250 participants from 40 countries present their views on the development of trans-Atlantic relations as well as European and global security. The participants in the conference included US Defense Secretary Robert Gates, Russia’s First Deputy Prime Minister Sergei Ivanov and Cabinet-level officials from various countries. The focus on a general strategy debate at the beginning of the conference quickly shifted to the relevance of continued engagement of the international community in Afghanistan including the role of the NATO. The US lashed out at some members, particularly Germany, saying they lacked commitment in the Afghanistan war. German Foreign Minister Frank-Walter Steinmeier and Defense Minister Franz Josef Jung, had emphatically fended off all criticism of Germany’s role in Afghanistan.
Apparently to cool down the miffed German side, Robert Gates condescended to say at one point that he did not point a finger at Germany at all, explaining that the request for more commitment in Afghanistan had been issued to all the members of the trans-Atlantic alliance. However, the US defense secretary warned of a rift developing within NATO if the row over burden sharing in Afghanistan went on. He said that some allies ought not to have the luxury of opting only for stability and civilian operations, thus forcing other allies to bear a disproportionate share of the fighting and dying. Meanwhile, there are growing indications of a change in NATO’s strategy in Afghanistan. The failure of the US-led NATO forces in making any headway in Afghanistan had prompted French Defense Minister Herve Morin to declare that the problem of reconstructing Afghanistan could not be resolved purely by military means.

—Arab News