Twists and Turns of Chinese Currency Management

The following news item from Reuters on Saturday (October 2nd) shows some remarkable cunning in an era when accusations are being hurled around about currency manipulation, and especially the Chinese version of it. This version, which is multi-faceted, and includes-- to the annoyance of the Japanese central bank-- the enthusiasm that the PBOC has for buying the yen whenever the BOJ tries to make it cheaper. The current visit by the Chinese Premier to Greece is now providing an opportunity for further magnanimity which could result in a stronger euro, which may not be exactly what Monsieur Trichet has in mind.

(Reuters) - China offered on Saturday to buy Greek government bonds when the country returns to markets, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout.

Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.

"With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter.

"China will undertake a great effort to support euro zone countries and Greece to overcome the crisis."

The last quote is particularly revealing as it achieves at least three objectives for the world's second largest economy:

1. It is a recognition by the Chinese authorities that in a fragile and totally inter-connected financial system, a serious crisis for the basket case EZ economies would be especially harmful to China, which has vast holdings of euros and the government bonds of the Eurozone constituent states.

2. The support of China for the sovereign credits of Greece, and quite likely the other PIIGS economies, will help to further bolster the euro against the yuan. This can only be good for Chinese exporters.

3. Furthermore it could have the effect of diverting attention away from the current antagonism between Washington and Beijing over the artificially low rate of exchange between the US currency and the yuan. Ironically by supporting the Eurozone financial system, and indirectly the euro, it will become harder for the ECB and the Federal Reserve to condemn the Chinese actions, which can only be considered as making a positive contribution from the perspective of helping to avert systemic anxieties.

In the post-2008 meltdown era, the trend towards a more altruistic form of "capitalism", some would even say outright socialization of the global financial system, China appears to be taking a leadership role in recognizing its dependency on the continued solvency of its less dynamic trading partners by rewarding them with pledges of further financial support. In so doing, the Chinese authorities will continue to find even more reasons to continue their policy of "currency management". Perversely, policy makers in the US and Eurozone may not appreciate such altruism.

Disclosure: No positions

About the author: Clive Corcoran

View the Original article

Chinese 'Manipulate' Their Currency to Our Advantage

Politicians just can't leave well enough alone. Once again we hear the drumbeat of concern over the alleged fact that China has "manipulated" its currency—by keeping it too weak—and how that harms the U.S. economy. Yet nothing could be further from the truth.

To begin with, the Chinese yuan has appreciated by 23% since China's central bank first decided to peg the yuan to the dollar at the beginning of 1994—almost seventeen years ago. The Chinese economy has had plenty of time to adjust to its current currency regime, and if that weren't enough, the currency has appreciated significantly in the interim. Moreover, the Chinese have recently committed to allowing the yuan to appreciate even further, as suggested in the above chart.

Leaving aside the issue of whether they have kept the yuan artificially weak or not, China's monetary policy (which is driven by pegging its exchange rate) has been successful at delivering relatively low and stable inflation: since 1996, in fact, Chinese inflation has been substantially similar to that of the U.S (actually, it has been a bit lower—2% vs. 2.5% per year). This fact alone is almost proof that they haven't been keeping the currency artificially weak. (I'm leaving out 1994-95 since inflation in those years was temporarily boosted due to the 50% devaluation of the yuan that preceded its being pegged to the dollar.) In other words, our price level has risen about the same as the Chinese price level for the past 15 years. If the yuan had been chronically undervalued during that time, then Chinese inflation would most likely have been higher.

View the Original article

Tongjitang Chinese Medicines Buyout Update

Tongjitang Chinese Medicines Company (NYSE: TCM) reported that it is still considering the buyout offer from a JV comprised of its Chairman/CEO and Fosun Industrial, the Hong Kong conglomerate. The JV offered $4.50 per ADS on April 8, 2010 for every share its members do not already own. Mr. Xiaochun Wang, Tongjitang’s Chairman and CEO, now has a 51% stake in the company and Fosun owns an additional 32%.

In reporting its Q2 results, Tongjitang reiterated that Morgan Stanley Asia Limited is advising an independent group of directors on the sale. It also said CITIC Ka Wah Bank Limited has authorized a term loan facility up to $25 million for the share purchase, more than enough for the $20 million worth of stock still outstanding (at $4.50).

Investors do not seem to believe the transaction will take place. Tongjitang is currently trading hands at around $3.50 per share, a 22% discount to the current offer.

Tongjitang made its IPO in 2007 at a price of $10 per ADS. Although the company had been growing at a CAGR of 44% for the three years before the IPO, its growth rate dropped to almost zero after the event. Tongjitang is dependent on XLGB, its barrenwort treatment for osteoporosis, which supplied 77% of the company’s revenue at the time of the IPO.

XLGB has suffered a number of problems since then, but the greatest seems to be that it doesn’t interest the public. In Q2 of 2010, revenues from the QLGB fell 8% from year-earlier numbers to 74 million RMB ($10.9 million), which represents about half of Tongjitang’s total sales.

