Announcement

**xinhui** · 26 Jan 09,, 19:29

The 'statement' was a bomb drop and surprise everyone in the business. My personal view, (by no mean correct) it is just a standard confirmation tough talks as no one is willing to risk an econ war right now.

**xinhui** · 26 Jan 09,, 19:30

From CFR

http://blogs.cfr.org/setser/2009/01/...ing-right-now/

Is the US now more, or less, reliant on China�s government for financing?

Posted on Friday, January 23rd, 2009

By bsetser

Rarely do nominees � or even Treasury Secretaries � make news in their written response to questions posed by Senators. But Tim Geithner�s comments on China yesterday tcertainly made news. I more or less agree with Dr. Drezner . Geithner essentially restated Obama�s campaign position � and Obama has long been more concerned about China�s pattern of sustained intervention in the currency market than the Bush Administration has been. Manipulation sounds harsh, but it more or less is a different way of stating something that Dr. Bernanke noted a couple of years ago: China�s exchange rate regime has served as a de facto subsidy for China�s exports.

But Geithner also preserved his options. Above all he signaled that the US hopes that China will respond favorably to US calls for it too more to support domestic Chinese demand (China�s current stimulus is � measured correctly � smaller than the US stimulus: Keith Bradsher reports that �China�s stimulus program is likely to add 1 to 3 percent to its economic growth this year, said Dong Tao, a China economist at Credit Suisse. The American program is likely to add close to 3 percent to the United States� growth, he predicted� ) and to reconsider its peg. Michael Phillips of the Wall Street Journal reports:

Mr. Geithner stressed Mr. Obama�s promise to �use aggressively all diplomatic avenues open to him to seek change in China�s currency practices.�

More interesting, at least to me, is how hard it seems to be to report on the complexities of the US economic and financial relationship with China right now, when so much is changing. China is buying more Treasuries even as the pace of its reserve growth slows. But the increase in China�s demand has been dwarfed by the increase in Treasury issuance.

One point in the Times story was clearly off. The Times, citing Edward Yardeni, claims that China�s trade surplus is shrinking dramatically:

��Things have changed quite a bit since Hank Paulson made an issue of this,� said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. �The Chinese trade surplus is shrinking dramatically and China�s economy is falling into recession. I think it really wasn�t necessary. It doesn�t accomplish anything.�

Japan�s surplus is shrinking dramatically. But not China�s surplus. Its November surplus set a record, and December�s surplus was only a bit smaller. Imports are falling faster than exports, pushing the surplus up. China is importing less because it is poised to export less. But that isn�t all. As Andrew Batson reports, Chinese domestic demand has slowed. It is importing less for its own account too. And it is paying a lot less for its commodity imports.

The Times also asserts that the United States dependence on China for financing has increased:

�The United States, moreover, is increasingly dependent on China to finance its ballooning deficit. �

I have long highlighted the risks associated with the United States� reliance on China�s government for financing. But I am not sure that this dependence is currently increasing.

The US relies on China above all to finance its external deficit. But the trade deficit is falling right now, both absolutely and relative to GDP. One byproduct of the United States� own slowdown is that it has to borrow less from the rest of the world than in the past. That suggests that the US is now less not more dependent on the rest of the world for financing. That doesn�t necessarily mean that US dependence on China has decreased though: If China is the only country in the world with a big surplus and the US is the only country in the world with a big deficit, the US is arguably more reliant on China than in the past, simply because there are fewer other sources of external financing for the US deficit.

But in one respect that dependence has changed, as the pace of China�s reserve growth has slowed dramatically. Right now, the US in some sense relies more on private Chinese savers and less on China�s government.

Chinese demand for Treasuries (and until recently for Agencies) also has long helped to support those markets. But it isn�t clear � at least to me - that the United States dependence on China has increased recently. Here are the facts, at least as I see them:

