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China tries to limit the impact of global financial crisis

China tries to limit the impact of global financial crisis

"Our orders from European countries have fallen by 20 percent so far this month, and we've cut our profit margin by nearly 50 percent to maintain business growth," says Pan, a manager at Zhejiang Grand Import and Export Co, adding he never expected the financial turbulence on Wall Street to have such a major impact in such a short period of time.

"The US financial market is not just the US market itself, it is the world financial market. What is good for the US is also good for every country, including China," says Guo Shuqing, chairman of China Construction Bank.

As the world's second largest owner of US debt, Chinese decision-makers are quite clear about this point and promised to "join hands" with other nations to tackle the deepest financial crisis since the 1930s. But the question is what kind of rescuer could China be?

"The biggest contribution we can make to the world economy under the current circumstances is to maintain China's strong, stable and relatively fast growth, and avoid big fluctuations," Premier Wen Jiabao said at the recently concluded 2008 Summer Davos in Tianjin.

And many economists echo his viewpoint.

High growth

"The most helpful measure China can take now is to maintain its robust growth, thus it could be a buffer for the rest of the world," says Louis Kuijs, senior economist of the World Bank's Beijing office.

Peng Wensheng, head of China Research at Barclays, says a sound economy and a stable financial market are the prerequisites for China to make any other moves to help ease the global storm.

So far, China has been relatively unscathed by the crisis. The country remains a huge net exporter of savings, boasting the world's largest foreign reserves of $1.8 trillion; the financial system is awash with cash; and capital account controls shield it from volatile outflows. But that does not means China will be immune to an economic downturn.

With the US and the EU accounting for about 40 percent of China's total exports, the country's exports are sensitive to weaker demand in industrialized countries. And lackluster exports will likely translate into poor performance of corporate earnings and weak confidence, dampening the investment appetite in export-oriented industries.

Meanwhile, China's double-digit GDP growth is expected to drop to around 9 percent in 2009. The benchmark Shanghai Composite index has dropped nearly 60 percent so far this year, and inflation rates remain above policymakers' comfort zone.

To boost China's economy, and also as part of concerted efforts by global central banking authorities to respond to the global crisis, the People's Bank of China on Wednesday cut the interest rate by 0.27 percentage points and the reserve requirement ratio by 0.5 percentage points. In addition, in order to boost domestic demand, the State Council scrapped the 5 percent individual income tax on savings interest earnings on Thursday.

More rate cuts?

And to boost the economy, the government is very likely to bring about a further easing of monetary policy and a more simulative fiscal policy in the form of tax cuts and extra government spending, experts say.

"We are expecting the central bank to take another two rate cuts by 0.27 percentage points each in the following six months," says Peng Wensheng.

While striving to keep China's economy on the right track, the government may also continue to buy US treasuries.

Though the central bank has denied media reports that China will buy up to $200 billion worth of US treasuries to help Washington combat the deepening financial crisis, experts say US treasuries remain a comparatively safe investment for China.

"We can hardly see any signs that China will stop buying US assets because of the financial chaos," says Louis Kuijs.

But Chinese financial investors, who used to top the list of "saviors" of Western financial institutions hungry for cash to see them through the global credit crisis, have kept their hands conspicuously in their pockets.

"We will tighten the purse strings and spend every penny carefully," Jiang Jianqing, chairman of the Industrial & Commercial Bank of China Ltd, told the Tianjin Davos gathering.

Jiang's comments indicate the world's largest lender by assets is unlikely to take stakes in ailing US financial institutions just because their prices are low.

"As a commercial bank, we don't favor bargain hunting. We will still focus on strategic investment rather than financial investment," he says.

Earlier this month, insurance firm Ping An shelved its plan to purchase a 50 percent stake in Fortis' asset management company. In April , Ping An and Fortis signed an agreement to buy the Fortis' asset management company for 2.15 billion euros.

In September, the government also abandoned a $10 billion plan by China Development Bank to buy Germany's Dresdner Bank from insurer Allianz.

Chinese financial institutions have a sound reason for their caution now. Almost every high-profile Chinese purchase of an overseas financial institution made last year is now deeply in the red. That includes China Investment Corp's stake in US private equity firm Blackstone, which has lost near ly50 per cent of its paper value; CIC's investment in Morgan Stanley, which is down almost 20 per cent; and CDB's investment in Barclays Bank, which has dropped more than 50 per cent. Ping An's investment in Franco-Belgian insurer Fortis has also lost more than half its value since it took the stake last November.

