Friday, September 26, 2008
China, Venezuela step up energy cooperation
BEIJING (AFP) — China and Venezuela signed several energy agreements in Beijing on Wednesday that will allow the South American country to export half a million barrels of oil a day to the Asian giant from 2009.
The agreements are part of a three-day visit by Venezuelan President Hugo Chavez to China that began on Tuesday, aimed at developing cooperation with Beijing, which it calls a "strategic ally."
Venezuela, the fifth exporter of crude oil in the world, currently only represents 4 percent of Chinese imports of the product.
"Currently, we have 364,000 oil barrels a day and by 2009 we will get to 500,000," said Venezuela's energy minister Rafael Ramirez, after 12 accords were signed in the presence of Chavez and Chinese President Hu Jintao.
The agreements include the delivery of fuel oil to China by national Venezuelan oil company PDVSA and the construction of a refinery in Venezuela to process crude oil from the oil-rich region of Orenoque.
The two countries also agreed to build four tankers, he said, and signed a deal to double the capital in a joint investment fund, created two years ago, from 6 billion to 12 billion dollars a year.
"China will bring four billion and we will bring two billion, it is a fund that is mainly used for investment in Venezuela in infrastructure, electricity, education, agricultural and rail projects," said Haiman El Troudi, Venezuela's minister for forward planning.
"In return, we provide crude oil, fuel oil and oil to China as payment," he said.
Chavez was due to travel to Russia on Thursday, then France and Portugal as part of an international tour that has already taken him to Cuba.
Wednesday, September 17, 2008
Mr. Simpfendorfer and other economists cautioned that if the July pattern endured, it could quickly become a problem for the United States. Surprisingly, so far, China’s central bank has actually emerged as a big winner from the American turmoil. Its bond holdings of government-sponsored enterprises, estimated by credit rating agencies at $340 billion, rose in value by billions of dollars in a single day when the Bush administration made explicit the government guarantee of Fannie Mae and Freddie Mac bonds, causing their interest rate spreads compared to Treasury bonds to narrow by 5 to 35 basis points within hours.
The exact amount of China’s gain cannot be calculated without knowing the maturity and composition of its holdings of these bonds, which Chinese officials have not released, according to specialists in fixed-income securities.
Beijing officials regulate international capital flows so tightly that the central bank dominates China’s overseas investments. It holds more than 90 percent of all Chinese-owned bonds from Fannie Mae and Freddie Mac, for example.
“The average person on the street in China has no channel to invest in the U.S.,” said Jing Ulrich, the chairwoman of China equities at JPMorgan.
But most private investors elsewhere in the region have considerably more freedom to park their assets in whatever country they please, Mr. Lee, of the Hendale Group, said, and they are very interested these days in assets in Asia.
Monday, September 15, 2008
China's central bank has cut interest rates for the first time in six years amid growing turmoil in global financial markets.
The key lending rate will fall to 7.2% from 7.47% with effect from Tuesday, while the amount of cash most banks must keep in reserve was cut by 1%.
The surprise move comes as US bank Lehman Brothers files for creditor protection and world shares tumble.
With inflation cooling, China is keen to maintain stable economic growth.
"We all knew that there would be monetary policy relaxation in China, but we didn't expect the move would be so quick," said Gao Huiqing, an economist at the State Information Centre, a government think tank.
All but the biggest banks will be allowed to reduce the proportion of deposits held in reserve from 25 September - the first time the central bank has cut reserve requirements since November 1999.
Recent figures have shown that Chinese economic growth has slowed this year as a result of constrained demand for its goods from overseas markets.
The economy grew at an annual rate of 10.1% in the three months to June, down from 10.6% in the previous quarter and below the 11.9% seen for the whole of 2007.
Rising food prices helped to crimp growth as did the increasing cost of credit with six increases in interest rates last year aimed at bringing spiralling inflation under control.
Grain and pork shortages had pushed consumer prices to 11-year highs earlier this year, but government measures have helped to bring this figure down to 4.9% in August - a 14-month low.
This enabled Beijing to cut interest rates to boost consumer spending and offset a decline in demand for exports as the global economy slows.
Wednesday, September 10, 2008
China inflation drops as trade surplus hits record high
BEIJING (AFP) — Inflation in China fell for a fourth straight month in August while the trade surplus hit a record high, data said Wednesday, with analysts blaming weakening domestic demand.
The figures have pushed the case for Beijing to boost growth, economists said, following months of efforts by policymakers to slow down the world's fourth largest economy and rein in inflation.
"The policy priority has already changed... More concerns are probably on growth now," said Huang Yiping, a Hong Kong-based economist with Citigroup.
"The government will probably continue to relax some of its policies in the short term," he said, citing possible measures such as tax cuts and loosening credit controls.
The data showed the year-on-year increase in the consumer price index dropped to 4.9 percent in August, the fourth consecutive month of slowing inflation, which is far below February's near 12-year high of 8.7 percent.
The news came as it was also announced that the trade surplus for last month hit an all-time high of 28.7 billion dollars -- beating its record of 27.1 billion dollars in October last year..
Growth slowed to 10.1 percent in the second quarter of this year against a backdrop of cooling global expansion. The economy expanded by 11.9 percent in the whole of 2007.
And Wednesday's data suggested the third quarter could see that trend continue.
"The overall slowdown of the Chinese economy has become a trend," said Wang Xiaoguang, an economist with the National Development and Reform Commission, China's top economic planner, according to the state-run Xinhua news agency.
"The downturn (in the consumer price index) might reverse in the future, but the possibility is slim," he was quoted as saying.
Food prices, the main driver of inflation since last year, were up 10.3 percent in August from a year earlier. In July, food inflation had been 14.4 percent.
