Stronger currency will help in fight against inflation

The ongoing debt crisis in the US and Europe may force China to move faster on renminbi appreciation to mitigate the fallout on the domestic economy, experts say.
“Taming inflation is the top priority for the government and a faster appreciation of renminbi will help rein in the price of imports and limit their spillover impact on domestic prices, particularly if global commodity prices spike further,” said Ding Yuanzhu, deputy head of the Policy Advisory Department at the Chinese Academy of Governance.
Such actions are deemed necessary especially as the recent consumer price index numbers, a major gauge of inflation, are signaling the chances of a hard landing for the economy.
Ding said that with the US likely to launch a third round of quantitative easing in an attempt to stimulate its economy, it is time to realize that the two earlier US attempts had led to spiraling commodity prices and huge inflows of hot money into China, and further increased inflationary pressures.
The weakening of the US dollar has also not helped matters. The greenback dropped to a record low against the renminbi on Aug 10, forcing the central bank to set the official median trading price of the renminbi at 6.4167 against the US dollar, the highest since Beijing initiated exchange rate reforms in 2005.
“Further action on the renminbi front depends largely on three factors – inflation, unemployment and overseas conditions. China’s decision on currency appreciation should be based more on whether inflation or unemployment is the bigger threat,” said Derek Scissors, a research fellow in Asia Economic Policy at The Heritage Foundation. “Right now, an appreciating renminbi is a much better choice.”
The sharp increase in labor and imported raw material costs, partly attributable to the relatively lower currency exchange rate between the yuan and the US dollar, is also squeezing the profit margins of small and medium-sized enterprises in particular.
“Under such circumstances, the government should make the renminbi stronger and readjust its industrial structure,” Ding said.
“Rather than focus on growing the export numbers, policymakers must focus on inflation. International experience shows that high and sustained inflation can damage macroeconomic and social stability,” said Wang Jiacheng, a senior researcher at the Academy of Macroeconomic Research under the National Development and Reform Commission.

From: China Daily

Shareholders reported to be selling 50% of company to a strategic buyer

HONG KONG / SINGAPORE – China Construction Bank Corp (CCB), the world’s second-largest lender by market value, has made a preliminary bid for control of PT Bank Maspion Indonesia, three people with knowledge of the matter said.

Shareholders of closely held Bank Maspion plan to sell more than 50 percent of the lender, which is valued at about $200 million, said the people, who spoke on the condition of anonymity because the negotiations are private. A stake sale to a strategic buyer may help Surabaya-based Maspion expand its business catering to small and medium-sized companies, the people said.

CCB has yet to decide if it will make a binding offer, one person said. It held off making a decision after Indonesia’s government said last month that it will enact new bank ownership rules this year that may bar CCB from holding a majority stake, according to the people.

Bank Indonesia, the country’s central bank, said it plans to limit a single investor’s maximum ownership of commercial banks to improve governance in the industry. On July 1, Governor Darmin Nasution told parliament that while the limit will be less than 50 percent, the exact percentage hadn’t been decided. Malaysia and Singapore also impose restrictions on ownership of commercial banks.

PT Alim Investindo owns 77.8 percent of Maspion, according to the bank’s website. A Beijing-based media official at CCB didn’t respond to a telephone call and a text message seeking comment. Neni Tania, a secretary to Bank Maspion President Director Herman Halim, had no immediate comment.

In a separate development, Bank of America Corp (BofA) has held exploratory talks with the principal investment funds of Kuwait and Qatar about selling part of its stake in China Construction Bank, Reuters reported citing sources with direct knowledge of the talks.

Bank of America, which owns about 10 percent of CCB’s Hong Kong-listed shares and is scurrying to raise capital for its mortgage-scarred balance sheet, will be contractually free to sell the bank shares after August 29. They are valued at about $17 billion.

The bank, the largest in the United States by assets, is likely to sell half its stake in order to shore up its Tier 1 capital. Analysts believe Bank of America needs about $50 billion to meet new capital requirements.

Talks about the Chinese bank have been held with other investors in addition to the Kuwait Investment Authority (KIA) and the Qatar Investment Authority (QIA), the sources said.