Food for thought

Chinese financial institutions are learning the hard way in overseas acquisitions. And the ongoing financial crisis also offers more food for thought.

China's financial professionals used to be envious of their foreign counterparts who could easily roll out very sophisticated products. But this time, they shall partly contribute to the country's efforts to limit the impact of the crisis.

"We should take a new approach to product innovation in the financial sector. Appropriate innovation shall be encouraged, but excessive innovation should be strictly regulated," says Yang Mingsheng, vice-chairman of China Insurance Regulatory Commission.

According to Fan Wenzhong, the China Banking Regulatory Commission's deputy research chief, the government may thwart new financial products including derivatives in order to avoid the subprime crisis that's wreaked havoc on the US credit market.

The regulator will instead improve risk-management practices and force banks to put checks in place to prevent Asia's second-biggest capital market from being roiled, he told a conference in Beijing.

"The subprime crisis is far from over, so China's regulator should enhance risk awareness and protection, putting the emphasis on ensuring financial stability rather than innovation," Fan says, adding China's financial reform is "not about speed, it's about stability".

For Michael Pettis, a professor at Peking University's Guanghua School of Management, derivatives can improve the efficiency of markets, but they cannot create an efficient and stable market.

It is only the existence of a diverse investor base, with plenty of fundamental and relative value investors, as well as some speculators, that can create a market that allocates capital efficiently, he says.

"In order for China to have such an investor base it is far more important that investors have better financial and economic information and a mechanism to enforce discipline on managers than shiny but dangerous derivative toys, which can exacerbate self-reinforcing behavior," says Pettis.

The crisis, on the other hand, also underscores the need for regulatory reform.

"The current financial crisis that has pushed major Wall Street players into bankruptcy means that leaders from the business world have called upon all countries to help improve matters. No one is an island. What we need is international cooperation," says Liu Mingkang, chairman of the China Banking Regulatory Commission.

The coordinated rate cuts taken by six central banks on Wednesday, in fact, also show international regulators' determination to strengthen their cooperation.

But Charles Dallara, managing director of the Institute of International Finance (IIF), a global association of financial services firms with more than 390 member institutions, believes that effective multilateral cooperation requires the reform of current global institutional arrangements.

"A new global regulatory coordinating body should be established to monitor and coordinate financial regulation and supervision on an internationally consistent and convergent basis, for systemically important firms," he says.

According to World Bank President Robert Zoellick, the Group of Seven (G7) developed nations is no longer effective and should be replaced by a steering group that includes emerging economic powers like China, India and Brazil.

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Excellent article.

There are some very innovative suggestions.  An example is the Open Letter to President-Elect Obama in http://hk.geocities.com/winghang20022002/Open_Letter2.doc.

Some partial extracts include:
*****
(3)        The Innovative Alternatives

Modern Wealth is the quality and quantity of meaningful economic activities.  We must increase these meaningful economic activities.  Two of the coming pillars are:
(a)        Lead-out-energy machines and
(b)        Flying saucers.

In USA, the Jupiter Financial Group based in Corning, Arkansas funded a 225 HP Pulse Motor.  That particular motor is known to USA Government sources as it was prevented from being sent from the USA in October 2006 to China.  That particular motor uses batteries to start.  Once started, it leads out magnetic energy (more correctly electron motion energy) and runs without burning any fossil fuel.  That particular group could not understand the source of energy at that time.  I met them including their Chairman, Mr. John W. Bush, at Tsinghua University, Beijing.  (Contact Information - telephone: xxxxxx, email:xxxxxx)

I explained the theory behind their invention and also extended the explanation to the design of a flying saucer.  The explanation is available at http://www.energyfromair.com/IOE_talk.

These innovative solutions will let the World focus on the potential of non-polluting, virtual inexhaustible and easy-to-extract energy.  The technology can be applied to replacing all power plants, home generators and every electrical appliance.  The opportunity for further development and investment is huge.  The flying saucer technology is also mentioned in the same presentation.  The prospect of that is even greater – the flying saucer is likely to replace the home as the most important asset of every family.  It can fly to anywhere including outer space.
*****

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More on Flying Saucer

Mr. Lee Cheung Kin supplied the Appendix on a Flying Saucer Prototype in the Open Letter to President-Elect Obama.  

The PowerPoint presentation of that invention is available in:
http://hk.geocities.com/winghang20022002/Flying_Saucer.htm

The flying saucer can replace the home as the most important asset of every family.  It can fly anywhere including outer space.

