ChinaStakes

China's Accounting Standard Recognized in the European Union

admin — Thu, 20 Nov 2008 12:57:21 GMT

China’s new accounting standard has received approval from the European Securities Committee (ESC), the first time its accounting standard have been officially accepted for a major international capital market.

The equivalence of accounting standards means the accounting standard of one country has the same effectiveness as those of other countries, and is accepted by supervisory departments of countries in which a company would want to list on the stock exchange.

On November 14, members of ESC decided that during the transitional period from 2009 to 2011, the European Union will allow Chinese securities issuers to adopt the Chinese accounting standard when entering the European market.

The Ministry of Finance said the decision of the European Union demonstrates the equivalence between the Chinese standard and the International Financial Reporting Standards (IFRS). This will cut Chinese companies’ costs when going public in the EU. On the other hand, this will also improve the export environment for Chinese companies and relieve anti-dumping pressure.

An Ernst & Young auditor said that, in fact, after China implemented the new accounting standard in 2007, “there’s almost no difference” between the Chinese and international standard.

The new accounting standard brings in the concept of “fair value,” which is its biggest difference with the previous Chinese standard.

“Fair value” accounting is now a hotly debated issue in financial and business circles. Some blame it for worsening the present financial crisis, its “mark to market” system forcing firms to place values on assets too quickly, especially when those values are dipping, and adding instability to already falling markets. When assets are used as collateral, falling prices “marked to market” can prompt lenders to issue margin calls, forcing borrowers to sell in market conditions that might be unfavorable, devaluing the assets even more, prompting more margin calls, in a downward spiral.

Industrial and Commercial Bank of China Chairman Yang Kaisheng says that the rule to calculate a company’s assets by market value is responsible for the current crisis. He adds that the international accounting standard should be reconsidered and adjusted.

Waste and Corruption Worries Raised by China's Stimulus Package

admin — Thu, 20 Nov 2008 12:53:18 GMT

The National Development and Reform Commission (NDRC) is the most influential department among all Chinese economic departments, as all big and many “pet” development projects need its approval. The Chinese government is now requiring that 4 trillion yuan should be spent, much of it on infrastructure development and construction, by the end of 2010, 100 billion yuan of that in the next 40 days or so until the end of the year. Local government officials are rushing to Beijing and besieging the NDRC offices to get their hands on some of that cash.

It is reported that Beijing hotels near the NDRC are overflowing with officials from local governments, each complete with a briefcase full of heavy files detailing spending plans.

The 4 trillion yuan package includes positive fiscal policy, more investment, loosening monetary policy, and tax cuts, aiming to rapidly prop up the slowing economy. As a percentage of GDP, China is spending considerably more money in its rescue policy than the US, Japan, or the European countries. The 4 trillion yuan will be spent on infrastructure construction, public transportation, “green” construction, people’s well-being, and income improvement for low-income citizens.

It is not yet known, however, how the investment will be allocated to different areas and departments, or how the government can guarantee this investment will not be spent on redundant construction, or be “appropriated” by “interest groups.” From the perspective of policy makers, insufficient domestic demand along with declining exports due to global economic recession have forced the Chinese economy to greatly depend on internal government investment. It is thought that in the long-term this investment will still be the main driving force behind economic growth.

Wang Zili, an expert for the People’s Bank of China, wrote in an article published on China Business News, a leading newspaper based in Shanghai, “Now local governments and relevant departments are running wild in the name of economic rescue. This is very dangerous. Investing without sufficient and strict investigation will bring back past mistakes and damage the country’s effort to adjust its economic structure.”

“I’m really worried over this situation,” he added. “Past experience shows low efficiency investment led by the government will most probably cause waste, unnecessary construction, or power rent seeking. This has occurred many times in the recent ten years.”

“I have seen too many image projects and redundant construction, so we have every reason to doubt the efficiency of the government’s investment. Of course we are willing to believe that the central government itself is efficient and clean, but how can it guarantee the funds will be properly used by local governments without an independent judicial system, and oversight by the media and the public?”

China Buys More US Debt, Supports the Dollar as the Biggest Creditor

admin — Wed, 19 Nov 2008 13:10:07 GMT

China has finally succeeded in becoming America’s No. 1 creditor. Figures released yesterday by the US Treasury show China holding $585 billion US national debt by the end of September, and overtaking Japan, which had been the largest US creditor for eight years.

China achieved the distinction through two moves. In September, it increased its holding of US national debt, in the form of Treasury securities, by $43.6 billion, the largest monthly increase of the year, while in the same month Japan sold off $12.8 billion of US securities, leaving it holding $573.2 billion worth. The UK, America’s third largest creditor, also largely increased its holding, by $30.3 billion to $338.4 billion.

