China’s growth story due for reality check

Business Times – 11 Mar 2008

Country may face headwinds of a US recession as its stock market, property sector cool

THE beginning of Wen Jiabao’s second term seems remarkably similar to his first. In 2003, when Hu Jintao and Wen Jiabao, first took the helm as president and prime minister respectively, they were tested by the Sars crisis.

The pessimism of those like Gordon Chang in The Coming Collapse of China was at its peak. But Mr Hu and Mr Wen weathered that crisis and turned in the best five-year term performance in recent memory.

In 2007, China’s GDP reached RMB24.66 trillion (S$4.8 trillion), an average 10.6 per cent annual real growth from 2002 to 2007. In 2007, Germany defended its position as the world’s third largest economy only by a 2 per cent margin (higher than China) measured by daily-weighted exchange rate.

Also in 2007, China replaced the United States, becoming the world’s second largest goods exporter, next only to Germany. By the end of 2007, China’s foreign currency reserves ballooned to US$1.53 trillion, ranking it first in the world, 5.3 times more than at the end of 2002.

This time, when Mr Hu and Mr Wen are about to start their second term in January, China was plagued by a massive snowstorm and they weathered that too.

While many have doubts about China’s infrastructure quality and crisis control system, I simply cannot think of any other country that could have done a better job at a time when the worst snowstorm in half a century coincided with the Chinese New Year and millions of people were trying to get back home for family reunions and then go back to their places of work within the space of a few weeks.

According to Ma Kai, director of National Development and Reform Commission, China’s planning agency, from Jan 23 to March 2 – a span of 40 days – 196 million people travelled by railways and many millions by road, while the snowstorm almost paralysed the entire transportation network in many parts of China.

The 2003 Sars crisis and the 2008 snowstorms demonstrated China’s ability to overcome any shortlived crisis.

But for Mr Wen, there are much tougher challenges ahead in the first year of his second term. On March 5, at the first session of the 11th National People’s Congress (NPC), Mr Wen set China’s 2008 growth target at 8 per cent. Mr Wen’s 8 per cent target surprised none as this figure has been the regular target in the past few years. It basically comes from the 7-8 per cent long-term growth target which will quadruple China’s 2000 GDP by 2020.

In 2007, when the official target was set at 8 per cent, the real outcome was 11.4 per cent, a 13-year high. But in 2008, China could be nearer to the 8 per cent target.

The first challenge is obviously the US, one of China’s major export markets. In 2007, according to the US official figures, China replaced Canada to become the largest source of imports to the US valued at US$321.5 billion.

But the American economy may be in recession. And many economists wonder how serious it will be and how long the recession will last.

The US has a savings rate of virtually zero; its consumption was supported by an illusion of wealth.

But now more and more Americans owe more in mortgages than the real (current market) value of their homes. Worse, these people are about to pay more on their mortgages, as preferential rates come to an end. Delinquency and foreclosures can be expected and property prices will further drop, thus triggering a vicious cycle.

Some might argue that so far macro economic data only shows signs of a slowdown, not a recession. But you can really get a sense of economic fear from one person – Ben Bernanke, the Fed chairman.

In January, after having said that the sub-prime crisis was ‘containable’ for months, the Fed cut benchmark interest rate by 75 basis points (the biggest move in 23 years) just eight days ahead of a scheduled meeting. And on March 4, Mr Bernanke further urged banks to forgive a portion of mortgage principals.

As many pointed out, unlike the 2000-2001 US recession which was corporate dominated, this recession will be consumption led and therefore will have a much bigger impact on China. At the same time, the prospects for European Union, another important exports market for Chin a, will certainly not be as bright as it was. Facing domestic difficulties, the western world is very likely to practice protectionism and China may become its biggest target.

I project the contribution of net export to China’s GDP growth will be substantially lower this year than 2007.

As well, we are also witnessing the bursting of China’s own asset bubbles. On March 7, Shanghai Composite Index, covering both A and B shares listed on Shanghai Stock Exchange, closed at 4300.5, 30 per cent lower than the 6,124 historic high on Oct 16, 2007. At the same time, property, another bubble no smaller than the stock market, by and large remains intact.

Housing bubble set to burst

You might think that with improving living standard and fast urbanisation, the demand for property is huge in China. But the price is still be the biggest problem. People always see the booming  economy as the reason for a bull stock market, yet it is valuation that you have to look at the end of the day.

For a young couple with a combined monthly salary RMB 15,000 (the salary for fresh graduate is only about RMB 2000-3000), the price of a 70-year tenure apartment with a gross floor area of 120 square metres in a relatively good location in Beijing is equivalent to their 10-year combined salary. While the prices in second tier cities are lower, so are people’s wages.

At the same time, property has been playing a very important role in boosting the economy. In 2007, Chinese invested RMB 2854.3 billion in property, 32.2 per cent higher than 2006, accounting for about 25 per cent of China’s fixed asset investment in urban centres. It is also a hot spot for foreign investment. In 2007, utilised foreign direct investment (FDI) in real estate reached US$17.1 billion, more than double the figure the year earlier. It accounted for 22.7 per cent of China’s total utilised  FDI (excluding the financial sector).

But there are signs that the bubble is beginning to burst. Property brokers felt the pain first. Several high profile brokers have collapsed due to being overstretched and, more importantly, the reduced number of transactions.

Wang Shi, chairman of Vanke, the biggest listed property company in China, said earlier this year China’s property market had reached a turning point. Indeed, Vanke has started to offer price discounts for its housing projects in Guangdong, Chengdu, Shanghai and Beijing.

The world has witnessed a property boom in the past decade, and the collapse of the US housing bubble could trigger the falling of dominoes worldwide. The psychological impact of the collapse of the US property market on China cannot be underestimated. And measured by the relative values (and, in some cases, in absolute value), China’s property prices are even higher than in the US market.

Those who proclaimed ‘We are different’ as far as the stock market was concerned, have finally seen the law of gravity take hold. The property market is very likely to follow suit at some point.

When the bubble does burst, China’s investment growth will slow down greatly as it will influence not only property, but also the steel and the construction materials sector as well. Consequently, the country’s GDP growth will be further reduced.

Probably, China’s GDP growth will fall below 9 per cent this year, for the first time in seven years. But it is still a decent figure compared with the rest of the world.

The slowdown in the country’s exports growth should be a good reminder for China to attach more importance to how to improve product quality and add more value to its products. For instance, in 2007, China exported US$44.1 billion worth of steel products, which was the fourth most important export item by value. For a country facing growing resource shortages and environmental problems, to export steel products rather than more cars is stupid.

And more affordable housing generally will certainly better fit into Mr Hu’s ‘harmonious society’ concept.

China faces ‘very severe’ unemployment

20m new jobseekers expected every year: labour minister

(BEIJING) China’s labour minister yesterday admitted that the booming economy faced a ‘very severe’ unemployment situation as millions of new jobseekers join the market every year.

The flood of new entrants in both urban and rural areas will continue for a long time, labour and social security minister Tian Chengping told a briefing here.

‘The employment situation that we’re currently facing is very severe,’ he told journalists. ‘The main reason is that 20 million new jobseekers emerge every year in the countryside and in the cities. This will continue for a very long time.’

Mr Tian said that measures to deal with the problem included encouraging more start-ups and providing retraining for workers with outdated skills.

Earlier last week, Premier Wen Jiabao called for more measures to boost employment, saying that the urban jobless rate should be kept below 4.5 per cent in 2008, compared with a 4.6 per cent target last year.

‘We must redouble our efforts to increase employment, a matter that is crucial to people’s well-being,’ Mr Wen told Parliament in his annual work report, the Chinese equivalent to the US president’s State of the Union address.

Unemployment and inflation are the two top priorities for Chinese policy makers, because they affect, or threaten to affect, a large proportion of the population.

The main reason the government is targeting at least 8 per cent growth every year is to ensure that enough new jobs will be created to avoid social unrest.

Compounding the problem, there is no clear picture of the extent of the jobless issue, as Chinese unemployment statistics are notoriously unreliable, and probably higher than the 4 per cent reported for the end of 2007.

They tend to understate the true scale of the problem by, for instance, not counting rural unemployment or workers laid off from state-owned enterprises. – AFP

Source: Business Times 10 Mar 08

Inflation likely to have hit 8.3% in Feb: Bank of China

Reports of bank’s estimate trigger speculation of interest rate hike

(BEIJING) China’s inflation likely hit a new 11-year high of 8.3 per cent last month on the back of rising food prices, state media reported yesterday, triggering speculation of a modest hike in interest rates.

Severe winter weather which crippled transport networks, and the Chinese New Year festival which traditionally brings a surge in demand, were also seen as helping to drive up the price of food and other basic commodities.

The estimate of 8.3 per cent was given by the Bank of China, the country’s second largest lender, and reported by the state news agency Xinhua.

It came ahead of tomorrow’s publication of official inflation data from the National Bureau of statistics, which is used by authorities to decide whether to tighten monetary policy.

The consumer price index (CPI) had already risen 7.1 per cent in January from a year earlier, the highest since September 1996.

‘Everybody knows it’s going to be more than 8 per cent in February. Logically, February’s CPI must be higher than January’s,’ said Chen Xingdong, Beijing-based chief economist with BNP Paribas Asia.

In its report, the Bank of China said that February’s increase in the CPI was fuelled mainly by food, which rose more than 22 per cent from a year earlier, according to Xinhua.

‘It is making things worse . . . when people expect prices to keep rising, they will spend more to avoid those future rises, which in turn will push prices up,’ it reported, quoting the bank.

The effect of the freezing weather across much of China was first felt in January, but the main impact was in February, BNP Paribas Asia’s Mr Chen argued.

Chinese New Year, the biggest consumption festival of the Chinese calendar, also came in February, adding upward pressure on the price of everything from firecrackers to plane tickets. China’s inflation is seen as triggered mainly by the relative scarcity of basic products, such as pork and other staple food items.

According to observers, this leaves economic policymakers with a dilemma when opting for the right response, even though the central bank governor said last week that there was ‘definitely room’ for more interest rate hikes.

If he does raise interest rates – the classic response to rising inflation – he could deter producers of these basic commodities, so making the problem worse.

Another problem is that since early 2007, China has hiked its interest rates six times, while the US Federal Reserve has steadily lowered them. As a result, the spread between the two has widened dramatically, with the benchmark US federal funds rate now at 3 per cent compared with 7.47 per cent for China’s one-year lending rate.

Chinese policymakers fear that a big gap between Chinese and US rates will attract more speculative funds into the economy. – AFP

Source: Business Times 10 Mar 08

China losing competitive edge in some industries: survey

(SHANGHAI) China is fast losing its manufacturing competitiveness in some industries, and companies need to upgrade their operations there to stay profitable, according to a survey released yesterday.

The study comes amid reports that thousands of manufacturers, both Chinese and foreign, are shifting operations away from coastal regions, where labour and other costs are eroding their profitability, to inland areas or other countries. The ‘China Manufacturing Competitiveness’ survey by the Shanghai Chamber of Commerce found that more than half of the 66 foreign invested companies responding believe China is losing its competitive advantage over other ‘low cost’ countries, such as Vietnam and India.

‘The days of easy China manufacturing are at an end,’ said Ted Hornbein, chairman of the American Chamber of Commerce in Shanghai’s Manufacturers Business Council. ‘You can’t just view it as a workshop anymore.’

The companies surveyed, most of which were based in eastern China near Shanghai, said wages are rising an average 9 per cent to 10 per cent a year, with costs for raw materials up more than 7 per cent, the report said.

But companies can do more to improve their own operations to counter those trends, said Ronald Haddock, vice-president of consulting firm Booz Allen Hamilton, which conducted the study.

‘China’s competitiveness is at risk,’ Mr Haddock said. ‘The question is, is there something we can do about it?’ While many low-cost makers of cheaper products such as shoes, clothing and toys are shifting production to inland regions of China where wages and other costs can be lower, or to other developing countries. Mr Haddock said the survey results showed that many manufacturers could boost profitability by improving how they operate.

If companies don’t improve their management approach, ‘we think it is going to get pretty ugly for some of them,’ he said.

A crucial strategy used by the most profitable companies surveyed was to ensure China operations fit into their global supply chains – how the companies source, make and distribute products.

‘Starting with the right mind-set is the beginning,’ Mr Haddock said.

Source: AP (Business Times 5 Mar 08)

China’s economy leads world: poll

(WASHINGTON) More Americans believe China, not the United States, is the world’s top economic power, according to an opinion poll.The Gallup World Affairs survey found that four in ten Americans say China’s economy leads the world; only 33 per cent picked the United States.In 2000, the United States was top in the poll, with the support of 65 per cent. The World Bank lists the US as the world’s leader in economic output, with Japan second, Gallup said.China was ranked fourth in national economies in 2006.More than half of Americans polled eight years ago believed the US would be the world’s powerhouse economy for the next 20 years. Now, more predict that China will be top in two decades.The firm polled 1,007 adults in the US last week.The margin of sampling error was plus or minus three percentage points.  Source: AP (Business Times 23 Feb 08)

China no more the source of cheapest goods

Rising costs hit its competitive edge, forcing some firms to relocate overseas

(SHANGHAI) The teddy bears selling for US$1.40 each in Shanghai’s Ikea store may be just about the cheapest in town, but they’re not made in China – they’re stitched and stuffed in Indonesia.

The fluffy brown toys reflect a new challenge for China: its huge economy, which has long offered some of the world’s lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labour.

Those expenses, plus higher taxes and stricter enforcement of labour and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.

‘It’s true that we are facing difficulties regarding increased costs in China,’ said Linda Xu, public relations manager in China for Swedish retailer Ikea.

Though the competition for lower prices is not new, ‘we are constantly having to compete with other countries and suppliers’, she said.

While costs in China are rising nationwide, the greatest pain is being felt in the south, where about 14,000 out of the 50,000-60,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which neighbours Hong Kong.

‘Wages are rising, materials cost more. Overall, costs are definitely higher,’ says Duncan Du, general manager of Shenzhen Oriental e-Tecs Ltd, an electronics maker in the southern city of Shenzhen.

To adapt, many multinational manufacturers – including Intel Corp, iPod maker Hon Hai Technology Group and Japanese companies like Canon Inc and Sony Corp are expanding operations in Vietnam.

Car-parts makers are decamping for the Middle East and eastern Europe, and textile makers to Bangladesh and India.

Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China’s traditional export hub of Guangdong are closing or moving out.

As many as 300 of some 1,000 shoe factories in the Guangdong factory zone of Dongguan have closed down, according to a report by the China Light Industry Council. It said half of the shoe factories set up by Taiwan investors had already shifted production to Vietnam.

Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.

The higher costs mean Western consumers are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese sub-contractors.

‘Americans continue to want to buy at lower prices,’ said Kevin Burke, president and CEO of the American Apparel and Footwear Association. ‘They are used to going to the store during Christmas and getting something cheaper than a year ago.’

That’s no longer a sure thing.

Chinese inflation, meanwhile, has risen to its highest in more than 11 years, jumping 7.1 per cent in January, as snowstorms worsened food shortages. The biggest price hikes have been for food, but longer- term pressures on prices for manufactured goods will persist, analysts say.

Despite its huge pool of unskilled rural labourers, China’s supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 per cent to 15 per cent a year.

A new labour law requiring stronger employment contracts is expected to raise costs even more.

Source: AP (Business Times 23 Feb 08)

Rising costs squeeze Chinese factories

SHANGHAI – THE teddy bears selling for US$1.40 (S$1.97) in Shanghai’s Ikea store may be just about the cheapest in town, but they are not made in China: They are stitched and stuffed in Indonesia.The fluffy brown toys reflect a new challenge for China. Its huge economy, which has long offered some of the world’s lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labour.Those expenses, plus higher taxes and stricter enforcement of labour and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.‘It’s true that we are facing difficulties regarding increased costs in China,’ said Ms Linda Xu, public relations manager in China for Swedish retailer Ikea.Though the competition for lower prices is not new, ‘we are constantly having to compete with other countries and suppliers’, she said.While costs in China are rising nationwide, the greatest pain is being felt in the south, where about 14,000 out of the 50,000 to 60,000 Hong Kong-run factories could close in the next few months, said Ms Polly Ko of the Economic and Trade Office in Guangdong, which is next to Hong Kong.‘Wages are rising, and materials cost more. Overall, costs are definitely higher,’ said Mr Duncan Du, general manager of Shenzhen Oriental e-Tecs, an electronics maker in the southern city of Shenzhen.To adapt, many multinational manufacturers, including Intel, iPod-maker Hon Hai Technology Group and Japanese companies like Canon and Sony, are expanding operations in Vietnam.Car parts makers are decamping for the Middle East and Eastern Europe, and textile makers to Bangladesh and India. Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China’s traditional export hub of Guangdong are closing or moving out.As many as 300 of some 1,000 shoe factories in the Guangdong factory zone of Dongguan have closed down, according to a report by the China Light Industry Council. It said half of the shoe factories set up by Taiwan investors had already moved production to Vietnam.Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.The higher costs mean consumers outside China are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese subcontractors.Chinese inflation, meanwhile, has risen to its highest in more than 11 years, jumping 7.1 per cent last month, as snowstorms worsened food shortages. The biggest price hikes have been for food, but longer-term pressures on prices for manufactured goods will persist with prices for plastics and other materials climbing 30 per cent or more, analysts say. Source: ASSOCIATED PRESS (The Straits Times 23 Feb 08)

MAS fears Asia will hurt if US engine seizes

A negative spiral can take hold, affecting even the real economy

(SINGAPORE) A sharp and deep recession in the United States will hit Asian economies, warned Heng Swee Kiat, managing director, Monetary Authority of Singapore (MAS), yesterday.

And in his first public comment on the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Wading into the debate on whether Asia has de-coupled from the US, Mr Heng said the region has significant links with the world’s biggest economy through trade, investment and finance. Only if these linkages are significantly weakened can Asia be said to have de-coupled from the US, he said yesterday at a fund management conference.

Still, the short-term outlook for Asia remains generally positive barring any sharp deterioration in the global economy, he noted. The current forecast is for Asia ex-Japan to grow at a fairly healthy pace of around 7.8 per cent in 2008, one percentage point lower compared to last year.

Structural changes have taken place in Asian economies over the last 10 years, he pointed out. ‘Certainly, the fundamentals of the economies and financial markets in Asia have improved significantly since the Asian financial crisis,’ he said.

Most Asian economies have large foreign reserves and current account surpluses. There is a sizable educated and skilful labour force, and a growing middle class that forms a broad consumer base, he said.

Asian corporates and households are doing well after four years of robust growth. Asian capital markets are better developed. Asian banks are better capitalised, have less bad loans, and are better supervised and managed.

‘These are significant changes. However, a long-term or structural de-coupling of Asia from the US is possible only when the economic linkages through trade, investment and finance are significantly weaker,’ said Mr Heng.

Studies by MAS, and other economists, show that this is not the case at this stage, he pointed out.

What we are likely to see, however, is the weaker synchronisation of business cycles, he said.

‘The underlying momentum in the Asian economies will allow Asia to ride out the slowdown in the US if it is mild and short-lived. But a sharp and deep contraction will trigger the threshold where all economies will be affected, albeit in different degrees depending on their reliance on external demand,’ said Mr Heng.

On the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Policy makers are facing the challenge of how to contain the spread of the credit crisis to the real economy, he noted.

‘What is striking is that the securitisation of loans was meant to be a mechanism for risk transfer. Instead, it became a channel through which shocks are amplified and transmitted throughout the system in unpredictable ways. These shocks have now started to have an impact on the real economy,’ he said.

In the US, the housing-sector correction is leading the slowdown in the economy. Consumer spending is constrained by high debt levels. Financial institutions have sustained large losses. And this is driving the turn of the credit cycle, which means restraint on both consumer spending and corporate investments.

Indeed, at this point there is a risk of being caught in a negative spiral involving tighter credit standards, reduced credit availability and slowing down of the macro economy.

‘The extent to which this spiral takes hold determines the extent of the US slowdown, and the extent to which the rest of the world will be affected,’ said Mr Heng.

