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Tuesday, December 25, 2007

Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

Friday, December 14, 2007

Slight Easing in China's Output Growth

From Bloomberg this morning:

China's factory and property spending growth slowed, another sign that government lending curbs may be starting to cool the world's fastest-growing major economy.

Fixed-asset investment in urban areas rose 26.8 percent in the first 11 months from a year earlier, the statistics bureau said today, after gaining 26.9 percent through October. Economists calculated November's increase at about 26 percent, down from October's 30.7 percent.

Industrial output grew at the year's slowest pace in November, outstanding loans rose the least in eight months and export growth stayed at reduced levels. Those signs may do little to ease central bank concern the economy is overheating after inflation surged to an 11-year high and the trade surplus swelled.

``It's a slight moderation in connection with the tightening efforts but growth is still very strong,'' said David Cohen, an economist at Action Economics in Singapore. ``Another interest-rate increase before the end of the year would be consistent with avoiding overheating.''

The yuan traded at 7.3712 at 12:07 p.m. after closing at 7.3692 yesterday. The yield on a 15-year bond was little changed at 4.72 percent.

The median estimate of 18 economists surveyed by Bloomberg News was for a 26.6 percent increase in 11-month investment.

Nuclear Reactors

Investment in the oil and natural-gas industries rose 9.6 percent through November, a slower pace than the 12.3 percent gain in the first 10 months. Railways and transportation also had weaker growth.

Spending in the first 11 months rose to 10.1 trillion yuan ($1.4 trillion), more than the size of Canada's gross domestic product last year. China's projects include plans to become the world's biggest producer of nuclear reactors, building about 30 of them by 2020.

``It's too early to call it a slowdown -- we need three months of data,'' said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. He predicts three interest-rate increases next year, more investment controls, and a faster pace of yuan appreciation that will slow inflows of cash from exports.

Investment accounted for 42.5 percent of China's gross domestic product in 2006, compared with 24 percent in Japan, 20 percent in the U.S. and 17 percent in Germany. The number of new projects rose by 24,124 from a year earlier to 211,127 in the first 11 months, the National Bureau of Statistics said today.

Exports, Industrial Production

More than two-thirds of Chinese enterprises say their industries have overcapacity, the state-run Xinhua News Agency reported Nov. 11, citing a government survey. Textile, pharmaceutical and equipment manufacturing were cited as examples.

Industrial output grew 17.3 percent in November from a year earlier. Outstanding local-currency loans climbed 17 percent.

Export growth slowed to 22.6 percent for the past four months from the 29 percent pace through July because of cuts to tax incentives, weaker U.S. demand, and higher prices due to currency gains and production costs.

Spending on fixed assets is ``too rapid'' and has ``become a prominent problem,'' the State Council, or cabinet, said last month. The pace of growth has rebounded this year from the 24.5 percent increase in 2006 and means that new factories may come on stream just as global growth slows, leaving overcapacity, falling profits and bad loans.

The government is targeting inflation that surged to 6.9 percent last month and overheating as the biggest threats to an expansion that has been the biggest contributor to global economic growth in 2007.

China has raised the key one-year lending rate to a nine- year high of 7.29 percent, clamped down on bank lending, tightened project approvals, imposed environmental restrictions and limited land use to curb investment.

Tuesday, December 11, 2007

China Inflation November 2007

China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy. Consumer prices rose 6.9 percent in November from a year earlier after climbing 6.5 percent in October, the statistics bureau said today.

Surging food and fuel costs and a record $238 billion surplus in the first 11 months have prompted the government to name inflation and overheating as the biggest threats to growth. U.S. Treasury Secretary Henry Paulson is in Beijing to press for yuan gains that would narrow the trade gap and staunch the flow of money into the world's fastest-growing major economy.

The yuan gained by the most in a month against the dollar. The currency, which has climbed 12 percent since a fixed exchange rate was scrapped in July 2005, rose 0.22 percent to 7.3792 per dollar as of 4:46 p.m. in Shanghai from 7.3952 late yesterday. It touched 7.3770, the highest since the end of the dollar link.

