Highlights from the last week of China business news.

Numbers, numbers, numbers
The numbers are in, and China’s economic growth in the first quarter moderated to 10.6%, from 11.7% in the first quarter of last year. But inflation was on the rise, with the consumer price index climbing 8% year-on-year due in part to soaring food prices, which rose by 21% in the first quarter. Price growth did ease some to 8.3% in March from 8.7% in February, but Deutsche Bank economist Jun Ma doesn’t think China’s in the clear. He attributed the March dip to recovering vegetable production, more meat supplies and improved transportation following February’s winter storms. And just in case you thought this economy was weakening, a World Bank report said that China has finally overtaken Japan! Well… sort of. China was named the world’s second-largest economy as measured by purchasing power, although China is still behind the US, Japan and Germany in terms of GDP. While the US economy remains the top dog no matter how you measure it, China did beat back Germany to secure the number two spot in terms of purchasing power.

In appreciation of currency appreciation
The yuan continued its rise by climbing to its highest level against the dollar in more than a decade. It ended trading in Shanghai last Thursday at 6.9916 to the dollar, compared to 7.0017 the previous trading session, for an 18% rise against the greenback in the last three years and 4.5% this year alone. The yuan’s climb hasn’t been lost on speculators who’ve flooded China with hot money to the tune of US$80 billion in the first quarter, according to the deputy chief of the State Information Center’s economic forecasting department. This compares to US$120 billion in all of 2007. He encouraged China to maintain its tough stance on monetary policy, and the People’s Bank of China seems on board. PBOC governor Zhou Xiaochuan pledged to keep a tight rein on monetary policy and resisted calls to allow the currency to appreciate faster. The PBOC however did raise the reserve ratio requirement for commercial banks by 50 basis points to 16%.

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Highlights from the last week of China business news.

CITIC: moving on
CITIC Securities narrowly avoided a potentially disastrous relationship with (the new JPMorgan unit) Bear Stearns in what would have been a US$1 billion share swap. As Bear Stearns was forced to accept a US government bailout in the wake of the sub-prime mortgage meltdown, CITIC Group’s chairman Kong Dan was coy about the fate of the future tie-up, saying that it was not guaranteed, and that CITIC had yet to complete due diligence on Bear. JPMorgan Chase took over the beleagured Bear for a song, and CITIC, like a bridegroom discovering his bride’s criminal record, announced that it would abandon Bear. But CITIC is moving on. CITIC Securities said it still wants to invest in foreign banks, most likely through its Hong Kong unit. Meanwhile, CITIC Pacific set aside US$2.6 billion for capital spending this year, much of which will be spent on an iron ore project in Western Australia.

Not your average Zhou
Rumors of central bank governor Zhou Xiaochuan’s professional demise have been greatly exaggerated. Many believed that Zhou would be replaced during this year’s National People’s Congress (NPC). But China’s desire for stability and a seasoned hand at the helm won out and Zhou was reappointed to his post. He didn’t waste any time getting to business, either. During the NPC he announced that he saw “no need” to use the appreciation of the yuan to fight inflation, while hinting that further interest rate increases might be one of the weapons the PBOC uses fend off rising prices. Shortly after the NPC concluded, the PBOC announced that China would stop checking the sources of foreign exchange for Chinese outbound investments, a move likely to encourage capital outflows and curb excess liquidity. It also raised the reserve requirement ratio 50 basis points to a record 15.5%. The central bank added that it would consider ways to open its domestic financial markets to foreign investments, though no details were provided.

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After a brief reprieve, it’s now snowing in earnest again. China’s disastrous winter weather has already killed at least 60 people nationwide.

The central government has tapped into its emergency pork reserves, and will release 18,000 tons before the lunar new year on February 6.

The hardest-hit province appears to be Hunan, with Chenzhou city going into its eighth day without electricity. Food and petrol in that city of 4 million are running low. The Central Meteorological Authority’s website forecasts indicate more snow and sub-zero temperatures there for the next two days.

The SCMP reports that massive traffic jams around Nanjing are preventing supplies like fuel from entering the city. As a result, some stations are rationing fuel to 30 liters per car. Some taxis are charging up to three times the usual fare because of the fuel shortage.

Shanghai has shut down its port, leaving 1,000 ships stranded. According to Bloomberg, the storms could continue until the end of next week.

However, the Central Meteorological Authority’s forecasts on its website indicate that Shanghai should be clear of snow, although still cloudy, tomorrow and on Monday.

Six interest rate hikes, 10 increases in banks’ required reserve ratios (i.e. the proportion of assets they must lodge with the central bank and not lend out) - and the economy still grows by 11.4% in 2007, its fastest pace in 13 years.

