China's tightening may end with yuan hike

Business Times - 22 Jan 2010 COMMENTARY
China's tightening may end with yuan hike

And it could come without warning this year if Beijing's preferred gradualist approach doesn't cool the red-hot economy

By VIKRAM KHANNA

IN RECENT days, Chinese policymakers have stepped up their efforts to cool China's high-flying economy. But what we have seen so far could be only the beginning; there are likely to be more policy moves - including, possibly, some dramatic ones.

While there is debate about whether China's economy is in bubble mode, few are in any doubt that it is overheating (neither are China's policymakers themselves). There are many reasons for this, some unique to China, some not.

Together with other Asian economies, China has been one of the key targets of what economist Nouriel Roubini calls 'the mother of all carry trades'. The carry trade is the phenomenon of speculators borrowing at a low interest rate and deploying the funds in higher-yielding assets, or currencies. They then enjoy the yield difference, or 'carry'. Whereas the yen was the favourite borrowing currency pre-financial crisis, the US dollar has now taken its place.

China has pegged its currency to the US dollar (at about 6.8 yuan to the dollar since July 2008) partly to help its exporters in the face of the global crisis. But this peg means that China has to import America's monetary policy and keep interest rates very low. If it tries to raise them, this would suck in more capital, thus making it harder to rein in domestic money growth. In order to prevent the yuan from rising in the face of huge capital inflows, China's central bank has had to intervene in the forex market on a heroic scale, buying dollars and selling yuan.

In the process, last year alone, China added about US$450 billion to its reserves, which by year-end stood at close to a whopping US$2.4 trillion.

The counterpart of the reserve build-up has been the amount of money pumped into the domestic economy. Broad money growth in the last two months of 2009 was close to 30 per cent year-on-year - well above the official target of 17 per cent.

Bank lending has added to the problem. Last year, China's banks lent a record 9.6 trillion yuan (US$1.4 trillion or S$2 trillion), one third more than in the previous year. Part of this was to finance China's 4 trillion yuan fiscal stimulus package. But a lot of lending has eventually found its way into asset markets - mainly stocks and properties. The Chinese stock market jumped around 80 per cent last year. Property sales rose more than 75 per cent in 2009, while apartment prices in Shanghai and Beijing soared 50-60 per cent.

Dangerous

China is not well placed to be running such a loose monetary policy. Whereas the United States went through a severe credit crunch in 2009 and housing sector problems which warranted low interest rates, China did not. By importing America's monetary policy, China has effectively turned the yuan itself into a 'carry trade' currency domestically, enabling locals to borrow cheap in pursuit of higher yields in the asset markets.

This is dangerous. The eternal China bull Jim Rogers has acknowledged that some of China's real estate markets are in bubble territory. 'Dubai times 1,000' is how hedge fund investor James Chanos (who foresaw the collapse of Enron) characterises China's situation. While there is hyperbole in this description, there is also an element of truth.

The potential danger is that China's asset bubble will burst - and the consequences could be enormous. In essence, it will lead to massive losses for investors as well as Chinese banks, and could precipitate an asset price crash as well as currency problems across the region in an Asian crisis-style contagion.

As the property sector in China accounts for some 10 per cent of GDP and 20 per cent of total investment, the domestic consequences will be notable. Several sectors would be badly hit, including construction, steel, cement, and other capital goods industries - in which there is already overcapacity. In a snowballing effect, overall investment will drop sharply. The drop may not be short-lived: China's past investment booms have taken several years to unwind. After the overheating of the early 1990s, for example, investment declined for seven years, from 44 per cent of GDP in 1994 to 36 per cent of GDP in 2001.

As investment declines, China will be hard pressed to boost consumption suddenly. The measures needed to do this - such as strengthening social safety nets and deepening financial reforms - cannot be effective overnight. With both investment and consumption slowing, China's growth rate will take a hit, by some estimates as much as 3-4 percentage points. China's banks will see their non-performing loans soar. And while the country has the means to deal with this problem, it could be an enormously costly fiscal exercise.

With its domestic economy facing problems, China's dependence on the export sector will become even greater than it is now - at a time of weak global demand. This, coupled with the fact that hot money flows will reverse and start leaving China, will mean that the yuan will be under pressure to depreciate. As the overcapacity in China is being worked off, other Asian countries' export sectors will all be hit and currencies regionwide will also come under downward pressure, in a contagion reminiscent of the Asian crisis.

Fortunately, China's policymakers are wise to the dangers and have started to reverse some of China's pro-overheating policies. But it appears that, given their gradualist mindset, they are trying to do this in calibrated fashion.

Starting on Jan 7, the People's Bank of China (PBOC) started raising the cost of funding for lenders in the interbank market, by increasing the yields on three-month and one-year bills. From Jan 18, reserve requirements on Chinese banks were raised 50 basis points, effectively reducing their capacity to lend. This has been followed up with administrative measures to curb lending further.

Half-measures

However, these are not particularly aggressive moves; indeed, they are half-measures. For instance, administrative measures have in the past been easily circumvented - for example, by simply reclassifying projects. It is likely that more will be needed (and will be done) if China is to really start cooling down its red-hot economy.