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More on Innovation

One of the most important mindset in solving the global financial crisis is the willingness to jump out from the box.  Or be innovative.

The ebook on Innovation - The Story of Lawrence Tseung is in:
http://hk.geocities.com/winghang20022002/

The other ebook on How to win the Economic War writter ten years ago on how to deal with the Asian Financial crisis is in:
http://www.energyfromair.com/thebook.htm

Some of the important innovative concepts are explained - such as
(1) Mutual Credits,
(2) Sure-win businesses,
(3) Smart Cards,
(4) Money as a number in a trusted financial institution.

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Open Letter to President-Elect Obama

I like the analysis:

******************************************
Let me simplify the steps so that we can have a meaningful discussion.  The following simplified steps bring out the root of the problem.

(a)        The Federal Reserve Bank creates Money.
(b)        The money is passed to private banks.  These banks can further magnify the money by leverage – loan out more than they receive in deposits.
(c)        Since banks earn interest from thin air, it is to their advantage to loan out as much as possible.
(d)        The Federal Reserve Bank and the private banks created too much money over the years.  If the money were used to buy real goods and services, the price of such goods and services will go sky-high
(e)        Some guys in Wall Street thought up derivatives and helped to create the biggest casino in the World.
(f)        The banks sell and buy the derivatives with no real assets.  The excess money found a way to circulate without causing huge inflation.
(g)        With no sensible Government monitoring, some guys in Wall Street extended the madness into the mortgage market.
(h)        They loaned to individuals without vigorous checking.  The assumption was that the property prices would go up.  If the individual failed to pay, the real estate would have value.  The banks could sell such property.
(i)        To improve liquidity, the mortgage was packaged into financial instruments and sold as grade A assets all over the World.
(j)        The mortgage companies and banks could loan out more and earn more interest from thin air.  The derivative financial papers inflated the value so much that selling the underlying assets will not get the paper buyers any significant money.
(k)        The bubble eventually burst.  USA real estate prices stopped going up and started falling.  Many investors and homeowners defaulted.  The so-called grade A assets lost value.
(l)        Some of the largest mortgage companies, Investment Banks and Savings Banks started to collapse.  The George Bush Government did not see the danger immediately.  They allowed some of these so called trusted financial institutions to fail.  That caused panic Worldwide.  Even the Hong Kong citizens lost billions in the Lehman Brother Papers.
(m)        Many banks sold and owned many financial papers.  They became reluctant to loan and got worried about their own survival.  Many also issued similar derivative based financial papers.
(n)        Once Banks became reluctant to loan out money, many legitimate businesses suffered or collapsed.  This is how we got into the present financial crisis.

********************************************

This is the clearest explanation of the cause of the financial crisis I have read so far.

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Open Letter to President-Elect Obama

Dear MargaretLo,

Thank you for reading the Open Letter in http://hk.geocities.com/winghang20022002/Open_Letter2.doc.

It took us sometime to understand the cause of the present Global Financial Crisis.

In the Financial World, one key word is TRUST.  Money is just a number in a trusted financial institution.  The Investment Banks in USA sold too many innovative financial products including derivatives that had no underlying value.

Once that TRUST or blind faith in Wall Street is gone, those financial papers became worthless.  When Lehman Brothers was allowed to collapse, many investors lost heavily on what they believed to be very safe investment.  Even the largest Investment Banks had to convert to Commerical Banks to save themselves.

Rebuilding that TRUST will take time.  But the World Leaders cannot allow a meltdown of the Financial System Worldwide.  Some compromise must be made.

The voice from China will be heard.  It is a good opportunity for China.  Can China use this opportunity well?

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Open Letter to President-Elect Obama

Dear ltseung888,

Do you think that the buying of foreclosure homes by the US Government is a necessary step to restore TRUST?

If not, what are the alternatives?

Maggie

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Open Letter to President-Elect Obama

Dear Maggie,

You raised an excellent question.  I have to answer that in multiple parts.

The answer is quite complicated.  Part 1 – the question of TRUST.

TRUST is a very abstract thing.  Many Governments now guarantee Bank Deposits with no upper limit.  If one trusts the Government, one will be happy to leave the money with any Bank including the newly formed Commercial Bank of Goldman Sache etc.

When the financial paper of questionable value matures, one may just convert it into cash and leave it with one of the International Branches of Goldman Sache where the Government has no-upper-limit guarantees.  Thus Goldman Sache does not need to default on its financial papers.  

