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Market Avenue

Print Edition> Business
UPDATED: January 15, 2007 No.3 JAN. 18, 2007

The Chinese stock market is hustling to new highs, and we don't mean the one in Hong Kong.

The A share market hit record levels in the past several weeks to the delight of nearly everyone.

Understandably, more companies are sprinting to be listed.

China Life Insurance Co. Ltd., the largest insurer in China, has been listed on the Shanghai Stock Exchange. Second-tier China Everbright Bank also is looking to go public in Hong Kong.

To further marketize the economy, the central bank plans to use the force of the "Star Wars" sounding Shibor, which is really the new Shanghai Inter-bank Offer Rate, to be the country's benchmark rate.

But as investment enthusiasm begins to bubble, the Chinese central bank is throwing the brakes on, tightening the money supply by ordering banks to reserve more rather than heedlessly give away loans.

And speaking of tightening, despite the Chinese Government's efforts to put the squeeze on the trade surplus-indeed import growth increased and export growth decreased in 2006-the surplus still reached an unprecedented amount: $177.47 billion.

Too Much Cash Is Risky

Not many countries in the world had the opportunity to taste the fruit of $177.47 billion trade surplus in 2006.

Similarly, in the midst of the world's fastest-growing economy, not many banks in other countries have the temptation Chinese ones do to issue loans for whatever purposes.

Now the People's Bank of China (PBC) is fighting to buck these trends.

The PBC decided to raise its reserve requirement by another 0.5 percent to 9.5 percent effective January 15th in an effort to curb bank loans and soak up excessive money in the financial market.

It worries that the over-fluidity of money will create a bubble in the money market and the stock market, which will in turn hurt economic development in the long run.

The reserve requirement is the percentage of deposits commercial banks must deposit with the central bank. A 0.5 percent increase means the banks have to deposit an estimated 160 billion yuan in the central bank. This is the fourth time the central bank raised the reserve requirement rate in the past six months.

"Currently, the market is full of money," said Qin Juan, an analyst with Chang Xin Asset Management Corp. Ltd., in China Business News. "Even fund management companies are beginning to lend money to other [financial] institutions. It is only normal for the central bank to raise the reserve requirement."

But that will likely hit banks hardest of all industries. For them, fewer loans mean less profit.

"Meanwhile, it will pose some negative impact on the money market," Qu Hongbin, chief economist with HSBC Asia, told the International Finance News.

Ordinary consumers might get frustrated getting bank loans to buy a house or start up a new business. But the banks can avoid possible loan risks brought about by an audacious lend.

Ma Jun, an economist with Deutsche Bank AG, pointed out that the abundant money fluidity stems mainly from the trade surplus. Considering this, Ma said the central bank will probably raise the reserve requirement once or twice more in the next six months.

Welcome Back, China Life

As the largest insurance company in China by premium, China Life Insurance Co. made an impressive debut in the A share market in the Shanghai Stock Exchange on January 9. Its shares surged to 38.93 yuan on the first day of trading, double its initial public offering price, and its market value totaled $141 billion, making it the third largest insurance company in the world after American International Group Inc. and Berkshire Hathaway Inc.

After wandering about in the New York Stock Exchange and Hong Kong Stock Exchange for three years, China Life is finally back home.

What makes China Life's debut so significant?

Firstly, it is the first Chinese insurance company to be listed in three places: New York, Hong Kong and Shanghai. Secondly, nearly half of the Chinese life insurance market is eaten up by China Life.

China Life's steady business growth, increasing profitability and its stable leading position in the Chinese insurance market won itself wide recognition and favor from both domestic and foreign investors.

Chinese shareholders are generally sorry to see so many blue chips only listed in overseas market, like China National Petroleum Corp. and China Mobile. When it is time to share the profit, Chinese shareholders are constantly wondering, "Why can't we enjoy the fruits achieved by our fellow countrymen?"

A civil servant from the Financial and Economic Committee of National People's Congress said when they were talking about China's companies listing abroad, the inevitable question is always, "What should we do to bring them back?"

Foreign investment banks still are cautious about the market's incredible confidence in China Life. After reaching a profit peak of 38 percent in February last year, the company's profitability dropped to 21 percent in August. With further interest rate hikes, Goldman Sachs believes the value of China Life shares will fall. Citigroup's comment was even harsher, suggesting the market's expectation for China Life's growth is unrealistic. Citigroup suggested dumping company shares.

The Beijing News reported that China's second largest insurer, Ping An Insurance (Group) Co., is also planning an IPO in the Shanghai Stock Exchange. Taikang Life Insurance Co. Ltd., the fifth largest, will follow suit.

Me too!

After listing on the stock market, three of the Big Four Banks in China-Bank of China, China Construction Bank, and Industrial and Commercial Bank of China-collected an incredibly amount of money.

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