TO THE POINT: China will come to the rescue of the U.S. liquidity shortage by allowing domestic commercial banks to invest in the U.S. stock market and mutual funds. China and New Zealand signed their first free trade agreement, providing each other with more favorable trade policies. To tap into the great potential of the fast-growing economy, Intel planned to invest more venture capital (VC) in the mainland to a tune of around $500 million. The edible oil price will temporarily remain stable due to the drop in international soybean oil futures prices. Power enterprises' profits plummeted due to higher coal costs and the "as-low-as-usual" electricity prices.
By LIU YUNYUN
More Options for QDIIs
Chinese authorities agreed that some of China's qualified domestic institutional investors (QDIIs) can invest in the U.S. financial market, which is part of the U.S. securities watchdog's effort to restore Wall Street liquidity.
On April 7, the China Banking Regulatory Commission stated on its website that its chairman Liu Mingkang had reached an agreement with Christopher Cox, Chairman of the Securities and Exchange Commission (SEC) of America, to allow qualified mainland commercial banks to invest in the U.S. stock market as well as mutual funds approved by the SEC.
The two sides did not reveal the actual sum of money which can be invested, and the amount must depend on further negotiations. Crippled by the subprime mortgage crisis, the United States is in desperate need of cash, or liquidity. On the contrary, liquidity is held as the culprit for the skyrocketing property and consumer prices in China.
But can Chinese funds really fuel the U.S. market? The answer might not be so optimistic.
Before the April 7 agreement, commercial bank QDII products were able to invest in four overseas stock markets-Hong Kong, Japan, Singapore and Britain. But to date, most of the QDIIs have chosen to buy stocks and funds in Hong Kong, which is a more familiar market to mainland investors.
Setting aside the familiarity factor, the current poor performance of QDII products has disillusioned Chinese individual investors, who are now reluctant to buy QDIIs. On March 19, a QDII product operated by Minsheng Bank was forced to delist as its net value per unit was cut by half after investing in a Hong Kong mutual fund for just four months. Public data show most of the QDII products suffered losses of 15-40 percent, resulting in enormous dissatisfaction among individual investors.
In spite of the market turmoil in the United States, many bank managers are interested in investing in a more mature market like the United States. Shi Zhengrong, Senior Personal Banking Manager with the Bank of Communications, believed the U.S. stock market was worth investing, arguing investors must divert risks into different markets.
Free Trade Deal Inked
China signed a free trade agreement (FTA) with New Zealand on April 7, marking the fast developing giant's first-ever such pact with a developed country.
The deal did not come easy. Both sides promoted the idea in 2004 and went through 15 rounds of negotiations over the past three years.
According to the agreement, New Zealand promises to cancel import duties of all Chinese products by January 1, 2016, and 63.6 percent of the Chinese products do not have to pay import duties effective immediately. Meanwhile, 97.2 percent of New Zealand's exports to China will be duty free by January 1, 2019, and 24.3 percent of its exports now enjoy zero tariff since April 7 this year. The two countries made commitments higher than the WTO agreement.
"This is a landmark for China-New Zealand relations," said Chinese Premier Wen Jiabao in remarks ahead of the signing ceremony. "The agreement not only means we have met goals we set two years ago for our negotiations, but it also makes New Zealand the first developed country to reach a free trade agreement with China."
New Zealand's Prime Minister Helen Clark said, "it (the FTA) opens up new opportunities for businesses looking to engage with, or grow their existing links with China."
Intel VC Favoring China
Intel has firm belief in hi-tech. On the 10th anniversary ceremony of operations in China on April 8, Intel announced that it plans to invest a second batch of fund-up to $500 million-into hi-tech start-ups in the country in a bid to expand its presence in the hot emerging market. The amount is so far the biggest Intel investment in a single country, demonstrating Intel's confidence in China.
Intel Capital, the investment arm of the chip giant, will explore financially attractive and strategic investment opportunities in areas such as wireless broadband, technology, media, telecommunications and clean tech, said Arvind Sodhani, the unit's president.
The first batch of funds, totaling $200 million, was established in 2005, and has been fully invested in 28 companies. Some companies have already listed in the stock market either on the mainland or in Hong Kong, such as Neusoft Group and King Software Co. Ltd.
"Given the success of the original China Fund, it is time to renew our commitment," said Cadol Cheung, Managing Director of Intel Capital Asia-Pacific. "We expect to further increase our investment in China by pursuing business opportunities and participating in larger deals."
The new fund has already invested in two local firms, namely Holdfast Online Technology Co. Ltd., an online gaming platform operator, and Newauto Video Technology Inc., which provides video equipment and solutions for local television stations.
Venture capitalists are keen on cashing in on the mainland rapid economic growth. Statistics from China Venture Capital Research Institute showed by the end of 2007, the total VC managed by VC investment companies had surmounted 120.585 billion yuan ($17 billion), doubling that of 2006.
Edible Oil Price Hike Halted
The edible oil price hike has come to a brief pause amid declining international soybean oil futures. The domestic soybean oil futures price stayed at a high level of around 14,000 yuan ($2,000) per ton during the first two months of 2008, but recently dropped to around 10,050 yuan ($1,436) per ton.
Kerry Oil & Grains (China) Co. Ltd. (Kerry Oil) said in a response to Dongfang Daily on April 7 that it accepted China's top economic planner-the National Development and Reform Commission's (NDRC) suggestion not to raise edible oil prices in a short term. On March 20, Kerry Oil's application for lifting edible oil prices was approved by the NDRC, leading to panic buying among consumers who have been suffering from soaring commodity prices since last year.
Though the price hike fear was assuaged, the NDRC's role in the economy is questionable. In a market economy, a supplier is supposed to price its products according to demand, which is also the supplier's right. The government can work to maintain the market order, but not to interfere with the market operation.
Cheng Siwei, former Vice Chairman of the Standing Committee of the National People's Congress, said he agreed with the Central Government's decision to cut the overstaffed government departments, and raised the case of the NDRC in particular. Cheng argued the government departments should play the integrated function of collecting information, judging trends, and coordinating with other departments, instead of interfering with the market.
Power Companies Less Powerful
Over 40 percent of the mainland power companies suffered losses due to surging fuel prices and the unexpected snowstorms that hit the southern part of the country earlier this year.
On March 27, the National Bureau of Statistics issued a report saying the profit of large-scale (defined as having a main operation revenue above 5 million yuan ($720,000) state-owned industrial enterprises dropped 5.6 percent in the first two months. Profits were mostly dragged down by the power industry-down a tune of 61 percent-and by the oil refining industry, which lost 20.6 billion yuan ($3 billion).
Statistics from the China Electricity Council (CEC) showed that thermal power plants encountered the biggest losses among all power enterprises with profits in the first two months dropping 75.39 percent to 2.54 billion yuan ($364 million), mostly because of soaring coal prices.
Currently prices of electricity and refined oil are strictly controlled by the government, but the price of coal used for producing electricity and crude oil price are decided by market supply and demand. The government compensated two oil giants Sinopec and PetroChina for their refineries' losses, but no compensation commitment had been made for power enterprises.
The CEC applied for permission to raise electricity prices at the end of last year, but the NDRC so far has not given an affirmative answer.
Numbers of the Week
Chinese currency, the yuan, was trading at 6.9920 to $1 on April 10, the first time for it to breach the 7-yuan mark against the U.S. dollar since China de-pegged yuan from the dollar in 2005.
In 2007, China exported a total of $347.8 billion worth of hi-tech products, growing 38 percent on average since the dawn of this millennium.