‘Hence, the immediate challenge for policy makers is to contain the spread of the credit crisis to the real economy, to prevent this spiral.’

The full extent of the exposures is not yet known and central banks face different degrees of slowdown and inflationary pressures in their economies, he explained.

According to Mr Heng, a multi-pronged approach coordinated across jurisdictions, where necessary, was needed to tackle these challenges. ‘The situation is fluid, and we need to remain vigilant.’

 

Source: Business Times 20 Feb 08

Only one way to go for yuan – up, say analysts

Rapid economic growth, soaring inflation leave China with no choice

(BEIJING) China has no choice other than to let the yuan appreciate against the dollar, analysts say.

The combination of the world’s fastest economic growth, the highest inflation rate in 11 years and the rising cost of intervention will force gains in the yuan to accelerate, even as policymakers in Beijing resist calls from the West to let the currency appreciate at a faster pace, say Pacific Investment Management Co and Pictet & Cie, Switzerland’s largest closely held private bank.

The yuan rose for a fourth straight session yesterday to close at 7.1580 versus the dollar after hitting an intraday high of 7.1534, the highest since its July 2005 revaluation. Before the market opened, the central bank fixed the yuan’s mid-point at 7.1574, up from Monday’s 7.1667.

Central bankers in Thailand, Malaysia, Singapore and the Philippines are in the same situation, making their currencies attractive, according to money managers at the two firms and Merrill Lynch & Co. Nine of the 10 best performing currencies against the dollar in 2008 will come from Asia, surveys of foreign exchange strategists by Bloomberg show.

‘You’re likely to see less intervention,’ said Ramin Toloui, who helps oversee more than US$60 billion in emergingmarket bonds and currencies at bond fund manager Pimco. ‘Several Asian central banks see more rapid exchange- rate appreciation as an important tool to fight inflation.’

After rising 7 per cent last year, the yuan has appreciated 1.9 per cent to 7.1635 per dollar so far in 2008.

JPMorgan Chase & Co, the world’s ninth-biggest currency trader, predicts a further 14 per cent increase, while Citigroup in New York forecasts a 6 per cent advance.

Thailand’s baht has climbed 3.7 per cent to 32.53 this year, while the Taiwan dollar is up 2.4 per cent at NT$31.75.

While the International Monetary Fund expects growth in Asian emerging markets to slow to 8.6 per cent in 2008 from 9.6 per cent last year, that’s still six times faster than the 1.5 per cent expansion predicted for the US.

Consumer prices in the region’s 10 largest economies outside Japan are rising at an average annual rate of 5.3 per cent, compared with 4.1 per cent in the US, data compiled by Bloomberg show. Faster inflation raises the odds that central banks in Asia will increase interest rates, bolstering the appeal of their currencies.

‘We are long Asian currencies,’ said Donald Amstad, head of Asia-Pacific fixed-income at Aberdeen Asset Management, which oversees US$205 billion. ‘Asia is in relatively better shape than the rest of the world.’

A ‘long’ position is a bet that a currency will gain.

To keep their currencies from appreciating too fast and hurting exporters, Asian central banks have bought US dollars, accumulating US$4 trillion in foreign-exchange reserves.

The downside to intervention is that it increases the supply of the local currency, which tends to fuel inflation. To prevent that from happening, Asian central banks typically sell bonds to remove those funds from the economy.

That option has become more costly because interest on the debt is paid with income from its reserves, which are invested in dollar-denominated securities.

The People’s Bank of China pays 1.31 percentage points more on its six-month bills than it earns on similar maturity US Treasuries following the US Federal Reserve’s five rate cuts since September. Six months ago, the spread was 2.2 percentage points in favour of US debt.

After four years of profits, the bank is now losing US$4 billion a month by intervening, according to French bank BNP Paribas.

 

Source: Bloomberg, Reuters (Business Times 20 Feb 08)

Inflation in China hits 11-year high, set to rise further

(BEIJING) China’s inflation rose to its highest level in more than 11 years in January after devastating snowstorms worsened food shortages, according to data reported yesterday, and analysts warned there might be sharper increases to come.

Consumer prices in January climbed 7.1 per cent from the same month last year, driven by an 18.2 per cent rise in costs, the National Bureau of Statistics reported.

Economists warned that despite efforts to ease food shortages, China faces pressure for prices to rise across the board due to higher wages and costs for coal, iron ore and other industrial materials.

February inflation ‘is likely to be much higher than 7 per cent, and might even get close to double-digit levels,’ said Goldman Sachs economists Yu Song and Hong Liang in a report to clients. ‘Inflation is likely to have further legs to run.’

High inflation could complicate Beijing’s efforts to keep the fast-growing economy from overheating and add to pressure to let the exchange rate of its currency, the yuan, rise faster.

Surging food costs are a political concern for Chinese leaders because they hit the poor majority hard in a society where families spend up to half their incomes on food. Bouts of high inflation in the 1980s and 1990s sparked protests, which the government hopes to avoid repeating.

Economists expect interest rate hikes this year but say they should be modest because the key factor driving inflation is shortages of pork and some other food, rather than too much credit.

Beijing has nudged up rates over the past two years to cool a lending boom. But it faces the dilemma that more rises at a time when US rates are falling could attract money from abroad, adding fuel to the boom.

 

Source: AP (Business Times 20 Feb 08)

China, wary of social unrest, scrambles to contain food prices

It wants to avoid mistakes of 1988 as inflation hits 10-year high of 6.9%

(HONG KONG) Rocketing food prices in China have sown deep concern among the communist leadership, ever wary of social unrest, as they fumble to control inflation without repeating past mistakes, analysts say.

Overall inflation in China is running at a 10-year high – around 6.9 per cent in November year-on-year, official statistics show.

Inflation is now being driven almost exclusively by increases in the price of food, in particular the staple meat, pork, which has spiked 60 per cent year-on-year.

Prices have faced even greater upward pressure in recent weeks, as severe weather has crippled the transport system at the time demand is greatest over the Chinese New Year.

A report by Credit Suisse said 10 per cent of China’s farmland has been affected by the extreme cold, and one per cent could see a complete loss of crops and vegetables.

Price increases have been seen in food items ranging from cooking oil to apple juice, as China’s growth and global demand creates what economists have dubbed ‘agflation’ referring specifically to rises in prices of agricultural commodities.

Analysts say authorities in Beijing are becoming increasingly concerned about the prospect of food prices getting out of hand, but add that the problem is not yet approaching the levels that led to widespread popular dissatisfaction almost a decade ago.

‘They (the central government) are increasingly nervous about it,’ said Andy Rothman, Shanghai-based China macro-strategist for CLSA. ‘But it is a long, long way from the inflation problems before 1989.’

In January, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets. This followed the announcement in late December that from Jan 1 the government would slap taxes ranging from 5 to 25 per cent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.

The actions appeared to be stoked by memories of the widespread protests that resulted from the government’s clumsy handling of food price controls that led to inflation of around 50 per cent in the summer of 1988. Public anger prompted the demonstrations that the following summer morphed into anti-government protests and the death at the hands of the army of hundreds, possibly thousands, of civilians.

Vincent Chan, head of China research for Credit Suisse, cited another change in recent months, saying people were now expecting price rises.

‘If you look at the statistics, then China’s inflation problem is simply a food inflation problem,’ he said. ‘In the past, we have not really had a problem of inflation expectation (but) this year we have already seen that. And that normally means that prices will rise.’

CLSA’s Mr Rothman said pork price inflation is only a short-term problem, and predicted prices will start to fall back later this year.

‘This is a supply problem. In 2006, pork prices had a 10-year low. There was not any incentive for farmers to raise more pigs. This was made worse by blue-ear disease which stopped supply when demand was rising,’ he said.

The other major factor in Chinese inflation, cooking oil, was more complicated, he said, as 60 per cent of it is imported.

‘The major contributor to the rise is US ethanol policy and there is little the Chinese can do about that,’ he said.

Subsidies in the US have seen a major switch in land use to grow crops for fuel, rather than food, prompting worldwide increases in some staple foods.

The UN’s Food and Agriculture Organisation said in October that China was expected to slash its exports of cereals from 7.7 million tonnes in 2006-7 to 6.2 million tonnes in 2007-8. At the same time it would probably increase imports to 10.1 million tonnes from 9.3 million tonnes.

China imported 32.2 million tonnes of oilcrops, including corn and soybeans, in 2006-7, which the FAO said was expected to rise to 37.3 million tonnes in 2007-8, with exports expected to fall to 1.3 million tonnes from 1.5 million tonnes.

Mr Rothman said there had been anecdotal evidence of subsidies to poor rural areas, which if accurate could indicate the government’s willingness to take action to keep a lid on food prices and prevent any hint of social unease.

 

Source: AFP (Business Times 18 Feb 08)

2008 not necessarily like 2007: UBS

(ZURICH) UBS AG does not expect 2008 to be a year like 2007, when the Swiss bank wrote down US $18 billion in bad credits and posted the first loss since its creation, its chief executive was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the US economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ UBS chief executive Marcel Rohner told newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime writedowns.

Mr Rohner said UBS’s investment banking business would concentrate in 2008 on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks,’ he said.

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of 2007, including US$27.5 billion in sub-prime debt.

But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks. ‘The quality of our investment in leveraged buyouts, for example, is much better than in complex securities based on mortgages with poor debtor quality,’ he noted.

Mr Rohner said it was not currently possible to sell intact structured products. But where a collateralised debt obligation structure had become insolvent, UBS had been able to reduce its risks by selling the underlying securities at prices in line with their current valuation by the bank.

UBS’s private banking business has not been affected by the blow to the bank’s reputation, Mr Rohner said. Private banking recorded net inflows of more than 30 billion Swiss francs (S$38.8 billion) in the fourth quarter of 2007, and net inflows continued in January.

Mr Rohner defended the continuing payment of bonuses amid the losses, as the losses arose from real estate loans handled by a small part of the bank. Other areas of the bank had worked well and it was important to continue to motivate staff producing these results by treating them fairly.

 

Source: Reuters (Business Times 18 Feb 08)

IMPROVING OUTLOOK: UBS expects this year to be a better one

ZURICH – UBS does not expect this year to be like the last, when the Swiss bank wrote down US$18 billion (S$25.5 billion) in bad credits and posted the first loss since its creation, its chief executive officer (CEO) was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the United States economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ CEO Marcel Rohner told Swiss daily newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime write-downs.

Mr Rohner said UBS’ investment banking business would this year concentrate on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks.’

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of last year, including US$27.5 billion in sub-prime debt. But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks.

Last December, the Government of Singapore Investment Corp bought a 9 per cent stake in UBS for 11 billion Swiss francs (S$14.2 billion).

On Jan 30, UBS announced a 12.5 billion Swiss franc loss for the final three months of last year and a full-year loss of 4.4 billion Swiss francs, a record for the bank. This was due to a higher-than-expected US$14 billion write-down on assets connected to sub-prime mortgages in the US.

UBS was formed in 1998 after the Union Bank of Switzerland took over local rival Swiss Banking Corp.

 

Source: REUTERS (The Straits Times 18 Feb 08)

China’s economy may grow around 10% in 2008: IMF

Its MD says a faster pace of appreciation of yuan is needed to address economic challenges

(BEIJING) China’s economy is likely to grow around 10 per cent this year despite a global slowdown stemming from the US sub-prime mortgage crisis, Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), said yesterday.

Mr Strauss-Kahn said he had agreed with Premier Wen Jiabao and central bank governor Zhou Xiaochuan on the need for China to run a continued tight monetary policy to contain investment growth and inflation.

The inflation-adjusted exchange rate of the yuan, measured against the currencies of China’s main trading partners, has been moving in the right direction recently, Mr Strauss-Kahn told a news conference during a two-day visit to Beijing.

‘However, we encourage a faster pace of appreciation that would be helpful for addressing China’s key economic challenges and would also contribute to preserving global economic stability,’ he said in a prepared statement.

The central bank, which keeps the currency on a tight leash, let the yuan rise yesterday to 7.1760 per US dollar, the highest since it was revalued by 2.1 per cent in July 2005 and cut free from a dollar peg to float within narrow bands.

The yuan has now appreciated by 13 per cent against the dollar since then. But it has gained much less when measured against a basket of currencies and, to the ire of European policy makers, is actually worth less against the euro than it was in July 2005.

Relations between the IMF and China have been strained since the fund introduced new currency surveillance rules last June. Beijing objected to the rulebook, which will make it easier for the fund to determine whether a country is pursuing policies that lead to a fundamentally misaligned exchange rate in order to boost exports. China regards the new framework as a ploy by the United States to enlist the fund in its campaign for a stronger yuan.

The dispute has delayed the completion of the fund’s 2007 report on China detailing economic consultations between the two sides.

Mr Strauss-Kahn sidestepped a question on whether the yuan was fundamentally misaligned, saying the decision was one for the IMF’s board. But he said he had sought to make the case to Chinese policy-makers that a more flexible exchange rate would contribute both to a better-balanced Chinese economy and to global stability.

 

Source: Reuters (Business Times 16 Feb 08)

IMF predicts 10% growth in China

Beijing – THE International Monetary Fund (IMF) still sees China’s economy expanding 10 per cent this year.

‘The current financial crisis, which began in the United States housing market, is spreading to affect the real economy in the US and elsewhere,’ IMF managing director Dominique Strauss-Kahn told reporters in Beijing yesterday.

‘There will be some impact on China, but we still expect the economy to expand by 10 per cent this year.’

The World Bank this month cut its forecast for China’s growth to 9.6 per cent. The world’s fourth-largest economy expanded 11.4 per cent last year, the fastest pace in 13 years.

China is trying to slow inflation that is close to an 11-year high without triggering a sharp slowdown.

‘It’s even more necessary than before to have high growth in China,’ the IMF head said, referring to a slowing global economy.

‘More domestic-demand-driven growth will be what China needs rather than export-led growth.’

Mr Strauss-Kahn urged faster appreciation of China’s currency, the yuan, and said the IMF and China agreed the nation still needed a tight monetary policy to contain investment growth and inflation.

He said faster appreciation ‘would be helpful for addressing China’s key economic challenges and would also contribute to preserving global economic stability’.

China’s currency has climbed 1.7 per cent versus the US dollar this year. It traded at 7.181 to the US dollar yesterday.

Mr Strauss-Kahn said that ‘for a number of months now, the real exchange rate is moving in a good direction’.

 

Source: BLOOMBERG NEWS (The Straits Times 16 Feb 08)

China faces economic, political woes on price fears

(CHONGQING, China) China is supposed to be getting richer, but for Liu Gaohua, rising prices on everything from cabbages to houses mean life is only getting tougher.

‘It’s hard to get by day-to-day,’ said the resident of Chongqing, a western Chinese industrial city on the upper reaches of the Yangtze river.

‘We eat less pork than before. Before, we would eat it every day. Now it’s just too expensive. We eat it about every third or fourth day,’ he said.

Mr Liu, who works in the railway industry and is married with a 14-year-old son, is typical of those being squeezed hardest by soaring prices – the lower middle-class urban residents far from China’s wealthier coastal cities.

With consumer prices rising at their fastest rate in 11 years, China’s inflation is not only a sign of economic woes, it has become a political challenge for a leadership worried that any slowdown will erode its support and trigger instability.

President Hu Jintao, Premier Wen Jiabao and their team of economic policy-makers find themselves caught between the goals of their reform programme and their need to step in to moderate prices and ward off the spectre of social unrest that has haunted every generation of China’s Communist rulers.

Inflation figures have been disproportionately affected by rising food costs, especially staples like pork and cooking oil, leading some economists to predict the rises would not last.

But others say that Mr Hu and Mr Wen might be victims of the very success of their programme to build a ‘harmonious society’.

The term has become a catch-phrase referring to a model of more moderate growth that seeks to account for costs previously overlooked, from worker safety to environmental protection. An emphasis on work safety means smaller coal mines are being shut down, a campaign on food and product safety has taken some of the cheaper – and more harmful – pesticides and fertilisers off the shelves and a crackdown on polluters is forcing factories to install better equipment. Wages are also rising as the reservoir of surplus labour begins to be mopped up.

But all of that reflects a broader adjustment in the economy that could mean higher prices will not quickly abate.

‘There’s obviously mounting costs all along the way,’ said Matthew Crabbe, managing director of consumer research group Access Asia.

For some residents, the benefit of those policies that aim to save lives, curb environmental degradation and create a more equitable society, are being obscured by the only immediate consequence they see: the effect on their wallets. Mrs Li, a 52-year-old housewife, complains that she pays about 15 yuan (S$2.96) per half kilo of pork, compared with six yuan a year ago.

It was in a supermarket here in Chongqing that three people were killed in a November supermarket stampede as they scrambled for cut-price cooking oil.

Housing prices in the gritty port city are also soaring.

Mrs Li, who only gave her surname, said that houses in Chongqing were going for around 7,000 yuan per square metre, compared to about 1,200 per square metre a few years ago. ‘We have no means to get by,’ she said.

Her friend, joining her in a game of cards at a chilly temple courtyard tucked away from the city’s bustle, chimed in. ‘Wages are rising but the price of food is going up much faster,’ said the woman, surnamed Tan. ‘Our demands, our wishes, are that the government controls this. They shouldn’t let prices rise too high.’

The government stepped in earlier this month, announcing that it would ‘temporarily intervene’ in the market to prevent excessive price rises, harkening back to China’s planned economy days.

‘Essentially, the government is saying, where possible, and especially if you are a state utility, don’t raise prices and contribute to these worries,’ said Yang Dali, director of Singapore’s East Asian Institute.

In the past few weeks, the Education Ministry has also weighed in with temporary subsidies for student canteens, and Vice-Premier Hui Liangyu called for stricter implementation of farming subsidies and preferential policies for rural workers.

The policy moves play to the image Mr Wen has cultivated for himself as a man of the people. But the strategy, while appeasing the masses, is not without risks.

‘The worry is, if you impose those price controls you may distort the price situation and let deformities increase over time,’ said Singapore’s East Asian Institute’s Yang Dali.

But without controls, the spectre of social unrest looms. Inflation is often cited as a reason the Nationalist government lost the civil war to Communists in 1948-49. Market relaxations in 1988 caused sharp price rises that were seen as contributing to discontent that culminated in the Tiananmen Square demonstrations a year later.

 

Source: Reuters (Business Times 9 Feb 08)

Shanghai stocks jump 8.1% as govt comes to rescue

SHANGHAI – CHINA’S main stock index jumped more than 8 per cent yesterday in its biggest daily rise since June 2005, after the authorities intervened to halt a three-week slide in share prices.

Regulators’ approval of two new stock funds after a freeze of several months, official criticism of Ping An Insurance’s plan for a huge stock offer and the postponement of China Railway Construction’s US$4 billion (S$5.7 billion) initial public offering restored a good measure of battered investor confidence.

The Shanghai Composite Index opened more than 2 per cent higher and closed the day up 8.13 per cent at 4,672.17 points, within a whisker of its intra-day high of 4,672.214.

Gainers overwhelmed losers 865 to two, while over 300 stocks soared past their 10 per cent daily limits.

The index plunged 16.7 per cent last month amid panic-selling and remained 24 per cent below last October’s record high.

Most of the official steps were aimed at resolving one of the market’s biggest worries – the possibility of a big oversupply of fresh equity relative to demand.

In another gesture of official support, Mr Li Rongrong, head of the state asset management agency, was quoted by official media as saying China’s fierce winter weather would not affect the earnings of listed state firms controlled by the central government, so stock investors should not worry. The weather was improving and transport bottlenecks easing, local media said.

Banks helped lead the index up, continuing a rally that began on Friday amid signs China might ease a tight monetary policy to offset the impact of a slowing United States economy and ease the funding squeeze suffered by small banks and firms in recent weeks.

China’s central bank also introduced measures to enable commercial lenders to do more for developers of affordable housing.

China has long tried to boost incentives for firms to build cheaper housing, as the country’s booming real estate market has generated riches for some but put the price of home ownership out of reach for many.