One interesting proposal - made by, among several people, Barry Eichengreen of the University of California at Berkeley - is for China to substantially appreciate the yuan through a one-shot revaluation of 10-15 per cent. Other economists have proposed that in addition, China should let the yuan float within a fairly wide range against a basket of currencies. This would put paid to the expectations of yuan appreciation that are helping to drive capital flows into China. It would also give the PBOC more freedom to hike interest rates more aggressively to cool inflation and asset prices.

There would be some side effects; in particular, China's export sector will suffer. But experts estimate that the impact will be limited. Zhang Bin of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, which advises the Cabinet, estimates that a 10 per cent revaluation would slow growth in export sales by 3.3 per cent.

On the plus side, a Chinese revaluation will shift more resources into the domestic sector and make China's consumers richer, thus boosting domestic demand. It would accelerate China's move into higher-value industries, at least in the coastal provinces where wages are relatively higher. A yuan appreciation would also help reduce global imbalances by reducing China's trade surplus. If Asia's currencies also appreciate in the yuan's wake - a not unlikely scenario - this would further reduce global imbalances and help Asia become a more powerful engine of growth for the global economy.

As of now, China's official policy remains to keep the yuan pegged at a more or less fixed rate to the US dollar, despite external pressure for greater flexibility. Chinese policymakers will do their best to keep this policy unchanged. Their preferred approach is clearly to try and control overheating through other, more gradualist means. But if those don't work, watch for a without-warning hike of the yuan. It could happen in 2010.

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Bond Worry: Will China Keep Buying?

July 31, 2009

By LIZ RAPPAPORT and JAMES T. AREDDY

Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt.

A fuse was lit this week when traders noted China's apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country's actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit.

This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile. Many are selling in favor of riskier assets such as corporate bonds, stocks or even higher-yielding debt of other countries. This portends higher interest rates for the Treasury, and it may need to find alternative sources of cash like issuing more inflation protected Treasury bonds.

Tension on Wall Street trading desks began building late last week when the Treasury surprised the market with plans for a record week of sales. A Monday sale of $90 billion in Treasury bills with maturities of as much as a year went well. But China appeared absent from the following two sales, which totaled $81 billion of debt, traders say.

By Thursday morning, trading-desk heads were frantically working with clients to ensure a better fate for the $28 billion seven-year note auction. It did fare far better, allaying some concerns.

"We believe by maintaining the deepest, most liquid market in the world, we will continue to attract capital from a broad array of investors," said Andrew Williams, a spokesman for the Treasury Department.

The seven-year Treasury note rose after the auction, gaining 3/32 point Thursday to 99 25/32, which lowered its yield to 3.285%. The 10-year Treasury also gained in price on the day, up 6/32 to yield 3.641%.

Details about the auctions aren't revealed by the government until weeks later. Overseas buyers initially are lumped together into a category known as "indirect bidders," giving little insight into the origins of demand. It may be months until more thorough data on foreign-government buying are released by the U.S. Treasury. Foreign investors had been substantial bidders in recent Treasury auctions, even though their holdings of Treasury debt had started to wane. But this week's auctions renewed worries that central banks and other buyers will start selling more aggressively.

"If this trend continues, it could reflect foreign buyers' increasing concerns about the creditworthiness of the U.S.," said James Bianco, president of Bianco Research.

The worries over China shine a light on the potential vulnerability of the U.S. as it tries to fund is budget hole. Last year, China led foreign investors in selling mortgage securities guaranteed by government entities Fannie Mae and Freddie Mac, according to Treasury Department data. They also sold corporate bonds as the global financial crisis ramped up. They have not dipped back into these asset classes despite a huge rally in corporate bonds and mortgage debt this year.

While no one at State Administration of Foreign Exchange, which manages China's $2 trillion, would comment on the latest Treasury auctions, the government has left little doubt it fears the portfolio is at risk.

Clipped comments from government officials, amplified by state media editorials, point to a worry the U.S. will ultimately address its massive debt obligations by permitting inflation to rise or letting the U.S. dollar sink -- factors that would erode the value of Treasurys owned by foreign investors such as China.

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AFP/Getty Images

Treasury Secretary Timothy Geithner waits to greet Chinese vice premier Wang Qishan before the opening session of the Economic Track of US-China Strategic and Economic Dialogue at the Treasury Department in Washington on July , 2009.

At economic talks in Washington this week, senior Chinese officials gave their Obama administration counterparts an earful about the burgeoning U.S. budget deficit. China made clear it wants the U.S. to "protect its investment assets" for the good of the bilateral relationship, as the state-run Xinhua news agency reported.

The gravity of Beijing's concern was reiterated with blanket coverage of the talks in Chinese newspapers, which generally praised Washington for treating seriously its concerns. Global Times, a nationalistic English-language paper, published a front-page photo showing U.S. Federal Reserve Board Chairman Ben Bernanke appearing anxious, perched on the edge of a chair and listening as Chinese Vice Premier Wang Qishan makes a point.

