Icbccss&p500usd Discussion Threads

[snowflake34] 24/3/2004 14:59

Here's the latest from Morgan Stanley's Stephen Roach:

Global: China — Determined to Slow

Stephen Roach (from Seoul)


After five days in Beijing, I am convinced that a slowdown in the Chinese economy is at hand. China’s leadership is clearly worried about the risks of overheating. And those worries will likely translate into actions that should result in a meaningful deceleration of Chinese GDP growth over the course of 2004. For world financial markets and global commodity markets that are expecting the China boom to continue, a likely soft landing could come as quite a surprise. For China’s trading partners who are counting on open-ended support from the Chinese demand dynamic, a slowdown could comes as a rude awakening.

Despite its dramatic transition over the past 20 years, China remains very much a command economy — a system that ultimately takes its orders from the senior leadership of the country. That’s not to say the old Soviet-style central-planning mechanism remains intact. But the transition to a market-based system is still very much a work in progress. Rough estimates by China’s leading official think tank put assets of the state-owned economy still at approximately 60% of the nation’s total assets (see page 35 in the November 2003 issue of the China Development Review issued by the Development Research Center of the State Council of the PRC). China still pays enormous attention to five-year development plans that set broad guidelines for reforms and shifts in the mix of economic activity. China does not have an independent central bank, nor an autonomous fiscal policy. All directives on the policy front flow from the top. As such, getting China right basically means listening very carefully to what the senior leadership has to say about the economy and policy adjustments.

I was in Beijing these past several days to participate in the annual China Development Forum — a remarkable conference that brings together senior Chinese officials and “outside experts” from around the world for three days of intense discussions. The Forum is set up under the auspices of the State Council, China’s highest executive organ of state power headed up by the Premier. The sessions are structured and at times formal, but they offer an extraordinary opportunity for an exchange of views that you can rarely find in any nation — socialist or otherwise. The Forum is five years old and I have attended the last four. It has become the highlight of my year as a China watcher.

I listened carefully to what China’s leaders had to say over the past several days, and, in my view, the key message was unmistakable: Official China is dead serious about coming to grips with the possible overheating of the Chinese economy. In the words of Premier Wen Jiabao, “Overheating is my biggest concern. We are preparing further measures to slow growth and they will be more forceful.” To me, that says it all: The Chinese economy has become too hot to handle, and the leadership of this command economy is very focused on slowing the growth rate from the 9.1% pace recorded in 2003.

This is not exactly breaking news. Premier Wen used the occasion of the China Development Forum to reiterate a message he had conveyed earlier this month during the National People’s Congress. At this official gathering of the Chinese legislature, the Premier used the occasion of his annual “Government Work Report” both to legitimize the debate on overheating as well as to lower the GDP growth target to 7% GDP for 2004. At the China Development Forum, he drove the point home to the outside audience and added a note of emphasis that was certainly not lost on me.

Nor was Wen Jiabao’s message lost on the other Chinese officials and academics who participated in this just-completed Forum. Minister after minister, academic after academic, and researcher after researcher all joined the debate on overheating with great gusto. The most striking assessment of the risks came from a speech given by Ma Kai, Chairman of the National Development and Reform Commission. Chairman Ma worried that China was close to a critical point when bottlenecks in materials consumption could begin to constrain economic growth. According to his calculations, in 2003 China accounted for 7% of the world’s total consumption of crude oil, 31% of global coal, 30% of iron ore, 27% of steel products, 25% of aluminum, and 40% of the world’s total cement consumption. Ma Kai was unequivocal over his concerns about the risks such trends posed to the sustainability of Chinese economic growth. In his words, “If such an illogical mode of economic growth is maintained, it will be difficult to keep economic growth at 7%.” In China, that’s as direct a message as you’ll ever see.

Premier Wen left little doubt on the line of attack in the government’s efforts to slow the economy. It will come from reining in the excesses of the bank lending cycle. Bank lending had surged by 21% on the 12 months ending November 2003 — nearly double the average gains of about 12% over the previous five years, 1997–2002. Reflecting concerns over the impacts of SARS and a weak global climate in early 2003, Chinese authorities were willing to err on the side of injecting excess liquidity into the domestic economy. They now know they went too far. Property bubbles in Shanghai and elsewhere in the Coastal region, along with excess growth in fixed investment, are telltale signs of excess credit creation. The Chinese leadership seems determined to slow bank-lending growth in 2004, and there were hints of administrative measures to come in achieving this important objective.

The early read on a turn in the credit cycle is actually encouraging. In the five months ending February 2004, gains in total bank lending averaged Rmb 151 billion — 45% slower than the Rmb 275 billion average pace that prevailed over the first three quarters of 2003. In my view, that sounds like a pretty sharp slowdown in the pace of credit creation. But when I pushed senior Chinese officials as to whether they were satisfied with these results, they all said “no.” This underscores the strong sense of determination that exists in China to be even more forceful in coping with the overheating issue. The operative presumption in Beijing is that the sooner the efforts bear fruit, the greater the chances of a soft landing. Conversely, the longer it takes to contain the economy’s excesses, the greater the risks of a hard landing — and the unacceptable implications such an outcome would have for job creation. In China, the massive job losses associated with the ongoing restructuring of state-owned enterprises — with annual headcount reductions estimated at 7–9 million workers — makes the consequences of a hard landing almost intolerable.