Banks can now extend loans for affordable housing if the developers raise 30 per cent of the total capital. That compares with a 35 percent requirement for developers of more expensive homes.

Banks may lend to developers of affordable housing at interest rates as low as 90 per cent of the benchmark lending rate, which stands at 7.47 per cent a year, and for as long as five years, up from three years before, it said.

The central bank and the country’s banking regulator also expanded the category of those allowed to extend such loans to all financial institutions, such as joint-stock banks, from just state-owned banks.

The central bank signalled a relaxation of its credit clampdown last Thursday when it called on commercial banks to speed up loans to areas of the country battered by harsh winter weather.

A commentary published yesterday by the People’s Daily, a mouthpiece of the Communist Party, also criticised Ping An, whose plan for an equity sale as large as US$22 billion terrified investors last month because of fears the market could not absorb the share supply.

Fund managers said this almost guaranteed Ping An would not be able to proceed with the plan and might sharply cut any revised fund-raising proposal.

Metals-related shares, meanwhile, surged after Aluminum Corp of China teamed up with US aluminium producer Alcoa to buy a US$14 billion stake in Rio Tinto, which might block BHP Billiton’s effort to win Rio.

 

Source: REUTERS (The Straits Times 5 Feb 08)

ICBC sets reserves aside for possible 30% sub-prime loss

BEIJING – CHINA’S biggest bank, Industrial & Commercial Bank of China (ICBC), has set aside reserves equal to 30 per cent of its US$1.2 billion (S$1.7 billion) in sub-prime holdings to cover possible losses, a state news agency reported yesterday.

The report, if confirmed, would be the first indication that Chinese banks, which have so far avoided damage from the United States’ credit crisis, might face problems due to holdings of sub-prime mortgage securities.

ICBC chairman Jiang Jianqing disclosed the figures at a weekend meeting, the Xinhua News Agency said.

Phone calls to ICBC’s press and investor relations offices were not answered.

Chinese banks are believed to hold only modest amounts of sub-prime debt. But financial markets are watching them closely to see how they will be affected.

Last month, investors sold Chinese bank shares after a news report that the Bank of China, the country’s No. 2 lender, might record a loss for last year due to sub-prime problems. The Bank of China denied that but has yet to release details on the status of its sub-prime holdings.

Mr Jiang said ICBC’s sub-prime holdings ‘remained stable but risk reserves had been increased in the fourth quarter after supervisory departments issued warnings on a possible deterioration of the sub-prime crisis’, according to Xinhua.

The Bank of China and ICBC are believed to have China’s largest holdings of sub-prime mortgage debt.

ICBC had said earlier that it holds US$1.2 billion in sub- prime bonds, while Bank of China said in October that it had sub-prime debt valued at US$7.95 billion.

 

Source: ASSOCIATED PRESS (The Straits Times 5 Feb 08)

China economy expands 11.4%

But slower pace seen for 2008 on credit curbs, weaker global demand

(BEIJING) China grew 11.4 per cent in 2007, the fastest pace in 13 years, but is headed for a modest slowdown this year as global demand weakens and credit curbs to cap inflation ripple through the economy.

The softening was evident in figures issued yesterday, showing that annual gross domestic product (GDP) growth eased to 11.2 per cent in the fourth quarter from 11.5 per cent in the July-September period and 11.9 per cent in the second quarter.

‘If economic growth sees a mild slowdown, that would be within our expectations,’ Xie Fuzhan, head of the National Bureau of Statistics, told a news conference.

Still, 2007 marked the fifth consecutive year of double-digit growth for China, which is on course to overtake Germany as the world’s third-largest economy this year and is growing in importance as a locomotive for global growth.

‘Average growth over the last five years has been 10.6 per cent. That’s really extraordinary. The ups and downs each year have also been limited – that’s also extraordinary,’ Mr Xie said.

As global credit woes stemming from the US sub-prime mortgage crisis drag down demand for China’s exports, which contributed about a third of last year’s increase in GDP, economists expect China’s growth this year to dip to around 10 per cent.

If the economy slows more than expected, economists are in no doubt that Beijing will unwind some of the restrictive policies that it has rolled out over the past year.

And yet, China is also wary of inflation, which has touched off social unrest many times in the past. Although consumer price inflation slowed to 6.5 per cent in December from an 11-year high of 6.9 per cent in November, factory-gate inflation jumped to 5.4 per cent from 4.6 per cent.

To cap inflation and prevent overheating, Beijing raised interest rates six times last year and gave banks blunt orders to lend less. But continuing along this path could trigger a sudden slowdown as export demand weakens.

‘Tightening too much when the US is heading for a recession would be a double hit for the global economy,’ said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ‘Inflation is the key challenge.’

Currency gains, which push up export prices, may become a more important tool for cooling the economy this year. The US Federal Reserve’s unexpected cut in its benchmark interest rate to 3.5 per cent from 4.25 per cent this week makes China less likely to raise its one-year lending rate beyond a nine-year high of 7.47 per cent.

The Fed’s move increases the chances of ‘hot money’ flooding into China, Yu Yongding, director of the Institute of World Economics and Politics in Beijing, said earlier this week in Davos, Switzerland.

On Wednesday, Morgan Stanley cut its forecast for rate increases in China this year from two to none.

The yuan’s gains versus the US dollar accelerated to almost 3 per cent in the fourth quarter.

Weaker US demand and cuts to export incentives have already slowed growth in overseas shipments from China.

Exports rose at the slowest pace since 2002 in the fourth quarter.

‘The yuan should be allowed to appreciate faster to deal with excess liquidity and inflation,’ said Frank Gong, chief China economist at JPMorgan. ‘The pressure is building and the argument is gaining momentum within the Chinese government.’

 

Source: Reuters, Bloomberg (Business Times 25 Jan 08)

Overheating of Asian economies likely: Lehman

Better growth rate will attract massive capital inflows

GOOD economic news now could lead to tough times later, an American investment bank is warning. The bank, Lehman Brothers, says that a soft landing for the global economy could lead Asia ex-Japan economies to overheat later this year or into next year.

Lehman’s chief economist Asia ex-Japan, Robert Subbaraman, says the bank expects the region to ‘attract massive capital inflows’ because of its better growth rate than those of other regions, higher interest rates, and stronger economic fundamentals.

‘So our core view of the region is that the aggregate GDP growth for the Asia ex-Japan economies will weaken by about one percentage point this year to about 7.5 per cent,’ he said. ‘The weakening will be because of weakening exports; however, because of the strong capital inflows, the domestic economies are going to be red-hot.’

He also expects that, with the region’s exports weakening, Asian central banks will intervene heavily to slow currency appreciation, even more so than before.

This may result in the dilemma of the ‘impossible trinity’, which holds that a country can have only two of the three economic options of a fixed exchange rate, control over interest rates, and an open capital account.

‘We doubt that countries will impose Draconian capital controls,’ he said. ‘Thus it will become harder for central banks to raise interest rates, because to do so would attract even stronger capital inflows and put greater upward pressure on their currency.

‘In our view, that is a recipe for an overheating economy.’

On the other hand, the bank predicted that if there is a global recession, Asia ex-Japan economies will be severely hit – falling by as much as 4.5 percentage points. This would be nowhere near as bad as during 1997’s Asian financial crisis, because of ’sound economic fundamentals’ and ‘plenty of room for macro policy to respond’.

However, Lehman Brothers has not gone out with a full-blown recession prediction for the United States, forecasting only a 40 per cent risk of a recession this year, slightly higher than its predicted one-in-three chance at the beginning of this year.

 

Source: Business Times 23 Jan 08

Inflation to ease to 4%: govt economist

(BEIJING) China’s inflation will recede in 2008 due to a slowing economy and a drop in food prices, a senior government economist said in a report published yesterday.

Fan Caiyue, a deputy head at the economic research institute under the National Development and Reform Commission, said that China’s consumer price inflation would drop to 4 per cent this year from an estimated 4.7 per cent in 2007. In the China Securities Journal report, he also said that gross domestic product growth would slow to 11 per cent in 2008 from an estimated 11.5 per cent in 2007.

‘The mild adjustment in the macro economy, especially an ebbing of the surge in food prices, will help to ease inflationary pressure,’ he said, adding that food prices would drop in the second half of 2008.

The sub-prime credit crisis was unlikely to lead to a recession in the United States, but if it worsened, it would have a significant impact on demand for Chinese exports, he said. Still, China needed to continue monetary tightening in 2008, including further raising banks’ reserve requirements and  interest rates, to guard against economic overheating, he added.

The central bank increased the share of deposits that banks have to hold in reserve to a historical high of 15 per cent on Jan 13. It raised reserve requirements 10 times and interest rates six times in 2007.

Chen Dongqi, a senior economist at the same think-tank, said that it would be very dangerous if inflation remained above 5 per cent. ‘Then, real growth in household incomes will be much slower than the nominal increase, and that will erode the stability of the economic system and the sustainability of growth.’

But he added that an inflation rate of 3-5 per cent was still acceptable, saying that China faced no serious inflationary threat in the medium term due to overall industrial overcapacity.

 

Source: Reuters (Business Times 23 Jan 08)

Soros warns of worst financial crisis since WWII

(VIENNA) Billionaire investor George Soros said the world was facing the worst financial crisis since World War II and the United States was threatened with recession, according to an interview by the Austrian daily Standard.

‘The situation is much more serious than any other financial crisis since the end of World War II,’ Mr Soros was quoted as saying.

He said that, over the past few years, politics had been guided by some basic misunderstandings stemming from something which he called ‘market fundamentalism’ – the belief financial markets tended to act as a balance.

‘This is the wrong idea,’ he said. ‘We really do have a serious financial crisis now.’

Asked whether he thought the US was headed for a recession, he said: ‘Yes, this is a threat in the United States.’

He added that he was surprised how little understanding there had been on how recession was also a threat to Europe.

European shares fell nearly 6 per cent on Monday, their biggest one-day slide since the Sept 11 attacks of 2001, as fears of a US recession and more writedowns in the financial sector sparked a broad-based selloff.

In Washington, US Treasury Secretary Henry Paulson said that the US economy remained resilient and has healthy long-term fundamentals, but has slowed ‘materially’ in recent weeks.

Warning that, in the short term, risks were clearly to the downside, he said that Congress and the administration need to agree quickly on a package of tax cuts and other measures to boost the economy.

‘Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible,’ Mr Paulson said in remarks to the US Chamber of Commerce as House Speaker Nancy Pelosi and leaders in both parties prepared to meet President George W Bush at the White House to discuss a stimulus bill.

Such legislation presumably would involve tax rebates, business tax cuts and funding for a Democraticled call for additional food stamp and employment aid.

 

Source: AP, Reuters (Business Times 23 Jan 08)

Governments urge calm in face of market turmoil

Ministers in Asia and Europe advise investors to stay rational and not overreact

HONG KONG – GOVERNMENTS urged calm yesterday while calling for international cooperation to cope with a global slide in stock markets sparked by fears of a United States recession.

Asian markets experienced a day of heavy losses, with Hong Kong share prices suffering their biggest ever one-day slide, closing down 8.7 per cent, while bourses in Europe also opened in negative territory.

French Finance Minister Christine Lagarde said US President George W. Bush’s US$140 billion (S$201.9 billion) stimulus package for the American economy was a ‘bit vague’ and called on him to spell out his plans more fully.

‘I think he must go further to explain precisely how these billions of dollars are going to be injected into the economy,’ Ms Lagarde told French radio, as French share prices shed 2.57 per cent at the start of the day’s trading.

In Japan, Economics Minister Hiroko Ota told a news conference that the government saw no need for the time being to intervene to halt the rout.

‘Stock markets across the world are falling, and it basically stems from the US,’ she told reporters, before Japanese share prices tumbled 5.65 per cent to a 28-month low.

‘It is difficult at the moment to mull over action by Japan alone. Instead, we should cooperate globally,’ she said.

Mr Bush announced his economic stimulus package of tax cuts and other measures last Friday, but the proposal has failed to allay concerns about the health of the world’s No.1 economy.

Indian Finance Minister Palaniappan Chidambaram, whose country’s shares lost more than 7 per cent in early afternoon trade, urged investors to ignore the financial woes in the West.

‘My advice to investors is to stay calm,’ he said. ‘Corporate profits are high, corporate income tax is at an alltime high in terms of growth. There’s no reason at all to allow the worries of the Western world to overwhelm us.’

Australian share prices plunged by 7.1 per cent yesterday in the biggest one-day fall since October 1997, but the government said the country was likely to be able to weather the storm.

‘We are well-placed to ride out the turbulence that flows from events in the US, even though we are not immune to it,’ said Treasurer Wayne Swan.

‘The prospects for ongoing growth in Asia and the developing markets are assisting us to withstand the fallout occurring elsewhere.’

Meanwhile, European finance ministers said a global stock market slump and an economic slowdown in the US threaten to slow growth in Europe more than forecast.

‘The economic situation and financial markets are highly volatile and uncertain, a good deal more uncertain than usual,’ Luxembourg Finance Minister Jean-Claude Juncker said on Monday in Brussels after presiding over a meeting of counterparts from the euro region.

‘If there is a real slowdown in the US, obviously that would be felt in the euro zone.’

Stock market volatility has heightened uncertainty on the outlook for economic growth in the 15 nations that use the euro, according to a European Union briefing document obtained by Bloomberg News.

The draft document was discussed at Monday’s meeting of finance ministers.

Still, ‘it would be a mistake to fall victim to excessive pessimism’, Mr Juncker told a press conference after the meeting. ‘We shouldn’t overreact to events on the stock exchange.’

AGENCE FRANCE-PRESSE, BLOOMBERG NEWS

DON’T BE OVERWHELMED

‘My advice to investors is to stay calm. Corporate profits are high, corporate income tax is at an all-time high… There’s no reason to allow the worries of the Western world to overwhelm us.’

MR CHIDAMBARAM, India’s finance minister

Source: The Straits Times 23 Jan 08

Recession in US, Europe could shake Asia, S’pore

Region still relies heavily on world’s biggest markets, say economists

A RECESSION in the United States and Europe would badly hurt Asian economies, including Singapore’s, which still rely heavily on these two export markets for growth, according to economists.

Indeed, analysts at Lehman Brothers believe economic growth in Singapore could slump to as low as 2.5 per cent this year, if the worst-case scenario of a recession occurs. The official forecast is for growth of 4.5 per cent to 6.5 per cent.

Economists said yesterday that while the region’s economies have managed to stand on their own feet in recent years, their fortunes are still closely tied to external conditions.

Most economists are maintaining forecasts for a more benign slowdown, but they concede that risks of a severe downturn are on the rise.

‘We are probably only one shock away from the US economy tipping into a recession,’ said Lehman chief global economist Paul Sheard. ‘One thing that we will be thinking about the next week or so: Are we seeing that one shock now hitting the US economy in the form of this equity market meltdown that is unfolding this week?’

Global share prices have crashed since the start of the year and are accelerating their declines amid rising fears that a US recession may send the world economy into a tailspin.

Earlier theories that Asia’s booming economies are plotting their own destinies and escaping this plight are dissipating fast.

‘We don’t really buy the decoupling idea in its strong form,’ said Dr Sheard, adding that it is very unlikely that demand from Asia and other emerging markets can offset a slowdown in the US and Europe.

Singapore is especially vulnerable, given its small and open economy, said Mr Robert Subbaraman, who heads Lehman’s economic research for Asia, excluding Japan.

He believes overall Asian growth this year could fall by 4.5 percentage points from last year’s 8.7 per cent, if the rest of the world goes into recession. Singapore’s growth could come down to between 2.5 per cent and 3 per cent, he said.

For the moment, Mr Subbaraman is still hoping that aggressive US interest rate cuts will avert a recession to support a 5.3 per cent growth in Singapore and a 7.6 per cent expansion in the region.

This scenario, however, brings risks of an overheating economy, as foreign capital inflows drive up inflation to form possible asset bubbles in the region, he warned.

United Overseas Bank economist Ho Woei Chen said a US recession would hit Singapore’s export sector very hard.

‘Although exports to China have increased, enddemand is largely still in the US,’ he said.

Citigroup economist Chua Hak Bin said a 1-percentage-point reduction in US growth would cut Singapore growth by 1.7 percentage points.

He said a contraction in the US and Europe could lower Singapore growth from his current forecast of 5.6 per cent to between 3 per cent and 4 per cent. ‘Ultimately, manufacturing will be hit, as well as trade-related services such as wholesale and transport.’

Barclays economist Leong Wai Ho, though, is much more sanguine.

He tips Singapore growth at 6.5 per cent this year, purely on the strength of the domestic economy.

‘We already expect exports to contribute very little to growth,’ he said, pointing out that last year’s strong growth came amid a weak export performance.

Instead, private consumption, fuelled by record tourist arrivals and investments in the construction sector, should provide a buffer.

Projects, like the integrated resorts, are highly unlikely to be disrupted, while the record new manufacturing investments that Singapore won last year will provide support, Mr Leong said.

‘We have never entered a US recession from such a strong position. We are going into this with good quality, broad-based growth.’

 

Source: The Straits Times 23 Jan 08

Analysts see Asian economies weathering a US recession

Reason: Asia is now less dependent on the US economy

(BANGKOK) Asia would be able to weather any recession in the United States, analysts say, because rising trade and investment within the region make it less dependent on the US economy than in the past.

While a severe downturn in the US would drag on Asian growth by eroding demand for exports, a rapidly growing middle class is fuelling orders for cars, electronics and housing – much of which will be supplied from Asia itself.

Voracious demand for oil, iron ore and other commodities to build roads, sewage systems, and office buildings – especially in the booming economies of China and India – will also help sustain the region through any US slowdown.

‘The US economy is not that important anymore,’ Hans Timmer, a World Bank economist, said in Singapore earlier this month.

Excluding Japan, 43 per cent of Asia’s exports go to other nations in the region, Lehman Brothers calculates – up from 37 per cent in 1995.

‘China and India represent a bigger presence on the world stage than just a half dozen years ago,’ said David Cohen, director of Asian forecasting at Action Economics in Singapore.

A drop of one percentage point in US economic growth would shave 1.3 percentage points from China’s growth rate due to lower exports, Citigroup estimates.

Since China is growing so fast, that isn’t likely to make much of a dent. China’s economy will still expand 11 per cent this year, slightly slower than in 2007, Citigroup projects.

Lehman Brothers forecasts 2008 growth will drop to 9.8 per cent, still remarkably strong.

Most regional projections show some drop-off from 2007, but still reflect healthy expectations.

The UN Economic and Social Commission for Asia and the Pacific said 38 developing economies in the region – including China and India – will expand an overall 7.8 per cent this year, slightly lower than growth of 8.3 per cent in 2007.

Global growth, meanwhile, will moderate to 3.3 per cent in 2008 from 3.6 per cent last year, with any slowdown in the US largely offset by growth in developing countries, the World Bank projects.

But Rajeev Malik, an economist with JPMorgan Chase in Singapore, cautioned that growth in China and India could not make up all the slack of a US downturn.

‘Demand in industrial countries is still pretty important for the rest of Asia,’ Mr Malik said. ‘While China, and to some extent India, offer some offsetting demand, there will still be some downshifting in activity if the US goes into recession.’

If the US economy does contract, India’s growth will likely slow to 7 per cent from the current rate of about 9 per cent, he predicted.

Asian stock markets have tumbled in recent weeks amid worries that a slowdown in the US will hurt exporters’ profits.

Still, some analysts say some stocks appear oversold and the drop may present a buying opportunity given the region’s growth potential.

Japan, the world’s second-largest economy, may suffer the most from a US contraction.

Ryutaro Kono, chief economist at BNP Paribas in Tokyo, predicts the nation’s economic growth will drop this year to about half of the 2 per cent it has marked in recent years.

Lower demand for exports could even have a silver lining for China by restraining inflation, which has soared to the highest level in more than a decade.

‘If China’s exports slow down significantly, you definitely will see lower prices rather than inflation,’ said Minggao Shen, an economist with Citigroup in Beijing.

But he did warn that weaker export demand could leave Chinese manufacturers with overcapacity problems.

