Source: China Daily

The reform to China’s exchange regime is being carried out in a market-orientated means toward a long-term target. Turing it into a political issue would only harm the process or even tarnish the ultimate target itself.

China’s exchange regime is one of the major topics in the Strategic Economic Dialogue between China and the United States, which began in September 2006. The talks are only one indication of the US government’s concern over China’s exchange rate.

Before commenting on America’s over-concern, it is necessary to examine the gains and losses of the US on the renminbi exchange rate issue.

Will the United States reap great benefit from a significant renminbi appreciation? Certainly not.

China will see reduced exports as a consequence of renminbi appreciation, but the US will not stop buying the necessities it requires. US importers may turn to other developing countries. But if the commodities from those countries are more expensive than Chinese goods, the switch does not improve the US’s international balance by reducing its trade deficit.

If China loses its share of the international market for the yuan appreciation, its economic growth will be slowed, cutting down its imports from the US. It will not help reduce the US trade deficit, either.

Commodity trade aside, the renminbi’s appreciation will also hurt the US in capital account items. US direct investment will become less rewarding after the yuan gains against the US dollar, decreasing US profit from international investment.

As a matter of fact, the US has more to gain if China maintains the renminbi at a stable level.

When the US manufacturers shift their factories into China for the relatively lower costs here, US customers still enjoy the products by importing them from China. The consumption of resources, energy and the pollution to the environment during the manufacturing process are all left in China.

When the yuan is stable, the US has a more important advantage.

Thanks to the trade surplus, China has accumulated a large sum of US dollars and its world largest foreign exchange reserve is mostly in US dollars. Such a big sum, a considerable portion of which is in the form of US treasury bonds, contributes a great deal to maintaining the position of the US dollar as an international currency.

Russia, Switzerland and several other countries have restructured their foreign exchange reserve and reduced the US dollars they hold. China is unlikely to follow suit as long as yuan’s exchange rate is stable against the US dollar.

The Chinese central bank will be forced to sell US dollars once the renminbi appreciates dramatically, which might lead to a mass depreciation of the US dollar against other currencies.

The Chinese government launched an exchange reform regime years ago. The renminbi will be appreciated gradually, the exchange regime would evolve in a managed floating exchange rate system and an effective foreign currency market would be established.

China made such a choice because the former arrangement of pegging to the US dollar might weaken China’s flexibility in monetary policies. And it has also realized that an undervalued yuan will slow the industrial restructuring and cause vicious competition among Chinese exporters.

However, this reform is only part of a much bigger effort to upgrade the country’s industrial structure. The exchange regime is not going to finish the task single-handedly.

First of all, the exchange regime reform is not a solution to tackle China’s trade surplus. China’s exports are mainly propelled by the processing trade, which is not sensible to the exchange rate. Even if the renminbi does rise dramatically, the processing trade is not going to drop instantly and the trade surplus may not diminish. Figures from Japan and China’s Taiwan Province, where the processing trade used to dominate, have also indicated a lasting surplus in the case of an appreciation of local currency.

The exchange regime’s reform will not put the lopsided industrial structure into balance by itself. Theoretically, a changing rate would help promote the development of industries that are not trade-orientated, in China’s case, the tertiary sector.

However, China’s tertiary sector was fledgling for multiple reasons, including inadequate supply of qualified talent and underdeveloped infrastructure. Such factors are not easily improved by the exchange regime reform.

Therefore, an objective view about exchange regime reform is indispensable when people discuss the renminbi exchange rate.

The exchange rate equals a price between currencies in economic theories. Price is the key to allocating resources, which would bear remarkable significance for all resources in the market.

The Chinese government is determined to further this reform, but only according to its own blueprint. The greater target might be tarnished if the exchange regime reform is boiled down to the appreciation of renminbi. How much should the yuan be appreciated? How long will it rise? Similar questions should find their answers from the progress in related fields. No one can give definite answers before the progress is achieved.

It would be totally against the rule of the market economy when a country, through a political course, asks the Chinese government to change a key price in the economy. It is both unwise politically and unrealistic to ask China to realize the targets for its long-term reform in a short time.

The Strategic Economic Dialogue is a constructive innovation to eliminate bilateral misunderstanding, pinpoint the strategic issues of common concern and maximize the benefits of Sino-US cooperation. It may cost the chance of cooperation if the US insists on politicizing China’s exchange regime reform and the political shortsighted doggedness will also lead to the neglect of more important issues.

CAR manufacturers in Shanghai saw profits and output grow faster than any other manufacturing sector during the first half of this year, the Shanghai Municipal Statistics Bureau announced yesterday.

