(emphasis mine) [my comment]

China to speed up economic, political reforms amid crisis
www.chinaview.cn 2009-03-13 12:22:30


Chinese Premier Wen Jiabao answers questions during a press conference after the closing meeting of the Second Session of the 11th National People's Congress (NPC) at the Great Hall of the People in Beijing, capital of China, March 13, 2009. The annual NPC session closed on Friday. (Xinhua Photo)

BEIJING, March 13 (Xinhua) -- China will not slow down but speed up reforming its economic and political systems against the backdrop of the global financial crisis, said Chinese Premier Wen Jiabao here Friday.

"To counter the global financial crisis, we can't slow down the process of reforms. Instead, we would rather speed up reforms," said Wen at a press conference after the close of the annual parliament session.

"Only by doing so and removing institutional barriers can we ensure the implementation of all measures," said Wen.

He pledged to press ahead with economic reforms to improve the system of socialist market economy.

Subsidizing Consumption

China View reports that China is increasing subsidy for auto and home appliance replacements.

China to increase subsidy for auto, home appliance replacements
www.chinaview.cn 2009-05-19 16:32:07

*** Government will raise subsidies for auto replacements to 5 billion yuan this year.

*** Government will allocate 2 billion yuan to encourage home appliance upgrades.

*** CBRC said consumers will get loans without collateral for buying durable goods.

BEIJING, May 19 (Xinhua) -- China will increase subsidies for consumers who sell their cars and home appliances in order to purchase new ones, in an effort to spur domestic consumption and curb pollution, according to a cabinet meeting held Tuesday.

The government will raise subsidies for auto replacements from 1 billion yuan to 5 billion yuan this year, and allocate 2 billion Yuan to encourage home appliance upgrades, an executive meeting of the State Council presided over by Premier Wen Jiabao said.

The move will further help stimulate domestic spending after the rebate program for auto and home appliance buyers in the rural areas greatly boosted rural consumption, said a statement from the meeting.

Consumers who trade-in their used mid- and small-sized truck and some types of mid-sized passenger cars for new ones will receive a subsidy.

Subsidies will also be given to consumers who sell automobiles that no longer meet the government's emission standard, but are still within life expectancy.

The subsidy will be no more than the purchase tax of the automobile.

A pilot program of home appliance replacement will start in Beijing, Shanghai, Tianjin, Fuzhou, Changsha and provinces of Jiangsu, Zhejiang, Shandong, Guangdong, said the statement. No specific date was given.

Buyers will receive a subsidy worth 10 percent of the prices on five kinds of new appliances, namely, TV sets, refrigerators, washing machines, air-conditioners and computers.

Retail sales kept solid growth in China as the world's third largest economy turned to domestic consumption for growth after exports tumbled.

China View reports that China allows consumer financing companies to boost consumption.

China allows consumer financing companies to boost consumption
www.chinaview.cn 2009-05-13 20:16:34

BEIJING, May 13 (Xinhua) -- China will allow non-deposit-taking institutions both home and overseas to offer consumer loans to its citizens, a new measure to stimulate domestic consumption.

China Banking Regulatory Commission (CBRC) issued, on its portal Web site Tuesday, management measures on the experiment of consumer financing companies to seek public opinions.

Consumer-financing companies will be allowed to operate on a trial basis in China's four major cities -- Beijing, Shanghai, Tianjin and Chengdu.

Loans will be extended to individuals without collateral for buying durable goods, including appliances and electronic products, and other private consumption such as travel and education, but it has barred such loans for cars and property, according to the draft.

Reviving real estate markets

China View reports that Chinese commercial property norms relaxed.

Commercial property norms relaxed
www.chinaview.cn 2009-05-30 09:51:45

BEIJING, May 30 -- The government's decision to slash the minimum financial requirement for commercial property investment for the first time in 13 years, will help ease property developers' capital strain and stabilize housing prices, analysts said.