1) China has bought � according to the US TIC data � about $150 billion of Treasuries over the last three months of data. Annualized that is $600 billion, a huge sum. That data only runs through November. However, ongoing growth in the Fed�s custodial accounts implies that this basic pattern continued in December (data/ graphs can be found here)
2) The surge in China�s Treasury purchases has come even as China�s reserve growth has slowed. It consequently reflects a reallocation of China�s portfolio towards the safety of the Treasury market more than a surge in Chinese demand for dollars � and it may also reflect a decision by China�s reserve managers to shift funds out of the hands of private fund managers after Lehman (a decision that has had the effect of increasing reported Chinese purchases of US assets).
3) Once the shift in China�s portfolio toward safety ends, the pace of China�s purchases of Treasuries is likely to fall. It is hard to sustain a $600b annual increase in your holdings of Treasuries if your reserves aren�t growing. Hot money outflows will bring China�s savings into the global market, but in a less direct and harder to track way.
4) The Treasury has increased its issuance even faster than China has increased its purchases. The US is consequently selling more Treasuries to everyone, not just to China. The increase in China�s holdings of Treasuries consequently accounts for a significantly smaller share of the net increase in the supply of marketable Treasuries than in the past (Data here)

Does that mean that the US is more or less reliance on China for financing? It isn�t clear. China�s purchases have increased (more reliant) but it is now providing a smaller share of the financing for the US fiscal deficit than in the past (less reliant). One thing though is quite clear but strikes many as counter-intuitive: the large US fiscal deficit in 2009 will need to be financed primarily from domestic sources not from China. Let me put it this way. China currently has � in my judgment � about $900 billion of Treasuries.* That is a truly staggering sum. But China also didn�t buy them all in a year. The US will need to sell more than $900 billion of Treasuries to cover its 2009 budget deficit. And China isn�t going to double its Treasury holdings in 2009 �

Of course, if China decided to reduce its Treasury holdings in 2009, the amount the US would need to place with private buyers would increase. China matters. But it matters in a slightly different way than before. It used to be one central bank buyer among many; now it is the biggest source of central bank demand in a market that no longer relies quite so heavily on central bank demand.

Three final observations:

1) The US needs financing, but China also needs markets for its exports. The �balance of financial terror� is such that China cannot reduce its financing of the US without also reducing the market for its exports. That limits China�s options. My own guess is that China is more constrained than in the past, as it presumably doesn�t want to do anything with its reserves that would add to the global slump in demand for Chinese goods. If hot money outflows subside, China will almost certainly need to continue to add to its reserves. And China�s ability to shift its reserves from dollar to the euro is also constrained by its desire to maintain good relations with its European trading partners. Key eurozone countries wouldn�t appreciate a big euro rally right now induced by a surge in Chinese purchases, especially if China maintained its dollar peg during the process.
2) China�s currency has appreciated significantly in real terms even as the pace of its appreciation against the dollar has slowed. That implies more not less friction between the US and China. China was willing to allow the RMB to go up against the dollar when the dollar was going down against other currencies and other countries were snapping up more Chinese goods. Now that the dollar is going up and Chinese exports are going down, China is reluctant to allow the RMB to appreciate at all against the dollar. But the US naturally cares far more about the RMB�s value against the dollar than its value against other currencies.
3) Even though China�s currency has appreciated significantly in real terms recently, most real exchange rate indices put it only a bit above its levels in 2000. The expansion of China�s current account surplus since then - and the huge increase in China�s exports since then � suggests that the RMB remains fundamentally undervalued. Other Asian countries exports are actually falling faster than China�s exports. But the RMB�s real appreciation clearly came at a less than opportune time. The RMB was weak in real terms when China�s domestic economy was strong, and now it is getting stronger when China�s domestic economy is slowing sharply.

The US � a large deficit country � would benefit in a lot of ways if it could export its way out of trouble. That would also help to bring the world closer to balance. Yet with its own economy slowing sharply, China�s willingness to accept a stronger RMB has likely gone down. Here, US and Chinese interests diverge. Both want to draw on external demand to support their own growth.

Fortunately it is a littler harder to see why China would think that a major fiscal stimulus isn�t in its interests �

*I�ll explain the basis for my estimate in a subsequent post; I believe that most of the Treasuries that the TIC data indicates are held by UK investors were actually onsold to the PBoC.

**snowhole** · 28 Jan 09,, 09:15

Is this piece of info reliable? (Someone in the comments suggested that the source be Nelson Report and highly approved its credibility)

http://www.chinalawblog.com/2009/01/...called_hu.html

Yet I could find no other reference on google over this call...

**xinhui** · 28 Jan 09,, 18:17

As I stated before, I do believe that Geithner was playing for his audience, and to some extend, as a tactical move to deflect the "failure to pay tax" issue.

now, he is receiving fires from all directions and for me, it is a surprise to see an old China hand make such a stupid mistake.

