FT.com / China in fresh interest rate rise

China in fresh interest rate rise

By Patti Waldmeir in Shanghai and Robert Cookson in Hong Kong

Published: February 8 2011 11:58 | Last updated: February 8 2011 11:58

China has raised benchmark interest rates for the third time since October, as Beijing intensifies its battle against stubbornly high inflation.

The benchmark one-year lending rate would rise to 6.06 per cent from 5.81 per cent, effective from Wednesday, the People’s Bank of China said on its website on Tuesday. The one-year deposit rate will rise to 3 per cent from 2.75 per cent but longer term deposit rates will rise by as much as 45 basis points.

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“The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property,” said Mark Williams of Capital Economics.

The timing of the increase, which came on the final day of the week-long Chinese new year holiday, appeared to be aimed at avoiding unsettling global and domestic markets. The previous increase came on Christmas day.

“Clearly, Chinese policymakers are increasingly focused on fighting inflation and asset price bubbles,” said Dariusz Kowalczyk, economist at Crédit Agricole. The fact that deposit rates were raised by more than lending rates “shows the determination to bring the real savings rate closer to positive territory”, he said.

The rate rise comes as China seeks to curb rising inflation, particularly in food prices, following a huge expansion in the money supply in the wake of the financial crisis. Goldman Sachs forecasts that year-on-year consumer price inflation in China is likely to have risen to 5.3 per cent in January from 4.6 per cent in December.

In addition to interest rate rises, Beijing has sought to tighten liquidity in the economy by raising the amount of deposits that China’s biggest lenders must hold on reserve with the central bank.

“For China, the year of rabbit is the year of inflation,” said Qu Hongbin, greater China chief economist at HSBC. “Given that growth is still strong, Beijing can now fight against inflation single-mindedly”. Most economists expect a further interest rate rise and a further increase in bank reserve ratios in coming months.

Last month, the PBoC increased the reserve requirement ratio for China’s biggest banks by 0.5 percentage points to 19.5 per cent, its highest level since reserve requirements were introduced in the mid-1980s and the eighth such move since the start of 2010.

Jing Ulrich, head of China equities for JPMorgan, said she expected inflation to remain high in spite of the move. “We expect that inflation will remain elevated in the next several months due to a number of factors, including rising food prices, as well as inflation passed through from increasing wages, commodities prices, and possibly energy costs if they are liberalised.”

via ft.com

Chinese central bankers take action to cool inflation by raising interest rates again (eighth consecutive such move) to 3% from 2.75% for the one-year benchmark lending rate.

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China follows British footsteps to African wealth | BBC News

China follows British footsteps to African wealth

By Justin Rowlatt BBC News, Angola

Chinese investment in Angola is bringing back to life one of the greatest rail routes in Africa, the Benguela Railway. In return, China gets oil - but are accusations of a colonial-style scramble for resources fair?

The passengers squatted beside the railway tracks. It was impossible to tell how many there were.

In the darkness their bodies merged with great shapeless bundles of luggage, but there were certainly hundreds.

Then with the first flush of dawn, and bang on time, the bright beam of headlights appeared in the far distance.

The crowd immediately began to stir and jostle for position, even before the train had eased to a halt.

They threw up their boxes and bags into the open cattle trucks and scruffy passenger carriages, then scrambled after them.

The line stretches from Angola's west coast to the Zambia border

Tony, the railway official who was looking after us, urged us to get moving too.

"It will not wait for you," he warned.

He hurried down to the very last carriage, and gestured at us to board this battered old compartment.

"You can leave your things safely here," he said.

We did as he said and climbed up the steps, and into another world.

Teak-lined stateroom

The contrast with modern Africa could not have been greater.

We were in a teak-lined stateroom, the windows shaded by slatted blinds.

TV SERIES Justin Rowlatt has embarked on a global journey to explore the effects of China's policy of "going out" into the world to secure the energy and raw materials its rapidly growing economy needs. A two-part documentary series will air on BBC Two in early 2011. He will also be reporting regularly for the BBC News website. Chinese karaoke fans sing Angola's praises An invitation to dine in the Amazon Brazil's Chinese bikini problem Difficult times for blue-collar America Chinese chicken farmers ruffle Zambian feathers

There was a table with a crisp white tablecloth surrounded by four heavy chairs and, in the ceiling, a big silver fan.

