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

China’s inflation rate reached the highest level in more than a decade in November, while the country’s trade surplus continued to soar.

The government said the country’s consumer prices — a key indicator for inflation — went up 6.9% compared to a year earlier. This is the highest inflation level since December, 1996.

Andrew Freris, chief economist for the Asia Pacific region at BNP Paribas Bank in Hong Kong, says the reason the consumer price index was so high in November was not a further increase of food prices. Rather, he says, the government had raised state-set prices for diesel and gasoline by 10% in an effort to curb demand amid a fuel shortage.

He said, ‘Meat prices are now stationary in the sense that they stopped accelerating and I expect that the December prices will show that they are now coming down.’

And he expects the inflation rate to come down to about 5% in December.

Inflation has surged in recent months — mainly because of double-digit increases in food prices especially of pork, China’s staple meat. This is due to shortages after a disease killed millions of pigs and because of the rising cost of feed grains.

China’s trade surplus, meanwhile, remained high in November, totaling more than $26 billion.

The numbers suggest that the demand for goods made in China remains strong, despite mounting worries over product safety and several recalls by foreign toy companies this year.

The country exported goods worth more than $117 billion — up 22% from the same month last year.
Source: China Confidential

Overall Chinese business conditions remain positive but results for the main indexes in the November Xinhua Finance/MNI China Business Sentiment Survey show conditions deteriorating across the board.

The growth of new orders has slowed to its lowest level ever, with production and corporate financial positions declining to record lowsl. Most of the indexes remain in positive territory but indicate that growth has slowed considerably since the booming conditions reflected in the survey earlier this year.

The overall business sentiment index for current conditions stood at 63.85 in November, the lowest result ever in the survey which began in Jaunary 2005. That result was down from 64.58 in October and from 75.67 in November last year.

The index was above 80 in the first three months of this year.

The index for new orders fell sharply to 60.36 in November, also its lowest level ever, from 73.39 in the previous month and 71.48 a year ago.

The financial position index fell to the lowest level in survey history at 60.00, down from 63.64 in the previous month and 71.72 for the same month in 2006.

Logan Wright, China analyst for Stone and McCarthy Research Associates, said, ‘A combination of cost pressures have been building throughout this year, in the form of higher input prices, higher interest rates, faster yuan appreciation, and declining sales prices; these effects are depressing both corporate financial positions and overall sentiment.’

The survey results suggest Chinese companies still expect better times ahead, with the indexes showing expectations for conditions in three months outperforming the current indexes in most categories, and with some improving from the previous months’ survey. Our illustration is of a low pressure system. Seemed appropriate.
Source: Forbes

In The Economist there is a quite fascinating and somewhat doom-laden article on the risks presented to China by the dollar falling further in value.

William Buiter notes that:

If the dollar falls by another twenty or thirty percent, which is certainly possible, the Chinese and Japanese authorities would each be presenting their tax payers with a further $200bn to $300bn capital loss. That’s a heavy price to pay for access to US markets for your exports, especially for a poor country like China. . .

He continues:

The bind they’re in is an impossible one. If China (and other dollar holders) do not adjust their currencies, they can expect no relief from the inflation that’s recently attacked their economies. At the same time, continued depreciation of the RMB against the Euro may soon anger European nations, which are beginning to absorb many of the Chinese imports once destined for American shores.

If China and other dollar-heavy nations do allow for adjustments, even minor ones, then the dollar could plummet, instantly slashing the value of their foreign exchange portfolios. Neither option is particularly appealing.

This may well be called a rock and a hard place economic theory.
Source: The Economist

The US Federal Reserve has approved China Merchants Bank’s application to open a branch in New York.

The Shenzhen-based bank will become the first Chinese lender to open a branch in the United States since the country enacted the Foreign Bank Supervision Enhancement Act in 1991.

An official statement from the US government said the branch will ‘engage in wholesale deposit-taking, lending, trade finance, and other banking services.’

China Merchants Banks is China’s sixth-biggest lender and has, in the past, operated a representative office in New York. That is very different from a full branch the application for which was submitted n March this year.

The bank, with assets valued around US$145.6 billion, engages primarily in corporate and retail banking and treasury operations throughout China and operates a branch and an investment adviser subsidiary in Hong Kong.

Meanwhile, China Merchants has agreed to buy 10% of Taizhou City Commercial Bank to expand its domestic distribution network. China Merchants will pay RMB272.1 million (US$36.7 million dollars) for these shares.

Despite a spate of product recalls from China this year (heavily reported in the press who went for the story like a starving dingo at a dead rabbit) and growing scrutiny over the quality and safety of its goods, the Chinese export boom continues to accelerate. Maybe buyers do not believe all they read in newspapers. The following figures are according to trade statistics released last week.

China exported $878 billion worth of goods through the first nine months of this year, up 27% from its record shipments a year ago.

The Chinese trade surplus with the rest of the world ballooned to $187 billion through September of this year, up from $177.5 billion for all of 2006.

Even in categories where China was hit by high-profile recalls earlier this year, like food and toys, exports rose sharply, according to data compiled by the World Trade Atlas. Much, much more in the excellent report in the International Herald Tribune. Well worth reading.
Source: International Herald Tribune

China Investment Corporate (CIC), the country’s long-awaited state forex investment company set up to make better use of its huge foreign exchange reserve, has started business.

Lou Jiwei, the company’s newly-appointed board chairman, who is also deputy secretary-general of the State Council, seen here, said, ‘We will maintain transparency of company operations on the premise of safeguarding our commercial interests.’

