China’s factory and property spending rose 24.3% in January and February which means the government has to do something to prevent the world’s fastest-growing major economy from overheating.

The worst snowstorms in half a century failed to prevent a 33% jump in spending on real-estate development. Options are now to hasten gains on the renminbi, raise interest rates and increase banks’ reserve requirements.

Fixed-asset investment in urban areas rose to RMB812.1 billion ($115 billion) from a year earlier, the statistics bureau said today. That was more than the 24% median estimate of 21 economists surveyed by Bloomberg News and the 23.4% pace in January and February 2007.

Sherman Chan, an economist at Moody’s Economy.com in Sydney, said, ‘China’s economy is still very strong. The biggest challenge for policy makers this year is to cool inflation and at the same time to sustain growth and employment.’

A Bloomberg News survey of economists this week suggests rates and reserve requirements will rise this year. The renminbi will gain 12% versus the dollar in the next 12 months, compared with a 7% increase in 2007, forward contracts indicate. Currency appreciation cuts import costs.

Premier Wen told lawmakers last week that monetary policy is intended to tackle ‘the strong possibility of a resurgence in fixed-asset investment.’

The government is concerned that untamed investment will lead to excess industrial capacity and too large a toll on the environment and natural resources.

The People’s Bank of China lifted borrowing costs six times in 2007 and has pushed banks’ reserve requirements to 15%, the highest ever. The key one-year lending rate is 7.47%.
Source: Bloomberg

The obscure China Development Bank is to be transformed from policy lender to international player.

The China State Council’s plan to turn the China Development Bank into a commercial institution should transform what has been an obscure policy bank into a global financial player. It is also an indication of how China, besides routing investments through its sovereign investment fund, intends to use some of its massive US$1.4 trillion in foreign exchange reserves.

Approval should come soon for the 14-year-old bank to list on the stock market in the first half of this year.

Even before the change, the bank has been aggressively carving out a foreign presence.

As an indication of its ambitions, it acquired a stake in Barclays Bank last July, has invested in six overseas funds, including two worth a combined US$10 billion in Africa and Venezuela, and was about to bid for a stake in Citibank in January when the State Council vetoed the idea.

Its governor, Chen Yuan, seens in our illustration, is the only bank chief in China who is a full minister and member of the ruling State Council.

Chen, 62, is the son of Chen Yun, a leading revolutionary organizer in the 1920s and 30s and one of the ‘Eight Immortals’ of the Communist Party who was a senior policy maker for 50 years until his death in April 1995, at the age of 89.

The CDB was created in March 1994 to provide policy loans to major projects designated by the government, especially transport, communications, basic industries and infrastructure. These projects included the Three Gorges Dam and Shanghai Pudong airport. It does not take retail deposits and has only about 32 branches and four representative offices across the country.

CDB will be the first of three policy banks to list, probably in the first half of this year. The other two are China Everbright Bank and Agriculture Bank.
Source: Asia Sentinel

Edinburgh-based Scottish Widows Investment Partnership — sadly known as Swip — is to launch a commercial property fund in China over the next two years.

The company itself is renowned in Britain for the way it ran an advertising campaign. The advertisements showed the Scottish Widow, plainly having been widowed at an untimely young age, looking positively scrumptious in her widow’s weeds. The latest model to don the cloak is Hayley Hunt, from Virginia Water in Surrey.

There is no suggestion that this epic campaign will be used in China, more’s the pity. Instead fund management group Swip, which already has about $14 billion of its $194 billion assets invested in UK and overseas property will be investing in China.

Leading the drive will be Malcolm Naish who joined Swip as head of property last year from DTZ Investment Management.

Swip’s plans are at an early stage, with the company talking to potential partners, including developers and investors who have a knowledge of the local market in China.

Malcolm Naish said: ‘I suspect we’ll invest in more developed markets on the Eastern seaboard of China, such as Shanghai, but that depends on which partners we find.

‘When you go into a market such as China you need access to the right people who understand how the system works. . . .

‘We’re currently assessing what cycle in the market China is at.

‘We’re more likely to launch institutional funds in the first instance, but we’re open minded about retail funds.’

He added: ‘Some property fund investors took fright last year but those who have ridden through this storm should see sensible returns over the longer term.

‘The current downturn looks different from those in the mid 1970s and 1989-90. The economy is more stable, for example.’

Swip is drawn to China include its growing and urbanizing population and high GDP, 9% per annum between 1995 and 2005, compared with 2.7% in the UK.

Not many UK fund managers have commercial property funds investing in China.
Source: The Scotsman

National Australia Bank bought 20% in Union Trust and Investment Limited, making it the first foreign investment in China’s trust sector.

The investment by nabCapital, NAB’s capital markets and institutional banking division, makes the bank the third largest shareholder in UTI. Neither party revealed the price for the transaction.

nabCapital’s CEO John Hooper said, ‘With UTI’s focus on property this deal represents an opportunity for NAB to bring our expertise in structured financing to China’s burgeoning market.’

