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China Weekly 07.12

China Weekly 07.12

2010-07-12 09:20:00
Jonathan Granby,
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 CHINA WEEKLY

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China’s trade surplus grew more than expected in June, according to numbers released over the weekend. The data showed the trade surplus rising to $20.02 billion, higher than the expected $14.6 billion rise. The reading was also an improvement on May’s $19.5 billion, which itself was noted as a result of high growth in exports. In June, exports grew 43.9% compared with a year-ago period, a drop from May’s year-on-year growth of 48.5%, imports rose 34.1% less than May’s 48.3% rise. Expectations by economists showed exports rising 40% and imports 38%. Analysts are already speculating that the large trade surplus will only serve to heap more pressure on Beijing to allow the yuan to float more freely, especially with expectations of another large US trade deficit to be reported. Deutche Bank chief economist Jun Ma wrote in a note following the publication of the data that “the impact of the European sovereign-debt crisis on Chinese exports has been much smaller than feared and will likely remain modest in the third quarter”.
 
Also on the data front, Chinese banks slowed lending according to the economic report as China’s state-run banking system moved to curb the amount of credit flowing into the economy in June. Mainland Chinese banks extended 603.4 billion yuan ($89.1 billion) in new loans in June, lifting the total amount of lending in the first half to about 62% of the governments 7.5 trillion yuan annual target, according to data released by the PBoC. The lending figures were in line with the 600 billion yuan expectations for the month, and follow typical seasonal patterns in which banks typically lend 30% of the annual lending target in each of the first two quarters and then slow lending in the second half of the year. 
 
Turning to real estate, prices in major Chinese cities are set to decline significantly in the coming months as developers grapple with bloated inventories and wary buyers, according to recent research conducted by Standard Chartered Bank.  China’s leading cities could see prices tumble by 20% to 30% by the end of 2010 the report said. Analyst’s say that China’s housing market peaked earlier in the year and has turned lower after anti-speculative policies were unveiled in April and banks were required to set aside more cash as reserves in an effort to cool lending to the property sector. 
 
Elsewhere, China’s foreign exchange regulator the State Administration of Foreign Exchange (SAFE) said that its reserves are managed according to market principles, and concerns that it is considering dumping its US debt holdings are unfounded. Adding, US government debt is attractive because it’s the largest sovereign market on Earth, offers low transaction costs and provides good security. SAFE also said that gold won’t make up a big portion of its forex holdings in future because supply is limited and bullion doesn’t have a good track record on a risk-reward basis over the past 30-years. Earlier in the week, SAFE managers said that the funds had survived the financial crisis without significant losses and that they would continue to earn strong returns in the long term. 
 
In other news, China is weighing a nationwide resource tax designed to channel funds to help develop the impoverished western regions of the country. A tax was implemented on a trial basis in the oil-producing western region of Xinjiang in June, and the government is drafting a plan that could see the levy imposed nationwide. The trial tax carries a rate of 5%, though few details are available as to how it is calculated, from the Xinjiang region the tax is estimated to generate 4 billion yuan to 5 billion yuan annually. 
 
In a long awaited report, the US Treasury Department declined again to officially cite China for manipulating the foreign exchange value of its currency. Domestic manufacturers have repeatedly urged the administration to name China as a currency manipulator for keeping its currency at an artificially low peg to the US dollar.
 
Finally, several of the world’s largest banks operating in China have been approached by the country’s state-controlled labour union and encouraged to form labour unions. According to the report in the Financial Times, union officials spoke last month to banks including Goldman Sachs, JPMorgan, Morgan Stanley and UBS. The report quoted an unnamed foreign executive who said “they are actually telling us, not asking us” to form the unions. 
 
 
Written by Jonathan Granby, DailyFX Research Team
To contact the author email instructor@dailyfx.com
 
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