We had stepped back into Edwardian England.

Tony laughed at my astonishment. He had known we would be impressed.

"You should feel at home," he teased.

"This is one of the original British carriages, where the directors of the railway company would travel."

Our grand accommodation was a remnant of what was once one of the great routes of Africa - the Benguela Railway.

It was an engineering triumph, stretching 1,000 miles up from the Angolan coast, right into the southern Congo.

Some people mutter that it is really just another scramble for oil and other resources Angola's railways back on track

The railway took almost 30 years to build and cost the equivalent of hundreds of millions of pounds - as well as the lives of many of the indentured labourers who worked on it.

But little remains of the glory of the Benguela now. Until very recently all but a tiny stretch of the line was closed.

The railway was one of the many victims of Angola's 27-year-long civil war.

Now it is being rebuilt. Not, needless to say, by the British, but by the Chinese.

Back in Luanda, the Angolan capital, I had heard a lot of anxiety about the Chinese move into Africa.

Some people mutter that it is really just another scramble for oil and other resources.

It is true that Angola has some of the biggest oil reserves in Africa.

But as I looked around at the expensive fittings in our state car on rails, it looked as if motives of the men who built this railway were pretty similar.

The Benguela railway was not a philanthropic project, but a business investment. It was built to ship out the incredible copper wealth of central Africa.

Rolling supermarket

As soon as the train pulled into the first station - a dusty stop in the middle of dry scrubland - it was clear that the recent Chinese work on the railway is providing economic benefits too.

Those huge bundles I had seen by the passengers were thrown open.

Our people have been fighting for so long, they don't know how to build anymore Angolan woman

Inside were huge mounds of tomatoes, onions, greens, dried fish and great bloody lumps of meat.

The hundreds of people waiting surged forward, yelling and rushing from one carriage to another to barter for the goods on offer.

I realised that this train was, in effect, a rolling supermarket and the passengers were small businessmen and women.

"I couldn't do this before the railway was fixed," one large woman selling plump red tomatoes told me.

"Before, I had to travel by car which was much more expensive."

She giggled shyly and acknowledged that she was making better money now. "I am not rich, but a bit richer," she told me.

So how did these traders feel about the Chinese helping to refurbish the line?

They all agreed that the Chinese were very hard workers and had done a fine job.

But should the work not have gone to Angolans, I wanted to know?

"Our people have been fighting for so long, they don't know how to build any more," the woman with the tomatoes told me with a wry smile.

Fair deal?

Of course the Chinese labourers get paid - and their wages come out of a cheap loan which the Chinese government made to the Angolan government.

And that loan, in turn, is paid for in oil.

So in some sense oil money is still the motive.

BENGUELA RAILWAY Opened in 1928 to transport copper deposits It consists of 840 miles (1344 kilometres) of track Twenty-seven years of civil war destroyed much of the railway

But, as the train grunted and clanked on through the savannah, with its occasional vivid red acacia tree, it seemed to me that what was happening now was very different from what the British had done here.

The Angolan oil which pays off that loan is now sold abroad at the prevailing market rate.

Very different terms from those of the British, who carted hundreds of millions of tons of precious African copper down this line without paying anyone a penny for it.

So, while it may be tempting to see today's China as just another imperial power out to exploit the riches of Africa, it seemed to me that there is a big difference between the Chinese presence and the British one.

Though, sitting back in my state car as the train rattled on up the line, I had to admit those British railway pioneers did know how to travel in style.

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via news.bbc.co.uk

The Chinese have been wisely exporting their culture to the developing world in hopes of spreading their uniquely Chinese model for economic development, much the same way the west was able to export its model of free market capitalism to emerging markets post-WWII up until Reagan and the collapse of the Soviet Union. I have been blogging about this phenomenon for years, but the mainstream press is finally starting to wake up.

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Chinese family businesses: Dusk for the patriarchs | The Economist

Chinese family businesses

Feb 3rd 2011 | HONG KONG | from PRINT EDITION

COMPANIES can survive for hundreds of years. Their founders cannot. Hence the problem that eventually faces all family-owned firms: how to hand over from one generation to the next. In Stanley Ho’s case, the transition is proving stormy.