Geithner’s Yuan Call Rejected as ‘Horrible Advice’ (Update2)
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By Simon Kennedy

Jan. 28 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner’s call for China to loosen restrictions on its currency was criticized by economists and policy makers at the World Economic Forum.

Allowing the yuan to strengthen would be “economic suicide” amid an economic slump, Stephen Roach, Morgan Stanley’s Asia Chairman, told a panel in Davos, Switzerland, today. “I’ve never seen an economy in recession voluntarily raise their currency. It’s horrible advice.”

Renewed clashes over the yuan threaten to stoke tension between two of the world’s biggest economies and undermine cooperation to counter the global recession. China limited yuan gains against the dollar in July 2008 after the currency rose 21 percent following the end of a peg three years earlier.

“Shouting from Washington to Beijing is not going to make a difference,” said South Africa’s Finance Minister Trevor Manuel on the same panel.

Geithner, who took office two days ago, last week said President Barack Obama believes China is “manipulating its currency,” suggesting the new administration may take a tougher line with the biggest foreign buyer of U.S. government debt.

The Bush administration stopped short of using the term in criticizing China’s exchange-rate management. Some U.S. lawmakers are seeking measures to punish trading partners perceived to have undervalued exchange rates.

‘Long-Run Interest’

Former Treasury Secretary Robert Rubin, Geithner’s boss in President Bill Clinton’s administration, said late yesterday at a conference in New York that while it’s in the “long-run interest” of the U.S. and China for the yuan to be set by the market, “this is a time to maintain a stable financial relationship with China.”

“Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,” Geithner told Senators in written testimony. “The question is how and when to broach the subject in order to do more good than harm.” Obama’s team will “forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”

China’s commerce ministry said Jan. 24 that the country hasn’t manipulated its currency to promote exports and that accusations of government tampering in foreign exchange will fuel U.S. protectionism. China’s yuan trades at about 6.85 to the dollar.

World Bank Chief Economist Justin Lin said in Davos that an acceleration in yuan gains would be “bad for China’s growth.”

China’s economy is expanding at the slowest rate in seven years, a government report last week showed.

To contact the reporter on this story: Simon Kennedy in Davos at [email protected]

**xinhui** · 29 Jan 09,, 23:06

Here is a good write up on RMB and its relations with the US dollars from Brad Setser and Arpana Pandey of the Council on Foreign Relations, Center for Geoeconomic Studies.

China's Stake in America

January 29, 2009

China's holdings of U.S. assets are much discussed, but the true figures remain obscure. Brad W. Setser and Arpana Pandey gauge the scale of Beijing's American portfolio in this Working Paper from CFR's Center for Geoeconomic Studies (PDF file).
http://www.cfr.org/content/publicati...er_6_China.pdf

**xinhui** · 01 Feb 09,, 05:00

February 1, 2009
Chinese Cautious on Treasury Notes
By REUTERS

LONDON (Reuters) � China�s willingness to continue buying United States Treasury securities in large numbers will depend on its need to protect the value of its foreign investments, the Chinese premier, Wen Jiabao, said Saturday. He also said that a stable yuan is in everyone�s interests.

His enigmatic remarks, made during the final leg of his tour of European trading partners, could raise new concerns in Washington about China�s commitment to continue purchasing United States government debt.

The United States said this month that all its major trading partners should operate flexible currency exchange rates, expressing concern that China was manipulating the value of currency, the yuan, to boost its exports.

But analysts say there may be a limit to the pressure that the United States can put on China, as it is the single biggest foreign investor in the securities collectively known as Treasuries, with $681.9 billion as of November, according to government data.

Mr. Wen, asked during an event in London about the future of Chinese demand for United States government bonds, said: �This is a very sensitive question and a question that President Barack Obama will want to ask.�

Concerns that China may lose its appetite for buying Treasuries have helped depress United States government debt prices, along with worries about the large amount of bonds that will be needed to finance the next American economic stimulus package.

**xinhui** · 04 Feb 09,, 05:41

WASHINGTON, Feb 3 (Reuters) - U.S. Treasury Secretary Timothy Geithner held telephone talks with Chinese Vice-Premier Wang Qishan on Monday night and agreed to consult closely on the troubled global economy, the Treasury said on Tuesday.

"Both officials emphasized the need to maintain close consultations during this difficult period for the global economy and agreed on the need for a continued high-level dialogue on bilateral economic issues," Treasury said.

