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Market Watch
Business> Market Watch
UPDATED: January 23, 2007 NO.4 JAN.25, 2007
MARKET WATCH NO.4, 2007
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The more, the better?

Not exactly.

China is vowing to curb its excessive trade surplus. And experts are calculating the pros and cons of the country's foreign exchange reserves of over $1 trillion.

There's nothing wrong with rising China-South Korea and China-Japan trade, though.

Meanwhile, the paid-in FDI increased 4.47 percent in 2006 compared with a year earlier. But experts warned that the quality of FDI needs to be improved immediately.

And in spite of a recent slight stock market fluctuation, Chinese citizens' investing enthusiasm is soaring, with bank deposits plunging dramatically in order to buy stocks and funds.

Chinese don't seem to have much confidence that plummeting oil prices will benefit them, however.

Harmony Trumps Surplus

A huge trade surplus-giving rise to trade friction and international political wrangling-might not be the best way to promote a "harmonious world," which China heavily promotes.

Shortly after the Ministry of Commerce (MOFCOM) announced the immense trade surplus of $177.47 billion for 2006, Minister Bo Xilai showed his concern.

"It is not conducive to the balanced development of the domestic economy and it hurts the sustainable development of foreign trade," he said.

The minister said reducing the excessive trade surplus will be a top priority related to this year's foreign trade. Export commodities whose processing is harmful to environmental protection, will be heavily restricted.

The country will no longer pursue growth at any cost, realizing it is even more costly to rebuild the environment and energy reserves.

Double-Edged Sword?

China's $1 trillion of foreign exchange reserves in 2006 might distort the domestic economic structure, experts say. The government needs to be cautious in how to spend the big bucks.

"(Foreign exchange reserves) are enough," said central bank Governor Zhou Xiaochuan. The central bank announced that by the end of last year, the Chinese foreign exchange reserves had totaled $1.0663 trillion (see graph 1), which is the world's largest, having surpassed Japan's last February.

The trade surplus and increasing foreign direct investment (FDI) have contributed to the mammoth reserves.

Peng Xingyun, a senior researcher with the Chinese Academy of Social Sciences (CASS), estimated that about two thirds of China's foreign exchange reserves are invested in U.S. government bonds.

What if China's renminbi continues to appreciate? What if the U.S. dollar keeps depreciating? The U.S. macro control policy could easily lead to dollar depreciation, thus easing U.S. obligations to pay back China for U.S. government bonds.

The good news is that enough foreign exchange reserves will make China more capable of controlling financial risks and handling international payments.

Bullish Market Steals Deposits

"Have you bought any stocks?" is a frequently asked question in offices.

Walking into a local bank, whichever it is, you would find it stuffed with people either opening fund management accounts or withdrawing fixed deposits "to buy stocks," as one customer recently said.

Intrigued by the burgeoning stock market, city dwellers have no patience to wait for meager interest returns on savings. They are switching attention to the seemingly more lucrative stock market.

A central bank financial report on January 15 revealed that last year, citizens deposited 2.09 trillion yuan into banks. That indicated deposit growth slowed down by 5.3 percent compared with a year before.

The report also showed since last May, the stock market attracted some proportion of bank deposits, leading to the significant growth reduction in deposits.

Zhao Xijun, a finance professor with Renmin University of China, applauded citizens' increasing awareness of investing. "It is good for them to invest in the stock market," said Zhao. "Banks are no longer the only caregivers."

Careful, though, China.

Investment is not always as safe and sound as deposits.

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