Since the outbreak of the financial crisis, the US economy has declined steadily, and analysts here dispute over whether China should increase or cut its holding of US debt. Some believe a weak dollar will damage China’s foreign exchange assets, so many suggest the government sell US national debts.

The market for US national debt can not be regarded as fully competitive. Instead, it is essentially a market dominated by oligarchs. As most national debt is held by a few official organizations, any slight move can trigger exchange rate fluctuation. As an important dollar supporter and large holder of US debt, if China started to sell its US securities, the RMB/USD rate would be seriously affected. A weaker dollar would lower China’s wealth accumulated through trading surplus. “In this situation, China will be steadfast in maintaining the stability of USD,” said Liu Yuhui, head of the economic evaluation center at the Research Institute of Finance under the Chinese Academy of Social Sciences.

China needs to keep a certain amount of cash on hand to guarantee it has enough currency to cover three months of the country’s imports, to intervene in the exchange market, and to cope with capital outflow triggered by RMB depreciation. It is estimated that the China should keep about $300 billion to $400 billion in cash.

Meanwhile Liu Yuhui believes that while China cannot change the structure of its large existing foreign exchange reserve, it can make some strategic adjustment to diversify its portfolio. Mr. Liu said such large dollar position was very likely to suffer losses, while a USD depreciation and commodity price hike would greatly lower China’s purchasing power.

But an industry insider also said that due to the current global financial turmoil, buying US debt might be the best way to reduce the risk for China’s foreign exchange reserve. He said although the US has been seriously hurt by the financial crisis, European losses have been more serious, and commodity assets such as gold and petroleum are not safe enough since their prices can fluctuate drastically. Also, buying US debt securities has a strengthening effect on the dollar.

In 2009 the US may issue about $1.8 trillion of debts, a staggering sum, due to President-elect Obama’s promise on tax cuts and medical insurance reform, and there is no way it can sell all that to domestic investors. Since foreign investors now already hold $1.5 trillion of US debt, few are likely to step up to a large part of the new stuff, so the US will have to issue more dollars. “Whether issuing national debt or more dollars, USD is very likely to depreciate in a long term.”

While China chooses to increase its holding of US debts, Japan seems to be doing the opposite. Liu Yuhui thinks the situation in the two countries is different. The whole Japanese economy is very sensitive to exchange rate. Too rapid yen appreciation will seriously hurt its trade, and the situation will worsen during economic recession. “Japan intervenes in the currency markets frequently to prevent the yen from appreciating too quickly. The Japanese central bank spends a great amount of its foreign exchange reserve on intervention, so its holding of US national debt may change from month to month.

InBev's AB Acquisition Passes China's Anti-Monopoly Hurdle

admin — Wed, 19 Nov 2008 13:05:40 GMT

While Coke’s acquisition of Huiyuan is plodding through anti-monopoly investigation, the Ministry of Commerce (MoC) has conditionally approved another important case. InBev’s acquisition of Anheuser-Busch (AB) has become the first big deal to be approved since China issued its anti-monopoly law.

Four limits have been set on the deal by MoC: InBev is not allowed to increase AB’s 27% stake in the Tsingtao Brewery Group; if there is any change in InBev’s shareholders, or shareholders of InBev’s shareholders, the company must report it quickly to MoC; InBev may not increase its 28.56% stake in Zhujiang Brewery Group; and InBev should not seek a stake in either China Resources Breweries Co. or Beijing Yanjing Brewery Co.

InBev agreed on July 13, 2008 to acquire all AB shares at $70 per share. InBev is a Belgium-based listed company, with business in over 30 countries in the Americas, Europe, and Asian Pacific. Its business in China is mainly in southeast provinces such as Jiangsu, Zhejiang, and Fujian. AB is an American listed company with breweries in over 10 countries. Its products are sold in over 80 countries and regions across the world. Its business in China is mainly in the northeast. InBev 2007 turnover in China was 5.764 billion yuan and AB’s was 4.49 billion yuan

In accordance with Article 21 of the Anti-monopoly Law, InBev had to apply to MoC before the deal was closed. InBev submitted an official application and relevant materials on September 10, and supplemental materials on October 17 and October 23. After reviewing the deal, MoC declared the application materials met the requirement of Article 23 of the Anti-monopoly Law, and officially accepted Inbev’s application.

MoC approved the deal, with conditions, on November 18, 2008, its investigation showing that InBev’s acquisition of AB will not eliminate or restrain competition on the Chinese market. 　

