I attended USF's conference this month on opportunities and challenges for China's financial reform. It was nice to be back on my old MBA stomping grounds from last decade and the campus has changed quite a bit. USF's China Business Studies Initiative organized this conference and brought local thought leaders into contact with students and alumni. This conference is extremely important in light of the renminbi's growing use as a regional trading currency (according to this Peterson Institute paper "The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?").
China is increasingly allowing foreign entities to become Qualified Foreign Institutional Investors (QFII) that can invest in mainland China's markets. Further reforms will allow the designation of Renminbi QFII (RQFII) who can use the external currency to make internal Chinese investments. That is as close to full currency regime liberalization as China can come while still maintaining two currencies. The designations come with stipulations like domiciling a certain portion of the QFII's operations inside China. That's why non-Chinese banks are setting up shop in the Shanghai FTZ. My exposition should sufficiently set the stage for what the conference participants had to say. The Chinese consular official's introductory remarks noted that the PRC will duplicate the Shanghai FTZ if it succeeds.
Deloitte sent one of its longtime China hands to address China's pending reforms. The huge size of China's shadow banking sector and its encouragement of bad investment is well known but this was the first I've heard of grey-market wealth management products. I found a good discussion of the consequences of these proliferating grey market investments in the China Economic Review from February 2013. The Deloitte guy said China's Gini coefficient is in an unstable range but I have read many times that China's self-reported economic stats are notorious fabrications. I suspect economic inequality is a lot worse. His take on savings was interesting; apparently Chinese citizens still save personal capital to anticipate future health care needs in the absence of health insurance and that's why consumption spending hasn't taken off. China's leaders know that the country faces severe social stress if they don't push financial reform. The blame for structural imbalances obviously lies with state-owned enterprises that accumulate capital and create overcapacity. I find it ironic that the US's own state-owned enterprises - the housing GSEs, SIFIs, and bailed-out automakers - also create overcapacity and poor investments here at home.
The panel on capital markets and cross-border investments made it very clear that state-owned enterprises (SOEs) are an element of China's soft power. They can invest outside its borders in support of China's foreign policy objectives. I'll predict that full financial reform on the mainland will be impossible because China cannot stop subsidizing its SOEs. It absolutely must maintain an expansionist foreign policy to obtain natural resources in Africa and Southeast Asia and SOEs are its instrument of penetration. That also explains why the US maintains national security requirements that blunt the ability of Chinese SOEs to invest here, as the panel noted. I do not necessarily agree with the panel's conclusion that Shuanghui's acquisition of Smithfield Foods was a more cost-effective way to obtain advanced agricultural technology than developing food processing at home. I believe the acquisition is designed to divert pork products from the US so China can manage its pig cycle in the same manner as it manages capital flows. Shuanghui is privately owned but I think the connections between its top officers and the Politburo deserve scrutiny. I wonder about the panel's belief that an appreciating RMB will allow more US food exports to China. The stagnation of Chinese purchasing power due to inflation could IMHO easily be a countervailing force. The panel revealed that China expects the Shanghai FTZ to attract the regional headquarters (RHQs) of foreign firms away from Hong Kong and Singapore, where non-Chinese multinationals traditionally set up shop to manage their Chinese projects and repatriate profits. I was not surprised to learn the local governments report WOFE registrations up the chain to Beijing.
One of USF's deans gave a sales pitch for the school's Jesuit values. I have been skeptical of how seriously the school takes those values ever since they allowed a Stolen Valor fraud to receive free MBA tuition from 2007-2009 while he was masquerading as a ROTC faculty member. I'll take the values pitch seriously once they revoke his MBA and demand payback of the tuition remission he received. That won't be difficult after he's indicted and convicted for some related embezzlement scams he pulled in the local veterans' community. Several USF alumni may very well be indicted along with "Mickey," so maybe they'll bunk together in prison. I am optimistic that USF has new programs in the works like this China initiative. If they're serious about building MBA coursework in supply chain sustainability and internal audit / financial compliance then the school will differentiate itself. I'll believe it when I see the results.
