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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Black swans are a part of life. They are the term given by trader and author Nassim Nicholas Taleb to the unexpected, random, unpredictable events that disrupt models and forecasts, and make fools about economists and analysts. SARS was a black swan, and so was 9/11. So are SocGen’s troubles and Obama’s surge. Who could have predicted them? Who could have predicted the snow and traffic madness that hit China around the lunar new year?

Taleb’s book on the subject, Fooled by Randomness, is a must-read. He often gives the impression of being smug ands arrogant, but he’s right that a wise investment strategy has to take into account the unknowable – the random event that shifts a situation in a fundamental way, upsetting predictions happily or more usually tragically.

The government dodged a bullet for sure in the middle of the snow. It was the first serious black swan to hit China since SARS in 2003, and the fact that there was no disaster – no headlines reporting 50 dead in a stampede at Guangzhou railway station – was a pleasant relief and even a surprise.

It is worth remembering as the GDP train speeds towards another solid year of 10% growth that China is still susceptible to more black swans. Overall, it is probably true that the more mature, regulated and transparent a society, the less chance there is of seriously negative black swans. In those terms, China is in better shape today to ward off the birds than it has been for a long time.

But just as SARS got its start, it would seem, in a civet cat cage in a market in Guangzhou, what else is brewing out there? Who knows? Another religious cult? An environmental disaster somewhere no one thought of? A stand-off between the authorities and middle class property owners that turns nasty? A sudden stock market plunge? A couple of back-to-back airline crashes?

This is not a doomsday prediction, just a reminder that the unexpected is to be expected. China got over the snow pretty easily, but still has an endless capacity to surprise. It is worth keeping in mind.

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.

Inflated figures
China’s third-quarter macro figures came out last week. The trade surplus in October continued to surge, which for once is actually surprising. Expensive commodities worldwide meant that the value of imports was up 25.5% from a year ago, but export growth still outpaced it, leaving the month’s trade surplus at US$27.05, a record high. The central bank said GDP rose 11.5% in the first three quarters, compared to a total increase last year of 11.1%. On the other hand, inflation rose 4.1% in the first three quarters, compared to a 1.5% rise in 2006. Goldman Sachs analyst Hong Liang raised a warning about inflation again (she did this a few months ago at the height of the pork shortage too), saying that the monthly CPI could hit 7% this year. The central bank has done the only thing it can do: raise interest rates. The reserve requirement rate will go up for a ninth time this year, to 13.5%, effective November 26. Central bank governor Zhou Xiaochuan has pledged to fight inflation, but how exactly he plans to do this is anyone’s guess. Goldman predicts two more rate hikes by year’s end.

Planning a buying spree
Remember all that talk about a gush of Chinese capital outflows? Well, it’s definitely in the works. China National Offshore Oil Corp, which reduces to the rather cute acronym CNOOC, was linked to acquisitions in Australia and Nigeria this week. There was a rumor that CNOOC wanted to take over Shell’s stake in an oil project in Australia’s Northwest Shelf region for US$450 million, which was later curtly denied by the Chinese company. Now, a new story has surfaced, saying CNOOC wants to hand over US$900 million to Shell, again, but this time for almost 50% in two Nigerian offshore blocks. No comment from CNOOC.

But commodities acquisitions aren’t really news - banking buy-ins, however, are. The FT broke the news - citing anonymous sources - that China’s top three banks, Bank of China, ICBC and China Construction Bank, approached Singapore’s Temasek Holdings to buy its 17% stake in Standard Chartered. The contacts were “informal and discreet,” which could mean anything, really. In any case, no deal is on the cards - Temasek isn’t selling, and Standard Chartered isn’t keen on having its independence questioned by having the Chinese as its largest stakeholder. An ICBC official denied that any such offer to Temasek took place. Lastly, the much-ballyhooed China Investment Corp revealed that it’s a cornerstone investor in China Railway Group’s Hong Kong listing. The sovereign fund will take US$100 million, the biggest institutional stake, in the H-share offering. This is its second move after buying into Blackstone months ago.