At the same time, official China has another important motive to bring the bank lending cycle back under control. It is a critical building block to the financial sector reform initiative planned for 2004 — namely the “pilot” public offerings of two of the four state policy banks. Excess bank lending is a recipe for increased nonperforming loans, precisely what China wishes to avoid as it cleans up its banking system for international investor scrutiny later this year. Tempering the excesses of the credit cycle is key in achieving this important objective on the road to reform.

So far, there are only straws in the wind that the medicine is working. While lending growth has decelerated markedly since China’s central bank went public late last August with its tightening efforts, the real economy has barely flinched. Industrial output growth has moved down a tick, slowing to 16.6% y-o-y in the first two months of 2004 versus an 18.1% pace evident in December 2003. Courtesy of recent tax-law changes, the export slowing has been more pronounced — 28.8% average gains in January and February 2004 versus a 40.5% annualized surge in the fourth quarter of 2003. However, the senior Chinese officials I spoke with were not encouraged over these results. They want and need to see a much more decisive slowdown. Hence, the unequivocal message from the nation’s leadership that more actions are likely in order to assure such an outcome.

My fascination with China began about six years ago in the depths of the Asian financial crisis. It quickly became infectious. I continue to believe that getting China right is one of the most important tasks of global macro. Andy Xie and I have both maintained the out-of-consensus view since last fall that China was about to surprise on the downside. As I spread this message to investors around the world, the believers are few and far between. After all, the consensus in financial markets has only just accepted the legitimacy of the China growth miracle. But now that investors have discovered the China boom and all that it means for commodity markets, the Japanese recovery, and the global economy, they don’t want to let go. The Chinese leadership is sending a very different message. My experience tells me that they will have the final say — and in this case, sooner rather than later. They are utterly determined to slow an overheated Chinese economy.

[shoggoth] 24/3/2004 11:07

Looks like that strengthening of the banking system is being implemented.
Good news for china-based stocks and probably the rest of the world too.

BEIJING (AFX-ASIA) - China will launch a multi-tiered required deposit
reserve ratio (RDRR) system for commercial banks on April 25 under which the
reserve ratio for some bankswith a weak capital base and bad asset quality will
be raised to 7.5 pct from 7 pct, the People's Bank of China (PBoC) said.
(continues...)

[mcbeanburger] 20/3/2004 12:09

To:russwinter who wrote (10453)
From: Jay Chen Friday, Mar 19, 2004 5:38 PM
Respond to of 10523

Hello Russ, Followup on Chinese coal export ... it has just come to a full stop as far as the Philippines is concerned. My coal pal told me yesterday that he cannot get coal at any price from China (EDIT: in my book, by my reading, 'not at any price' is a very high price indeed ;0), because there is no export quota at the seller's end. Zilch, and this was in reference to the largest coal company in China.
Reference earlier heads-ips:

December 12th, 2003
... (b) China apparently has decided that it will phase out its coal export program and become a coal importing country;


February 13th, 2004
... Another juicy bit. My coal trading friend tells me that China just implemented a 33% cutback of coal export quota, so as to retain coal in country.


March 3rd, 2004
Doc V, My coal trading pal just informed me over the phone that the largest Chinese coal companies are reviewing all export term contracts, and starting with the contracts that are priced the least, informing the opposite parties that until and unless they agree to pay a premium over term contract price, there will be no deliveries.

[energyi] 17/3/2004 06:14

McB,
that is very interesting.
I will copy it to the CORN thread

[the knowing] 10/3/2004 01:57

BEIJING (AFX-ASIA) - China's industrial value-added output rose 23.2 pct
year-on-year in February to 370.93 bln yuan, with output for the first two
months of the year up 16.6 pct at 705.97 bln yuan, the National Bureau of
Statistics said.
Growth was driven by surging output in electronics, telecommunications and
metallurgy, the NBS said in a statement.
China's industrial value added output rose 7.2 pct year-on-year to 334.42
bln yuan in January, although adjusted for the timing of the annual Chinese
lunar new year holiday the output was up 19.1 pct year-on-year.
China's week-long annual holiday fell in January this year, cutting the
number of working days to 16 from 22. The holiday fell in February last year,
making year-on-year comparisons difficult.
[e-mail]
al/nma/rc

[snowflake34] 09/3/2004 21:18

China Posts $7.9 Billion Trade Deficit for Jan.-Feb. (Update2)
March 9 (Bloomberg) -- China posted a trade deficit for the first two months of this year after the government cut exporters' tax rebates and stepped up imports following U.S. criticism of mounting surpluses.

The two months of deficits totaling $7.9 billion deficit were China's first since March 2003. Exports rose 29 percent from a year earlier to $69.9 billion and imports jumped 42 percent to $77.8 billion, the Commerce Ministry said on its Web site.

The U.S. claims that China unfairly helps its exporters by keeping the yuan's value fixed to the U.S. dollar and blocks overseas companies' access to the Chinese market. China's trade surplus with the U.S. last year widened to a record $124 billion, equal to a 10th of the Chinese economy, official U.S. figures show.

``China is using its trade deficit to soften the U.S. rather than doing something directly about strengthening the yuan,'' said Chris Leung, an economist with DBS Bank Hong Kong Ltd.

