Renminbi falls and policy shift
July 22, 2008
By Peter Garnham Published: July 21 2008
The Chinese renminbi fell for the third consecutive day on Monday, sparking speculation that its continued appreciation might not be a foregone conclusion.
The renminbi has risen more than 6 per cent against the dollar this year as the Chinese authorities have used the currency as a tool to dampen inflationary pressures in the country’s overheating economy.
By midday in New York, the renminbi dropped 0.2 per cent to Rmb6.8290 against the dollar after the People’s Bank of China fixed the currency’s daily mid-point lower for a third successive day.
Gabriel Stein, of Lombard Street Research, said that, while the move could just be put down to “normal daily fluctuations”, the Chinese ministry of commerce had called for a slower pace of renminbi appreciation.
Wen Jiabao, the Chinese premier, has talked about helping China’s exporters.
“It could be the beginning of a policy shift,” said Mr Stein. “It could also be an attempt to stave off speculative capital inflows by showing that renminbi appreciation is not a one-way bet.” [Read more]
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Appreciation of Yuan slowing pace
July 22, 2008
21-July- As China marks the third anniversary of its currency reform, Beijing is preparing to slow the pace of yuan appreciation following complaints from exporters who are struggling to hold down costs in the face of a global economic downturn, analysts, government advisors and sources said.
The slowdown, which will follow the record pace of appreciation seen in the first half of this year, will mark the latest shift in an exchange rate reform strategy which has been under fire for several years for being either too cautious or too aggressive.
The yuan, which was estimated to be undervalued by 15-40 pct prior to revaluation, has risen by around 21 pct against the US dollar since it was depegged and moved to a managed float three years ago today.
The People’s Bank of China (PBOC) pushed for yuan reform in the months prior to July 2005 because the pegged system did not allow for any control over Chinese monetary policy, while expectations of a move were luring billions of dollars in speculative “hot money” into the country.
But three years later, China is struggling against its most serious inflationary bout in over a decade, the PBOC still does not have any monetary policy independence, and speculative inflows of hot money are estimated to be larger by several multiples.
The pace of appreciation in the three years of a managed float has reflected changes in China’s politics and its economy, both of which have played their roles in deciding how quickly the currency rises against the US dollar and the other majors.
Politics and economics will be brought to bear again on the pace of appreciation, analysts and government advisors said, with Beijing set to deliberately slow its rise in the final months of this year to help struggling exporters.
“The pace of appreciation will see periods of speeding up and slowing down, but the general trend is for it to slow,” said Zhu Baoliang, an economist and government advisor with the State Information Center, a think tank affiliated with the National Development and Reform Commission.
Zhu was a member of the one of the two teams that the government formed in early 2005 to assess the appropriate magnitude of the mid-summer revaluation.
The yuan has risen by nearly 7 pct against the dollar this year, already outstripping the 6.9 pct increase seen over the whole of 2007. Zhu predicted that the yuan could rise by around 10 pct over this year, implying another 3.5 pct rise for the remainder of this year.
The faster pace of appreciation seen in the first half was adopted in early December following the government’s shift to a “tight” monetary policy, and critics of the cautious nature of Chinese currency policy — including the US Treasury — were quick to notice and publicly encourage this shift.
The currency had risen by 11.8 pct prior to the December shift, and both Washington and Brussels — alongside a handful of voices in Beijing — were warning that the undervalued yuan was fueling unsustainable global imbalances and protectionism (the yuan has actually depreciated gains against the euro since July 2005 owing to dollar depreciation).
But the increase in the annualized pace of appreciation to as much as 17 pct in the first quarter this year has created its own problems, not least the threat posed by hot money. This has intensified a long-running debate among the tier of economists who advise the government on macroeconomic policy.
The apparent deterioration in monetary conditions has led to the near-daily calls from economists for a change in tack.
Some believe that only a virtual repegging of the currency — a sharp appreciation all at once or over a short period — would end the bets on appreciation, stemming the flow of dollars onshore and easing the PBOC’s sterilization burden.
“Since the July 21 revaluation, there has been this one strand of opinion calling for the yuan to rise faster to ease appreciation pressure, but the reality has been that the faster the yuan has risen, the bigger the appreciation expectations are,” said Zhao Qingming, an economist with the China Construction Bank in Beijing and a former PBOC researcher.
