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ARC China Weekly News Summary

Last updated: 05:09 05 Aug 2009 EDT, First published: 04:09 05 Aug 2009 EDT

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U.S. - China Meetings Highlight a Rebalanced Relationship


As special representatives of U.S. President Barack Obama and China President Hu Jintao, U.S. Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan concluded the first meeting of the Economic Track under the U.S.-China Strategic and Economic Dialogue in Washington last week. 


Much of the discussion was dominated by continuing Chinese concerns about the U.S.’s growing national debt and the security of China’s existing investments in it. Chinese Vice Premier Wang Qishan urged the U.S. to protect the value of the dollar while Geithner largely played down the topic, saying the two countries were on the same page when it came to the need for emergency measures to help bring the world out of recession.


Mr. Geithner, speaking at the farewell dinner marking the end of two days of what were said to be very successful discussions, stated that China is embarking on “a remarkably ambitious set of reforms” that will see the country grow more from consumer demand than exports.  He went on to add that both countries have taken valuable steps towards repairing the global economic crisis through a series of reconstruction efforts and stimulus packages that will lead the U.S. and China “on a path to a more balanced and sustainable recovery in the future.”


U.S. Secretary of State Hillary Rodham Clinton explained the broadest and most discussed challenge facing U.S.-China relations by saying, "Both nations must avoid the temptation to close off our respective markets to trade and investment. Both must work hard to create new opportunities for our workers and our firms to compete equally, so that the people of each country see the benefit from the rapidly expanding U.S.-China economic relationship."


The joint press release issued last week by the U.S. Department of Treasury stated, "During the Dialogue, the two sides had a candid and in-depth exchange of views on the strategic, long-term and overarching issues concerning the development of bilateral relations. Both sides recognized that the Dialogue offers a unique forum to promote understanding, expand common ground, reduce differences, enhance mutual trust, and step up cooperation."


The talks came at a time when China and the U.S. are headed in vastly different directions, with Merrill Lynch last week being the most recent bank to upgrade China’s GDP growth forecast, to 8.7% for 2009 and 10.1% for 2010. Meanwhile the U.S. economy is expected to contract by 2.6% in 2009 and to grow by only 0.8% according to the latest analysis by the IMF. With little growth in sight to offset the U.S.’s huge deficits, the U.S. will continue to need China’s purchases of new debt issuances to meet its ongoing fiscal obligations. The U.S.’s dependence on China will only increase in the near future and this will shape the balance of power and the tone of discussions for years to come.
 
Adam Roseman, Founder & CEO ARC China


China’s July PMI Inches Up as Recovery Solidifies


China’s manufacturing sector consolidated its recovery in July, with businesses benefiting from a revived domestic economy and reporting a slight pickup in external demand, a key survey showed.
China’s official purchasing managers’ index (PMI) for July inched up to 53.3 from 53.2 in June, the China Federation of Logistics and Purchasing (CFLP) said.


It was the fifth straight month that the official PMI has stood above the watershed mark of 50, indicating an expansion of activity. It was also the third consecutive month that the PMI reading had increased, showing that the recovery had steadily found firmer footing.


“Looking ahead, with domestic demand growing more quickly, we can forecast that the economic recovery will continue,” said Zhang Liqun, a researcher at the State Council’s Development Research Centre who comments on the official figure for the logistics federation.


The new orders sub-index was unchanged in solidly expansionary territory at 55.5 in July from June. Of the 20 industries covered in the survey, 14 reported growth in new orders.


Half of these industries also said export orders were up on the previous month, making for an overall export sub-index of 52.1, its third straight expansionary month.


In all, 9 of 11 sub-indexes were higher than their respective levels in June


Source: Financial Times

China's Central Bank Reassures on Monetary Policy


China's central bank pledged to maintain loose monetary policy to support the economy and said it would ensure sustainable credit growth without resorting to heavy-handed quotas to rein in a lending spree.


In a statement that analysts said was intended to calm skittish markets, the People's Bank of China Vice Governor Su Ning said the central bank "will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum."


But there was also a hint of a gradual shift in policy footing when an unnamed official was quoted by Xinhua news agency as saying that the central bank would "fine tune" its loose monetary stance and keep prices "within a reasonable and controllable range."


Officials have expressed concern about the risk of stock and property bubbles inflating because of an unprecedented surge in bank lending, and the central bank said that consumer prices, now in mild deflationary territory, could start rebounding after the third quarter.