The city’s carmakers reported combined profits of 6.6 billion yuan (US$825 million) for the first six months of the year, a 49.4 percent increase from the same period last year. The auto industry accounts for 13.8 percent of Shanghai’s total industrial profits.

The bureau reported that carmakers saw revenues and output grow faster than five other major industries, including steel, information products, petrochemicals, household appliances and bio-medicine.

Auto industry output was valued at 68.7 billion yuan from January to June, up 57.4 percent year on year. The auto industry now accounts for 8.1 percent of the city’s total industrial output and accounts for 3.7 percentage points of the city’s industry growth.

“The rebounding industry benefited from new policies that favor sales of small engine powered family cars, coupling with people’s increasing income,” said bureau official Wang Zehua.

Shanghai Automotive Industrial Crop, the nation’s second largest automaker, sold 682,000 units during the first half of the year to surpass all other domestic automakers.

Car production in the city could jump by as much as 25 percent this year from 2005, the bureau estimated.

Source: China Daily

Mainland companies’ fervor for overseas listings has yet to cool despite stricter application processes and a government attempt to encourage more to list on the mainland, a market researcher said on Wednesday.

But foreign venture capital and private equity firms in the long run need to consider establishing yuan-denominated funds and look at the A-share market to profit from the mainland companies in which they have invested.

According to Beijing-based Zero2IPO Group, 21 mainland companies launched overseas initial public offerings (IPOs) in the second quarter, compared with 14 in the previous quarter and 21 a year ago.

Money raised totaled $11.50 billion compared with $2.06 billion in the first quarter and $12.61 billion a year ago. That is an indication overseas IPOs remain brisk, said ZeroIPO founder and CEO Garvin Ni.

Mainland companies earlier formed offshore firms in which foreign investors could invest and then be listed overseas. A revised regulation issued last September requires that the formation of such offshore companies must be approved by the Ministry of Commerce (MOFCOM).

None has so far secured a MOFCOM approval, a sign that the government wants more domestic companies to choose to list on the mainland instead of in overseas bourses.

Ni said many private companies already completed their restructuring plans before the revised regulation was issued, so that they have eventually managed to launch overseas IPOs.

As well, intensifying competition among overseas bourses to attract mainland companies also boosted overseas listings.

Yet overseas venture capitalists and private equity firms could have difficulty cashing in on overseas listings because the process could become lengthy and complicated due to the new rules.

But an exit from an A-share listing could pose an even bigger risk than an overseas listing for venture and private equity firms, said Neil N. Shen, founding managing partner of Sequoia Capital China, noting that rules for a mainland listing are unfamiliar to many foreign investors.

Lingering regulatory uncertainty and volatility in domestic stock markets are also baffling foreign investors, according to Tina Ju, managing partner of KPCB China and Kevin Wang, founder of Natixis Private Equity Asia.

Zero2IPO’s Ni suggested venture and private equity firms launch yuan-denominated funds, partnering with local companies to avoid risks brought by the revised regulation.

“It’s time to raise renminbi (yuan-denominated) funds to exit an investment from the A-share market,” he said.

Source: Xinhua

China needs “decisive” measures to rein in excessive demand and control inflation pressures as its M2growth has understated the speed of monetary expansion, according to the latest report by Goldman Sachs, the U.S. investment bank.

Growth rate of M2, a broad measure of money supply, edged down to 17.1 percent in April 2007, while M3, which includes M2, deposits in non-bank financial institutions and securities issued by financial institutions, picked up to 19.2 percent year-on-year.

“The M3 growth rate has been faster than that of M2 since the second quarter of 2006, likely reflecting the fast accumulation of capital-market-related financial assets,” said Liang Hong, chief China economist with Goldman Sachs Asia.

Figures from the bank show that bonds issued to non-financial institutions grew 30 percent year-on-year in April and non-M2 deposits by other financial institutions soared 63 percent over the same period of last year.

In the past, M2 and M3 are used to maintain similar growth speeds due to relatively small changes in non-M2 liabilities in the country, said Liang, who believed a broader money supply measure like M3 would be a more useful parameter to assess the extent of monetary expansion and to forecast the demand, given the rapid growth in capital markets.

Since the M3 growth has been hovering over 19 percent year-on-year in recent months, she expected the economy would continue to speed up and inflation might intensify in the near term.

The Goldman Sachs predicted the consumer price index (CPI), a major inflation gauge, would be at 3.6 percent in 2007 and an average of more than four percent in the rest of the year. The bank expected CPI inflation to ease to 2.6 percent in 2008.

