China’s central bank opens liquidity front in hot money war


100 Yuan notes are seen in this illustration picture in Beijing November 5, 2013. Credit: Reuters/Jason Lee

100 Yuan notes are seen in this illustration picture in Beijing November 5, 2013. Credit: Reuters/Jason Lee

China’s central bank delivered two major surprises to investors this week: it engineered a sharp decline in the yuan against the dollar and at the same time relaxed its tight grip on money markets that had kept interest rates firm.

In effect, the central bank was playing bad cop with speculators in the foreign exchange market to try to shake out one-way appreciation bets, while making nice with money market traders.

That was a marked change from December and January when the regulator appeared deaf to howls of pain emerging from China’s money market as interbank lending rates spiked, rattling both domestic and global investors.

“The PBOC has suddenly become surprisingly soothing, and that has resulted in a great improvement in money market sentiment,” said a trader at a Chinese commercial bank in Shanghai, although he questioned how long the new environment would last.

The central bank’s action was unusual because traders had expected the authority to mop up the extra yuan entering markets as a result of its intervention in order to prevent interest rates from easing. It did drain funds, but not to the extent that the market had expected.

Traders and analysts are divided over what the central bank is trying to achieve.

Some argue the looser rates could be designed to provide a further deterrent to hot money inflows as its tries to battle against speculation that the yuan is a one-way appreciation bet.

Others suspect the change of heart may be designed to offer relief to equities and real estate markets, both of which have shown signs of strain under the tighter credit environment in place since last year. That could boost sentiment during the annual session of parliament that begins next week.

But the relaxation also complicates the central bank’s efforts to maintain pressure on risky shadow banking and encourage heavily indebted Chinese corporations to cut their debt burden.

“The central bank has a difficult task in trying to prevent growth from sliding sharply and avoid a financial crisis, while taming the credit bubble and deleveraging the economy,” wrote Barclays economist Jian Chang in a research note on Friday.

THE NEW “NEW NORMAL”

The PBOC has remained rhetorically committed to maintaining adequate liquidity for growth, but in practice that has meant different things at different times.

During dramatic cash crunches in Chinese markets in June, December and January, the central bank declined to act to ease the pressure and instead insisted liquidity was in fact “ample”.

On Wednesday, however, the PBOC announced it had no plans to change monetary policy, adding that stock market investors in particular should not worry about liquidity supply.

Traders usually discount such talk – especially rhetorical attempts to juice stock markets – and instead watch what the central bank actually does. In this case, the central bank put its money where its mouth was by allowing rates to ease.

The average rate for the seven-day bond repurchase contract, considered the most reliable indicator of China’s real-time liquidity conditions, was already easing before Wednesday’s announcement by the PBOC. One transaction was done as low as 1.6 percent on February 21, the lowest rate for that instrument since late 2010.

Market participants who believed the PBOC wanted to keep rates in elevated territory widely expected the PBOC to conduct a major drain of funds during open market operations. While the central bank did indeed drain funds to the tune of 160 billion yuan ($26 billion) for the week, the amount was much less than had been expected.

During the comparable week of 2013, the PBOC pulled a massive 351 billion yuan out of the financial system.

COORDINATED STRATEGY?

Some traders argue the central bank is only allowing rates to ease in the run-up to the annual meeting of the National People’s Congress starting next Wednesday – hoping to deliver a liquidity-driven stock market rally to give an optimistic backdrop to the event.

However, others wonder if Beijing has lost its will to keep up the pressure on money markets following a run of weak economic indicators.

China’s official manufacturing purchasing managers’ index (PMI) is forecast to slip to 50.1, which would be the lowest level since June last year, a Reuters poll shows. The data is due to be released on Saturday.

PBOC data shows it has been largely successful in its attempts to isolate the money market from its intervention in the currency market, supporting the thesis that the decline in rates is deliberate and not an unintentional side effect of currency meddling.

Bank of America Merrill Lynch economist Lu Ting argued that the combination of falling money rates and a falling yuan shows the PBOC is trying to solve a policy conundrum produced by its campaign to push up money rates, launched in mid-2013.

The rising rates attracted hot money, which in turn put one-way upward pressure on the yuan, which in turn attracted even more hot money.

“The PBOC has been under tremendous pressure to deliver solutions to this dilemma since late 2013, and it has been persistently requesting co-ordination from other government agencies,” he wrote, and argued that it is at long last getting support from other regulators.

“We did not simplistically call the rising rates in 2H13 as the PBOC’s tightening, and we won’t simplistically call the PBOC’s current action as easing.”

