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PBOC Shows Signs of Tightening Monetary Policy

According to Galaxy Securities' Co. chief economist, Zuo Xiaolei, China's central bank may tighten monetary policy this year after previously saying it would "fine-tune" it. Xiaolei says that the People's Bank of China has excessively loose monetary policy in the first two quarter of the year but that the last two quarters needed to be changed to "appropriately loose monetary policy". The People's Bank of China also said in a quarterly report that it will maintain a "moderately loose" monetary policy and guide "appropriate" loan growth. According to Xiaolei, the adjustment will avoid big ups and downs in China's economy and ensure growth. The central bank is selling more bonds to decrease the supply of yuan in the public's hands, in attempt to avoid inflation.

China's central bank may tighten monetary policy this year after saying yesterday that it would use "dynamic fine-tuning," Galaxy Securities Co. chief economist Zuo Xiaolei said. "In the first half, we had excessively loose monetary policy and now, in the second half, we're moving into appropriately loose monetary policy," Zuo said today by phone from Beijing. The Shanghai Composite Index fell for a second day, trimming this year's gain to 84 percent, on concern that the government will rein in lending to prevent bubbles in stocks and property. The Peoples Bank of China also said in a quarterly report that it will maintain a "moderately loose" monetary policy and guide "appropriate" loan growth. "The central bank is doing the right thing," Zuo said, without specifying how it may tighten policy. "China needs stable economic growth. China doesn't need big ups and downs." The stock index slid 2.4 percent as of the break in trading at 11:30 a.m. local time. The central bank has kept interest rates and reserve requirements for banks unchanged this year after cutting them in the final four months of last year to counter the effects of the global credit crisis. It's selling more bills to mop up cash. The reserve ratio is 15.5 percent for big banks and 13.5 percent for small lenders. The key one-year lending rate is 5.31 percent. "Spooking Investors' The reference to fine-tuning policy "is spooking investors who are worried that the central bank will follow up with tightening measures, such as hiking the reserve ratio," said Wang Zheng, a fund manager at Jingxi Investment Management Co. in Shanghai. The central bank will "use market oriented methods to carry out dynamic fine-tuning taking into consideration domestic and international economic conditions and price changes," it said in yesterday's report. Chinese banks made a record 7.37 trillion yuan ($1 trillion) of new loans in the first half as the government sought to revive economic growth that slowed to the weakest pace in almost a decade. M2, the broadest measure of money supply, rose a record 28.5 percent in June from a year earlier.

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China vs. EU: Tariffs on Fasteners

China filed a complaint against EU tariffs on fasteners at the WTO, claiming its duties break global commerce rules. On January 2009, the EU imposed a five-year tariff on imports of Chinese iron or steel fasteners worth an estimated 575 million euros ($809 million) in 2007, which the country justified as for prevention of "further distortions" and to "restore fair competition". China, however, does not agree that the EU has been harmed significantly enough to defend the trade protection. China and the EU are consulting to sort through their WTO case. The two countries must now hold talks for at least two months to resolve the trade dispute, and if it persists, China may ask WTO judges to rule.