The China Securities Journal, citing a report from the central bank’s research bureau, reported the CPI was expected to rise 3.2 percent for the whole of 2007, with its peak of 3.5 percent in thethird quarter.

Food prices have climbed in China this year, pushing the country’s CPI to 3.4 percent in May, higher than the government’s warning level of three percent.

Source: Xinhua

China’s corporate bond market, which has struggled compared with stocks and treasury bonds, is expected to get a lift as regulators finish soliciting opinions on a draft regulation of its issuance.

Corporate bonds are rare in China, as only a handful of large state-owned enterprises get approval from the National Development and Reform Commission (NDRC) to issue such bonds. The price and the amount of bonds to be issued are decided by the commission, and the commission also requires the state commercial banks to underwrite the bonds. In this case, the country, not the companies, bear the risks, and such bonds should be more appropriately called “enterprise bonds” as opposed to real corporate bonds made with companies bearing the risks in developed countries. Just 283.1 billion yuan of corporate bonds were issued by the end of last year, accounting for only 1.35 percent of GDP, far lower than the 40 percent in the United States and 17 percent in the Republic of Korea. The draft regulation is seen as a landmark move towards the take-off of corporate bonds to allow more Chinese companies access to bond issuance in a bid to boost direct financing of domestic companies. According to the draft, the China Securities Regulatory Commission (CSRC) will be charged with supervision of corporate bonds, while the NDRC remains in control of “enterprise bonds” issued by state-owned enterprises. The CSRC will be able to approve the issuance of bonds with maturity times of longer than a year by Chinese listed companies. The draft says companies listed overseas as well as on the Shanghai and Shenzhen exchanges will be able to issue such bonds. The CSRC will not approve every issue on an individual basis, but laid out clear criteria for bond issues in the draft rule. It said the the prices and interest rates would be set by the market and require bonds to be backed by the assets of the issuing company. A company’s total outstanding corporate bonds are capped at 40 percent of its net assets. Analysts said the commission would first encourage companies with net assets of one billion to 1.5 billion yuan or more to issue the bonds without bank guarantees. The rule also said the corporate bonds would be registered with the China Securities Depository and Clearing Co. Ltd. to open the trading of corporate bonds at stock exchanges, instead of the inter-bank market. Shang Fulin, chairman of the CSRC, said in January that the development of the corporate bond market would be the commission’s priority in 2007. “Corporate bonds would provide more channels for investment and provide a new outlet for excess liquidity in the capital market, and it would also encourage companies to improve management and performance,” said Yi Xianrong, an economist with the Chinese Academy of Social Sciences. Yang Jian, researcher with the People’s University of China, also welcomed corporate bonds, describing them as one of the best tools in capital allocation as they bore an interest rate higher than the national debt bonds, but were less risky than stocks. Chinese companies welcomed the launch of corporate bonds, allowing them a new channel of financing, but they await further regulations on corporate bond issues to be able to weigh the risks against bank loans and stock financing. “We surely welcome the issuance of corporate bonds,” said Xu Junmin, secretary of board of directors of Shanghai Airlines, adding the company might issue corporate when conditions are ripe. Corporate bonds might cut financing costs, but their issue would be decided after a comprehensive evaluation of the company’s performance and financial status, said Yangjun, with Sichuan Changhong Electric Company Limited. A coal company in Inner Mongolia said corporate bonds could help high-yielding companies to lower financing costs, and it hoped the approval process would be no longer than three months. The approval from the NDRC usually takes a year to 18 months to complete. Analysts believed there would be huge demand for companies to issue corporate bonds as a majority, some say 90 percent, of corporate financing still comes from bank loans. However, questions were raised about the prospective bond buyers. It would be difficult for both individual and institutional investors to accept corporate bonds, compared with mutual funds and stocks, said Yang Yongguang, a researcher with Sealand Fixed-income Securities Research Center. “Individual investors would not buy the corporate bonds,” echoed a business insider with China Life Insurance Assets Management Company. However, he said insurance companies might be willing to invest in corporate bonds if there is a big interest rate gap. Insurance companies usually invest their capital in the less riskier national debts. He also expressed concern over the nation’s imperfect credit rating and tracking system, and said it could undermine the acceptance of corporate bonds. A report from the U.S. Federal Reserve on China’s corporate bonds also urged the country to develop financial institutions willing to hold corporate bonds such as insurance companies, pension funds, and investment funds.

(one U.S. dollar equals 7.6155 yuan)

Source: China View

The Chinese central government and the government of the Hong Kong Special Administrative Region (HKSAR) signed Friday Supplement IV to the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), aiming to further open the mainland market to Hong Kong.