 

Source: AP (Business Times 22 Jan 08)

Southern China fights inflation by hiking wages

Officials hope raise will offset rising prices and stave off social unrest

SOUTHERN China took steps to combat rising inflation yesterday with the manufacturing hub of Guangdong province set to raise minimum wages by 13 per cent after the Chinese New Year.

Over in the autonomous casino enclave of Macau, its government yesterday also proposed a 7 per cent pay rise for civil servants.

The moves come as soaring property prices helped push up inflation to over 5.3 per cent.

Guangdong’s labour chief Fang Chaogui said yesterday that the rise of 12.9 per cent – to be introduced in stages – will offset spiralling consumer prices, which many fear could lead to social unrest, especially among low-income households.

Prices of food soared 9.1 per cent on average across the province last year, compared to just 2.4 per cent in 2006.

Guangdong’s consumer price index rose 3.7 per cent in 2007 – the biggest jump in a decade.

‘The plan to raise the minimum wage has been submitted to the provincial government for approval and should be ready for implementation after the Chinese New Year,’ Mr Fang told the media in Guangzhou, the provincial capital.

While the Guangdong authorities have raised minimum wages several times in recent years, these were aimed more at turning the region’s labour-intensive manufacturing base into a high-value, service-oriented hub rather than warding off inflation.

Guangdong governor Huang Huahua pledged during the province’s recent party congress meetings to cap inflation at 4 per cent this year.

Academics and analysts welcomed the rise in minimum wages, given that inflation and a widening salary gap could further fuel social tensions in the affluent south, where an increasing number of people have become millionaires following the opening up of China’s economy over two decades ago.

Guangdong was among the first areas in China to be liberalised, and this attracted a flow of investments from the neighbouring financial hub of Hong Kong.

As an economics professor at Guangzhou-based Jinan University noted, the difference between average and minimum wages on the mainland as a whole still lags behind international standards.

Globally, minimum wages typically make up 40 per cent to 60 per cent of the average wage – a benchmark that mainland China has not yet reached, said Professor Han Zhaozhou.

The minimum wage in Guangzhou, he noted, was 780 yuan (S$150 ) per month in 2006 – or just over 25 per cent of the city’s average pay of 3,027 yuan.

‘More raises in minimum wages, in small increments each, will better correct this discrepancy,’ he said.

Across from the Guangdong city of Zhuhai, Macau plans to raise public wages, with starting salaries in the civil service rising from 5,500 patacas (S$900 ) to 5,900 patacas.

However, analysts feel that the increase is not enough.

They note that civil service wages still lag behind those in the private sector, which has helped to push Macau’s medium wage level to 6,000 patacas now from about 3,500 patacas 10 years ago.

Fuelled by a boom in the gaming and entertainment sector, housing prices in Macau have as much as doubled over the past two years.

‘Civil servants are not likely to think much about the proposed raise, which means the usual trend of them moving into the private sector should remain strong,’ Macau University professor Eilo Yu told The Straits Times.

 

Source: The Straits Times 21 Jan 08

Dubai govt investment arm eyeing China, says CEO

(SINGAPORE) Dubai government investment agency Istithmar is mulling investments in China, the Wall Street Journal quoted its chief executive as saying yesterday.

Istithmar comes under the umbrella of the state-owned Dubai World, which also includes DP World, a container port handler that was forced by lawmakers in the United States to sell its US assets over security concerns.

‘Everyone is aware of the backlash DP World faced in the US and as a result, sovereign wealth funds are looking towards non-developed markets to avoid such a backlash,’ Istithmar chief executive David Jackson was quoted as saying on the website of the Journal. ‘Countries such as China, where we recently opened an office, are very welcoming to sovereign wealth funds, so more are looking to invest there.’

DP World was forced to sell its US assets after agreeing to buy British ports and ferries group P&O for US $6.8 billion last year. P&O operated at six terminals in the US. Dubai World has a multi-billion dollar global portfolio, including P&O, US retailer Barney’s, a stake in the United Kingdom’s Standard Chartered banking group, and about US$20 billion in real estate assets around the world outside of Dubai.

‘There is a lack of trust in sovereign wealth funds and better initiatives are needed to curb such suspicions,’ Mr Jackson said. Asian and Middle Eastern sovereign funds have made headlines recently by acquiring stakes in major financial firms such as Merrill Lynch, Citigroup and UBS.

 

Source: Reuters (Business Times 18 Jan 08)

CHINESE ECONOMY’S SUPER-GROWTH

‘Growth’ problems won’t go away yet

THE Chinese economy, having chalked up an average growth rate of 9.7 per cent for over two decades, sustained another year of double-digit growth last year, at 11.5 per cent. This was first announced by Premier Wen Jiabao on Nov 20 last year whilst visiting Singapore. Soon after this, the Chinese Academy of Social Sciences put 2007 growth at 11.6 per cent. After the usual statistical adjustment, real growth is likely to be 11.6 per cent or slightly higher.

Since its accession to the World Trade Organisation (WTO) in December 2001, China has experienced doubledigit economic growth rates averaging 10.6 per cent. As a result, its total gross domestic product (GDP) last year was almost double its 2002 level. China, already a huge economy of almost US$3.2 trillion (S$4.6 trillion) at market exchange rates, is about to displace Germany as the world’s third-largest economy.

When a mammoth economy like that grows so fast, the effects can reverberate far and wide, affecting global levels of production, consumption, trade, and financial movements.

In fact, last year the Chinese economy contributed about as much to global GDP as the United States.

East Asian economies such as Japan, South Korea, Taiwan and Singapore have also enjoyed growth at near double-digit rates for two to three decades. But they have never registered double-digit rates of growth for five years in a row like China. The country’s ’super-growth’, with annual inflation kept below 3 per cent, is quite unprecedented, particularly since China is already a large economic powerhouse with a huge base.

Such growth has even taken China’s economic policymakers by surprise. The 11th Five-Year Programme (2006-2010) had envisioned a potential annual growth rate of only 7 to 8 per cent. As a result, the Chinese leadership was initially quite worried about economic overheating. Indeed, foreign commentators have for some time anticipated an imminent hard landing.

Why has China’s super-growth been able to consistently defy gravity? High growth has been mainly propelled by high levels of domestic fixed investment, which has been growing at an average rate of 26 per cent since 2002. Domestic consumption, while a less important source of growth, has also been growing at double-digit rates (around 12 per cent for the same period).

Foreign trade and foreign direct investment have also contributed to economic expansion, with exports growing over 30 per cent a year since China joined the WTO. More significantly, the bulk of investment spending every year goes to infrastructure building and industrial expansion (which in turn builds up capacity for further growth), with a relatively smaller proportion for property and housing development.

Rare exception

INDEED, China is a rare example of an economy that has sustained high levels of capital investment over a long period. China has regularly devoted almost 45 per cent of its GDP to gross domestic investment. This has been matched by an equally high level of gross domestic savings (almost 50 per cent). Chinese households are fabulous savers.

The retained income of corporations is also an important part of domestic savings, as state-owned enterprises usually plough back their earnings into investment instead of redistributing them to shareholders. In short, there is no scarcity of capital for domestic investment.

The pro-growth policies of the central government are well known. The ruling Chinese Communist Party critically depends on good economic growth for social stability as well as political legitimacy.

The central government is always inclined to mobilise domestic savings as cheap (in fact, subsidised) capital for many large-scale infrastructure projects, from highways and railways to ports. This explains how China constructed the world’s second-largest highway network after the US in just over a decade.

Indeed, such ‘growth bias’ has extended all the way down to provincial and local governments. These governments are vying for more foreign direct investment for industrial expansion. They also want more domestic capital for infrastructure-building in order to generate more local employment and deliver economic growth.

Deeply entrenched

HIGH economic performance is of critical importance to the political careers of local officials, though environmental protection has recently been added as another indicator of performance. The pro-growth institutional structure in China is indeed extensive and deeply entrenched.

Economic theory suggests that decade-long growth and low inflation is the result of a rise in total factor productivity. Various academic studies and much anecdotal evidence indicate that the Chinese economy has indeed experienced substantial productivity gains. Wage increases in recent years offer a good example of labour productivity growth. It stands to reason that the heavy investment in physical and human capital, the successful financial sector reform, the extensive technology spillovers (and the learning effect) from multinationals, together with China’s integration with the global economy, must have borne fruit.

China has also exhibited a highly impressive external sector performance, as manifested in its swelling foreign reserves, rising trade surplus, and extremely low external debt. All these show that the prolonged economic boom was not built on a house of cards, but on real economic fundamentals.

But the fact that sustained growth is supported by strong economic fundamentals does not mean that the economy will not overheat or run into other constraints. Any economy experiencing a long period of high growth will inevitably develop structural tensions, giving rise to various distortions and imbalances. Cracks will show up sooner or later.

Inflation has already become a problem. The consumer price index (CPI) began to move up in February (2.7 per cent) last year, initially because of rising food prices. It soon snowballed to 6.5 per cent in October and further to 6.9 per cent in November, the highest in more than a decade. China’s annual inflation for last year as a whole is likely to exceed 4.7 per cent.

This is still not serious in terms of ‘core inflation’, that is, excluding food items. But it is sufficient to cause the government to take action. This is partly because the current inflation rate has well exceeded the long-held ‘comfort level’ of 3 per cent, and partly because it is set to rise further in the months ahead after ‘importing’ more international inflation, partly as a result of rising energy prices.

In late November, China’s top leadership, the Politburo, led by President Hu Jintao, declared that preventing economic overheating and curbing inflation would be the country’s most important policy priorities this year.

Overheating and inflation have been officially described as ‘twin economic woes’.

The subsequent annual Central Economic Work Conference reaffirmed the same policy line and came up with specific macroeconomic controls and price-stabilising measures. China’s top economic planning body, the National Development and Reform Commission, urged local authorities to stay vigilant against chain reaction price hikes.

It remains to be seen how far the government wants its retrenchment policies to cool growth. If the government is really determined to tackle the underlying causes of China’s long-term overheating, it will have to push much more vigorously for effective policy measures that go beyond battling inflation. It will need to include a broader range of policies to address the yuan exchange rate and macroeconomic imbalances.

All signs point to another year of strong growth of about 10 per cent this year, but with higher inflation, possibly from 5 to 6 per cent.

Just a few months ago, some analysts were unsure if inflation would pose a real threat to economic growth and social stability. The socalled ‘headline inflation’ (6.5 per cent for October and 6.9 per cent for November) was still reasonable for an economy growing at doubledigit rates. The rise in the CPI was primarily driven by increases in food prices (which constitute a third of the weighting in the CPI basket).

The price hike was actually not across the board, as many manufactured products still faced problems of overproduction.

Hence, the government refers to current inflation as ’structural inflation’. ‘Core inflation’ remains quite subdued, rising to just around 1.5 per cent last year, again much better than in many countries in the region. Except for pork (in short supply due to an epidemic that led to culling of pigs), China is facing no serious food shortages. In fact, a bumper harvest was recorded last year.

Overall, China today is facing a kind of cost-push inflation. The government still has the means to contain it, using such measures as removing supply bottlenecks, stabilising prices through controls and subsidies (particularly fuel subsidies), increasing imports, and curbing speculative activities.

Inflationary expectations

HIGHER food prices are actually good for farmers, as they reverse the terms of trade in their favour and thus transfer more resources to rural development. If the government could tolerate annual inflation at between 5 and 6 per cent, then officials would not be worried about economic overheating. But the fact is that Beijing finds 4 to 5 per cent inflation unacceptable.

The Politburo has already adopted tighter macroeconomic control measures. Whether or not the present rate of core inflation is actually serious is now a matter of semantics.

The Chinese people, who have been used to years of low inflation or even deflation, are understandably sensitive to even mild inflation. Urban dwellers are easily agitated over food price hikes, and these areas still have a large number of low-income people, notably migrant labourers.

But inflation can hurt even the members of the more affluent middle class, who now have to cope with negative interest rates. In fact, some have started to withdraw their savings to invest in the stock market and the property market. This is a sign of rising inflationary expectations, which will, in turn, fuel further inflation.

For a leadership known to have a strong fear of social instability, recent policy shifts targeting economic overheating and inflation are certainly rational and timely. What remains to be seen is the effectiveness of the policy package. Given Beijing’s strong vested interest in high growth, the strength of the government’s commitment to reducing overheating also remains to be seen.

Viewed from the demand side, inflation is a monetary phenomenon. Because of China’s persistent current and capital account surpluses, the People’s Bank of China has been unable to stem the rapid growth in money supply. This is despite the fact that the central bank raised interest rates six times and the reserve requirement ratio for commercial banks 10 times last year.

Because the yuan is grossly undervalued, the government’s ‘proactive, controllable, and gradual’ exchange rate reform is evidently not working. This is partly because of leakages in the capital control system and partly because of the increasing cost of sterilising large foreign capital inflows.

Last year, the yuan appreciated by about 6.9 per cent against the US dollar (compared with 3.4 per cent in 2006) and 1.8 per cent against the yen; but weakened by about 4.2 per cent against the euro. Overall, the yuan has risen about 13 per cent against the US dollar since July 2005, when the fixed exchange rate regime ended.

But the yuan’s lack of flexibility provides an opportunity for the influx of speculative capital, as well as a major source of excessive domestic liquidity. The central bank’s recent move to widen the yuan’s trading band gradually is not expected to be very effective. It could even invite more speculative capital inflows, given the big gap between the yuan’s nominal rate and effective exchange rate.

Underlying the yuan’s problems are China’s acute external and internal macroeconomic imbalances. These are, in turn, the cumulative results of the country’s high growth based on over-savings, over-investment and over-exports combined with under-consumption.

The Chinese government is not oblivious to these fundamental economic problems. In fact, the 11th Five-Year Programme is supposed to address such long-term issues. The central government has also emphasised the importance and urgency of more ‘balanced’ growth. However, the leadership, with its penchant for stability and the late Deng Xiaoping’s gradualist approach to reform, has become politically and institutionally incapable of undertaking bold reform measures.

This means that the government’s recent attempts to reduce overheating will only provide a breather. This year will not mark the end of China’s era of high growth. High growth (at around 10 per cent) will continue.

The fundamental problems associated with long-term high growth will also remain.

Professor John Wong is Research Director at the East Asia Institute.

Source: The Straits Times 18 Jan 08

US hurdles force Dubai state fund to look to China

Istithmar among such funds seeking out less developed markets to avoid excessive scrutiny DUBAI government investment agency Istithmar is considering investments in China, after being rebuffed in the United States, The Wall Street Journal reported yesterday.

Istithmar comes under the umbrella of state-owned Dubai World, which also includes Dubai Ports World (DP World), a container port handler that was forced by US lawmakers to sell American assets over security concerns.

‘Everyone is aware of the backlash DP World faced in the US, and as a result, sovereign wealth funds are looking towards non-developed markets to avoid such a backlash,’ Istithmar chief executive officer David Jackson was quoted as saying on the Journal’s website.

‘Countries such as China, where we recently opened an office, are very welcoming to sovereign wealth funds, so more are looking to invest there.’

Asian and Middle Eastern sovereign funds have made headlines recently by acquiring stakes in major financial groups such as Merrill Lynch and Citigroup in the US and Switzerland’s UBS.

Merrill and Citigroup have received billions of dollars in cash infusions from sovereign wealth funds, including those of Singapore. And they are in talks to get even more capital from outside investors – raising eyebrows in Washington, where lawmakers have more closely scrutinised foreign investments in recent years, the Journal said.

DP World was forced to sell its US assets after agreeing to buy British ports and ferries group P&O for US$6.8 billion (S$9.7 billion) last year. P&O operated six terminals in the US.

Dubai World, whose businesses include property developer Nakheel Group, has a multibillion-dollar global portfolio, including P&O, US retailer Barney’s, a stake in British bank Standard Chartered and about US$20 billion in real estate assets around the world outside of Dubai.

‘There is a lack of trust in sovereign wealth funds and better initiatives are needed to curb such suspicions,’ Mr Jackson said. ‘Countries such as the US, Britain and Germany are very reluctant to allow sovereign wealth funds in.’

 

Source: REUTERS (The Straits Times 18 Jan 08)

China increases penalties for price-fixing to fight inflation

Firms that hoard goods can be fined up to one million yuan: Cabinet

(BEIJING) China’s Cabinet yesterday sharply increased penalties for price-fixing, expanding an anti-inflation campaign that has failed to cool a surge in politically sensitive food costs.

Food costs soared by 18.2 per cent in November, pushing the overall monthly inflation rate to 6.9 per cent, its highest level in 11 years.

Companies that hoard goods or try to fix prices can be fined up to one million yuan (S$197,055), up to 10 times the previous penalty, the Cabinet said on its Website.

The increased penalties are meant to ’strike (at) the activities of driving up prices through hoarding or cheating’, the government’s Xinhua news agency said.

In another development, official sources told Reuters that China’s consumer price inflation in December eased to 6.5 per cent from a year earlier, off an 11-year high of 6.9 per cent in November, official sources said.

The consumer price index for all of 2007 probably rose 4.8 per cent compared with a 1.5 per cent increase in 2006, the sources said.

If confirmed when official data are released next week, the December drop would provide some relief to policy makers in Beijing, who have voiced growing alarm about inflationary trends.

But Zhou Xiaochuan, central bank governor, has long expressed optimism that December’s inflation data would show a marked moderation because of a high base effect from a year earlier.

A pace of 6.5 per cent would match October and August as the second fastest on the year.

China International Capital Corp, a top China-based investment bank, raised its forecast for 2008 full-year inflation to 5-5.5 per cent, a full percentage point higher than its previous range.

Ha Jiming, its chief economist, said global oil and grain prices and domestic pork prices would provide most pressure, while China’s new labour law would also push production costs up.

Mr Ha suggested that Beijing lean towards credit tightening, yuan appreciation and agricultural subsidies to ease inflation.

The government’s intervention, announced last week, to hold down prices for basic necessities, potentially including cooking oil and rice, was not a long-term solution, he said.

‘Price controls will not alter people’s expectations on inflation, and negative real interest rates will continue to exist,’ Mr Ha wrote in a note to clients.

Vice-Finance Minister Li Yong said on Sunday that China would have a tough time in 2008 battling inflation.

Strong rumours of a 6.5 per cent December reading have been circulating for several days in China’s financial markets which, nevertheless, remain unconvinced that inflation has peaked.

In August, the government accused Chinese instant noodle makers of pushing up food costs by illegally colluding to raise prices by up to 40 per cent. It has given no indication whether it has evidence of illegal behaviour by other producers.

The price surge, which began in mid-2007, has so far been limited to food and is blamed on shortages of pork and grain. The government raised gasoline and diesel prices in November to curb rising demand, but said that should add only 0.05 percentage points to monthly inflation.

The surge in food prices has been especially painful for China’s poor majority, who spend up to half their incomes on food. And the government worries that sustained high inflation for food could start to push up prices in other parts of the economy.

Higher food costs will hit hard as China prepares for the Chinese New Year in early February, an important family holiday when households stock up on groceries to throw banquets.

Suppliers of meat, eggs and other food have been ordered to report price increases over 5 per cent to the government.

In September, the government froze prices of cooking oil and some other basic food items that still are state-set.

But prices for meat, vegetables, noodles and other processed food are dictated by the market and have risen sharply.

Beijing also has tried to increase food supplies by raising subsidies to pig farmers and imposing curbs on grain exports.

But Premier Wen Jiabao warned last week that with global prices for crude oil, grain and other commodities rising, pressure for Chinese prices to rise ‘is still great’.

Beijing has raised interest rates repeatedly to curb a boom in construction and investment that regulators worry could lead to financial problems if borrowers fail to repay loans. Economists say the inflation spike is due to food shortages and has nothing to do with those concerns.

 

Source: AP, Reuters (Business Times 15 Jan 08)

Big China firms’ bonds better: ING

(HONG KONG) Investors in Chinese property bonds should adjust their portfolios in favour of larger, diversified firms and cut their exposure to smaller developers which are focused on fewer cities, ING Bank said in a report yesterday.