The panel on RMB internationalization noted that obtaining physical RMB outside China is still difficult and the overall quotas for offshore RMB are still small compared to China's stock market capitalization. Dollar-RMB swaps allow Chinese investors to purchase US Treasuries more cheaply than with direct purchases. It's intriguing to note that trading differentials between onshore and offshore RMB allow arbitrage with forward contracts. Non-China MNCs use offshore RMB to hedge their exposure to operations inside China. I would be very wary of those Hong Kong banks attracting RMB deposits with high rates. That's what Cyprus banks did up until last year and that ended badly for many large depositors. Investors who use those RMB to buy dim sum bonds when China hyperinflates its way out of a shadow baking crisis are going to be really hurt. I don't think there's any totally safe place for foreigners to invest in China for those reasons until long after the reforms of the Twelfth Five-Year Plan have taken hold. MNCs need to take risk management very seriously in China.
The final panel on the implications of the RMB's globalization gave me my chance to ask my only question. I asked the panel if they thought the RMB would ever displace the US dollar as the world's reserve currency. I set off a few laughs among the audience. The panel generally thought that it won't happen in the near term as long as the RMB remains China's control currency for managing trade and investment. The RMB pools outside China aren't large enough yet for reserve use among central banks. One panelist from the Bay Area Council Economic Institute noted that foreign-born talent is rising faster in the Bay Area than in the rest of the US and that local patents with foreign co-inventors are growing in number. I guess that means our region has the right stuff to attract brain power. US investors who want to bank with one of the four licensed Chinese banks in California need to know that RMB deposits are not insured by the FDIC. That's a relief. For a minute there I thought the US taxpayer might have been subsidizing Chinese moral hazard. Those Chinese banks can grant letters of credit in RMB, which is good news for the local import-export crowd and the trade promotion experts at ChinaSF. It's too bad the stupid losers over at FX Invest West Coast didn't invite me to speak at their show this year. If they invite me next year I'll have a lot to say about the RMB thanks to this conference. I will note for the record that the IMF's SDR regime does not at present include the RMB. I don't think that will change. Please note that Alfidi Capital is not a QFII of any sort, so don't ask me where you can open an RMB account.
Events like this give me hope for USF students. The quality of my fellow USF MBA students a decade ago was very low. Things are different now. I will continue to attend USF events like this high-quality China conference. There were many very attractive Chinese women on hand wearing their shiny cheongsam dresses. I'll get their phone numbers next time. Good job, Dons.
China is increasingly allowing foreign entities to become Qualified Foreign Institutional Investors (QFII) that can invest in mainland China's markets. Further reforms will allow the designation of Renminbi QFII (RQFII) who can use the external currency to make internal Chinese investments. That is as close to full currency regime liberalization as China can come while still maintaining two currencies. The designations come with stipulations like domiciling a certain portion of the QFII's operations inside China. That's why non-Chinese banks are setting up shop in the Shanghai FTZ. My exposition should sufficiently set the stage for what the conference participants had to say. The Chinese consular official's introductory remarks noted that the PRC will duplicate the Shanghai FTZ if it succeeds.
Deloitte sent one of its longtime China hands to address China's pending reforms. The huge size of China's shadow banking sector and its encouragement of bad investment is well known but this was the first I've heard of grey-market wealth management products. I found a good discussion of the consequences of these proliferating grey market investments in the China Economic Review from February 2013. The Deloitte guy said China's Gini coefficient is in an unstable range but I have read many times that China's self-reported economic stats are notorious fabrications. I suspect economic inequality is a lot worse. His take on savings was interesting; apparently Chinese citizens still save personal capital to anticipate future health care needs in the absence of health insurance and that's why consumption spending hasn't taken off. China's leaders know that the country faces severe social stress if they don't push financial reform. The blame for structural imbalances obviously lies with state-owned enterprises that accumulate capital and create overcapacity. I find it ironic that the US's own state-owned enterprises - the housing GSEs, SIFIs, and bailed-out automakers - also create overcapacity and poor investments here at home.
