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* C F A U P D A T E *
(A Newsletter of Chinese Finance Association)
Volume 1, No. 4, Monday, February 27, 1995
All Rights Reserved, CFA, 1995
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In This Issue:
- News Highlights -
1. U.S., China Reach Agreement to Avert Trade War
2. U.S., China Sign Energy Cooperation Deals and $4 Bil Contracts
3. Shougang's Chief Steps Down, Son Arrested for Economic Crime
4. China Issues More Bonds to Curb Inflation
5. Bond Futures Trading Frenzies in Shanghai, Trading Scam Probed
- Market Watch -
Greenspan Report Sends U.S. and Hong Kong Markets to Record High
- CFA Affairs -
1. Ford Foundation Funding Report Available upon Request
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NEWS HIGHLIGHTS
1. U.S., China Reach Agreement to Avert Trade War
(By Steve Sun)
After two weeks of intensive negotiation, the United States and China signed
an agreement on Sunday and averted a bruising trade war, which would have
automatically gone into effect on Sunday if the two sides had not reached an
agreement.
Under the agreement, China will take tougher steps to enforce its anti-
piracy laws and will remove import quotas and other trade barriers for U.S.
music and movies to enter the Chinese market.
U.S. President Clinton, Trade Secretary Brown, and Trade Representative
Kantor hailed the historic agreement.
In Beijing, Wu Yi, China's Minister for Foreign Trade and Economic
Cooperation, acclaimed the agreement as "a new turning point" for the two
countries. "We hope Sino-U.S. economic and trade relations can overcome
interference so that trade ties can develop on a long-term basis, " Wu said.
Businessmen and investors in Taiwan and Hong Kong felt relieved with the
news. About 25,000 Taiwanese-invested companies operate in mainland China,
with a total capital between $10 billion and $20 billion, according to
Beijing's figures quoted by Taiwanese officials. U.S. and China are two
biggest trading partners of Hong Kong.
According to Reuter, the following are the eight major points in the
U.S.-China agreement:
-a comprehensive long-term structure for enforcement of China's
intellectual property protection laws, including formation of powerful
inter-agency task forces empowered to raid pirate factories and aid
prosecution of counterfeiters
-initiation of a six-month "special enforcement period" beginning on
March 1 that will involve sweeping crackdowns on enterprises and individuals
suspected of counterfeiting U.S. movies, recorded music, computer software
and other copyrighted, patented or trademarked goods
-a longer-term plan for deepening protection of intellectual property,
with special focus on computer software
-implementation of "enhanced remedies" including stripping of business
licenses and criminal prosecutions for serious offenders
-enhanced customs service with broad enforcement authority at China's
borders to seize counterfeit goods
-the immediate cessation of all exports from China of counterfeit goods
-greater access to the enforcement system in China and more transparency
about the rules that apply
-market access allowing legitimate U.S. products to replace counterfeit
goods, including abolition of all quotas restricting import of U.S.
audio-visual works and provisions to establish joint ventures with the right
to produce and reproduce U.S. works in China and to market and distribute
them nationwide.
- - -
2. U.S., China Sign Energy Cooperation Deals and $4 Bil Contracts
(By Yan, Hong)
Two days before the mutual trade sanctions between U.S. and China were to
take effect and both sides were working intensely in last-ditch talks to
avoid them, U.S. Energy Secretary Hazel O'Leary finished her six-day visit
to China by presiding over the signing of a spade of official cooperation
deals and corporation contracts.
On Thursday, Feb. 23, Ms. O'Leary signed six of the seven agreements
between U.S. and Chinese governments herself in a jovial ceremony in
Beijing. These accords, in forms of protocols, memoranda and statements of
intent, encompass issues ranging from efficient and renewable energy
technology development, bilateral energy policy consultations, fossil energy
recovery and utilization, regional climate research, research reactor fuel,
and energy statistics and market information exchange.