The Chinese are also in a bind. If they sow doubts about the solvency of the U.S. government, they risk driving down the value of the $800 billion in U.S. Treasurys they already own.

The Chinese government's Treasury strategy is a closely guarded secret, and analysts were hard-pressed to identify any evidence that might suggest an adjustment was suddenly under way. "We worry about the devaluation of the U.S. dollar, but not at this stage," said Yang Hui, a bond salesman at Citic Securities Co. in Beijing.

Fed's Paper Facility Falls to $67.3 Billion

The Federal Reserve's holdings in a facility set up to support the commercial-paper market fell to $67.3 billion in the week ended July 29 from about $106 billion last week, according to data released Thursday.

This week, three-month paper was maturing, and companies likely took their funds out of the Fed's Commercial Paper Funding Facility.

"We are seeing a significant improvement in sentiment around commercial paper, which is encouraging people to leave the Fed's protective custody," said Joseph Abate, money-markets strategist at Barclays Capital in New York.

The facility held about $334 billion at the end of 2008.

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China hopes draw billions in foereign funds back to Asia

* Asia markets likely to extend rally on foreign inflows

* Foreign net inflows to Asia at 48-week high

* China, Taiwan, S. Korea biggest winners

(Repeating item first carried on Thursday with no change to text)

By Faith Hung and Kevin Plumberg

TAIPEI/HONG KONG, April 30 (Reuters) - After a six-month drought, foreign investors have been sending billions of dollars back to Asia, a trend some expect to continue on hopes China will lead the region out of the global economic recession.

Foreigners have poured a net $6 billion into six major Asian markets since early March, according to BNP Paribas, helping to boost China, Taiwan and South Korean stocks by up to 35 percent this year and making them the world's best performers.

Regional government efforts to drive their economies out of recession by aggressively cutting interest rates and spending billions of dollars on stimulus packages, especially the $600 billion one implemented by China, are fuelling international investor appetite for risk after months of caution.

"I think it's time to be in risky assets. The rally we've seen since March is the start of a new bull market," said Anthony Bolton, president for investments of Fidelity International, an affiliate of the world's top mutual fund firm Fidelity Investments, on a trip this week to Taiwan.

"I started to put in money in September, November, and then January and March. We are buying China-focused funds," said Bolton, whose contrarian bets made him a top U.K. fund manager for more than two decades.

China's official Purchasing Managers' Index (PMI) for March, rose to 52.4 from 49.0 in February, marking its first time in expansionary territory since September, a rebound that Beijing said the economy may have bottomed. [ID:nPEK25397]

The index is a key survey of the manufacturing sector, showing managers felt cautiously optimistic about the next few months.

To view two graphs on foreign fund inflows and stock market gains in Asia since March, please click on: https://customers.reuters.com/d/graphics/AS_FLWS0409.jpg https://customers.reuters.com/d/graphics/AS_FLWS20409.jpg

CHINA LEADS

The massive inflows to China plays and other emerging markets contrast with outflows from developed markets, a sign foreign investors bet China will lead Asia out of the global recession.

Emerging market equity funds have received inflows of $7.3 billion so far this year, compared with outflows of $56.1 billion for developed market equity funds, fund flow tracker EPFR Global said in a recent report.

In the past week alone, foreigners purchased $1.6 billion worth of Asian equities, their second-highest buying level in 48 weeks. Meantime, mutual fund buying was at a 50-week high of $946 million, Nomura International said in a report.

China equity funds absorbed another $243 million and Taiwan equity funds posted their highest weekly inflows in nearly a year, said EPFR.

Fund managers said they favoured shares of infrastructure, raw materials, personal computer makers and China plays on expectations they will continue to benefit from China's massive economic stimulus.

"China's determination to sustain 8 percent-plus GDP growth remains the cornerstone of the latest surge in risk appetite," EPFR Global senior analyst Cameron Brandt wrote in the report. Bratin Sanyal, head of Asian equity investment for ING Investment Management in Hong Kong, shared a similar view.

"We believe the bigger economies in Asia are going to come out of the downturn more quickly. China, India and Indonesia remain our favourite markets along with Singapore and Hong Kong because they add some stability to our portfolios with companies that are liquid.

STABILISING FORCE

Fund managers said recent interest in Asia by foreign funds is likely to stabilise those markets, as many fund managers buy in on dips after missing initial rallies.

"Many institutional investors are worried stocks have risen too much, too fast. They are waiting for any pull-back as an opportunity to build up their positions," said Wendy Kuo, chief investment officer of Yuanta Funds.

Yuanta's funds, with $3.3 billion of client assets, recently bought shares of Ping An Insurance <2318.HK>, Nine Dragon Paper <2689.HK> and carmaker Dongfeng Group <0489.HK>, all Chinese firms listed in Hong Kong, Kuo said.

China-listed shares in its two exchanges in Shanghai and Shenzhen are closed to all but a handful of foreign buyers.

Jamie Cumming, a senior investment manager on the global equity team of Aberdeen Asset Managers in Edinburgh, said he gradually added cyclical names, materials and industrials, including Chinese oil refiner PetroChina <0857.HK> and Taiwanese chip maker TSMC <TSM.N> at the start of the year.