InBev promised it would respect all the conditions raised. In 2007, the combined market share of InBev and AB was about 12.7%, slightly lower than those of Tsingtao Brewery Group and China Resources Breweries Co.

Foreign Insurers Up Capital to Fuel China Expansion

admin — Wed, 19 Nov 2008 13:03:40 GMT

Foreign life insurance companies are increasing their China investments to support expansion in the market. Recently, the China Insurance Regulatory Commission approved the investment increase applications of three companies including Citic-Prudential, whose capital fund is the largest among foreign insurance companies in China.

The registered capital of Citic-Prudential rose from 1.82 billion yuan to 1.98 billion yuan, Sun Life Everbright’s 900 million yuan climbed to 1.2 billion yuan, and Pacific-Antai Life raised its 700 million yuan to 800 million yuan. AXA-Minmetals and Aviva-Cofco have also been granted approval to increase investment.

Foreign insurance companies need capital funds of at least 500 million yuan if they are to develop business nationwide. According to regulations, insurance companies with less than 500 million yuan must increase their capital fund by a certain amount each time they open a new branch.

Citic-Prudential upped its capital fund from 1.45 billion yuan to 1.82 billion yuan just five months ago and overtook Generali to become the No. 1 foreign life insurance company in China by capital. A director of Citic-Prudential said this increase aimed to support the company’s further expansion across the country.

Aviva-Cofco is also growing rapidly. Its premium total ranks second among foreign life insurance companies in China, next only to AIA China. Now the company has developed its business in 40 key cities in 9 provinces.

Rapid business expansion has also put pressure on capital funds. Aviva-Cofco has increased its capital fund annually since 2006. Aviva-Cofco President Zhang Wenwei said the company was constantly increasing its capital fund not only to meet the development of the company and government requirements but also to reinforce the company’s capability to pay compensation and accept insurance.

China now has 24 foreign life insurance companies. Since 2006, 15 of them have increased their capital fund. By now the capital of most companies has risen to over 500 million yuan, and of some, including Citic-Prudential, Generali, Aviva-Cofco, Aegon-Cnooc, Sun Life Everbright, and Allianz China, to over 1 billion yuan.

The IMF Needs Fixing, and China Wants a Say

admin — Tue, 18 Nov 2008 14:00:53 GMT

What to do about the IMF? This, of course, was a question bandied about at the recent G20 Summit hosted by George Bush in New York last weekend, though no decisions were taken. Japan promised to throw a bunch of money at the Fund, which is sorely in need of it amidst the present world economic turmoil, and it was gently suggested that China might also like to contribute a portion of its oceanic foreign reserves.

Perhaps China should, but there seem to be a lot of question it wants answered before it does.

To get some of these questions and other thoughts out into the air, Tsinghua University held an “Advanced Forum on Global Finance and Economy" on its campus on Saturday, Beijing time, some hours before the G20 Summit. Included in the discussion were four Chinese scholar/officials, all of whom have served in the IMF. They were: Dai Qianding, former IMF executive director; Zhang Xiang, former director of the People’s Bank of China’s (PBoC) International Department and IMF executive director from 1996 to 1999; Wei Benhua, PBoC counselor, former deputy director of the State Administration of Foreign Exchange (SAFE), IMF executive director from 1999 to 2003; and Wang Xiaoyi, currently deputy director of SAFE and IMF executive director from 2003 to 2006. Vivek Arora, IMF’s chief representative in China, delivered a speech at the Forum and the discussion of the four ranged from the present state of the fund to what they considered needed to be done with it.

United States will not give up leadership

Dai Qianding first pointed out that it is better to exist with the IMF than to have to try to exist without it, although he admitted that that is a hotly debated point. Without IMF, he said, US unilateralism would be even more formidable. In current multilateral institutions such as IMF, China has some force of containment on the US. Dai noted that reform is long-term, and China should gradually expand its right to speak through its own efforts.

Wei Benhua noted that the United States will use all means to maintain its leading position, while Europe will fight the US for dominant status, and both will ignore developing countries. China must understand this for its development in the future.

It is unreasonable, said Wang Xiaoyi, that countries active in the global economy and financial markets should play the leading role in IMF, and it needs to be improved. The USD accounts for 86% of global foreign exchange transactions. The euro and the dollar account for 50% and 34% of international bond storage, respectively, and 27% and 63% of global foreign exchange reserves. USD accounts for nearly 90% in the global trade settlement. While the status of USD in the global economy has been weakened compared to its position 20 years ago, it is still dominant.

“The United States won’t give up its leadership in international organizations because it will protect its interests in the global financial system.” Wang said.