The People's Bank of China last week ordered lenders to set aside 14.5 percent of deposits as reserves, up from 13.5 percent. China's one-year lending rate is at a nine-year high of 7.29 percent after five increases this year.

The trade surplus climbed 14.7 percent to $26.3 billion in November from a year earlier, the third-biggest monthly total, the customs bureau said today. The $15.2 billion trade surplus with the U.S. pushed the 11-month total with that country to $149.2 billion.

China's money-supply growth exceeded the central bank's annual target for a 10th straight month as a ballooning trade surplus pumped cash into the world's fastest- growing major economy.

M2, the broadest measure of money supply, rose 18.5 percent to 40 trillion yuan ($5.4 trillion) in November from a year earlier, the People's Bank of China said today on its Web site.

Sunday, December 09, 2007

China's Inflation Problem

From Bloomberg today:

China's inflation probably held at the its highest level in more than a decade, adding pressure on the central bank to raise interest rates for a sixth time this year or let the yuan appreciate faster.

Consumer prices rose 6.5 percent in November from a year earlier, according to the median estimate of 21 economists surveyed by Bloomberg News. That's unchanged from October's pace, the fastest since December 1996. The statistics bureau will release the figure at 10 a.m. tomorrow.

China on Dec. 8 ordered banks to increase reserves by the most in four years, three days after government said it would shift to a ``tight'' monetary policy among measures to cool the world's fastest growing major economy. U.S. Treasury Secretary Henry Paulson, who visits Beijing this week, recommends faster appreciation of the yuan to tame price increases.

``China's policy makers are facing a red hot economy with galloping inflation and asset prices,'' said Daniel Melser, an economist at Moody's Economy.com, a unit of Moody's Investors Service in Sydney. ``The best way to combat inflation would be to loosen the leash on China's tightly managed currency.''

In the latest move to limit credit, the central bank will require lenders to put aside a record 14.5 percent of deposits, starting Dec. 25, up from the previous 13.5 percent.

The increase, which was twice as much as the nine others this year, ``reflects the urgency of inflation concerns of the government,'' said Liang Hong, an economist at Goldman Sachs Group Inc. in Hong Kong.

China To Strengthen The Dollar?

From Bloomberg this morning:

As U.S. Treasury Secretary Henry Paulson visits China this week to push for faster appreciation of the yuan, the bigger issue may be what China is doing to strengthen the dollar.

Paulson's fifth trip to the nation as Treasury Secretary has taken on added urgency as the U.S. grows more dependent on the dollar's decline to lift exports and keep the economy out of recession. While the pace of the yuan's gains tripled in the past 15 months, Chinese officials now plan to increase investments in America that may boost the U.S. currency instead.

``China at this stage needs to be looking to opportunities provided by the weakening U.S. dollar,'' Ha Jiming, chief economist in Beijing at China International Capital Corp., the nation's largest investment bank, said in an interview last week. ``Very recently the government is becoming more interested in channeling money out of the country.''

The Ministry of Commerce said last week it will encourage businesses to buy American assets. Twenty insurers were granted licenses to invest overseas. China Investment Corp., the nation's $200 billion sovereign wealth fund, said it will be a ``stabilizing force'' in markets rocked by credit losses, signaling it may invest in American banks.

``We just started the going-out strategy,'' said Xia Bin, director of financial research at the State Council Development Research Center, which reports to the nation's cabinet. ``It is helpful to reduce yuan appreciation pressure in tandem with other measures, like blocking inflows of speculative money,'' he said in a Dec. 7 interview.

`Rush to Invest'

The combination of a trade surplus that reached $27 billion in October and rising foreign investment increased currency reserves ninefold this decade to $1.46 trillion, according to data compiled by the People's Bank of China.

At the same time, inflation rose to a 6.5 percent rate in October, the fastest in a decade, and regulators are concerned that the country's financial markets are a bubble waiting to burst. The benchmark CSI 300 Index of stocks in Shanghai and Shenzhen jumped 147 percent this year, pushing prices to more than 45 times per-share earnings, more than double that of Hong Kong's Hang Seng Index.