Still, some fund managers advised caution.

"Globally, policymakers have added $2 trillion in stimulus but global equity markets have lost $15 trillion in market cap since the peak of the last bull market," said Mark Matthews, Asia Pacific strategist with Fox Pitt Kelton in Hong Kong.

"People are misconstruing some of the sequential improvements in numbers for an economic recovery. It's not an economic recovery and I don't think we are anywhere near an economic recovery."

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China and the Dollar

Markets don't like Treasury talking down the dollar's status.

As if the dollar didn't have enough problems, Timothy Geithner took China's bait yesterday and said he was "quite open" to its suggestion this week to displace the greenback with an "international reserve currency." The dollar promptly fell and stocks followed, before the Treasury Secretary re-emerged to say "the dollar remains the world's dominant reserve currency. I think that's likely to continue for a long time."

AP

Mr. Geithner is learning on the job, and yesterday's lesson is that it isn't smart to fool with currency markets when you are already tempting fate with a gigantic U.S. reflation. Treasury and the Federal Reserve are flooding the world with dollars to break the recession, and the world is rightly getting nervous. The solution floated by Chinese central bank governor Zhou Xiaochuan -- an increased role for the International Monetary Fund -- isn't desirable. But his warning about the dangers of dollar weakness and exchange-rate instability is still worth heeding.

Since the collapse of Bretton Woods in 1971, the global economy has tried to function with floating exchange rates, in which the "market" is said to set currency prices. As the world discovered in the 1970s and the Bush Treasury forgot, however, the market for currencies isn't the same as for apples or copper. Central banks control the supply of currencies through their monopoly on money creation. Often, as at the Alan Greenspan-Ben Bernanke-Donald Kohn Federal Reserve this decade, they get policy wrong, with disastrous consequences. Amid the global economic downturn, some central banks, like Vietnam's, are also turning to currency devaluation for a trade advantage.

Mr. Zhou may want to head off this potential train wreck. On Monday he proposed an international reserve currency "anchored to a stable benchmark and issued according to a clear set of rules." He wants the supply of money to allow for "timely adjustment" to "changing demand," and those adjustments to be "disconnected from economic conditions and sovereign interests of any single country." And he thinks the IMF can create a global currency by expanding the use of its already-existing Special Drawing Rights (SDRs), a synthetic currency linked to the underlying currencies of IMF states.

Yet who would determine the "right price" of the SDR -- the IMF? The multilateral institution's economic prescriptions have sent numerous nations into tailspins, particularly in Asia. There's nothing to say, too, that national monetary authorities wouldn't cheat and adjust their domestic money supplies as they saw fit -- or apply political pressure on the IMF to change the SDR's currency weightings in their favor.

But the main problem with the SDR is that it can't be used for anything in the real world. When the IMF allocates SDRs, recipient countries exchange them for local currencies at local central banks. That money is then used to buy real assets and facilitate trade. That exchange inflates the money supply of the domestic country that's accepting the SDRs in exchange for local currency.

There isn't consensus within China's central bank on the idea of empowering the IMF, though Beijing is eager to have more say at the institution. Hu Xiaolian, a vice governor of the bank, said Monday that "investing in U.S. Treasury bonds is an important component of China's foreign currency reserve investments." She added: "We are naturally relatively concerned with the safety and profitability of U.S. government bonds."

Ms. Hu isn't alone, and we only wish the Treasury, the White House and the Fed were equally as concerned. The dollar's status as a reserve currency gives the U.S. enormous advantages, and it should be protected ferociously by our public officials. It means we don't have to repay our debts in foreign currency and that our borrowing costs are cheaper. To the extent that the rest of the world follows a dollar standard, it also gives us far greater global sway.

It is this influence that Russia, China and others sometimes resent and would like to see displaced. The problem is that there really isn't an obvious successor to the dollar. No other economy is large enough, with deep enough capital markets. The euro might become an alternative down the road, but it remains too new and lacks the necessary underpinning of political cohesion.

Yet Mr. Zhou's demarche is also a warning that reserve currency status carries special obligations. It means the U.S. isn't conducting monetary policy only for itself but for much of the world. And it means that when the U.S. falls for the temptation to debase its currency, it sends shocks through the entire global trading system. The dollar's sharp but needless gyrations during this decade are in our view one of the major causes of the housing and commodity asset bubbles that led to the financial panic and global recession.

If Mr. Geithner meant yesterday that he is "open" to broader monetary and exchange-rate cooperation, that could be a step forward. But instead of abdicating to IMF bureaucrats, this would mean working with the world's most important governments and central banks -- for starters, the Fed, ECB, and the Banks of England, Japan and China. The world could use monetary reform, but the goal should be to reduce currency fluctuations and enhance price stability and world trade. In the meantime, the dollar's special status is an asset worth preserving.

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China Bank Braces fdor Deflationary Pressures

BEIJING -- China's central bank warned there is growing likelihood of a further downturn in China's economy, and that "relatively large" deflationary pressures loom.

