Author: Coco Kee, Managing Partner of KGA
YI Gang was recently appointed as the head of the People’s Bank of China (PBoC), China’s central bank, to succeed Xiaochuan, who will soon retire after leading PBoC for 16 years. The appointment is as important to China as to the U.S. for the following 4 reasons:
I. PBoC is somewhat equivalent to the U.S. Federal Reserve
PBoC’s U.S. counter-party is the Federal Reserve and YI Gang similar to Jerome Powell, current Chair of Fed, though the PBoC and Fed are different in multiple aspects, including structure, affiliation functionality. Unlike the Fed, the PBoC is a government entity within the State Council, responsible for setting and executing monetary policies, preventing and addressing financial risks and maintaining the stability of the currency RMB.
Recently, the PBoC is taking on more responsibilities with regard to monitoring and regulating financial institutions, similar to the role the Fed has played since the 2008 financial crisis.
II. The first “Sea Turtle” educated in the U.S. who joined the PBoC
“Sea Turtles” refer to Chinese returnees educated in the West. spent 14 years in the U.S. before taking his position in 1997 with the PBoC, where he has remained ever since.
was among the first group of people admitted to through a national exam after more than a decade-long shut-down of China’s higher education, as a result of the Cultural Revolution. He was admitted in 1978 to Peking University, or Beijing University, the top school in the country.
In 1980, he was hand-picked and financed by Peking University to go to the U.S., where he first studied at Hamline University in Minnesota and later the University of Illinois where he earned economics. Subsequently, he became a tenured professor of economics at the University of Indiana where he taught until 1994.
In 1994, together with 5 other returnees, including Justin Yifu Lin, former Chief Economist of the World Bank, he founded the China Center for Economic Research (CCER), now called the "National School of Development," at Peking University.
Since 2015, CCER's researchers have been coming to the U.S. to share their annual forecast of China's economy hosted by New York Stock Exchange.
Unlike the majority of sea turtles who often find it challenging to work Chinese governmental institutions, never let his training in the U.S. get in the way and, in fact, had worked very well over the years with his locally trained colleagues, all the while slowly and steadily rising through the ranks of the PBoC.
III. A realistic idealist
has his but at the he is fully aware of the reality with which he deals. He does not lose his perspective. He returned to China when its financial infrastructure was embryonic and chaotic to pursue his dream of helping his country build it. He diligently and patiently carried out his duties and played his role in the government while also expressing his concerns over issues and problems, such as water shortages. For a time he minimized toilet flushing in his home in an attempt to save water.
He understands and embraces the government’s ambition to make the RMB a global reserve currency. At the same time, he points out that compared with other reserve currencies and their financial markets, China is not there, yet. It takes time for things to mature and decision-makers should “stay calm and keep breath smooth”(心平气和).
Deep in his heart, YI is a believer in the market. However, he takes a more balanced approach. He knows that things do not happen overnight, especially in China, given its size, complexity diversity, where there is a real risk of serious trouble if prudence and proper caution aren't embraced.
His appointment gives some Chinese hope that he may help push for more clarity of policies when it comes to cryptocurrency. As early as 2013, when asked about his thoughts with regard to Bitcoin, he commented that from the standpoint view of the PBoC, Bitcoin would not be considered legitimate in the near term, but he personally thought people had the freedom to trade Bitcoin through the Internet. He also noted at that time that he personally thought Bitcoin quite unique and intriguing.
He is known for being very poised and reserved and for never losing temper. He looks more like a scholar than a bureaucrat.
All these qualities, in addition to his accomplished career with the PBoC, made him stand out and win the trust of LIU He, Vice Premier in charge of economics and finance, Xi protégé and advisor.
IV. Why YI’s Nomination is Important to the U.S.
China is sending a clear signal to the West, especially to the U.S., about its attitude towards the reform of its financial markets. Both of the nominees were educated in the U.S. and have been the advocates of reform.
LIU has been instrumental in the past years helping the country reduce overcapacity and pivot the economy towards a more consumption-driven one. Together with LIU, through wisely managing monetary policy, YI Gang will try to address the challenges of neck-breaking debt, asset bubbles, maintain the stability of the financial system, while still keeping the supply of capital ample to support Chinese companies’ expansion both in China and overseas. His predecessor ZHOU Xiaochuan has definitely not left him with an easy job. The good news is that YI Gang has the support of LIU and XI.
