New Capital Sources Sought for CBD Growth

The 5th Beijing Chaoyang International Business Festival set the stage for what could become one of the most interesting and dynamic moments in history of Beijing and two of its key districts.

Numerous high-level speakers at the festival's meetings and seminars elaborated a clear sense of direction and purpose in connection with the economic development of Chaoyang District and its Central Business District in the run up to the 2008 Olympic Games. In addition, they placed those developments within the context of the overall economic development of Beijing and the Bohai Rim region.

Speaking at the Forum on CBD Multinationals Headquarters and Regional Development, Long Yongtu, secretary-general of BOAO Forum for Asia, said, "China's entry into the WTO is not merely an aim to join an international organization, but a strategic decision made for participating in economic globalization in a much more deep-going, overall and effective way...." Long said there were three major conditions to consider. The first, he said, is the country's firm commitment to the obligations assumed with accession to the World Trade Organization (WTO).

 "The most important thing we are facing is to demonstrate to the whole world that China's development is not a threat but an opportunity, so as to convince international society not to adopt an attitude of surrounding and blocking, jealousy and disruption, but to adopt an attitude of welcoming, support, cooperation and sympathy."

Long said the best way to ensure this is for China to adhere to the rules and regulations of the WTO and to open up its markets to the world.

Long said a second major condition is the adoption of a market economy, which China began to set into motion in 1992.

"This is to say, China began to promise and follow a set of rules and regulations of international market economy, because if you don't promise to practice the market economy, complying with the rules and regulations will be out of the question."

Because China has done this, the secretary-general said, "China's economic systems will certainly be integrated into the global economy. If we go backward on the road of market economy, it will mean that we have gone against our promise to international community, and this will cause great damage to our international image and block the progress of China's reform and opening-up, which is what we don't want to see."

He said China's adherence to the conditions for participating in the WTO and world economic system "has created some basic conditions for China to benefit from the historical course of economic globalization in which China will participate for the next 20 years after China's entry into the WTO."

Long said participating in economic globalization does not constitute "economic integration," as with the European Union.

Instead, he said China recognizes economic globalization as "a primary stage of the historical course of the global economic integration toward which the world is marching. In this primary stage, the Chinese Government still firmly grasps economic sovereignty in its own hands."

This includes retention of rights to make decisions about such things as the revaluation of renminbi, the Chinese currency, customs, bank-interest and currency-exchange rates.

He said, "We will not lose our State sovereignty and will not let some important factors which decide our economy－policies and economic-adjusting levers, namely our economic sovereignty － be damaged by our participation in economic globalization."

Far from merely mimicking the West, Long said, "Our generation is demonstrating to the world that, under the condition of socialism, we can practice market economy and we can do it better than the western countries."

One of the key districts in Beijing implementing the country's economic development plans is Chaoyang District, which is the home of Beijing's Central Business District (CBD) and the city's Olympic Park, the main venue of the 2008 Olympic Games.

Speaking at the same forum, Chen Gang, governor of the People's Government of Chaoyang District, Beijing, said the district's goal is to "promote the aggregation of regional headquarters of multinational corporations and modern service sectors."

Chen said China's accession to the WTO, preparations for the 2008 Olympic Games and the mainland's Closer Economic Partnership Agreement, oriented towards the Hong Kong and Macao special administrative regions, create an unprecedented opportunity for the development of the CBD's headquarters economy. The development of the CBD will, in turn, interactively link the Beijing CBD with other CBDs in China, other "functional areas" within Beijing, such as the Zhongguancun Science and Technology Park, and will strengthen the overall economic development capabilities of Beijing and other cities of the Bohai Rim.

Development of the first phase of the CBD, where much of the infrastructure is already in place, is expected to "aggregate more professional talent, capital, information, and other factors of innovation," according to Chen. This will bring in even more banks, investment companies insurance companies and other modern service companies and generate more activity within the domestic economic environment.

And a key to all this lies in the area of finance where the CBD will serve "as the core area for the development of modern service sectors with international finance taking the lead." The festival's "Varied-level Capital Markets and Local Economic Development" and "Varied-level Capital Markets and CBD Financial Industry Development" forums provided a glimpse into the thinking of some of Beijing's most-prominent economic development thinkers.