``The biggest issue in Asian markets starting from 2008 will be China's rush to invest overseas,'' said Park Hyo Jin, a strategist in Seoul at Good Morning Shinhan Securities Co. The firm is a unit of Shinhan Financial Group Co., South Korea's second-largest finance company by assets.

The yuan strengthened 11.9 percent since the end of the fixed exchange rate with the dollar in July 2005, including 8 percent since Paulson became Treasury Secretary in July 2006.

`Pace of Change'

The cost to buy yuan in 12 months with forwards fell 1.4 percent last week to 6.8075 per dollar, the biggest decline in three months. The spot rate for the currency dropped 0.04 percent to 7.4030, and declined 0.3 percent on Dec. 6, the most in one day since the peg was scrapped. It rose 0.15 percent to 7.3922 at 11:29 a.m. Shanghai time.

Paulson will try to show in the Dec. 12-13 meetings that a stronger currency will help restrain consumer prices. Chinese officials agree with the ``principle'' that they need a more flexible exchange rate, Paulson said in an interview Dec. 7. A currency that responds to market signals would help China control inflation. ``The pace of change has accelerated,'' he said. ``They need to move it more.''

``The U.S. wants a strong yuan, but what about the dollar being so weak?'' said Binay Chandgothia, who oversees $2 billion as chief investment officer at Principal Asset Management Asia in Hong Kong. ``This will form part of the posturing in the discussions.''

Strong Dollar

Paulson has been consistent in saying a strong dollar is in the nation's interest at the same time that the U.S. Dollar Index, which measures the currency's performance against six of its biggest trading partners, fell to 74.48 on Nov. 23, the lowest since it began trading in 1973. The index, down 8.7 percent for the year, rose 0.1 percent today to 76.33.

The depreciating dollar has helped American exports rise to records in the seven months through September, the longest streak since 2000, Commerce Department data show.

Exports rose to $140.1 billion in September, a bright spot in an economy suffering the worst housing slump in 16 years. The trade deficit narrowed to $56.5 billion in September from the record $67.6 billion in August 2006 as a falling dollar made American goods cheaper in foreign markets.

Record Deficit

The U.S. deficit with China, though, is set to exceed last year's record of $232.5 billion, prompting lawmakers including Senator Charles Schumer, a New York Democrat, to propose sanctions unless the yuan gains at a faster pace. U.S. growth may slow to 1.9 percent in 2008, compared with 10 percent forecast for China, the International Monetary Fund in Washington said.

The nation's leaders have growing incentives to help the dollar appreciate. China owned $396.7 billion of Treasuries as of September, up from $71.4 billion in 2000, according to the Treasury Department. Among foreign nations, only Japan, with $582.2 billion, owns more U.S. government debt.

China Investment ``wants to be a stabilizing force in the international capital markets'' just as other sovereign wealth funds have been, Chairman Lou Jiwei told a conference in Beijing on Nov. 29.

Overseas acquisitions by Chinese companies climbed to almost $28 billion this year, compared with $19 billion in all of 2006, according to data compiled by Bloomberg. The government has approved funds to raise the equivalent of $42.2 billion to invest abroad as of Sept. 30, according to central bank data. In July, the nation's insurers were allowed to invest 15 percent of an estimated $300 billion of assets in foreign currency holdings.

Initial Steps

Initial steps to invest abroad had mixed results. U.S. lawmakers in 2005 blocked an $18.5 billion bid by Hong Kong- based Cnooc Ltd., the country's biggest offshore oil producer, for El Segundo, California-based Unocal Corp. In May, China Investment, the sovereign wealth fund, bought $3 billion of shares in New York-based Blackstone Group LP. The value of the holding has fallen by $1 billion.

Blackstone is planning a bid for Rio Tinto Group, the world's third-largest mining company, that may include China Investment, the Daily Telegraph reported today. Spokespeople for China Investment, Rio and Blackstone all declined to comment.