The company now holds out hope that XLGB, a member of the Essential Drug List, will get a boost from China’s healthcare reform. But Tongjitang complains that local governments are slow to adopt the EDL, and no sales bump has ensued.

Tongjitang’s Q2 revenues rose 3% to 1378 million RMB ($20.3 million). Net income fell to a loss of 4.7 million RMB ($0.7 million) from a year-earlier profit.

The company has made numerous acquisitions to decrease its dependence on XLGB, but none of them has provided game-changing levels of income. Most recently, Tongjitang paid $18 million to acquire Guiyang Liquor Factory. In Q2, the liquor business generated just 2.1 million RMB ($300,000) of business. In China, liquors are applied orally or topically to treat bone-related diseases.

The current funding commitment from CITIC remains viable until September 24, 2010. However, two earlier funding agreements each expired, only to be succeeded by new ones.

Disclosure: none.

About the author: ChinaBio Today

View the Original article

How the Western Equity Markets Will Benefit From Chinese Growth

After the slowdown we had in the western economy, China has become the key economic engine for the global growth. Most of the time US equity markets look out for the Chinese market for its direction hoping that a continued growth in China will help the US companies. In my view Chinese economy has little to do with how the US companies will do in the short term. In my view structural changes taking place in China will help the US and European companies in the long run as these companies are better prepared to benefit from these changes.

Short term: It is US economic recovery that will drive the market, not the emerging market recovery

By looking at the most recent full year numbers available for S&P500 companies, it is clear that more than half of the revenue for US companies is generated within the US itself. Interestingly the numbers suggest that the significance of the US market increased over the last 3 years. So for the earnings growth of the US companies what matters are the developments taking place in the home market, not in the emerging markets.

Table 1: Geographical breakdown of revenue

2007

2008

2009

US

55%

56%

59%

EU

10%

12%

10%

UK

2%

1%

1%

Other

33%

31%

31%

100%

100%

100%

Source: Bloomberg

(Click charts to enlarge)

Chart 1: The significance of US market for the US companies


View the Original article

Why You Should Pay Attention to the Chinese Energy Policy

Back in March 2009, Wall St. hit bottom and the world markets entered one year long rally. The fact is that the Shanghai stock market index bottomed earlier in December 2008 (see plot below). Back then, China started the biggest stimulus package and pushed its GDP growth over 10% in the following year. Most countries worldwide benefited from China's move.



View the Original article

What the Bear Market in Chinese Stocks Is Telling Us

China has been the economic engine powering the global recovery, but the engine may be sputtering based on the behavior of Chinese stocks. The Shanghai Composite has been trading in bear market territory since May 6th.

Unlike the U.S., UK and EU, which have service based economies, China's economy is heavily industrial. What takes place in China provides important information about the state of the global manufacturing. Activity in China is a key driver of the markets for industrial metals, materials, and energy. It was just announced in the media that China has become the largest consumer of energy commodities globally; pulling ahead of the United States, but the Chinese government has denied it.

Since the major Western economies and the Chinese economy have different compositions, it is reasonable to assume that their stock markets could trade in different patterns. The bull market peaks came at about the same time however. The Shanghai market hit a bottom around 1000 in mid-2005 and entered a bubble pattern in 2006, which continued until a high of 6036 was reached on October 17, 2007. As the bubble burst, Chinese stocks fell 72% until the market reached 1707 on November 4, 2008. Unlike U.S. stocks, which continued to fall until they reached their bottom in early March 2009, the Shanghai composite then began to rally. The prices for metals, materials, and the companies that produce them tended to follow the Chinese market and not Western markets - investors should keep this in mind for future reference. Oil didn't bottom until mid-February 2009 though.

Not only did the Shanghai Composite hit its low four months earlier than the U.S. market, its high from the rally that followed took place well before the top in Western stock markets. So far, Chinese stocks topped at 3471 on August 4, 2009. U.S. stocks peaked on April 26, 2010. By the end of August 2009 the Shanghai index was down more than 20% on a closing basis, but only briefly. After some recovery, stocks entered bear market territory again for a few days in the end of September. They then moved up and traded with less than a 20% drop from the August peak for many months until May 6th of this year. Chinese stocks have continued to trade at a bear market loss since that date.

Poor performance of Chinese stocks indicates weakness in the global industrial economy. Most commodities are likely to suffer declines as a result. This has more significance for the U.S. currently than it usually would ordinarily because the industrial sector of the economy has performed best during the recovery. The much bigger service sector has remained fairly anemic despite $3 trillion of federal deficit spending in fiscal years 2009 and 2010. If U.S. manufacturing turns negative, and behavior of Chinese stocks indicates is might, the U.S. economy is likely to follow.

Disclosure: No positions

About the author: Daryl Montgomery

View the Original article