TO THE POINT: China's pledge to further reform the renminbi exchange rate regime recently delivered a boost to Asian currencies and global stock markets. The central bank expanded its pilot program involving yuan settlement in foreign trade to include trade centers the world over. The National Audit Office revealed details about local government debts, raising concerns over a financial black hole. By setting up a stringent entrance threshold, China aims to clear up the crowded third-party payment industry. Financial pressure mounts on real estate developers, due to the recent housing market gloom. China will overtake Japan as the world's second largest advertising market within five years, said the international accounting firm PricewaterhouseCooper.

By HU YUE

China's Currency

China's renminbi exchange rate reform will be a gradual process, but its impact on the markets has already been felt.

The central parity of the renminbi to the U.S. dollar reached 6.7980 on June 22, a substantial appreciation of 0.43 percent over the previous day, the highest since China unpegged the yuan to the U.S. dollar in July 2005, according to the China Foreign Exchange Trading System. But on June 23 the yuan slipped to 6.8102 against the U.S. dollar.

The People's Bank of China, the central bank, announced on June 19 that it will push forward renminbi exchange rate reform, but ruled out the possibility of a one-off revaluation.

The announcement boosted other Asian currencies against the dollar, and sent stock prices up around the world. On June 21, stock indexes in Hong Kong, Germany, Tokyo and France rose by between 1.6 percent and 3.1 percent. The benchmark Shanghai Composite Index closed up 2.9 percent as investors bid on stocks of Chinese airlines and metals firms, whose costs for imported fuel and iron ore would be lower if the yuan gains value.

The international community welcomed the reform. The move "will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer." said Dominique Strauss-Kahn, Managing Director of the International Monetary Fund.

Global Settlement

The central bank and several other related ministries announced on June 22 to expand the yuan settlement pilot program.

The regions where Chinese exporters can use the yuan to settle trade agreements will be extended from the original Association of Southeast Asian Nations (ASEAN) and Hong Kong and Macao to the rest of the world.

It also added 18 domestic regions to the program, including Beijing, Tianjin and Chongqing municipalities, and Liaoning, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Hainan, Yunnan, Sichuan, Jilin and Heilongjiang provinces, and Inner Mongolia, Guangxi Zhuang, Tibet and Xinjiang Uygur autonomous regions.

China introduced the trial program in July 2009 in an effort to reduce its reliance on the U.S. dollar to avert foreign exchange fluctuations, and also to increase the yuan's international importance.

Shanghai and four cities of Guangdong Province were the first places where foreign trade could be settled using the yuan.

The total value of yuan transactions from July 2009 to May 2010 was 44.55 billion yuan ($6.5 billion), according to the central bank.

Local Debt

The National Audit Office on June 23 made a report to the 15th session of the Standing Committee of the 11th National People's Congress, providing a fresh snapshot of local government debt.

Liu Jiayi, Auditor General of the National Audit Office, said in the report that 18 provincial, 16 city and 36 county-level governments audited were burdened with outstanding debts of 2.79 trillion yuan ($410 billion) by the end of 2009, including 1.04 trillion yuan ($152.3 billion) of debt raised in 2009 alone.

But only 8.92 percent of the new debts in 2009 were invested under the Central Government's 4-trillion-yuan ($586 billion) stimulus package, and a bulk of them went to infrastructure projects started before 2008, said Liu.

There were a total of 307 local financing vehicles in the audited regions, raising more than half of the total local government debts, said Liu.

Worries have been proliferating over the hidden financing vehicles due to their reckless expansion and operational mismanagement. In May, the government even vowed to keep local governments from making illegal guarantees for the financing vehicles.

The local government debts in west China, in particular, were bigger risks, said Liu. The debt ratio of seven provincial, 10 city and 14 county-level governments audited exceeded 100 percent, with that of some reaching an astonishing 364 percent, he said.

Third-Party Safety

The central bank on June 21 also issued a circular, stepping up stringent control over the crowded and chaotic third-party payment industry.

The rules, which will come into effect on September 1, 2010, stipulated non-bank payment service providers must apply for a business license by September 2011. In addition, the providers must have a registered capital of at least 100 million yuan ($14.6 million) for a license and should have been making profits for two consecutive years, said the central bank.

The order gives the central bank oversight over a huge payments network that has sprung up outside the traditional banking system due to an online business boom. There are about 300 payment companies across the country, but prospects of the sector are shaky due to a lack of regulation. And some small providers are believed to be involved in illegal activities, such as money laundering and credit fraud.

"The new policy is a long-needed boon for the health of the industry and almost half of the companies will be forced out of the market," said Fang Yingzhi, an analyst at the China E-Commerce Research Center.

"The regulation will be an accelerator for the sector and allow more room for large players," said Su Hui, spokeswoman of the Hangzhou-based Alipay, the country's top online payment company.

Alipay grabbed a 52-percent share of the online payment market in 2009, followed by 24.7 percent of the Shenzhen-based Tenpay, an online payment unit of Tencent, said the Analysys International Consulting Co. Ltd.

Property Market

With clouds gathering over the property market, developers are facing serious headwinds.

Though massive price declines haven't happened yet, property developers are stepping up discounts to bring potential buyers to the table. Meanwhile signs are emerging that many developers are reeling from deep financial distress.

China Index Research Institute said in a recent report that 13 of the country's top 50 property developers now report a debt ratio of more than 70 percent, a dangerous signal of financial quagmire.

With the monetary environment tightening and sales falling precipitously, property developers are coming under pressure to lower house prices, said Ge Haifeng, General Manager of the Data & Statistics Center under the institute.

Adding to their financial woes is a spending spree on land acquisition in past boom times, he said.

HSBC chief China economist Qu Hongbin in a recent report reduced the bank's forecasts for Chinese real-estate-company earnings, and predicted a 20-30-percent price drop on residential property.

But the housing gloom is unlikely to cause a much broader slowdown to the economy due to low leverage of debt, said Qu.

Housing mortgages account for around 20 percent of credit assets of Chinese banks, and only 6 percent of Chinese households bought houses on mortgages, he said.

Ad Booming

China will replace Japan as the world's second largest advertising market in five years, said a recent report by the international accounting firm PricewaterhouseCooper (PwC).

The report predicted a sustained upturn in advertising growth in China whereas Japan, second only to the United States, is largely static. The exhaustive Global Entertainment and Media Outlook 2010-2014 covers sectors from television, music, film and video games to radio, publishing and advertising in 48 countries.

In addition, the report also predicted that China will have the fastest growing entertainment and media consumption over this period, with an annual growth of 12 percent.

"The power behind the growth in China is from within—it is a domestic story. The demand from the consumer is to get high-quality content. The fact that it is a difficult market for foreigners is not stopping growth," said Marcel Fenez, PwC's global leader for entertainment and media. "And the speed of migration to digital in China is ahead of established markets."