China filed its first complaint against the European Union at the World Trade Organization, saying EU anti-dumping duties on Chinese screws and bolts break global commerce rules. The EU decided in January to impose the five-year tariffs on imports of Chinese iron or steel fasteners worth about 575 million euros ($809 million) in 2007. The 27-nation bloc said at the time that the levies would "prevent further distortions and restore fair competition." China said EU rivals haven't been sufficiently harmed to justify the trade protection. The EU "failed to comply with the relevant WTO rules in the process starting from initiation, investigation to the final determination," China's WTO mission said in an e-mailed statement from Geneva today. "The determinations made are neither impartial nor transparent, which infringes the legitimate commercial interests of over 1,700 Chinese fastener producers." Fasteners, used for everything from car parts to furniture, are made in the EU by companies such as Italy's Fontana Luigi SpA that demanded the levies to counter below-cost, or dumped, sales in Europe by Chinese competitors. The duties stemmed from an inquiry opened by the EU in November 2007. China, the world's second-largest exporter after Germany, accounts for 60 percent of EU imports of the carbon steel fasteners, which also come from Taiwan, the U.S. and Japan. Rules Followed The European Commission, the EU's trade authority, rejected China's accusation that the bloc failed to follow WTO rules in probing imports of Chinese fasteners. "As we do in all anti-dumping cases, the applicable EU rules were followed scrupulously, which are in full compliance with the terms of the WTO Anti-Dumping Agreement," the commission said in a statement from Brussels. "The commission has continuously rejected any notion that the investigation might not have been legally sound or otherwise incompatible with its obligations under the WTO agreement." Chinese fastener manufacturers increased their share of the EU market to 26 percent in the 12 months through September 2007 from 17 percent in 2004, according to the bloc. EU producers suffered a drop in their combined home-market share to 17 percent from 22 percent in the same period, when consumption expanded by almost a third. The duties range from 26.5 percent to 85 percent, depending on the Chinese company. The Chinese subsidiaries of two EU producers -- Italy's A. Agrati SpA and Spain's Celo SA -- were exempted from the levies. Consultations Today's request for consultations is the first step in the WTO case. Under the Geneva-based trade arbiter's rules, China and the EU must now hold talks for at least two months in an effort to resolve the dispute. If consultations fail, China can ask WTO judges to rule. The EU is already trying to curb imports of Chinese products ranging from frozen strawberries to ironing boards. China faces EU anti-dumping duties on about 40 products -- more than any other nation. The bloc has complained three times against China at the WTO. The EU has carried out more than 140 anti-dumping probes into imports from China since 1979, "becoming one of the WTO members most frequently taking anti-dumping actions against Chinese products," China's mission said. "The Chinese side opposes consistently any abuse of anti-dumping actions and the rising tide of trade protectionism." Not About Protectionism The commission said anti-dumping measures are about fighting unfair trade, not protectionism. "The decision to impose measures was taken on the basis of clear evidence that unfair dumping of Chinese products has taken place with state distortion of raw-material prices," the commission said. "This is harming the otherwise competitive EU industry, with potentially dire long term effects." China has been cited in 60 trade probes by other countries this year, compared with 62 in all of 2008, state-run Xinhua News Agency reported on July 14, citing Liu Danyang, vice director of the Bureau of Fair Trade for Imports and Exports under the Commerce Ministry. Investigations this year involve trade worth $8.27 billion, compared with $6.2 billion in 2008, Xinhua said, adding that Liu attributed the higher figures to rising trade protectionism.

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China Development Bank Will Expand to Brazil, Egypt and Russia

China Development Bank Corporation opened its first branch outside the mainland in Hong Kong on the 29th of July, 2009 as the state-run bank for public works projects plans to expand carry out. Russia, Egypt and Brazil are the locations of the next expansions. Moscow and Cairo will begin operating later in 2009 while Rio de Janeiro will operate in 2010, according to Vice President Li Jiping. The bank has already engaged in lending to the three countries and admit that their "...strategic goal is to become an internationalized bank" and support the nation's rapid economic growth in the next decade. Chinese Premier Wen Jiabao said on July 10th that the nation's $2 trillion plus of foreign exchange reserves "should be used to help companies invest abroad." The China Development Bank Corporation plans to invest in ports, steel mills and energy in Brazil, according to Rio de Janeiro state Governor Sergio Cabral. In addition, the bank has "expressed interest" in investing in projects in the 2014 World Cup Soccer tournament and Rio de Jainero's bid for the 2016 Olympics. In Russia, the bank lent $1.3 billion to Russia's state development bank, Vnesheconombank. Meanwhile, in Ghana, the bank lent more than $1 billion to finance a cotton facility in Malawi and power station in Ghana in 2007.