The agreement was signed by Henry Tang, secretary of Finance of HKSAR government, and Vice Minister of Commerce Liao Xiaoqi, witnessed by HKSAR Chief Executive Donald Tsang and Minister of Commerce Bo Xilai. Welcoming the agreement, Tang said that it will provide further and broader opportunities for Hong Kong business and reinforce Hong Kong’s comparative advantages in better tapping the potential of the mainland market. Under Supplement IV to the CEPA, the mainland will open 11 new service areas to Hong Kong, including sports, environment and public utilities. The mainland has already opened 27 areas to Hong Kong, and the agreement promised further access to these areas such as banking, securities, tourism and insurance. In banking, the minimum total asset requirement for a Hong Kong bank acquiring a shareholding in a mainland bank will be lowered from 10 billion U.S. dollars to 6 billion U.S. dollars. Both sides will enhance cooperation in establishing green lanes for Hong Kong banks to set up branches in mainland, and encouraging mainland banks to set up subsidiary operations in Hong Kong. In tourism, the minimum annual business turnover required of a Hong Kong travel enterprise setting up joint venture and wholly owned enterprises on the mainland will be reduced to 8 million U.S. dollars and 15 million U.S. dollars, respectively. Hong Kong travel agencies in Hunan, Hainan, Fujian, Jiangxi,Yunnan, Guizhou and Sichuan provinces and Guangxi Zhuang Autonomous Region will be allowed to apply for the operation of group tours to Hong Kong and Macao for the permanent residents in these provinces and autonomous region, an extension of similar arrangement already in place in Guangdong on a pilot basis. In relation to conventions and exhibitions, Hong Kong services suppliers will be allowed to organize exhibitions in Guangdong and Shanghai through cross-border supply on a pilot basis. In addition, Hong Kong enterprises established in Guangdong and Shanghai will be allowed to organize overseas exhibitions for mainland enterprises in these areas. The mainland will also support Hong Kong in attracting and organizing large-scale international conventions and exhibitions. The required capital investment required of Hong Kong services suppliers for setting up equity or contractual joint-venture medical institutions on the mainland will be lowered from 20 million yuan (about 2.6 million U.S. dollars) to 10 million yuan (1.3 million dollars). All the service liberalization measures will come into force on Jan. 1, 2008. The mainland will work out and promulgate the necessary implementation rules and regulations as appropriate. CEPA was signed in 2003. Under CEPA, the mainland has agreed to give all products of Hong Kong origin tariff free treatment if they meet the CEPA rules of origin. On trade in services, the mainland has already allowed preferential treatment to Hong Kong services suppliers in 27 services. Latest figures from the HKSAR government indicated that between 2004 and 2006, CEPA generated 36,000 new jobs for Hong Kong residents and induced 5.1 billion HK dollars additional capital investment in Hong Kong. CEPA also created 16,000 new jobs for mainlanders and attracted 9.2 billion HK dollars additional capital investment by Hong Kong companies on the mainland.

“The implementation outcomes indicate that CEPA is a mutually beneficial arrangement, allowing Hong Kong to explore the vast mainland market while assisting the mainland in integrating with the world economy,” said Henry Tang, the secretary of Finance.

Source: China View

Nearly three-quarters of corporate executives expect to increase investment on the Chinese mainland over the next three years after the introduction of a comprehensive bankruptcy law, according to a survey jointly issued by Deloitte China and CPA Australia China Division.

The survey of 480 executives from the mainland, Hong Kong, Singapore and Malaysia found that investors are mainly positive about China’s new Enterprise Bankruptcy Law, which was enacted on June 1. The attitude towards the new law is underpinned by a workable and transparent bankruptcy regime, which will help investors identify investment risks and exit options if investments perform poorly. The new law unifies the bankruptcy regime for Chinese enterprises on the mainland – including foreign- and domestic-owned, and State- and privately-owned – and is more comprehensive than the former bankruptcy law, which was implemented 20 years ago. The former law said China had bankruptcy jurisdiction over only State-owned enterprises, but there was nothing in place to protect the more than 4.9 million privately owned companies. “These reforms address the need for a more efficient and effective redistribution of corporate assets, whether State-owned or privately owned,” said Derek Lai, national leader of reorganization services at Deloitte China. The new law embraces international standard practice and introduces new concepts, such as debt restructuring.

Two-thirds of respondents said a formal debt restructuring system would protect interests of a bankrupt company while half of the respondents believe it would protect the interests of creditors, according to the survey.