The minimum amount of capital needed to jumpstart a new commercial property or an affordable housing project has been lowered from 35 percent of the total project cost to 20 percent, the State Council said in a statement on Wednesday.

The move was taken as a key adjustment in the government macroeconomic measure to buck the economic downturn and revitalize the ailing property market.

The last adjustment in this regard goes back five years, when the government raised the minimum capital requirement ratio to 35 percent to cool down the sizzling real estate market [The 35 percent minimum capital requirement ratio was an anti-inflation measure aimed at reducing domestic demand for property. Removing it should have a big impact]. At that time, Chinese commercial banks were not allowed to extend loans to real estate developers who have initial capital of less than 35 percent of the property project's total investment.
…
Liu Yuanchun, deputy head of school of economics at Renmin University of China, said real estate investments may start to pick up in the second half of this year thanks to government stimulus measures.

"The 15 percentage points reduction in financial requirement ratio is expected to release 300 billion yuan for investment in new property projects," Liu said.

… According to a survey on Sina.com, the nation's largest portal website, over 60 percent of the respondents believed the move will ease capital strain of real estate developers and propel property prices.

Nearly 50 percent of the respondents felt that the measures would help the property market recover.

China View reports that China allocates $878 mln for low-rent house building fund.

China allocates $878 mln for low-rent house building fund
www.chinaview.cn 2009-06-01 19:16:52

BEIJING, June 1 (Xinhua) -- China's Ministry of Finance (MOF) announced Monday that the central government had earmarked the second batch of 6 billion yuan (878 million U.S. dollars) as special fund for low-rent house building projects across the country this year.

The central government allocated the first batch of 7 billion yuan fund for this purpose in April, thus completing the goal of providing 13 billion yuan of subsidy for this year, the MOF said in a Web site statement.

The move was to help more low-income households nationwide improve their living conditions and boost domestic demand, the ministry said.

Figures released on May 21 by the National Development and Reform Commission, China's top economic planner, showed that 214,000 low-rent housing units had been built by April since the government launched the 4-trillion-yuan stimulus package last November, with construction on another 650,000 units underway nationwide.

Broadening investment channels

China Daily reports that China broadens insurers' investment channels.

China broadens insurers' investment channels
By Li Huayu (chinadaily.com.cn)
Updated: 2009-05-27 16:45

China has issued new rules to allow insurers to invest in corporate bonds without bank guarantees and allow smaller players to trade stocks directly, in a move to boost the country's fledgling stock and debt markets.

The changes will likely boost the bottom lines of China's insurers such as China Life Insurance Co, the world's top life insurer by market value, its smaller rival Ping An Insurance (Group) Co of China and China Pacific Insurance.

The China Insurance Regulatory Commission (CIRC) said in statements on its website in April it was also allowing life insurers and non-life insurers to invest 6 percent and 4 percent of their assets, respectively, in bonds backed by infrastructure projects.

In order to do so, insurers' solvency ratio in the previous two years must be above 120 percent, the regulator said.

Insurance firms may also invest 15 percent of their total assets in unsecured bonds, including those issued by big State firms in Hong Kong, the CIRC said. They can also invest in local government bonds - a new category of debt launched recently.

Insurers who have solvency ratios of more than 150 percent can now directly trade stocks. Previously, smaller companies could only invest in the equity market through asset management companies or fund houses.

China’s own “NASDAQ”

China Daily reports that China is setting up its own "NASDAQ".

Second board excites 'survivors'
By Zhang Ran (China Daily)
Updated: 2009-04-06 07:51


China's securities regulator released guidelines on March 31 to establish a growth enterprise board to list small companies. Asianewsphoto

Fan Zhi, founder of a Beijng-based new materials company, was among the most excited when he first heard that China was going to set up its own "NASDAQ" in 2000.

Yet he waited almost a decade for his dream to come true. China's securities regulator finally released guidelines on March 31 to establish a growth enterprise board (GEB) to list small companies.

