Central bank: Rate of inflation \’still low\’
Central bank signal comes amid division over interest rate hikes
Central bank governor Zhou Xiaochuan said Tuesday China\’s inflation rate remains \”relatively low\”, amid ongoing debate among officials and economists on when policymakers should raise interest rates to rein in rising inflation and asset prices.
The inflation rate still needs to be \”closely watched\”, Zhou told reporters in Sydney after a meeting with other central bankers.
China\’s consumer price index (CPI), a major measure of inflation, rose by 1.9 percent in December from 0.6 percent in November, due to the country\’s ample liquidity. The country initiated its economic stimulus plan to keep economic growth stable in late 2008. Chinese banks extended 9.6 trillion yuan ($1.4 trillion) in new yuan loans in 2009, almost double that of 2008, while the lending in January is forecast to reach 1.3 trillion yuan.
The rapidly rising inflation, together with surging house prices, has led to expectations of imminent interest rate hikes. The stock market has also been declining in recent trading days as investors expected more tightening policies following the country\’s move to raise the reserve requirement ratio of commercial banks and tighten real estate deals.
But Dai Xianglong, chairman of the influential National Social Security Fund, said in a speech in India on Monday that China was unlikely to raise interest rates in the first half of 2010 as the economic recovery was still not on solid ground.
Dai, a former central bank governor, said that despite possible policy adjustments to combat inflation and asset bubbles, money and lending supply will remain relatively loose over the course of the year.
\”Interest rate hikes are not the most appropriate tool if policymakers want to control inflation,\” said Zuo Xiaolei, chief economist of China Galaxy Securities.
China\’s recent inflation rise, in essence, stems from increasing liquidity in the financial system. The best way to curb inflation is to raise banks\’ reserve requirement rate or conduct open market operations, she said.
China announced the raising of banks\’ reserve requirement ratio, or the proportion of money commercial banks must keep in reserve, on Jan 12. It has also resorted to a number of open market operations to mop up liquidity as banks rushed to lend to pre-empt a possible tightening of policy.
China may continue to raise the requirement ratio this year, possibly increasing it three or four times to 18 percent from the current 16 percent, said Qu Hongbin, chief China economist of HSBC.
Qu said an interest rate hike could come in April because inflation could be very serious if interest rates are not raised. China is scheduled to release its first-quarter economic data in mid-April.
Economists also forecast that China\’s CPI could be mild in January, because of the relatively high base of last January. China\’s traditional Spring Festival fell in January last year.
But it can rise up to 3 percent in February as consumption can still pick up during the Chinese New Year period, which starts on Feb 14, analysts said. Inflation could stabilize later, Nomura Securities reported.
\”If that happens, the possibility of interest rate hikes would decrease,\” said Zhang Lan, head of research at Shanghai-based Changjiang Securities.
Agencies contributed to the story
China, Vietnam to set up new trade zone
South China\’s Guangxi Zhuang autonomous region and Vietnam have approved a framework agreement to establish a new cross-border economic zone in the latest effort to further boost economic and trade cooperation between China and its Southeast Asian neighbor.
It is part of broad efforts to further enhance bilateral economic ties between China, the world\’s third-largest economy – one of the fastest-growing economies in the world – and the Association of Southeast Asian Nations (ASEAN) following the establishment of the China-ASEAN free trade area (FTA) earlier this year.
The framework plan for the new cross-border economic zone between Dongxing, a city administered by Fangchenggang, a port city in Guangxi, and Mong Cai city, the largest border trade zone in northern Vietnam, was approved by the Guangxi regional government. Administrators are now applying for approval from the central government, Mo Gongming, mayor of Fangchenggang, told China Daily on the sidelines of a local legislative session last month.
Mo added that the plan was approved by the Vietnamese government in 2009. Nguyen Anh Dzung, consul general of the Consulate General of Vietnam in Nanning, confirmed the approval of the plan by Vietnam at a reception marking the 60th anniversary of the establishment of the diplomatic ties between Vietnam and China in Nanning on Jan 30.
According to the initial plan, the new cross-border zone will cover about 4 square kilometers in Mong Cai city and about 5.8 square kilometers in Dongxing city in the first phase. Dongxing hopes to expand the size of the Dongxing section of the zone to around 13 square kilometers in the future, said Liu Quanyue, mayor of Dongxing.
Dongxing port is one of the country\’s main trading hubs with Vietnam. [China Daily]
Dongxing, the only Chinese city with both land and sea borders with ASEAN, has a total area of 540.7 square kilometers and a population of 110,000. Mong Cai, a key Vietnamese city open to the outside world with preferential government policies, has a total area of about 520 square kilometers and a population of about 100,000.