China has in the past used a quota system to control lending, telling banks not to exceed specific ceilings. This credit management was a key prong of China's monetary tightening in 2008.


Su's comments appeared to rule out an imminent return to a strict, central bank-directed quota system.


"They are responding to an incorrect interpretation by the market," said Ting Lu, economist with Merrill Lynch in Hong Kong.


Beijing has tamped down a little on the tide of money washing through the economy, but it is seen as unwilling to shift to more substantial tightening until a full-fledged recovery is assured.


"There will not be credit quotas this year, though there could be window guidance," Lu said, referring to more informal directions that Beijing gives banks to influence their decisions.


Source: Reuters


Spot Iron Ore Prices Pass $100 per Ton


Iron ore prices have broken above $100 a ton delivered in China for the first time in nine months, as steel output recovers from a slump earlier this year.


How much further prices can rise and how long gains can be maintained is a vital question for Chinese steel mills and their Australian iron ore suppliers, locked in a bitter fight over long-term contract pricing.


Traders and analysts in China say iron ore prices are being guided by strong demand from the steel industry. Chinese steel output hit a record 49.42 million tons in June, data from the National Statistics Bureau showed.


"The market is focusing on steel prices more than ore prices. Ore prices are up because demand was boosted by the steel mills, which are keeping production high to pursue profits," said a Beijing-based trader.


"The prices are likely to reach $105 a ton soon," said a Shanghai-based iron ore trader. "Australian miners are tightening their spot supplies and are not expected to ease them until a long-term deal with Chinese mills is announced."


Trade sources said China's Baoshan Iron and Steel Co Ltd is expected to raise September prices for its major hot-rolled and cold-rolled steel products by about 5 to 6 percent versus August, its third consecutive monthly increase.


Source: Reuters


China Vows ‘Reasonable’ Result in Iron Ore Talks


The China Iron and Steel Association vowed to keep pressing for a “reasonable” result in annual iron ore price negotiations, saying that excess imports had hindered this year’s marathon talks.


 “First, the talks are still on and we are still actively pushing them forward,” said Luo Bingsheng, CISA vice-chairman, speaking at a press conference following the group’s annual two-day industry meeting.
We hope to see a reasonable result,” he added.


China’s talks with BHP Billiton, Rio Tinto and Vale have already been clouded by Rio’s rejection of a further tie-up with Chinese aluminum company Chinalco, and the country’s detention of four Shanghai-based Rio employees for allegedly using “abnormal methods” to obtain state and commercial secrets.


To prevent its negotiating position from being undermined still further, CISA is now urging the Chinese steel industry to put its own “chaotic” house in order, and is calling for new rules that will force all Chinese mills and ore traders to adhere to a single ”unified” benchmark price agreed with foreign miners.


“We hope that the term prices negotiated with miners can become a benchmark unified price for China. The import agencies can charge agency fees,” Mr Luo said. He said under the new proposals, trading companies could charge a 3-5 percent commission on top of the agreed term prices.


After taking over negotiations from Baoshan Iron and Steel following last year’s crushing 65-96 percent contract price rises, CISA promised to unite the industry behind its efforts to secure more favorable terms from the foreign miners, but control over China’s fragmented steel sector has proved to be impossible.


The association’s position was hurt by record monthly iron ore imports beginning in March and driven mainly, it said, by smaller mills and trading companies.


Source: Financial Times


Chinese Government Will Pay to Install 500MW of Solar Power


China is launching what it calls the "Golden Sun" demonstration project to install at least 500 megawatts of solar farms across the country in the next two to three years.

solar power project and transmitting and distributing the solar power from that project. The incentive would go up to 70 percent for photovoltaic projects in remote areas without connections to the grid.


China said it's keen on promoting renewable energy development while stimulating the economy. It is home to many solar energy equipment makers who have seen their sales and profits decline quickly because of a softened market demand worldwide. These companies have been exporting their products largely to the Europe and the United States rather than the domestic market.


The Golden Sun project provides the latest evidence that China is on an ambitious path to become a major consumer of solar electricity. In March this year, the government said it would subsidize rooftop and building-integrated solar power projects with as much as 20 RMB per watt.


These projects would start at a minimum of 50 kilowatts in generation capacity.