On Friday, U.S. and Chinese firms signed 26 energy contracts worth $4
billion. The deals include sales of steam turbine and generating equipments
by Westinghouse Electric Corporation to Qinshan Nuclear Power Station in
central China; retrofitting nine fertilizer plants in China with its
environmentally clean gasification technology by Texaco, which seeks to
expand its coal-gasification plant sales to China; and a contract to explore
for natural gas in the South China Sea. The largest deal is a letter of
intent to set up a joint venture to build and operate a 1,200 megawatt power
station in western Sichuan between the province's power company and a unit
of General Public Utilities (GPU) of New Jersey.
China is facing increasing energy shortage as its demand for electricity
is outrunning supply by more than 20 percent. China hopes to woo up to $300
billion in foreign capital for energy projects over the next 15 years.
However, foreign bankers are concerned about the terms under which China is
inviting foreign capitals into this sector without bank guarantees of
repayment and with a cap of the rate of return. Brushing aside these
concerns, Secretary O'Leary says that the process (of participation) is more
important.
- - -
3. Shougang's Chief Steps Down, Son Arrested for Economic Crime
(By Yan, Hong)
Amid speculations of Deng Xiaoping's health and intensified power struggle in
China's top leadership, the Chinese authorities on Feb.17 announced the
arrest of Zhou Beifang, 41, chief of Shougang's Hong Kong holding company,
who is being investigated for 'serious economic crime'. The significance of
the incident is underscored by the fact that just one day earlier, Zhou's
father, Zhou Guangwu, "retired for health reason" as Shougang's Chairman. The
elder Zhou, 77, was a comrade-in-arms with Deng Xiaoping in 1940's. With
Deng's blessing, Shougang, the Capital Steel and Iron Corporation, has grown
from a smoke-spewing state steel-maker to an $11 billion multinational
conglomerate that includes a bank, five companies listed on the Hong Kong
stock exchange and a massive iron-ore mine in Peru.
News of the downfall of such well-connected men rocked the Chinese
business community and caused jitters in the Hong Kong stock market as
investors dumped so-called red-chip companies. CITIC Pacific Ltd., a
subsidiary of CITIC Group founded by China's Vice President Rong Yiren,
Continental Mariner Investment Co. Ltd., chaired by Wang Jun, son of late
Chinese Vice President Wang Zhen, and Oriental Metals (Holdings) Co. Ltd.,
chaired by Deng Xiaoping's son-in-law Wu Jianchang, are among the hardest hit
red-chips on Monday. Also hit were shares of Hong Kong multi-billionaire Li
Ka-shing's Cheung Kong Holding Ltd., which has extensive dealings with
Shougang and Deng Zhifang, Deng Xiaoping's son and the head of Shougang's
Hong Kong-based real estate arm. Prices recovered some later in the week.
Business executives speculate that the moves against Shougang could
signal a new round of a high-level anti-corruption drive tied to the power
struggle for the post-Deng era. With their once powerful parents out o
political favor, their children, so-called princelings or 'Taizi Dang', once
heavily recruited by western companies trying to do business in China can
become more of liabilities than assets.
- - -
4. China Issues More Bonds to Curb Inflation
(By Steve Sun)
China will issue 150 billion yuan ($17.75 billion) treasure bonds this year,
the largest amount in its history. The government issued 103 billion yuan in
1994 and 30 billion in 1993. China needs to finance its huge deficit, which
is estimated to be 91 billion yuan this year. Issuing more bonds rather than
printing more money to cover China's mounting deficits will help to curb
inflation, since it will draw money away from consumers and bring down
spending.
These bonds will be issued in three types. The first is Paperless
Certificates with a coupon of 14% plus an inflation subsidy (currently
indexed at 11.87%). Targeting individual investors, Paperless Certificates
have attractive rates but will not be traded in the market. The second type
is Paper Bond and the third is Paperless Bonds, both with 14.5% coupon and
without an inflation subsidy. These bonds are tradable and designed for
institutional investors.