Chinese Premier Wen Jiabao on Friday reiterated government plans to keep the yuan's exchange rate ``basically stable,'' language China's leaders use to deny any change in the currency's peg to the dollar is imminent. To help address U.S. concern regarding the currency issue, Chinese leaders have been taking companies on purchasing trips to the U.S. in recent months.

Telecoms, Cars

A delegation of Chinese telephone companies led by Ministry of Information Industry Deputy Minister Lou Qinjian in January awarded Motorola Inc., Lucent Technologies Inc., Cisco Systems Inc. and other U.S. suppliers contracts for equipment totaling $2.3 billion.

Chinese companies bought $8.5 billion of airplanes, cars, machinery and agricultural products in the U.S. in November and December.

For February alone, China's imports surged 77 percent to $42 billion. That's their biggest increase in more than four years. Exports rose 40 percent to $34.2 billion, leaving a trade deficit for the month of $7.87 billion.

The reduction of export-related rebates to an average 13 percent of tax bills on Jan. 1 from as much as 17 percent last year may continue to damp overseas sales. Ahead of the change, exports in December jumped 51 percent, their biggest gain since March 1995, as shipments were accelerated to take full advantage of the rebates.

Overseas sales will probably grow a fifth this quarter, about half the pace seen in the previous three months, the commerce ministry said last month, citing a study by the National Development Reform Commission.

Economists combine China's economic statistics for January and February to minimize distortions caused by changes in the timing of the week-long Lunar New Year holiday, which started on Jan. 22 this year and Feb. 1 in 2003.

[energyi] 09/3/2004 12:32

China's boom times have just begun

James Hamilton


Tuesday, March 09, 2004
TORONTO: Specialist China watcher Peter O'Connor had miners and money men clinging on his every word at the PDAC Conference this week as he outlined the modern industrial miracle developing in China.

An economist with IMS Investment Management Selection in London, O'Connor told the audience that while it was impossible to see too far into the future, the indicators were in place for China to continue growing at a frenetic pace till at least the end of the decade.

He said a massive overhaul of state-owned and privately run companies in China was driving a new industrial revolution that in turn had created an insatiable demand for raw materials.

O'Connor said this, coupled with a US$54 billion influx of foreign investment, had turned China into a new-age economic powerhouse which looked set to grow at between 7% and 8% for the next three to five years.

He said China's economic goal of quadrupling GDP by 2020 looked achievable and by 2015 forecast that the country's GDP would be larger than Japan and bigger than the US by 2039.

"Fundamentally, rising demand for raw materials is bumping up against constrained supply," O'Connor said. "Therefore, there is further growth potential and it appears the boom will continue till the end of the decade. Those best positioned to prosper from this are upstream raw material suppliers."

O'Connor said China needed huge amounts of natural gas and oil to continue fuelling its growth aspirations. It also needed to conquer the disparity between its rich coastal cities and its poor, inner regional population centres.

"If anyone doubts the boom then they should look at the amount of people travelling outside the country," he said. "Last year 10 million Chinese went outside the country, by 2010 that number is expected to increase to 100 million."

The economist said while domestic production of resource materials was also increasing at a rapid rate, this needed to be put in context. Such is China's need for feed materials that for first time Chinese investment institutions were investing big sums offshore to guarantee supply for the next 20-30 years. He pointed to the recent Woodside gas and BHP Billiton iron ore offtake deals as key examples of this trend.

"Put it another way, in the early 19th century China accounted for 30% of world GDP," O'Connor said. "If it makes 15% by 2020 that will be an exceptional effort. It's not unthinkable to believe China's GDP will be bigger than the G6 in 40 years time.

"However, don't be sucked in and believe everything you hear. That said, I think there will be ample opportunities to make money in the years ahead."

[snowflake34] 08/3/2004 12:54

China eyes lifting curbs on capital account
By James Kynge in Beijing
Published: March 7 2004 21:56 | Last Updated: March 7 2004 21:56


China hopes to remove many of the constraints on its closed capital account within six years, a senior Chinese official said this weekend - the first time such a timetable for liberalisation has been outlined since the Asian financial crisis struck in 1997.

The official also said pressure on China's currency to appreciate was easing.

Guo Shuqing, head of the body that manages China's $416bn foreign currency reserves, said the capital account - the system for managing investment transactions - may be mostly open within five to six years as long as reforms to China's ailing state banks are completed.

"In five to six years, we'll see that most of the [capital] account under most situations will be convertible," said Mr Guo, head of the State Administration of Foreign Exchange (Safe).

China's desire to ease upward pressure on the renminbi has spurred a more flexible attitude to the capital account. The People's Bank of China, the central bank, and Safe have moved to rebalance demand between the US dollar and the renminbi. Beijing's argument that the renminbi did not have to be revalued had received a boost, Mr Guo said, because the trade balance swung into a deficit of "several billion US dollars" in the first two months of this year. The surplus in 2003 was $25.5bn.

Trade figures for February have not been officially announced but, if Mr Guo's prediction is confirmed, the emerging deficit would seem to provide Beijing with ammunition to counter US charges that an undervalued renminbi is yielding unfair trade advantages to China.

China has said for months that it plans to introduce greater flexibility into its exchange rate regime, under which the renminbi is pegged to the US dollar at Rmb8.28. Most analysts believe this means Beijing will at some stage allow the renminbi to fluctuate within a wider band.