This could partly be reflected in better food supply, but Stephen Green, a Shanghai-based economist with Standard Chartered, said in a research note that "we see a wealth of evidence" that consumption growth had indeed slowed.
The evidence included sluggish car sales, falling revenues at major electronics retailers and weakening enthusiasm for buying homes, he said.
Less vibrant domestic demand was also seen as a main factor behind the massive trade surplus.
The August surplus was caused by an abrupt slowdown in imports rather than any particular pickup in exports, observers argued.
"Import growth declined rather steeply while exports posted just normal growth," said Feng Yuming, a Shanghai-based economist with Oriental Securities.
China's exports last month increased 21.1 percent from a year earlier to 134.9 billion dollars, according to customs data. In July, exports had increased 26.9 percent.
Meanwhile, August imports were up 23.1 percent to 106.2 billion dollars, customs said, marking a steep decline from 33.7 percent growth the month before.
"Soft imports growth and the reacceleration and pickup in trade surplus growth in August could be an indication of weakening domestic demand," Goldman Sachs said in a research note.
Bucking the trend of a general slowdown, foreign companies have poured money into the Chinese economy this year, according to other data released Wednesday.
Foreign direct investment into China rose 41.6 percent in the first eight months of the year compared with the same period last year, Beijing said.
Overseas companies invested 67.7 billion dollars in the period from January to August, the commerce ministry said in a brief statement on its website.
However, the flood of foreign money was a drop in the ocean of much larger domestic spending on investment, official data suggested.
While investments in fixed assets -- a key measure of spending on productive capacity -- were up 27.4 percent in the first eight months of the year, foreign funds earmarked for such investments increased by a mere 6.0 percent.
Friday, September 5, 2008
HONG KONG — China’s central bank is in a bind.
It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.
Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.
Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.
The central bank’s predicament has several repercussions. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts. This could heighten trade tensions with the United States. The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit.
The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.
The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the former division chief for China at the International Monetary Fund.
“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.
Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates. When interest rates rise, the prices of bonds fall.
Officials at the central bank declined to comment, while finance ministry officials did not respond to calls or questions via fax seeking comment. Data in a study by the Bank of International Settlements based in Basel, Switzerland, sometimes called the central bank for central banks, shows that many central banks had small capital bases relative to foreign reserves at the end of 2002, though few were as low as the People’s Bank of China.
Given the poor performance of foreign bonds, the Chinese government could decide to shift some of its foreign exchange reserves into global stock markets.
The central bank started making modest purchases of foreign stocks last winter, but has kept almost all of its reserves in bonds, like other central banks.
The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value.
The central bank’s difficulties do not, by themselves, pose a threat to the economy, economists agree. The government has ample resources and is running a budget surplus. Most likely, the finance ministry would simply transfer bonds of other Chinese government agencies to the bank to increase its capital. But even in a country that strongly discourages criticism of its economic policies, hints of dissatisfaction are appearing over China’s foreign investments.
For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”
Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities. With aircraft carriers costing up to $5 billion apiece, $1 trillion would, in theory, buy 200 of them.
By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.
The yuan has risen 21 percent against the dollar since China stopped pegging its currency to the dollar in July 2005.
The actual declines in value of the central bank’s various investments are a carefully guarded state secret.
Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.
Along with Treasuries, China has invested heavily in mortgage-backed bonds from Fannie Mae and Freddie Mac, the struggling mortgage finance giants that are sponsored by the United States government. Standard & Poor’s estimates China’s holdings at $340 billion.
Some bond traders suspect that the central bank has scaled back its purchases of these securities, as have China’s commercial banks. But the central bank trades this debt through many third parties in many countries, making its activity opaque to outside analysts.
The central bank has gone to great lengths to maintain its foreign purchases. The money to buy foreign bonds has come from the reserves required that commercial banks must deposit with the central bank. In effect, China’s commercial banks have been lending the central bank more than $1 trillion at an interest rate of less than 2 percent.
To keep the banks strong when they were getting such little interest on their reserves, the central bank has kept deposit rates low. The gap between what banks are paying on deposits and the rates they are charging ordinary customers to borrow is several percentage points. This amounts to a transfer of wealth from ordinary Chinese savers to the central bank and on to Americans who are selling their debt to the Chinese.
The central bank is now under considerable pressure to reduce the commercial banks’ reserve requirements to encourage growth as the Chinese economy shows signs of slowing.
Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.
He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.
“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.
Monday, September 1, 2008
Chinese Airlines Report Disappointing First-Half Results
By Claudia Blume
A number of Chinese companies have reported disappointing earnings for the first half of this year. They include airlines, the country's largest insurance company and China's largest oil refiner. Claudia Blume in Hong Kong has more on these and other stories in our weekly summary of business news from the Asia Pacific region.
China's largest international airline, Air China, reported a 21 percent drop in profits for the first-half of the year. Air China's earnings fell to about $180 million, down from more than $229 million during the same period last year.
Its rival, China Eastern Airlines, had a loss of more than $30 million for the first half of the year. Both airlines have suffered from high fuel costs and a slowdown in passenger traffic after the May earthquake in China's Sichuan province.
Results were also disappointing for other Chinese companies. Profits for the country's biggest insurer, China Life Insurance, fell 32 percent during the first six months of this year, to $2.3 billion. Analysts say the decline was caused by a steep drop in China's stock market that diminished the company's investment returns.
Meanwhile, China Petroleum and Chemical Corporation, Asia's biggest oil refiner, saw its first-half net profit drop by 77 percent from a year ago. A gap between surging global crude oil prices and government-controlled domestic prices means that Chinese refiners cannot pass on price hikes to consumers, resulting in falling profits.