The guidelines for listing require that firms have at least 10 million yuan in accumulated net profits in the last two years, compared to a 30-million-yuan minimum over three years required for listing on China's main boards.

Companies that report profits of at least 5 million yuan for the most recent year on revenue of at least 50 million yuan - along with annual revenue growth of at least 30 percent - can also qualify for GEB listing, according to the recent announcement.

The rules will take effect on May 1, according to the China Securities Regulatory Commission (CSRC). CSRC officials also said that the GEB may start trading as early as August.

"The growth of smaller private companies has been restricted due to a lack of funding," said Jing Ulrich, chairman of JPMorgan China Securities. "With lower listing requirements, the GEB could help increase financing options for small and medium-sized enterprises (SMEs) and provide much needed capital for those with strong growth potential."

…

"Rumors of a second board came out over and over during the past nine years. But the waiting process was so long that a lot of small companies had to shut down because of a lack of funds," Fan said.

SMEs [Small and Medium-Sized Enterprises] in China have been hard hit by shrinking demand during the global economic recession. Access to capital funding was difficult for them even before the meltdown.

Despite strong credit growth in recent months, reports suggest much of new lending has been channeled toward State-owned enterprises, infrastructure projects and large companies.

Over the years Fan tried many ways to fund his company's expansion.

"I tried to borrow money from banks. But small companies in China can get no more than a 10 million yuan loan at once, not to mention the complicated application procedure," he said.

He also talked to a few venture capitalists but finally refused them as "none of them are really familiar with the business model".

"I want some one who really knows the company's value," Fan said.

He also gave up the idea of overseas listing after he consulted bourses including the NASDAQ, Toronto, London and Singapore exchanges for listing prospectuses. Fan said he believes it is better to list at home since Taikong Panel's market is rooted in China.

In 2004, a mini second board for SMEs was set up at the Shenzhen Stock Exchange to test the waters, but the requirement to list on the board is still quite high for companies like Taikong Panel.

Even though Fan's company owns more than 50 intellectual properties, those can only account for about 30 percent of the company's total equity.

According to the rules of the newborn GEB, these "invisible assets" could account for 50 to 70 percent of the company's total equity.

"This is really exciting," Fan said. "The GEB really gives a green light for survivors like Taikong Panel."

[The ‘exciting’ things happening in America’s financial world are very different from the ‘exciting’ things that are happening in the Chinese financial world…]

Commodity Derivatives

China View reports that China launches PVC futures trading.

China launches PVC futures trading
www.chinaview.cn 2009-05-25 09:39:19

DALIAN, May 25 (Xinhua) -- China started the trading of polyvinyl chloride (PVC) futures contracts at 9 a.m. at DALIAN Commodity Exchange Monday, with September contract V909 opening 275 yuan higher at 6575 yuan per ton.

After steel futures and rice futures, this is the third new futures trading launched in China this year.

PVC is a kind of synthetic resin widely used in construction, plumbing, electric wires and packaging. China is the world's largest PVC manufacturer, with an annual output of 8.82 million tonnes last year.

China Daily reports that China is encouraging the development of domestic derivative products.

Regulator: China should meet rising derivatives demand
(Agencies)
Updated: 2009-03-25 16:59

China should accommodate rising demand for derivatives as a tool for hedging risks in the domestic market even as the government clamps down on speculative trading abroad, a senior banking regulator said on Wednesday.

Nearly half of Chinese firms trading derivatives abroad in the past two years did so without government approval, partly due to a lack of tools for hedging risks, said Li Fuan, director of innovation supervision at the China Banking Regulatory Commission (CBRC).

The government has become increasingly concerned about heavy losses racked up by State firms from such illegal activity.

China's State-assets watchdog has ordered State firms to review their futures, options, forwards and swap contracts in overseas markets and quit those with high risks, following high-profile losses on derivatives by companies such as CITIC Pacific and China Eastern Airlines.