In its annual monetary policy report published Monday, the People's Bank of China reiterated that it remains committed to keeping its yuan exchange rate at a balanced level. The report said the central bank also plans to use interest rates and banks' reserve requirement ratio to manage liquidity in the banking system.

Given "the contraction in external demand, excess capacity in some industries, management difficulties at corporations, [and the] increase in urban unemployment, the downward pressure on [China's] economic growth has clearly increased," the report said.

There could be global inflationary pressures in the medium-to-long term, but in the short term, deflation is the greater danger, the bank said.

"The risk of deflation is relatively large" due to falling raw-material prices in the international market and weak external demand causing overcapacity within China, the bank said.

The report didn't appear to signal any policy change was imminent in terms of the central bank's moderately loose monetary policy, but it did say that pushing forward reform of the country's electricity-pricing mechanism is among its tasks for 2009.

The central bank already set out in its December executive summary that it will target a growth rate of about 17% for broad money supply, M2, this year

Solar shares rally on new Chinese subsudy

NEW YORK, March 26 (Reuters) - Shares of solar companies rallied sharply on Thursday after the Chinese government said it would launch a generous new subsidy for the clean power systems.

Chinese-based companies were the biggest gainers, with Trina Solar Ltd <TSL.N> up 40 percent at $12.14 per share, Suntech Power Holdings <STP.N>, up 40 percent at $10.96, LDK Solar Co <LDK.N>, up 36 percent at $8.00, Yingli Green Energy <YGE.N> up 39 percent at $5.75, Solarfun Power Holdings <SOLF.O> up 26 percent at $4.48 and Canadian Solar <CSIQ.O>, up 23 percent at $5.95.

Those shares had been hard hit so far this year as financing for new solar projects dried up, but the news that China would move to support the industry spurred hopes that the government could open up a potentially huge market for the industry.

"This is a pleasant bit of news out in what has been a quite bleak time for the solar industry. The numbers are quite substantive," said Edward Guinness, co-manager of the Guinness-Atkinson Alternative Energy Fund which owns shares in several solar companies.

According to a statement on a Chinese government website, solar projects larger than 50 kilowatts of output will be eligible for a subsidy of about $2.90 per watt.

"We believe meaningful upside potential exists if government support for domestic solar sector continues," a Barclays analyst wrote in a research note, adding the move could boost Chinese demand by about 200 megawatts starting in the second half of 2009, a nearly four-fold increase from Barclays' projection for this year.

China is home to several solar power companies, but most of the sales are to Germany and Spain, the two largest markets in the world. The United States is the third largest market.

The crisis in financial markets has shut off much of the funding for new projects since late last year, while weakness in the euro versus the dollar has eroded profit margins for companies that sell into the European market.

One analyst said while the news was clearly positive for the solar sector, many details had yet to emerge.

"Although the subsidy may cover about 60 percent-plus of the cost of installation, it is unclear how much the energy generated from the system will be valued," Piper Jaffray analyst Jesse Pichel said in a note to investors.

The news also boosted shares of U.S. companies First Solar Inc <FSLR.O> by 14 percent to $152.96 per share and SunPower Corp <SPWRA.O> by 15 percent to $27.66, while Germany's Q-Cells <QCEG.DE> rose 21 percent to 18 euros and Norway's Renewable Energy Corp (REC) <REC.OL> gained 18 percent to 58.40 crowns. (Reporting by Matt Daily and Wanfeng Zhou in New York and Nichola Groom in Los Angeles, editing by Matthew Lewis) ((matt.daily@thomsonreuters.com; + 1 646 223 6121; Reuters Messaging: matt.daily.reuters.com@reuters.net)) Keywords: SOLAR/SHARES

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China bilateral currency swaps

     BEIJING, March 27 (Reuters) - China this week signed a 100 billion yuan 
($14.6 billion) currency swap with Indonesia, its fifth such agreement since 
December. 
    The main purpose of the bilateral swaps, which total 580 billion yuan, is to 
promote trade, and Chinese exporters could be the biggest beneficiaries. For a 
related analysis, double-click on: [ID:nPEK66902] 
    Here is a breakdown of the swap agreements and 2008 trade figures: 
                  SWAP LINE:         CHINA EXPORTS TO:       CHINA IMPORTS FROM: 
 1. South Korea   180 bln yuan/              
    (Dec 12)      38 trln won                $74.0 bln               $112.2 bln 
 2. Hong Kong     200 bln yuan/                       
    (Jan 20)      227 bln HK dollar         $190.7 bln                $12.9 bln 
 3. Malaysia      80 bln yuan/ 
    (Feb 8)       40 bln ringgit             $21.4 bln                $32.1 bln 
 4. Belarus       20 bln yuan/ 
    (March 11)    8 trln Bel. ruble          $1.42 bln                 $0.62 bln 
 5. Indonesia     100 bln yuan/ 
    (March 23)    175 trln rupiah            $17.2 bln                $14.3 bln 
 ($1=6.831 Yuan) 

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Singapore asks china to supervise S-chip firms

* Singapore cbank chairman visiting China

* talks to officials on recent scandals of S-chip firms

SINGAPORE, March 27 (Reuters) - Singapore's Senior Minister Goh Chok Tong called on Chinese authorities to maintain "stringent supervision" over their companies that list in the city-state, the Business Times newspaper reported on Friday.