But it is far from certain now that such a widening of the band would result in a renminbi appreciation, analysts said. The steps China is taking to increase demand for the dollar and decrease it for the renminbi are expected to sap the upward pressure on the Chinese currency.

"Our main aim this year is to maintain the stability of our currency's value," said a PBoC official who declined to be identified. The PBoC was also reluctant to raise interest rates, partly because it could spur speculative "hot money" from abroad.

A scheme called qualified domestic institutional investor, which would require selling renminbi to buy foreign currency, was very likely to be approved, Mr Guo said. Chinese companies were to be allowed to keep more of their foreign currency earnings. He saw no problem in allowing China's $14bn welfare fund to invest up to $2bn in overseas markets. The fund is initially expected to pour Rmb5bn into the Hong Kong stock market.

However, a recently launched scheme under which Hong Kong citizens were able to change their Hong Kong dollars into renminbi was losing popularity, a financial official said. "It just adds to demand for the renminbi and increases renminbi money supply. We do not want to create an offshore renminbi centre in Hong Kong" the official added.

[snowflake34] 08/3/2004 12:53

March 03, 2004

Greenspan clashes with White House
By Gary Duncan
The US Federal Reserve chairman fears the effects of floating China's currency

THE White House insisted last night that it still wants China to float its currency on world markets — despite a warning from Alan Greenspan that this would be a high-risk move posing serious dangers to global recovery.
The Federal Reserve Chairman’s stark advice on the potential fallout from a yuan float came in a letter that Richard Shelby, chairman of the US Senate’s powerful Banking Committee, released.

Mr Greenspan wrote that if China moved to abandon the yuan’s controversial peg to the dollar it could lead to a flood of money out of China, destabilising its financial and banking system.

The Fed Chairman went on to give warning that if this were to happen the resulting upheaval could also undercut recovery in America and around the world.

The blunt comments from Mr Greenspan appeared to be a tacit warning to the growing band of US politicians responding to popular unease over Chinese competition for jobs and markets with demands that Beijing float the yuan.

But with the US presidential election only eight months away and Senator John Kerry, the leading Democratic challenger, increasingly leaning towards protectionist rhetoric, the White House insisted that it still wanted the yuan’s value set on the currency markets.

“Our policy remains the same. Our policy is very well known,” said Scott McClellan, President Bush’s press secretary.

In his letter to Senator Shelby, the Fed Chairman said: “Many in China fear that removal of capital controls that restrict the ability of domestic investors to invest abroad, and to sell and to purchase foreign currency, which is a necessary step to allow a currency to float freely, could cause an outflow of deposits from Chinese banks, destabilising the system.”

Up to 50 per cent of Chinese bank loans are going unpaid, Mr Greenspan noted. He said that this was only sustainable because Chinese bank depositors did not withdraw their funds.

The Fed Chairman suggested that if a yuan float did destabilise China’s vast economy, the consequences would not be restricted to within its own borders, nor to within Asia. “Financial instability in a major emerging market economy such as China would present a risk to the global economic outlook,” he wrote.

American critics of China believe its dollar peg is holding the yuan at artificially low levels, giving a huge boost to its exports to the US. The politically sensitive US trade gap with China hit a record $124 billion (£67.5 billion) last year.

Chinese exports to other countries have also surged as the dollar’s fall has taken the yuan’s value sharply lower against rival currencies, making Chinese goods cheaper worldwide.

Under China’s present policy, the yuan is kept in a tight range of 0.04 per cent around a peg of 8.278 per dollar.

But the stance also creates substantial problems for Beijing. All of China’s foreign currency earnings from its exports are converted into yuan by its companies.

Unlike Western central banks, the Chinese are unable to neutralise the inflationary effects by selling bonds to mop up the extra cash since there is no private market for such paper.

The result is surging foreign reserves at its central bank, and an overheating of the domestic Chinese economy.

For these reasons, most analysts expect that China will move to a more flexible exchange rate — but only gradually, and at its own pace.

“I think they will move to suit their own domestic needs,” said Gerard Lyons, chief economist at Standard Chartered.

“The key issue (for them) is domestic economic stability.”

Mr Lyons believes that the most likely first step would be for Beijing to widen the band in which the yuan moves, later this year. But he does not expect a revaluation of more than 10 per cent.

Mr Greenspan’s letter acknowledged first steps by Beijing to lay the groundwork for change. The Chinese Government “seems to be moving to strengthen their banking system”.

But the Fed chief added that steps to “eliminate state interference in banking decisions” and forge a “viable credit system” would be required before any eventual free float of the yuan

[hectorp] 06/3/2004 11:12

.
-
also
Mr Wen is determined to quell overheated investment...especially in steel cement property and aluminium...
to do so, stricter environmental laws are needed and better land laws etc... projects that don't meet environmental standards for 'protection, energy consumption, safety and, technology' should be BLOCKED
...

[hectorp] 01/3/2004 22:54

agree, not much change this year but we ahvfe to peicl in change due in 2005 and 6.. ther could of course be a token decoupling this eyar.

[snowflake34] 01/3/2004 14:36

March 1 (Bloomberg) -- China's Premier Wen Jiabao said the country is working toward letting market forces decide the value of the yuan, the latest sign that the government is considering ending the currency's nine-year peg to the dollar.

The government wants to create an exchange-rate mechanism based on ``market demand for and supply of'' the currency, Wen said in a speech carried by the official Xinhua news agency. He didn't give a timeframe, adding China plans to keep the yuan ``basically stable at a reasonable and balanced level.''