According to the plan, the new economic zone is designed to replace the current 4-square-kilometer cross-border economic zone in Dongxing approved by China\’s cabinet, the State Council, in 1992, said Mo.
The mayor of Fangchenggang added the new zone would be isolated from residential areas, unlike the existing one.
\”We are positive about the new cross-border economic zone,\” Nguyen said. \”It\’s a new concept and a new pattern of cooperation for both sides. The two sides need to have more discussions on specific policies as well as the content and scope of the cooperation.\”
\”A joint team has been established to push for specific cooperation between Dongxing and Mong Cai and China should speed up the process of cooperation,\” said Liu.
A second bridge will be built on Beilun River on the border between China and Vietnam as part of the new infrastructure to further boost border trade in the future Dongxing-Mong Cai economic zone, Mo said.
The current bridge, erected in 1958, now can hardly meet the needs of significantly increased passenger and cargo transportation with the establishment of the China-ASEAN FTA and rapid development of the Guangxi Beibu Bay economic zone.
In 2009, nearly 4.9 million people crossed the Dongxing border, rising from about 4.6 million in 2008, according to the mayor of Dongxing.
The volume of trade between China and Vietnam through the Dongxing-Mong Cai border reached $2.4 billion and $4.1 billion in 2007 and 2008 respectively, the highest among the China-Vietnam border gates.
\”We hope the planned Dongxing-Mong Cai economic zone allowing more free movement of capital, people and cargo, can play an important role in facilitating trade between the two cities, boosting China-Vietnam economic ties and enhancing China-ASEAN cooperation,\” Liu said.
New free trade zone to benefit China
China\’s top brands could be on the road to becoming global household names after the launch of the 4.5 trillion U.S. dollars China-ASEAN Free Trade Area (CAFTA) market, the world\’s largest free trade zone, according to trade experts.
Bruneian dancers perform at a China-ASEAN expo in Nanning, Guangxi, in November 2008. (Photo Source: Chinadaily.com)
Despite the country being an economic powerhouse, few of its big companies have ever made a major impact on the world stage.
But if they dominate the 1.9 billion-population CAFTA, Chinese companies could build a platform from which to attack European and North American markets.
China will have made the switch from being a developing country exporting cheap goods to finally making a success of globalization.
Zhang Tianbing, founder of international management consultants AT Kearney\’s China Research Center in Shanghai, said China companies could move from being regional to global players.
\”Chinese companies have never successfully taken advantage of globalization and this could be one of the opportunities presented by the free trade area,\” he said.
\”If they establish dominant market positions in the region they could move on to do the same in Europe and North America. It would be a major stage in the evolution of the economy.\”
The China-ASEAN Free Trade Area came into being on Jan 1 with 90 percent of goods set to be tariff-free between China and Indonesia, the Philippines, Thailand, Singapore, Malaysia and Brunei.
Li Shunde, chairman of Guangyuan Tian Mei Jewelry Co, based in Guangyuan in Sichuan province, is one entrepreneur who sees the CAFTA area as a platform on which to eventually attack world markets.
\”I see the ASEAN market as the first stop on the way to selling in international markets. The free trade area with its zero-tariff policy is a major opportunity for us,\” she said.
China\’s largest private car manufacturer Geely is another that expects to benefit from the free trade area.
Yu Xueliang, vice-president of Geely, has confirmed he has had discussions about setting up car manufacturing facilities in Indonesia, where it already has an assembly plant.
\”Indonesia doesn\’t have an indigenous carmaker and the total number of vehicles produced there is just around 600,000 a year. The country has a big population and plenty of potential, however,\” said Yu.
\”We are going to extend the scale of the plant and expand other operations there in alliance with other companies,\” Yu said.
Indonesia is one country to voice concerns about China using the free trade area as a dumping ground for cheap goods it cannot now sell to western markets because of the economic crisis.
Indonesian President Susilo Bambang Yudhoyono was still coming under pressure from his own parliament to ask for a delay in the implementation of CAFTA – even after the launch date – to protect the country\’s footwear, textile and food beverage industries.
Ignatius Lim, commercial counselor at the Singapore embassy in Beijing, said Indonesia\’s reaction was understandable.
\”Officials there need to protect domestic factories so as to maintain people\’s living conditions. Under such an economic situation, even developed countries tend to protect themselves by initiating anti-dumping and other measures,\” he said.
Zhang Yunling, director of the Institute of Asia-Pacific Studies at the China Academy of Social Sciences, said far from being a negative influence, China could prove to be the engine of growth in the region.