Goh, chairman of central bank and financial regulator the Monetary Authority of Singapore, was speaking to officials in Guangdong province in the wake of scandals that have hit Chinese firms listed in Singapore, or S-chips, in recent months.

"It's a way of helping them brand themselves," Goh told reporters in Shenzhen, the newspaper said. "If they allow a small percentage of these companies to defraud investors, that's going to spoil the reputation of other Chinese companies, good companies, listed in Singapore."

Renewable energy firm China EnerSave <CENE.SI> said on Thursday a subsidiary defaulted on the repayment of bank loans of 898.8 million yuan ($131.6 million) in China and the company has also defaulted on a loan repayment of $20 million.

Earlier this month, Chinese-based education provider Oriental Century <ORNL.SI>, partly owned by Singapore's Raffles Education <RLSE.SI>, said its chief executive Wang Yuean "substantially inflated" the company's balance sheet for its 2008 full year financial results.

Along with Oriental Century, shares in FibreChem Technologies <FIBR.SI> and China Sun Bio-Chem <CSUN.SI> are suspended from trading over alleged accounting irregularities.

There are over 100 Chinese companies listed in Singapore, and at least 25 are from Guangdong, one of China's richest provinces and a manufacturing hub, the newspaper said.

Goh, a former prime minister, said he had heard some 900 firms in Shenzhen had closed down but the city was expecting 10 percent growth this year.

"If we tighten (regulations) too much, we can lose some of these companies from being listed every year," Goh said. "If we don't tighten, then we have other problems."

Singapore Exchange <SGXL.SI>, Asia's second largest-listed bourse, is also home to listings from Indonesian, Malaysian and Indian firms, but new initial public offerings have slowed to a trickle as investors fled slumping stock markets. (Reporting by Neil Chatterjee; Editing by Dhara Ranasinghe) ((neil.chatterjee@thomsonreuters.com, +65 6403 5657)) ($1=6.832 Yuan)

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China's Currency Proposal Gets Respect, and Questions

U.S. officials don’t seem to think much of People’s Bank of China governor Zhou Xiaochuan’s proposal for a new “super-sovereign” reserve currency. But some serious people are taking it seriously, despite the obvious impediments to making it happen — and not all of them work for the IMF.

Mr. Zhou’s proposal “has the potential to lead to one of the most profound reforms of the global monetary system in the coming decades,” Deutsche Bank China economist Jun Ma wrote in a report Wednesday. He endorsed the analysis behind China’s proposal, arguing that the status of the U.S. dollar as a reserve currency enabled the country’s excessive borrowing and helped contribute to the U.S. real estate bubble.

He said the idea of a super-sovereign reserve currency deserves serious consideration as it is “a possible solution that can help end the huge bilateral imbalances between China and the US in the long run.” Mr. Ma concedes that the technical barriers to implementing the idea are enormous, but says the idea could slowly gain support from both developing nations and some rich countries.

Other observers are surprised and somewhat suspicious of China’s newfound interest in a global reserve currency controlled by the IMF, since the People’s Bank of China often seems to have more feeling for its own currency.

“Events on the ground suggest the PBOC is more actively promoting the [yuan] itself as a reserve currency,” Royal Bank of Scotland economist Ben Simpfendorfer said in a report, pointing to its recent currency-swap agreements with Hong Kong, Malaysia, Indonesia and Belarus.

Those deals imply the central bank is trying to move toward settling some trade in yuan rather than dollars, he said, which could be a way to shield CHina’s exporters from the recent big moves in the exchange rates of the U.S. dollar and euro. The yuan is unlikely to end up as a global reserve currency but could gradually see more use regionally, perhaps becoming a sort of de-facto Asian monetary unit, Mr. Simpfendorfer said.

Either way, it’s pretty clear China would prefer that the reserve currency of the future be something other than the dollar.

–Andrew Batson

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Volcker: China Chose to Buy Dollars

When talk at the Journal’s Future of Finance Initiative turned to inflation, participants turned the resident expert: Paul Volcker. He had a lot to say.

Paul Morse for The Wall Street Journal

Paul Volcker at the Wall Street Journal’s Future of Finance Initiative in Washington, D.C.

The former Federal Reserve chairman touched on a number of subjects ranging from the Fed’s communication strategy to China’s concerns about the U.S. debt load. The latter sparked questions over whether the U.S. could default on its debt — it effectively had done that at least once, Yale professor Robert Shiller noted. When President Roosevelt took the U.S. off the gold standard and unilaterally devalued the dollar, the move wiped out some 75% of dollar-denominated debt. “Maybe I shouldn’t even mention this,” Shiller joked.