The bank advised bond investors to remain invested in bigger firms like Shimao Property Holdings, Agile Property Holdings and Hopson Development Holdings, and said it expected less bond issuance from large developers this year.

It also recommended that investors pare positions in bonds issued by Greentown China Holdings and Shanghai Real Estate due in 2013.

Tightening credit conditions in China, growing risk aversion in global markets, a property-sector slowdown in some Chinese cities and concerns about fresh bond supplies have caused a widening of credit spreads in the Chinese property sector recently, the report said.

‘Despite our long term positive outlook on the sector, spreads are likely to stay wide in the near term due to soft market sentiment,’ it said.

‘However, we do not see any immediate credit-specific problems, especially for large developers.’

Bonds issued by firms with higher ratings, large land banks and diversified geographic exposure were worth buying because of their strong sales and resilience to property-sector downturns in selected cities, it said.

ING analyst Steve Chow said that spreads on Shimao’s bonds maturing in 2016 and on Lai Fung Holdings’s bonds maturing in 2014 had widened less than the spreads on other Chinese property bonds due to their respective credit strengths.

He expects more bond offerings from Chinese property companies this year, with small and medium developers bearing a low BB and B credit rating seen as the primary source.

Firms that had initial public offers last year are also potential bond issuers in 2008, he said.

Large firms, with the exception of Country Garden Holdings Co and Agile Property, are likely to make few issuances in 2008 because they are either highly geared or have prudent expansion strategies, he said.

 

Source: Reuters (Business Times 15 Jan 08)

China may be cooling off at the wrong time

Global economy will take double hit if US goes into recession

(PARIS/BEIJING) China is starting to gain control of its turbocharged economy, just as a US slowdown raises the risks of doing so.

A narrowing trade surplus and declining money- supply growth are among the first signs that China is pulling back from its fastest expansion in 13 years. The government has raised interest rates six times in a year, restricted credit, frozen some prices and let the currency appreciate to dampen growth and inflation.

The risk is that, with months of effort to cool off China finally taking hold when the US is already flirting with recession, both main engines driving the global economy may power down at the same time.

‘As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown,’ said Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase. ‘If the central bank raised interest rates too much, it would damp domestic demand and increase the danger of economic downturn.’

China is still on a tear. Its economy expanded 11.5 per cent last year, according to a government estimate, and it contributed 17 per cent to global growth, the same as the US. With prices rising at the fastest pace in 11 years, the ruling Politburo and the central bank are trying to engineer a cooling of growth that doesn’t also throw millions of China’s 1.3 billion people out of work.

The tougher policies may be starting to pay off, data showed on Jan 11. Last month’s trade surplus shrank to US $22.7 billion from US$26.2 billion in November, and the broadest measure of money supply rose by the least in seven months.

Vice-Finance Minister Li Yong said on Sunday that China plans to better coordinate fiscal and monetary policies in 2008 to further cut the trade surplus and mop up excessive liquidity. Yi Gang, a vice-governor of the People’s Bank of China, said the central bank ‘will decisively fight against inflation and implement tight monetary policies’.

Meanwhile, Goldman Sachs last week joined Morgan Stanley and Merrill Lynch in forecasting that the US will slip into recession this year. Yesterday, Goldman cut its 2008 growth forecast for China to 10 from 10.3 per cent.

The two economies are closely linked. The US buys about 19 per cent of China’s exports. A cooling US economy could magnify the impact of China’s anti-inflation measures, said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. ‘A US recession would cause a major disruption to the Chinese economy,’ he said.

 

Source: Bloomberg (Business Times 15 Jan 08)

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

http://www.businesstimes.com.sg/sub/storyprintfriendly/0,4582,263785,00.html? (1 of 2)1/15/2008 10:55:38 AM

China economy may cool down at worst time

Combination of a US recession and a hard landing in China could cause global slowdown

PARIS – CHINA is starting to gain control of its turbocharged economy, just as a United States slowdown raises the risks of doing so.

A narrowing trade surplus and declining money-supply growth are among the first signs that the world’s fourth-largest economy is pulling back from its fastest expansion in 13 years.

The government has raised interest rates six times in a year, restricted credit, frozen some prices and let China’s currency appreciate to dampen growth and inflation.

The risk is that, with months of efforts to cool off China finally taking hold when the US is already flirting with a recession, both main engines driving the global economy may power down at the same time.

‘As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown,’ says Mr Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase.

‘If the central bank raises interest rates too much, it will dampen domestic demand and increase the danger of an economic downturn.’

China is still on a tear. Its economy expanded 11.5 per cent last year, according to a government estimate, and it contributed 17 per cent to global growth, the same as the US.

With prices rising at the fastest pace in 11 years, however, Beijing is trying to engineer a cooling of growth that does not also throw millions of China’s 1.3 billion people out of work.

The tougher policies may be starting to pay off.

Last month’s trade surplus shrank to US$22.7 billion (S$32.4 billion) from US$26.2 billion in November, and the broadest measure of money supply rose by the least in seven months – prompting Goldman Sachs yesterday to cut its growth forecast this year for China to 10 per cent from 10.3 per cent.

Goldman last week joined Morgan Stanley and Merrill Lynch in forecasting that the US would slip into a recession this year for the first time since 2001.

The two economies are closely linked. The US buys about 19 per cent of China’s exports. A cooling US economy could magnify the impact of China’s anti-inflation measures, says HSBC Holdings chief China economist Qu Hongbin.

‘A US recession would cause a major disruption to the Chinese economy,’ says Mr Qu. ‘Aggressive tightening could prove to be an overkill.’

A 1-percentage-point slowdown in the US would trim China’s export growth by 4 percentage points and reduce gross domestic product by 0.5 percentage point, according to Mr Ma Jun, chief China economist at Deutsche Bank in Hong Kong.

A simultaneous slowdown in the US and China would be ‘bad news’, says Dr Nariman Behravesh, chief economist at Global Insight.

China’s trade with the rest of the world has been growing three times as fast as the global average since it joined the World Trade Organisation in 2001.

‘A combination of US consumer spending and Chinese imports has pulled the world economy along,’ says Dr Behravesh. ‘The combination of a US recession and a hard landing in China could push the global economy into a recession.’

Still, if Chinese leaders want to whip inflation, they may have no option but to keep raising interest rates and constraining credit and hope that any US downturn is short-lived.

Chinese consumer prices accelerated by 6.9 per cent in November from a year earlier, while producer prices rose at the fastest in more than two years.

The dilemma, says HSBC’s Mr Qu, is that China cannot afford to wait to discover the fate of the US economy.

Policymakers need to make a bet on whether domestic inflation or falling overseas demand is the bigger risk, he says.

BLOOMBERG NEWS

GROWTH BOOSTERS

A simultaneous slowdown in the US and China would be bad news because a combination of US consumer spending and Chinese imports has pulled the world economy along, says Dr Nariman Behravesh of Global Insight.

FINE BALANCE

‘As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown.’

MR FRANK GONG of JPMorgan Chase, who adds that if the central bank raises interest rates too much, it will dampen domestic demand and  increase the danger of an economic downturn

Source: The Straits Times 15 Jan 08

EU seeking partnership with China in Africa

Proposal comes as Chinese presence is eroding Europe’s influence in region

LONDON – THE European Union has announced that it is seeking Chinese cooperation in Africa.

EU Development Commissioner Louis Michel has pledged to present Beijing with an ‘African partnership’ when he visits China in March.

But Mr Michel, a former Belgian foreign minister known for his promotion of human rights, risks running afoul of Europe’s non-governmental organisations, most of which view China as a hindrance in Africa.

And, judging by the initial reactions from Beijing, the Chinese are not impressed by his concept either.

European governments are used to dealing with Africa on their own. After all, the overwhelming majority of African states are former European colonies.

Commercial links remain strong. In 2006 – the last year for which complete figures are available – Europe was still Africa’s top economic partner, accounting for S$425 billion worth of trade.

But the Europeans have watched with incomprehension and subsequent fury as China has made deep inroads into Africa.

The Chinese interest was initially in oil, gas and other raw materials. However, it has evolved into a far broader political and economic engagement that, while transforming the African continent, is also marginalising the Europeans.

According to Chris Alden, the author of a new book on Beijing’s African involvement, the Chinese are attractive to local governments because they finance infrastructure projects at a speed that the Europeans simply cannot match.

‘They have a very light touch when it comes to bureaucracy, while the EU is the master of bureaucracy,’ he points out.

And, while the Europeans anguish over the human rights implications of their investments, ‘China does not suffer from such concerns’, he adds.

Since the start of this decade, China’s trade with the world’s poorest continent has risen from virtually nothing to a total of S$71 billion in 2006. Beijing’s Export-Import Bank recently earmarked another S$30 billion specifically for African investments.

The Europeans are feeling the pinch from all directions. Their companies, which used to mine most of Africa’s raw materials, are now regularly trounced by the Chinese.

And, more importantly, African leaders – who now have China for financial and political support – are rejecting Europe’s traditional lectures about good governance and human rights.

Portugal, itself a former African colonial power, tried to reassert Europe’s voice by holding an Africa-EU summit last December. It was a total fiasco: African leaders refused to sign a new trade agreement which the EU offered, mainly because it imposed a demand to open local markets.

The Europeans have now decided that, if they cannot beat the Chinese, they had better join them. And the EU thinks it has something to offer.

Mr Michel believes that if China does not buy into Europe’s agenda, which concentrates on improving African governance, sooner or later the Chinese will repeat Europe’s old colonial experience: African governments will not repay their loans, and may repudiate their raw materials deals.

So, the EU leader hopes that, by making China an offer of partnership, the two trading blocks could agree on a common African agenda.

Unfortunately for Mr Michel, the Chinese are not interested.

‘We are happy to discuss African questions,’ said Mr Jiang Yu, a spokesman for China’s Foreign Ministry. But, he added, this can only take place by ‘respecting and listening to the opinions of the Africans’.

The EU may well be right in its prediction that China will ultimately be disappointed in Africa.

Yet the Chinese remain determined to find this out for themselves, without Europe’s help.

 

Source: The Straits Times 15 Jan 08

Developing nations to lift world economy amid US slowdown

They will be the biggest drivers of global growth as pace slows to 3.3% this year: World Bank

DEVELOPING nations will be key in helping the global economy mitigate the drag from a slowing United States.

With their domestic economies coming into their own, poor countries will be the world’s biggest growth driver this year, the World Bank said in a report yesterday.

And Singapore is especially well-poised to take advantage of this as it is located amid the hottest of the world’s emerging economies.

‘I do believe that there is an impact from whatever happens in the US economy on the developing regions,’ World Bank lead economist Hans Timmer said at a press conference to present the bank’s outlook for the world economy.

‘But the result is not that the world economy will be on its knees.’

The bank is predicting global economic growth will moderate to 3.3 per cent this year, due mainly to a slowdown in the US, the world’s biggest economy.

The US, mired in a severe housing market downturn that has caused much financial turmoil worldwide, is widely expected to decelerate further this year.

While the World Bank has estimated that the US should manage a modest 1.9 per cent expansion this year, fears of a recession appear to be rising, prompted by recent economic data.

‘We can certainly smell a US recession although we can’t taste one yet,’ said United Overseas Bank economist Thomas Lam.

Against this ominous backdrop, developing economies are emerging as a bright spot for the year. They are expected to grow 7.1 per cent this year, with East Asia’s growth stars clocking in at an average of 9.7 per cent.

‘Singapore benefits from its location in Asia, which has shown the strongest dynamism in the world,’ said Mr Timmers, who cited the region’s red-hot economies of China and Vietnam. He pointed out that developing nations have become much more resilient to external demand shocks in the past few years.

The US housing slowdown, for instance, began two years ago and has been hurting US imports of goods made in poorer countries.

But that has not derailed the developing world from its growth path as its robust domestic economies – bolstered by better economic policies, open borders and stronger supply-side structures – have been picking up the slack.

Many emerging economies have also been largely unscathed by financial problems caused by the US subprime crisis as their direct exposure to the crisis has been limited.

‘With that resilience, with their strong performance, developing countries are now mitigating the slowdown that is occurring in the US,’ said Mr Timmers.

He noted that the developing economies together equal the US economy in size.

‘But they are growing more than three times as fast. That means their contribution to global demand is more than three times as important as the contribution of the United States.’

Still, a sharp and drastic slowdown in the US remains a key risk to the developing world and the global economy.

Also, an overreaction by policymakers might result in bigger problems down the road.

The World bank warned that if central banks overstimulate the economy with over-aggressive rate cuts, asset bubbles could be created.

‘Commodity markets could tighten further, inflationary pressures would mount and financial imbalances would increase rather than recede.

‘Such a scenario could sow the seeds of a much sharper downturn in the medium term.’

 

Source: The Straits Times 10 Jan 08

Inflation and trade surplus driving yuan: Central bank

BASEL (SWITZERLAND) – CHINESE central bank governor Zhou Xiaochuan has said the trade surplus and faster inflation are driving the yuan’s appreciation.

The currency’s gains reflect ‘economic data’, Mr Zhou told reporters yesterday in Basel, where he was meeting Group of 10 central bankers.

The surplus, rising prices and Chinese institutions selling currency reserves ‘may be major factors to the formulation of the exchange rate’, he said.

The yuan has gained about 14 per cent against the US dollar since the end of a peg in July 2005. A stronger Chinese currency would help cool inflation by lowering import costs and slowing money inflows by pushing up export prices.

China’s trade surplus surged 52 per cent in the first 11 months of last year from a year earlier to US$238 billion (S$341 billion).

China is trying to prevent cash from the trade surplus from fanning inflation, asset prices and fixed-asset investment. The People’s Bank of China will keep monetary policy tight this year, Mr Zhou said last month.

The currency has reached 7.263 per US dollar, the strongest since the peg was abandoned.

Standard Chartered this month raised forecasts for the yuan. The currency may gain 9 per cent against the dollar this year and 7 per cent next year, economist Stephen Green wrote in a research report.

‘The primary reason for our change of view is domestic inflation and the increasing disquiet it is causing senior policymakers,’ he said. ‘Beijing is becoming ever more concerned about domestic inflation.’

China consumer prices surged 6.9 per cent in November from a year earlier, the fastest pace since December 1996, as food and fuel costs jumped. Producer prices rose 4.6 per cent, the biggest gain in more than two years.

A record 48 per cent of 20,000 households said prices were ‘too high and difficult to accept’, a quarterly survey released by the central bank last month showed.

About 65 per cent of interviewees expected prices to keep rising this year.

Source: BLOOMBERG NEWS (The Straits Times 8 Jan 08)

Consumption to hit record low

(BEIJING) China’s consumer spending, blamed for lacklustre contribution to the world’s fastest-growing economy compared with investment and trade, will hit a record low in more than two decades, despite anticipated higher growth in urban income than that of the aggregate economy, according to analysts.

The inflation-adjusted disposable income of Chinese urban residents would increase by about 13 per cent year-on-year in 2007, a report by the Chinese Academy of Social Sciences (CASS) said.

It would be the first time the growth of urban income had surpassed economic growth over the past five years, according to the report.

China’s economy was forecast to expand by about 11.5 per cent in 2007.

The country’s income growth also outpaced economic growth in 1979, 1986, 1990, 2001 and 2002.

The report said the income of Chinese farmers would also be at an 11-year high of 8 per cent growth for 2007.

Despite a rosy picture about income growth, consumption by Chinese residents remained at a low level.

It contributed about 36 per cent to the country’s gross domestic product (GDP) in the first three quarters, according to the report.

The 2007 figure would hit a record low against around 60 per cent in the period from the country’s opening up initiative in 1978 to 2002. The figure had slipped by bigger margins thereafter to reach a low of 50 per cent in 2006.

The smaller consumption contribution to the country’s sizzling economy, compared with an average 70 per cent across the world, had long been labelled a lame duck in powering the country’s economic growth.

The report said consumer spending was mainly dragged down by surging housing prices in 2007.

Many Chinese had chosen to hold off purchases of other commodities in response to runaway housing prices. Chinese traditionally considered housing as their most important purchase.

From January to November, housing prices in 70 major Chinese cities jumped 7.3 per cent year-on-year.

Housing prices were up at an annual rate of 10.5 per cent in November alone.

The November rate was the largest monthly gain since July 2005 when China started to cover more cities in its monthly housing price survey. The country’s top leaders have repeatedly called for a bigger role of consumption in the economic growth to relieve its reliance on investment and export.

The point was stressed again at the National Congress of the Communist Party of China in October last year.

 

Source: Xinhua (Business Times 5 Jan 08)

China’s growth, inflation expected to slow

SHANGHAI – CHINA’S economic growth and consumer price inflation are expected to slow moderately this year as cooling policies take effect and food supplies increase, a major government research institute forecast yesterday.

Gross domestic product growth is projected to ease to 10.8 per cent this year from an estimated 11.4 per cent last year, the State Information Centre said in a report published by the official Shanghai Securities News.

The centre, which is part of the National Development and Reform Commission, the top economic planning agency, predicted that consumer price inflation would drop to about 4.5 per cent for all of this year from an estimated 4.7 per cent in 2007.

The third and fourth quarters of last year saw the peak of food price inflation, and food prices should now rise more slowly as agricultural investment and production pick up, the centre said.

However, producer price inflation – prices at factory gates – is actually expected to rise, to 3.5 per cent from 2.9 per cent.

The centre cited rising prices of energy, raw materials and labour, and said that overall, industrial profits would trend downwards this year because of such pressures.

Growth in China’s trade surplus will slow this year, given overseas protectionism, uncertainty about the strength of the United States economy and policy steps taken by Beijing such as the abolition of export tax rebates and faster appreciation of the yuan, the centre forecast.

It estimated the trade surplus at US$328.4 billion (S$472.3 billion) this year, up 22.5 per cent from US$268 billion in 2007. That would represent a slower rise than last year’s estimated 51 per cent leap of the surplus.

China’s export growth is expected to slow to 19 per cent from 25.7 per cent in 2007, helping to slow growth in urban fixed asset investment to 24 per cent from 26.3 per cent, the centre said.

Investment in the real estate sector is forecast to ease to 25 per cent growth from 29.5 per cent.

The centre’s major forecasts were broadly in line with previous statements by other government officials and agencies.

Source: REUTERS (The Straits Times 3 Jan 08)

Bombs, security fears mar revelry as world greets 2008

(NEW YORK) Millions staged midnight parties at iconic landmarks around the world to ring in 2008, but bomb attacks and security fears quickly darkened New Year festivities in places.

In New York, hundreds of thousands of revellers crowded the fabled Times Square, braving cold temperatures and stringent security measures to see Mayor Michael Bloomberg release the New Year’s Eve ball on its 100th lowering, with a dazzling display of new environmentally-friendly lights.

But it was Sydney that got the global party going as more than a million people lined the harbour for fireworks. The giant steel archway of the Sydney Harbour Bridge was again the centrepiece of the traditional display in Australia’s main city, with a giant neon hourglass illustrating the theme of time passing.

An estimated 700,000 people were out on the damp London streets and crammed on riverbanks to watch the 10-minute fireworks display on the Thames, which focused on the giant London Eye observation wheel, police said.

However, bombs planted by suspected separatist rebels at discos and other entertainment centres rocked Thailand’s troubled south as revelry was at its peak. In Pakistan’s biggest city, Karachi, police stopped thousands from attending a traditional gathering on a beach overlooking the Arabian Sea amid security fears after the assassination of Opposition leader Benazir Bhutto.

Belgian authorities cancelled a traditional fireworks show in Brussels as the country went on maximum alert over possible terror threats. French authorities put 13,000 police on the streets of Paris and its troubled suburbs to deter any repeat of riots last month. But an estimated 400,000 French and foreign visitors still turned the Champs Elysees into a mass of car-honking festivities. Even more people – around one million according to police – packed streets around the Brandenburg Gate in what German media billed as the world’s biggest New Year’s party.

In China – set to host the 2008 Olympics in Beijing – President Hu Jintao called for world peace and development in his New Year address. ‘We sincerely hope people of all nations live under the same blue sky freely, equally, harmoniously and happily, and enjoy the achievements in peace and development of the humankind,’ he said. Thousands in Hong Kong ignored unusually low temperatures to see the fireworks in Victoria Harbour. In the northern Chinese city of Harbin, tourists strolled through a display of ice structures and some toasted the New Year in a bar made from ice blocks.