It is unclear if any agreement with the sovereign wealth funds or other investors have been cemented.

Bank of America, whose shares have fallen 20 percent in the past week, did not mention the Chinese investment during a widely followed conference call that top executives held on Wednesday with thousands of investors. During the call, Chief Financial Officer Bruce Thompson said that asset sales are being considered to boost capital.

“These stakes will be sold eventually,” one source said of the Chinese bank shares. “They have been shown previously to funds who matter.”

Bank of America spokesman Jerry Dubrowski declined to discuss whether negotiations have been held, and officials at QIA and KIA were not immediately available for comment.

“We continue to be a significant shareholder in CCB and we intend to continue the important long-term strategic alliance with CCB originally entered into in 2005,” Dubrowski said.

The sources sought anonymity because they are not authorized to speak to the media.

Bank of America has not been getting much support this year from its CCB investment. Shares of the Chinese bank have fallen some 24 percent, partly in anticipation of a BofA sale, traders said.

Last November, Bank of America sold its option to purchase additional shares of CCB that were available in a rights offering.

From: China Daily

The sovereign debt crisis in the US will affect exports from China as the US is a major destination and a major market for Chinese exports.
With most of the export earnings being in the form of US dollar payments, a weakening of the greenback will further dent the earnings of Chinese exporters. To make matters worse, Europe, the largest market, is also facing uncertain times, while the euro is falling.
China is the world’s largest exporter, and most of its economic growth comes from rising trade.
“The current US debt crisis is similar to the 2008 financial crisis. When purchasing power declines in the US, it will have a direct impact on Chinese exports,” said Bai Ming, a researcher with the Ministry of Commerce.
“Over the next few years, Chinese manufacturers will have to contend with even more sluggish demand, renminbi appreciation and other trade problems,” said Zhang Ming, a researcher at the Chinese Academy of Social Sciences. “With the odds loaded heavily against them, there is very little that the Chinese exporters can do, than further improve their core competencies.”
Zhang said the passive appreciation of other currencies, especially the renminbi, will be a direct result of the weaker dollar, which again constrains China’s exports.
Bilateral trade volume between the China and the US was $385.34 billion in 2010, accounting for over 12.9 percent of China’s total trade value. The EU, China’s biggest importer, is also facing the risk of a slowdown in economic growth.
Some analysts feel that the US rating downgrade will prompt China to reduce its dependence on the export-led economy and focus more on stimulating domestic demand.
Zhao Qingming, an economist at China Construction Bank, said that the US downgrade will ring alarm bells on the trade balance front.
He feels that the US downgrade may lead to an acceleration of the economic transition in China. “Since low growth seems likely in the US, the EU and Japan, the Chinese economic transition becomes more urgent and demanding. China’s role as the factory of the world has come to an end, and an upgrading of its industries is vital,” said Zhao.
“China’s economic transition and upgrade started with the 2008 economic crisis when the nation decided to boost domestic demand. The fresh crisis will help reshape China’s economy,” said Zuo Xiaolei, chief economist at China Galaxy Securities.
The debt crisis will also shuffle the decks of Chinese export enterprises and replace labor-intensive industries. “The US will request China to open its market further, and put more pressure on the yuan.” said Sun Lijian, a professor at Fudan University.

From: China Daily

BEIJING – The Chinese currency Renminbi, or the yuan, gained 19 basis points to a record high of 6.3972 per $1 on Friday, according to the China Foreign Exchange Trading system.
In China’s foreign exchange spot market, the yuan is allowed to rise or fall by 0.5 percent from the central parity rate each trading day.
The central parity rate of the yuan against the US dollar is based on a weighted average of prices before the opening of the market each business day.

