Yuan’s strength Will Be Used to Cut Trade Surplus

China’s currency rose on speculation the government will use strength in the Yuan to narrow the trade surplus and bonds advanced.

United States Labor Secretary Elaine Chao said on Aug. 26 that the Bush administration will keep pressing China to let the Yuan appreciate at a faster pace to help close a trade deficit with the Asian nation. China’s trade balance unexpectedly widened 4 percent in July from a year earlier to US$25.3 billion, the first increase in four months.

“China still has a huge trade surplus, giving room for appreciation of the Yuan,” said Xie Dongming, an analyst at Oversea-Chinese Banking Corp in Singapore. “The currency will appreciate more on a trade-weighted basis while its advance against the dollar will depend on the dollar’s moves.”

The Yuan has weakened 0.2 percent versus the US dollar in August, after a 6.9 percent gain in the first seven months of 2008. It fell by the most in four weeks on Aug. 25.

US Treasury Secretary Henry Paulson said on August 19 that China must let its currency appreciate to curb domestic inflation and defuse tensions in the US Congress that may prompt trade disputes. The Yuan has gained 8.3 percent versus the Euro and 4.3 percent against the yen this quarter, compared with a 0.09 percent advance versus the US dollar.

BOC Reports 43% Profit Growth in the First Half Year

Bank of China, the country’s third largest bank by assets, posted a 42.78 percent growth in first-half net profit, the only domestic listed bank reporting a profit growth below 50 percent. The country’s 13 other listed banks posted on average a 96 percent increase in first-half profits.

The Beijing-based bank said that its net profit vaulted 42.78 percent to 42.18 billion Yuan ($6.17 billion) in the six months to June 30 from a year earlier. However, it is the slowest profit growth among the country’s 14 publicly traded banks.

Analysts said the bank’s huge US sub-prime-related asset has greatly eroded the lender’s earnings.

Another reason is the stronger Yuan against the greenback eroded the values of its overseas holdings.

The bank has the highest ratio of overseas investment among Chinese banks at 44 percent. It also has the highest ratio of foreign exchange assets at more than 30 percent, much higher than the average 8 percent of domestic banks. This has caused and will continue to have a negative effect on its profit.

The bank has 689 outlets overseas, with the overseas business accounting for 43 percent of Bank of China’s profit in 2007, compared with only 3 percent for Industrial and Commercial Bank of China, the country’s largest bank by assets.

Multinationals Flock to Shanghai on Relaxed Rule

More than 200 multinational corporations (MNCs) have established their regional headquarters in Shanghai, making the city one of the most attractive places on the Chinese mainland to set up regional headquarters.

On Aug. 27, 19 MNCs, including Capgemini, IKEA, HKC (Holdings) Ltd, Applied Materials Inc, Toyota Boshoku and Ingersoll Rand, received certificates registering Shanghai as the location for their regional headquarters, lifting the total to 206.

To encourage more MNCs to establish key operational centers in Shanghai, which will help the city upgrade its economic functionality and move closer to being a financial center, the government amended a regulation last month to make the city more attractive.

The Provisions of Shanghai Municipality on Encouraging Multinational Corporations to Establish Regional Headquarters, issued by the Shanghai Municipal Government on July 7, lowered the standard of the accumulated paid-in capital invested by the parent company within China from US$30 million to US$10 million

Tang Dengjie, Shanghai’s vice mayor, said the city would boost both hardware environment and services to attract more MNCs to set up their regional headquarters in Shanghai.

Shares Edge up on Recovering Confidence

Chinese shares edged up on August 21st, comforted by words the country’s top market regulator is considering to cut or cancel the stock dividend tax.

The Shanghai Composite Index was up eight points, or 0.34 percent, to close at 2,350.14. In Shenzhen, the market fell 0.13 percent, or 10.11 points, to close at 7,817.05.

Aggregate turnover reached 43.4 billion Yuan ($6.31 billion), slightly lower than 47.2 billion Yuan on Wednesday.

Nearly half of the stocks dropped on the two bourses. In Shanghai, 380 stocks rose while 401 fell; in Shenzhen, 351 issues rose while 296 fell.