NAB is one of the largest listed financial institutions on the Australian Stock Exchange and has strong experience in structured property finance, which brings together property, finance, equity capital markets and cooperative finance.

John Hooper said, ‘Our cooperative venture will concentrate on developing new products, particularly in infrastructure and construction - two tremendous growth areas in China. The bank will have a chair on UTI’s board and several other top management members in charge of risk management.

John Hooper is still quite optimistic about the country’s real estate sector, but shows little interest in investing in China’s banking sector.

He said, ‘For the time being, we have no plan to buy a stake in China’s commercial banks’ although he added NAB would like to be a more ‘active’ investor in the banking sector.

One of the largest attractions of UTI, according to John Hooper, is the company is relatively small, with high growth potential and sound corporate governance.

According to Wang Xichao, UTI chairman, the partnership will help the company explore creative businesses in QDII, infrastructure trusts, pension products, REITs and real estate trust funds.

In 2006, the company was one of two trust companies approved by the central bank to run REITs, on a pilot basis.
Source: China Daily

Chinese Finance Minister Xie Xuren says China will maintain a ‘prudent’ fiscal policy to maintain stable and rapid economic growth as well as basically stable consumer prices.

In an article in the official People’s Daily, Minister Xie said the fiscal policy will be implemented along with a tight monetary policy to prevent economic overheating and widespread inflation.

In truth, there is nothing overly new in this.

When China concluded its three-day 2007 Central Economic Work Conference, which ran from December 3 to 5, 2007, the official communique said that China will maintain a ‘prudent’ fiscal policy for the coming year.

The conference said various monetary instruments would be used to regulate liquidity and to strictly control the size of loans and frequency of credit extension, so as to better regulate domestic demand and balance international payments.

The December conference said that with a prudent fiscal policy and a tight monetary policy, China will be able to achieve ‘the Two Prevents’ in the coming year: to prevent economic growth developing from rapid to overheating, and to prevent price rises evolving from structural to evident inflation.

In truth, China has been implementing a prudent monetary policy since 1997. From 1998 to 2002, the country increased money supply to counter deflationary pressure.

From 2003 to 2007, the monetary policy began to tighten in order to help address changes in economic development, including rapid growth in credit extension, investment and foreign exchange reserves.

Now Finance Minister Xie Xuren states the government plans to improve its consumption tax system adding that the government is also waiting for a suitable time to launch a planned new fuel tax. A new tax to protect the environment is also under consideration.

China’s annual legislative meeting, bringing thousands of delegates to deliberate the country’s economic and political issues, opens tomorrow, March 5, in Beijing.
Source: RTT News

China received $74.7 billion in foreign direct investment in the non-financial sectors last year, ahead of all developing countries for the 15th successive year.

The Ministry of Commerce said the figure reflects a year-on-year increase of 13.59%.

Total foreign direct investment (FDI) — including capital flows to the financial sectors such as banking, insurance and securities — was $82.7 billion in 2007, up 13.8 % from a year earlier.

Wang Zhile, director of the Multinational Enterprise Research Center affiliated to the Ministry of Commerce, said, ‘The growth is higher than my expectations. It shows China’s role as a crucial link for multinationals’ global manufacturing, purchasing and research.’

This year may well be a bit different.

Income tax rates for domestic and foreign companies were unified at 25% from the beginning of 2008. Prior to this, domestic companies paid 33% income tax while foreign companies, which benefited from tax waivers and incentives, paid an average of 15%.

The effect will be considerably muted by the fact that foreign companies registered before the new rates took effect will pay tax at the preferential rate for another five years.

It is true that foreign investors are also paying more for labor and material costs, such as oil, plastics and steel, and face tighter policies on polluting and resource-intensive industries. On the other hand, China has, by a considerable margin, a more attractive manufacturing climate — not using that in the weather sense — than any country in the west and this is likely to last for many more years. It is expected that China will continue to be a magnet for foreign development and investment as Beijing’s policies to woo foreign investors and open up continue.

Wang Zhile said, ‘The Chinese leadership assured foreign investors at the 17th Party congress late last year that China will stick to its reform and opening-up policies. It is taken as a good opportunity by many foreign investors.’
Source: China Daily

China’s central bank, the People’s Bank of China has said price levels will remain high throughout the first half of the year as the nation is facing an ‘increasing’ risk of inflation.

The bank said in its monetary policy report for the fourth quarter that structural supply shortfalls and rising international prices would hold domestic price levels at a high level for a period of time.

Growth of the consumer price index (CPI), a barometer of inflation, surged to an 11-year high of 7.1% last month.

Analysts said although raw agriculture prices went up substantially last month, it normally takes one or two months for the pressure to pass through to manufactured and processed food items, which will add pressure to inflation in the following months.