Mr Ho is the gambling king of Macau: the founder of an empire that includes casinos, ferries, an airline, hotels and commercial property. He is also 89 years old, in poor health and less lucid than he once was. His four families are fighting like harpies over his assets, which are held within an array of complex structures.

It is messy: Mr Ho (pictured, with his third wife and their daughter) had four concurrent “wives” in a territory that does not recognise polygamy. Three are still alive, plus at least 16 children. Mr Ho apparently had a stroke in 2009, prompting his relatives to start struggling for control.

Their feud has become a YouTube sensation. Every few days, a wheelchair-bound Mr Ho issues a statement that contradicts his previous one: either accusing his relatives of robbery or exonerating them. Throngs of Hong Kongers have joined the journalists outside the family’s many opulent residences, straining for the latest whispers. Two photographers have had their feet run over by limousines.

The Ho saga has prompted fresh scrutiny of other firms that will soon face succession tussles. A major investor in two of Mr Ho’s Macau companies (one controlling casinos, the other ferries) is Cheng Yu-tung, 85, who runs his own swelling conglomerate, New World Development, with unresolved succession issues.

At Sun Hung Kai, Hong Kong’s largest property owner, the succession seemed settled in 1990 with the death of the founder and management passing to his three sons. But turmoil erupted in 2008 when the founder’s then 79-year-old widow, Kwong Siu-hing, emerged as the true power, pushing out her eldest son, Walter, who had been chief executive. On Sun Hung Kai’s board sits Lee Shau-kee, 82, who runs another property company, Henderson Land, with its own succession issues.

Any talk in Hong Kong about succession soon touches upon Li Ka-shing, 82, the territory’s richest resident, whose empire encompasses utilities and property. Much of his wealth has been pledged to charity, but no one knows who will run his firms when Mr Li dies. When he was abruptly hospitalised in 2006, shares in his listed companies immediately sank.

Many Hong Kong tycoons are getting old (see table). Typically, their fortunes date back to the early post-war years, when Hong Kong was a desolate rock, Macau was in decline and Singapore was a swamp. They built empires while keeping tight personal control, often using bewildering interlinked corporate structures.

Within a few years, dozens of publicly listed (but family-controlled) Asian companies will change hands. If history is any guide, the process will hurt, says Joseph Fan, a professor at the Chinese University of Hong Kong. A study he jointly conducted of 250 companies in Hong Kong, Taiwan and Singapore controlled by Chinese families found that successions tended to coincide with tremendous destruction of value (see chart).

There are exceptions. Sir Run Run Shaw, a 103-year-old media mogul, appears to be retiring in peace. On January 26th he announced that he would sell his controlling stake in TVB, Hong Kong’s largest television network, for more than $1 billion. It was the last public link to an empire that once included the largest private film studio in the world. Mr Shaw retired from active management on his 100th birthday, in favour of a much younger manager, his then 77-year-old second wife, Mona Fong.

Many patriarchs built their fortunes with risky bets: movies, the first casino, manufacturing. But many have shifted into merely collecting rents from property and related businesses (ports, hotels, retail) or from government concessions (electricity, telecommunications, gas, casino licences).

The simplicity of the underlying businesses may account for the ferocity of the family battles—it is not hard to make money if you own a casino near mainland China these days. However, in areas that are genuinely competitive, such as banking, Hong Kong’s family firms have been largely elbowed aside by multinationals.

Patriarchs add value in two ways that do not appear on balance-sheets, says Mr Fan. Their reputation ensures that banks will lend money to their companies. And their relationships with government are often lucrative. Alas, these strengths are hard to bequeath to one’s children. Which is why some Asian empires will struggle to outlive their founders.

via economist.com

Very interesting article on the tumultuous fall of Hong Kong's great 20th century tycoons, or the inglorious rise of the next generation of Chinese business leaders, depending on your perspective.

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Bamboo scaffolding (more images)

See the full gallery on posterous

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Gas Prices in Hong Kong

While there are few gas stations to be found throughout Hong Kong, the prices are quite reasonable by US standards. I found this station while wandering by myself in the middle of the night down a secluded street near the US consulate (Kennedy Road I believe). With the HK$ exchanged at a pegged rate of approximately US$7.75, the cost of regular unleaded is a bit less than $2 and premium is slightly over $2. This at least partially explains the city's very reasonable taxi fares.