Opposition to the yuan’s speedy gains have a powerful ally in the shape of the Ministry of Commerce.
Data from the first half show the trade surplus falling by nearly 12 pct compared to the same period a year ago, with textile, shoe and clothing manufacturers particularly hard-hit. This has led to the yuan becoming the whipping horse of the export sector, which claims that currency appreciation is imposing an unbearable cost on operating conditions.
Others argue that a repegging would do nothing to end speculation and deprive China of a much-needed price setting tool and raise temperatures anew in the US and Europe.
They insist that the tide of hot money inflows — which have been estimated by Stone & McCarthy Research Associates at 160-180 bln usd in the first half alone, double the inflows for all of 2007 — require that aggressive action be taken to regain control of monetary policy.
Michael Pettis, a professor at Beijing University and observer of financial crises in Latin America in the 1980s and 1990s, insists that the monetary pressures caused by the government’s timidity will eventually force a significant one-off revaluation.
“Monetary policy since July 2005 and even before that can be basically described as “too little, too late” — the real problem is that there is no monetary policy in China, there is only a currency regime,” he said.
Although headline inflation appears to be easing with an increase in agricultural production, economists warn that the official data fail to provide an accurate picture of prices, and that the billions of dollars in inflows are fueling classic monetary inflation.
Unprecedented measures by the PBOC to control the flow of liquidity into the economy haven’t stopped M2 from growing by nearly 20 pct this year, even off last year’s impressive base.
Despite the Commerce Ministry’s opposition, some officials, who spoke on condition that their names not be published, said that the PBOC has a more powerful voice within the State Council than it has been given credit for. They also said that the debate over the yuan has little bearing on a leadership whose expertise in monetary affairs remains limited.
“This debate among economists isn’t having too much impact on policy,” said a source close to the cabinet.
One official argued that any significant overhaul of yuan reform policy would require the direct intervention of a leadership which, for now, is happy to leave the complexities of exchange rate issues at the ministry level.
“The Ministry of Commerce has been calling for a slower yuan rise since the start of this year but the pace of appreciation has actually sped up — this is proof enough that the PBOC is the most important force in deciding the yuan exchange rate’s movement,” said an official within the State Administration of Foreign Exchange.
That isn’t to say that the government is ignoring the implications of exchange rate policy choices.
The threat to the economic system posed by hot money has raised concerns at the highest levels of government and has prompted a tightening up of controls over the capital and trade accounts in recent weeks on the conviction that the trade surplus and foreign direct investment are acting as channels for bringing illicit funds onshore.
A one-off revaluation looks unlikely for a government which makes decisions by consensus and has demonstrated little willingness to take big, risky policy steps to complement China’s growing interdependence with the global economy.
Analysts insist that, even if a large one-off revaluation is the cure for China’s monetary ills, the unknown knock-on effects of such a move could have devastating consequences for an economy whose banking and industrial sectors remain stuck in transition between central planning and the market.
“Gradual and stable yuan appreciation remains the more realistic choice,” said Yang Yuanjie, a researcher within the Ministry of Finance said.
Source:XINHUA
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China Auto Parts Industry
July 21, 2008
In 2007, China national macro-economy continued to maintain a rapid growth momentum. A further increase of residents’ income and price cut of passenger vehicles stimulated consumption demand to a great extent. Influenced by the factor, the auto industry continued to keep the good momentum of development recorded in the previous year. The year of 2007 witnessed a new record high in both production and consumption of auto, with auto production and consumption reaching 8.88 million units and 8.79 million units respectively.
Rapid development of China’s auto industry has provided a broad space for auto parts industry. In recent years, China’s auto parts industry has made a great progress and some innovative auto parts producers have grown up rapidly, fully demonstrating the vitality of self-brand producers of auto parts.
With the fast development of auto parts production base in Changchun, capital of Jilin province, Shiyan, a city in Hubei province, Wuhu, a city in Anhui province, Huadu, a city in Guangdong province and Beijing-Tianjin-Hebei Bohai Economic Circle, auto parts industry clusters and regional economic development have undoubtedly become the new hot spots in the recent years. According to incomplete statistics, China has around 1,000 auto parts based industrial parks across the country and among them 100 parks are key regional clusters or development zones.
