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Market Watch
Business> Market Watch
UPDATED: September 13, 2010 NO. 37 SEPTEMBER 16, 2010

BIG BOND SALE: Bank of China Ltd. begins selling up to 5 billion yuan ($735 million) of two- and three-year yuan-denominated bonds in Hong Kong on September 8. It was the third time the bank issued these bonds in Hong Kong since mainland banks were allowed to do so in June 2007 (LU XIAOWEI)

Numbers of the Week


The Purchasing Managers' Index for China's non-manufacturing sector in August remained the same as July's percentage, at 60.1 percent, said the China Federation of Logistics and Purchasing.


China's railway passenger traffic in August rose 8.1 percent year on year to hit 162 million people, said the Ministry of Railways.

TO THE POINT: China's outbound direct investment grows as firms hunt down opportunities to expand overseas. International hot money seems to be pulling out of the country after months of torrential inflows. U.S. auto behemoths bask in the glow of an auto market boom in China. The Yangzijiang Shipbuilding Holdings debuted on the Taiwan Stock Exchange on September 8, underlining growing financial tie-ups between Taiwan and the Chinese mainland. China snaps up Japanese government bonds in a bid to diversify its foreign reserve holdings. The Chinese Government pushes for stronger M&A activities.


Outbound Rush

Despite a deep downturn in the world economy, Chinese firms are beefing up efforts to head overseas.

China's outbound direct investment (ODI) rose 1.1 percent year on year to $56.53 billion in 2009, the largest among developing countries, said a report jointly released by the Ministry of Commerce (MOFCOM), the National Bureau of Statistics and the Sate Administration of Foreign Exchange on September 5. This was the eighth consecutive year of growth.

By the end of 2009, Chinese enterprises established at least 13,000 overseas companies in 177 countries, with their combined assets topping $1 trillion, said the report.

The manufacturing industry was the most coveted area of Chinese ODI, followed by the wholesale and retail sector and tenancy and business services, said Shen Danyang, a senior official of MOFCOM.

Successful expansion overseas would allow Chinese companies to take production closer to the markets it serves, and generate greater returns from the economy of scale.

The government will continue to strengthen efforts to push forward outbound investment and foster multinationals with global footprints, said Chinese Vice President Xi Jinping, at the opening ceremony of the second World Investment Forum on September 7 in Xiamen, Fujian Province.

Capital Outflow

Signs are surfacing that international hot money is bowing out of China.

In July, the country reported 171 billion yuan ($25.2 billion) of increased money supply in circulation from foreign exchange inflows, including the trade surplus, foreign direct investment (FDI) and international hot money, according to the central bank.

Since the trade surplus and FDI stood at $28.7 billion and $6.92 billion, respectively, the hot money outflow was estimated at $10.4 billion in July, said a recent report by the Research Center for International Finance under the Chinese Academy of Social Sciences (CASS). This is the third consecutive month of net outflow after torrent inflows in the first four months of this year.

Risk aversion came to the fore as fears about the Greece debt crisis abounded, promoting speculative investors to turn to the safe U.S. bond market, said Zhang Ming, General Secretary of the CASS' Research Center for International Finance.

Meanwhile, investors have lost some interest in China as expectations for a rise in the value of the yuan weakened and policymakers poured cold water on the hot property market, he said.

The Chinese currency, the yuan, lost 0.52 percent of its value against the U.S. dollar in August as the market confidence for the U.S. economy picked up.

But still, guards are necessary against speculative capital, which may come roaring back later this year, said Wen Bin, a senior analyst at the Bank of China Ltd.

Auto Blossoms

For global auto giants reeling from the overwhelming industry fallout, the Chinese market is truly a silver lining.

General Motor (GM) said its August sales in the United States dived 24.9 percent from one year ago to 185,176 units while in China sales surged 19.2 percent to 181,625 units.

Ford Motor Co.'s China subsidiary and joint ventures sold 44,047 units in August, skyrocketing 24 percent from a year earlier. In its home market, Ford's sales volume plunged 10.7 percent year on year to 157,503 units in August.