Chinese solar companies are expecting the government to create a feed-in tariff program that would allow solar power plant operators to sell electricity at premium prices.


Just last week, Suntech Power (NYSE: STP) and ReneSola (NYSE: SOL) said they had inked roughly 2.3 gigawatts of deals with provincial and city governments to build solar farms. Suntech makes solar cells and assembles them into panels while ReneSola makes silicon wafers for making solar cells.


China is looking at installing 10 gigawatts of solar energy capacity by 2020, and some analysts expect more than 2 gigawatts of new generation could be added by 2011, reported Reuters.


For the Golden Sun initiative, each project would need to have a minimum of 300-kilowatt capacity, and it should be completed in one year. To make sure the money is spread out across the country, the government said each province should limit the projects to 20 megawatts total.


The government didn't specify whether the new incentives would apply only to ground-mounted systems. But the 300-kilowatt requirement is larger than the 50-kilowatt minimum mandated for the incentives announced in March.


If a project generates more than can be used onsite, the project owner could sell the excess electricity to grid operators at prices on par with power from coal-fired power plants.


"This program is more suitable for off-grid solar power development where power generated from diesel generation costs over $0.15/kilowatt hour," wrote Vishal Shah, senior analyst at Barclays Capital, in a research note. He added that incentives aren't likely to drive a lot of demand for solar energy equipment for 2010.


Source: Greentech Media


Buffett Posts $1 Billion Profit on Investment in Chinese Hybrid Maker BYD


Warren Buffett's Berkshire Hathaway Inc. earned a $1 billion paper profit from an investment it agreed to make in Chinese carmaker BYD Co. less than a year ago.


The automaker has jumped fivefold in Hong Kong trading since the deal was announced on Sept. 27, helped by Buffett's investment and rising demand for fuel-efficient vehicles. Three days earlier Berkshire agreed to an investment in Goldman Sachs Group Inc. that has since generated a paper profit of about US$2 billion.


Berkshire's MidAmerican Energy Holdings Co. unit agreed to buy 225 million new shares of BYD for HK$8 apiece. That stock has a market value of about HK$9.4 billion (US$1.2 billion), based on recent closing prices. Buffett will pay HK$1.8 billion.


The investment may help BYD, the seventh-biggest carmaker in China, boost its profile overseas and also reassure potential customers, Chief Executive Officer Wang said last year. The automaker started selling the F3 DM, the world's first mass-produced plug-in hybrid, in December.


BYD is also China's biggest maker of rechargeable batteries. The company supplies power units to mobile phone makers including Motorola Inc., Nokia OYJ, Samsung Electronics Co. and LG Electronics Inc.


Source: Zero2IPO


Footwear Company Raises $45 Million From New Horizon


New Horizon Capital, a Beijing-based private equity firm is investing US$30 million to acquire about 3.96 million shares of Exceed, a wholly-owned subsidiary of 2020 ChinaCap Acquiro, an AMEX-listed holding company with operations in China.


The firm, which is making the investment through its wholly-owned subsidiaries from its first and third private equity funds, will also fund Windrace, a Chinese sports and leisurewear company, in acquiring up to US$2.5 million of 2020 ChinaCap Acquiro warrants on the open market. New Horizon may also invest up to an additional US$13.1 million through the exercise of up to 2,500,000 warrants after the closing of the deal, Windrace said in a statement.


The investment will be used to partially repay a promissory note issued by Windrace to an affiliate of Goldman Sachs.


Established in 2002, Windrace designs, manufactures and sells footwear, apparel and other accessories in China under the brand Xidelong. The company has experienced growth in the mass market concentrated in the second and third tier cities in China.


Source: Zero2IPO


China Movie Firm Raises $15 Million


Sequoia Capital and Matrix Partners, teaming up with a Chinese investor, have agreed to invest around $15 million in a privately-held Chinese movie maker and distributor.


Poly Bona, often known as China's Miramax, recent completed Series B fundraising with the three investors.


Sequoia Capital and SIG Asia Investments are both Series A investors. SIG Asia did not participate in Series B fundraising for Beijing-based Poly Bona.


After the fundraising, Sequoia Capital, SIG Asia and Matrix Partners would hold a seat on Poly Bona's seven-person board for each firm.


Poly Bona holds about a 20 percent share of the domestic movie distribution market.


Source: Zero2IPO

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