"The clampdown won't reduce demand for derivatives," Li told a financial conference in Shanghai. "When that demand accumulates to a certain degree, companies will take risks, with or without government consent."

Li encouraged domestic financial institutions to develop more derivative products to satisfy demand from both companies and individuals but urged them to be more transparent in risk disclosure and to raise the level of investor education.

Shanghai as a global financial center and a major gold trading market

China Daily reports about Shanghai’s ambition to become a global financial center.

Shanghai needs rule change to be financial hub
(Xinhua)
Updated: 2009-05-15 19:54

SHANGHAI -- Zhou Xiaochuan, governor of the People's Bank of China (PBOC), Friday said China needs to modify market regulations to turn Shanghai into a global financial center.

"(We) should make clear and improve from time to time our rules of the game when developing a global financial center," Zhou told a financial forum in Shanghai.

He said the rules, including the legal system and those on accounting, corporate governance and initial public offering, should be modified for global acceptance.

China plans to make Shanghai a global financial center by 2020 [it will happen faster] that matches the country's economic strength and the international status of its currency, the State Council, or Cabinet, said on April 29.

To achieve the goal, the authorities should also improve infrastructure and information environment and modify rules on tax, market access and talent recruitment, Zhou said.

"The ratio could fall following government measures to boost domestic demand, but it will continue to be high globally for a long period of time," he said. "With the huge savings and the government encouragement for overseas investment, we have all the conditions to speed up the development of various investment funds."

China Daily reports that it is only a matter of time before Shanghai becomes a major gold trading market.

Shanghai gears up for the big league
By Wang Ying (China Daily)
Updated: 2009-05-29 10:46

With gold gaining a greater role in China's foreign exchange portfolio, experts feel that it is only a matter of time before Shanghai becomes a major gold trading market.

It has already got off to a sound beginning by opening the Shanghai Gold Exchange in October 2002. Around 4,220.7 tons of gold was traded at the bourse in 2008, worth 822.9 billion yuan ($120.52), up 134.19 percent and 164.15 percent year-on-year, respectively, making it the world's top exchange for spot gold trading.

"Although Shanghai still lags behind other gold trade centers like Hong Kong, New York and London in terms of global influence, China's robust economic growth and the city's plans to turn itself into a global financial center will give it an added advantage," said Albert Cheng, director of the World Gold Council's Far East Division.

Cheng added that the bourse should now attach more importance to product innovation and start gold mine financing and gold exchange-traded funds (ETFs).

Sources said China is planning to launch gold ETFs in Shanghai to diversify the current range of derivatives on offer. "ETFs are known for their low trading costs, safe storage and high liquidity. However, because the spot market for gold ETF trading is in London, the central government needs to increase its legislative support and remove the procedural hurdles," Cheng said.

Investment in technology

China View reports that China to invest billions on key technology development, bio industry.

China to invest billions on key technology development, bio industry
www.chinaview.cn 2009-05-13 18:57:01

BEIJING, May 13 (Xinhua) -- China will support eleven national research programs with at least 62.8 billion yuan (9.2 billion U.S. dollars) in one and half year to achieve breakthroughs in key technology development, the government said Wednesday.

Areas covered by the programs included advanced numerically controlled machine tools, trunk-line aircraft, new-generation broadband wireless mobile communications network, and high-end central processing units and software.

The programs also focused on the development of large oil and gas field, advanced nuclear power stations that use pressurized water reactor and high temperature gas-cooled reactor, technology for the treatment and control of water pollution, transgenic products, new drug development, and the treatment of major infectious diseases such as HIV/AIDS and viral hepatitis.
…
The meeting also adopted a plan on stimulating the country's biological technology development in areas such as medicine, agriculture, energy, manufacturing and environmental protection.
…
Companies, universities and research institutes will be encouraged to develop technologies with their own intellectual property rights.