Volcker, who as head of the White House’s Economic Recovery Advisory Board is a key adviser to President Obama, expressed concerns about inflation as a way of dealing with mounting debt. “One historic way of getting yourself out of this situation — or trying to — is to inflate. Either you do it deliberately or you allow it to happen,” he said. “And if we permit that to happen then I think all these dollars will come tumbling down on us.” He said the U.S.’s greatest strength is its history and reputation, and suggested that shouldn’t be put at risk.

He also critiqued the Fed. “I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery,” Volcker said. “I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery.”

As for China’s criticism of the U.S., Volcker was unsympathetic. “I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to depreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us.”

The 81-year-old elder statesman commented on the current state of the U.S. economy: “We’re in a government-dependent financial system; I never thought I would live to see the day… We’ve got to fight to get away from that.”

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Wen's Dollar Warning

THE WALL STREET JOURNAL ASIA

Chinese Premier Wen Jiabao said Friday that he has "worried" about the safety of U.S. assets -- meaning the Treasury bonds his government owns. Whatever Mr. Wen's political motives, his concerns about the integrity of U.S. sovereign debt are timely and apt.

U.S. debt held by the public has now hit $6.6 trillion -- up from $5.3 trillion only a year ago. That doesn't count the $5.2 trillion or so in outstanding Fannie Mae and Freddie Mac liabilities that we now know also have a taxpayer guarantee. And it doesn't count the many ways that both the Federal Reserve and Treasury have guaranteed financial assets more broadly -- such as $29 billion in Bear Stearns paper, $301 billion in dodgy Citigroup assets, and hundreds of billions in Federal Housing Administration loans.

Wen Jiabao

President Obama's stimulus plan and new budget will require an additional $3 trillion to $4 trillion in new borrowing over the next two or three years, and that's if the economy recovers smartly. Adding it all up, Federal Reserve Chairman Ben Bernanke earlier this month estimated that U.S. public debt-to-GDP would reach 60% over the next few years, up from 40% before the financial panic hit -- and the highest level since the aftermath of World War II.

That's a lot of T-bills to flog, and the world is taking note. Our colleagues at MarketWatch reported last week that the cost to buy insurance against U.S. sovereign debt default has surged in the past year. The spreads on credit default swaps for U.S. government debt hit 97 basis points last week -- or $97,000 to buy insurance on $10 million in debt -- nearly seven times higher than a year ago and 60% higher than the end of 2008.

Mr. Wen called on the U.S. to "maintain its credibility, honor its commitments and guarantee the safety of Chinese assets." Little wonder: China, like other trading nations, has a big stake in this fiscal free-for-all. Although it doesn't release detailed data, roughly two-thirds of Beijing's $1.9 trillion foreign-exchange reserves are likely parked in U.S. Treasury debt.

The Obama Administration revealed its sensitivity on the issue by responding quickly, with Presidential spokesman Robert Gibbs saying Friday "there's no safer investment in the world than in the United States." Mr. Obama added Saturday that "not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States."

The White House is almost certainly right that the U.S. won't default; the consequences would be too dire. But there are risks well short of formal debt repudiation. As the supply of U.S. debt increases, investors may demand a higher yield and interest rates would rise, reducing the tradeable value of current Treasury bonds. The other temptation will be to inflate away the debt, which would also devalue dollar-denominated assets.

What Mr. Wen is really saying is that even the U.S. national balance sheet has limits. The dollar is the world's reserve currency, so the U.S. has the rare privilege among nations of being able to borrow (and then repay its debts) in its own currency. America also remains the world's main safe haven in a crisis, as the flight to the dollar and T-bills in recent months underscores.

But reserve currency status isn't a birthright and it can vanish when nations are irresponsible for too long. Deficit spending has its uses when the money is spent on winning a war or to finance tax cuts and investments that promote economic growth. The tragedy of Mr. Obama's $787 billion "stimulus" and his $410 billion 2009 spending blowout is that they spend principally on income maintenance and transfer payments that have little or no growth payback.

Mr. Wen may have been trying to placate his domestic Chinese audience, which is suffering through its own economic slowdown. Or perhaps he was trying to repay Treasury Secretary Timothy Geithner for his nomination-hearing comments on Chinese currency "manipulation." Mr. Wen doesn't have much room to lecture the U.S., having done too little in his six years in office to liberalize the Chinese economy.

But the Chinese Premier is right to warn the U.S. political class that the global demand for American debt will continue only if the U.S. runs economic policies that make U.S.-dollar assets worth the risk.

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Hopes of Quick Rebound in China Strat to Fade

Hopes of Quick Rebound in China Start to Fade

Despite an Increase in Bank Lending, Steel Prices Fall, Demand for Exports Shrinks and Consumers Buy Fewer Foreign Goods

By ANDREW BATSON

BEIJING -- Hopes for an early recovery in China's economy are starting to unravel, undercutting the optimism that has helped to make the country's stock market the world's best performer this year.

Getty Images

A worker carries bottled gas past a ship in China. Despite more credit for industries such as shipbuilding, an early rebound is unlikely.

In recent weeks, some companies and investors had seized on a surge in bank lending and an upturn in steel prices -- a key indicator in China's industry-heavy economy -- as signs that a massive government stimulus program was already taking hold.