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Bamboo Scaffolding

I cannot seem to get over my fascination with bamboo scaffolding. Its almost as if the scaffolding is weaved (woven?) together with the excess material sticking out the top, much like an unfinished wicker basket.

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China the Mother of All Grey Swans / Japan Past the Point of No Return - October 2010 - By Vitaliy Katsenelson

via scribd.com

Is China on the verge of imploding? Is the excess and idle capacity going to drag the entire country under, and with it the rest of the world?

Many very interesting points raised in this presentation from Vitaliy N. Katsenelson of Investment Management Associates.

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China Permits Foreign Investment WFOEs in Medical Industry | China Briefing News

China Permits Foreign Investment WFOEs in Medical Industry

Dec. 14 – In a follow up to the piece we wrote last week on China opening up its medical industries to foreign investment, here we offer readers a direct translation of the pertinent text taken from Guobanfa [2010] No. 58 issued on November 26.

Article 5: Allowing overseas capital to establish medical institutions

Opening up shall be further deepened for medical institutions and investments in medical institutions by overseas capital shall be adjusted into permitted foreign-invested projects.

Overseas medical institutions, enterprises and other economic organizations shall be allowed to set up medical institutions through the form of joint ventures or cooperative joint ventures within China with Chinese medical institutions, enterprises and other economic organizations to gradually cancel restrictions over the proportion of equity held by overseas capital.

Eligible overseas capital may establish wholly-owned medical institutions within China on a pilot basis and restrictions shall be removed gradually.

Overseas capital may make investments in both for profit medical institutions and non-profit medical institutions.

Overseas capital shall be encouraged to establish medical institutions in the central and western parts of China.

Capital from Hong Kong SAR, Macau SAR and Taiwan region in establishing medical institutions in the mainland shall enjoy priority support policy in accordance with relevant provisions.

Article 6: Simplifying and standardizing examination and approval procedures for overseas capital making investments in medical institutions

The establishment of Sino-foreign joint venture medical institution and Sino-foreign cooperative joint venture medical institution shall examined and approved by health authorities and commerce authorities at the provincial level, among which the establishment of Chinese medicine hospital, Chinese and western medicine hospital and minority medicine hospital shall seek the opinions of Chinese medicine administration authorities at the provincial level.

The establishment of foreign wholly-owned medical institutions shall be examined and approved by the Ministry of Health and the Ministry of Commerce, among which the establishment of Chinese medicine hospitals, Chinese and western medicine hospitals and traditional Chinese medicine hospitals shall seek the opinions of the State Administration of Traditional Chinese Medicine. Specific measures shall be separately formulated by relevant authorities.

At present, foreign investment is only permitted (with very rare exceptions) in the form of Joint Ventures, however the circular states the equity amount in favor of the Chinese partner may now be reduced. Initial pilot schemes will be permitted for the establishment of WFOEs, while the promulgation of the application procedures is still being worked on.

Also within the circular are the provisions for more “social capital” to be made available for the reform of public hospitals. It dictates the circular is intended to “stably transform some public medical hospitals into non-public medical institutions, appropriately lower the proportion of public hospitals, promote the reasonable distribution of public hospitals and create the situation in which multiple investments are made in medical institutions,” effectively meaning the door has now opened for a class of private hospitals to be both funded from overseas to service the domestic market.

This circular paves the way for far easier access to the large medical care industry in China for foreign investors. Further information concerning this development and the implications for interested parties may be made to Richard Hoffmann, senior legal associate at Dezan Shira & Associates. The firm handles numerous clients in China’s health care and medical industry and can be contact at legal@dezshira.com.

via china-briefing.com

Big news for the opening up of Chinese markets to foreign competition. It still probably makes little sense to try to operate on the mainland without a local partner, but a major step in policy regardless.

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U.S. and China Agree to New Public/Private Healthcare Partnership | China Briefing News

U.S. and China Agree to New Public/Private Healthcare Partnership

Jan. 20 – China and the United States announced a new public/private sector joint partnership yesterday focusing on the healthcare industry. The U.S. Trade and Development Agency, the U.S. Department of Health and Human Services and the U.S. Department of Commerce joined with China’s Ministries of Health and Commerce to announce their support for the establishment of the new organization.