Such an arrangement does not depend on the underlying value of the financial papers but on the Government guarantees.  TRUST can be restored because the holders of financial papers feel that they will not lose any money.

(This is the reason why Goldman Sache and other Investment Banks became Commercial Banks.)

Lawrence

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Open Letter to President-Elect Obama

Dear Maggie,

Question: Do you think that the buying of foreclosure homes by the US Government is a necessary step to restore TRUST?

Part 2 – The price of houses in USA

The most important asset for the average USA family is the home.  The average American families are willing to put much resource to improving their homes.  They will trade up when their income increases.

Previously, about 10 years ago, Banks were very cautious in their lending practice.  They would lend approximate two-years salary of the family.  That put a ceiling on the price of the average home.  Then they relax the rules.  Some Banks even ignored the checking of income.  The Banks thought that if the price of houses were always upwards, they could always recover the loan by selling the foreclosed properties.  They were right for a period of a few years.

Unfortunately, the situation went out of hand with no effective monitoring.  Some individual obtained loans that were totally out-of-line with their income.  They could not possibly accord the mortgage.  Some even gambled to have two or more houses – hoping to sell and make profit with the appreciating housing value.  The unfortunate part is that some were successful.  That encouraged many more to follow.  That created the property bubble.

As with all bubbles, they will burst eventually.  In the case of USA, the Wall Street guys invented financial papers based on such property and/or mortgages and sold such financial papers worldwide.  Some even packaged such with derivatives and the whole thing depended on TRUST to continue.  Once that TRUST is gone, such financial papers become worthless – as evidenced by the Lehman Brother papers when it collapsed.

In a free market, when there are many vacant houses (excess supply), the price of houses will fall.  This created the phenomena of people with negative worth – familiar to Hong Kong Citizens.  For example, one owns properties worth US$2 million and have total mortgage of US$160 million.  The net worth is US$40 million.  When the value of property drops by 30%, the property is worth only US$140 million.  The person joins the rank of the negative worth.  If the person loses his job, he might be forced to declare bankruptcy.  Such a person is even worse than poor – psychologically and credit wise.   

Thus Governments cannot allow price of houses to fall too much.  When and how to rescue is important.  If the politicians are divided, the result may even be panic and meltdown.

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Sure-win Business and Smart Card

Dear Lawrence,

I find the concept of sure-win business and smart cards intriguing.  They are described somewhat in http://www.energyfromair.com/thebook.htm.

However, I still do not understand how they can be implemented?  Do you think that they are the right medicine for the present global financial crisis?

Maggie

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Sure-win Businesses and Smart Card

Dear Maggie,

In order to understand sure-win businesses and Smart Cards, we need to first understand the following:

(1)        A Government must increase its money supply in order for its citizens to get wealthy as a whole.  If there were no increase in the money supply, the only way will be via redistribution.  In redistribution, if one gets richer, someone must get poorer.
(2)        However, this increase must be carefully controlled to avoid excessive inflation. The increase in money supply must be in step with the increase in meaningful economic activity.
(3)        Some Governments use Banks or other Financial Institutions to do this task for them.  A Government must be seen as just, fair and one section cannot contradict another.  This inflexibility in many cases will hamper successful implementation.

Once the above is understood, the concept of sure-win business and smart cards can be understood easily.

(1)        The sure-win businesses essentially receive some of the income from the controlled increase in money supply either directly or indirectly.  For example, in a model restaurant, there could be 24-hour monitoring cameras for the investors to have a glimpse of the business environment.  The income and expenses can be reported automatically daily.  The shareholders can vote on some of the decisions on-line.  The initial model can be developed with Government funds from the ‘increased money supply’.
(2)        The Government can own some shares in these model restaurants.  It can help to increase their businesses by issuing coupons for the Civil Servants to eat in such restaurants.  It can ask these restaurants to provide or deliver food to Old People’s Home etc.  The money essentially comes from the ‘increased money supply’.
(3)        The Smart Card essentially gives a bit of the ‘increase money supply’ to every citizen to buy approved goods and services.  The underprivileged can receive more.  This serves both as a safety net and a distribution of the ‘increased money supply’.  
(4)        If the Model Restaurants accept the use of the Smart Card as payment, their businesses will further increase.  The chance of creating ‘sure-win’ businesses will be very high.  The Government can then sell some of its shares to ‘absorb back some of the increased money supply’.
(5)        Such practices should not be over done.  It is a matte of coordinating the planning right hand with the market driven left hand.
(6)        The full model can be implemented in one or more selected cities first.  It is not the classic socialism or communism.  It is the new model of ensuring every one gets a piece of the new pie created with new technologies such as infinite lead-out-energy and flying saucers (or improvement on existing technologies or models).  

