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Market Watch
Business> Market Watch
UPDATED: December 1, 2007 NO.49 DEC.6, 2007
MARKET WATCH NO.49, 2007
China and the EU agreed to expand cooperation on currency and strive to avoid major renminbi fluctuation
 
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TO THE POINT: China and the EU agreed to expand cooperation on currency and strive to avoid major renminbi fluctuation. Domestic PC giant Lenovo planned to build its first European factory in Poland. CNOOC, China's largest offshore oil producer, will launch the country's first offshore wind power plant. The U.S. Commerce Department proposed to levy two new countervailing tariffs on imports from China. The U.S. subprime mortgage crisis created a nightmare for Chinese QDIIs, which lost 10 percent of their value. Rising oil prices drove Chinese fuel oil futures to record highs.

By LIU YUNYUN 

Making RMB Flexible

Chinese Premier Wen Jiabao stated on November 28 that the country will gradually make its currency convertible under the capital account.

Wen said China had made significant improvement in reforming its exchange rate regime. In the past two years, the renminbi rose 11.9 percent against the U.S. dollar and grew 7.4 percent against the Japanese yen.

Hong Kong-based newspaper Ta Kung Pao quoted people in the know as saying that the Chinese Government had agreed that the renminbi should be further appreciated and the daily floating range would be expanded from the current 0.5 percent to between 0.8 and 1 percent.

At the Fourth EU-China Business Summit, Wen said that China would work with the EU to take comprehensive measures to optimize the economic structure and prevent major fluctuations in foreign exchange rates. At the same time, both sides would contribute to the orderly adjustment of global imbalances, according to a statement issued by the People's Bank of China.

Soaring Fuel Oil Futures

Shanghai fuel oil futures surged 4.4 percent on November 26, the largest one-day increase since early 2006, reaching the highest level since the contracts began trading in 2004.

Expectations of further global oil price hikes propped up futures prices. The most actively traded fuel oil futures contracts for March delivery on the Shanghai Futures Exchange surged to a record high of 4,275 yuan per ton before closing at 4,172 yuan, up 4.4 percent from the previous trading day.

On the New York Mercantile Exchange, the most actively traded crude oil futures contracts for January delivery rose 0.63 percent to $98.8 per barrel. The contract price has increased a total of 5.2 percent in the second and third weeks of November.

"Shanghai fuel oil futures are expected to closely follow the global upward trend of crude oil prices," said Li Jingyuan, an analyst at Haifu Futures Co.

Rising concerns about a supply shortage of refined oil products in the mainland also accelerated the price surge of fuel oil futures.

Lenovo's New Ambition

Lenovo, China's largest computer maker, plans to further explore the European market by establishing a factory in the Legnica Special Economic Zone in Poland.

The company stated on November 27 that it will invest $20 million and will hire around 1,000 people.

It is the fifth new factory announced by Lenovo this year. The first four factories were built in Shanghai, Baddi in India, Monterrey in Mexico, and North Carolina in the United States.

"Our new plant in Poland is an example of Lenovo's world-sourcing strategy in action," said Gerry Smith, Senior Vice President of Lenovo's global supply chain. The strategy refers to utilizing resources at the most suitable place and in the most appropriate way.

The Polish factory will assemble, distribute and ship Lenovo computers to customers in Europe, the Middle East and Africa, where Lenovo's business grew by 18 percent year on year in the third quarter to $886 million, tantamount to 20 percent of its total business.

International Data Corp. reported Lenovo ranked third in global market share in the third quarter of this year, after HP and Dell. Lenovo had a market share of 8.2 percent.

Domestically, Lenovo takes around 36 percent of market share, a surge which started after it acquired IBM's PC business in 2005. It is now in fierce competition with Taiwan-based Acer to be the top producer of computers in the mainland.

Trade Disputes Escalating

Dogged by a huge trade deficit, the United States is scratching its head to find fault with China again. The U.S. Commerce Department vowed on November 28 to impose preliminary duties on imports of Chinese steel tubes and laminated woven sacks.