China Development Bank Corp., the state-run bank for public works projects, opened its first branch outside the mainland in Hong Kong today and plans offices in Russia, Egypt and Brazil as part of a global expansion push. The offices will start operating in Moscow and Cairo this year and the Rio de Janeiro area next year, Vice President Li Jiping told a press conference. The Beijing-based bank agreed in May to lend $10 billion to Brazil's state-controlled oil company, helped finance a fund in Africa and extended loans in June to Russia's development bank. "Our strategic goal is to become an internationalized bank," Li told reporters, adding that the Hong Kong branch will cover Asia. "Mainland organizations can effectively go out to the international market through this Hong Kong platform." Chinese Premier Wen Jiabao said on July 20 that the nation's more than $2 trillion of foreign-exchange reserves should be used to help companies invest abroad. China's "going out" strategy is also designed to help ensure the nation has access to the resources needed to sustain the fastest economic expansion among the world's 20 largest economies. The bank agreed to lend $1.3 billion to Vnesheconombank, Russia's state development bank, the Moscow-based lender said June 14. The China-Africa Development Fund, which has helped finance a cotton facility in Malawi and power station in Ghana, was set up in June 2007 with an initial $1 billion from China Development Bank. Brazil Plan The branch in Brazil will invest in ports, steel mills and energy, Rio de Janeiro state Governor Sergio Cabral said on June 30. The bank also has expressed interest in investing in projects related to the 2014 World Cup soccer tournament and Rio's bid for the 2016 Olympics, Cabral said in a statement. The city is home to Petroleo Brasileiro SA, which is considering buying Chinese equipment in return for further loans, and Vale SA, the world's largest iron-ore producer. China, the world's third-biggest economy, became Brazil's leading trade partner this year after the global recession choked sales to the U.S. The two countries' central banks are studying a proposal to use their own currencies -- the real and the yuan -- in bilateral trade instead of the U.S. dollar. Leaders of Brazil, Russia, India and China -- the so-called BRIC nations -- called for a "more diversified" monetary system to reduce dependency on the U.S. dollar at a June 16 meeting in the Russian city of Yekaterinburg. China Development Bank's profit tumbled 28 percent last year on higher loan losses as the nation's economic growth slowed. The bank, which had 3.8 trillion yuan ($556.3 billion) of assets at the end of 2008, received a $20 billion capital injection from the government in December 2007 and is seeking to become a commercial lender. The Ministry of Finance owns 51.3 percent of the bank and Central Huijing Investment Co., a unit of China's $200 billion sovereign wealth fund, holds the rest.

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China Adjusts Gasoline & Diesel Prices to $3.14/gallon Max

China slashed gasoline and diesel prices by about 3.3 percent after three consecutive increases in prices caused widespread concern about fuel costs. The National Development and Reform Commission announced that pump prices for 90 octane gasoline will cost a maximum of about $3.14 a gallon in Beijing. China's top planning agency said it adjusted the prices to match the movement in crude-oil costs, taxes and profit for refiners, such as China Petroleum & Chemical Corporation and PetroChina Co. This is the second time in 2009 that the prices are cut to help reduce costs for manufacturers and encourage economic growth of 8 percent this year, create jobs and improve social unrest. Wang Jing, the chief oil analyst at Orient Securities Ltd. said, "This move is to some extent signaling that the Chinese government is bowing to public pressure in adjusting fuel prices... It also reassures the industry that the country will stick to the fuel pricing formula." The country's government may adjust fuel prices when crude-oil costs change more than 4 percent over 22 working days, according tot the reform commission.