Wang added that in the next few years, in terms of economy, trade, the status of international currency, economic openness and the development of financial markets, and so on, cooperation between the United Kingdom, Japan, China and other countries will gradually increase. From this perspective, it is inevitable and objective to increase the voices of those countries as well as those of developing countries.

New ideas on IMF formula share

In his speech, IMF’s Vivek Arora said that its current total capital is over $300 billion, of which the US contributed 17% and the cumulative share of the EU is 41%. Since major IMF decision-making requires at least 85% of the vote, the US has the voting weight to make it the sole country with a one-vote veto.

"The current voting weight of China in IMF is about 4% and China's economic volume accounts for about 5% in terms of exchange rates in the international market, and 11% in terms of to purchasing power parity. Other countries have similar circumstances, for example, Mexico, South Korea, and Turkey. Voting rights of countries in the IMF should also be adjusted accordingly with their economic power ranking in the world," Arora said.

However, Wei Benhua said the IMF voting formula in essence doesn’t change despite discussion on it every five years and requests of developing countries about it are not considered.

Wei said it is right that IMF capital formula share takes economic strength instead of population factor into consideration.

Besides voting weight, Wei also said that China should strive for a position in high IMF management or department director to increase its internal influence. IMF currently has a president, four vice presidents, and a chief economist, similar to the World Bank.

In favor of increasing IMF funding

Arora pointed out IMF needs sources of adequate funding, not only from economic powers but also from countries with abundant foreign exchange reserves, and that would have a significant impact on voting allocation in IMF.

Wei Benhua agreed, and said that China is in favor of capital injection into IMF for its operations.

"In the face of global crisis, the traditional point of view that balance of payment difficulties occur only in the field of trade and that the financial support it needs is limited must change. The current financial crisis is spreading quickly to almost every aspect of finance and affecting the tangible economy. The funding support it needs is great." Wei said that he supported increasing IMF’s capital and that this is a good chance for China to increase its share.

Zhang Zhixiang said that every 5 years IMF assesses its capital scale. The current capital in IMF is about $300 billion, but now with the present financial crisis the fund needs to be much bigger.

"However, it is hard to say how much is enough. IMF is neither the world's central bank nor the global lender. The issue of capital increase needs better assessment,” Zhang said.

The issue of regulatory reserve currency

Zhang Zhixiang said that the current international financial crisis has highlighted a particular issue, i.e., the major reserve currency can not be based on the credit of a single country, and there should be an objective yardstick by which to measure it.

"International monetary system adjustment should start from this. To identify the growth of a reserve currency, there should first of all be objective criteria," Zhang said. The dollar was linked to gold before, but now that is gone. The so-called warning mechanism in the international financial system is an indication of the inflation of main reserve currency.

Wang Xiaoyi believes that the international financial system should change, and the role of regional currencies should be enlarged. At the international level, the IMF can remain. But reform is needed and measures supporting reform also need to be taken.

"US veto power should be removed. Although the developing countries can not be dominant or account for half the weight (they now account for about 30%), cancelling the veto power of the US will change the leadership of IMF and give emerging market countries a stronger voice," Wang said.

Government to Control Labor Costs to Maintain Employment and Competitiveness

admin — Tue, 18 Nov 2008 12:35:05 GMT

Beijing is taking action during the economic downturn to prop up employment, control labor costs, and maintain companies’ competitiveness. The government will suspend raising the minimum wage, while reducing the contribution rate for basic medical and employment injury insurance in some areas.

The two policies come from the Ministry of Human Resources and Social Security (MHRSS) in order to help companies survive the current turmoil and to stabilize the employment situation. Wang Dewen, an expert at the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences, said the two policies have different aims, the first to stabilize employment, and the second to help more people enjoy a more secure life.

No Raise In Minimum Wage In the Next 12 Months

Hard times have descended on many firms, especially small and medium-sized labor-intensive enterprises. Employment is falling, and the social security system is under growing pressure. MHRSS said yesterday that now its primary task has become helping firms survive and stabilizing employment.

The new rulings now require government departments to suspend raising the minimum wage and to guide qualified enterprises and high-tech service outsource companies to implement comprehensive and flexible working hour systems.

Su Hainan, an expert at the China Association for Labor Studies, said that the latest macroeconomic figures from the National Bureau of Statistics showed that major indicators supporting a minimum wage rate hike such as GDP and CPI were all declining, and that employment pressure was increasing.

