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Chinese Yuan Remains Near Record Low, Insurers Able To Double Equity Investments

Thursday, 12 July 2007 19:30:19 GMT  |  Richard Lee, Currency Analyst

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Chinese Yuan Remains Near Record Low, Insurers Able To Double Equity Investments
Rumored in the overnight, officials at the China Insurance Regulatory Commission have mulled over allowing asset management branches of insurance companies to double their investment in local equities.  Raising the bar to 10 percent, the decision, should it be announced, would allow major insurers like China Life and Ping An to beef up returns that have overshadowed revenue from declining premiums.  Subsequently, the decision also comes at a time when domestic stock markets have pulled back, seemingly not as overheated as before and allowing for more stable investments.  Notably, it would additionally allow access to companies traded in Hong Kong contributing to two traffic in the underlying currency.  As a result, although the Chinese yuan continued to trade at record lows, the exchange rate pulled back modestly to trade at 7.5690 in the New York session.

Foreign Direct Investment Advances In China
Even as further statements of an unfair competitive advantage emerge, it seems that foreign trade partners continue to yearn for low manufacturing costs in the world’s fastest growing economy.  According to reports by the Ministry of Commerce, foreign direct investment into China advanced by 12.2 percent in the first six months of 2007.  Even more stunning was the fact that FDI into China soared by 21.9 percent in the month of June alone as foreign companies continue to establish factories and production sites in the country.  The report findings are likely to see further reverberations in the economy as consumption rates will tend to follow suit.  Retail sales figures are scheduled to be released next week with the majority looking for a continuation in the recent uptrend.  Advancing by 15.9 percent in the previous month, consumption rates are expected to have accelerated once again, rising 16 percent in the month of June.

China Moves Closer To Being World’s Number Three
Following the revision to growth in the Chinese economy, today’s report by the National Bureau of Statistics shows that China is making a clear move to overtake Germany’s place as the world’s third largest economy.  Previously jumping up the rankings to overtake the UK as the world’s fourth largest just last year, another move higher would place the Chinese economy third following behind both Japan and the US.  Subsequently, it would also spur tightening measures by policy officials in helping to curb inflationary pressures garnered through an overheated economy.  Including raising interest rates and reserve ratios on banks, solutions may ultimately include a more flexible currency regime.

Bouncing Back, Regional Stocks Find Support
Regional stock markets in Asia bounced back from yesterday’s losses in the overnight with both Hong Kong and Singapore mildly higher.  In Hong Kong, shares advanced after a ratings upgrade on China Mobile Ltd. by US based investment bank Citigroup Inc. as insurance and banking stocks found support from new mainland policy.  With government officials likely to offer insurers the ability to double the shares invested in China, companies like Ping An Insurance Co. advanced.  Shares of China’s second largest insurer rose 4.2 percent on the announcement to trade at HK$61.30.  China Life Insurance Co. gained 1 percent to HK$30.45.  Ultimately, both releases were able to lift the Hang Seng Index higher by 202 points, with the benchmark closing at 22,809.02.  Singapore shares were subsequently higher following better than expected earnings from Singapore Press Holdings Ltd as the company showed sales and revenue increases for the quarter.  The good news bucked a trend for the Straits Times Index, rising for the first time in three down sessions.  Ultimately, the benchmark stock index was able to gain 29.62 points to close at 3,624.56.

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