Geithner, just sworn in a week ago on Monday, is talking with financial counterparts and senior officials around the world as the Obama administration works on shaping up its plans for stimulating the U.S. economy and stabilizing a faltering financial sector.

(Reporting by Glenn Somerville, Editing by Chizu Nomiyama)

**xinhui** · 07 Feb 09,, 01:50

China Manipulates, Europe Wins

By Nate Taplin

Tim Geithner, the newly confirmed U.S. Treasury Secretary, ruffled feathers in Beijing and raised eyebrows across the Atlantic with a statement at his confirmation hearing that China has been "manipulating" its currency to gain an unfair advantage in export markets. Geithner's comments were received with predictable hostility in Beijing, but more interesting was the lukewarm response from across the Atlantic--given the European Union's own large current account deficit with China.

A spokesperson for the EU's monetary and economic affairs commissioner simply commented that "exchange rates should reflect economic fundamentals. That's all we wish to say." In other words, despite tough talk on China last year, the EU prefers not to touch this one.

Why such caution? The issue seems to represent an obvious convergence between U.S. and European interests. European exports to China now constitute a significant growth sector in several European economies. A stronger yuan would mean cheaper European goods for Chinese consumers. And Europe is pressing its case quite strongly in other arenas--cooperating with the U.S. to win a recent WTO ruling against Chinese auto parts tariffs, the first such legal setback the Chinese have suffered since joining the WTO in 2001.

There are several possible reasons for EU hesitancy on the currency issue. It's true that a strong yuan would make European goods cheaper in China and Chinese goods more expensive in Europe. But if the yuan were to appreciate significantly against the euro and the dollar, it would likely also appreciate against the currencies of some lower-wage Asian countries which whom China runs significant trade deficits, importing their intermediate goods to assemble into final goods which are then sold in the west. Furthermore, China would be able to buy oil and other commodities--significant contributors to the cost of Chinese goods--more cheaply, because many of these are priced in dollars. If these factors combine to push down inflation in China, especially in the export sector, this will tend to make Chinese exports more price competitive, not less--making them more attractive to European consumers.

Thus the overall impact of a revaluation on the Sino-EU trade balance is somewhat hard to judge. It depends (among many other factors) on the relative size of these two effects: a stronger yuan making Chinese goods less affordable for Westerners, versus lower price inflation in Chinese export industries making them more so. It's not straightforward: between 2005 and 2008, the yuan actually appreciated by almost twenty percent against the dollar, and yet the US trade deficit with China ballooned by approximately the same amount. While this may simply suggest that the yuan needs to appreciate far more than it already has--as suggested by Geithner--it may also indicate that China's export competitiveness runs deeper than simply an undervalued currency.

Finally, even if Western goods in China become significantly cheaper, the constraints on the spending of Chinese consumers (worries about healthcare, education, etc.) are generally more severe than those on Westerners, even now. This imbalance is arguably as large a contribution to China's trade surpluses as the value of its currency and is already beginning to be addressed by the Chinese authorities. In any case, given the uncertainty surrounding the outcome of further appreciation--especially in the midst of a dramatic deceleration in China--it is unsurprising that Europe's leaders are loath to risk their political capital in a confrontation with China over the yuan, especially as the US seems to be taking the lead so forcibly.

Nate Taplin is a graduate student in the Asian Studies and International Economics programs at the Johns Hopkins University Paul H. Nitze School of Advanced International Studies (SAIS) in Washington, D.C.
http://newsweek.washingtonpost.com/p...rope_wins.html

**xinhui** · 07 Feb 09,, 03:39

Yuan One-Year Forwards Post Biggest Weekly Advance in a Decade
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By Belinda Cao

Feb. 6 (Bloomberg) -- Yuan forwards due in a year completed their biggest weekly gain in a decade as China said it wants to maintain a stable currency to limit the impact of the global financial crisis. Bonds dropped.

Non-deliverable one-year forwards show traders pared bets for steeper declines in the yuan after Governor Zhou Xiaochuan said this week in Beijing that the People�s Bank of China wants to avoid big currency fluctuations. Premier Wen Jiabao said Jan. 30 in Brussels that a stable yuan will benefit the world economy. Three-month yuan forwards advanced the most in more than eight months this week.

�Senior officials have been consistent recently in speaking for a stable currency,� said Zhu Jianfang, chief economist at Citic Securities Co. in Beijing, China�s biggest brokerage by market value. �For this year, the yuan-dollar rate won�t go too far away from the current level even if we may see relatively larger daily fluctuations in between.�

Forward contracts indicate China�s currency will weaken 1.2 percent to 6.9175 a dollar in a year, compared with expectations for 7.0775 a week ago, according to data compiled by Bloomberg. Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable contracts are settled in dollars.