A MHRSS spokesman signaled the ruling on minimum wage a month ago. Local governments have adjusted minimum wages more frequently in recent years mainly because of rising commodity prices and living expenses. Meanwhile, MHRSS has required minimum wage adjustment every two years. Some local governments failed to implement this policy in the past and have made more adjustments to catch up. 29 provinces have adjusted the minimum wage since last year, and some have in recent years been adjusting it annually.

By the end of September, 19 provinces and municipalities including Beijing, Shanghai, and Tianjin had increased the minimum wage by about 15%.

Cutting Medical Insurance Contributions

According to MHRSS requirements, regions with large employment injury and medical insurance fund balance may reduce contributions for a period to relieve payments of firms in difficulty and their staff.

But local governments are also required to steadily improve social insurance, adjust pensions for retired workers, improve compensation payment standards for unemployment and employment injury insurance, and reduce minimum premium payments or raise maximum of medical insurance to improve social security.

Wang Dewen said the cut of the medical and employment injury insurance contribution rate will help to relieve companies’ tax burdens. Now the total contribution rate of five types of social security insurance has reached more than 40%, an unbearable burden for most small and medium-sized enterprises.

“More important, cutting the contribution rate acts as an incentive to encourage firms to insure more employees, so more employees will be protected by this system,” he said.

He Ping, director of MHRSS’s Institute of Social Security, has long suggested cutting medical insurance contributions for a time. He said the current balance of medical insurance funds is too high, and goes against the basic principle of the medical insurance system.

The medical insurance fund was established in 2004, and the balance has been increasing year by year. By 2007 it had reached 155.8 billion yuan, enough to cover 21.5 months’ medical expenses. Guangdong’s fund contains the largest balance, covering the need of 56.2 months.

Wang Dewen believes reducing the contribution rate will not affect the balance of payment into the insurance fund. At lower rates, more people will participate and the total premium payment will actually increase.

BoA Again Raises Its Stake in China Construction Bank, Amid Selling Concerns

admin — Tue, 18 Nov 2008 08:07:45 GMT

A new investment from Bank of America (BoA) totaling 48 billion yuan (about US$7 billion) will increase its share holding in China Construction Bank (CCB) to 19%. With this investment, BoA’s book gain in CCB will rise to US$11.7 billion. But the share holding increase has triggered analysts’ concern that BoA may sell CCB shares to relieve its domestic financial pressure.

BoA is going to exercise its call option and buy 19.58 billion CCB H-shares from Central Huijin. Exercise price per share is 120% of CCB’s audited net assets per share on September 30 this year.

According to CCB’s third quarter financial report, which has not been audited, CCB’s net assets per share was 2.05 yuan on September 30. Judging from this number, BoA’s exercise price should be 2.46 yuan per share, and the deal totals over 48 billion yuan.

The financial crisis has cost BoA money, and then it acquired Merrill Lynch for $50 billion. On October 27, BoA’s 19.133 billion CCB H-shares became tradable and brought the bank a rich book gain. The market believed BoA was likely to sell CCB shares and take its profit, but BoA has chosen to greatly increase its holding.

After exercising its right, BoA will hold 44.713 billion CCB H-shares, 19.13% of CCB’s total equity. Central Huijin and its subsidiary hold 133.362 billion CCB H-shares, 57.03%.

According to the contract, BoA’s exercise price is the higher of two prices: 120% of CCB’s net assets per share when BoA exercises its right, or a floating price. For example, if BoA exercises its right between August 29 2008 and August 28, 2009, the price is 107.12% of the IPO price of CCB’s H-shares, or HKD2.35 per share.

BoA’s CCB shares acquired this time will become tradable on August 29, 2011.

BoA has so far invested about $12 billion in CCB. In 2005, BoA bought 17.482 billion CCB H-shares from Central Huijin for $2.5 billion, and another 1.651 shares for $500 million at HKD 2.35 per share, the IPO price when CCB went public in Hong Kong. In the middle of this year the bank bought yet another 6 billion CCB shares from Central Huijin at HKD 2.42 per share. According to the exchange at that time, the deal totaled less than $1.9 billion. Assume an exercise price of 2.46 yuan per share, according to the current RMB/USD rate, and BoA spent about US$7 billion on the latest deal.

According to CCB’s closing price yesterday of HKD 4.11 per share, after BoA exercises its right, the market value of its holding of CCB shares will be HKD 183.77 billion, or US$23.7 billion, and its book gain will reach about US$11.7 billion.

Despite this increase of its holding, BoA may still sell off some of its stake. “BoA may sell some of its shares when necessary, but we’re not worried. Many investors are interested in CCB,” said a CCB insider. According to this insider, even if BoA decides to sell CCB shares, it is unlikely it would sell them directly on the secondary market, probably transferring them to other companies, instead. Although BoA is CCB’s second largest share holder, according to the contract BoA will not seek to participate in CCB’s management, so CCB’s management team will remain unchanged.