Source: Reuters “China’s central bank opens liquidity front in hot money war”

Related post: China’s official PMI seen hitting eight-month low dated February 28, 2014

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Japan says puzzled by new China WWII national days


Japan says puzzled by new China WWII national days

Japan says puzzled by new China WWII national days

Tokyo (AFP) – Tokyo on Friday said it was puzzled over why Beijing approved national remembrance days to commemorate the Nanjing Massacre and its defeat in World War II, after decades of Japanese pacifism.

The move is the latest in a vitriolic diplomatic spat between Asia’s two largest economies, who are at loggerheads over disputed territory and differing interpretations of their shared history.

Meanwhile, Tokyo said it was pressing ahead with a controversial plan to re-examine evidence on which a 1993 apology for the system of wartime sex slavery was based, an issue that provokes particularly strong feelings in South Korea.

State media in China reported Thursday that the National People’s Congress, the rubberstamp parliament, had designated September 3 as victory day and December 13 as a day to remember those killed when imperial troops raped and pillaged the then-capital of Nanjing.

Japan invaded China in the 1930s and the two countries fought a full-scale war from 1937 to 1945.

China says more than 300,000 people were slaughtered by Japanese troops in a six-week killing spree in Nanjing, which started on December 13, 1937. Some foreign academics put the figure lower.

It was unclear what significance the formal “national days” will have, although they are not expected to be public holidays.

Japan’s top government spokesman Yoshihide Suga said Friday he could not understand why China had made this change at this point.

“I can’t deny there is a question why they have to set up these commemoration days more than 60 years after the war,” he said.

“But this is a domestic matter for China, so the government declines to comment on it.

“Japan’s position on World War II has not changed a bit, and Japan has followed the path of peaceful nationhood since the end of the war, which has been highly commended by the international community,” he added.

– ‘Re-examine and understand’ –

Tokyo and Beijing are embroiled in a series of rows, including a long-running diplomatic set-to over disputed islands in the East China Sea.

Tensions rose further late last year when Japanese Prime Minister Shinzo Abe visited the Yasukuni shrine, which honours Japan’s war dead, including convicted war criminals.

Abe told the parliament this week he “must make more effort” to get countries such as China and South Korea to understand his pilgrimage.

Suga said Abe “meant to say that his visit was to pledge that Japan would never wage war again, that he would build a peaceful nation”.

At a parliamentary committee, Suga separately said the administration would set up a team to look at the lead-up to the 1993 apology issued to “comfort women”, the euphemism for those forced to work in Japanese military brothels during WWII.

“We’d like to launch a team to re-examine and understand the background (of the statement),” he said, according to Kyodo News. He did not elaborate on any plan to issue a new declaration, a move that would meet with anger from South Korea.

Some on Japan’s right insist comfort women were merely common prostitutes, and that the state had nothing to do with coercion. Most respected historians dispute this view.

China and South Korea often call on Japan to “reflect” on its past, while Tokyo says its neighbours use history as a diplomatic stick to beat it with.

Japan’s official position, one that has been repeatedly endorsed by successive governments, is that it inflicted grievous harm on the populations of countries it invaded, and has offered numerous apologies.

However, comments by senior right wing figures — including those with close connections to Abe — on the veracity of events like the Nanjing Massacre regularly undermine that stance.

Source: The West Australian “Japan says puzzled by new China WWII national days”

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More than 1,000 arrested in China for trafficking babies on the internet


Baby trafficking has emerged as a serious social problem on mainland China. Photo: EPA

Baby trafficking has emerged as a serious social problem on mainland China. Photo: EPA

Four trafficking rings smashed and 382 babies rescued, says the Ministry of Public Security

Mainland Chinese police have arrested more than 1,000 people in multiple cities for trafficking babies on the internet, the Ministry of Public Security announced on Friday.

On Feb. 19, authorities rescued 382 infants from trafficking operations conducted in 27 cities, and also smashed four baby-smuggling rings, said a statement released by the ministry on its website.

The crackdowns were launched after police in Beijing and Jiangsu received a tip-off last year that the suspects were engaged in child trafficking by running a website that promoted baby adoption.

Further investigations revealed that the suspects operated four such websites, and used various tools on the internet, such as an instant messaging platform and online bulletin boards, to communicate with potential buyers.

A total of 1,094 suspects were arrested in the clampdown and some of them made confessions, the ministry explained.