\”Although some countries have voiced their worries, ASEAN should take advantage of the speed of China\’s growth,\” he said.
Zhang at AT Kearney insisted China was unlikely to assert as much power as the United States does in the North American Free Trade Agreement, one of the largest other free trade areas along with the European Union.
He believes it could be Chinese manufacturing under threat from imports from other Southeast Asian nations where production costs are lower.
\”Chinese manufacturers are no longer the lowest cost producers anymore. What you will see is a lot of Chinese companies setting up production facilities in places like Thailand and Indonesia and exporting goods to China. This will have the effect of Chinese manufacturing moving to cheaper places in western China,\” he said.
One company planning to do this is Haier. It already manufactures refrigerators in Prachinburi province in Thailand, its first factory in Southeast Asia.
It intends to take advantage of zero tariffs to import some fridge models back into China.
Wu Yong, general manager of Haier Electric (Thailand), said the products could have a competitive edge in the Chinese market.
\”The founding of the FTA will give more momentum to China and ASEAN enterprises to expand their business in each other\’s market,\” he said.
Xu Ningning, deputy secretary general of the China-ASEAN Business Council based in Beijing, said China and ASEAN countries already had a successful trading relationship before the introduction of the free trade area.
Trade between the two parties has been increasing at 20 percent a year and reached 231 billion U.S. dollars in 2008.
\”Some small- and medium-sized enterprises in ASEAN worry cheaper but better Chinese products would destroy their domestic business when the tariff is cancelled. The area\’s success, however, will be judged by whether enterprises in all countries feel any real benefit,\” said Xu.
Zhang at AT Kearney expects China to have a dominating influence and can envisage the area adopting the yuan as a single currency in the future as happened with the euro in European Union nations excluding the UK.
\”You already see the yuan accepted in a number of Southeast Asian nations alongside the domestic currency. I think if we look into the future this could be a possibility,\” he said.
China considers social security tax
China\’s Ministry of Finance is considering levying a social security tax in an effort to narrow the wide gap in income distribution, said a report in Friday\’s 21st Century Business Herald, citing Finance Minister Xie Xuren.
Xie said in his article published in Thursday\’s Qiu Shi (Seeking Truth), an official magazine of the Communist Party of China Central Committee, this year will witness personal income tax reform, and taxes will be better applied as a way to adjust income distribution.
China\’s social security, including pension insurance, basic medical insurance and unemployment insurance, are paid by the State, enterprises and individuals to the social security fund in the form of a \”social security fee.\” Changing the form into a social security tax means the recourses for the social security fund will be broadened.
\”It\’s the first time China raised the issue of social security tax, targeting the existing huge gap in income distribution,\” said Li Weiguang, professor of Tianjin University of Finance and Economics, adding that the current social security fund collecting system can hardly cover all citizens.
At present, the social security fund is administered by provincial budgets, leading to problems due to uneven regional development and migration.
Double-digital GDP growth forecasted this year
A top Chinese think tank forecasted the nation\’s economy would experience a mild rebound this year, with gross domestic product expanding around 10 percent year on year.
Among the three economic engines, investment is expected to contribute 6.3 percentage points to the GDP growth, while consumption and net export will contribute 4.2 and 0.5 percentage points, respectively, the Center for Forecasting Science of the Chinese Academy of Sciences said in a report issued on Saturday.
Investment would continue to increase as a result of the government\’s economic stimulus measures, with focuses in agriculture, transportation, and industries relating to people\’s livelihood, but the annual investment growth would decrease from 30.1 percent in 2009 to 25 percent, the report said.
The country\’s foreign trade is expected to step out of recession as overseas demand rises due to the recovery of the world\’s economy.
Total value of the foreign trade would advance 17.6 percent year on year, with export up 16.6 percent and import up 18.9 percent, according to the report.
The report also estimated that consumption price index (CPI), a major gauge of inflation, would rise 3.06 percent from a year earlier, as a combination of economic revival, ample liquidity, and inflation expectations would drive up the prices.
Data from the National Bureau of Statistics (NBS) showed China\’s economy expanded 8.7 percent last year, of which investment growth contributed 8 percentage points, consumption contributed 4.6 percentage points, while net exports dragged down GDP growth by 3.9 percentage points due to the sluggish external demand.
Faster economic adjustment \’brooks no delay\’: Hu
Chinese president Hu Jintao Wednesday called for the whole nation\’s efforts to accelerate the adjustment of economic development pattern to promote sound and fast economic and social development.
\”The transformation of economic development mode brooks no delay based on a comprehensive judgment on international and domestic economic situation,\” Hu said at an opening ceremony of a seminar attended by provincial and ministerial-level officials.