Meanwhile, inflation came to 6.5% in December, just down from the record 6.9% consumer price index growth seen the previous month. This puts 2007 full-year inflation at 4.8%, well above the government’s 3% target.

Roll on a more frugal 2008… or so Beijing will be hoping. The policymakers made similar noises last year but the general consensus appears to be that the controls (direct credit tightening as well as the standard interest rate and reserve ratio measures) will be more severely imposed this time around.

For reference, Citi predicts 11%, Deutsche Bank 10.4% and UBS 10.4%.

Highlights from the last week of China business news.

Trying to keep a lid on prices
The government has been stepping up efforts to keep inflation under control lately. Premier Wen Jiabao announced a freeze on energy prices, meaning no increase in the price of oil products, natural gas and electricity. Then the NDRC said large food producers would have to get government approval if they wanted to raise prices. The central bank joined in by announcing its first reserve requirement ratio hike of 2008 - the 11th since the start of 2007 - bringing the rate to 15%. As Spring Festival (and its attendant price-gouging) approaches, the cabinet also toughened regulations on price manipulation, raising the maximum fine to US$137,000. And with inflation hitting an 11-year high in November, the last thing the government would want is even higher prices over the festive season.

End of the road for SIA-Temasek?
The saga continues. Singapore Airlines (SIA) said it wouldn’t raise its offer for a stake in China Eastern Airlines, days after the Shanghai-based carrier’s minority shareholders voted to reject a buy-in by SIA and Temasek. Air China and its parent, China National Aviation Holding Corp (CNAHC), looked set to pounce on the opportunity to expand their own stake in China Eastern (see our piece in last week’s mailer for a recap). But a glimmer of hope remained for the Singaporeans. China Eastern said it couldn’t consider any bid from CNAHC because of a technicality: a lockup clause embedded in the terms of the SIA deal that would run for the next eight months. Then that glimmer was extinguished when China Eastern said it would consider “any sincere bid” from CNAHC. Cathay Pacific Airways, which owns a bit of Air China and vice versa, said it will support Air China if it makes a bid for China Eastern. The momentum for a CNAHC deal is building.

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Highlights from the last week of China business news.

Hobnobbing in Bali and Beijing
Lots of high-powered meetings recently, with the attendant speculation about their outcomes. Probably the most enjoyable one to be at is in Bali, where 190 countries have sent delegates to hash out a plan - for two weeks - to replace the Kyoto Protocol, which expires in 2012. That meet started Monday, and, although details are still surprisingly thin on the ground, it appears that China will continue to reject imposed emissions targets. It will propose the creation of an international technology transfer fund - paid for by developed countries - that will help developing nations research and create their own clean technology. This works out very well for China, clearly. In the less salubrious environs of Beijing, another meeting of consequence ended this week, confirming the rumors that the top national leadership has decided to step up monetary tightening measures next year. The seasoned decoders of bureaucrat-speak at the Journal say officials now speak of a “tight” monetary policy for next year, instead of the “stable-to-tight” regime now in place. Next week, the US-China Strategic Economic Dialog happens for the last time this year. Hank Paulson flies in with Susan Schwab, product safety chief Mike Leavitt and others to talk about product safety and - surprise! - letting the yuan appreciate more quickly. Vice Premier Wu Yi must be glad she’s retiring in March.

Rio Tinto mines a rich vein of rumors
Will they or won’t they, steel executives wondered this week about a Chinese counter-bid for Rio Tinto. Last week, we wrote that China Investment Corp was rumored to be putting together a deal to buy into Rio, but that was quickly squashed by CIC and Rio executives. The sovereign wealth fund did say, after all, that it’s not confident enough to go raiding abroad yet, and that it would steer clear of sensitive industries. So the rumor mill promptly put new hearsay into circulation. For awhile, it seemed that Baosteel would spearhead a consortium of Chinese firms to snatch up Rio Tinto. A Baosteel executive told Economic Observer last week that his firm would only join a bid if the Chinese government wanted it to - hinting that a bid was possible, though not confirmed. Then the 21st Century Business Herald said Baosteel chairman Xu Lejiang confirmed that a bid was in the works. Shares of Rio Tinto jumped. Today, the official Shanghai Securities News quoted Xu denying the quote. “I did not say this. It is a fabrication of the media,” he said. Even with that seemingly definitive response to the matter, our guess is the rumor mill still has plenty of grist to keep it churning.

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Highlights from the last week of China business news: China comes off smelling like roses at the APEC summit in Sydney, much to Bush’s chagrin; the latest macro numbers are out, and inflation isn’t getting any lower. (more…)

Highlights from the last week of China business news: The Olympics countdown begins, and spin doctors get out their toolkits; the central bank warns of more rate hikes to keep inflation in check, even as trading accounts proliferate.

(more…)