As tens of thousands of people flocked to Moscow’s Red Square, Russia’s President Vladimir Putin used his final New Year address as president to congratulate Russians on a ‘national renaissance’ driven by ‘colossal resources’, in a pre-recorded broadcast.

In Iraq, crowds surged into the streets of strife-torn Baghdad, setting off firecrackers and firing weapons and dancing in a rare moment of freedom from the daily violence that has recently eased.

 

Source: AFP (Busines Times 2 Jan 08)

Global economy facing threat of stagflation

Growth may slow to 4-year low and inflation could hit 10-year high

WASHINGTON – THE world economy is facing the risk of stagflation – the double whammy of suffering both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase.

The worst United States housing slump in 16 years, coupled with a tightening of credit by banks, have brought the world’s largest economy ‘close to stall speed’, according to former US Federal Reserve chairman Alan Greenspan.

At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

‘What lies ahead is a period of stagflation – slow or no growth combined with rising inflation – in the advanced economies,’ says Morgan Stanley co-chief global economist Joachim Fels.

Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a tenfold increase in oil prices drove both unemployment and inflation above 10 per cent.

Mr Feldstein, who heads the national bureau that serves as the arbiter of when US recessions begin and end, said the combination of a stalled economy and rising inflation could be seen as a form of stagflation.

‘It depends on how you want to define it,’ he said. ‘If you say an inflation rate of 3.5 per cent and a recession is stagflation, then we could have stagflation.’

Mr David Hensley, director of global economic coordination at JPMorgan, sees global growth of 2.4 per cent this quarter and next, and inflation at 3.5 per cent.

That is a far cry from the bad old days more than a generation ago, when world growth slowed to just 0.7 per cent in 1982 while inflation ran at an annual rate of 13.7 per cent, according to data compiled by the International Monetary Fund.

Even so, no less an authority than Mr Greenspan himself expressed concerns.

Speaking on ABC’s This Week programme aired last Sunday, he said a period of ‘remarkable disinflation’ is ending.

‘We are beginning to get not stagflation, but the early symptoms of it,’ he said.

The situation poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first. How they respond will go a long way in determining which danger proves to be bigger: a slumping global economy or rising prices worldwide.

For now, traders in futures markets are betting the Fed will remain focused on supporting growth, even after the latest government inflation reading last week showed consumer prices rose last month at the fastest pace in more than two years.

As of last Friday, investors put a 74 per cent probability on another quarter percentage-point cut in the Fed’s benchmark overnight rate next month, down from 100 per cent the day before.

If the global economy faced only the risk of faster inflation, the policy prescription would be clear: higher interest rates.

Yet, with growth slowing in the US and Europe, central banks remain under pressure to cut rates

 

Source: BLOOMBERG NEWS (The Straits Times 18 Dec 07)

IMF expects to lower global growth outlook

(ZURICH) The International Monetary Fund will lower its growth outlook as the continued credit crisis hurts the US and European economies, while global imbalances also weigh on growth, its top economist was quoted as saying.

‘Given this background, the numbers will indeed be weaker than in our latest World Economic Outlook,’ IMF chief economist Simon Johnson told Switzerland’s Finanz und Wirtschaft business newspaper in an interview on Saturday.

The IMF already lowered the forecasts from its July World Economic Outlook in October. But the numbers would in all likelihood have to be revised down again at the Fund’s next update in January, when it gives a preview of its April official forecasts. ‘We will not be able to stick to 1.9 per cent 2008 gross domestic product growth for the United States, nor to 2.1 per cent for Europe,’ Mr Johnson said. ‘By how much we will have to lower our GDP forecasts, we will know in January.’

The Fund already warned in November that the global economic growth outlook had dimmed, because of a troublesome mix of tighter credit terms and rising energy prices. The US dollar remained overvalued despite its continued drop since 2002, Mr Johnson said, which could be an obstacle for the US trade deficit to gradually diminish. Too high oil prices and the undervalued Chinese currency boosting exports in US trading partners formed the other side of the trade imbalance equation, he added.

The IMF did not have a foreign exchange target in mind for the greenback, but it should fall even further despite its persistent decline, to help diminish the US trade deficit and the chance of disorderly currency movements.

 

Source: Reuters (Business Times 17 Dec 07)

Factory, property spending growth slows on loan curbs

Industrial output in Nov grows slowest, while loans rose the least in 8 months

(BEIJING) China’s factory and property spending growth has 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 per cent in the first 11 months from a year earlier, the statistics bureau said yesterday, after gaining 26.9 per cent through October. Economists calculated November’s increase at about 26 per cent, down from October’s 30.7 per cent.

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 that 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 12:07pm after closing at 7.3692 on Thursday. The yield on a 15-year bond was little changed at 4.72 per cent.

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

Investment in the oil and natural-gas industries rose 9.6 per cent through November, a slower pace than the 12.3 per cent 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 (S$1.98 trillion), more than the size of Canada’s gross domestic product last year.

‘It’s too early to call it a slowdown – we need three months of data,’ said Stephen Green, senior economist at

Standard Chartered Bank 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 per cent of China’s GDP in 2006, compared with 24 per cent in Japan, 20 per cent in the US and 17 per cent 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 yesterday.

 

Source: Bloomberg (Business Times 15 Dec 07)

China’s ‘07 inflation may exceed 4.4%

Nov consumer prices likely at 6.5%, the highest in a decade

(BEIJING) China’s 2007 inflation may exceed 4.4 per cent, driven mainly by rising food prices, China’s banking regulator said.

‘We will focus on preventing the structural rise in prices from transforming into overall inflation,’ Liu Mingkang, chairman of the China Banking Regulatory Commission, said at a conference organised by Caijing magazine yesterday in Beijing. ‘Next year, the government will take a series of measures to stabilise prices of goods, including pork, food and cooking oil.’

Mr Liu’s comments underscore the Chinese government’s move to set new growth and inflation targets next year, as prices soar beyond state control. China’s November consumer prices may have risen 6.5 per cent, according to the median estimate of 21 economists in a Bloomberg News survey, the highest level in more than a decade, adding pressure on the central bank to raise interest rates a sixth time this year or let the yuan rise faster.

The pressure of economic overheating is still ‘very large’ and the central government will continue with measures to curb excess liquidity and rapid asset price growth, Mr Liu said yesterday without elaborating.

China on Dec 8 ordered banks to increase reserves by the most in four years, three days after the government said it would shift to a ‘tight’ monetary policy among measures to cool the world’s fastest-growing major economy.

Starting Dec 25, the central bank will require lenders to put aside a record 14.5 per cent of deposits, up from 13.5 per cent.

China’s economy, the world’s fourth largest, expanded 11.5 per cent in the third quarter from a year earlier.

China’s banks must enhance their risk management policies and ‘learn’ from the experience of US financial institutions in their exposure to sub-prime lending, the Chinese bank regulator said.

‘Risk control is very important for the financial sector, especially in the light of lessons learnt from exposure to subprime loans,’ Mr Liu said. ‘The turbulence from the sub-prime lending crisis is not over.’ The Industrial & Commercial Bank of China, the country’s largest bank by value, wrote off about US$58 million of investments in US mortgage-backed securities in the third quarter.

The regulator said it won’t interfere with Chinese banks’ plans to expand overseas. ICBC last week won shareholder approval to pay US$5.6 billion to buy a 20 per cent stake in South Africa’s Standard Bank. The Chinese lender, armed with enough cash to buy JPMorgan Chase & Co, has announced acquisitions in Indonesia, and Macau in the past year, and is buying a stake in a Thai Bank.

Meanwhile, China’s factory gate prices jumped 4.6 per cent in the year to November, overshooting forecasts by a wide margin and fuelling concern that inflation could pose a stiffer challenge than many anticipated.

Producer price inflation registered a 27-month high less than a week after China’s top leaders said a main goal for next year was to prevent inflation, hitherto concentrated in food prices, from spreading more widely in the economy.

The leap in the producer price index (PPI), which surpassed forecasts of a 3.4 per cent rise, sets the stage for today’s consumer price data.

 

Source: Bloomberg, Reuters (Business Times 11 Dec 07)

China’s policy shift signals concerns about inflation

BEIJING – CHINA’S announcement that it will move to a tight monetary policy from what it called the prudent stance of the past decade may not mark a radical new departure.

But the change in rhetoric suggests the Chinese leadership wants to signal concern about living standards as people fret about inflation.

Analysts say the pronouncement on next year’s policy, from a top-level economic policy committee this week, points to a more intensive use of tools already in play, such as the stricter enforcement of banks’ lending quotas.

‘The official announcement of ‘monetary policy biased towards tightening’ is not really new news,’ Mr Frank Gong, JPMorgan’s chief China economist, said in a note. ‘The authorities have been trying to tighten the monetary environment throughout this year.’

Inflation in October matched an 11-year high at 6.5 per cent and analysts do not expect it to be much different when data for last month is published next week.

Rises in the consumer price index have come almost entirely from food. Some economists argue that since core inflation, which excludes food and energy, has held steady near 1 per cent, the broader economy is not threatened.

That may miss the point. ‘Inflation is still very narrowly confined to a small group of food items, but they’re highly visible,’ said Mr Arthur Kroeber of research firm Dragonomics. ‘Authorities want to be super cautious that they’re seen to be vigilant about inflation.’

The government said on Wednesday its two main economic policy goals for next year were to prevent the economy from overheating and to keep food price inflation from spreading to other sectors.

A string of officials and government think tanks have forecast that inflation will taper to about 4 per cent next year. But the central bank made clear in its third-quarter monetary policy statement that the country could be in trouble if inflationary expectations became entrenched.

The latest batch of data showed meat and poultry cost 38.3 per cent more in October than a year before, vegetables were up 29.9 per cent and food oil climbed 34 per cent.

That makes a serious dent in the average Chinese wallet.

 

Source: REUTERS (The Straits Times 8 Dec 07)

OECD warns of inflation risk in China

PARIS – CHINA’S economy faces serious inflation risks which, if unchecked, could fuel yet more speculation in stocks and property, the Organisation of Economic Cooperation and Development (OECD) said yesterday.

Economic growth is likely to reach 10.7 per cent next year and 10.1 per cent in 2009, the OECD said in its twice-yearly Economic Outlook report, meaning China would experience seven consecutive years of doubledigit expansion.

‘The economy has moved to a situation of excess demand with increasing pressure on monetary aggregates,’ it said.

‘If this situation persists and global food prices do not moderate as expected, there is a risk of inflation becoming entrenched.’

The OECD’s warning coincides with a markedly growing emphasis on inflation among policymakers in Beijing.

Inflation in China hit a 10-year high of 6.5 per cent in August and again in October, while for the full year it is likely to be 4.4 per cent.

‘Speculative activity has already increased, both in the equities market and in real estate markets in southern coastal areas,’ the OECD said.

 

Source: AGENCE FRANCE-PRESSE (The Straits Times 7 Dec 07)

Boom times could soon be over for China banks

Bad loans are set to rise, even as govt moves from prudent to tight policy

SHANGHAI – THE fat years may be ending for Chinese banks as bad loans increase and monetary policy tightens.

After government bailouts and reforms ended a debt crisis early this decade, bad loans could rebound because of exposure to China’s red-hot property market. But a debacle on the scale of the United States sub-prime credit crisis remains very unlikely, officials and analysts say.

‘The good days for China’s banks are about to end,’ said Mr Qiu Zhicheng, an analyst at Haitong Securities in Shanghai.

‘China’s economy is near the peak of its cycle and growth is slowing down. Banks, the biggest beneficiary of this round of the economic boom, will start to suffer.’

While strong profit growth could be crimped by tighter economic policy, Chinese banks and their share prices will probably continue to outperform lenders in most developed economies that are much more vulnerable to the global credit squeeze.

But regulators are pressing banks to cut loan growth, and the central government announced on Wednesday that it was moving to ‘tight’ monetary policy after a decade of ‘prudent’ policy.

Some banks have already begun to suffer from bad loans in the second half of this year, official data shows.

Outstanding non-performing property loans at Guangdong Development Bank (GDB), in which Citigroup has a major stake, rose by 1.05 billion yuan (S$205.7 million) in the first 10 months of this year, according to the transcript of a speech by Mr Liu Mingkang, chairman of the China Banking Regulatory Commission, China’s top banking watchdog.

As a result, he said he had put GDB on an internal list of about 10 Chinese banks ordered not to extend new loans before the end of the year. These banks may receive further guidelines to restrict loan expansion next year.

‘A rapid increase of asset prices will add overall risk to the national financial system and create considerable credit risk in the banking sector,’ Mr Liu said in a closed-door speech made to senior Chinese bankers and local regulators in late October.

A slight slowdown in the overall economy next year may also sour some loans in overheated sectors such as steel and cement.

‘China’s economy might slow considerably in the next year, in which case the banking industry would bear the brunt and bad loans would rise sharply,’ says Mr Lin Yan, a Fitch Ratings analyst in Beijing.

The non-performing loans ratio of major Chinese banks now averages 5 to 6 per cent, compared to more than 20 per cent before 2003, when Beijing began to use its foreign exchange reserves to bail out institutions such as Bank of China and China Construction Bank.

Some analysts estimate the ratio may rise by 1 or 2 percentage points next year, especially if the government’s efforts to curb the property market misfire.

The authorities are using taxes and administrative steps to try to cool the market gradually, but there is the risk of a sudden pullback of prices.

 

Source: REUTERS (The Straits Times 7 Dec 07)

Oil price falls below US$90

(LONDON) The price of oil fell back below US$90 yesterday as the market speculated about the chances of an increase in Opec output at the cartel’s meeting next week, dealers said.

They said prices also fell after it appeared more likely that an explosion on a key pipeline from Canada into the United States would have only a limited impact on supply.

Yesterday, New York’s main contract, light sweet crude for January delivery, was down US$1.75 to US $89.35 per barrel, after earlier striking a one-month low of US$88.52. Brent North Sea crude for January tumbled US$1.32 to US$88.93.

The Organization of the Petroleum Exporting Countries (Opec) meets in Abu Dhabi on Wednesday with many participants expecting the group to boost output to help counter record- breaking prices.

‘All eyes will be on Opec now ahead of the group’s meeting on Dec 5,’ said Nimit Khamar, analyst at the Sucden brokerage here. ‘Many expect the group to hike supplies in order to cool off prices.’

The oil producers’ group is a key player in the energy market because it produces about 40 per cent of the world’s crude.

Opec last decided to raise production in September when it agreed to provide an extra 500,000 barrels a day to the market from Nov 1. ‘The forthcoming Opec conference now looms large over the oil market,’ the Commonwealth Bank of Australia (CBA) said in a report to clients.

‘It appears that oil markets are considering the possibility that there will be an increase in Opec production ceilings of at least 0.5 million barrels per day.’

Earlier this week, Saudi Oil Minister Ali Al-Nuaimi said the market was well supplied and that high prices did not properly reflect supply and demand. Asked whether Saudi Arabia, the world’s biggest oil exporter, would push for an increase in production at next Wednesday’s meeting, Mr Nuaimi said the cartel would first need to see market data.

Since striking record peaks just under US$100 last week, prices have slumped by about US$10 in New York and almost US$8 here.

 

Source: AFP (Business Times 1 Dec 07)

China, India seen driving Asia’s wealth market

SG PRIVATE Bank is looking to China and India to drive Asia’s wealth markets, and the sub-prime crisis is a short-term hiccup, says chief executive Pierre Baer.

The firm advises on some US$20 billion in Asian clients’ assets, posting an annual growth of about 30 per cent. It set up its Singapore office in 1998.

‘Despite the recent increases in their stock markets, China and India will be the wealth drivers. This is a structural, fundamental shift in wealth generation that we’ve not seen previously,’ says Mr Baer.

SG Private Bank recently opened its new office at One Raffles Quay, on which it spent millions of dollars – in ‘double-digit millions’ – to renovate. The centre is adorned with a collection of contemporary Asian and Australian art.

The bank employs some 600 staff in the region, of whom half are based in Singapore. It has separate teams to service non-resident Indian clients, as well as non-Asian clients from Europe and the Middle East.

The bank continues to hire, but is ‘elitist’ in its approach, he says. ‘The growth and quality of the financial industry will depend on the quality of its people… We are somewhat elitist in our hiring. We’ve turned down candidates even if they have a book of business because we didn’t think they had all the skill sets required for the long term.’

The bank, he says, does not set product targets, which run against the grain of client advisory. Bankers should be at pains to identify clients’ needs.

SG will set up its own training centres in Hong Kong and Singapore for its career bankers. At the moment, some 110 bankers have been sent to Paris and London to complete a number of training modules.

He says clients are at the moment concerned about volatility, and are tapping structured products to temper that. ‘It is not about how much money you can make but how much you avoid losing. The fear of losing is key.’

SG’s key services include philanthropic and trust advisory. On the alternative front, the bank offers a wine investment fund which has so far attracted some US$40 million in assets.

 

Source: Business Times 28 Nov 07

Large yuan revaluation ‘would hurt growth’

SEOUL – A BIG Chinese currency revaluation would invite speculation and damage growth, said Dr Fan Gang, a monetary policy adviser to the People’s Bank of China.

Sharp increases in the yuan’s value would trigger ‘large speculative capital inflows and outflows that will kill China’s growth and financial stability’, Dr Fan, a member of the central bank’s monetary policy committee, said at an investment forum in Seoul yesterday.

Officials from the Group of Seven nations have increased pressure on China to let the yuan appreciate more and take the burden off other currencies. French Finance Minister Christine Lagarde said on Sunday that the yuan causes ‘tensions’.

‘What would happen after a large – say 40 per cent to 50 per cent – appreciation of the yuan? Another request in two years,’ Dr Fan said. He was referring to United States lawmakers’ calls for bigger gains.

The yuan has climbed about 11.5 per cent versus the US dollar since a fixed exchange rate was scrapped in July 2005.

The world’s fourth-largest economy grew 11.5 per cent in the third quarter as record trade surpluses pumped in cash. A stronger currency would make exports more expensive, staunch the inflow of money and ease tensions with trading partners.

The dollar is likely to keep falling, a problem for the yuan, Dr Fan said. Central bank governor Zhou Xiaochuan said yesterday that his country supports a strong dollar.

Source: BLOOMBERG NEWS (The Straits Times 21 Nov 07)

China supports strong US dollar, says official

Beijing hopes for an orderly solution following recent market turbulence

(CAPE TOWN) China supports a ’strong dollar’ because it would be conducive to fostering a healthy global economic system, the country’s central bank governor Zhou Xiaochuan said yesterday.

Speaking to reporters, Mr Zhou said that Beijing hoped for an orderly solution following recent market turbulence stirred by defaults of US mortgages. ‘So in this sense, actually we hope to see a strong dollar,’ he said. ‘We support a strong dollar,’ he added.

The US dollar’s recent slide was a major topic of discussion at a weekend summit of financial leaders of the Group of 20 (G-20) economic powers and is expected to top the agenda at a current meeting of central bank governors in Cape Town.

The opinions of different central banks towards the US dollar were ‘close to each other’ in the context of international gatherings such as the G-20 and the International Monetary Fund (IMF), Mr Zhou said.

Turning to the domestic economy, Mr Zhou said that Beijing need not raise interest rates too frequently given that current inflationary pressures were coming mainly from rising food prices.

But China could not rule out further interest rate rises although none were on the cards ‘next week’.

Given excess liquidity in the economy, however, China would continue to raise banks’ reserve ratios, he said.

China’s central bank has raised interest rates five times this year to curb inflation and prevent real returns on bank deposits from sinking too far into negative territory.

Earlier this month, China announced that it would raise banks’ reserve ratio by 0.5 percentage points to 13.5 per cent, a record high. The central bank said that the move would take effect on Nov 26.

China would also consider letting its currency move more freely if necessary although it is comfortable with current settings, Mr Zhou said. China will gradually widen the band within which the yuan is allowed to trade, he said.