One of the suspects, Zhou Daifu, said he had paid up to 3,000 yuan (HK$3,774) to another suspect for procuring government registration certificates for the smuggled babies, reported People’s Daily, the mouthpiece of the Communist Party. Zhou would then re-sell the certificates, it said.

He would also require both the seller and buyer of the registration certificates to make a “donation”, which usually cost up to six per cent of the transaction amount, to his websites. Zhou had even planned to provide surrogacy and foster care services, said the People’s Daily report.

Cyberspace has provided a convenient platform for traffickers, explained Liu Ancheng, the deputy director of the security ministry’s criminal investigation bureau.

“The criminals build up their platforms through the internet, and engage in trafficking activities under the veil of baby adoption. They are operating in secrecy,” he said. “They have no boundaries, and their networks are spreading across the whole nation.”

The public security ministry will ramp up its crackdown on baby trafficking on the internet, Liu added.

Baby trafficking has emerged as a serious social problem on mainland China. Last month, a Shaanxi doctor was found guilty for selling babies from her hospital for as little as 1,000 yuan.

The obstetrician, Zhang Shuxia, was convicted of tricking parents into giving up their babies by changing test results to show that the babies had birth defects. She sold seven babies to a middleman and pocketed more than 100,000 yuan. Six of the seven babies were rescued by police, but a baby girl died.

A court in Shaanxi province gave Zhang a suspended death sentence for what it described as the crime’s negative impact on society.

In Shandong province, two traffickers used online platforms to lure young women who had unplanned pregnancies to give up their babies, reported Shenzhen TV on Monday. The smugglers sold 10 babies over the past three years, earning more than 500,000 yuan.

Source: SCMP “More than 1,000 arrested in China for trafficking babies on the internet”

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China’s Secret Reconciliation Proposal to Philippines amid Tension over Fishing Right


A second-hand warship the Philippines bought from France for patrolling the South China Sea

A second-hand warship the Philippines bought from France for patrolling the South China Sea

According to China’s Global Times., regarding the incident of Chinese Coast Guards driving away Philippine fishermen with water cannon, Philippine Secretary of Defense Voltaire Gazmin said, “If Chinese coast guards ships continue to deal with our fishermen with water canon, we will respond by sending Philippine coast gaurds ships.”

Philippine media believe that Gazman does not send navy because of the lesson learnt from the Scarborough Shoal standoff in 2012. At that time, Philippines committed a blunder by sending its navy to deal with Chinese fishermen.

According to Philippine GMA News, Solicitor General Francis Jardeleza, however, thinks such an incident can be used in the memorial the Philippines has to submit to the UN arbitration panel on March 30 as an incident of harassment.

I wonder that was perhaps why Philippine government organized fisherman to provoke China to drive away the fishermen so as to win international sympathy and have something to complain in its memorial.”

Jardeleza is full of confidence that the Philippines will win. GMA news quotes him as saying, “Losing is not an option. We are a small country but we want to win big. Time and history [are] on our side.”

According to him, if the Philippines wins, China will have “to face the wrath of the international community.”

It seems China is already afraid of such wrath.

Global Times says that Philippine rappler website exposed on February 27 that China’s attempt to induce the Philippines to withdraw its application for arbitration by the offer that both sides withdraw their government ships from the Huangyan Island (known also as Scarborough Shoal) and China makes additional investment in the Philippines.

Rappler website says a former national security adviser learnt the information through some secret channels and the information has been confirmed by two government officials. In the last week of January, President Aquino held a secret cabinet meeting to discuss China’s proposal.”

Global Times, however, regard what Rappler says as somewhat abnormal.

I, however, believe that the Chinese proposal, though somewhat abnormal, is quite good for resolving the issue.

China gains instead of loses something if the Philippines accepts the proposal. First, government ships leaving the island is but a return to the status before the Scarborough standoff. That was both China and the Philippines wanted when they signed the Declaration on conduct between China and ASEAN in 2002.

The Philippines will recover its fishing right in the area around the island and get Chinese investment to boost its development.

China will have more opportunities to invest in the Philippines to exploit the cheap labor and rich resources there.

It is indeed a win-win proposal that I do hope is true.

In addition, China may focus on its dispute with Japan while the ease of tension between China and the Philippines will make US pivot to Asia less justified.

However, I do not think that the Philippines will accept the proposal if there is really such a proposal.

They are so confident that they do not consider all the possible outcome. What if the Philippines loses the arbitration? It has to implement it, but if the Philippines wins, China will certainly refuse to implement the award as it rejects the arbitration at the very beginning.

No problem, Philippine President Aquino has already been mentally prepared for the worst: He can accuse the international community of appeasement.