One-year yuan forwards rose 2.3 percent this week, the most since March 1999, Bloomberg data show.

Stocks Rally

The yuan may advance as the nation�s economy shows signs of recovering more rapidly than some investors and analysts expect, Citigroup Inc. said in a note to clients yesterday.

An increase in the Purchasing Managers� Index to a seasonally adjusted 45.3 in January, from 41.2 the previous month, sparked speculation the economy is set to rebound. The China Federation of Logistics and Purchasing reported the data on Feb. 4. A reading below 50 still signals contraction in manufacturing.

The Shanghai Composite, the world�s second-best performer this year, has rebounded 25 percent since the government pledged 4 trillion-yuan ($585 billion) of spending to revive economic growth. The central bank has also cut the key lending rate five times since September to support industries and stem job losses.

China�s economy expanded 6.8 percent last quarter from a year earlier, the slowest pace in seven years. Exports in December slumped the most in almost a decade, official data show. Gross domestic product may rise 6.3 percent this quarter, the median estimate of nine economists surveyed by Bloomberg News showed.

Yuan Confrontation

U.S. Treasury Secretary Timothy Geithner, before taking office, said last month that President Barack Obama believes China is �manipulating its currency,� suggesting the new administration may take a tougher line with the biggest foreign buyer of government debt. China denied the accusation and Premier Wen said a confrontation will make both the U.S. and China �losers.�

Renewed clashes over the yuan threatened to stoke tension between the two countries and undermine cooperation to counter the global recession.

Morgan Stanley said investors should �take profit� on the yuan�s three-month non-deliverable forwards, which climbed almost 1 percent this week.

�We prefer to move to the sidelines now and reassess at a later date,� the bank said in a report dated yesterday.

The yuan traded at 6.8344 a dollar at the 5:30 p.m. close in Shanghai, from 6.8367 yesterday, according to the China Foreign Exchange Trade System. The currency moved less than 0.1 percent for the third straight week. Zhu forecast the local currency will trade within a 5 percent range around 6.83 versus the dollar this year.

Bonds Slide

Government bonds declined for a third week after lending data fueled speculation China�s economy is on the path to a recovery.

China�s four-biggest state-owned banks offered a record 1.2 trillion yuan ($176 billion) of new loans in January, the China Securities Journal reported on Feb. 4.

Stock gains also prompted investors to seek higher yielding equities, said Ye Ying, a bond analyst in Shenzhen at the securities unit of Ping An Insurance Group Co. The Shanghai Composite Index, which tracks the bigger of China�s two stock exchanges, rose 9.6 percent this week to the highest level in more than four months.

�The bond correction was fueled by this week�s better- than-expected data showing the economy will bottom out soon,� Ye said. �Bonds were also under a seesaw impact from the stock market.�

The yield on the 2.71 percent note due in November 2015 climbed 25 basis points to 2.9 percent this week, and the price of the security dropped 1.5 per 100 yuan face amount to 99.84, according to the China Interbank Bond Market. A basis point is 0.01 percentage point.

China�s bonds traded on the interbank market have slumped 1.6 percent this year after gaining 14 percent in 2007, an index compiled by the National Interbank Funding Center showed. �It�s much more difficult to make money on the debt market this year than last,� Ye said.

To contact the reporter on this story: Belinda Cao in Beijing at [email protected]
Last Updated: February 6, 2009 06:16 EST
http://www.bloomberg.com/apps/news?p...TjM&refer=home

**xinhui** · 15 Feb 09,, 23:25

No surprise there.

Tim Geithner, US Treasury secretary, also used a more conciliatory tone towards Beijing than he did last month, when he accused China of manipulating its currency to benefit exporters.

G7 softens tone on China

By Guy Dinmore in Rome, Daniel Dombey in Washington and Kathrin Hille in Beijing

Published: February 15 2009 18:51 | Last updated: February 15 2009 18:51

The US and other Group of Seven industrialised countries have stepped back from criticism of China in a push for greater cooperation with Beijing and a more unified response to the global financial crisis.

In a communique issued following their meeting in Rome at the weekend, G7 finance ministers adopted milder language than recently regarding China�s handling of its currency. Tim Geithner, US Treasury secretary, also used a more conciliatory tone towards Beijing than he did last month, when he accused China of manipulating its currency to benefit exporters.