 

Source: Reuters, AFP (Business Times 20 Nov 07)

S’pore, China to jointly develop eco-city

Tianjin Eco-City to be a model of sustainable devt

(SINGAPORE) In a highly anticipated landmark signing at the Istana yesterday, the governments of Singapore and China inked a framework agreement to jointly develop an eco-city in Tianjin, which will deepen cooperation and bring bilateral relations to greater heights.

The vision is for the Sino-Singapore Tianjin Eco-City to be a model of sustainable development that is socially harmonious, environmentally friendly and resource-efficient.

It will be developed by a joint venture between a Singapore consortium led by Keppel Corporation and a PRC consortium comprising Chinese companies such as the Tianjin Binhai New Area Urban Infrastructure Construction Investment Co Ltd, Tianjin TEDA Investment Holdings Co Ltd and the China Development Bank.

Prime Minister Lee Hsien Loong said he was pleased with the decision and was confident the Chinese central government and the Tianjin government will give the project their full support.

This project is yet another flagship of bilateral cooperation between Singapore and China since the 13-year-old Suzhou Industrial Park, visiting Chinese Premier Wen Jiabao said.

‘The Suzhou Industrial Park has become a crystallisation of the friendship between our two countries, and with the eco-city to be built in Tianjin, it will become another highlight in our relations,’ Premier Wen added.

The two leaders signed a framework agreement that set the parameters for collaboration, while a supplementary pact that guide the implementation details was signed by Minister for National Development Mah Bow Tan and China’s Construction Minister Wang Guangtao.

Under the framework agreement, China and Singapore will share their expertise and experiences in the formulation of policies and programmes to engender social harmony, urban planning, environment protection, resource conservation, recycling, ecological infrastructure development, use of renewable resources, reuse of wastewater and sustainable development.

Deputy Prime Minister Wong Kan Seng and Vice- Premier Wu Yi will jointly chair a Singapore-PRC Joint Steering Committee (JSC) to oversee all major issues relating to the development of the eco-city project while a Joint Working Committee (JWC), co-chaired by Mr Mah and Mr Wang will address issues and problems related to the development. The JWC will report to the JSC, which will be under the Joint Council for Bilateral Cooperation (JCBC).

The key outcomes spelt out under the supplementary agreement are a vibrant local economy with good environmental conditions, the formation of socially harmonious and inclusive communities, good environmental technologies and practices, and a reference for other cities in China in the management, technological and policy aspects.

Further details of the eco-city are being finalised.

Earlier on, the leaders met for about an hour, where they reviewed the 17 years of Sino-Singapore bilateral ties and discussed other issues such as Singapore-China free trade agreement, cross-straits situation and Myanmar.

Both leaders expressed confidence in the current state of relationships that are based on mutual interests and respect.

‘Our relations are good because the foundations of the relations are based on compatible strategic views of the way Asia is developing, of China’s development, and peaceful emergence into the world order,’ PM Lee said.

‘Therefore, we believe that there’s room for us to work together for mutual benefit and on the basis of equality and mutual respect.’

Yesterday’s state visit by Premier Wen also saw the official launch of the Singapore China Foundation (SCF) which seeks to strengthen people-to-people ties between Singapore and China through cooperation in education and human resource development.

The SCF currently offers two scholarship schemes to Singaporeans and PRC nationals to pursue Master programmes and executive programmes in Singapore and China and has awarded scholarship schemes to more than 20 Singaporean and Chinese officials since its inception under a memorandum of understanding in 2004.

PM Lee also hosted Premier Wen to an official dinner banquet yesterday at the Istana Banquet Hall.

In the days ahead, Premier Wen will be attending a series of high-level regional summits here, including the 11th Asean Plus Three Summit and the Third East Asia Summit that are held alongside the 13th Asean Summit. He will deliver a keynote speech at the National University of Singapore today.

 

Source: Business Times 19 Nov 07

Tough times ahead seen for China if bubble pops

Retired Japanese official says soft landing unlikely, social disquiet rising

IN TOKYO

CHINA’S economy has little chance of achieving a soft landing once the ‘bubble’ in stock market and real estate prices there bursts, according to former senior Japanese finance ministry official Toyoo Gyohten, who now heads one of Asia’s leading economic research institutes.

Meanwhile, resentment over the pace of change in China is growing among social groups ranging from farmers to city dwellers and intellectuals and could erupt, he said.

Mr Gyohten’s bearish comments on China were made at a briefing in Tokyo last Friday shortly after the World Bank predicted continuing strong growth in China’s economy and that it would not suffer greatly from any popping of the bubble in asset prices.

The World Bank analysis that China and the rest of East Asia would be little impacted by a slowdown in the US economy was also challenged by Chinese officials who said that it could be very serious.

World Bank claims that an asset bubble burst in China would have limited impact because it has not been accompanied by a boom in consumption were rejected by Mr Gyohten. The former vice-finance minister for international affairs, now president of the Tokyo-based Institute of International Monetary Affairs, said that fallout from an asset price implosion, in the shape of surging bankruptcies, unemployment and bad loans in the banking system, would be highly damaging to China’s economy.

Six rises in China’s interest rates plus nine increases in banking reserve requirements plus the imposition of administrative controls on bank lending have failed to curb the runaway trend in stocks and other assets prices while inflation has now hit its highest level in ten years, said Mr Gyohten.

Chinese authorities will probably tighten monetary conditions further to contain these pressures, or some other event will trigger an asset bust, he said. ‘Either way, there is little possibility of a soft landing.’

A former chairman of the Bank of Tokyo and now special advisor to the Bank of Tokyo-Mitsubishi UFJ, Mr Gyohten also said that he ‘could not rule out the possibility of a major revaluation of the Chinese yuan,’ owing to growing pressure from Europe as well as the United States for such a move.

‘We cannot deny that the (currency) is undervalued,’ he said, noting that it had risen in value by only around 10 per cent against the dollar since 2005.

Mr Gyohten’s analysis of China’s political situation was even more downbeat than his comments on the country’s economy. ‘At various levels of government (in China) there is increasing corruption and wrongdoing,’ he said.

Social resentment is rising and ‘people are beginning to question the legitimacy of the dictatorship of the communist party. The thing the leadership fears most is revolution.’

Chinese authorities will probably seek to quicken the pace of ‘gradualist’ political reform, he suggested. While the past 30 years have been devoted to establishing China’s presence among the world’s leading economies, the next 30 years will see an attempt by China to cement the market economy and to establish political stability under the leadership of the communist party, he added.

 

Source: Business Times 19 Nov 07

Inflation rising as Hong Kong looks to grow 6% this year

Govt revises target from 5-6%, but inflation hits 2.5% for first nine months

IN HONG KONG

HONG Kong’s economy is tipped to grow by 6 per cent this year as the city continues to enjoy strong domestic demand and low unemployment, but inflation has hit levels not seen since the 1997 handover.

‘The momentum for economic growth has become more obvious and significant,’ acting government economist Helen Chan announced yesterday, unveiling a revised GDP forecast of 6 per cent for 2007.

The government had previously forecast a rate of between 5 to 6 per cent. In the third quarter of 2007, GDP was up 6.2 per cent in real terms over a year earlier. It marks the 16th consecutive quarter of economic growth in the city.

However, the increase was just 1.7 per cent compared with the previous quarter, marking a small slowdown in the rate. Although domestic demand was strong, exports were seen to suffer amid a slowdown in the US economy.

Private consumption grew 9.7 per cent in real terms in the third quarter, buoyed by a strong labour market and rising household income.

Unemployment in the third quarter was 4.1 per cent, the lowest since mid-1998. Wages also increased by 2.9 per cent during the same period.

Inflation, however, continued its ascent, hitting 2.5 per cent in the first nine months after netting out the effects of a rates concession and public rental waiver introduced in February as part of Budget giveaways.

‘Inflation continued to creep up,’ Ms Chan said. ‘Inflation is not too high but we have to monitor the situation closely.’ The rate for 2007 as a whole is expected to be 2.7 per cent, she said (again after netting out the rates/rental effect).

She added: ‘I don’t think it’s a great problem. The current inflation rate is still quite a modest one.’

Hong Kong is facing a food price hike, partly due to a global trend but also because of its heavy reliance on the mainland for imports. Prices of certain foodstuffs – most notably meat and cooking oil – have surged in China in recent months. The headline inflation rate is expected to go up further in the fourth quarter.

Total exports were up 6.4 per cent in real terms in the third quarter compared with a year earlier. However on a seasonally adjusted quarter-to-quarter comparison, total exports of goods decreased slightly by 0.2 per cent in real terms during the period.

Policy-makers will be watching further developments in the US economy closely, Ms Chan stressed, with Hong Kong relying on the US market for 13 per cent of its exports. China now accounts for 49 per cent of the city’s exports.

‘In a way we have felt the pinch of a slowdown in the US economy,’ Ms Chan explained. ‘In the near term we are cautiously optimistic about the export outlook.’

She stressed: ‘Of course, we have to keep a close eye on changes in the external environment.’

Exports in services were, by contrast, up by 12.3 per cent in real terms during the third quarter, which the government says reflects a strong rise in inbound tourism and the city’s vibrant financial market activities.

Hong Kong’s stock market has been on a rollercoaster ride over the past few weeks, pushing through the 30,000 barrier before suffering sharp corrections. On Friday the benchmark Hang Seng Index closed at 27,614.43, down 1136 points or 3.95 per cent.

 

Source: Business Times 17 Nov 07

US credit woes hurt foreign funds to Asia

While inflow is fast slowing for HK, China and India, S’pore is experiencing outflow

THE flood of foreign funds surging into Asian bourses over the past four weeks has been reversed by the ongoing credit woes in the United States.

Singapore has started experiencing an outflow, with a net sale of US$2.1 million (S$3 million) last week by funds investing exclusively in Asian equities, according to Citigroup Investment Research.

This is a striking contrast to the situation in end-September, when US$110.4 million flowed into local equities in the space of a week.

And in other bullish regional markets such as Hong Kong, China and India, the inflow of foreign funds into equities has slowed down considerably.

Only US$84.3 million was invested in H-shares – shares of China firms listed in Hong Kong – between Nov 1 and Nov 7, compared with US$576.5 million between Sept 27 and Oct 3.

Over the same period, foreign funds spent just US$29.9 million on Hong Kong stocks, excluding H-shares, an 86 per cent plunge from the US$216.5 million they spent in the week of Sept 27 to Oct 3.

The slowdown in fresh investments in Asian equities coincided with the bearish mood in the US, where banks have been writing down billions of dollars in their pool of debts.

That has been coupled with the greenback plunging against regional currencies following two US interest rate cuts.

It raises fears of an unravelling in the carry trade – hedge funds taking out huge yen loans because of Japan’s low interest rates to invest in higher-yielding assets.

Sentiment has also been spooked by perception that H-shares have shot up too fast, fuelled by foreign investors entering Hong Kong and Singapore in anticipation of China allowing domestic funds to invest in overseas equities.

Fund managers’ appetite for risk has also weakened considerably. Merrill Lynch’s latest survey of Pacific Rim fund managers showed that defensive sectors – insurance, retail and consumer products – are now preferred over sexy growth stocks.

And despite oil soaring close to US$100 a barrel, fund managers have started to pare down positions in the energy sector.

Despite the falls in regional markets, the Merrill Lynch report noted that fund managers are still ‘overweight’ on shares, having reduced cash holdings to 2.8 per cent from 3.7 per cent last month.

And even as Hong Kong’s Hang Seng Index has dropped by more than 10 per cent from its record high in September, Merrill Lynch said fund managers continue to favour Hong Kong and ’sharply increase their enthusiasm for frontier markets’.

‘Fund managers have also returned to Singapore and reduced their exposure in other Asean markets,’ it added.

But Morgan Stanley’s head of global emerging markets equity strategy, Mr Jonathan Garner, said that next year may be more difficult than this year.

While the focus is on the impact any slowdown in the US economy could have on emerging markets, Europe is a much bigger export market for developing countries. ‘Weakness in the US economy could spill over to the euro zone. Emerging markets may survive a slowdown in the US, but not the US and Europe combined,’ said Mr Garner.

He expressed particular concern over a possible ‘contraction in valuations’ in China and India, after their exceptional stock market performances this year. ‘H-shares valuations are back at the 1997 and 2000 peak levels.’

Morgan Stanley has adopted a defensive posture, adding Telekom Malaysia and removing China Mobile and Hyundai Heavy from its focus list last week.

 

Source: The Straits Times 17 Nov 07

World Bank sees robust East Asia growth next year

But if oil prices hit new highs, region’s resilience will be tested, it cautions

 

IN TOKYO

THE East Asian economies will continue to see robust growth next year despite a likely US slowdown, but new highs for oil prices will test the region’s resilience, says the World Bank.

 

The bank has, in its latest East Asia & Pacific Update, raised its growth forecasts for emerging East Asian economies in 2007 and next year, despite heightened downside risks to global growth from financial turmoil and soaring oil prices.

 

‘We expect the stronger growth momentum in the region to carry through 2008,’ says Milan Brahmbhatt, principal author of the report. The bank’s optimism stems from a sharp spurt in East Asia’s growth in the first half of this year, and its confidence that the region’s domestic demand is strong enough now to offset a slowdown in exports.

 

Emerging East Asian economies are projected to grow at a robust 8.4 per cent overall in 2007 – the fastest pace in three years – and to moderate only slightly to 8.2 per cent next year. Its forecasts see the Singapore economy growing 7.4 per cent this year, and 6.4 per cent in 2008.

 

Even if the US falls into recession as a result of the sub-prime mortgage crisis and growth there plunges to zero in 2008, that should shave only one percentage point off the median growth of emerging East Asian economies, the bank says.

 

But rising oil prices are a key risk. The bank’s growth forecasts for 2008 are based on an assumption that oil prices will average US$70 a barrel next year. But if they stay at around US$90, this could shave a further one percentage point off growth projections, it says. Thus far, even though oil prices have more than doubled over the last three to four years, the impact on world growth has been fairly muted, the bank notes.

 

One reason is that the surge in prices has come mostly from strong global demand growth rather than a decrease in supply. The bank also cites research suggesting that the sensitivity of growth in developed countries to oil shocks has fallen sharply in the last two decades – with impact for East Asian economies. But further new oil price highs next year will test the robustness of the region’s and global growth, it cautions.

 

Overall, the World Bank is sanguine about the outlook for East Asia, saying that ‘the region’s performance in previous global downturns suggests that the impact on East Asia is unlikely to be especially severe or protracted given the region’s strong macroeconomic fundamentals and in the absence of a major downturn in global high- tech demand such as occurred in 2001′.

 

It ’substantially increased’ its growth forecasts for 2007 and 2008, compared with six months ago, mainly because of the ‘unexpected and large domestic demand-led acceleration of growth in China (which is forecast to grow at 11.3 per cent this year and 10.8 per cent in 2008)’. Growth has also picked up in most of the other larger economies of the region as a result of more buoyant investment and spending on consumption, it adds.

 

Emerging East Asian economies are defined by the World Bank to include those of China, Indonesia, Malaysia, the Philippines, Thailand, Hong Kong, South Korea, Singapore and some unspecified smaller economies in the region. In contrast to its upbeat outlook for East Asia, the bank revised down its growth projections for the US and the OECD area as a whole by one percentage point and one-and-a-half percentage points respectively. Growth across the OECD as a whole is likely to be only 2.2 per cent in 2008, it says, while growth in Japan is expected to fall from 2.2 per cent in 2006 to 2 per cent this year and to 1.8 per cent in 2008.

 

The outbreak of the US sub-prime crisis has had little adverse impact on East Asia so far, the World Bank notes. ‘Preliminary assessments suggest that direct exposures of East Asian financial institutions to sub-prime risks are relatively limited.’ But ‘risks may increase if global instability and tightening of credit markets intensify and lead to further declines of prices of various other structured assets held by banks.’

 

Source: Business Times 16 Nov 07

Credit crisis ‘unlikely to faze East Asia’

World Bank expects region to shrug off sub-prime woes, high oil prices to log in solid growth

THE sub-prime crisis in the United States is not posing a significant risk to East Asia’s rapid growth, according to the latest World Bank forecasts.

 

The region is expected to expand by a solid 8.2 per cent on average next year, shrugging off the subprime fallout and high oil prices, said the bank’s half-yearly report released yesterday.

 

This is slightly lower than the 8.4 per cent growth rate projected for this year, following last year’s 8.3 per cent expansion. ‘The impact of the US sub-prime housing crisis and the renewed surge in oil prices have clearly increased downside risks,’ said Mr Milan Brahmbhatt, the principal author of the report. ‘Nevertheless, we expect that the stronger growth momentum in the region will carry through in 2008.’

 

In fact, the bank’s overall outlook for East Asia – spanning economies from China to Vietnam – has turned rosier over the past six months. This is despite sub-prime woes shaving a projected 1 percentage point off US growth next year, which could lead to waning appetites for East Asian-made imports in America and other rich countries.

 

One reason is that the region’s strong expansion has so far been driven by domestic, not external, demand. This is especially so in countries such as China and Singapore, which are experiencing investment booms. ‘It is worth noting that this year’s pickup in East Asia has occurred despite a substantial decline in US import growth, and some more modest slowing in the region’s own exports,’ said the report.

 

The bank does not believe the US will slide into a recession, but even if that does occur, the impact on East Asia will not be severe, it said. ‘A fall in US growth to, say, zero in 2008 – a 2 percentage point growth decline – might be accompanied by a 1 percentage point fall in median East Asian economic growth from around 6 per cent to 5 per cent – significant but no disaster,’ it said.

 But it did warn about the impact of soaring crude prices: ‘New highs for oil…will test the solidity of the East Asian and global economic expansions in 2008. ‘We calculate that an average oil price of US$90 in 2008 will be associated with an income loss in East Asia

of about 1.1 per cent of gross domestic product.’

 In its latest regional outlook, the International Monetary Fund (IMF) also highlighted the issue of rising food prices in economies such as China. The fund’s resident representative in Singapore, Dr Ranil Salgado, presenting the outlook yesterday, noted that inflation has picked up in Asia’s newly industrialised economies as well as in China.

Furthermore, despite the run-up in global oil prices, China decided to raise its domestic oil prices only recently, with Malaysia and Indonesia likely to follow suit. Consequently, ‘there could be even more inflationary pressures than shown here’, he said.

The IMF predicts that Singapore’s GDP growth this year will hit 7.5 per cent before easing to 5.8 per cent next year. ‘Assuming that credit markets gradually normalise, the fallout from the global financial turmoil should be manageable for emerging Asia owing to strong economic fundamentals and healthy corporate and banking sector balance sheets,’ noted the report.  Source: The Straits Times 16 Nov 07

Frustrated Taiwanese rage against rising prices

Consumers heckle govt leaders over economic hardship as elections loom

 

TAIPEI – THE stout man in a blue apron was busy handing out discounted fried dough stuffed with minced green scallions to Taiwanese office workers in a back alley lined with low-priced eateries.

 

‘Prices of everything from soybean oil to flour to scallions have skyrocketed,’ said Mr Tsai Hui-ming yesterday. ‘I have to offer discounts because many customers complain they haven’t had a pay raise for years and can hardly afford the bare necessities.’

 

Inflation – fanned by soaring prices for fuel and other commodities – has become a hot political issue in Taiwan as the island moves towards legislative elections in January next year and a presidential poll two months later.

 

The situation has become so bad that a number of disgruntled consumers have taken their complaints directly to President Chen Shui-bian.

 

Last week, an unemployed man interrupted Mr Chen while he was making a speech at the opening of a trade show in Taipei. The man, identifying himself only as Charlie, shouted: ‘People can hardly make a living!’

 

He sparked what the media has dubbed the ‘Charlie syndrome’, a reference to people who are typically reserved and respectful towards their government leaders but are now so disgruntled that they are lashing out at them.

 Later the same day, a meat vendor complained about her lagging business when Vice-President Annette Lu toured a market in the southern city of Kaohsiung to check on prices.

Several others yelled at leaders elsewhere over the weekend; in the southern city of Tainan, Mr Chen’s bodyguards had to shield him from a gaggle of protesters.

