MARKET WATCH

MARKET WATCH

TO THE POINT:Answering the U.S. threat to classify China as a currency manipulator, Chinese Premier Wen Jiabao said China will maintain the yuan at a relatively stable level and on a reasonable basis, while any trade protectionism under the guise of currency manipulation should be condemned. China’s sovereign wealth fund made another major investment in a U.S. power company in addition to its previous interest in financial institutions. Foreign direct investment in China rose slightly in the first two months of this year. Google remains unresolved in its decision to leave or continue operating in China. Netizens strongly opposed the construction of a maglev train connecting Shanghai and Hangzhou, complaining that the project was a waste of money.

By LIU YUNYUN

Defending the Yuan

Recent complaints from the United States about the Chinese yuan have escalated. Chinese Premier Wen Jiabao said China is an advocate of free trade and opposed the idea of taking aggressive measures to force another country’s currency to either depreciate or appreciate.

Facing mounting pressure from Western countries, relevant ministries have reportedly implemented a stress test over labor-intensive export-oriented industries, which bear the full brunt of yuan appreciation as their profitability has already been squeezed out by penny-pinching Western buyers.

Wang Qianjin, an analyst at Webtextile.com, said the average profit of the textile industry in China is around 3-4 percent. A 5-percent appreciation of the yuan—an increase that exceeded what a company could sustain and would force thousands of smaller factories to close—would mean 30 billion yuan ($4.39 billion) in profit losses for big textile companies, Wang said.

The Google Question

Internet search engine giant Google Inc. remained under the spotlight after it threatened to withdraw from the Chinese market in January. Recent Western media reports about Google’s “99.9 percent” possibility of leaving China ignited fears that the censorship dispute would escalate into a fight that neither side could win.

Ministry of Commerce (MOFCOM) spokesman Yao Jian said on March 16 the two Google-owned companies registered in China had not sent any withdrawal reports to MOFCOM. Yao said China strongly opposed politicizing the business disagreement.

Ministry of Foreign Affairs spokesman Qin Gang said at a March 16 press conference that Google’s decision is an individual act of the company. Qin said if Google retreats it would neither affect the Chinese investment environment nor change the fact that most American companies in China are reaping profits.

Qin insisted all companies operating in China should obey Chinese laws and regulations.

Currently, Google holds up nearly one third of the mainland Internet search market, while homegrown Baidu.com took up the remaining market share. Since Google’s withdrawal intention was made public, share prices of Baidu have been on the rise. On March 15, Baidu’s NASDAQ-traded shares closed at $576.84, surpassing Google’s for the first time.

“Once Google closes its China operation, the Internet search industry will lose its development gauge, thus diminishing Baidu’s creativeness,” said Lu Bowang, President of China IntelliConsulting Corp.

CIC’s New Move

The Chinese sovereign wealth fund— China Investment Corp. (CIC)—responsible for managing the country’s $200 billion foreign reserves bought $1.58 billion worth of shares in the U.S. AES Corp., a global power company. CIC paid $12.6 for each share.

The AES deal gives CIC a seat on the company’s board of directors.

By the end of 2009, CIC had held shares in 84 American companies (including Exchange Traded Funds) for a total market value at $9.627 billion, mostly in resource and financial stocks.

CIC has so far used most of its $200 billion investment fund pool, leaving it with few available funds for future deals, said Wang Jianxi, Deputy General Manager of CIC, on March 5 on the sidelines of this year’s National People’s Congress(NPC) session.

Wang said CIC was facing a dilemma in choosing its targets. “Among big economies, China is growing fast but CIC cannot invest in its home country. Therefore, when making investments, CIC will take into consideration the ‘China factor’ in developed and emerging economies,” he said.

Investing in China

China remained a hot destination for foreign investment in the first two months of this year.

Figures from the MOFCOM showed foreign direct investment (FDI) in January and February stood at $14.024 billion, growing 4.86 percent year on year.

The fastest growing FDI sectors in 2010 were agriculture, forestry, animal husbandry and fishery with growth of 81.88 percent year on year. Foreign companies’ investment in manufacturing experienced the biggest drop—13.02 percent.

The service sector was a magnet for FDI, attracting nearly half of all foreign investment. The investment proportion has also been on the rise since the beginning of this year.

Wang Zhiyue, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the MOFCOM, said more FDI would likely go to hi-tech sectors and modern services, like medical care and education.

MOFCOM figures also showed an increasing outbound investment craving from the domestic companies—the companies invested in 693 companies in 89 countries with total non-financial investments of $4.66 billion in January and February, surpassing the total outbound investment in the first quarter last year.

Maglev Rail Concern

Critics expressed concerns over the government’s approval of a magnetic levitation railway (maglev) project connecting Shanghai and Hangzhou, capital of Zhejiang Province.

Zheng Jian, chief planner of the Ministry of Railways, said on the sidelines of this year’s NPC session in early March that detailed research on the project was underway.

The new maglev, with an estimated investment of 35 billion yuan ($5.12 billion), was approved by the Chinese Government in 2007, but was suspended due to concerns over radiation. The railway will link the two cities via a 38-minute commute.

The existing railway network between the two cities, however, already provides fast service. With the completion of a highspeed railway line later this year, it will only take 48 minutes to travel from Shanghai to Hangzhou and vice versa, making the maglev plan unnecessary.

The trial maglev operation in Shanghai—connecting the downtown area to Pudong Airport—has suffered tens of millions of yuan in losses each year since it began operating in 2003.

The proposed maglev line is to be built by Germany’s Transrapid consortium, mainly ThyssenKrupp and Siemens.

Numbers of the Week

20.4%

China’s fiscal revenue in February rose 20.4 percent year on year to 494.497 billion yuan ($72.4 billion), according to the Ministry of Finance.

250.3 billion

The profits of state-owned enterprises totaled 250.3 billion yuan ($36.6 billion) in January and February, rising 88.9 percent year on year, said the Ministry of Finance.

Increase in China’s Holdings of U.S. Treasury Securities($bn) (China’s holdings by the end of January 2010 totaled $889 billion.)

(Source: U.S. Department of the Treasury)