MARKET WATCH

MARKET WATCH

By HU YUE

TO THE POINT:By ordering another hike of the reserve requirement ratio,China is sparing no effort to dampen inflation. The central bank starts a trial currency program, under which qual ifi ed Chinese companies can settle their overseas direct investments in Chinese currency, the yuan. China remains the largest foreign holder of U.S. Treasury securities, even after shedding $11.2 billion in November 2010. State-owned enterprises reap handsome profits,drawing strength from the buoyant economy. China has become the country with the most installed wind power capacity worldwide. Due to the possibility of a sluggish auto market starting this year, private automaker BYD plans to cut its dealership in 2011.

Soaking Up Liquidity

The People’s Bank of China, the central bank, on January 20 increased the reserve requirement ratio for banks in a move to siphon excess liquidity out of the market,a trigger for runaway inflation. It was the first hike this year after six increases in 2010.

Commercial banks will have to set aside an additional 0.5 percent of their deposits in reserve, locking about 350 billion yuan($52.7 billion) they could otherwise lend.

A fl ood of low-interest credit has found its way into the economy, forcing up prices across the country, including consumer goods and properties. The broad money supply (M2), which covers cash in circulation and all deposits, had stood at 72.58 trillion yuan ($11 trillion) by the end of 2010, up 19.7 percent year on year, topping the government’s target of 17 percent.

In the wake of proliferating in fl ationary fears, China has vowed to take a prudent monetary stance this year, marking a switch from the moderately loose policy adopted to counter the fi nancial crisis. Last year, the central bank also raised interest rates twice and drained liquidity through a series of market operations.

Since issuing central bank bills has turned out to be less effective, more reserve requirement rate increases are probably in the pipeline, said Wu Shijin, an analyst with the Guoxin Securities Co. Ltd.

Lian Ping, an economist with the Shanghai-based Bank of Communications,

expected more interest rate hikes around the Spring Festival, which falls on February 3.

“The one-year deposit rate remains negative in real terms given soaring inflation,”he said. “But a drastic increase is less likely as a large gap in rates with the United States would attract torrential in fl ows of speculative hot money.”

Yuan’s Global Reach

The central bank launched a trial program to allow quali fi ed enterprises to settle their overseas direct investments in the yuan,or renminbi, a move expected to extend the Chinese currency’s global reach and ease excess domestic liquidity.

In a notice issued on January 13, the central bank said businesses that were allowed to settle cross-border trade in the yuan would also be permitted to conduct direct investments, including mergers and acquisitions,outside China using the yuan.

In July 2009, China started a pilot scheme to promote yuan settlement in crossborder trade in five cities, and widened the program to cover 20 provinces and municipalities in June 2010.

Further, domestic banks could offer those enterprises loans for their overseas investment, and their investment pro fi ts could be remitted back to China in the yuan, according to the new rules that took effect on January 6.

The program is intended to push forward internationalization of the yuan and provide better support for Chinese enterprises expanding globally, said the central bank.

The move would provide a channel for domestic capital to flow out, taking inflationary pressures off the country, said Guo Tianyong, Director of the Research Center of China’s Banking Industry at the Central University of Finance and Economics.

Meanwhile, it is bound to smooth the way for Chinese companies to venture abroad and help them avert foreign exchange risks, said Liu Dongliang, a senior analyst at the China Merchants Bank.

With deep pockets at their disposal,expansion-minded Chinese fi rms are quickening the pace of establishing a cross-border presence. Overcapacity at home and a stronger yuan are also forces pushing Chinese capital offshore.

But it remains to be seen how the program will work as many foreign companies may be reluctant to accept the yuan, he said.

Of fl oading U.S. Assets

China trimmed its holdings in U.S.Treasury securities by $11.2 billion to $895.6 billion in November 2010, said the U.S.Department of Treasury. This is the first reduction after four consecutive months of increases.

China remains the largest foreign holder of U.S. Treasury securities, ahead of Japan,which increased its holdings by $2.2 billion in November to $877.2 billion. Total holdings of Treasury securities by all foreign countries amounted to $4.35 trillion, an increase of 0.9 percent from the previous month. This was widely considered a sign that other nations still have an appetite for dollar assets.