China, the world's second-biggest energy user, cut gasoline and diesel prices by at least 3.3 percent after three increases since March triggered public concern that fuel costs are too high. Pump prices for 90 octane gasoline will be set at a maximum of 5.7 yuan ($0.83) a liter, or about $3.14 a gallon, in Beijing, the National Development and Reform Commission said in a statement on its Web site. Prices were adjusted to reflect the decline in global crude prices, said China's top planning agency. Today's price cut, the second this year, will help to lower costs for manufacturers as China targets 8 percent economic growth this year to generate jobs and maintain social stability. The government's third increase on June 30 sparked "widespread public debate," according to the official Xinhua News Agency, after China's gasoline prices exceeded those in the U.S., the world's largest oil user. "This move is to some extent signaling that the Chinese government is bowing to public pressure in adjusting fuel prices," Wang Jing, the chief oil analyst at Orient Securities Ltd., said by mobile phone in Shanghai. "It also reassures the industry that the country will stick to the fuel pricing formula." The Chinese government controls prices under a mechanism that takes into account crude-oil costs, taxes and a profit for refiners, including China Petroleum & Chemical Corp. and PetroChina Co., the nation's biggest fuel producers. China may adjust fuel prices when crude-oil costs change more than 4 percent over 22 working days, the reform commission said in May. PetroChina, Sinopec "The latest fuel price cuts are unlikely to lower shares of the two companies as the move shows the government is strictly enforcing the pricing mechanism and will allow oil companies to pass on higher costs if crude prices rise," said Grace Liu, an analyst at Guotai Junan Securities in Shenzhen. PetroChina gained 1.8 percent to HK$9.49 in Hong Kong trading before the fuel price announcement while Sinopec, as China Petroleum is known, climbed 0.7 percent to HK$7.14. The gasoline price charged by refiners will fall by 3.3 percent to 6,510 yuan a ton, or 70 U.S. cents a liter, starting tomorrow and the diesel price will drop by 3.7 percent to 5,770 yuan a ton, the National Development and Reform Commission said today. Jet fuel prices will be reduced by 5.5 percent to 4,770 yuan a ton. The price of gasoline in Beijing, set at $3.14 a gallon, compares with an average of $2.49 a gallon in the U.S. "Public's Misconception' Gasoline and diesel prices have risen by an average 24 percent this year, according to calculations made by Bloomberg. China cut prices by as much as 3 percent in January. About 94.3 percent of more than 260,000 people surveyed by Chinese Web portal sina.com thought fuel prices are too high, Xinhua said on July 1. The reform commission said in a statement on July 14 that the public have a "misconception" about the government's fuel-pricing mechanism. Fuel prices have been raised by "no more than 25 percent" since mid-January, compared with a 70 percent gain in global oil prices during the period, the commission said in the statement.

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China Shipbuilding to Sell Around 2 Billion Shares

Chinese state-owned company, which is the biggest ships' maker, is planning to offer $942 million in initial public offering, according to a report from China Securities Commission.

The Beijing-based, state-controlled company is selling as many as 1.995 billion shares, or a 30 percent stake, in the stock offering, according to a draft prospectus posted on the Web site. The commission's listing panel is scheduled to meet July 27 to vet its application to sell shares. China International Capital Corp. is managing the sale. China Shipbuilding Industry Co. is 97 percent owned by China Shipbuilding Industry Corp., one of the nation's largest shipbuilders and repairers, according to its Web site. China Shipbuilding Industry Co.'s sales rose 41 percent to 16.06 billion yuan last year from 2007. Net profit grew 52 percent to 1.2 billion yuan in the same period, according to the draft prospectus.

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China's Largest Housing Contractor will raise $7.3 Billion in IPO

China State Construction Engineering Company, China's largest housing contractor, is planning on raising $7.3 billion "in the world's biggest initial public offering since March 2008". It looks to sell about 12 billion shares from 3.96 yuan to 4.18 yuan each.

"The market won't have any problem holding up the State Construction sale," Yu Yang, a Guangzhou-based strategist at Guotai Junan Securities Co., said before the filing. "There's so much money around after the relatively loose monetary policy." State Construction's profit fell 44 percent in 2008 to 4.92 billion yuan because of the slowing property market, rising raw material prices and higher tax payments. The company and its advisers are predicting a recovery this year, as the government's 4 trillion yuan stimulus package begins to revive the economy. Nationwide property sales jumped 53 percent last month from a year earlier by value, and investment in real estate development increased 9.9 percent, the statistics bureau said July 10. Economic growth is therefore picking up pace.

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PBOC Begins Tightening Monetary Policy

The People's Bank of China sold one-year bills at the "highest rate this year," which increased money market rates to avoid bubbles in the stock and property markets.

The idea is to "soak up excess cash in the financial system after…almost eight months" and avoid inflation. It also absorbs funds through bill buy-back arrangements with commercial lenders. "The central bank is using the gradual increase in yields to alert the market to prepare for a tighter policy in the future," said Liu Jianyan, a fixed-income analyst at First Capital Securities Co. in Shenzhen. "But there won't be a drastic reversal of previous loose monetary policy." The yield rose from 1.60 last week to 1.65. Liu predicts that yield on the one-year bill will climb to 2 percent by the end of 2009. The hike in yields will be restricted because China's central bank will avoid raising its 5.31 percent benchmark one-year lending rate for a year as the government hopes to maintain "mini-bubbles" to help the world's third- largest economy recover, said James Yuan, who manages 36 billion yuan as chief investment officer at the joint venture of Prudential Financial Inc.