The key for the transformation was to achieve it \”at an accelerated speed\” and with practical effects, he said.
Hu urged the country to enhance its capacity of independent innovation, deepen reform of the system for managing science and technology, and speed up its building of a \”grand\” pool of innovation-oriented talents in a bid to give scientific and technological support for the transformation.
To achieve the end, the country should speed up optimizing the economic structure and industrial upgrading, and the transformation of development mode of the agriculture sector, he said.
Hu also urged to improve energy, resources, ecological and environmental conservation and enhance China\’s capacity for sustainable development.
Other major tasks listed by Hu to accelerate economic adjustment include balancing economic and social development, promoting development of the cultural industry, and adjusting the development mode of foreign trade.
Last year was the most difficult for China\’s economic development since the new century, but the country\’s economy managed to achieve an overall recovering trend after the government carried out proper measures, he said.
China\’s gross domestic product grew 8.7 percent in 2009, according to the National Bureau of Statistics (NBS).
However, Hu said the basis for the recovery was still unstable at present, and the international economic situation in the post-crisis era was more complicated.
\”On the surface, the global financial crisis impacted on the speed of China\’s economic growth, but in essence it was the economic growth pattern that was worst hit,\” Hu said.
The adjustment of development mode would help to improve the country\’s economic development quality and efficiency, the economy\’s international competitiveness and anti-risk capability, and to expand the space for China\’s development, he said.
Hu admitted the adjustment would be a prolonged and arduous war, but said the work could be pushed forward by unwaveringly deepening reform in various sectors.
Hu said, the 17th National Congress of the Communist Party of China (CPC) in 2007, put forward the call for accelerating the transformation of the country\’s economic development mode.
The strategic tasks for the adjustment were to promote economic growth to shift from relying mainly on investment and exports to relying on a well-coordinated combination of consumption, investment and exports; from secondary industry serving as the major driving force to primary, secondary and tertiary industries jointly driving economic growth, and from relying heavily on increased consumption of material resources to relying mainly on advances in science and technology, improvement in the quality of the workforce and innovation in management, Hu said.
Senior Chinese leaders Wu Bangguo, Wen Jiabao, Jia Qinglin, Li Changchun, Xi Jinping, Li Keqiang, He Guoqiang and Zhou Yongkang were present at Wednesday\’s opening ceremony of the seminar at the CPC Central Committee\’s Party School.
Mills press for \’China price\’ in 2010 iron ore talks
Chinese mills are trying to keep iron ore prices rising less than 30 percent in this year\’s industry talks with the big three global miners, the New Express Daily reported today.
It was reported that delegations from Baosteel, Wuhan Iron and Steel and others are already in Singapore to hold discussions with BHP Billiton and Rio Tinto of Australia and Brazil\’s Vale.
Baosteel, China\’s largest steel maker, was designated at the end of last year to represent China in the 2010 iron ore talks. The company has represented the country except for 2009 when the China Iron &Steel Association took over and received heavy criticism for its inflexible negotiating tactics.
The newspaper said it is hard for Chinese mills to hold a \”China price\” as the world\’s top three iron ore producers are sidelining them and focusing on negotiation with Japanese and South Korean steel companies to set a benchmark contract price.
So far Rio Tinto has finished the first round of talks with Japanese and South Korean delegations and proposed to raise the iron ore price by 40 percent, which was neither accepted nor declined.
The 2010 talks are expected to come to an agreement on the price of iron ore by April 1, China Securities Journal said, citing an unnamed source closed to the issue.
China reaffirms openness to foreign investment
A Chinese Foreign Ministry spokesman Thursday said the government would as always welcome foreign investment and that it would maintain the mutually beneficial strategy of opening-up.
Responding to questions at a regular press conference on doubts some foreign enterprises have about China\’s investment environment, Qin Gang said he did \”not agree with such opinions.\”
\”China will continue to welcome foreign enterprise investment and create an open, fair, transparent environment for them, providing various opportunities,\” Qin said.
The government was also willing to listen to their advice on investment in China.
Qin said China\’s large consumer base, labor resources and improving infrastructure had made it a big market that could not be neglected by entrepreneurs with strategic vision.
Qin said China had made more than 200 regulations or laws in regard to foreign investment.
\”We strictly abide by the commitments made on accession to the WTO, and have conducted comprehensive reviews and repeals of regulations that do not conform to the WTO commitments,\” he said.
The investment environment was becoming better and China had attracted more foreign investment than other countries for many years, Qin said.