In October, New York-based Bear Stearns Cos., the second- biggest underwriter of U.S. mortgage bonds, sold a $1 billion stake to state-owned Citic Securities Co., based in Beijing.

`Various Risks'

``Not many Chinese companies have made successful investments overseas so far,'' said Lian Ping, chief economist at Shanghai-based Bank of Communications Ltd., the nation's fifth-biggest state lender. ``We should push outbound investments further, but need to watch various risks.''

Forward contracts suggest the yuan will gain 8.7 percent over the next 12 months, compared with 5.9 percent in the past year. Some investors say they'd be surprised if the gains are that large.

``The market is expecting too much in terms of what China may do after Paulson's visit,'' said Wee-Ming Ting, who helps manage $2.4 billion of global emerging market debt as head of Asian fixed income at Pictet & Cie in Singapore and invests in yuan forwards.

Is the Lending Slowdown Biting?

From the FT today:

China loan curbs hit businesses

By Henny Sender

Published: December 9 2007 16:32 | Last updated: December 9 2007 16:32

In the Chinese river city of Fuling, where Hong Kong’s Noble Group has a soybean crushing operation, the barges continue to unload their cargo of soybeans to be turned into meal and cooking oil and sold on to customers.

But in recent weeks, some of those customers have been doing something new, company officials say: asking Noble to provide them with credit because they can no longer obtain financing from their banks.

But what with one hand you take away, with the other you give:

China raises foreign investment quotas

By Sundeep Tucker in Hong Kong, Geoff Dyer in Shanghai and Richard McGregor in Beijing

Published: December 9 2007 22:06 | Last updated: December 9 2007 22:06

China is to treble the amount of money that foreigners can invest in the mainland capital market, making the long-awaited announcement on the eve of this week’s high-level economic summit between Chinese and US policymakers.

The State Administration of Foreign Exchange, the country’s foreign exchange regulator, said on its website on Sunday that the quota for registered foreign investors would be increased from $10bn to $30bn. It could take several months before institutional investors secure fresh quotas.

The announcement will be welcomed by foreign investors, who have been lobbying for greater access to the mainland’s booming stock market, and comes amid signs Beijing is poised to permit further foreign investment in the domestic securities industry.

The Financial Times reported last week that Credit Suisse and Morgan Stanley had each signed agreements with Chinese partners to establish mainland investment banking ventures – the first such moves since a moratorium on further foreign involvement in the sector was introduced two years ago to protect local firms.

Citigroup, Merrill Lynch and JPMorgan are among the other US investment banks discussing potential partnerships with mainland securities firms, though foreign bankers believe new ventures will be not allowed to operate in some lucrative business areas.

Beijing is expected to point to the twin developments to placate the US delegation, led by Hank Paulson, US Treasury secretary, which has been lobbying China on a number of fronts since the so-called Strategic Economic Dialogue began last year.

Beijing agreed in principle to expand the quota for the Qualified Foreign Institutional Investors scheme at a previous round of bilateral talks in May, though it held back implementation because of a surge of capital trying to enter the country.

The flagship index on the Shanghai market has fallen by about 15 per cent in the past month, though it has still doubled this year.

In an indication of how lucrative the Chinese capital market has been to the 49 institutions which have secured QFII licences, the regulator said on Sunday that the value of their securities had risen to Rmb200bn ($26.5bn) from the initial investment quota of $10bn.

News of the revised quota was welcomed by Chris Ruffle, co-chairman of MC China, a subsidiary of Martin Currie, a UK-based fund manager and largest foreign investor in A-shares.

Mr Paulson is still expected to come under pressure from US investment banks to ensure that new securities ventures will be allowed to trade mainland stocks.

Beijing is expected to permit Credit Suisse and Morgan Stanley to each acquire a 33 per cent stake in their ventures – the maximum allowed under the law. However, western bankers familiar with the thinking of Chinese authorities believe that the new securities ventures will only be granted licences to underwrite initial public offerings and not to trade domestic stocks.