Wen's comments, which go further than recent statements by China's top leaders, come amid intensifying speculation over the yuan. Revaluation of the Chinese currency is a ``fairly reasonable expectation'' and would boost international markets, U.S. Federal Reserve Chairman Alan Greenspan said on Friday.

``If the government were to set the yuan's exchange rate based on current demand for the currency, it would have to revalue it,'' said Chris Leung, an economist with DBS Bank Hong Kong Ltd. ``More people are converting their foreign assets into yuan because they expect it to appreciate in value.''

Xinhua released the text of Wen's speech, made to a gathering of provincial officials on Feb. 21, after a U.S. Treasury-led team visited Beijing last week for two days of talks with Chinese officials on changes to financial structures and regulation that may pave the way for a more flexible currency.

In recent statements, Wen and other top officials have said only that China plans to ``improve'' the exchange-rate mechanism, while keeping the yuan stable.

Asset Bubble

The U.S. and other countries including Japan have pressured China to end the yuan's fixed exchange rate, set at about 8.3 to the dollar since 1995, arguing that the link undervalues the currency and gives the nation an unfair trading advantage.

Treasury Secretary John Snow said in a U.S. television interview last week that China is ``committed'' to moving toward a free-floating yuan. While the country's financial structures are too rudimentary to allow an immediate change, the government is beginning to take the first steps, Snow said.

Greenspan and some economists have argued that China needs to loosen the peg to prevent the economy overheating. China's economy grew 9.1 percent last year, its fastest pace in six years, with fixed-asset investment surging 26.7 percent.

China's currency regulator said last week speculators betting on a yuan appreciation are creating an asset bubble, pushing up money supply and fueling inflation by converting foreign assets such as the dollar into the yuan.

China's foreign reserves reached $416 billion in January after surging by a record 40.7 percent last year to $403 billion, while consumer-price inflation accelerated to a 6 1/2-year high of 3.2 percent in December, remaining there in January.

Dollar Buying

The central bank has to buy dollars to hold steady the value of the yuan, which at present is allowed to fluctuate within 0.3 percent of its 8.277 pegged level. Those purchases boost the domestic money supply, creating credit that is being channeled into investment in industries such as steel, autos and real estate where the government has warned of over-investment.

``China has to realize the currency peg is contributing to the country's inflationary pressure,'' said Hong Liang, an economist at Goldman Sachs Group Inc. in Hong Kong. Wen's comments ``could mean China will soon be opening more channels for yuan outflows.''

Goldman forecasts China will revalue the yuan by 2.5 percent by the end of this month and switch the peg to a ``crawling basket'' of currencies, allowing a further appreciation of 1.5 percent in 12 months.

``If the inflow of foreign exchange continues, the Chinese government would have no choice but to widen the yuan's trading band,'' said DBS's Leung. ``The government has to manage market expectations and say explicitly what its currency policy will be to stop the speculation.''

Timing

China's government hasn't released any timetable, nor detailed how it might carry out an adjustment to the exchange- rate regime.

U.S. officials have blamed the fixed link for contributing to U.S. manufacturing job losses and stoking a trade deficit that swelled to a record $124 billion last year. Because of the fixed link, the yuan has tracked the dollar's 12 percent slide against a basket of six major currencies in the past year, making Chinese goods cheaper abroad.

``We are not quite sure at this stage what the extent if any of the undervaluation'' of the yuan is, Greenspan said on Friday after a speech in California. ``There is no doubt there is upward pressure on the currency.''

[snowflake34] 27/2/2004 16:43

Morgan Stanley's opinion on chinese yuan revaluation:

Currencies: RMB Float--Impossible in H1, Unlikely but Possible in H2

Stephen L Jen (London)

For close to a year now, my view on the RMB peg being dismantled has been: “extremely unlikely in H1, very unlikely in H2, and a meaningful risk in 2005.” I still believe the implicit risk is substantially lower than that priced in the forward market, but am slightly modifying my view to “extremely unlikely in H1, unlikely but possible in H2, and a meaningful risk in 2005.”' The key reason behind this modification is that Beijing may now see the RMB issue as a “bargaining chi”' that can be used to gain political benefits from the US in this election year. The ultimate decision on the timing and new exchange rate regime should still be driven primarily by economic considerations, but I now believe politics will also matter.

A united stand on the RMB with my compatriots. Steve Roach, and Andy Xie, and I have been aligned in our thinking on the RMB. The key arguments we have made include: (1) there is no imminent risk of a de-peg; (2) the view that the RMB is grossly undervalued is unconvincing--China is on its way to running a sustained trade deficit; (3) a forced de-peg is not possible, and any change will be done proactively and voluntarily by Beijing; and (4) China has a strong preference for a gradual and modest transition. I remain firm on all of the above points.

Politically motivated arguments are tiresome to dispel. From an economic perspective, the case against a maxi-revaluation of the RMB or a premature float is very strong, in my view. However, US political factors have significantly confused the issue. I have the following thoughts.