Source: Global Times “Philippines makes a clamor to send coast guards ships to the Huangyan Island but not warships for fear of upsetting China” (summary by Chan Kai Yee based on the report in Chinese)

Source: GMA News “SolGen: Ruling on West PHL Sea claim may be out by 2015”

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Tentative China pension reforms tackle inequality, but financing issues remain


People rest next to a red wall near Tiananmen Square in Beijing November 22, 2010.  Credit: Reuters/Petar Kujundzic

People rest next to a red wall near Tiananmen Square in Beijing November 22, 2010.
Credit: Reuters/Petar Kujundzic

China’s latest step to overhaul its pension system to even out payments between urban and rural residents is a move experts say is more symbolic than sweeping.

After years of robust growth, China is confronting a growing income gap and unhappiness over economic disadvantages, especially those endured by its millions of migrant workers.

The current system offers vastly different payouts depending on which scheme workers are covered by, a source of much rancor to employees increasingly aware of the unequal nature of development in the world’s second-largest economy.

The country’s fragmented pension system is loosely divided into four categories: civil servants and state officials, private sector workers, non-employed urban residents and rural residents.

The latest reforms, details of which were given on Wednesday, will merge the final two of the four streams. The new fund will be made up of annually paid pension insurance, government subsidies and other contributions, and will pay pensions to residents from the age of 60, the State Council said.

Monthly pensions will only begin after 15 years of payments, and will offer payouts ranging from 100 yuan ($16.32) a year to 2,000 yuan ($330).

Experts cautiously welcomed details of the reform, which is particularly aimed at migrant workers, who were previously unable to transfer money accumulated in one region to another.

“Merging the systems is absolutely essential. But getting so many people under one scheme needs time,” said Lu Xuejing, head of the Labour and Social Security department at the Capital University of Finance and Economics.

Lu also noted that this step would prove relatively easy.

“Even though the names are different, when the system created these two separate (pension schemes) they were already basically the same.”

In October, Reuters reported that China was close to announcing long-awaited pension reforms as it seeks to create a sustainable safety net for a rapidly ageing population.

Economists pointed out that funding issues, which were not mentioned in the reforms, are of greater concern when it comes to how sustainable the pension system is.

Deutsche Bank’s chief economist Ma Jun estimated that China could face a 68 trillion yuan ($11.1 trillion) funding shortage by 2033.

“The No. 1 source of China’s fiscal and debt risk is the financing gap in the pension system,” said Ma, who authored an 80-page report that came up with the figures.

Ma said that if the government transferred 80 percent of listed state-owned enterprise shares to the pension system and raised the retirement age, then the funding deficit problems could largely be addressed.

But these two issues face some opposition, especially from a public that has spoken out strongly against previous proposals to raise the retirement age.

“You have to raise (the retirement age) gradually, not overnight, this is something to do over several years,” Ma said.

The two streams covered by this round of reforms were originally introduced as part of a drive to extend basic social security coverage to all citizens. Both streams offer similar payouts, but they are much lower than other pension streams.

Experts, however, doubt the changes will make a big difference to payouts.

“In terms of the amount of money paid out, this new integration plan won’t really have much difference at all,” said Ka Lin, a professor in Zhejiang University’s School of Public Administration.

China first announced plans to merge the two streams earlier this month, saying the change would improve social security, allow workers to more easily move for the best job prospects and support domestic consumption.

($1 = 6.1266 Chinese yuan)

Source: Reuters “Tentative China pension reforms tackle inequality, but financing issues remain”

Related posts:

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China’s official PMI seen hitting eight-month low


Smoke rises from chimneys of a steel plant next to a viaduct on a hazy day in Tangshan, Hebei province February 18, 2014.  Credit: Reuters/Petar Kujundzic

Smoke rises from chimneys of a steel plant next to a viaduct on a hazy day in Tangshan, Hebei province February 18, 2014.
Credit: Reuters/Petar Kujundzic

China’s factory activity likely expanded only slightly in February, a Reuters poll showed, dropping to an eight-month low that would indicate a modest slowdown is continuing.

China’s official manufacturing purchasing managers’ index (PMI) may slip to 50.1, down from January’s 50.5, according to the median forecast of 12 economists in the poll.

A reading above 50 indicates expanding activity while one below that level points to a contraction.

If February’s reading is below 50.5, it will be the third straight month of decline since November’s 51.4. The last time the index was below 50 was in September 2012, when it was 49.8.