The first bunch of 101 billion yuan ($11.98 billion) of three-year bonds
will be issued on March 1 and will be in the form of Paperless Certificates,
according to the Shanghai Business News.
- - -
5. Bond Futures Trading Frenzies in Shanghai, Trading Scam Probed
(By Steve Sun)
Bond futures trading in Shanghai Stock Exchange went into frenzy after
investors learnt that two-third of the 150 billion yuan ($17.75 billion)
bonds to be issued this year will not be traded in the market.
To clamp down bond speculation, 101 billion yuan ($11.98 billion) bonds
will be issued in the form of paperless certificates and will not be
transferable. The purpose of such a decision is to counter illegal short-
selling on China's bond market that have drawn huge amount of money away from
stocks and equities.
However, the move led to opposite effect when traders rushed to buy
existing bond futures contracts. Total face value of bond futures traded on
Thursday was a record high of 494.11 billion yuan ($58.8 billion), almost
four times the previous high of 128.96 billion yuan ($15.4 billion.) set only
two days ago on Tuesday.
Most large brokerage firms had been short-selling bond futures, and the
unexpected surge brought huge loss to them and led to one or more trading
scams.
About 8 minutes before market close, a fervent selling of the tree year
June 1992 t-bond, the hottest contract of the day, pushed its price down.
After an investigation, the exchange decided to cancel all trades
involving the June 1992 t-bond which occurred after 4.22 pm and 13 seconds.
If these trade were not canceled, the actual turnover will be 807.5 billion
yuan, 80% of which was in June 1992 t-bond contract. The exchange said in a
statement there was "serious and deliberate violation of trading rules."
The scam involved Shanghai International Securities, the country's
largest brokerage firm. Exchange officials said the firm lost more than 600
million yuan ($72 million) before the burst of selling at about 4:22 pm.
The exchange suspended bond futures trading Friday to discuss the
matter. Trading resumed later after the exchange imposed a restriction (0.50
yuan up or down) on intra-day price movements on bond futures.
The price caps, traders say, will help to prevent short-sellers from
incurring larger losses.
- - -
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MARKET WATCH
(By Steve Sun)
Last Week Before Change
Dow J Industrial Average 4011.74 3953.54 +58.20
Standard & Poor 500 Index 488.26 481.97 +6.29
NASDAQ Composite 791.08 786.96 +4.12
Tokyo Nikkei Index 17472.94 18020.51 -547.57
Hong Kong Hang Seng Index 8218.95 8043.01 +175.94
CLSA Index All China 1232.91 1186.44 +46.47
CLSA Index China B 820.30 824.89 -4.59
CLSA Index Shanghai A 3020.69 2880.74 +139.95
CLSA Index Shanghai B 638.50 638.13 +0.37
CLSA Index Shenzhen A 980.28 955.76 +24.52
CLSA Index Shenzhen B 773.12 788.59 -15.47
CLSA Index Hong Kong H 1126.78 1144.72 -17.94
At market close on Friday, February 24, 1995
52 Weeks High Date Low Date
Dow J Industrial Average 4011.74 02/24/95 3593.35 04/04/94
Standard & Poor 500 Index 488.26 02/24/95 438.92 04/04/94
NASDAQ Composite 803.93 03/18/94 693.79 06/24/94
Tokyo Nikkei Index 21552.81 06/13/94 17472.94 02/24/95
Hong Kong Hang Seng Index 10432.02 02/24/94 6967.93 01/23/95
CLSA Index All China 2282.47 09/13/94 801.27 07/29/94
CLSA Index China B 1244.64 02/24/94 804.46 02/08/95
CLSA Index Shanghai A 5734.65 09/13/94 1744.01 07/29/94
CLSA Index Shanghai B 944.90 02/24/94 591.38 02/08/95
CLSA Index Shenzhen A 1759.42 09/08/94 716.55 07/29/94
CLSA Index Shenzhen B 1284.69 09/26/94 773.12 02/24/95
CLSA Index Hong Kong H 1727.07 02/24/94 947.85 01/13/95
Greenspan Report Sends U.S. And Hong Kong Markets to Record High
U.S. financial markets had a strong week, fueled by Federal Reserve Chairman
Alan Greenspan's report to the congress.
