China interest-rate cut proves surprise
September 19, 2008
CHINA yesterday cut key lending rates and the reserve requirement on smaller banks to lift the economy amid easing domestic inflation and against a backdrop of American-driven global financial turmoil.
From today, the benchmark one-year lending rate will scale back by 0.27 percentage point to 7.2 percent, the People’s Bank of China said.
The move is the first interest-rate prune since China started a run of increases on October 29, 2004. During the period, the central bank has raised rates nine times. The interest rates on deposits will not change.
The reserve-requirement ratio will drop by 1 percentage point to 16.5 percent from September 25 except for the country’s big-five banks and the Postal Savings Bank.
The requirement will drop by 2 percentage points to 14 percent for financial institutions in the areas hit by the May 12 earthquake.
It is the first time the central bank has lowered the proportion that banks set aside from lending since November 1999. The bank raised the requirement 18 times between July 2006 and June this year.
“We decided to make the cuts to keep a stable and fast development of the economy by fulfilling the policy of structural adjustment,” the central bank said on its Website yesterday.
The PBOC initiatives were queried by some economists.
“I am quite surprised by the move as China’s growth is still robust and there is no signs of a significant economic slowdown,” Jan Lambregts, director and head of research Asia of Rabobank International, said yesterday. “China’s exposure to the US credit crunch is still limited.”
Lambregts said it was an early stage for the central bank to take this action as the real interest rate in China was “still very low.”
He said a wiser path may have been moves designed to help small and medium enterprises hard hit by tight monetary policies as China’s inflation fell to a slower-than-expected 4.9 percent in August.
Other economists worried that China may be deterred by a decrease in external demand. Citigroup expects a policy reversal as early as the fourth quarter.
With China’s inflation falling to 4.9 percent in August, the central bank may feel more inclined to stimulate SMEs with lending-rate cuts.
The longer the loan life, the smaller the decrease. The six-month lending rate drops the most at 0.36 percentage point while the five-year-plus by the least at 0.09 percentage point.
Shanghai Daily
Tags: small and medium enterprises, slowdown, bank of chinaRelated Posts:
China Tightening Foreign Investment Restrictions
September 7, 2008
Under pressure from nationlists, China’s government is expected to continue blocking approval of foreign investments in key sectors. In particular, any involving “national strategic industries,” a definition which now specifically includes the bearing industry. And while rejecting more foreign investors outright, it is also consolidating many sectors under state control.
The China Industrial Security Center, part of the State Economic and Trade Commission, said its studies now show foreign merger and acquisition activity in China has reached the point where it has led to essential monopolies in some industries, threatening domestically owned and controlled businesses.
In addition, foreign investment is seen as potentially weakening China’s control over its own destiny in developing infrastructure and supplying defense-related needs.
CISC holds that foreign investments have not produced the often-promised results — access to new technology, international synergies, productivity gains — or delivered operating advantages, or any special improvement in the business at all.
Instead, CISC says allowing foreign direct investment has many risks :
• Market manipulation. It now claims foreign investors use the Chinese companies as tools to control specific domestic Chinese markets, earn outsized profits, then ship those profits out of China and overseas to the parent company.
• Impact on local economies. CISC said China’s economic safety is at risk in allowing foreign financing and ownership of raw materials supplied to domestic energy, transportation, and similar infrastructure dependencies. Similarly, autonomy is at risk when foreigners own key support businesses in the finance and publication sectors.
• Hindering local industry. When they come to relying on foreign funding, input and control, the Chinese businesses become too passive in developing their own skills, products and technologies. This threatens the future of business and may ultimately threaten China’s defense security.
The bearing manufacturing industry was specifically cited as an example of one where foreign involvement should be limited. In the bearing industry, foreign ownership should spark concern — because reliance on foreign resources hinders organic domestic development of skills and resources, and also because it creates the potential for China to rely on foreign-owned bearing manufacturers for the availability of key components needed for domestic security.
• Foreign ownership of large businesses in China, with no government controls, is a threat to the traditional economic system, which relies on many small-scale manufacturers. CISC said foreign-owned multinationals have unfair advantages over local businesses which can be short of technology savvy, and/or do not have much export sales built up.
In China, small and medium enterprises (SMEs) account for as much as 70% of domestic manufacturing output. Their access to capital has been hurt by recent government reforms aimed at tightening inflation and throttling back overheated growth.
Recent statistics issued by the State indicate manufacturing businesses are involved in nearly a quarter of all foreign-funded M&A activity in China. Overall, there were 169 M&A deals in China during second quarter 2008 — up 225% from first quarter.
Despite the central government’s stance on majority foreign ownership, locally-solicited foreign investment has been accelerating in manufacturing-heavy provinces. For example, FDI in Sichuan Province this year is up 108% to USD $1.8 billion, despite May’s devastating earthquake. Over 180 new foreign-funded businesses were given approval to begin operations in Sichuan, down 13 percent from 2007. But those businesses have agreed to invest more than $4.2 billion, up 208% from 2007.
Arcelor Mittal was recently rebuffed in its efforts to become more deeply involved in the highly fragmented Chinese steel industry. The Chinese government is consolidating steel producers; it wants the 10 largest, currently at 35% market share, to be at 50% by 2010, and 70% by 2020. Lakshmi Mittal said; “I do not see that in a year or so, the Chinese government will change their strategy where they do not want foreign companies to have a majority control.”
Source: bearings-china.com.cn
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Zhejiang to Save SME’s by 1bln Dolar Credit
September 1, 2008
From Nation, page 12 and 14, issue no. 381, August 18, 2008
Abridged Translation by Ren Yujie
Original article: [Chinese]
China’s Zhejiang provincial banking commission has mandated a 7 billion yuan credit line to help local small and medium enterprises (SMEs) ride out a perfect storm created by tight credit, yuan appreciation, and increasing costs.
The decision came after an August 6 meeting between the commission and a coalition of SMEs who have increasingly lobbied for market-saving measures.
Such meetings had been frequent in Zhejiang of late, where 20% of all businesses experienced losses in the first half of 2008. In response, Zhejiang authorities have led the charge to intervene in the market by supporting local SMEs in reducing taxes and opening up more credit.
These market-saving measures have kept the coals red in the dispute on whether local government should intervene on behalf of struggling businesses and if so, exactly how to do it.
Zhou Dahu, the director of Wenzhou’s Tobacco Product Accessories Association, said there were over 3,000 lighter-producing businesses in Wenzhou at the peak in 1993, but that the number had decreased to 600 or 700 in recent years. Today there are no more than 100 still in operation, he added. [Read more]
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