1. Whatever happens, USD/RMB will not move much in the coming year. First, Beijing firmly believes that the RMB is not grossly mispriced. My colleagues and I have all made the point that China's goods market is pretty much in balance, and that it is the capital account whose speculative capital is exerting a great deal of pressure on the RMB. Second, Beijing dismisses the argument that, because of China's large bilateral trade surplus with the US, the RMB must be massively undervalued. Its rhetorical response is that, should it then also devalue the RMB against the currencies of every Asian country (including Japan) against which China runs trade deficits? Third, reflecting the desire of Chinese leaders that this industrial revolution continues, the RMB will not be allowed to appreciate sharply in the coming years. Fourth, it is just not the “Chinese way” to abruptly change key policy variables such as the exchange rate, particularly when there is so much economic and political uncertainty. Also, if the Chinese leadership were to opt for a maxi-revaluation, and if it goes wrong, what would the political ramifications be? Fifth, if the USD does stage a modest recovery from here, would the RMB still be undervalued, on an index basis? In sum, whatever China decides to do later this year or next year, I believe the magnitude of the move will be very modest, i.e., less than 5%.

2. Rising inflation is a major concern, but not in the way that some investors think. Both CPI and PPI inflation have shown signs of upward pressure. But Beijing's thinking on how to deal with these pressures is quite different from the market's, and the solution will not involve RMB revaluation, in my view. First, the key source of metals and fuels inflation is the property market, itself identified by the government as a sector needing to be reined in. To deal with these bubbles, interest rate policy is too blunt an instrument. Second, for a country like China that still suffers from significant labour market slack, it is virtually impossible to generate sustained high inflation. Third, agriculture price inflation is seen as “good,” as it is a form of wealth transfer to the farmers. Fourth, some in Beijing believe that a little bit of inflation wouldn't be bad in facilitating the reduction of the real value of NPLs. Fifth, another reason why the construction industry was so overheated last year is related to the wholesale reshuffling of local government officials, meaning a wave of approvals in new infrastructural projects. In any case, both interest rates and exchange rates would be instruments that are too blunt to deal with the type of inflation we are witnessing in China.

3. G7's statement means nothing to Beijing; only the US view matters, in my view. The third sentence in the relevant paragraph in the latest G7 Communique was clearly aimed at China. However, in my view, Beijing does not believe that the G7 should formulate a policy for non-G7 countries. In fact, the key here is that, as far as Beijing is concerned, only the US view matters; Euroland and Japan have very limited leverage on China. If anything, the Sino-US relationship is probably at its highest point in decades.

4. Political gains matter for RMB policy, provided that the key preconditions are satisfied. A forced de-peg was never a possibility, I believe. China will never, in my view, allow itself to be forced, either by political or market pressure, to de-peg the RMB. Any change made to the peg will be done proactively and voluntarily. Thus, ironically, the less pressure, the more likely it will be for China to float its currency. In fact, it does appear possible that China may consider using the RMB to “repay” the US politically. If the US plays a constructive role in helping to contain the situation in Taiwan, and further improves its relationship with China, Beijing may consider using the RMB as a form of a “political reciprocity,” but only if certain conditions are satisfied: (1) China should start to run an overall trade deficit by late-summer. This should help dull investors' enthusiasm in having long RMB positions. (2) The new capital controls on inflows and relaxed restrictions on outflows should start to show up in the capital account by midyear. (3) Further progress in banking sector reform should be made by then. (4) A stronger USD by this summer would also help. If these economic conditions are satisfied, Beijing could consider de-pegging right before the US election

[snowflake34] 27/2/2004 13:27

By Peter S. Goodman
Washington Post Foreign Service
Friday, February 27, 2004; Page E01


BEIJING, Feb. 26 -- China's senior currency regulator warned Thursday that the billions of investment dollars surging into the country may be generating a potentially dangerous bubble, adding to recent speculation that the government may slightly increase the value of the country's currency in order to cool growth.



"The inflation rate is rising, and the asset bubble problem is starting to get worrying," Guo Shuqing said in a statement published on the Web site of the State Administration of Foreign Exchange, which supervises inflows of foreign money.

Guo's assessment of the pitfalls facing China's economy was unusually candid, the strongest indication yet that the country's senior leaders fear that speculation is driving an unsustainable boom -- one that could end badly for China's insolvent banks, now choked with about $500 billion in bad loans. His words lent credence to the widening view that while China will resist foreign pressure to revalue its currency, it may go that route for purely domestic reasons -- as a way to apply a brake to potentially excessive growth.

Rapid foreign investment is forcing the country's central bank to step up purchases of foreign currency to maintain the fixed exchange rate of the yuan, also known as the renminbi. Last year, China's foreign reserves grew more than 40 percent, to $403 billion, according to the government.

Although the government has sold billions of dollars worth of bonds to absorb some of this money, China's banks have lately shown a reluctance to buy. The domestic money supply grew by nearly 20 percent last year. Awash in cash, China's banks have increased their lending, adding momentum to already booming industries, such as real estate construction and automobile manufacturing. These industries have in turn absorbed ever-larger quantities of raw materials such as steel and cement, contributing to an accelerating though still modest inflation rate. In 2003, it was about 3 percent.

As China's leaders know well, economic booms have a way of going bust. The Asian financial crisis of the late 1990s, which reversed decades of economic progress in months, emerged after years of sustained investment that resulted in a glut of office towers across the region, along with forests of half-finished shopping malls, apartments and hotels. When many of these ventures failed, banks were forced to write off billions in bad loans. Credit taps were turned off for good companies as well as bad.