Hillary Clinton, US secretary of state, will this week become the first senior member of the new administration to visit China as analysts look for clues as to how Washington will handle one of its most important economic relationships.

In a speech before she left, she labelled a �positive, co-operative relationship� between Beijing and Washington as �vital to peace and prosperity, not only in the Asia-Pacific region but worldwide� and also announced the resumption of military contacts between the two nations.

However, in a sign of potential for tension, China on Sunday hit out at a �Buy American� provision in the $787bn economic stimulus package approved by the US Congress last week. �History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships,� the official Xinhua news agency said in a commentary.

Aides at the G7 finance ministers meeting in Rome said the US and the UK in particular pushed for the group to take a more conciliatory approach towards Beijing ahead of a broader G20 summit in London on April 2.

�The G7 has realised that China needs to be brought into the fold of the global financial system rather than be treated as a pariah just because of currency inflexibility,� UBS said in a note on Sunday on the meeting. �This is also a realisation that as the world�s largest foreign exchange reserve holder and the US�s largest creditor nation, China not only holds the purse strings but its continued growth is crucial to helping the world recover from the economic crisis.�

In its communique, the G7 welcomed China�s fiscal stimulus and �continued commitment to move to a more flexible exchange rate� � notably milder language than the G7 meeting in Washington in October, which had called for �accelerated appreciation� of the renminbi.

Although the currency has appreciated more than 20 per cent against the dollar since 2005, many US politicians accuse the country of artificially depressing it � a charge made by US president Barack Obama during his election campaign.

At his press conference, Mr Geithner said the US was committed to working with China. �We very much welcome the steps they�ve taken to stimulate domestic demand,� he said.

Copyright The Financial Times Limited 2009
http://www.ft.com/cms/s/0/0b6d7d02-f...077b07658.html

**xinhui** · 04 Mar 09,, 06:39

China to start yuan trade settlement in HK soon

http://uk.reuters.com/article/rbssFi...090304?sp=true
HONG KONG, March 4 (Reuters) - Hong Kong will soon finalise an agreement with China to allow firms to settle trade between the city and China's Guangdong province using the Chinese yuan, expanding the yuan's role as a trade currency beyond the mainland for the first time.

China is gradually liberalising its currency, which is not convertible. Allowing it to be used for trade in Hong Kong is a small step toward making it an international currency.

"The two governments will develop the two places as renminbi (yuan) clearing bases," the Hong Kong government said in a statement after Chief Executive Donald Tsang met with Guangdong officials during a visit to Beijing on Tuesday.

Details of the plan would be finalised soon, the statement said. Cross-border trade between Hong Kong and Guangdong is currently in Hong Kong <HKD=> dollars or U.S. dollars.

Beijing said in December that it aimed to allow the yuan <CNY=CFXS>, also known as the renminbi, to be used on a trial basis to settle trade between a few Chinese provinces and neighbouring states.

Members of the Association of Southeast Asian Nations would also be permitted to use the Chinese currency in trade with China's southeastern regions of Guangxi and Yunnan, it said.

The official China Securities Journal reported last week that selected banks in Shanghai, including Bank of Communications (601328.SS) and the Shanghai branch of Bank of China (601988.SS), would soon begin settling cross-border trade in yuan.

Hong Kong is being used as a centre for the gradual liberalisation of the yuan. In the past few years Beijing has authorised the issue of yuan-denominated bonds in the city, as well as the establishment of Chinese currency accounts for Hong Kong residents and payment in yuan at some retailers.

Tsang, during his visit to Beijing, also discussed measures to allow more mainland tourists to visit Hong Kong independently of tour groups.

From April 1, residents in the southern city of Shenzhen will be able to visit Hong Kong freely, expanding a scheme that has been introduced in other Chinese cities over the past six years.

Mainlanders now account for more than half of tourists in Hong Kong. Expanding the visitor scheme to Shenzhen is aimed at supporting the recession-hit Hong Kong economy as tourists account for 20-30 percent of the city's retail sales. (Reporting by Susan Fenton, Editing by Jacqueline Wong)

**Inst** · 04 Mar 09,, 07:04

The argument that appreciation in the Yuan will decrease the price of Chinese goods is specious. While from a Yuan point of view the price of external inputs will decrease, the price of Chinese inputs will remain constant. From, say, a dollar point of view, the price of external inputs will remain constant, whereas the price of Chinese inputs will increase. Hence, from an external point of view, the value-added price of Chinese goods will follow the rise in the Yuan, but the total cost will only weakly follow the Yuan.