But now steel prices are falling again, and closer examination of the recent bank data suggests that many of the loans won't immediately fuel economic growth. Meanwhile, trade has continued to contract, as demand for Chinese exports from the U.S. and Europe wanes, and Chinese companies and consumers, in turn, buy fewer foreign goods.

The upshot is that a real pickup in China's economy could still be several months away, or longer. That's bad news for a global economy in which China is the only major power still growing.

"It would be a mistake to think that China could decouple from the rest of the world, or carry the rest of the world on its shoulders," said Bruce Kasman, chief economist for J.P. Morgan. "A sustained recovery in China is dependent on better news globally."

China's government has put about 230 billion yuan ($34 billion) into stimulus projects so far, with more to come. Many economists think it will take time for that jolt to work its way through the economy, and don't expect major effects to show up until around the second half of this year.

Local companies, more optimistic about the stimulus package, began bidding up steel prices and freight rates in December. Investors did the same with Chinese stocks: The benchmark Shanghai Composite Index at one point this month was up 30% for the year, though it has come down a bit since.

By the beginning of February, steel prices had gained about 15% from November lows. China is the world's largest consumer of the metal, and the run-up in prices got a lot of attention.

But much of that steel was stockpiled, rather than immediately used in factories or construction sites.

Inventories of some steel products rose more than 30% in January from December, the China Iron & Steel Association said in a report last week.

"Recent additions to inventories by dealers and users have led to a rebound in steel market prices ... [but] the steady increase in inventories will affect the stable operation of the steel market later on," it said.

The anticipated demand hasn't yet materialized, and those inventories are weighing on the market.

Average steel prices dropped 6.3% last week, after falling 3.2% the week before, according to Mysteel, a Shanghai-based research firm.

Getting a solid read on the Chinese economy has been particularly difficult in recent weeks because the weeklong Lunar New Year holiday fell earlier this year than in 2007, distorting annual comparisons of key indicators in January.

Other data reinforce the sense that economic activity has yet to revive. Industrial output in the business hub of Shanghai fell 12.7% from a year earlier in January -- even after adjusting for the holiday. Nationwide, industrial statistics haven't yet been published for January.

Also, imports nationwide fell 43.1% in January from a year earlier -- a drop that, allowing for the holiday impact, suggests slowing demand in China.

"Domestic demand for imports is still very weak, as the housing-construction slump continues, and the fiscal stimulus-induced investment demand has yet to come through," said UBS economist Wang Tao.

The huge expansion in lending in January -- banks made 1.62 trillion yuan in new loans, twice as much as last year -- was widely seen as a positive sign.

Associated Press

College students wait to enter at a job fair in Wuhan, in central China's Hubei province, Feb. 20, 2009. The once ravenous international appetite for Chinese-made goods is shrinking, leading to increased unemployment in the country.

But other data on deposits suggest companies are hoarding their cash rather than spending it, so those loans may not be immediately fueling economic growth.

Further doubts have been raised by the unusual nature of recent loans. Short-term bills accounted for 42% of new corporate lending in January, or 623.9 billion yuan, three times the already elevated level of November and December, and 10 times October's figure.

Because companies can borrow those bills for a lower interest rate than they earn on deposits, some economists think the surge comes more from financial engineering than actual borrowing.

"Recent monetary and credit data do not reflect real economic demand," said Ha Jiming, chief economist of China International Capital Corp.

Meanwhile, major Chinese port operators are reporting even lower volumes of containers coming through in February than in January, Citigroup analysts Ally Ma and Brian Lam wrote in a report this week.

Based on those data and other indicators, an annual decline of 20% or more in Chinese exports in coming months "seems inevitable," the analysts wrote.

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China warns slowdown could worsen, does not rule out rate cut

China's central bank warned the country's economic slowdown could worsen and the risk of deflation was high, in its latest quarterly report, while not ruling out further interest rate cuts. China's economy will continue "stable and rapid growth" as government stimulus measures kick in but the global economic crisis has hit hard, the People's Bank of China said in its fourth quarter monetary policy report. "(We will) appropriately use various tools, including adjustment of interest rates and banks' reserve requirement ratios, to ensure reasonable monetary and credit growth," the bank said. China cut interest rates five times in the period from September to December, with the benchmark one-year lending rate now standing at 5.31 percent, while the one-year deposit rate is 2.25 percent. The export-dependent Chinese economy , the world's third-largest, expanded by nine percent last year, the first time in six years that it posted single-digit growth. "External demand is shrinking, some sectors have overcapacity, enterprises face operating difficulties and urban unemployment is rising, while the downward pressure on economic growth is increasing," the central bank said. Weak demand means deflation is likely in the short term, but in the medium-to-long term massive injections of liquidity by central banks around the world could fan inflation, it said in the report released late Monday. China's consumer price index, the main gauge of inflation, was up only 1.0 percent in January while producer prices, which measure trends at the wholesale level, fell 3.3 percent, prompting economists to warn deflation was imminent. Deflation is a situation when a continued fall in prices encourages people to postpone buying products as they expect to get a better bargain later, but that in turn only serves to further slow the economy.

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