Ford attributed its strong sales growth in China to robust demand for the Ford Focus, one of the best sellers in its class, and the new Ford Fiesta, which China lists in its fuel-efficient vehicle directory.

"We hope to accelerate this growth momentum with new investments that expand our product portfolio and distribution channels in China," said Robert Graziano, CEO of Ford Motor China.

China toppled the United States earlier this year from its decades-long position as the world's largest auto market. The unprecedented boom is expected to continue as the economic take-off boosted income, making cars a new "must have" for numerous families.

Crossing the Straits

Yangzijiang Shipbuilding Holdings debuted on the Taiwan Stock Exchange on September 8, becoming the first mainland company to list on the island's bourse.

The Singapore-listed shipbuilder raised around $141 million by selling 240 million Taiwan depository receipts (TDRs). The TDRs are tradable securities issued by enterprises outside Taiwan. The rights and obligations of TDR holders are the same as those of common stockholders. Each receipt represents 0.5 common shares of the company.

On the first trading day, its share price closed at 20.1 New Taiwan dollars ($0.63), surging 6.91 percent from the offering price of 18.8 New Taiwan dollars ($0.59).

Yangzijiang, based in Jiangyin, east coastal Jiangsu Province, is the fourth largest shipbuilder on the Chinese mainland. It produces a range of commercial vessels, container ships, bulk carriers and multipurpose cargo vessels. Its sales revenues came in at 10.6 billion yuan ($1.6 billion) in 2009, surging 44 percent from one year ago.

"The floatation is just the first step of our strategy to further tap into the shipbuilding market of Taiwan," said Ren Yuanlin, Chairman of the Board of Yangzijiang Shipbuilding.

"This is definitely a milestone for Taiwan," said Stanley Chu, a spokesman at the Taiwan Stock Exchange. "We see this listing as a strong future indicator and hope to attract more mainland companies."

"Our next step is to get red chips to list in Taiwan. Hopefully that will happen by the end of the year," he said. Red chips are Chinese companies incorporated overseas and traded in Hong Kong.

Eyeing Japan

China bought 583.1 billion yen ($6.97 billion) worth of Japanese government bonds in July, the seventh straight month of net buying, said the Ministry of Finance of Japan on September 8. The figure was higher than the net 456.4 billion yen ($5.3 billion) China purchased in June.

The news comes after the yen marked a fresh 15-year high against the dollar on September 7. The Chinese purchase was believed to be one of the factors pushing up the Japanese currency.

Since earlier this year, China has been diversifying its investments of foreign exchange reserves. The country has trimmed its holdings of the U.S. Treasury securities by $51.1 billion in the first half of this year while it loaded up $20.2 billion of the Japanese government bonds and $3.4 billion of South Korean treasury securities.

It is necessary now for the country to fend off risks of investing in U.S. dollar assets since the U.S. deficit has been piling up, said Guo Tianyong, Director of the Research Center of China's Banking Industry under the Central University of Finance.

China's foreign exchange reserves currently consist of 65 percent in the U.S. dollar-denominated assets, 26 percent in the euro, and 5 percent in the pound sterling, an anonymous government official was quoted by the China Securities Journal as saying.

M&A Push

By delivering a boost to mergers and acquisitions (M&As), China aims to sharpen its industrial competitiveness.

The State Council released a circular on September 6, vowing stiff efforts to press ahead with M&As in industries that are struggling with overcapacity, low concentration and weak innovation.

The focus would be put on automobiles, steel, cement, machinery, rare earths and aluminum sectors, said the State Council. The goal is to cultivate a batch of innovative corporate giants with international competitiveness.

The government also pledged to scrape policies that used to restrict cross-regional M&As, and allow private capital into state-controlled sectors through M&As.

China's domestic M&A activity has rebounded strongly, reaching levels comparable to those seen at the peak before the financial crisis, said a recent report by the international accounting firm PricewaterhouseCoopers (PwC).

In the first half of 2010, there were 1,884 announced deals, with the largest being China Mobile's acquisition of a 20-percent stake in Shanghai Pudong Development Bank for $5.8 billion, said the report.

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