Monthly Archives: February 2008

Banking Up The Profits

What’s the difference between Chinese and western banks?No write-offs and more lending than authorities like versus huge write-offs and less lending than authorities like.

The FT reports that Chinese banks will be announcing record profits for 2007 over the next few weeks. One domestic media report put pre-tax profits for all domestic banks at Rmb610bn ($85.4 billion), an 83% cent increase from a year earlier.

The question for 2008 is how will they deal with government efforts to cool the economy and reign in credit. For U.S. banks, the question will be how will they deal with government efforts to stimulate the economy and alleviate the credit crunch.

Different worlds.

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Kicking The Foreign Investment Tires

The U.S. tire-maker Goodyear is close to investing $1 billion in a second plant near Dalian, according to Reuters, though the company says it has yet to make a final decision.

Goodyear has been producing in China since 1994, when it set up a joint venture with Dalian Rubber General Factory, and now has a retail distribution network through its Eagle Stores. Rivals Michelin, Continental AG and Bridgestone also produce in the world’s second largest car market for both local and export sales.

An investment of this size will need State Council approval, which it is likely to get. Contrary to the impression held by some outside the country, China is welcoming to new foreign direct investment, even if it provides competition for existing local manufacturers. China has a large enough domestic tire industry to account collectively for 6% of the world market with sales of $6.5 billion, including the export of 30 million tires a year to the U.S.

What China won’t allow is foreigners taking over existing local enterprises, unless they are basket cases, and foreigners taking control of the major state-owned enterprises in industries where there is a designated national champion. China Law Blog has an exemplary post today laying out China’s FDI rules in plain English.

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No 4 as No 1. Some Mistake, Surely?

Just ran across this Gallup Poll from earlier this month, asking Americans which of China, the U.S., the E.U., Japan, Russia and India is the world’s leading economic power, now and in 20 years. China easily tops both lists, a contrast to when Gallup asked the same questions in 2000 and the U.S. was the clear leader.

Yet look at the numbers for the size of those economies and the order is 1. E.U., 2. U.S., 3. Japan, 4. China, 5. Russia, 6. India, with the E.U. and U.S. being five times bigger economies than China. Even if you use purchasing power parity rather than nominal GDP, China is still third.

The disparity between perception and reality that the poll reveals may go someway to explaining why Americans and Europeans are turning so protectionist right now.

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After Hu

Political futures are being decided in Beijing this week. The party’s central committee started a three day full session on Monday to put in place the key state and government leaders for the next five years, Xinhua reports.

This is the layer below President Hu Jintao, Prime Minister Wen Jiabao, National Peoples Congress chairman Wu Bangguo and chairman of the Chinese People’s Political Consultative Conference, Jia Qinglin — and the one from which the present top leadership’s successors will be drawn in 2012. Appointments as vice-president and vice-premier will be closely scrutinized, as will any promotions to the Central Military Commission.

Key figures to watch are Xi Jinping, 54, being tipped as Hu’s successor, and Li Keqiang, 52, his most likely rival, but now being talked of to succeed Wen as prime minister. He will probably get the job of implementing a plan to cut the number of cabinet agencies to 21 from 28 by creating several super ministries.

Both Xi and Li made it onto the Politburo Standing Commission last year. Other rising stars to watch: former Beijing mayor Wang Qishan, ex-Guangdong Party boss Zhang Dejiang and Party functionary Liu Yandong, All three are being tipped to be vice-premiers.

All new appointments will be publicly announced at the annual session of the National People’s Congress next month.

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Higher Yuan Signaled

Another signal from the central bank that it will let the yuan rise faster this year to stimulate domestic demand as part of its fight on inflation, now at an 11-year high.

The Peoples Bank of China’s latest monetary policy report says currency appreciation will play a bigger part in a push to tighten monetary policy, along with higher interest rates and slower money growth. The central bank has already let the currency reach its highest level since the mid-2005 scrapping of its dollar peg in favour of a (highly) managed float. The yuan gained 7% last year versus the dollar, twice its rise in 2006. Analysts are forecasting a 12% gain this year.