Analysts said CIC’s debut was a major move China had made to increase the value of its $1.4-trillion foreign exchange reserve, which is the world’s largest.

The CIC, with a registered capital of $200 billion, is a solely state-owned company.

The company will mainly pursue combined investment in overseas financial markets, and it wil into domestic financial institutions to support their reforms, such as shareholding reforms of China’s state-owned banks, said the sources.

The CIC will operate in a completely commercial way despite its governmental backup explaining that ‘it will deal with its forex investment business independently by persisting in the principle of separating government functions from company management.’

It will try to maximize the proceeds via long-term investments within a range of acceptable risks, the sources said.

In May, the new company, still in preparation, made its first investment in non-voting shares, valued at $3 billion, in the U.S. private equity firm, the Blackstone Group. China’s exports rose by 27.6% in the first half of 2007, exceeding imports growth of 18.2%, lifting the trade surplus to $112.5 billion.
Source: People’s Daily Online

The U.S. stock market Nasdaq has received Chinese government permission to open a representative office in Beijing as more companies from China issue shares abroad.

China originally agreed in December to let Nasdaq Stock Market and the New York Stock Exchange open offices in Beijing.

Nasdaq says 49 Chinese companies are traded on its market and China could soon become its biggest source of non-U.S. listings.

Chinese companies have issued shares on U.S. and European markets to raise money and increase their visibility abroad.

Eric Landheer, Nasdaq’s head of Asia Pacific, said in a statement, ‘Having a representative office in China will enhance our ability to provide the highest level of value and service to Chinese companies.’

The illustration shows a sign in New York which says China International Labor Day. Listed on Nasdaq. And that was May 2004. Which you could either call previous or prescient.
Source: Canadian Business Com

According to Ministry of Commerce statistics China’s outward direct investment totaled $16.1 billion dollars in 2006, up 31.6% over the previous year.

Wu Jianmin, president of China Foreign Affairs University said, however, that when they try to invest abroad, Chinese enterprises lack a network of people and sales channels, knowledge about the local market and communication. He said, ‘They need help from diplomatic resources.’

In this case ‘Diplomatic resources’ is used to mean a wide range of people and institutions that could provide Chinese investors with knowledge of local markets. The resources include China’s embassies in the investment destinations, scholars, and retired diplomats and officials with a good knowledge of the country.

Vice Minister of Commerce Liao Xiaoqi, seen in our illustration, told the East Asia investment forum in Beijing that the Chinese government will encourage and help qualified enterprises to invest abroad. One way is to establish overseas economic cooperation zones, which both accelerate Chinese investors’ ‘going out’ and benefit local industrial clusters.

Haier Group, one of China’s leading home appliance makers, in November 2006 established the first economic and trade cooperation zone in Pakistan. The zone deals with home appliance manufacturing, related supplies and services.

Some Chinese companies are planning other zones of this kind in the Association of Southeast Asian Nations.

Vice Minister of Commerce Liao Xiaoqi also said the government will grant investors more information by holding trade and investment events as well as investment-guideline websites.

China, which has been one of the world’s largest investment destinations for several decades, is emerging as a growing overseas investor. In the Chinese central government’s blueprint, the country’s overseas investment will hit $60 billion dollars during the 11th five year plan which runs from 2006-10.

Chen Jian, assistant commerce minister said, ‘The figure is conservative. Our development is usually higher than the expectation of experts. China’s outward investment is entering into a fast growth era from the early stage.’ He expects China’s outbound investment to reach $30 billion for the whole year of 2020.

Almost unarguably China’s annual outward investment is too small compared to the foreign direct investment it attracts — $600 billion in 2006. Thus inward to outward investment is seriously out of balance. In many other countries the ratio is closer to even.
Source: China View

Suan Teck Kin, an economist at United Overseas Bank suggests China may allow its currency to trade freely after Beijing hosts the Olympics next year, seeking to curb excessive lending and cool the economy.
Suan Teck Kin predicts the currency will strengthen 1.8% by the end of the year to RMB7.43 per US dollar and reach RMB7.08 by the end of 2008.

Restrictions on inflows and outflows of money for investment allow the central bank to dominate the currency market.

Gains have been limited to 9.3% since a link to the American dollar was scrapped in July 2005.

Suan Teck Kin said, ‘They have to adopt a free float. When China can’t have control over its currency any more, it will solve some of the problems on liquidity.’

China allowed its currency to be freely convertible under the current account in December 1996. Foreign companies have won approvals to invest $10 billion in China’s stock and bond markets, while domestic investors have been awarded $15 billion of such quotas to buy securities overseas.

Dollar buying by the People’s Bank of China has expanded currency reserves to a record $1.33 trillion (note most carefully that is trillion as in a thousand billion.)

Ma Jun, an economist at Deutsche Bank AG in Hong Kong, does not believe China’s currency will immediately float. He said, ‘It will take at least five years. It requires a range of institutional reforms and strengthening of risk management. It also requires a broad balance of supply and demand for the currency.’

All this is a backdrop to the United States complaining slow appreciation gives Chinese exporters unfair trading advantages. China’s customs authorities said the country’s monthly trade surplus hit a new high of US$26.91 billion in June, up 85.5% over the same month last year. Huang Guohua, senior analyst with the General

Administration of Customs said this was mainly because domestic companies, whose export tax rebates were cut on July 1, were rushing exports. It is a complicated situation and will not be resolved to the satisfaction of the United States in the near future.
Source: Shanghai Daily