In general, speakers at the forum said additional sources of capital formation are needed to continue the development of the CBD's and other urban infrastructures in China.

The speakers said economic development to this point has depended too much on bank loans and China's equity markets. The results, among others, have slowed bank restructuring and reform and have exposed investors, especially individual investors, to unnecessarily high economic risks. In addition, delays have been reported in obtaining funding for low-return-on-investment infrastructural projects such as road construction.

According to Shu Wei, president of the Beijing Central Business District Administrative Commission and deputy director of the People's Government of Chaoyang District, Beijing, the prime source of funding for infrastructural improvements in the CBD has been a form of land rents, but things are changing.

The CBD's recently begun Tonghuihebei Lu project is being financed by a 600-million-yuan bond issue handled by the Beijing International Trust and Investment Company Limited. Individuals were reportedly the prime purchasers of the bonds.

Additional bonds are expected to be used to pay for bus stations, roads, streets, underground pedestrian walkways and other infrastructural projects within the CBD.

The use of municipal and revenue bonds and other financial instruments are expected to be expanded within the scope of China's agreements within the WTO.

Shu said the timing of implementation of these new financial mechanisms will accord with the implementation of the WTO agreements in China, not sooner, not later.

Kong Xuhong, standing director and director of the Debt Market Division of Asia for Merrill Lynch, who spoke at the varied-levels capital forum, said alternative sources of finance are needed by the Beijing CBD and Chinese cities in general, because simply developing land does not ensure that land values will increase or that they will provide certain, stable sources of revenue for urban infrastructural development.

Chen agreed and said "primitive accumulation, mortgages and bank loans" are no longer sufficient to meet urban infrastructural needs.

His comments came following a speech by Shen Bingxi, deputy director of the Financial Market Division of the People's Bank of China.

Shen called for the use of municipal bonds to fund infrastructural projects in China and said an "intra-bank bond market" needs to be created to meet these needs.

He said, "This is our future orientation."

Shen said the participation of local communities in the bond market via the intra-bank bond market would allow local communities to benefit from improvements in the national economy.

"National and local bond markets are complementary," he said. "And the wider they are spread, the more they will benefit each other. This would foster wider participation in the local economies, more development and more investment."

Shen said domestic economies in China that are relying upon bonds are thriving, whereas those which are not, mostly in China's interior regions, are not.

He said corporate bonds now issued in China are few in number and are not distributed via an intra-bank system which would spread risks and rewards to a wider range of investors.

"Under the current system, cities will not be able to find enough capital or deal with infrastructural needs. Of course, some cities have found their own ways, but...," he said, a self-regulating market system would be a superior source of funding, "and this is something we should give our full attention to."

Kong said the use of municipal bonds in China could save as much as 35 percent to 40 percent within the country's financial system.

Chaoyang's Chen said the CBD will also expand the use of "trusts" to manage the public's interest in the marketplace. He said trusts can be used to manage housing, property rights, leases, sales, vehicle fleets, computer equipment and other business activities.

"These have already helped to improve the cash flows of some businesses."

Chen said new rules and regulations for trust operations in the CBD are being developed.

Wang Guogang, deputy director of the Institute of Finance and Banking for the Chinese Academy of Social Sciences, said it makes sense to create multilevel capital markets.

"There are 1.3 billion people in China, and the society is divided in many ways. There are many different levels of society here in Beijing. Everything is multilateral.

If we say society has ten different levels, but only allow one level to participate in the economy, the other nine cannot participate in our economic activity and resource allocation."

Wang said this was true even for State-owned Enterprises which now operate at various levels of the national economy.

"We need to have various production relationships. China still has a highly centralized planning and market system; these capital markets need to be transformed. This is also a requirement of international financial markets." Wang said banks and equities markets are geared for long-term investments, but, he said, "Short-term abilities are needed."

In addition, Wang said, using financial markets would allow for a better allocation of scarce resources in the Chinese economy.

"Financial markets must be allowed to function; market players need to be free to choose their financial instruments, both on the tangible and intangible markets. Let the markets function, and let the players find their own ways out." Wang said new mechanisms are needed for the supervision of financial markets; they should not follow existing administrative systems or structures.