China and Japan to Compete/Cooperate for International Financial Clout

admin — Mon, 17 Nov 2008 14:34:39 GMT

As the two countries with the largest foreign exchange reserves, China and Japan attracted great attention on the issue of funding the IMF (International Monetary Fund) at the G20 Financial Summit held in Washington, D.C., this past weekend.

Japan said it was prepared to provide $100 billion to IMF, to help those countries badly hurt in the global financial crisis. It is clear that Japan would like to play a leading role in regional cooperation in Asia. Prime Minister Taro Aso noted in Washington on Saturday that Japan has the confidence to play a leading role in the establishment of a stable international economic system to strengthen financial cooperation and the independent development of Asia. He also said that Japan is looking forward to China’s investment in the IMF.

Whether to inject funds into IMF or not has aroused debate in Beijing. Zhou Shijian, senior researcher on China-US Relations at Tsinghua University, said: “Since the United States and Japan are allies and Japan is ranked second among the IMF's shareholders, with its $3 trillion of non-government foreign exchange reserves and huge official foreign exchange reserves, it is certain that Japan will inject funds, both from its political interests and the actual situation.”

“But,” Zhou continued, "I don’t think that time has yet come for China. On the one hand, the financial crisis has not ended and the summit has made no specific agreements on issues such as IMF reform. On the other hand, it is necessary to balance obligations and rights. China's equity interest in the IMF is not high, and China need not to play the role of ‘picking up the check.’”

China did announce that it would participate in financing the World Bank, led by the US.

Lin Yifu, chief economist at the World Bank, disclosed that China is interested in the following aspects: (1) International Development Association (IDA) support for low-income countries. IDA-15 negotiation will raise a fund of $42 billion, which can be used in the next three years; (2) International Bank for Reconstruction and Development (IBRD) providing loans to middle-income countries. Last year’s budget was $ 13.5 billion, and this year it can provide $27 billion; and (3) International Finance Corporation (IFC) strengthening capital structure of central banks in developing countries to invest in private enterprises. If central bank capital is short, IFC will provide funds to those countries as a strategic investment partner. It can help tide over a crisis so as to prevent meltdown and economic recession.

When a financial crisis or payment crisis emerges in a developing country, China could provide funds to assist the offset of difficulties brought about by the absence of private capital flows. China also noted Japan’s action, and said that countries with large foreign exchange reserves can inject funds into IMF.

At the G20 summit, President Hu Jintao put forward the idea of the diversification of the international monetary system. Though not explicitly, this refers to the regionalization or internationalization of RMB, which involves issues of confrontation between the yen and the yuan in East Asia in the future.

China and Japan both expressed their willingness to promote regional financial cooperation in East Asia. China believes that with strong foreign exchange reserves and regional coordination, the 1997 type of financial crisis will not recur. There is a direct competitive relation among East Asia's collective system of foreign exchange reserves and the World Bank and International Monetary Fund. Some economists have called for the establishment of a mechanism in East Asia independent of IMF. Under such a system, China and Japan's cooperation and competition must be very subtle.

China, Japan and South Korea reached fruitful results at the G20. The three countries agreed to speed up the multilateral exchange in the "Chiang Mai Initiative," a currency swap initiative among Asian countries to help resist financial pitfalls. The three parties will hold a seminar on macroeconomic and financial stability on November 26 in Tokyo, Japan.

It is likely that agreement on specific size and conditions of the currency swap will be reached at the seminar. South Korea forecasts the currency swap between South Korea and Japan will come later than with China, and the negotiation will be started within this year. It has been learned that the currency swap between China and South Korea will be based on USD instead of Won or RMB, but the currency swap between Japan and South Korea is based on yen because yen is an international currency.

China Grid Investments Multiply as Power Consumption Slumps

admin — Mon, 17 Nov 2008 13:50:40 GMT

The central government’s recently announced economic stimulus package will start in the energy field. The State Grid, the China’s biggest company by assets, will expand its investment in the next two years by 100%, to 1.16 trillion yuan.

Beijing will also invest 2.73 billion yuan in the State Grid, the first project to be announced from the investment plan. On hearing the news, the company the same day signed equipment sourcing contracts, totaling 7.71 billion yuan, with several power equipment suppliers.