This proposal was based on its firm belief that China provides unfair subsidies for the manufacturers of these goods. Behind this stands its intention to shelter relevant industries from being rivaled by the sharp growth of imports of these goods from China in recent years.

Earlier this year, the United States launched countervailing and anti-dumping rulings on imported Chinese coated art paper, according to an earlier statement from the Ministry of Commerce.

In defense, Gao Hucheng, Vice Minister of Commerce, dismissed the anti-dumping and countervailing investigations against China conducted by the United States as not complying with WTO rules. The rules are supposed to have no binding force on China, a non-market economy according to the United States.

The U.S. Commerce Department will make a final decision over whether to implement the proposal in April 2008.

Breakthroughs in Renewable Energy

Pressured by soaring oil prices, China is quickening its pace to tap into renewable energy resources to feed its booming economy. A milestone breakthrough in its efforts was made as the country's first offshore wind power plant came into use.

The news was announced on November 28 by the China National Offshore Oil Corp. (CNOOC), the nation's largest offshore oil producer, which built the plant at a cost of 40 million yuan ($5.4 million).

Boasting an installed capacity of 1.5 mw, the plant can generate 4.4 million kwh of electricity a year, easing some of the burden of severe shortages of energy.

Moreover, it will save an annual carbon dioxide emission of 3,500 tons and sulfur dioxide 11 tons, according to the CNOOC.

China pledged to strengthen efforts to explore clean and renewable energy resources and diversify its energy supplies.

Currently, wind power still accounts for a small part of the nation's total power supply despite a substantial growth in recent years.

Small Banks Do Better

China's city-level commercial banks reported better performance this year, according to the China Banking Regulatory Commission (CBRC).

The average non-performing loan ratio stood at 4 percent this year, down from the 15.26 percent at the end of 2003, said Jiang Dingzhi, Vice Chairman of the CBRC. Meanwhile, city commercial banks' average capital adequacy ratio was raised to 8.6 percent this year, up from the -1.6 percent at the end of 2003.

There are 115 city commercial banks and some city-level commercial banks have launched initial public offerings in the domestic yuan-denominated A-share market, like Bank of Beijing, Bank of Nanjing and Bank of Ningbo.

Moreover, there are more than 30,400 rural cooperative banking institutions.

Rural cooperative banking institutions reported 183.1 billion yuan in combined net assets, and their capital adequacy ratio averaged 9.1 percent, while the figure was -6.8 percent four years ago. These institutions had suffered losses for 10 consecutive years and only began making profits in 2006.

Jiang concluded that those commercial banks nationwide, including rural cooperative banking institutions, are developing in a healthier way, with their capital adequacy and assets quality improving substantially.

QDIIs Take a Hit

China's qualified domestic institutional investor (QDII) scheme has hit a skid recently with paper losses amounting to 10 percent in less than a month. The scheme allowed domestic banks and mutual fund companies to invest in overseas financial markets. It was devised to divert excessive liquidity in the domestic market and encourage people to invest in mature markets.

China Economic Times quoted an insider's estimates that the four QDIIs managed by mutual fund companies had suffered a total loss of $1.34 billion by the end of November 24. Currently, the four QDIIs are close-ended. But people fear if the redemption starts, QDII managers will face enormous redemption pressure, which in turn will hurt the QDII performance again.

The subprime mortgage crisis weakening the U.S. economic growth has been the major culprit. The stumbling U.S. stock market and the depreciating U.S. dollar made it hard for QDII managers to handle the crisis.

Even if they did not lose money in the stock markets overseas, foreign exchange fluctuation still eats away at their revenue since Chinese citizens bought the QDIIs in yuan, but the QDIIs were traded in other currencies.

Numbersof the Week

23.5 billion yuan

In 2007, the Chinese Government has invested and will invest up to 23.5 billion yuan ($3.18 billion) to raise energy efficiency and cut pollutant emissions.

$62 million

China exported $62.06 million worth of flowers in the first eight months of this year, growing 34.5 percent year on year, according to statistics from the General Administration of Customs. Sales to Japan, the European Union, the Republic of Korea and Association of Southeast Asian Nations grew rapidly while those to the United States and Hong Kong declined. 

 



 
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