From: China Daily

BEIJING – China’s new-yuan lending fell sharply in July to 492.6 billion yuan ($77 billion), the lowest level for seven months, because of the nation’s monetary tightening measures, but analysts said the policies will be fine-tuned in light of the current global uncertainty.
The People’s Bank of China, the central bank, also said in a report on Friday that while policies would remain “prudent”, there should be a targeted increase of lending in sectors such as agriculture and affordable housing.
New-yuan lending in July was 141.3 billion yuan lower than in the previous month, and 25.2 billion yuan lower than in July 2010, the central bank said in a statement on its website. Loans failed to reach the general market estimate of around 550 billion yuan.
The broad money supply (M2), which includes cash in circulation and all deposits, rose 14.7 percent year-on-year to 77.29 trillion yuan by the end of July, but the rate of increase, the lowest in six years, was 2.9 percentage points lower than the same period in 2010. The nation has set the whole-year target for M2 growth at 16 percent.
“The actual figure is normal considering the current situation, as control of inflation is still the top priority for the central government,” said Zhu Baoliang, chief economist at the State Information Center, a top government think tank.
“The shrinkage of new lending was a result of the stringent monetary policies over previous months, and a seasonal decline,” said Zhu, explaining that lending in the second half is normally lower than in the first, and only accounts for about 40 percent of the year’s total. The China Banking Association predicted that the country’s new lending this year may be between 7 trillion and 7.5 trillion yuan.
China’s consumer price index reached a three-year high of 6.5 percent in July even after the country raised interest rates three times and the reserve-requirement ratio (RRR) for banks six times, with the RRR reaching a record high of 21.5 percent.
The central bank said on Friday in a monetary policy report for the second quarter that the inflation situation “still allows no optimism”, meaning that the current prudent monetary stance will continue.
However, the report said that more loans will be made to the agricultural sector, small and medium-sized enterprises, subsidiary housing projects, strategic industries and environmentally friendly industry, which analysts said is a de facto “targeted loosening”.
E Yongjian, a researcher with Bank of Communications Ltd, predicted that China’s M2 growth could pick up in August, when new lending will be around 500 billion yuan, according to a Reuters report.
Zhao Mingqing, a senior researcher with China Construction Bank Corp, said the figures suggested that the central bank is not likely to raise interest rates or the RRR again this month.
Nomura Securities said China’s monetary policy has shifted away from a tightening stance because external uncertainties now outweigh inflation concerns. The report added that the country could even cut the RRR in the worst-case scenario.
“We expect the authorities to keep the interest rate and the reserve-requirement ratio unchanged through the rest of 2011. If external conditions worsen, then we believe an RRR cut would be the first policy tool adopted,” according to Nomura’s report.”The policy is currently in a “wait and see” mode … and plans for countermeasures are (likely) being prepared,” it said.

Although far from the center of the current global financial storm, China is still suffering its effects.

The downgrade of the U.S. credit rating and the falling value of U.S. debt are bad news for China’s large holdings of foreign exchange assets, two thirds of which are denominated in U.S.-dollars.

As the U.S.’ largest credit holder, China is all too aware of its possible losses.

Zhang Xiaoqiang, deputy head of National Development and Reform Commission, said, “The U.S. Federal Reserve’s policy of keeping interest rates near zero until 2013 will lead to higher world-wide inflation, and higher commodity prices. Economies like China have to pay the bill for the economic recovery. If the U.S. continues its loose monetary policy, it will hurt the purchasing power of China’s foreign exchange reserve.”

Zhang believes the debt crisis will lead to a new economic downturn. This would result in a decline in demand in overseas markets, possibly affecting China’s exports.

At the same time, the depreciation of U.S. dollars is stoking inflation in China.

“There are many uncertainties in the developed economies. They are facing high unemployment, high inflation, and weak consumption demand. This will definitely have a negative impact on China on its exports, and commodity prices,” said Zhang.

The US debt crisis is likely to dampen China’s economic expectations, as the country’s latest inflation figures have already hit new highs. The U.S.’s debt woes may worsen global liquidity and lead China to toughen its counter-inflation measures at home.

However, while Zhang Xiaoqiang admits that China’s economic growth is expected to slow down later this year, a huge downturn isn’t likely.

“GDP growth this year is expected to be 8%, In the first half of the year we had a 9.6%, so in the second half a lower GDP growth is within our expectations. We need to focus more on the quality rather than the quantity of economic development,” he said.

Experts believe China has to strike a balance between maintaining its growth, curbing inflation and restructuring its economy. A fresh round of economic turmoil could force China to shift its focus to the domestic market. And China may need to be cautious in adjusting its tight monetary policy.

(Source: cntv.cn)