 

Taiwan’s inflation rate rose to a 13-year high of 5.34 per cent last month, boosted by rising fuel prices and typhoon-induced destruction of large swathes of vegetable gardens and other agricultural lands.

 

Although prices on the island of 23 million people are still low compared with many parts of Asia, years of sluggish economic growth have made inflationary pressures bite, particularly among poorer Taiwanese families, said economist Liang Chi-yuan.

 

Citing government figures, he said that over the past seven years, disposable household income rose at an average annual rate of 0.4 per cent, while annual expenses grew by 1.2 per cent.

 

In Taipei, dough vendor Tsai has joined a number of bakeries and restaurants handing out discount coupons. Consumers have been seen lining up for hours for such coupons. The main opposition Kuomintang party has fastened on the economy in the run-up to elections, noting that the number of households falling under the poverty threshold has risen from 30,000 to 80,000 in the past few years.

 It has also used its website to feature a 14-year-old boy reduced to shucking oysters to pay for his English tutor.

Still, Taiwan’s booming high-technology exports fuelled a respectable economic growth rate of 4.6 per cent last year, with a similar figure expected for this year. At a meeting with farmers last Saturday, a visibly annoyed Mr Chen said people complaining about

economic hardships should move to China. ‘You could swim over there, and don’t come back after you do,’ he said.

 

Economist Wu Hui-lin of Taipei’s Chunghua Institute for Economic Research said Taiwan’s economy remains generally sound.

 

‘The government should…leave inflation for the market to check,’ he said. That may not be far off. A central bank official told a news conference yesterday that inflation would likely ease this month, though it would probably remain above 2 per cent.

Source: ASSOCIATED PRESS, REUTERS (The Straits Times 16 Nov 07)

 

China’s prosperity a boon for S’pore: MM Lee

Minister Mentor lauds efforts at greening Beijing before Olympics

A GROWING and prosperous China is good for Singapore, Minister Mentor Lee Kuan Yew said yesterday.

 

Mr Lee, who is in Beijing to meet China’s top leaders, made the remarks when he held talks with Chinese Foreign Minister Yang Jiechi. Trade and investment between the two countries have grown significantly over the years.

 

Singapore and China are working to take already close ties even further with the signing of a new flagship collaboration – the eco-city project. The project aims to showcase how China can balance rapid economic growth with environmental protection.

 Achieving this balance is a top priority for the Chinese leadership, which is concerned that continued environmental degradation would eventually hurt the country’s booming economy.

‘A prosperous China is good for Singapore,’ said MM Lee. ‘That is why we want to see China stable and growing.’

 

He also praised the capital city’s successful greening efforts ahead of next year’s Olympics, adding: ‘Whatever China wants to do, it can do better than Singapore.’

 

Mr Yang, who spoke in English throughout the 45-minute meeting, said bilateral ties were ‘very good’ and noted that Chinese Premier Wen Jiabao would be paying an official visit to Singapore this Sunday.

 This is the first visit to Singapore by a Chinese premier in eight years.

During his trip, Mr Wen is expected to sign several bilateral agreements, including a pact on the eco-city project. Mr Yang, who returned from a trip to Iran on Tuesday, will also be part of the Chinese delegation visiting Singapore.

 

Commenting on the Chinese Foreign Minister’s hectic schedule, MM Lee said: ‘(China) is now a very important country’. ‘You are all over the world. Afghanistan, North Korea, and Iran … any trouble spot, (such as) Darfur, you are in.’

 

MM Lee and Mr Yang also discussed regional and international issues of ‘common concern’, the official Xinhua news agency reported without elaborating.

 

Mr Lee was accompanied by Mrs Lee, Minister in the Prime Minister’s Office Lim Swee Say, Senior Parliamentary Secretary for Education Masagos Zulkifli and senior officials during the four-day trip, which began on Wednesday.

 Defence Minister Teo Chee Hean will join the Singapore delegation today. They will meet Chinese President Hu Jintao, as well as Mr Xi Jinping, China’s sixth-ranked leader, and state councillor Tang Jiaxuan today. Source: The Straits Times 16 Nov 07

China economy may be 40% smaller than estimated

About 300m Chinese living below poverty line, three times larger than current estimates

 

WASHINGTON – CHINA‘S economy is actually 40 per cent smaller than most recent estimates, a United States economist has said, citing a new way of measuring growth based on purchasing power.

 Dr Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a former US Treasury official and World Bank economist, made the comments in a report published by the US thinktank and in a commentary in the Financial Times.

Dr Keidel said he made the calculations based on a recent, little-noticed report by the Asian Development Bank (ADB) that made its first analysis of China’s economy based on so-called purchasing power parity (PPP), which stripped out the impact of exchange rates.

‘The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 per cent smaller than previously stated,’ Dr Keidel wrote. ‘This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities, such as growth, public investment, pollution control and poverty reduction.’

 

The ADB data was the first to be based on purchasing power analysis, according to Dr Keidel. Based on this new analysis, he said, ‘the number of people in China living below the World Bank’s dollar-aday poverty line is 300 million – three times larger than currently estimated’.

 China’s gross domestic product would have been roughly US$5 trillion (S$7.2 trillion) in 2005, compared to some US$12 trillion for the US on the same basis. This still means China is moving ahead of Japan as the world’s second-largest economy, but it may not

overtake the US until around 2030.

 ‘These calculations are not just esoteric academic tweaks,’ Dr Keidel wrote.

‘Based on the old estimates, the US Government Accountability Office reported this year that China’s economy in PPP terms would be larger than the US by as early as 2012. Such reports raise alarms in security circles about China’s ability to build a defence establishment to challenge America’s,’ he said.

 The use of PPP began in the 1950s as part of an effort to compare economies without the distortion of exchange rates, which could be influenced by trade or investment flows. Dr Keidel said the data helped explain why the Chinese authorities were paying little heed to calls by Washington and Europe to boost the yuan.

‘Our focus in the US on trade and exchange rates is secondary or tertiary in their view’, while ‘risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing’s eyes than in Washington’s’, he added.

In Beijing, the World Bank’s lead economist for China, Dr Bert Hofman, said he thought it was too early to use PPP as a basis for revising size estimates of China’s economy. ‘There is a big international effort going on about international price comparisons to correct differences in price levels across countries in order to give a better comparison across economies,’ Dr Hofman said.

 But that effort is ’still very much work in progress’, he added. ‘It’s too early to tell what the final implications will be.’

 

Source: AGENCE FRANCE-PRESSE (The Straits Times 16 Nov 07)

 

Credit crisis, inflation threaten world growth, says Fukui

GLOBAL economic growth is under increasing threat from two fronts – the United States sub-prime crisis and soaring commodities prices that may push up inflation.

The warning came from Bank of Japan governor Toshihiko Fukui at a function in Singapore last night. He said the sub-prime turmoil could severely disrupt financial markets, which could then have a ripple effect on economic growth. The risk of inflation is just as potent, presenting a challenge to central bankers who will need to use monetary policy to maintain price stability amid strong growth, added Mr Fukui, who spoke as part of the Monetary Authority of Singapore Lecture series.

 

Inflation expectations have been ‘generally contained’ in many markets. But rising oil prices, driven by high economic growth worldwide, especially in oil-hungry emerging markets, have increased the ‘risk of a rise in inflation expectations in the longer term’, Mr Fukui said.

 

Rising commodity prices will also ‘inevitably impair terms of trade for oil-consuming countries’, he added. Mr Fukui acknowledged that ‘downside risks for the US economy’ persisted, but the risk of stagflation – stagnant growth accompanied by high inflation – in the US and other economies was ‘muted compared to the 1990s’.

 

The credit market turmoil, linked to high-risk sub-prime home loans, was actually the result of many years of favourable growth and benign conditions in the world economy.

 

‘The crux of the problem, as I understand it, is that risk evaluation had become too lax under those benign conditions, and this has led to a correction through market forces,’ said Mr Fukui.

 Financial imbalances were allowed to accumulate that, in turn, triggered corrections and posed a risk to economic stability.

Central bankers, like goalkeepers in football teams, must, therefore, defend against turbulence arising from the increasing complexity in the international flow of funds, he said. They must accurately read the risks of the global economy and financial markets to ’stabilise the market when it is under pressure’. Source: The Straits Times 16 Nov 07

US$ still the anchor of Chinese reserves

Central bank official affirms policy after calls for a switch to stronger currencies

 

WASHINGTON – THE US dollar will remain the anchor currency of China’s massive foreign reserves, despite suggestions that they were too heavily skewed towards the weakening greenback, said a senior Chinese central bank official.

Mr Yi Gang, the People’s Bank of China’s assistant governor, said on Wednesday that the dollar had to continue as the key component of the country’s US$1.4 trillion (S$2.03 trillion) reserves, because it was ‘the largest currency that we use’ in terms of trade and foreign direct investment (FDI), as well as financial clearances and settlements.

‘It is also a very firm policy for China that in our reserves, the US dollar is the main currency, and that policy is very firm,’ he said in reply to a question at a forum in Washington. Mr Yi, who is also the central bank’s director-general of operations, said recent suggestions by a senior Chinese politician, as well as a state banker, that Beijing move its largely dollar-based reserves towards currently stronger currencies, such as the euro, were mere ‘opinion’.

 Comments, particularly by Mr Cheng Siwei, the vice-chairman of China’s Parliament, that strong currencies ought to be given more weight in the country’s reserves to offset the losses in weak ones, sent the dollar into a tailspin last week.

The market chaos led US Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson to defend the dollar’s position. ‘Dollars remain the dominant reserve asset and I expect that to continue to be the case,’ Mr Bernanke said. Noting that the greenback had been the world’s reserve currency since World War II, Mr Paulson said: ‘I put the US economy up against any in the world in terms of competitiveness.’

 

Before Mr Yi’s remarks, the dollar fell close to a new record low against the euro in London, as weak US retail sales bolstered speculation about another interest rate cut by the Fed. The single European currency was trading at US$1.4658 in New York in the early afternoon on Wednesday, against US$1.4600 a day earlier. In London, the euro at one point rose to US$1.4725, just off the record US$1.4752 it set last Friday.

 

Mr Yi said that while the central bank diversified the major currencies making up its reserves, ‘the point is the principle for our diversification and the principle that guides us for these reserves is that they should be proportional to our real economic transactions – meaning trade, FDI, and clearance and settlement.’

 

About 70 per cent of China’s huge foreign exchange reserves are generally believed to be held in US dollar-denominated paper, mainly US government bonds. This has proved to be a less-than-ideal investment, due not just to the low yields on government debt, but also the weakening of the dollar.

 

China’s reserves, which overtook Japan’s for the world’s top spot early last year and topped US$1.43 trillion in late September, have been boosted especially by the nation’s huge trade surplus.

 

Source: AGENCE FRANCE-PRESSE (The Straits Times 16 Nov 07)

High oil price demands good policies

IT would be a fallacy to imagine that the prospect of a US$100 price tag for a barrel of oil will lead to a push for renewable fuels any time soon. Simply put, there is nothing definitive yet on the horizon offering a reliable, continuous and cheap alternative in the face of mounting energy demand.

Oil prices have remained resilient in their upward trajectory. Producers remain steadfast about the adequacy of supply in the system even as large consumers clamour for more.

Traders focus on the thin inventories to push the price up. When oil was at half the current price level, it was seen as compelling enough for the big competitive initiatives. Yet there is no excited talk of renewable sources of energy or even theories that high prices would yield new oil supplies, driving prices down. Instead we have ever higher-priced oil.

Yes, consumers are in a fix, for which they should share the blame. Have they been willing to make the necessary sacrifices and use pressure to accelerate the shift? In countries that matter to oil consumption, people have not been pushy enough.

Politicians may make noises but will act only if they are convinced that a change – putting at risk trillions of dollars of infrastructure investment and millions of jobs – is politically worth their effort.

Then subsidies and legislation will follow for a meaningful change of direction. Until then, some countries will do their bit but no cohesive global policy or focus on the next big thing will emerge. Big energy companies spend scant sums on research and development on renewable fuels. Independent R&D betting on the new future have surged but their budgets are small beer.

Unless the existing big players like car, energy and power companies as well as governments line up behind a change and consumers show a determination to support the drive, we will continue to grope for good answers for years, if not decades. Not convinced? ExxonMobil has forecast energy demand will grow 1.3 per cent a year, a tad lower than at the current rate, requiring a third more energy by 2030.

It says hydrocarbons would still meet 80 per cent of demand then, though renewable energy supply will grow at a faster clip of 9 per cent a year from now.

Rich nations’ energy adviser, the International Energy Agency, is also equally bleak. Unless governments embark on low-carbon policies, it sees the unprecedented rise in energy demand accelerating climate change, threatening global energy security and possibly creating a supply crunch. By 2030, the world will have to find an additional 30 million barrels per day, equivalent to Opec’s current total daily production.

Such an enormous challenge demands good policies and determined execution. Global R&D cooperation and conservation, not bitter recrimination by rich polluters, should be the way forward.

 

Source: Business Times 15 Nov 07

Inflation back to 6.5% in Oct as food prices rise

More monetary tightening, further rate hikes seen to rein in inflation

(BEIJING) China’s consumer prices rose sharply in October, tying a decade- high monthly inflation rate of 6.5 per cent, the government reported yesterday, adding to pressure for measures to cool a politically sensitive surge in food prices.

Food prices jumped 17.6 per cent in October over the same month last year, while the price of pork, China’s staple meat, soared 54.9 per cent, according to the National Bureau of Statistics.

The overall October inflation rate was higher than the 6.2 per cent reported in September and matched August’s 6.5 per cent, the highest rate in 11 years.

‘We expect more monetary tightening to rein in inflation, including further rate hikes,’ Lehman Brothers economist Mingchun Sun said in a report to clients.

Inflation has surged in recent months due to double-digit increases in food prices blamed on shortages of pork and other basic goods.

The food price spike is especially sensitive for the communist government, because China’s poor majority spends as much as one-third of its income on food.

A deputy central bank governor said last month the government expects inflation for the full year to be 4.5 per cent, overshooting the official target of 3 per cent.

Inflation for non-food items in October was just 1.1 per cent, the statistics bureau said.

Beijing froze prices of cooking oil and other basics in September, and is pressing farmers to raise more pigs, promising free vaccinations and other aid. Economists say price pressure should ease when a new grain crop is harvested and more pigs come to market.

Farmers had been reluctant to raise more pigs in part because of an outbreak of blue ear disease, which killed 70,000 animals and prompted the government to destroy thousands more. The government declared last week it had brought the outbreak under control.

An official of China’s top planning agency, the Cabinet’s National Development and Reform Commission, said in October that the government would consider investment curbs and other unspecified ‘measures to adjust prices’.

The government said in October that pork prices fell in August due to increased supplies. There was no immediate explanation yesterday for the sharp price increase in October.

Regulators raised state- set prices for diesel and gasoline by 10 per cent on Nov 1 in an effort to curb demand amid a fuel shortage. But the government said that should add only 0.05 percentage points to the monthly inflation rate.

The government has raised interest rates repeatedly this year to curb a boom in construction and investment that regulators worry could lead to financial problems.

Economists say the recent inflation spike is due to food shortages and has nothing to do with those concerns.

 

Source: AP (Business Times 14 Nov 07)

Sub-prime crisis: New push to review rating firms’ role

IN TOKYO

US Securities and Exchange Commission (SEC) chairman Christopher Cox promised yesterday that regulators would ‘aggressively’ pursue the new mandate they have been given to review the role that rating agencies played in the sub-prime mortgage loan crisis.

He was speaking at a briefing in Tokyo as new evidence emerged that the fallout from the crisis is continuing to spread to Japanese financial institutions.

In Tokyo for a meeting of the International Organisation of Securities Commissions (IOSCO), Mr Cox stressed the need to restore faith in ‘honest markets’ following the debacle caused by the collapse of the sub-prime mortgage sector and associated financial derivative products.

He said: ‘I hope that in two or three years’ time we will be able to look back on lessons we have learned’ from the crisis.

This week IOSCO set up a special task force to examine issues facing securities regulators following recent events in the global credit markets. One of its jobs will be to examine the role of credit-rating agencies and how they relate to the sub-prime crisis.

Mr Cox said the task force hopes to produce a report by February as part of wider crisis analysis being conducted by the Financial Stability Forum.

Credit-rating agencies have claimed they have only limited responsibility for the crisis that has resulted in massive losses at leading Wall Street financial institutions. Being responsible only for default risk and not for liquidity risk or other forms of market failure, the agencies cannot be held to account more widely, they have claimed.

Mr Cox said yesterday that he hoped in future it would not be possible to ‘draw distinctions’ which allow certain institutions to minimise blame for the crisis. He suggested that the role of ’structured finance mechanisms’ which have been at the heart of the current financial system crisis and in whose formation rating agencies have played a part would be ‘redefined’ in future.

The ‘transparency’ of these structured finance vehicles, which has enabled banks and others to keep their exposure to sub-prime-related mortgage products off their balance sheets and therefore out of the view of investors and regulators, needs to be improved, Michael Prada, chairman of IOSCO’s technical committee, suggested in a speech to the Tokyo conference. The ‘role of rating agencies with regard to structured products’ needs to be examined, he said.

Meanwhile, reports emerged in Tokyo that Mizuho Securities, the unlisted brokerage arm of Mizuho Financial Group, may post a sub-prime-related loss of over 100 billion yen (S$1.3 billion) and delay a planned merger.

The report in the Nikkei business daily raised fears that more such losses may lie ahead and dragged financial stocks, such as Mizuho Financial, sharply lower. The Nikkei 225 stock average hit a three-month closing low of 15,583.42.

 

Source: Business Times 10 Nov 07

China’s trade surplus may top $43b in October

Figures due soon seen adding fuel to US complaints that yuan is still undervalued

BEIJING – CHINA’S monthly trade surplus probably topped US$30 billion (S$43.3 billion) for the first time, adding fuel to United States complaints that the yuan is undervalued.

The gap widened 29 per cent last month from a year earlier to US$30.8 billion, according to the median estimate of 14 economists surveyed by Bloomberg News.

US Treasury Secretary Henry Paulson said yesterday that China is ‘out of step’ with the rest of the world’s calls to let the yuan appreciate. A plunge in the US dollar to a record low against the euro adds pressure on China to allow faster gain in the yuan to staunch a flood of cash that’s stoking stock and property bubbles.

‘Faster exchange-rate appreciation would be the best way to manage the excess liquidity,’ said Mr Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong. ‘As we move into the US election season, China’s trade surplus will become a more sensitive political issue.’

Exports likely rose 22.8 per cent last month from a year earlier, the same pace as in September, the survey showed. Imports probably increased 19.2 per cent after a 16.1 per cent gain the previous month.

The yuan headed for its biggest weekly advance against the US dollar since 2005 after Mr Paulson made the comments. The currency has gained more than 11 per cent versus the US dollar since a fixed exchange rate ended in July 2005.

‘China is increasingly seen as out of step with international norms and expectations, as evidenced by the growing number of national leaders and multilateral institutions calling for currency appreciation,’ Mr Paulson said in New York.

China needs ‘more flexible prices, including a much more flexible, market-driven exchange rate’, he said.

China’s central bank said last night in a monetary policy report that it will ’strengthen the role of prices in managing the economy’ and improve the coordination of interest and exchange rate policies. It also said moderate currency appreciation may help ease inflation pressures.

Consumer prices rose 6.2 per cent in September from a year earlier, almost the fastest pace in a decade.

French President Nicolas Sarkozy said this week that France and the US agree China should stop depressing the yuan’s value to gain an export advantage.

The predicted October surplus would bring the 10-month total to a record US$216.4 billion, up 62 per cent from a year earlier. Export volumes are biggest in the final quarter because of Christmas shipments.

‘The level of exports is so far above the level of imports that imports would have to grow considerably faster than exports just to stop the surplus growing any more,’ said Mr Mark Williams, an economist at Capital Economics in London.

 

Source: BLOOMBERG NEWS (The Straits Times 10 Nov 07)