Central bankers are struggling to sterilize the inflationary impact of the reserves piling up as a result of the country’s current-account. But now that short term interest rates are higher in China than the U.S., policy makers also worry that the prospect of further currency gains will suck in hot money.

PBOC vice governor Yi Gang told a financial conference in Beijing on Sunday that the fallout from the U.S. subprime mortgage mess and the severe winter that has hit central and southern China posed threats to growth (though with the economy growing at 10% plus such worries are relative) , “but taking into consideration all of these changes, we still think inflation is our biggest threat and we should spare no effort to tame prices.”

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Million Buck Bonuses

Chinese securities companies and asset management firms are now paying million dollar bonus to retain staff, according to the FT. So fierce is competition for experienced professionals that Wall St.-style bonuses now rule.

There are only 300 people with all the required regulatory qualifications to manage funds, according to the FT’s report, and staff turnover has been running at 30% at the 60 approved asset management, which have seen assets under management increase tenfold to $450 billion in the past two years. Such is the power of supply and demand.

Investment bankers underwriting initial public offerings have also done very nicely. There were $65 billion-worth last year. Investment banks typically take 3%-4% of that in fees.

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Learning Chinese

Forbes magazine set one of its reporters to learning Mandarin in four days. A futile task but painfully funny in the telling.

That piece is one of a collection on language. Another is by Chris O’Brien, who writes the wonderful Beijing Newspeak blog, on his experiences of turning Xinhua’s English service into English. Another painfully funny read.

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Food Games

A convergence of three touchy issues, the Beijing Olympics, product safety and relations with the U.S.: The U.S. Olympic team is to bring all its food with it from America and will take its meals in its training camp, not the Olympic Athletes Village. It is concerned about ensuring that local food is safe and doesn’t contain any rogue drugs or other taints that could cause American athletes to fail the Games’s random drug tests. Chinese authorities, who have made elaborate preparations for months to ensure that food supplies for the Games don’t get tainted with the odd bit of anti-freeze or other toxic chemicals or growth stimulants, are “disappointed” for which read outraged. Everyone playing to type.

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ChiPhone

Intriguing snippet over on MacNN: one in ten of Apple’s oh-so-fashionable iPhones – some 400,000 handsets — are being used in China. The twist is that the iPhone isn’t sold in China. So any iPhones being used there must have been imported on the grey market and unlocked.

The MacNN report quotes In-Stat, a research consultancy, quoting numbers from China Mobile. Apple’s discussions with China Mobile, China’s largest mobile telco, about becoming the official carrier in China, reportedly broke off last month. China Mobile won’t accept the revenue sharing deal Apple insisted on with its partners in the U.S. and Europe.

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Rising Prices. Rising Yuan?

The latest monthly inflation figures showing a 7.1% rise in consumer prices in January, the biggest increase in 11 years, are little surprise given the transport bottlenecks and food shortages caused by the severe winter in the south and west of the country. The question is, how long it will take for their impact to work through the economy, and what proportion will prove to be temporary.

Food prices have been the main driver of inflation over the past couple of years. The damage to winter crops from snow and ice has been severe, and priority has been given to allocating food supplies to the worst-stricken areas, but nature works in seasons and spring plantings and new herds and flocks will, in time, come to market. The all-important grain market is forecast to have a normal year’s harvest. The cost of animal feedstocks is the wild card. But it will take a couple of months for the winter’s effect on food prices to wear off.

Power and distribution networks aren’t expected to return fully to normal until at least mid-year. Even before this winter, industry and commerce was passing on increasing energy costs, spreading inflationary pressures widely in the economy. That is not going to go away anytime soon.

An extension of administrative controls to hold down consumer prices is likely, as is another round of interest rate rises. There were six last year. But the financial system is still rudimentary enough to make monetary policy a blunt instrument, and higher rates will attract more hot money.

The central bank, already struggling with the cost of managing its massive reserves, is likely to increase banks’ reserve requirements. It will also be under greater pressure to step up the rise of the yuan against the U.S. dollar. The currency has risen by about 13% since Beijing loosened is dollar peg in mid-2005, rising more rapidly recently, at an annualized rate of 20%.  At this point it needs all the help it can get in controlling inflation.

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