The plan is aimed at giving those companies much-needed support. For example, self-developed bio-industry products would be the first choice in governments' purchase plans. Special investment funds and agencies will be set up to help channel more private investment into biotechnological industries.

The government will enhance the protection of intellectual property rights, and ensure safe use of biological technologies and products, the plan said.

Social Security

China Daily reports about social security for all in China.

Social security for all
(China Daily)
Updated: 2009-05-26 07:53

President Hu Jintao's call for accelerated social security reforms in both urban and rural areas demand the full attention of all departments in charge of building a better social safety net.

If the country is to create a development opportunity out of the current economic crisis, the policymakers concerned must speed up their efforts to overhaul the social security system in line with people's increasing needs.

Since the global financial and economic crisis hit the country's exports hard late last year, the Chinese authorities have recognized the necessity to move away from reliance on export and investment for growth. And, to boost domestic consumption as a key growth engine, a national consensus has been developed on a more universal, flexible and efficient social security net to cushion people against hard times.

The central government has planned to allocate 728 billion yuan ($106 billion) this year - an increase of 29.4 percent year on year - for items directly related to the people's well-being such as education, medical and health care, social security, employment, low-income housing and culture. The country has also achieved considerable progress on expanding coverage of basic social security in both urban and rural areas.

My reaction: China is speeding up economic and political reforms. In addition to everything listed above, China has also recently unveiled its first sovereign credit rating standards and is opening its capital markets and currency to the world.

To boost consumption and free up its capital markets, China is:

1) Raising subsidies for auto replacements from 1 billion yuan to 5 billion yuan

2) Allocate 2 billion yuan to encourage home appliance upgrades.

3) Allows consumer financing companies to boost consumption. non-deposit-taking institutions both home and overseas will be able to extend loans to consumers without collateral for buying durable goods.

4) Slashing the minimum financial requirement for commercial property investment for the first time in 13 years. The minimum amount of capital needed to jumpstart a new commercial property or an affordable housing project has been lowered from 35 percent to 20 percent.

5) Earmarking 6 billion yuan (878 million dollars) for low-rent house building projects across the country.

6) Issuing new rules to allow insurers to invest in corporate bonds without bank guarantees and allow smaller players to trade stocks directly

7) Creating its own "NASDAQ". (China's securities regulator released guidelines on March 31 to establish a growth enterprise board (GEB) to list small companies.)

8) encouraging the creation of new commodity derivatives.

9) Promoting Shanghai as a global financial center and a major gold trading market.

10) Supporting eleven national research programs with at least 62.8 billion yuan

11) Overhauling its social security system and allocating 728 billion yuan ($106 billion, a 29.4 percent increase from prior year) for items directly related to the people's well-being such as education, medical and health care, social security, employment, low-income housing and culture.


Conclusions:

1) China's efforts to boost consumption (economic liberation, massive government spending, etc...) are hugely inflationary. They are creating tremendous demand for raw materials. The dollar peg, by subsidizing China’s export sector, is also creating tremendous demand for raw materials. This is why China is now importing records amount of commodities.

2) These measures to boost consumption would be difficult if not impossible to reverse. When inflation starts threatening the Chinese economy again, the path of least resistance will be to drop the dollar peg, reducing the cost of imports and stabilizing prices.

3) Every step to boost domestic consumption makes China less dependent on the US.

4) Unlike the US, China still has many options to further boost domestic consumption:

A) Make the yuan freely convertible. This would result in billions of yuan leaving China and going into circulation around the world. China would then be able to print yuan and spend it on whatever they like to restore the domestic supply.
B) Allow foreign investors and central banks to buy Chinese treasuries. This would instantly drive down Chinese interest rates, supporting the economy.
C) Use its 2 trillion foreign reserves to fund domestic spending.
D) Continue to remove the anti-inflation measures it put in place over the years (ie: lower reserve requirements to 10%)
E) etc…


The outlook for China contrasts pretty starkly against that of the US.