The National Energy Administration formulated an investment plan for the energy area after the State Council increased central government investment this fourth quarter by 100 billion yuan. The government will bankroll construction and consolidation of the company’s grid in western cities and in rural areas in the west and middle of China, accounting for 68.2% of its incremental investment on urban and rural grid construction for the fourth quarter totaling 4 billion yuan. The central government has also increased its budgeted capital fund investment this year for China Southern National Grid by 810 million yuan.

“The government will spend hundreds of billions of yuan to stimulate economic growth and facilitate bank loans at the same time. This is the first project. To stimulate the economy with this project immediately, orders should be placed as soon as possible,” said Zhang Guobao, director of the National Energy Administration, to State Grid’s top management.

Lu Jian, assistant to the general manager and spokesman for the State Grid, said the company planned to invest 12 billion yuan. Apart from the central government’s cash, other funds will come from bank loans and the company’s own pockets.

Insiders and outsiders are paying great attention to how the government will raise and spend the total of 4 trillion yuan. The National Grid project offers observers an example.

It can be concluded from this project that future investments in other new projects may also come from both the central government and the enterprise, and the government’s investment will be used to stimulate greater investment.

As for how a company can plan to spend 12 billion yuan in such a short time, Lu Jian said the company would accelerate the sourcing and payment process to ensure the government’s investment would be paid to manufacturers as soon as possible.

The State Grid had planned to invest 550 billion yuan on grids in the next two years, but due to the accelerated construction plans and demands to stimulate internal consumption, the company has doubled its planned investment.

China Southern National Grid is also increasing its investment in the next two years, by 60 billion yuan. In next year alone total investment will be as high as 90 billion yuan. 　

The power industry is labor and capital intensive with a long industry chain. Investing in grids directly promotes greater investment, consumption, and foreign trade, and stimulates metals, construction materials, and machinery industries. For a 500 KV project, for example, every 100 kilometers of wire consumes 5000 tons of steel, 2000 tons of aluminum, and 7000 cubic meters of cement.

But as a whole, the current stimulus will not offset the present slide in power demand.

According to a report from China Southern National Grid, the non-ferrous metal market is in depression this year, market prices having dropped since September. Of the total, aluminum and copper have fallen over 20% and nearly 45%, respectively. Power consumption in the aluminum industry in Guangxi Province has fallen by about 100,000 KWH. In other high power consumption industries such as steel, cement, chemicals, carbide, and yellow phosphorus, all are using less power, slowing power consumption growth in the west of China.

High power consumption industries there are very price sensitive, and prices for their products will not rebound significantly in the near future. As these industries will continue suffering losses as a whole, power consumption growth in Western China is not in anybody’s cards.

Nortel's Situation Dire, Faced with Huawei, ZTE and Global Giants

admin — Mon, 17 Nov 2008 11:04:55 GMT

Huawei’s and ZTE’s low cost global expansion plans are putting heavy pressure on the world’s more mature telecoms companies, and Motorola and other big-time equipment makers are facing the heat. Among them, Nortel’s situation is undoubtedly the worst.

According to Mark Sue, analyst for RBC Capital Markets, Nortel is plagued by short funds, and if it cannot raise money by selling assets, its heavy debts will push it into bankruptcy before 2011.

“Considering the worsening macro environment, Nortel’s challenged industry position, and concerns related to liquidity while the capital markets are basically closed, we think bankruptcy is a distinct possibility down the road,” Sue wrote in a note to investors, cutting his target price on Nortel from US$1.5 to zero.

Nortel began taking losses in 2006. In 2007, the company lost US$103 million in the first quarter, $37 million in the second, and $844 million in the fourth quarter. The situation has only worsened since the beginning of this year. First and second quarter losses were $138 million and $113 million, and the total deficit for the year so far has reached $3.66 billion.

Benefiting from the development of the telecoms industry, Nortel’s market value rose as high as $90 billion in 2000. But in the fierce competition against telecom companies such as Cisco and Huawei, Nortel has faced increasing performance pressure. Since the beginning of the year, Nortel’s market value has plummeted 95%.

Mark Sue said Nortel’s cash flow was such that if the company failed to gain a government rescue or dig up crucial financial support, it would run out of all its cash when its $1 billion corporate bond matures in 2011.

Nortel’s previous main income came from three areas: wireless, fixed, and intranet. The company had strong advantage in CDMA business and fixed network.

But Chinese enterprises, such as Huawei and ZTE are rising, keeping costs and prices comparatively low, and this along with pressure from industry consolidation, is making if difficult for some former global giants to compete. In 2005 Ericsson acquired Marconi to consolidate its leadership in the market. In 2006 Alcatel merged with Lucent, and Nokia merged with the telecoms sector of Siemens.

“If a telecoms firm has no costs advantage and is not big enough, the only possibility is decline,” said an industry insider.