China has introduced some safeguards -- increasing the percentage of assets that banks must hold in reserve from 6 to 7 percent in a bid to slow lending as well as tightening credit flowing to the auto and real estate industries. But so many projects are already in the works that these measures may not be adequate.

In recent months, China has felt pressure from abroad -- particularly the United States -- to allow the yuan to float freely amid complaints that its low exchange rate makes the country's exports unfairly cheap. China has rebuffed these demands, noting that two-thirds of its exports are produced by factories wholly or partly owned by foreign companies. China has also emphasized that, even as it enjoys a roughly $120 billion trade surplus with the United States, its global trade is largely balanced -- the result of its growing appetite for the goods of the world, particularly raw materials.

On Thursday, a delegation from the U.S. Treasury wrapped up two days of talks here with Chinese counterparts to discuss the currency issue with no clear indication that the delegates had gained anything new.

Yet, even as most analysts insist that Beijing will not yield to outside pressure on its currency, analysts are increasingly pondering the possibility that China will opt to slightly revalue the yuan as a way to slow the onslaught of foreign money. As Guo noted in Thursday's statement, much of this money has come in anticipation that China will eventually revalue.

Some analysts suggest that any revaluation will simply attract even more speculative money in anticipation of another bump up. "Once China goes down this path, it's a bottomless pit," said Andy Xie, an economist at Morgan Stanley in Hong Kong.

But others suggest that the speculators have already been rewarded. If a revaluation emerges, the speculators watch their yuan appreciate in value. If the government holds the line on the exchange rate, yuan-based assets increase in value as inflation lifts the price of everything from rubber factories to apartment buildings.

"The speculators have already won," said Arthur Kroeber, managing editor of China Economic Quarterly, speaking during a seminar Wednesday in Beijing.

Others surmise that inflation could itself generate momentum for a revaluation. As China pours more and more capital into importing raw materials, it might be tempted to increase the value of its currency as a way to reduce the bill.

[mcbeanburger] 26/2/2004 17:38

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The new China Syndrome: Commodity price boom sets alarm bells ringing
Mining firms cash in but policymakers increasingly worried over inflationary threat
By Philip Thornton, Economics Correspondent
25 February 2004
Economists warn of dangers from 'globalised' inflation

News Analysis: The new China Syndrome: Commodity price boom sets alarm bells ringing

Outlook: Inflationary future

There is a major economic boom gripping the world - an asset price bubble perhaps - but few people in the UK will have noticed. Prices of a vast range of commodities, from cement through coal to copper, have surged over the past year and the root cause is another C-word - China.

The world's most populous country is sucking in the world's raw materials at an unprecedented rate to feed its domestic economic boom. It imported 30 per cent more oil last year than in 2003, making it the world's second largest importer after the United States. It accounts for half of the world's consumption of cement, a third of its coal and more than a third of its steel, according to Barclays Capital.

While the demand for raw materials has surged, the supply capacity has been unable to respond at the same pace and prices have surged as stock levels have tumbled.

Prices for metals are red-hot. Copper prices have raced to eight-year highs as part of a broad-based surge that saw a jump in the prices of tin, zinc, aluminium and lead - all of which are heavily used in manufacturing.

The price spike may have had commodities dealers and traders in mining stocks jumping with joy, but it has set alarm bells ringing at central banks worried about having to control inflation once the incipient boom takes hold.

Certainly there are some clear winners. Shares in the world's largest mining companies have ballooned over the past year. Shares in Xstrata, the London-listed Swiss miner, have doubled, BHP Billiton has jumped more than 50 per cent while Rio Tinto has risen 15 per cent. Antofagasta, the only pure copper producer listed in London, has seen its share price double over the past 12 months to take it to the brink of entry into the FTSE 100 index.

"Steel industry demand, global demand for finished products, are flying," said Tom Cutler, an analyst with Clarksons shipbrokers in London, citing booming demand in China, South Korea, Japan and Europe. "I've even heard that Teesside has begun exporting iron ore to China."

Shipping owners and brokers have cashed in, with a record rise in sea freight costs. JE Hyde, the 100-year-old shipping broker, this week described the market as "extraordinary", calling it "a freight market so strong the like of which has never been seen before".

This has raised the cost of chartering a ship and securing a port berth, as well as adding to business costs thanks to the extra delays.

Tim Bond, author of Barclays Capital's annual report into asset prices, its Gilt-Equity Study, said the boom had sent prices up "vigorously". "It's not just commodity prices but transportation prices as well," he said. "Marine shipping prices have mostly tripled and in some instances if you want to charter a ship immediately it has quintupled over the last couple of years."

The two big questions for the financial markets and policymakers are how long the price spike will last and whether it will trigger a surge in inflation.

Mick Davis, the chief executive of Xstrata, the mining company that announced a fall in profits yesterday, said there was a "huge amount of speculation" over the market in 2004.

"Across almost all the base metals, prices have been driven upwards by a combination of demand for product, particularly in the Far East and associated with China, and tightness in supply," he said.

"While we see little evidence that the demand side of the equation will change for the worse - in fact there are encouraging signs that it is continuing to increase on the back of returning growth in the Western economies and continuing strength of the Chinese economy, the outlook for increased supply varies between the different commodities."

Deutsche Bank agreed, saying it was forecasting further rises in commodities prices. "We are quite bullish because of the dollar weakness and also because of the global reflation cycle," said Amanda Lee, an economist in its commodities research unit.