Greenspan said to the congress that the economy was slowing but not
heading into recession. The central bank's chief said the Fed would move
quickly to cut rates if it felt inflation pressure was under control.
Both Dow Jones Industrial Index and S & P 500 Index had a gain on every
market day of the week, and reached their historical high on Thursday and
again on Friday. Dow also broke 4000 points on Thursday for the first time.
However, small stock index Nasdaq Composite did not break its record high,
although it gained 4.12 point over the week.
Hong Kong market, driven by Wall Street's record, jumped three percent
on Friday to finish the week at a 1995 high. But Tokyo market, in contrast,
continued its weakness and reached its 13 month low. Honk Kong H shares, so-
called Red Chips, were hit by a shocking news from Shougang, the Capital
Steel & Iron Co. (See CFA Update News Highlights.)
Both Shanghai's A share and B share indices finished the week higher.
However, A share index dropped more than five percent Friday in the wake of
a bond market scandal. Brokerage firms were selling for cash to cover their
loss from short-selling bond futures, and investors lost their confidence on
their brokers. (See CFA Update News Highlights.)
Shenzhen B share index reached its 52 weeks low, signaling the
exchange's trouble continued.
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CFA AFFAIRS
1. Ford Foundation Funding Report Available upon Request
(By Wu, Guojun)
A financial report on the use of Ford Foundation fund ($10,000) has been
prepared as part of a fiscal year 1994 report to the Foundation. The report
is available to all members of the CFA upon request. To request a copy send
a message to gwu@ecu.stanford.edu
* * * * * *
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SUBSCRIPTION
CFA Update is published by China Finance Association. To
subscribe, please contact gan@econ.berkeley.edu. To contribute
articles, contact xsun@midway.uchicago.edu. For CFA membership,
contact gwu@leland.stanford.edu
DONATIONS
This newsletter is furnished to you free of charge. However,
a donation from you can help to continue and improve this service.
Please contact Steve Sun, xsun@midway.uchicago.edu, (312) 753-0474
EDITORS
Sun, X. Steve (EIC) University of Chicago
Yan, Hong UC Berkeley
CFA BOARD OF DIRECTORS
Cai, Hongbin (President) Stanford University
Cheng, Lilan MIT
Dai, John Qiang (Chairman) Stanford University
Gao, Bin, New York University
Jiang, Ping Stanford University
Sun, Xiaodi Steve University of Chicago
Wu, Guojun Stanford University
Yang, Baiyan UCLA
Zhuang, Shuo Boston University
CFA ADVISORY BOARD
Huang, Da Member, Economic and Financial Committee of the
People's Congress of China, and Formal President,
People's University of China
Li, Yining Deputy Director, Legislation Committee of the
People's Congress and Dean, Business School of
Beijing University
Liu, Hongru Chairman, Security Regulatory Commission of China
Zhou, Xiaochuan Vice President, Bank of China
Zhu, Xiaohua Vice Governor, People's Bank of China, and
Director, Foreign Exchange Administration of China
Wu, Jinglian Senior Research Fellow, Development and Research
Center of the State Council of China
Arrow, Kenneth Nobel Economics Laureate, Stanford University
Boskin, Michael Former Chairman, Council of Economic Advisors to
the President of the United States, and Senior
Fellow, Hoover Institution
Duffie, Darrell Stanford University
Heal, Geoffrey Executive Dean, Graduate School of Business,
Columbia University
Lau, Lawrence Stanford University.
Miller, Merton, Nobel Economics Laureate, University of Chicago
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