China Weekly 03.29
Yuan related talk still dominated headlines last week, which overall was a relatively quiet one in China. Starting at the beginning, Monday saw Chinese Commerce Minster Chen Deming speak of the likelihood that China would record a large trade deficit in March. Turning to the yuan, Chen said that China’s worsening trade landscape was a clear indication that China shouldn’t revalue its currency against the US dollar. “It’s not rational for China to revalue the yuan, as it would hurt both Chinese exporters and American consumers.” Chen concluded that the calls were highly politicized since they continued to gather momentum even as China’s trade surplus was shrinking. Continuing on this note, PBoC governor Zhou Xiaochuan said that too much commotion is going on over China’s currency and it wasn’t helping the situation. While commenting on the sidelines from the Inter-American Development Bank’s annual meeting in Mexico, the governor said that whether to allow the yuan to rise involved “very complicated issues” one of the most pertinent is the “tremendous task to create jobs”.
The label ‘currency manipulator’ is one that is circulating more and more as the yuan issue continues to snowball. The US Treasury has until April 15 to decide if they wish to label China as a currency manipulator, which would escalate the conflict between the two parties. The chairman of Morgan Stanley Asia, Stephen Roach, said he doesn’t agree that China is manipulating the value of the yuan. Adding, that China’s trade imbalances are a multilateral problem that cannot be solved through a bilateral adjustment of foreign exchange values.
At the week’s close Fan Gang, a top adviser to the PBoC, wrote an editorial piece in the state run China Daily where he articulated that China may allow its currency rate to move more freely if the economy continues to improve, but the move won’t do much to remedy structural economic problems in the US. “China may resume a managed float (which led to a 22% appreciation in value up to 2008 when the fixed peg was re-established) if the uncertainty of the post-crisis situation diminishes”, Fan said. Continuing, “the move wont do much to help the US economy since it will result in raising the cost of Chinese goods sod in the US, adding to inflationary pressures. The US central bank may, in turn, be forced to raise interest rates and tighten monetary policy, steps that could ultimately hurt the recovery”
Elsewhere, state owned enterprises (SOEs) with only secondary or tertiary interests in the hospitality industry have been told to get out of the hotel business. One analyst estimates this could involve as much as 100 billion yuan ($14.6 billion) in assets changing hands and effect as many as 2,000 hotels and 100 SOEs. The order was issued by the State-Owned Assets Supervision and Administration Commission (SASAC) on Jan 25 but details were initially withheld from the public. Sources close to the SASAC said the move was aimed at integrating and reorganizing the sector and transferring ownership to companies that will manage the hotels more professionally. Industry experts were left scratching their heads over the puzzling move and some wondered whether government agencies had interests in the divestments. The head of one state owned company, speaking on condition of anonymity, said “to be honest we don’t know the true intentions behind the SASAC’s actions, perhaps an asset-management company will be set up so that they can operate the hotels themselves”. SOEs in property development and travel as well as state airlines and hospitality firms will be allowed to keep their hotels. State-owned tourism and hotel companies such as China Travel Service and China International Travel Service may be in the best position to profit from the changes.
On the property front, Beijing announced another round of tightening measures this time targeting mortgage loan terms. The mortgage interest discount has been reduced for first time buyers; the discount has been abolished and down payment requirement raised to 40% for second time home buyers, and for third time buyers, rates are at banker discretion while the down payment has been raised to 60%. Despite sales volumes in primary and secondary markets collapsing, no one is panicking since local governments and developers have massive amounts of liquidity from last year, which they raised through land and property sales as well as taking advantage of the ‘anything goes’ borrowing window during the economic stimulus period. They seem to be of the opinion that Beijing will reverse these policies before their liquidity runs dry. Therefore they have decided not to cut prices. Current lending terms effectively keep second and third home buyers out of the market, in theory, forcing developers to cut prices and attract first-time home buyers who have low incomes and little wealth. However, the developers are resisting this play since Beijing is expected to loosen again soon. This cat-and-mouse game will continue until Beijing proves its credibility by maintaining a tight market policy until local governments and developers run out of money, forcing everyone to play by the new rules.
In a round up of other news; the Bank of China said Tuesday its 2009 net income rose 26% from a year earlier, because of a rebound in lending activity. Net income totaled 81.07 billion yuan ($11.87 billion) beating analyst expectations of 79.32 billion yuan. Staying with banks, the Bank of China paid senior executives and board members a total of 205 billion yuan ($30 billion) down 45% from 373.7 billion yuan in 2008. The cuts in salaries were part of China’s financial executive pay reform, with a performance appraisal system at its core, meant to prevent bankers from focusing on short-term profits. Elsewhere, the Industrial & Commercial Bank of China (ICBC) said it will raise fresh funds to shore up capital and slow asset growth this year, after the world’s largest bank by market value posted a 16% rise in 2009 net profit, its smallest increase in the past six years. The ICBC said it intends to issue as much as 25 billion yuan ($3.7 billion) of bonds convertible into its Shanghai listed shares. Its action follows smaller peer, Bank of China which is planning to sell up to 40 billion yuan worth of convertible bonds, similar plans are in the pipeline for Bank of Communications and Shanghai Pudong Development Bank. ICBC Chairman Jianqing said “we are confident that fund-raising plans wont lead to any dilution in our return of equity, which will be maintained at around 20%” in an effort to ease investor concerns about a supply glut of new shares.
Finally, East China Mineral Exploration and Development Bureau will pay $1.2 billion to acquire the Brazilian iron ore producer Itaminas Comercio de Minerios. The two companies signed a letter of intent last week according to Winbros, a consultancy hired by Itaminas. According the reports, Itaminas annually mines three million metric tons of iron ore and has estimated reserves of 1.3 billion tons of the material.
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