Top news of the week
Banking regulators look to rein in lending
Twice last week the Chinese stock market performance made international headlines, but for the wrong reasons. The benchmark Shanghai index dropped by 6% on Monday and was down another 4.3% on Wednesday. For a brief moment on Wednesday, the index was down 20% from the peak reached only two weeks ago. After three weeks of declines the Chinese stock market has now recorded a year-to-date return of 55%, down from 85% at the peak.
Many attributed the fall to worries about a likely drying up of liquidity in the second half of 2009. Recent media reports that banking regulators are circulating draft regulations among bank bosses to raise capital requirements and tighten loan supply did little to alleviate such concerns. The draft regulations require banks to deduct from supplementary capital any subordinated and hybrid bonds issued by other lenders. This means banks may have to either cut back on lending or raise new capital to meet the 12% capital adequacy ratio as required by regulators.
Banking regulators have good reason to act quickly to check the loan growth. Loans given out in the first seven months exceeded the 2009 full-year plan of 5 trillion yuan by 47%, and M2 year-over-year growth of 29% in the first half is much higher than the 17% target set at the beginning of 2009. However, they are walking a tightrope in trying to contain speculation fuelled by cheap credit and keeping the economy on the recovery track. We don't think the government is keen to significantly tighten credit supply in the coming months, for fear of choking off much-needed growth. What they are aiming at is fine tuning policies to moderate the behavior of participants in the capital market.
After all, the government needs stability in the capital market, not rounds of boom-bust cycles, as it works on the launch of a Growth Enterprise Board for capital-hungry growth business, the listing of foreign companies on the Shanghai Stock Exchange, and measures to improve transparency in the IPO process.
Market recap
The Chinese stock market declined last week, with two sharp falls on
Monday and Wednesday, as investors were concerned that the government
will change its monetary policy to curb excess liquidity. The benchmark
Shanghai Composite Index fell to a low of 2,761 on Wednesday, which was
a 20% slump from the peak of 3478 reached only two weeks ago on 4
August. Over the five trading days, the Shanghai Composite Index fell by
2.9% to 2,961, while the Shenzhen Composite Index dropped 4.9% to
11,892. This is the third week of decline in a row.
Macro and industry updates
July foreign direct investment declines
Data from the Ministry of Commerce showed China attracted only $5.4 billion in foreign direct investment (FDI) in the past month, two thirds of what it attracted last July and the lowest level since last November. On a year-over-year basis, FDI into China declined for the tenth consecutive month. Rising labour costs after China implemented the new labour laws are thought to be one key factor driving foreign investors to cheaper locations in Indonesia, Vietnam and India.
China to invest in subway, light rail
The Chinese government recently approved the subway and light rail construction plans for 22 cities, with a total investment of 882 billion yuan ($130 billion) over the next five years. The plans involve 79 routes totalling 2260 kilometres in Beijing, Shanghai, Guangzhou and other major cities that have a minimum of 3 million residents and local tax revenue of 10 billion yuan.
Air China buys 12.5% stake in Cathay Pacific
After the deal, the country's largest airline Air China will own about 30 per cent of Hong Kong-based Cathay Pacific. Air China acquired a 17.5% stake in Cathay Pacific in 2006, and has formed a strategic alliance with the latter to promote flights between its main hub of Beijing and Hong Kong. Swire Pacific, the largest shareholder of Cathay Pacific, also slightly increased its holding to 42%.
China Unicom in Carrefour, BestBuy deal
China's No 2 mobile operator, China Unicom, will set up 3G experience stores at Carrefour and BestBuy locations to educate mobile users about 3G services and handset features. There have been rumours that both retail chains will also carry the Apple iPhone under Unicom service contracts when Unicom officially launches 3G in September, but Unicom insists they are still in talks with Apple about introducing the iPhone to China.
C2C auction site Taobao sees volume double
Taobao reported 80.9 billion yuan ($11.8 billion) in transaction volume in the first six months of 2009, up 97% from the year-ago period. Household goods, apparel, mobile phones and cosmetics are the top-selling categories by transaction amount. Taobao now boasts a registered user base of 145 million, 85% of whom are under the age of 35.
Contributions from Iris Tan.
