Piecing Together a Puzzle with Trillions
 
The 4 trillion yuan stimulus package recently announced by China’s government targets a range of projects, from low-income housing to railway construction. While potential beneficiaries line up, banks and local governments are eagerly preparing loans and investments. But Caijing’s chief economist warns of a potentially risky “Investment Great Leap Forward” built on unrealistic promises and irresponsible investments.
 
Less than two weeks after Beijing’s announcement, eight municipalities and provincial governments announced major qualifying investments for the next two years totaling 2.8 trillion yuan. But questions remain. Its unclear how much of the promised local money represents new outlays, and how much would come from existing but renamed investments. Moreover, how can local governments strained by a weak housing market raise more cash?
 
Central Bank Offers To Aid Foreign Banks
Amid the global financial turmoil, foreign banks operating in China face increasing liquidity stress. The strain prompted the central bank, the People’s Bank of China, to begin offering a Term Auction Facility instrument to ease short-term liquidity pressure for financial institutions, including foreign banks with stakes in China. The central bank initiative may serve as a last resort for rescuing stressed foreign banks.
 
The credit crunch largely stems from high loan-to-deposit ratios for foreign banks in China, reflecting their fight for market share and rapid growth despite low capital bases. The strain surfaced in mid-September when foreign banks in China started having trouble borrowing through the nation’s interbank market. Interest rates rose and loan volumes shriveled, squeezing those foreign banks that relied heavily on interbank loans.
 
China, Russia Resume Oil Loan Negotiations
 
China and Russia have decided to continue talks on a plan for US$ 25 billion in Chinese loans to Russian energy companies. The loan scheme, discussed during Chinese Premier Wen Jiabao’s visit to Russia in October, calls for funneling US$ 15 billion and US$ 10 billion to Russia’s state-owned Rosneft and Transneft to secure long-term crude oil supplies for China. Negotiations between the two countries had been temporarily suspended due to disputes over interest rates and state guarantees. But a source told Caijing declining international oil prices had put pressure on Russian oil firms, strengthening China’s position at the bargaining table. The Russian energy minister November 18 said the talks were hindered by “technical obstacles” but would resume. One source said the Chinese expect a settlement by November 25.
 
Why Bailout Citic Pacific?
 
Citic Group plans to clear the balance sheet and reduce derivatives trading exposure for its subsidiary Citic Pacific, which was stung by bad bets on the foreign exchange market. Group Vice Chairman Chang Zhenming described the plan in an interview with Caijing. The group will provide Citic Pacific with a US$ 1.5 billion standby loan that can be substituted with convertible bonds issued to Citic Group.
 
Given the turmoil in global equity and credit markets, Citic Pacific has found it extremely difficult to access financing. But this is not the first bailout for the firm by its parent. And questions have been raised over who should be held responsible for the losses. Senior managers at Citic Pacific and investment bankers who sold complicated derivatives are among those being blamed.
 
Hangzhou Subway Collapse: Who’s to Blame?
 
The recent collapse of an unfinished section of the Hangzhou subway system highlighted a series of safety problems in the region’s construction industry. The November 15 tunnel collapse killed 10 workers. Another 10 were reported missing. A preliminary government investigation blamed the accident on deficient safety measures, neglect, insufficient or nonexistent worker training, loose hiring practices, and failed government oversight. Project leader China Railway Construction Group initially linked the disaster to local ground water and variable soil conditions, blaming heavy rains in October for dangerous conditions.

But the contractor later responded to the criticism, admitting that “to catch up with progress, many aspects have been neglected.” Caijing also uncovered the widespread use of informal subcontracting for railway projects, suggesting that many workers in the collapsed subway tunnel lacked experience.