The panel on capital markets and cross-border investments made it very clear that state-owned enterprises (SOEs) are an element of China's soft power. They can invest outside its borders in support of China's foreign policy objectives. I'll predict that full financial reform on the mainland will be impossible because China cannot stop subsidizing its SOEs. It absolutely must maintain an expansionist foreign policy to obtain natural resources in Africa and Southeast Asia and SOEs are its instrument of penetration. That also explains why the US maintains national security requirements that blunt the ability of Chinese SOEs to invest here, as the panel noted. I do not necessarily agree with the panel's conclusion that Shuanghui's acquisition of Smithfield Foods was a more cost-effective way to obtain advanced agricultural technology than developing food processing at home. I believe the acquisition is designed to divert pork products from the US so China can manage its pig cycle in the same manner as it manages capital flows. Shuanghui is privately owned but I think the connections between its top officers and the Politburo deserve scrutiny. I wonder about the panel's belief that an appreciating RMB will allow more US food exports to China. The stagnation of Chinese purchasing power due to inflation could IMHO easily be a countervailing force. The panel revealed that China expects the Shanghai FTZ to attract the regional headquarters (RHQs) of foreign firms away from Hong Kong and Singapore, where non-Chinese multinationals traditionally set up shop to manage their Chinese projects and repatriate profits. I was not surprised to learn the local governments report WOFE registrations up the chain to Beijing.
One of USF's deans gave a sales pitch for the school's Jesuit values. I have been skeptical of how seriously the school takes those values ever since they allowed a Stolen Valor fraud to receive free MBA tuition from 2007-2009 while he was masquerading as a ROTC faculty member. I'll take the values pitch seriously once they revoke his MBA and demand payback of the tuition remission he received. That won't be difficult after he's indicted and convicted for some related embezzlement scams he pulled in the local veterans' community. Several USF alumni may very well be indicted along with "Mickey," so maybe they'll bunk together in prison. I am optimistic that USF has new programs in the works like this China initiative. If they're serious about building MBA coursework in supply chain sustainability and internal audit / financial compliance then the school will differentiate itself. I'll believe it when I see the results.
The panel on RMB internationalization noted that obtaining physical RMB outside China is still difficult and the overall quotas for offshore RMB are still small compared to China's stock market capitalization. Dollar-RMB swaps allow Chinese investors to purchase US Treasuries more cheaply than with direct purchases. It's intriguing to note that trading differentials between onshore and offshore RMB allow arbitrage with forward contracts. Non-China MNCs use offshore RMB to hedge their exposure to operations inside China. I would be very wary of those Hong Kong banks attracting RMB deposits with high rates. That's what Cyprus banks did up until last year and that ended badly for many large depositors. Investors who use those RMB to buy dim sum bonds when China hyperinflates its way out of a shadow baking crisis are going to be really hurt. I don't think there's any totally safe place for foreigners to invest in China for those reasons until long after the reforms of the Twelfth Five-Year Plan have taken hold. MNCs need to take risk management very seriously in China.
The final panel on the implications of the RMB's globalization gave me my chance to ask my only question. I asked the panel if they thought the RMB would ever displace the US dollar as the world's reserve currency. I set off a few laughs among the audience. The panel generally thought that it won't happen in the near term as long as the RMB remains China's control currency for managing trade and investment. The RMB pools outside China aren't large enough yet for reserve use among central banks. One panelist from the Bay Area Council Economic Institute noted that foreign-born talent is rising faster in the Bay Area than in the rest of the US and that local patents with foreign co-inventors are growing in number. I guess that means our region has the right stuff to attract brain power. US investors who want to bank with one of the four licensed Chinese banks in California need to know that RMB deposits are not insured by the FDIC. That's a relief. For a minute there I thought the US taxpayer might have been subsidizing Chinese moral hazard. Those Chinese banks can grant letters of credit in RMB, which is good news for the local import-export crowd and the trade promotion experts at ChinaSF. It's too bad the stupid losers over at FX Invest West Coast didn't invite me to speak at their show this year. If they invite me next year I'll have a lot to say about the RMB thanks to this conference. I will note for the record that the IMF's SDR regime does not at present include the RMB. I don't think that will change. Please note that Alfidi Capital is not a QFII of any sort, so don't ask me where you can open an RMB account.
Events like this give me hope for USF students. The quality of my fellow USF MBA students a decade ago was very low. Things are different now. I will continue to attend USF events like this high-quality China conference. There were many very attractive Chinese women on hand wearing their shiny cheongsam dresses. I'll get their phone numbers next time. Good job, Dons.
