Economy

China’s foreign exchange assets increased by US$50.4 billion in July, nearly US$40 billion more than its growth in June, according to the latest “Balance Sheet of Monetary Authority” released by the central bank. The People’s Bank of China (PBOC) has yet to announce the July forex reserve data, but due to a high positive correlation and small difference in the monthly growth between forex assets and forex reserves, it is reasonable to expect a surge in new forex reserves in July, said Shen Minggao, Caijing’s chief economist.

Such a result helps to quell concerns about “hot money” flowing out of China since June. Assuming July’s new forex reserves were approximately US$50 billion, including July’s US$25.3 billion trade surplus and US$8.3 billion foreign direct investment, the remaining “unexplainable” part was US$17 billion. These fluctuations reflect a normal “seasonal” feature in net capital inflow, Shen said, adding that as long as China’s economy maintains relatively robust growth, international capital will continue entering. In the near future, China still needs to deal with the excessive liquidity problem, caused by huge trade surplus accumulation, said Wan Tao, chief China economist with UBS Securities.

PBOC will strive to guarantee that increased credits are granted to those who need them in the agricultural sector, small- and medium-sized enterprises (SMEs), and businesses in earthquake-affected areas. The central bank said on September 1 that the amount of new loans to the agricultural sector this year should be larger than 2007, its growth rate should be higher, and its share in the total new loans should increase. The amount of new loans to SMEs should be no smaller than 2007 and its growth rate no lower. The 5 percent rise in credit quota announced by PBOC earlier this August aims to help the companies solve a fund shortage deadlock, but commercial banks may lack the incentive to lend for higher risks but smaller profit margins, analysts said.

The slowdown in European economic growth may pose a major challenge to Chinese exporters, who have been suffering from weakening demand from the United States, analysts said. As a result of sluggish performance in Europe, the euro exchange rate against the yuan fell to below 10 for the first time in more than two years. Exports to Europe, which account for 20 percent of China’s total exports, may be severely affected by weakening demand and comparatively higher prices from rising yuan, said Ma Jun, chief economist for greater China with Deutsche Bank.

Finance

Non-tradable shares newly released from lock-up periods as part of the “share segmentation reform” once again stirred fierce public debate recently. Investors worry that newly tradable shares may be dumped into the A-share market, only to further bring down the bear market. The debate was ignited by Li Kun, a researcher working for the think-tank of NDRC, who suggested a windfall tax be exerted on these newly tradable shares. Officials of the China Securities Regulatory Commission fired back, saying Li’s proposal ruins the spirit of the “share segmentation reform.”

A recent official report reveals that 7.7 percent of financial institutions, 350 in all, lack preventive measures against money laundering. The majority of these flawed systems involved unidentified clients or unreported, suspicious trading. 54.55 percent of the criticized 350 banks are state-controlled and 2.05 percent are foreign owned.

One key member of Yongjin Group, Liu Gang, went into custody in late August, adding another chapter to a case involving the suicide of Yongjin’s founding father and the detention of a former vice chairman of China’s Securities Regulatory Commission. Insiders told Caijing that Yongjin, a private financial clan, reaped a windfall for selling unlocked shares of Shanghai Pudong Development Bank, which they obtained by controversial measure, then cashed most of the stocks when share prices peaked.

Vanke released 5.9 billion yuan in corporate bonds despite regulatory and market concerns. Chinese real estate developer Vanke Co. issued 5.9 billion yuan in corporate bonds in order to boost liquidity. The Chinese real estate market has experienced a cash flow squeeze this year under the tightened credit policy. Bonds were sold at 5.5 percent interest rate for written bonds and 7 percent for non-written bonds, at the low end of their consulted interest rate span.

Industry

China hikes export tariffs on fertilizer products in an effort to guarantee domestic supply and stabilize prices. From September 1 to December 31, export duties on nitrogenous fertilizer and ammonium will rise to 150 percent from the current 100 percent. Meanwhile, a 100-percent levy on other fertilizers, which was set to be imposed from April 20 to September 30, will be extended to December 31. China will also impose a temporary tax on exports of plant or animal-based fertilizer (excluding guano) at 460 yuan per ton from September 1 to December 31.

Asia’s largest reinsurance company, China Reinsurance (Group) Corp., said it is working on plans for an initial public offering (IPO), following a management shakeup. In an internal staff meeting, China Reinsurance’s newly appointed Chairman Liu Feng said that the company is working on an IPO plan and will at some point determine a good time to go public. He did not disclose the timetable. Liu also said the company is maintaining active involvement in setting up China’s catastrophe insurance system. Liu Feng was appointed as the chairman of China Reinsurance after the former company Chairman Liu Jingsheng stepped down for “personal reasons” on August 13.

In an effort to expand beyond carbonated drinks in China, the Coca-Cola Company said it plans to buy China’s best-known juice maker, Huiyuan Juice Group, for US$2.4 billion. Coca-Cola has reached agreements with three of Huiyuan’s shareholders to take over a combined 66 percent stake of the company. Coke will offer HK$ 12.2 for each of Huiyuan’s Hong Kong listed shares, compared with Huiyuan’s HK$ 4.14 share price before being suspended on September 1. If the deal goes successfully, it will be the biggest takeover by any foreign company in China. Coca-Cola said it has submitted materials to government departments for antitrust review.

Hampered by inflation and natural disasters, China’s major household appliance chains witnessed slower sales growth in the first half. Suning Electrical Appliance Chain Group Co. Ltd., China’s leading electronics retailer, reported 70-percent growth year on year – an impressive performance, but falls short of last year’s 111 percent. Suning posted a 39-percent year on year growth in sales revenue for the first half, which was about one-third less than the 61-percent growth they achieved in same period last year. Earlier, China’s top appliance chain Gome Electrical Appliances Holding Ltd. also reported slower growth this year. Industry analysts blamed slower growth on inflationary pressure as well as the real estate slump.