Ericsson adopted positive expansion strategy to compete with Huawei and ZTE, with their low costs and low sales prices, and saw a drastic decline in its profits and share price. Nortel, much smaller than Ericsson, went for a completely different strategy. Due to the small scale and low profitability of its UMTS business, it sold this division to Alcatel Lucent for $320 million, in the process giving up all its 3G business including WCDMA and HSPA, and focused completely on 4G technologies. But now 3G business including WCDMA is putting a lot of money into the pockets of the major telecoms companies such as Ericsson, Nokia Siemens, and Huawei, while there’s no timetable for the commercial use of 4G technologies for at least the next three years.

Now Nortel is focusing its business on intranet such as CDMA, WiMax, and Unified Communications, but is facing challenges in all the three areas.

Figures show the growth potential of the CDMJA market is much more limited than that of the WCDMA market. Even worse is that about 70% of orders in the CDMA market go to ZTE and Huawei, and Nortel might stand a chance only in North America. WiMax technology is still under development. But for the WiMax network built by the US telecom operator Sprint, now the largest on WiMax market, equipment orders all went to Nortel’s competitors and Nortel got nothing.

The intranet market is now Nortel’s most important income source, but its rivals there include Cisco, Juniper, and Huawei, and the firm has no obvious advantage.

Rumor has it that Nortel may be forced to sell its metropolitan area network and ethernet sector, but even this looks difficult under current circumstances. More important, grabbing cash by selling off business parts instead of finding its core competitiveness is just putting off the inevitable.

Export Tax Rebate Rises: the External Demand Also Rises?

admin — Sun, 16 Nov 2008 13:54:39 GMT

China will lift the export tax rebate for thousands of goods and adjust tariffs for other goods from December 1. This is China’s third tax rebate raise this year. Along with its 4 trillion yuan economic stimulation plan to expand the internal demand, the government is working also to stimulate external demand.

This adjustment involves 3770 types of products, mainly labor-intensive and electromechanical products, accounting for 27.9% of total exports. The government also cancelled export tariffs for some steel products, chemical products and grain.

Zhou Shijian, a senior researcher at Tsinghua University, told China Business News that export tax rebate is an international convention. He says the rebate for all goods except those with high pollution and high energy consumption should be restored and the government should quickly return the full tax amount to export enterprises.

As for slack external demand, Zhou thinks Chinese enterprises will survive it, as most of China’s exports are goods for everyday use with low demand elasticity. Meanwhile, emerging market demand is still strong. Chinese enterprises can seize this opportunity to diversify markets and upgrade products.

Zhou Shijian believes export companies also look for a slight fallback of RMB exchange rate. Export difficulties will be much relieved if the RMB/USD rate drops to about 7.

Yesterday, the Ministry of Finance released an export tariff adjustment scheme for some chemical products and chemical fertilizer. The government will set a benchmark price for the off-season next month, and will cut the previous 125% to 185% export tariff (from September to December this year) for chemical fertilizer to 10% to 110% until the end of next year. Experts believe this will boost chemical fertilizer exports.

China

has adjusted the export tariff for chemical fertilizer several times this year. Earlier it lifted the tariff for nitrogen fertilizer and synthetic ammonia from September to December this year, while levying a 100% special tariff on other chemical fertilizer products and raw materials from October to December. Since the tariff for urea is as high as 185%, companies can make little profit if they export chemical fertilizer products. Not long ago, the China Petroleum and Chemical Industry Association revealed that chemical fertilizer production dropped by 1.5% year on year in September, and suggested the government help companies to survive the hard times by temporarily exempting the export tariff.

According to a brokerage analyst, these polices are conducive to exports by domestic companies, but as international prices for chemical fertilizer may still decline further, risk still exists.

Yesterday, the government cancelled export tariffs for some steel products, including all hot rolled coils, hot rolled plates, large-size extrusion profiles and welded pipes, some cold rolled sheets, most steel wires, alloy steel sheets and other products.

mysteel.com analyst Zeng Jiesheng thinks these measures will help relieve the pressure on the current steel market and steel companies, but with overseas demand still weak and the gap between domestic and overseas steel prices, steel exports may not increase sharply. And due to the global economic recession, if China’s steel exports were to increase significantly, overseas anti-dumping policies would certainly appear. 　

Other analysts say prospects for steel exporting after the canceling of the tariff mainly depends on overseas demand, and were not optimistic.

Domestic steel prices have slumped since October. By October 31, the domestic comprehensive steel index dropped 35.35 points, or 24.56%, over the end of September, to 108.59 points.