These economic concepts must be thoroughly discussed and understood by the econimists and the general public before actual implementation.  They can cure the present financial crisis as people are willing to listen to innovative ideas now.

Lawrence

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Lead-out-energy and flying saucers

Dear Lawrence,

Thank you for explaining sure-win businesses and smart cards.  Both are bold and innovative concepts – yet they sound logical.  At least the economists will have something interesting to discuss.

Can you elaborate on your last point of how lead-out-energy machines and flying saucers change the World Economy?

Maggie

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Lead-out-energy and flying saucers

Dear Maggie,

The lead-out-energy machines essentially solve the World Energy Crisis.  The lead-out-energy machines lead out gravitational or electron motion energy.  Such energy is pollution-free, virtually inexhaustible and available anywhere including outer space.  With infinite energy, the World can have infinite modern wealth – the quality and quantity of meaningful economic activities.

In the lead-out-energy from still air, we have the technology to reverse global warming.  Thus technology has come to the rescue once again.

The flying saucer technology essentially replaces all vehicles including cars, ships and airplanes.  If you use Internet Explorer, you can see the PowerPoint presentation slides at http://hk.geocities.com/winghang ... er.files/frame.htm.  The flying saucer can takeoff and land vertically.  It will not eject any hot gases.  It will not disturb the air as it does not use propellers.  It will likely replace the home as the most important asset of every family.  It is effective the home but it can fly anywhere including outer space.

The additional bonus of these two technologies is that China has an undeniable position.  The East will shine.  This will stimulate the citizens of China, India, Pakistan, Vietnam, Korea, etc.  The West no longer has the complete dominance in science and technology.  The World will re-examine every rule and regulation – in science and in economics.  The coming progress will be faster than any other period in human history.

Lawrence

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Lead-out-energy and flying saucers

Dear Lawrence,

I have read the ebook in http://hk.geocities.com/winghang20022002/.  Your story is interesting and there are many innovative suggestions.

Are you getting support from the Chinese Universities on the theory of lead-out-energy machines and flying saucers?

How about the Western Universities?  Do you need help in getting the Western Universities to examine your material?  I can activate the Old Girls’ network in England and USA if you do not object.

What are the experiments or prototypes you can bring to USA if there is sufficient interest?  I am in Los Angeles.

Maggie

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The flying saucer experiment

Dear Maggie,

Let me describe the prototypes or experiments that can be shared worldwide one-by-one.  The first one I would like to talk about is the flying saucer prototype provided by Mr. Lee Cheung Kin and team.  Mr. Lee sent the information out in an open letter to President-Elect Obama as soon as Mr. Obama had a commanding lead on November 4, 2008.  Mr. Lee wanted to ensure a spot in the expected scientific development of the flying saucer technology for him and his team.

The full PowerPoint presentation can be viewed in Internet Explorer - available in http://hk.geocities.com/winghang ... er.files/frame.htm.

The most important experiment is experiment001 in slide 3.  In this experiment, a rectangular container is placed on a flat, smooth surface.  In the middle of the container is an electromagnet that can repel two permanent magnets with equal mass at equal velocity towards the two ends of the rectangle.  One end is a hard, smooth surface.  The other end is a padded surface.  The net force is expected to move the rectangular container towards the direction of the hard surface.

That particular experiment is an absolute confirmation of the China Patent application 200510120813.5 with inventors Wini Woo, Bill Fong and Lawrence Tseung.  Mr. Lee Cheung Kin worked with his Military College Alumni friends in May 2008 and had a flying saucer prototype flying in a stadium in China at the last week in October 2008.  He is taking full responsibility for the demonstration, disclosure or publicity of that prototype.  He can be contacted in Hong Kong at (852) 2707 9729 or email: cheungkin331@hkbn.net.

Experiment001 cannot be wrong both theoretically and experimentally.  Yet some people raised the objection to reactionless drives or inertia propulsion.  They said that according to Newton's Third Law – action is equal to reaction; such inertia propulsion systems are impossible.

If you have connection with the Physics or Electrical Departments of Universities, please ask them to replicate experiment001 and publish their independent results.

Lawrence

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