**xinhui** · 09 Mar 09,, 19:20

U.S. Treasury's Geithner to host China's Yang
Mon Mar 9, 2009 1:28pm EDT

WASHINGTON, March 9 (Reuters) - U.S. Treasury Secretary Timothy Geithner is scheduled to host bilateral talks with Chinese Foreign Minister Yang Jiechi on Wednesday, a Treasury official told reporters on Monday.

The two are expected to discuss a host of issues, including Beijing's purchase of U.S. debt and China's currency regime.

Geithner upset China earlier this year when he said China was manipulating the value of its currency to keep it artificially low to help Chinese exports.

U.S. officials later said Geithner was merely repeating comments President Barack Obama had made during last year's presidential campaign and the U.S. Treasury Department had not made a formal finding that China was manipulating its currency.

Yang is in the United States from March 9-13 to meet with a host of U.S. officials.

A day after the meeting with Yang, Geithner travels to London for a meeting of finance ministers from the Group of 20. The Treasury chief is expected to brief his counterparts on his plans to stabilize financial markets in the world's largest economy. (Reporting by Corbett B. Daly; Editing by Leslie Adler)

**xinhui** · 09 Apr 09,, 22:26

Since November, the world’s third-largest economy has set up 650 billion yuan in so-called currency swaps to help importers in Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea avoid having to pay dollars for Chinese goods.

Credit Suisse Selling Chinese Bonds Shows Markets Opening Up
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By Tom Kohn and Bryan Keogh

April 9 (Bloomberg) -- President Barack Obama can look to China’s corporate bond market for evidence Premier Wen Jiabao is opening up his currency to the world.

Sales of non-financial bonds rose to a record 199 billion yuan ($29.1 billion) this year, making it the third most popular currency for company debt behind the U.S. dollar and euro. The market overtook offerings in Japanese yen for the first time after being ranked sixth in 2007, according to data compiled by Bloomberg.

During last year’s presidential campaign, Obama said in a letter to the National Council of Textile Organizations that Chinese “manipulation” of the yuan creates a reliance on exports that hurts the U.S. and global economies. While denying the charge, China in December promised to open capital markets and is also easing rules limiting foreign banks’ role in bond sales and trading.

“A sizable and vibrant domestic corporate bond market is a precondition” for the yuan to become an international currency, said Shang-Jin Wei, professor of Chinese business and economy at Columbia University’s Graduate School of Business in New York.

While attacking the dollar’s dominant role in global finance, China is boosting its currency by bolstering the corporate bond market and making it easier to do business in yuan.

Since November, the world’s third-largest economy has set up 650 billion yuan in so-called currency swaps to help importers in Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea avoid having to pay dollars for Chinese goods.

‘Hugely Liquid’

Record bond issuance and loosened regulations have persuaded at least six overseas investment banks, including New York-based Goldman Sachs Group Inc. and UBS AG of Zurich, to start underwriting local-currency debt.

“It’s a hugely liquid market,” said Joseph Chee, head of capital markets at UBS Securities Co. in Beijing, who forecasts securities sales, including those of corporate bonds and short- term paper, will jump about 50 percent to 1 trillion yuan this year. “It will continue to grow.”

The pace of expansion provides “a striking contrast between the health and growth of financial markets in China and the condition of markets in the West, which are still struggling,” said Mark Williams, an economist at London-based Capital Economics Ltd. who advised the U.K. Treasury on China from 2005 to 2007.

China is using a 4 trillion-yuan stimulus plan to bolster capital markets by encouraging infrastructure spending and boost growth above last quarter’s 6.8 percent, the weakest in seven years. That’s attracting European and U.S. banks as they grapple with recession at home and $1.25 trillion of losses and writedowns triggered by the collapse of the mortgage market.

State Support

The $256 billion of Chinese corporate notes outstanding are dwarfed by $1.96 trillion in government debt as of Dec. 31, according to the Asian Development Bank.

China’s currency has gained 21 percent against the dollar since a fixed peg to the greenback was scrapped in 2005. The country’s central bank now manages the yuan against a basket of currencies, including the dollar, euro and yen.

The yuan traded at 6.84 to the dollar yesterday.