Singapore boosts its guanxi
China and Singapore indulged in a week of cozy relationship-building, with top officials of both countries meeting here and in the land of the Merlion. Singapore’s Lee Kuan Yew told Singapore’s newspaper, the Straits Times, that the man tipped to be Hu Jintao’s successor, Xi Jinping, belonged to the “Nelson Mandela class of persons,” upon meeting him for the first time in China. Meanwhile, Premier Wen Jiabao spoke candidly at a conference in Singapore, saying that illegal money flows threatened China’s stability and that his government would have difficulty reaching the environmental targets they set for themselves. This culminated in the announcement that China and Singapore would build an “eco-city” together in Tianjin, that hot economic development zone the central government is now so keen to promote. It brings to mind another Singapore-China project, the Suzhou Industrial Park, which was started when China was still trying to encourage industry in the Yangtze River Delta. More eco-cities are a good idea, because hopefully it will mean hearing less disturbing news, like the report this week about China’s increasing appetite for nuclear energy, and how it has just signed a landmark deal with Kazakhstan to buy the uranium it needs to build 40 new nuclear power plants by 2020.

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The Financial Times reported today that China’s National Social Security Fund (NSSF) has held talks with three US private equity (PE) firms with a view to buying a stake of nearly 10% in one of them.

Given Beijing’s long-held ambition to boost outbound investment this is hardly surprising. China’s desire to increase capital outflows has gained momentum this year with China Investment Corp’s (CIC) investment in PE group Blackstone (See our July 2007 piece on it), CITIC Securities announcing a tie-up with Bear Stearns and ICBC moving in on both Seng Heng Bank of Macau and South Africa’s Standard Bank.

What is also unsurprising is the concern expressed in the West at the nature of some of these investments. Politicians and industrialists in the US and Europe may be coming around the the fact that the countries that have gobbled up all their forex are now trying to put it to constructive use; but the opaque management of the sometimes politically-motivated sovereign wealth funds doing the buying is proving a little harder to swallow.

So where does the NSSF come into this? CIC’s investment strategy may be a closely guarded secret but its ultimate aim - to realize greater returns on China’s foreign currency holdings, with half an eye on strategic resource purchases - is quite clear.

The NSSF is generally referred to as the lender of last resort for China’s wobbly social security network. But what is this “last resort”? Since it was founded in 2000, various theories have been put forward: it is a strategic reserve; it is to be spent in provinces where poverty is most prominent; it is for use once China’s demographics become so twisted that each worker will have to feed a string of elderly dependents; it is only there to support the pension system; it is a cash pile for welfare in general, including unemployment benefits, medical cover, and so on.

Will the NSSF do all these things? Will it do none of them? This fund has been given license to invest abroad, it has been allocated chunks of big-money IPOs, yet we don’t know exactly why it is there. Ultimately, this isn’t an issue for suspicious foreign trade partners. It is an issue for the Chinese people who are supposed, at some time and in some way, to rely on it for support.

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…)

The central bank raised interest rates yesterday to combat rising inflation, which has mainly been caused by rising food prices. Various economists have said it’s nothing to worry about, because it’s supply-side inflation and there’s nothing a central bank can do about it.

But there is one other factor driving this pork price rise that is worrying, and that’s the mysterious blue-ear disease that’s killed tens of thousands of hogs since last year. A few days ago, China’s top veterinary official came out to pooh-pooh rumors that millions of hogs had already died of the disease. Businessweek did a story recently about that, and so did the New York Times.

Top vet says pig disease is under control

Businessweek: Economics of the pork biz

New York Times: Virus spreading alarm and pig disease in China

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…)

Highlights from the last week of China business news: Paulson’s latest visit (no prizes for guessing what he talked about. Starts with an R and ends with a ‘enminbi’); state-owned steel and auto giants get leaner, but not without dieting problems.

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