A preliminary survey released last week by HSBC and Markit Economics showed that the factory sector activity hit a seven-month low of 48.3, from 49.5 in January. The index for new orders dropped below 50, and employment reached its lowest point since the global financial crisis.

“Usually we observe if the HSBC PMI has seen such a big decline, then the official one will also see a similar downward trend, but not as bad,” said Wei Yao, China economist at Societe Generale in Hong Kong.

The official PMI is weighted more towards bigger and state-owned enterprises and tends to paint a rosier picture than the HSBC/Markit private survey, which focuses more on smaller firms and those in the private sector.

“When the economy slows down, usually the private sector feels the squeeze first,” Yao said.

Analysts cautioned against reading too much into this month’s preliminary Markit/HSBC numbers, given the smaller-than-usual number of work days. The Lunar New Year festival, which began on January 31 and covered early February, likely affected factory output as manufacturers shut for China’s biggest annual holiday.

China’s economic indicators have been mixed of late – weak investment and declining PMI readings have been countered by surprisingly buoyant exports and bank lending. This makes it hard to draw firm conclusions about the economy’s direction.

The government has been trying to reduce the economy’s dependence on exports and enhance the role of domestic consumption, but it is unclear how much growth it might be willing to sacrifice for its goal.

In 2013, China grew 7.7 percent, steady from the previous year and fractionally above market expectations of 7.6 percent, which would have been the slowest since 1999.

Economic growth targets for 2014 have yet to be made public. Government economists have said the official target could again be 7.5 percent, the same as the 2013 target.

The official PMI figures will be released on Saturday, March 1 at 9:00 am (0100 GMT). The final HSBC/Markit PMI is due on March 3 at 9:45 am (0145 GMT).

FORECASTS

4CAST 50.1

Barclays 50.3

BBVA 50.3

BOC International 50.0

CA-CIB 49.5

Citi 50.1

Haitong Securities 50.1

Industrial Bank 50.2

ING Financial Markets 50.0

Societe Generale 50.0

Standard Chartered 50.6

Zheshang Securities 50.3

Median 50.1

Highest 50.6

Lowest 49.5

Mean 50.1

Prior 50.5

No. of Forecasts 12

Source: Reuters “China’s official PMI seen hitting eight-month low”

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China’s Xi to run Internet security body: state media


China's President Xi Jinping waves from the presidential tribune at the opening ceremony of the 2014 Winter Olympics in Sochi, February 7, 2014.   Credit: Reuters/Lionel Bonaventure/Pool

China’s President Xi Jinping waves from the presidential tribune at the opening ceremony of the 2014 Winter Olympics in Sochi, February 7, 2014.
Credit: Reuters/Lionel Bonaventure/Pool

Chinese President Xi Jinping is to take the reins of a government body for Internet security and aims to turn China into a “cyber power”, official state media reported on Thursday, as the country steadily tightens its grip online.

Since coming to power, Xi has presided over an intensifying online crackdown that has drawn criticism from rights groups and dissidents at home and abroad.

China has also faced growing accusations of carrying out state-sponsored hacking attacks around the world, charges the government strongly denies.

Among the security body’s aims would be to coordinate Internet security among different sectors, and to draft national strategies, development plans and major policies, Xi was quoted as saying by Xinhua.

“Efforts should be made to build our country into a cyber power,” he said, adding that without Internet security, there was no national security.

Last year a secretive Chinese military unit believed to be behind a series of hacking attacks was brought to light by a U.S. security group [ID:nL4N0BJ3QA], and in December another security firm said Chinese hackers had spied on European foreign ministries before a G20 meeting. [ID:nL1N0JP0BY]

Xi also said that working on public opinion online was a long-term responsibility, and the Internet could be used to “spread discipline”.

Laws would be drawn up to “perfect Internet information content management”, to help manage cyberspace and protect people’s legal rights, he said.

Last year, China’s Communist Party renewed a heavy-handed campaign to control online interaction, threatening legal action against people whose perceived rumors on microblogs such as Sina Weibo are reposted more than 500 times or seen by more than 5,000 people.

Rights groups and dissidents have criticized the crackdown as another tool for the party to limit criticism and to further control freedom of expression.

The government says such steps are needed for social stability and says every country in the world seeks to regulate the Internet.

China has the world’s most sophisticated online censorship system, known outside the country as the Great Firewall. It blocks many social media websites, such as Twitter, Facebook, YouTube and others, along with many sites hosted in Taiwan and those of rights groups and some foreign media agencies.

Source: Reuters “China’s Xi to run Internet security body: state media”

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