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China Weekly 03.08

China Weekly 03.08

2010-03-08 12:39:00
Joel Kruger;Jonathan Granby,
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CHINA WEEKLY

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Last weeks news was dominated by the National People’s Congress which opened on Friday. Chinese Premier Wen Jiabao took the stage and wasted no time, offering the government’s projections and forecasts for the coming year. Starting with the budget-deficit; the fiscal shortfall is expected to rise to 1.05 trillion yuan ($154 billion) in 2010 as the nation boosts spending on items such as agricultural and rural development as well as low income housing. In 2009 the government’s fiscal deficit reached 950 billion yuan, the highest level in six years. This years projected deficit translates into 2.8% of China’s GDP in 2010. The deficit will be met through 850 billion yuan in central government borrowing and 200 billion yuan in local government debt, Wen said. The premier’s remarks coincided with the Ministry of Finance’s budget report, which offered 3% as a limit for the deficit. “Although China’s economy is recovering, the foundations aren’t solid yet, and we need to maintain continuity and stability in fiscal policies”, according to the ministry’s annual budget report. The report continued to say “the fiscal deficit in 2010 needed to be an appropriate size, but must be kept under 3% in order to be able to gradually reduce the deficit in future years”. Xinhua – the state run news agency – reported that China plans to spend more than 818 billion yuan on agriculture and farmers and rural areas in 2010, an increase of 93 billion yuan over 2009 spending.

Returning to the NPC, Premier Wen Jiabao pledged further measures to curb speculation in China’s housing market, signaling that lending to the sector would be tightened along with the imposition of targeted taxes and stricter enforcement of real estate laws.  “We will rein in speculative housing purchases by intensifying the implementation of differentiated credit and tax policies.” Wen continued to say that the government would work to improve management of land to prevent prices from rising too fast along with making greater efforts to tackle illegal land hoarding and property-price manipulation. Deutshce Bank said Wen’s comments were an indication that the government would like to see some correction in housing prices in coming months. Jun Ma, an economist at Deutsche Bank in Hong Kong said “a second quarter decline in high-end housing prices in major cities like Shanghai and Beijing becomes more likely.” Wen’s address also set out economic targets for the year, including setting the rate of growth in China’s GDP at “about 8%.”

Moving away from the National People’s Congress, on the data front, China’s manufacturing activity slowed in February after a year of improving conditions, suggesting the governments’ efforts to rein in stimulus and credit growth are beginning to find traction. “While still in expansion, overcapacity in manufacturing, wage pressure and more restrained government spending may have affected sentiment among purchasing managers”, J.P. Morgan’s Jing Ulrich in Hong Kong wrote on Monday. The other major release showed that new lending hit 600 billion yuan ($87.9 billion)(by Feb. 18th) and is expected to surpass 700 billion for February, according to bank officials. In January 2010, commercial banks lent a total of 1.39 trillion yuan according to the PBoC. The rather large difference between the January and February numbers is attributed to the seven-day Spring Festival holiday said Guo Tianyong, a professor at the Central University of Finance and Economics.

Staying with news on the national stage, the central bank indicated Thursday it plans to stick to its moderately loose monetary policy while remaining vigilant against overly fast rises in consumer prices. PBoC Vice Governor Su Ning said he is confident China can counter inflationary pressures this year, noting that there have been few signs of such pressures emerging in the past few months. In a separate development, China’s banking regulator has ordered the nation’s lenders to restrict credit to local government projects while increasing lending to private businesses. Xiao Yuanqi, an official with the China Banking Regulatory Commission said the measures reflect government efforts to help prevent overspending on real estate and other projects that could lead to speculative excess.

Turning to the on-going iron ore price negotiations, unnamed industry sources have said that global miners BHP Billiton, Rio Tinto and Vale will likely pitch for a 50% hike in iron ore prices with Chinese steel mills. Each has their own motivations, conditions and requirements; Rio Tinto wants a 50% hike over the 2009 benchmark price, while BHP wants the ore it supplies to some mills to be priced at spot rates. Vale is seeking a flat 50% increase based on the difference between the spot price and the 2009 benchmark price. Baoshan Iron & Steel Co. which is leading this year’s talks, will wait for responses from Japanese and South Korean mills to the proposed prices before making a decision. In a separate development involving Brazilian miner Vale, Qingdao port, China’s second largest foreign trade port, is in preliminary talks to develop a shipping berth for 400,000-metric-ton iron ore carriers. Chang Dechuan, Chairman of Qingdo Port Group, speaking on the sidelines of the National People’s Congress said the port management haven’t involved Rio Tinto or BHP in the talks. The supersized carriers are Vale’s attempts to reduce its disadvantage in having a longer shipping route, and therefore higher costs, in courting the China market. Chang said “we’re not sure when work will start” since the project is awaiting government approval. The group plans to build one 400,000-ton berth in direct competition with a rival port which has similar plans and is also courting Vale.

In the world of mobile phones, the Chinese market which is the world’s largest is an essential one to tap. Apple Inc., which already has a partner to deliver its iPhone to Chinese customers, was being courted last week by China Mobile, the biggest mobile operator in the world, to ink a deal that would allow them to carry the iPhone. China Mobile Chairman Wang Jianzhou said the two firms have been in talks for some time and the two companies had agreed on the stake size and other details are being ironed out. China Mobile caused a stir earlier in the week when it confirmed it was holding talks to buy a stake in Shanghai Pudong Development Bank Co. that could lead to it expanding into mobile banking services. The potential deal would reportedly mark the first time a telecom firm has made a major investment outside of its core cellular services business.

In a short round-up of other stories; Morgan Stanley reached a deal to sell its entire 34.3% stake in China International Capital Corp, said Li Jiange, Chairman of the Chinese investment bank. Li declined to disclose any details of the deal since it is still pending Chinese government approval.

Elsewhere, China Railway Construction Corp. will raise up to 8 billion yuan ($1.17 billion) through a private sale of newly issued shares to a group of up to 10 investors, including to its parent company. About 1.035 billion shares will be sold at a minimum of 7.74 yuan a piece, about a 10.5% discount to their Shanghai close of 8.66 on Friday.

On the gaming front, Sands China Ltd, the Macau casino operator controlled by Las Vegas tycoon Sheldon Adelson, said its net profit for 2009 climbed 21.7% helped by higher earnings as its casinos in the world’s biggest gambling hub attracted more than 35 million visitors.


Finally, China’s sovereign wealth fund said the responsibility for any potential bailout of Greece should fall primarily on the European Union, making the first official comments since reports in January that it was considering the purchase of Greek debt.
 

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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