“The economic and social development of any nation depends on the health and productivity of its people,” said U.S. Department of Health and Human Services Secretary Kathleen Sebelius. “This partnership builds on a strong foundation of bilateral cooperation in this critical sector of our economies.”

The American Chamber of Commerce in China (AmCham-China) was an early proponent of this partnership on the U.S. side and applauds its establishment.

The Healthcare Partnership Program follows two highly successful, existing public/private partnerships that operate under AmCham-China’s umbrella, namely the Aviation Cooperation Program and the Energy Cooperation Program.

“The Healthcare Partnership Program is a milestone in U.S.-China cooperation in healthcare and will strengthen the contribution of U.S. companies to China’s healthcare reforms,” said AmCham-China Chairman Ted Dean. “Public/private partnerships like the Healthcare Partnership Program are important examples of how the two countries can come together for mutual benefit.”

The new public/private partnership was announced as part of Chinese President Hu Jintao’s official state visit to the United States this week. The Healthcare Partnership Program will be headquartered in AmCham-China’s Beijing office.

China Briefing broke the news of foreign investment being allowed into China’s healthcare and medical industries six weeks ago. Foreign investors may now establish WFOEs in the sector, our full overview of the applicable regulations are contained in our article “China to Allow Foreign Capital into Medical Organizations” and a translation of the regulations in this piece, “Foreign Investment WFOEs in China’s Medical Industry.”

Dezan Shira & Associates have been advising foreign manufacturers and pharmaceutical companies about establishing a presence in the China market, and obtaining the pertinent licenses, since 1992. Please contact the firm for legal and tax advice concerning investments into this industry at info@dezshira.com, or download the firm’s brochure here.

via china-briefing.com

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Nassim Taleb: "The Fed does not understand risk!"

 

 (Distressed Volatility)

PIMCO | Mohamed El-Erian - We've Voted. What's Next For the Economy?

We've Voted. What's Next For the Economy?

• With the two chambers of Congress split between Democrats and Republicans, the conventional wisdom likely to be repeated over the next few weeks is that political gridlock is good for the economy. While often true, that is not the case today.
• Democrats and Republicans must meet in the middle to implement policies to deal with debt overhangs and structural rigidities.
• The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society.

via pimco.com

Mohamed El-Erian, Co-CIO/CEO of PIMCO and the voice on the street that I trust utmost in times of uncertainty, casts a veil of uncertainty over the seemingly decisive electoral mandate claimed by the GOP in yesterday's triumph at the polls. The insurgent nature of the GOP movement, spearheaded by the Tea Baggers (Party), does not inspire hope in the prospects of overcoming the policy gridlock in DC that must be addressed before any fundamental changes can be made to the country's rapidly deteriorating long-term fiscal health with an aging population and public pension liabilities light-years beyond the tipping point of permanent insolvency.

Due to the "great age" of leverage, debt and credit entitlement, and the related surge in structural unemployment, the private sector is not in a position to control its own destiny. Emerging markets are rapidly eroding traditional economic and political competitive advantages enjoyed by the US. It is hard to disagree with El-Erian in his conclusion - the extreme nature of today's political discourse is ill-suited to tackling the pressing issues of our time.

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Mid-term elections, QE and the markets: Tea and QE | The Economist

But there is also a nice irony at work. The tea party is opposed to massive government spending and bailouts. But QE is a way for the central bank to finance that government spending and to pump money into the banking sector. So on the day that the tea partiers may be celebrating, an unelected central bank will be carrying out a programme, probably totalling several hundred billion dollars, that will cut against everything the partiers stand for.

via economist.com

Buttonwood accurately foresaw the overwhelming victory of the Tea Baggers and we are now mere hours from the likely Federal Reserve announcement of QE2 and the resumption of the printing press. The irony observed in the above excerpt - that the Fed is poised to undermine everything the Tea Baggers fundamentally stand on through its independent monetary authority - is unlikely to be fully appreciated by the media as the day progresses. It will be interesting to see the response of the freshly invigorated GOP activists in the coming weeks leading up to their inauguration early next year. I suspect the radical tone will be subdued by political realities and market uncertainty, not to mention the radical shift in mindset that accompanies a transition from insurgent to incumbent.

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