More than 40% Growth in FDI Used in 1st 7 Months

China saw a growth of almost 45 percent in foreign direct investment (FDI) actually used in the first seven months of this year, due partly to high interest from overseas investors, the Ministry of Commerce said on August 20th.

But analysts said it should not rule out possibility for short-term speculative capital, or hot money, rushing into the mainland through Hong Kong.

From January to July, China approved the establishment of 16,891 overseas-funded enterprises, a decline of 22.15 percent from the same period last year. However, the FDI actually used nationwide amounted to $60.724 billion, up 44.54 percent. Researchers said that this is an indication that the per-project average FDI used had increased substantially.

Analysts said foreign capital was shifting from the manufacturing sector to the service sector and new-technology and high-tech projects.

Meanwhile, as Wang Chao, assistant to the commerce minister, pointed out, more foreign funds poured into central and western regions. In the first half, the central region doubled FDI it used, while the western region recorded a 140-percent growth.

Analysts also noted that it was possible for large amounts of hot money to contribute to the fast growing FDI through Hong Kong, which accounted for 40 percent of the FDI nationwide.

The commerce ministry said that in the first half year, of the FDI actually used nationwide, $23.39 billion came from Hong Kong, up 94.5 percent year-on-year.

Chinalco Gets the Rio Nod

Aluminum Corp of China, or Chinalco, has got Australian approval to raise to 11 percent its stake in Rio Tinto Group, the target of a hostile $143 billion takeover by rival miner BHP Billiton Ltd. It bought a 9 percent stake in London-based Rio in February and said in March it might seek to increase that holding.

The bid by China’s biggest aluminum producer may make it more difficult for Melbourne-based BHP to succeed in its all-stock takeover offer for Rio, the world’s third largest mining company. Chinalco may be seeking to increase its stake to block that deal, the Australian Financial Review reported earlier.

“This will underpin the Rio share price and also create uncertainty about whether or not BHP will get its deal over the line,” said Stephen Bartrop, a resources analyst and director of Sydney-based Stock Resource. “Even if Chinalco doesn’t increase its stake, it shows they have the capacity to block the deal.”

BHP’s CEO Marius Kloppers wants the Chinese company’s support for his deal, which would create the world’s biggest producer of aluminum and energy coal.

China to Float More than 24b Yuan in Three-year T-bonds

China’s Ministry of Finance said on Friday it would float 24.59 billion Yuan ($3.62 billion) worth of three-year, book-entry treasury bonds next week.

The bonds, the 11th batch of its kind this year, had a fixed annual interest rate of 3.92 percent, the ministry said in a statement on its website.

The bonds would be issued from July 14 to July 17, and trading would begin on July 21.

Interest would be calculated starting from July 14 and paid annually, with the principal to be returned upon maturity on July 14, 2011.

The ministry planned to issue eight new batches of book-entry bonds between July and September.

Baosteel Plans to Lower Most Prices in Oct

Baoshan Iron & Steel (Baosteel), the country’s largest listed steel mill, announced it is to lower most of its steel products prices in October after it raised prices in three consecutive quarters this year.

Baosteel announced that it will slash the price of its cold-rolled steel products by 300 Yuan ($43.78) per ton from the fourth quarter. Except the prices of hot-rolled plate and silicon steel, other products will drop in price to the different extents.

Baosteel said the new prices were the futures price for the fourth quarter. Experts believe the explanation will give Baosteel a “broader leeway” to further correct its product prices.

Over the past two months, steel products witnessed a 10 to 12 percent price drop in the domestic market. “By correcting its product prices, Baosteel is setting its price on a more market-orientated basis,” Yang Baofeng, analyst from Dongfang Securities, said.

Another reason behind the price revision is the sales slump in the global steel market during the third quarter of this year, which adds to market uncertainty. “All the downstream industries, such as automotives, construction materials and home appliances are having an oversupply problem, which as a result will erode their demand for steel products,” the analyst from Haitong Securities said.

“The last but not the least reason is the tax,” he said. “Inside information has it that the central government will soon stop its policy of export tax refund. Once it becomes effective, domestic steelmakers will be reluctant to export their steel products. Therefore, a growing stockpile of steel products will be found in China, which will lead to a further price cut.”