Government support for state-controlled banks, the yuan’s managed exchange rate and regulations curtailing foreign companies from buying or selling local securities are limiting growth in the corporate debt market, according to Nicholas Lardy, an economist specializing in China at the Peterson Institute for International Economics in Washington.

‘Super-Sovereign’

Still, Wen has ambitions to play a bigger role in global financial markets. While stopping short of promoting the yuan as a replacement for the dollar, Central bank Governor Zhou Xiaochuan said in March that the International Monetary Fund should create a “super-sovereign reserve currency.”

Zurich-based Credit Suisse Group AG and Deutsche Bank AG of Frankfurt won licenses for joint ventures with Chinese securities firms since December, joining Goldman Sachs, Morgan Stanley, UBS and CLSA Asia-Pacific Markets in starting local partnerships.

The $29.1 billion of yuan-denominated company debt issued this year compares with bond sales of 16.6 billion pounds ($24.4 billion) and 1.79 trillion yen ($17.9 billion), Bloomberg data show.

Dollar-denominated debt sales totaled $201 billion while offerings in the European currency reached 109 billion euros ($144.7 billion).

Underwriting Licenses

China National Petroleum Corp., the country’s biggest oil producer, sold 20 billion yuan of bonds on Oct. 27, Dec. 11 and March 20 in the nation’s biggest corporate offerings. The 2.25 percent the Beijing-based company paid on the March notes, due 2012, is 4.25 percentage points less than the coupon that South Korea-based Hana Bank was charged for similar-maturity government-backed debt in dollars this month.

Credit Suisse in December said China granted it permission to underwrite shares and bonds. The bank’s local affiliate, Credit Suisse Founder Securities Ltd., this year helped Shaoxing Water Group Co., Peking University Founder Group Corp. and Lin’an City Urban Construction Development Co. raise a combined 3.1 billion yuan.

Deutsche Bank won approval in January to underwrite bonds through Zhong De Securities, a Beijing-based venture with Shanxi Securities Co. Morgan Stanley has a 34 percent stake in China International Capital Corp., the second-biggest underwriter of non-financial corporate debt last quarter and one of only two brokers permitted to underwrite medium-term note sales.

‘Enormous Demand’

“The government is trying to get more capital into state- owned enterprises and companies in China generally,” said Chris Keogh, managing director of Gao Hua Securities Co. in Beijing, New York-based Goldman Sachs’s partner. “We’re seeing enormous demand from companies who want to issue.”

Companies in China, Japan, South Korea and Taiwan face higher refinancing risks than peers in the rest of Asia-Pacific because they’re “over-reliant” on bank loans to meet debt obligations, Fitch Ratings said in a March 18 report.

China must open the debt market to foreign investors and loosen capital controls if it wants the yuan to take a bigger role in global finance, said Brad Setser, a former Treasury official and Council on Foreign Relations economist in New York.

“It’s hard to have a more global currency if you don’t let foreigners own your debt as an asset,” Setser said.

Foreign Borrowers

China is increasing the amount of domestic securities overseas funds can buy under the qualified foreign institutional investor program. Standard Chartered Plc, the U.K.’s second- largest bank by market value, said April 7 that its local unit became the first foreign-owned lender to trade Chinese corporate debt after a commercial-paper transaction.

As authorities ease restrictions, foreign companies with operations in China may find the yuan bond market useful for raising cash, Columbia’s Wei said. Regulators may begin to allow such international issuers within two or three years, Keogh of Gao Hua forecasts.

For now, the global credit crisis is hindering banks’ ability to garner more market share, said Michael Pettis, a finance professor at Peking University.

“They’re dealing with much bigger problems, and a number of them are looking to get out of their Chinese investments,” he said. “I don’t really see a gold rush going on here yet.”

Li Pumin, policy research director of the planning ministry responsible for China’s bond sales, declined to comment. Ma Jihua, the National Development and Reform Commission deputy fiscal and financial affairs director governing corporate debt, couldn’t be reached for comment.

Wen said last month that China must speed up financial changes to combat the financial crisis. “We can’t slow down the process of reforms,” the premier told a press conference after the close of the annual parliament session. “Instead, we would rather speed up.”

To contact the reporters on this story: Tom Kohn in Hong Kong at [email protected]; Bryan Keogh in New York at [email protected]
Last Updated: April 8, 2009 17:30 EDT
http://www.bloomberg.com/apps/news?p...u4&refer=china

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