If LIU or did not deliver changes or reforms fast or significant enough to appease the U.S., it may be more a result of their dealing in their minds prudently with the variety of challenges they are inheriting than their desire to do so.
The following is an excerpt from a paper by YI Gang published in the Cato Institute’s Journal in 2008 and it appears to well reflect what China has been working on the past 5years. For the full paper, click here.
"The RMB exchange rate is an economic issue. The best way to bring about an equilibrium exchange rate is further reform. dialogue will help speed up the reform process and make the convergence to a new equilibrium smoother. However, it should be noted that it takes time to establish an efficient market.
... To move toward equilibrium, coordinated policy measures are needed for structural adjustment. To resolve China’s large trade surplus and restore external balance, measures are required for promoting domestic demand, increasing imports, investing abroad, and accelerating urbanization—in addition to currency appreciation. In fact, many measures can generate impacts similar to currency appreciation, such as imposing environment protection requirements, enhancing labor standards, strengthening labor protection, and upgrading the judiciary system. All these measures mean higher costs, lower competitiveness, and a reduced trade surplus, which will move the economy toward equilibrium. Also, it is important to recognize that it will take time for these measures to bring about structural changes. Policymakers in Washington and elsewhere should be patient as China makes its way toward a full-pledged foreign exchange market. "
Last week, I was invited by the Voice of America (VOA) for a remote interview to share my outlook on U.S. - China trade and investment in 2018. The topic is “Will 2018 be a year of war between the U.S. and China in cross-border trade and investment?”
The discussion was triggered by two events, CFIUS’ blocking of Ant Financial’s acquisition of MoneyGram and the failed partnership between Huawei and AT&T.
Yes, CFIUS rejected the acquisition attempt of MoneyGram by Ant Financial, an affiliate of Alibaba, out of national security concern -- MoneyGram is the owner of a large amount of U.S. citizens’ personal information.
Am I shocked to learn of the rejection? Not exactly. CFIUS’ concern is legitimate. Let me put on my hat as a Chinese. Protection of customers’ personal information is not the priority of most Chinese companies, yet.
Will CFIUS block more Chinese acquisition deals down the road? Very likely. However, people forget that the concern over Chinese acquisition activities has been building up for a period of time. Only after Trump took office did both political parties and Congress sit down and take actions. Industries such as semiconductor, aerospace, IT information infrastructure, mobile technology, and consumer data information, fall into the categories of sensitive sectors.
My recommendation to Chinese companies is to stay away from these sectors. There is no lack of good U.S. companies to invest in and/or acquire, i.e., healthcare and biotech.
AT&T bailed out of its potential partnership with Huawei at the last minute, right before the 2018 CES (Consumer Electronic Show in Las Vegas), at which Huawei was expected to announce the partnership. For Huawei, this was most disappointing and frustrating.
Media reported that both AT&T and Verizon had to distance themselves from Huawei under political pressure. I prefer not to read too much into this speculation for lack of data points. Instead, I want to point out a couple of things from a business perspective.
First, Huawei needs to hire a more competent U.S. public relations company, period.
Second, any U.S. carrier has to be bold enough to take on the risk of distributing Huawei’s smartphones. Huawei’s reputation in the U.S. was affected by the congressional investigation in 2011-2012. There is no evidence in the allegation that Huawei had colluded with the Chinese government. Nor did the Congressional report prove Huawei was compromised. Huawei decided to exit the U.S. market. Since then Huawei had been focused on other markets. How does it expect to successfully reenter the U.S. market without sufficiently addressing these prior doubts and concerns from years ago?
Third, Huawei may have to learn from its peer to be more patient and persistent to do well in this new market. ZTE, another state-owned Chinese smartphone company, has made a dent in the U.S. market. It took more than a decade for ZTE to get to where it is in the U.S.
Image credit: Counterpoint research
The political headwinds in the U.S. towards Chinese companies will be getting stronger in 2018 and for years to come. Growing into more than the world’s manufacturing floor in the past decade, China is competing globally for market share with its own brands and technology. If it wants to become a successful global player, Chinese companies like Huawei will have to learn to address regulatory and political hurdles in different countries in addition to others.
The US trade deficit with China will not shrink overnight. Will the U.S. launch a trade war with China? Has the U.S. government lost its mind? There is no point to discuss which country would suffer more.
The VOA also asked what I would recommend to the Chinese government? Sit down and talk. Spewing rhetoric is one thing, solving problems and reaching a consensus is another. The Chinese government has made a gesture to open up its banking market and allow majority foreign ownership in Chinese banks. This is an encouraging development. Also, the U.S. and Chinese governments should identify more products that China wants and the U.S. is willing to sell. For example, recently the U.S. allowed China to start importing LNG from the U.S.