\”Individual companies\’ actions do not indicate that China\’s investment environment or opening-up policy has changed. People should view the issue from comprehensive and long-term perspectives,\” Qin said.
However, if foreign companies violated China\’s laws, they would be dealt with strictly according to law, as China was a country under the rule of law, Qin said.
Qin also called on foreign companies to adapt to the new situation in China, saying the market was becoming more competitive.
PMI of manufacturing sector up in March
The Purchasing Managers\’ Index (PMI) for China\’s manufacturing sector stood at 55.1 percent in March, up 3.1 percentage points from last month, the China Federation of Logistics and Purchasing (CFLP) said Thursday.
It was the 13th straight month that the index was above 50 percent.
The PMI includes a package of indices to measure manufacturing sector performance. A reading above 50 percent indicates economic expansion, while that below 50 percent indicates contraction.
The figure stood at 56.6 percent in December 2009, the highest since May 2008, according to the CFLP.
Zhang Liqun, a researcher with the State Council\’s Development Research Center, said the growth in the March figure indicated that the economic recovery was having a very positive impact on the manufacturing sector.
However, it was yet to be seen whether the growth would continue, as the strong rebound in exports was not sustainable, and uncertainties still remained in the rise of demand, he said.
The PMI reading was based on data from the National Bureau of Statistics, covering purchasing and supply managers in more than 700 firms across China.
China\’s trade winds blowing strong
An employee checking containers for shipment at Yangluo Port in Wuhan, Hubei province. [Nan Fei / for China Daily]
China\’s full-year trade balance will still be in surplus and there is nothing to be alarmed about the figures turning into a deficit in March, economists said on Wednesday.
The nation in 2009 surpassed Germany as the second largest importer in the world after the United States, according to a recent report from the World Trade Organization.
That in turn also explains the reason for the March deficit to some extent.
The surging imports may helped China to register a trade deficit in March, Premier Wen Jiabao and Minister of Commerce Chen Deming said last week. It would also mark the first monthly deficit in the past six years.
The March deficit will also to some extent reduce the heat that China faces from other nations, led by the United States, to revalue the yuan.
But the nation will still face pressures on this front, as the deficit is albeit only a temporary phenomenon, said the economists.
Many US politicians have of late been pressuring the Barack Obama administration to label China as a currency manipulator and have also threatened the use of punitive measures on China\’s exports.
China has been a major victim of these trade measures, such as anti-dumping duties, in the past 15 years, and incurred losses of $30-$40 billion so far, said a report by the Ministry of Commerce.
China is scheduled to release its trade figures for March on April 10. The nation\’s trade surplus has plummeted by over 50 percent in the first two months of the year.
\”Considering the price hikes on many categories of imports and the still weak exports, there are high chances that the nation imported more goods than it exported in March. But the trade deficit cannot be that big and it will not last long,\” said Dong Xian\’an, chief macroeconomic analyst of Shanghai-based Industrial Securities.
\”There would be a trade surplus for the whole year. It may be a tad lower at around $137.5 billion this year,\” Dong said.
Last year, China reported a trade surplus of $196.1 billion, down 33.7 percent from $295.5 billion in 2008.
China\’s monthly trade surplus dropped to $7.6 billion in February from $24 billion in October 2009. Moreover, in terms of services trade, China suffered a deficit of $29 billion last year.
\”While the continued fall in the trade balance is a positive sign in terms of correcting global imbalances, we are not sure whether a deficit can be sustained in the coming months,\” said Barclays Capital China in a report.
\”For 2010, our forecast calls for the trade balance to fall to $186 billion, but the latest development suggests some downside risks.\”
From January to February, China imported record high volume of resource-related commodities, such as copper, iron ore and crude oil. \”Actually, the commodity import boom had waned since late last year, but there are signs of revival now as imports are needed to feed stimulus projects in the first quarter,\” said Jinny Yan, an economist with Standard Chartered Shanghai.
The strong demand is likely to continue into the second quarter of this year also. That in turn, could lead to a decline in the trade surplus, but it is not something that would be sustainable in the medium term, they said.
In March, crude prices rose nearly 50 percent from a year earlier, while iron ore soared by over 10 percent in the same period.
Developed nations represented by the US recently saw a rebound in domestic consumption and job creation. With China\’s import growth likely to falter later this year, there is no doubt that it will still end up with a trade surplus in 2010.
Another factor that could aid the trend is the fact that Chinese manufacturers still have a strong competitive edge globally. \”China can record rapid growth in exports and maintain its leading edge for a long time,\” said Ma Yu, senior researcher from the Trade Research Institute of the Ministry of Commerce.