"We think that demand will increase, while for the past few years the infrastructure spending and exploration to discover new metals sources had been frozen, so new supply may not be able to support the increasing demand, especially from China."

John Meyer, a mining analyst at Numis stockbrokers, said previous prices spikes in 1972, 1978 and 1985 showed that an initial rise was followed by a brief period of consolidation before embarking on a further rise.

"It's my view that metals prices will take a second leg up and that there are further opportunities for investors to buy into mining stocks in anticipation of an equity bull run," he said. He pointed to anecdotal evidence of supply shortages in minor metals such as cobalt, cadmium, nickel and chromium.

According to Barclays' Tim Bond: "This is probably the longest and broadest-based commodities rally we have seen since the 1970s."

Mention the 1970s and commodities in the same sentence and anyone with a long memory or a sense of economic history will recall the huge spike in the oil price.

There is a vigorous debate among economists over the impact of a rise in commodities, and particularly oil, on inflation and growth. One camp says the vast technological innovation over the past three decades has left the industrialised world far less vulnerable to a commodity price shock.

However others say the West is still dependent on consumption of fuel and raw materials, and point out that every recession - including the one that began in 2001 - can be blamed on an oil price spike.

David Bloom, global economist at HSBC, said that in fact rising commodity prices were, perversely, part of disinflation or falling prices. "The traditional idea of increased demand leading to increased commodity prices and then goods prices and finally wage demand doesn't hold," he said.

Commodities made up only a fifth of the cost for Chinese companies making finished goods, with the bulk of the rest going on wage costs. "China has low unit labour costs so they are making goods cheaply, the prices of finished goods is falling and this is encouraging more demand," he said. "We are talking about a billion people in China making cheap goods."

Others are not so sanguine. Mr Bond said there was a consensus that the issue was more for profit margins than for headline inflation. "Our view is perhaps a bit different in that the scale of the rises we are having in raw materials prices and the fact that they are so widespread, means they are probably going to be an issue for output prices."

Douglas McWilliams, the chief executive of the Centre for Economic and Business Research, agreed with Mr Bloom that an initial benefit from cheaper goods prices would be superseded by price pressures as the global recovery took hold.

"Our model shows that the impact is a timing one," he said. "The commodity prices pressures will come through when economies are reaching the limits of capacity.

"Central bankers will anticipate and move interest rates accordingly, and particularly in the US we believe that super-low interest rates will disappear quite fast."

[snowflake34] 25/2/2004 13:30

Feb. 25 (Bloomberg) -- BOC Hong Kong (Holdings) Ltd., Bank of East Asia Ltd. and HSBC Holdings Plc are among 40 lenders that started accepting yuan deposits in Hong Kong for the first time today, as financial integration with China deepens.

BOC Hong Kong offered customers opening yuan deposit accounts a travel bag or towel set and an annual interest rate of 0.5 percent, higher than the 0.0001 percent Hong Kong dollars earn. There were no queues at any of the banks' Central district branches, and at HSBC no gifts were offered for yuan depositors.

The changes are part of a free-trade accord signed between China and Hong Kong last June that's relaxed limits on mainland tourists visiting Hong Kong and prompted retailers to accept yuan debit cards. Banks are trying to tap the equivalent of $8.36 billion of yuan notes held in the city, mainly by regular visitors to China and companies with operations over the border.

``Many elderly clients are thinking about switching their Hong Kong dollars into yuan because they go to China often,'' said Paul Au, first vice president in the Treasury department of International Bank of Asia, which is offering a yuan deposit rate of about 0.74 percent. ``We've had a lot of enquiries. People are particularly keen to know about the interest rate for deposits.''

The policy, a test-case for allowing greater convertibility of the yuan, includes limits on movement of capital.

Limits

The banks from today will be allowed to exchange up to 20,000 yuan ($2,416) a day for each individual if the transaction is conducted through a deposit account. Cash transactions will be limited to 6,000 yuan. Individual customers may remit up to 50,000 yuan a day from Hong Kong to their accounts in China.

``We have to offer these services or our customers will go to other banks,'' Chan Kay Cheung, Bank of East Asia Ltd. deputy chief executive, said in an interview last week. It's ``too premature'' to comment how much business yuan services may generate, he said.

Bank of East Asia Ltd., Hong Kong's fourth-largest publicly owned lender, said it's offering some promotions between Feb. 25 and May 31. Customers who open yuan deposit accounts in Hong Kong will earn an extra 0.18 percent interest bringing the total to 0.68 percent annually, it said in a statement. The lender will also waive fees on remittance services.

Deposits in China earn interest of 1.98 percent annually. In the U.S. the 12-month rate is 1.3 percent.

Visitors

Visitors to Hong Kong rose to a record 1.79 million in December, an increase of 7.2 percent from a year earlier, the Hong Kong Tourism Board said. Mainland tourists, which account for more than half of Hong Kong's visitors, rose more than a third to 1.02 million.

The People's Bank of China, China's central bank, appointed BOC Hong Kong as the clearing bank for yuan services.

With closer economic integration between China and Hong Kong, the new yuan services are ``near and dear'' to the people of Hong Kong, said He Guangbei, chief executive of BOC Hong Kong in a press statement.

[energyi] 21/2/2004 10:49

OUT-OF DATE STATS... in China

We see the reality in Commodity prices first,
in growth stats later