The frenzy of inbound M&A from China may come to an end. Besides stricter scrutiny by CFIUS, the Chinese government will likely be increasingly less tolerant of highly leveraged acquisitions. According to the investment guidelines recently released by the Chinese regulator, the deal size at or below $300 million has a better chance to get approval. Entertainment, sports and real estate investments and acquisitions are restricted by the government.
Taking both governments’ practices into consideration, in 2018, we may see smaller size transactions and hopefully more sophisticated, strategic buyers and investors from China. As I previously mentioned, I am bullish about biotech and healthcare sectors.
2016 Rio Olympics is going to end tonight. China is trailing the U.S. in the number of total medals while ranking the third in gold medals. This year's Olympics is different in a couple of ways for Chinese.
Gold Medal Fixation, No More?
China is getting fewer gold medals this time. In 2008 Beijing Olympics, China won 51. However, this time, they are going home with only 26 of them. Does it matter? Used to. But not as much.
China started to fix its "gold medal obsession" since early 2015, when the central government announced that it would stop rewarding local governments based on the number of gold medals the athletes from each province win from international competition. Under the incentive system, Chinese athletes are under tremendous pressure to win only gold, dismissing silver and bronze. The shift of the policy, hopefully, may encourage more young people to participate in the sports, first and foremost, to enjoy.
The interview of the 20-year-old Fu Yuanhui, who won 100m backstroke bronze medal, went viral in China. When she found out that she got a bronze medal she was thrilled and said, " I used my primordial force to win it. I am happy about the result." Her attitude is so different from that of the silver medal winner Wu Jingbiao at 2012 London Olympics, who broke down and cried in a national TV interview:
"I shamed my country, my team and all of those who cared for me," he said.
Traitor or Hero
The women volleyball gold medal at Rio Olympics means a lot to China. The Chinese team has been struggling in the past 12 years until Rio. It is because of the Iron Hammer Lang Ping.
The coach Lang Ping used to be the captain of China's women volleyball team. Together with her teammates, she won 3 champions in the 80s and early 90s. The gold medals she and her team brought home went beyond medals. Encouraged by their victory, the whole country was lifted up spiritually with a strive to make China stronger and better.
She left China in the late 90s, studying overseas and coaching Italian and U.S. teams. Until a couple of years ago she was summoned back to help turn around Chinese women volleyball team and prepare for the Olympics.
While she was coaching foreign teams, Chinese called her a "traitor", accusing her of helping foreigners to defeat her own people. After Rio, Chinese treats her as a hero.
However, Lang Ping, with her "Iron Hammer" becomes a challenge to the long-time centralized sports system in China. Lang Ping's contract with China will expire by this September. Where she will be next depends on what she chooses to do and to be. After 8 years studying and working overseas, to her, sports is not just a vehicle to serve one's country anymore. More important, she wants to live a life she desires, not letting other people decide for her.
Not until recently, China has been a land where money seems to grow on trees. A couple of years ago, a U.S. fund went to China to raise money from Chinese investors. After the presentation, someone from the audience raised his hand. He asked the presenter to clarify whether the expected investment return of 10% meant monthly or annual. The presenter jokingly responded, "if you know of an opportunity that guarantees 10% monthly, please tell me. I want to invest my money." The person said, " Sir, few people in China will invest for a return of 10% a year." Long silence from the presenter.
The audience was not joking. Chinese investors have been lending to some privately owned businesses at absurd high rates, sometimes as high as 48%/year or higher. In theory, the money serves as bridge loans for a couple of months, but at times borrowers keep it longer.
Privately owned businesses are poorly served by banks. Working for big and fat State-Owned Enterprises often means less leg work, less risk and much bigger transaction in dollar amount. In need of capital for operations and expansion private companies often turn to private lenders, a reliable funding source. Business owners have to put up their houses, cars, manufacturing facilities, sometimes their marriage certificates, as collateral to lenders. Sadly once they borrow such loans they are trapped. They have to keep borrowing from new lenders to pay off the previous lenders. When source of funding dries up some borrowers either shut down their businesses and disappear, or tragically take their own lives.
On one hand, the world is taken by awe that Chinese companies are going through a shopping frenzy overseas, acquiring trophy companies, on the other hand, privately owned businesses cry out for growth and operational capital at home.