China’s export of auto parts reached CNY14.5 billion in 2007. International auto giants have become more and more confident of the quality of China’s auto parts. Sales revenue of China’s auto parts producers reached CNY403.5 billion in 2006. It is estimated that the output value of China’s auto parts is expected to reach CNY800 billion in 2010.
Source: Shanghai Daily
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China’s Wind Power Industry
July 20, 2008
Article by Lou Schwartz and Ryan Hodum
When 2007 ended, China’s installed base of wind power totaled just over 6 gigawatts (GW), earning the country fifth place among the world’s largest wind energy producers (after Germany, the U.S., Spain and India), up from sixth place in 2006. Wind power industry statistics show that by the end of 2008, China’s total installed base of wind power production will have reached 10 GW; some experts are estimating that by 2010, the total installed capacity for wind power generation in China will reach 20 GW and that by 2020 China’s installed base of wind power will total 100 GW (current global wind installation is 94 GW).
In 2007 an estimated 24 billion Yuan [approximately US $3.28 billion] was invested in China’s wind energy sector. Not surprisingly, this level of investment has spawned an industry — local manufacturers are responding by producing the equipment and components that the wind energy industry requires to sustain this growth.
It is conservatively estimated that between 2006 and 2015, 100 billion Yuan [US $14.5 billion] will be spent on equipment and component purchases to further develop China’s wind power industry. According to the Ministry of Commerce, by the end of 2006 there were more than 100 Chinese companies manufacturing equipment and components for the wind industry.
Foreign wind power equipment manufacturers, including the most significant international wind turbine manufacturers, Vestas, Suzlon, Gamesa, Nordex Corp., Honiton Energy Ltd. and GE Energy, have aggressively engaged this market. Though foreign wind turbine manufacturers’ share of the market has declined from nearly 75% a few years ago to 55% now, the foreign presence in China’s wind industry remains significant.
Foreign wind power equipment manufacturers have made strategic investments in China, allowing them to remain dominant even as indigenous Chinese wind equipment capabilities grow. At EU €60 million, Gamesa’s factory in Tianjin, which manufactures wind turbines, is the Spanish company’s second largest foreign investment (after the United States).
Also located in Tianjin is Vestas’ Wind Turbine Equipment (China) Co. Ltd., which manufactures blades and does wind turbine assembly.
Nordex has located two of its three manufacturing centers in China and has established the company’s Asia headquarters in Beijing. In the next three years, Nordex expects to invest an additional 500 million Yuan [approx. US $71 million ] to grow its business in China four-fold. GE Energy’s Shenyang wind turbine plant produces 1.5-MW-class wind turbines.
Localization of Equipment Manufacturing
To help spur the development of an indigenous wind power equipment and components industry, Beijing has mandated that all new wind power projects have at least a 70% Chinese component. Wind power equipment manufacturers also now enjoy a 50% discount on value added taxes (VAT) payable in China.
On April 23, 2008 the Ministry of Finance announced two changes to import tariff regulations with respect to the wind power industry, further spurring development of Chinese wind power equipment manufacturing. The first change, effective January 1, 2008, implemented a tariff and VAT rebate program for imports of parts and raw materials used in the manufacture of wind turbines. This change was significant because a large percentage of parts and raw materials used in the manufacture of wind turbines still must be sourced from outside of China.
The second tariff change, effective May 1, 2008, eliminated the tariff-free importation of wind turbines less than 2.5 MW. This tariff change is a strong indicator that the Chinese wind turbine industry is maturing rapidly; as recently as late 2007 Chinese wind power equipment was incapable of producing megawatt-class wind turbines.
Megawatt-class turbines are increasingly produced domestically and the elimination of tariff-free imports of wind turbines less than 2.5 MW in size will give added impetus to the domestic production of increasingly large wind turbines.
The economics of the wind power equipment industry are quite favorable. At present the cost of construction of wind power in China is approximately 8000-9000 Yuan/Kw [US $1170-1315 /kw] and 60% to 70% of those costs are equipment purchases. Because many of the most important Chinese wind power equipment and components companies have grown out of large industrial companies (including several public companies), there appears to be sufficient financial strength for these companies to grow.
Funds to finance new wind power equipment and component manufacturing in China have come primarily in the form of commercial bank loans, retained earnings and equity investments.