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China Eastern Airlines and Shanghai Airlines Integrate

China Eastern Airlines is planning to buy Shanghai Airlines, a deal worth about 7 billion yuan ($1 billion).

Since the announcement, each share of Shanghai Airlines will be exchanged for 1.3 China Eastern Sales. China Eastern is going to raise the 7 billion yuan by issuing shares. After the deal is sealed, China Eastern will control over 50 percent of flights from its base in Shanghai and improve the airline's business. Both companies suffered losses in 2008, and the integration of the airlines will allow them to compete against Air China and China Southern Airlines, its domestic rivals. Shanghai Airlines will keep its brand name. Combined, the two companies will operate about 306 airplanes.

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China and the U.S Prepare to Discuss Global Warming

The U.S is planning on demanding China to decrease its tariffs on clean energy technology in order to further the two country's goals of combating global warming.

According to David Sandalow, assistant secretary of energy for policy and international affairs policy, the two countries know they have "much to gain by partnering to develop clean energy technologies that will power our economy by cutting carbon emissions," since both are the largest greenhouse gas emitters. As reported by Reuters, "The two countries have tremendous trade opportunities in areas such as wind power, energy efficiency, clean coal and modernizing the electric grid, but U.S. companies face high tariffs on some exports," said Travis Sullivan, policy director for Commerce Department. In addition, U.S companies are worried about Chinese policies that favor domestic companies, which threaten American products. In turn, China is concerned about "U.S export controls that restrict sales of some high-technology goods." Currently, "China is resisting setting a hard cap on greenhouse gas emissions that many believe is necessary for the U.S. Senate to approve any climate treaty." "We think China needs to make a significant commitment ... in order to address the climate problem," Sandalow said.

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China's Car Sales Increased 48%

China's passenger-vehicle sales increased about 48 percent in June, which is the most significant increase since February 2006.

Much of the credit is being given to the government's stimulus spending from a $585 billion (4 trillion yuan). The two quarter sales jumped 18 percent to 6.1 million after the government slashed some retail taxes and offered vehicle subsidies in rural areas to encourage demand and help the auto market. According to an analyst at First Capital Securities Co., Wang Qingtao, "China's downward slide is clearly over. There is also a huge natural demand for vehicles, which will continue to drive the industry for years to come." Stocks for SAIC motor Corp., China's biggest automaker have more than tripled this year. Stocks for Dongfeng Motor Group Co., the largest Hong Kong automaker have more than doubled this year alone. Increasing auto sales add to the evidence that China's economy is recuperating from a slowdown in the beginning of 2009.

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China Pressures for International Reserve Currency

The Chinese authorities find it hard to explain to its domestic public why a relatively poor developing country is lending so much to one of the world's most affluent economies. Yet the reason is pretty straightforward. The decision to peg the yuan to the dollar in 1994 initially helped achieve macroeconomic stability, but with a growing trade surplus and appreciation pressure on its currency it also forced the PBOC to intervene in the foreign exchange markets to maintain the yuan's parity with the dollar. While the accumulation of foreign reserves – the complement to China's ever-growing current account surplus - has been regarded as virtuous and as an insurance against currency crisis, it has increasingly created problems.

Chinese authorities have repeatedly called for a new global monetary order that depends less on the U.S. dollar. In March, for instance, Chinese Premier Wen Jiabao expressed concern about the value of China's large holdings of U.S. assets and demanded that the U.S. government take measures to guarantee its "good credit." Also in March, just before the London G-20 Summit, the People's Bank of China (PBOC), published a paper by Zhou Xiaochuan, the PBOC governor, on its Web site in which he asked for a new "super-sovereign" international reserve currency "that is disconnected from individual nations" to secure global financial stability and facilitate world economic growth. He proposed that a more prominent role should be given to Special Drawing Rights (SDRs), a basket of currencies used by the International Monetary Fund (IMF) as a unit of account, suggesting that SDRs could replace the dollar as main reserve currency in the medium term.

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