Numbers of the Week

4.19 trillion kwh

China’s power consumption totaled 4.19 trillion kilowatt hours in 2010, surging 14.56 percent from a year ago, said the China Electricity Council.

166.25 billion yuan

China’s lottery sales in 2010 rose 25.5 percent year on year to 166.25 billion yuan ($25.6 billion), said the Ministry of Finance.

ADDING WEIGHT: A cargo ship in Nanjing, capital of Jiangsu Province, waits to set sail. China’s ship makers received new orders of 75.23 million deadweight tons in 2010, said the Ministry of Industry and Information Technology

Pro fi table SOEs

China’s state-owned enterprises (SOEs)generated juicy profits in 2010, basking in the glow of a robust economy.

In 2010, SOEs raked in a combined profit of 1.99 trillion yuan ($306.2 billion),skyrocketing 37.9 percent from a year ago,said the Ministry of Finance (MOF). Of this total, the central SOEs earned 1.34 trillion yuan ($206.2 billion), and the rest went to local SOEs.

Their revenues totaled 30.33 trillion yuan($4.7 trillion), an increase of 31.1 percent year on year. The SOEs also experienced an improvement in profitability as their profit-to-sales ratio came in at 6.6 percent,compared with 6.3 percent in 2009.

The SOEs maintained growth momentum last year, with both pro fi ts and revenues doubling that of five years ago, said the MOF. Such bullishness made significant contributions to the recovery of the real economy.

But Shao Ning, Vice Chairman of the State-owned Assets Supervision and Administration Commission, added a note of caution.

“The enterprises will face daunting challenges this year as the monetary environment becomes tighter and costs inflation creeps up,” said Shao at the 12th New Year Forum of the Guanghua School of Management of Peking University on January 16.

Li Yining, a renowned economist and Peking University professor, said SOEs should play a larger role in China’s economic rebalancing by exploring global markets and making forays into emerging strategic industries such as information technology and new energies.

Wind Power Giant

As part of its efforts to curb carbon emissions, China is sparing no efforts in developing clean and renewable energy plants,as reflected in its tremendous endeavor to increase the country’s wind power.

By the end of 2010, China had become the country with the most installed wind power capacity, supplanting the United States, said Li Junfeng, Secretary General of the Chinese Renewable Energy Industries Association (CREIA).

China installed 16 gigawatts (gw) of new wind power capacity in 2010, growing 62 percent year on year, making its total installed capacity 41.8 gw, said Li.

The wind power capacity installed in China in 2010 will save 31.3 million tons of coal, reducing carbon dioxide emissions by more than 90 million tons, suspended particles by nearly 33,000 tons, sulfur dioxide by 64,000 tons and nitric oxide by 60,000 tons.

The efforts will be carried on in the coming years. China will increase its cumulative grid-connected installed wind power capacity to 55 gw this year and increase its cumulative installed wind power capacity to 100 gw by 2015. By 2020, it plans to have 200 gw of installed capacity.

Dealerships Down

A foreseeable auto market slowdown in 2011 has triggered major dealer pullouts due to the termination of favorable auto purchase policies. BYD Co. Ltd., one of China’s largest private automakers, has cut the number of the dealerships by 100 citing unreasonably fast growth of its sales network in the past.

The company set an ambitious goal at the beginning of 2010 to double its sales to 800,000 units, but its performance was rather disappointing last year. In the first half, the company only sold 289,000 cars.In August, it reduced its full-year goal to 600,000 units.

China has undoubtedly overtaken the United States to be the largest auto market in the world, but whether China can keep its momentum in 2011 remains a question.

In the middle of last year, a number of BYD dealers quit the company’s sales network due to sluggish sales and high inventory.

BYD has greatly expanded its dealerships to more than 1,200 last year from some 600 in 2008. Wang Chuanfu, Chairman of BYD, also noted the low standard the company set in its early days when choosing dealer partners.

Warren Buffett’s investment firm Berkshire Hathaway Inc. has a 10-percent share in BYD, which is traded publicly in Hong Kong.