Turbines
According to Steve Sawyer, secretary general of the Global Wind Energy Council, by 2009 China will become the world’s largest producer of wind turbines. At present China has at least 40 wind-power turbine manufacturers: 17 are state-owned or state-controlled companies, 12 are private Chinese companies, 7 are joint-venture companies and 4 are wholly foreign-owned companies.
Though China has yet to export wind turbines, China’s two largest wind turbine manufacturers — Xinjiang Jinfeng (Goldwind, whose December 2007 initial public offering (IPO) was the first pure-play wind power equipment Chinese stock offering in the U.S.) and Sinovel — have plans to export in 2009 and 2010.
Many of the largest wind turbine and other equipment manufacturers have licensed technology from western companies, including from AMSC Windtec, REpower, Aerodyn, Vensys and Garrad Hassan. Most of the largest Chinese wind turbine manufacturers have begun to produce 1.5-MW wind turbines and gradually these Chinese wind turbine manufacturers, having purchased designs for 2-, 3- and 5-MW wind turbines, are developing prototypes of larger wind turbines.
Bearings
The Chinese wind power industry continues to depend on imports for its supply of bearings. However, this dependence may be short lived. On December 11, 2007, the Timken Company entered into a joint venture agreement with the Xiangtan Electric Manufacturing Co., Ltd. to manufacture ultra-large bore bearings for the main rotor shafts of megawatt-class wind turbines. The bearings will be manufactured in China with some of the bearing materials and components coming from the U.S. The new US $38 million plant, which will be located in Hunan Province, will begin construction in 2008. Timken will have an 80% interest in the new venture.
Blades
The largest wind turbine blades to be manufactured in China to date (measuring 40.25 meters long) are now being manufactured by the China Materials Science and Technology Wind Power Blades Joint Stock Co. Ltd., [Read more]
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China Machine Tools Industry
July 20, 2008
China’s machine tool industry plays an important role in world machine tool industry in recent years.
In the aspect of output value, China has accounted 1/4 of the world machine tools. Therefore, the healthy development of China’s machine tool industry will promote the world machine tool industry continues to maintain a rapid development.
According to the National Bureau of Statistics data of whole machine tool industry, in 2007 the 4291 manufactories achieved RMB 274.77 billion in industrial output value, up 35.5 per cent year-on-year; RMB 268.1 billion of sale revenue, an increase of 36.2 per cent year-on-year; throughput of 97.6 per cent, an increase of 0.5 per cent year-on-year.
In 2007, the output of metal-cutting machine tool was 606,835 sets, an increase of 11.7 per cent year-on-year, among NC metal-cutting machine tool 123,257 sets, an increase of 32.6 per cent year-on-year;
Forming machine tool 172,766 sets, an increase of 9.2 per cent year-on-year, among NC forming machine tool 3,011 sets, an increase of 53.7 per cent year-on-year;
Woodworking machinery production and casting machinery 19.2 per cent and 15.4 per cent year-on-year respectively, metal cutting tools fell 0.4 per cent year-on-year.
Machine tool export has continued to grow rapidly. In 2007 it made $5.2 billion, up 36.2 per cent year-on-year, including metal processing machine tool $1.65 billion, increased 39.2 per cent year-on-year, NC metal processing machine tool $500 million , an in crease of 48.2 per cent year-on-year, accounting for 30 per cent of the metal processing machine tool, metal-cutting machine tool $1.22 billion, up 31.6 per cent year-on-year, forming machine tool $430 million, up 66.5 per cent year-on-year.
In 2007, the imports of machine tool was $11.77 billion, an increase of 5.7 per cent year-on-year, among metal processing machines tool $7.07 billion, a decrease of 2.4 per cent year-on-year. China’s foreign trade deficit of metal processing machine tool reached $5.42 in 2007, lower than the same period last year $6.06 billion.
Considering the overheated economy and higher inflation, the central government has tied the monetary policy, which has already affected on some investments, particularly small and medium-sized machine tool investors. China’s machine tool industry is expected to slow down, but, on the other hand, high-value-added products such as NC machine tool, large and heavy machine tool will still keep a strong growth, especially the state key projects and 16 major science and technology projects will boost the domestic demand for high-technical NC machine tool. China is expected to maintain a strong demand for NC machine tool in the next three to five years; in particular the large-scale NC machine tools will remain a 30 per cent growth.
source: Report Linker
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