Food price rises may in turn spill over to other sectors, pushing up prices of other products and labor costs.

Ma Jun, chief economist of Deutsche Bank in China said, ‘The underlying inflationary pressure is even stronger than the January headline number is suggesting, and CPI inflation will likely make two more new highs to reach 7.8% in February and 8% in March.’

With a view to cushioning the impact of international commodity price rises, the central bank said it would further use more flexible exchange rate to reduce inflationary pressure.

The renminbi, has appreciated more than 13% since it was de-pegged from the dollar in July 2005. It climbed 6.9% against the US dollar in 2007.

The central bank report said most exporters had adapted better than expected to the stronger renminbi.
Source: China View

The China Banking Regulatory Commission (CBRC) reports the assets of China’s banking sector rose to RMB52.6 trillion yuan ($7.32 trillion) in 2007 from RMB43.9 trillion in 2006.

According to CBRC the state-owned Bank of China, China Construction Bank, the Industrial and Commercial Bank of China, the Agricultural Bank of China and Bank of Communications make up 53.2% of the total assets.

Twelve joint-stock commercial banks, including China Everbright Bank, accounted for 13.8%, while city commercial banks accounted for 6.4%. The remaining 26.6% were covered by other financial institutions.

CBRC figures showed China’s banking sector had total liabilities of RMB49.57 trillion in 2007, up 18.8% from the previous year.

State-owned commercial banks owed RMB26.43 trillion of the total debt, up 15.5%, and joint-stock commercial banks had RMB6.91 trillion, a rise of 31.5%. The remaining RMB16.22 trillion was owed by city commercial banks and other kinds of financial institutions.
Source: Window of China

The illustration is of a woman praying at Longhua Temple on the second day of the Chinese Year of the Rat. Traditionally The Year of the Rat marks a period of conquest – which is possibly what business leaders have in mind

William Hess, Beijing-based analyst for Global Insight, says: ‘The government has taken a liking to the concept of national champions, and wants to see globally competitive Chinese firms emerge in the sectors that it associates with national strength. This certainly includes the automotive sector, pharmaceuticals, and natural resources.

‘I expect to see more acquisitions by financial firms, and efforts by the government to position its homegrown technology-related firms as global players — especially in networking equipment with companies like Huawei, and in mobile phones.’

Lenovo’s finance chief Wong Wai-ming said that the computer giant will be pursuing acquisitions this year. ‘We have cash and virtually no borrowing. We also have the track record to raise the necessary debt equity. It there is the right investment opportunity, we are capable of doing it and we will do it.’

So far, there have been two types of Chinese international expansion running in parallel. A strategic expansion, and a knowledge expansion. The first expansion involves government-backed moves to secure supplies of resources like iron ore, oil, and coal, and to invest Beijing’s vast sovereign wealth fund.

The second involves smaller Chinese companies seeking out Western assets — often distressed ones — to acquire expertise and technology.

At last month’s Detroit Motor Show, the world’s biggest, there were five Chinese carmakers displaying their models. The car-makers do not match Western-style quality control. But then neither did the Japanese three decades ago.
Source: Daily Telegraph

Finance officials from the Group of Seven nations — U.S., Japan, Germany, the U.K., France, Italy and Canada — called for China to strengthen its currency against all its major trading partners. What, in fact, they were saying was that China, Asia’s second-largest economy, should to bear a greater burden of the global slowdown. There is little moral logic in this although it might be strategic logic. No one has, as yet, accused China of starting the sub-prime —- dodgy loans — problems in the United States although that may yet come.

G-7 finance ministers and central bankers said in a statement that China should do more to defuse trade tensions by allowing the renminbi to climb at a quicker pace not only against the dollar but also other currencies.

Canadian Finance Minister Jim Flaherty is in a good position to speak on this subject as his country is the U.S.’s largest trading partner, and has seen a 52% gain in its currency against the dollar over the past five years.

Jim Flaherty said, ‘Countries with large surpluses must allow greater flexibility in their exchange rates, and I say this as a finance minister from a country that has played the role of a shock absorber.’

Tim Condon, head of Asian research at ING Groep NV in Singapore, said, ‘I thought China would be under the radar at this meeting given the rapid pace of yuan appreciation that China has been observing this year.’ Adding, ‘I’m a bit surprised by the pressure.”

Former People’s Bank of China Deputy Governor Wu Xiaoling said on Feb. 2 that authorities will tighten credit growth further and make the renminbi more flexible. China’s inflation rate was 6.5% in December, receding from an 11-year high of 6.9% in November.

The G-7 also repeated that ‘excess volatility’ in currencies is ‘undesirable’ and that the group will continue to ‘monitor’ markets closely.

Our illustration shows Chinese Finance Minister Xie Xuren, left, being welcomed by his Japanese counterpart Fukushiro Nukaga prior to the reception dinner for the G7 Finance Ministers and Central Bank Governors.
Source: Bloomberg