Asia hit by tumbling China

Chinese stocks slumped more than 6 percent on Wednesday after China tripled a share-trading tax in a bid to cool its red-hot market, knocking Asian markets lower but failing to trigger the broad rout some had feared.

The yen held gains after rebounding from a record low against the euro as the Chinese move prompted investors to cut back risky positions in so-called carry trades financed by borrowing the Japanese currency.

Investors were anxiously awaiting the reaction of European and U.S. markets, with London spread betters forecasting Britain's FTSE 100, France's CAC 40 and Germany's DAX to open down around 0.5 percent.

China's Ministry of Finance raised stamp duty on share transactions to 0.3 percent from 0.1 percent in what was seen as the strongest attempt yet to curb speculation in a market that had risen more than 60 percent so far this year.

Tokyo's Nikkei closed down 0.5 percent, while MSCI's index of regional shares outside Japan was down 1 percent at 0615 GMT.

"The decline today is 100 percent influenced by China," said Soichiro Monji, chief strategist at the equity management department of Daiwa SB Investments in Tokyo.

"In theory it shouldn't matter if Chinese stocks plunge, but markets are at high levels and investors are very aware of the downside risk."

The benchmark Shanghai Composite Index was down 6.2 percent, having fallen as much as 7.4 percent earlier. Shares of brokerages were hardest hit on fears the tax rise would shrink market turnover, with CITIC Securities tumbling by the 10 percent daily limit.

Beijing's cooling measure prompted fears of a repeat of late February, when a steep slump in Chinese stocks triggered a global equities sell-off as risk aversion swept financial markets.

Regional stock markets fell almost across the board but the losses were not as dramatic. Australia's stocks benchmark lost 1.2 percent and Taiwan shares fell 0.4 percent.

Indexes in Hong Kong and Singapore were both down more than 1 percent at their midsession breaks, but South Korea's KOSPI crept into positive territory near the end of the trading day, ending up 0.1 percent at a record close.

"This is not like the China shock in February," said Kim Joong-hyun, an analyst at Goodmorning Shinah Securities in Seoul. "The markets are showing that the impact from China this time will not be long-lasting."

In the foreign exchange markets those jitters prompted some scaling back of carry trades, where investors borrow low yielding currencies such as the yen to buy assets offering higher returns.

Carry trades are vulnerable to reduced risk appetite, often prompting a sharp appreciation of the yen when investors reverse such positions.

The Japanese currency jumped against the dollar and euro as share trading opened in Shanghai, but quickly trimmed gains to trade a little firmer on the day.

"The foreign exchange market is swinging between hope and despair due to developments in Chinese shares," said Kosuke Hanao, head of forex sales at HSBC in Tokyo.

The euro eased to 163.45 yen after reaching a fresh record high of 164.29 yen the previous day as comments by European Central Bank officials suggesting more euro-zone rate increases prompted investors to buy the single currency.

The dollar bought around 121.60 yen at 0615 GMT, little changed from late U.S. trading. The dollar remains in sight of a three-month high of 121.89 yen hit last Friday.

China's midnight announcement, which came late in the U.S. trading day, limited Wall Street gains on Tuesday. The Dow Jones closed 0.1 percent higher, although the Nasdaq rose 0.6 percent on a wave of takeover news in the tech sector.

Benchmark Japanese government bond 10-year yields fell 2 basis points to 1.730 percent.

CHINA'S TRADE SURPLUS OVERSHADOWS TALKS

Hewlett Packard Company chief sales officer Andy Mattes, right, and Wan Shou Gu, left, from a Chinese company, sign papers of agreement in San Francisco, Wednesday, May 9, 2007 during a formal signing ceremony between US and Chinese companies. [AP]

China's trade surplus grew in April, setting the scene for a tense meeting in Washington this month aimed at tackling bilateral disputes.

China recorded a surplus of $16.9bn (£8.5bn), more than double that of March, Beijing announced on Friday. For the first four months of the year, the surplus reached $63.3bn, 88 per cent higher than for the same period in 2006.

More important than the monthly figure is the continued acceleration of the trend of the past two years, in which exports have outpaced imports with China's main trading partners, the US and Europe, by a significant margin.

Stephen Green, an analyst at Standard Chartered bank in Shanghai, issued a report on Friday predicting that China's current account surplus would hit $400bn this year, equal to about 12.8 per cent of GDP.

This would be unprecedented for a country of China's size and stage of development. Surpluses of this magnitude have usually been recorded only by smaller nations growing out of a crisis, or by significant oil exporters.

China's current account surplus for 2006 was $249.9bn, or 9.5 per cent of GDP, well ahead of consensus predictions 12 months ago.

China is sending up to 14 cabinet-level officials to Washington this month for the second Strategic Economic Dialogue, a forum established to provide a long-term framework to manage the two nations' relationship. But with many shorter-term issues on the agenda, the dialogue is being transformed.

Hank Paulson, US Treasury secretary, who initiated the dialogue, has shifted the emphasis in talks from an overwhelming focus on the currency to a discussion on opening China's financial and other service markets.

INVESTMENT FROM CHINA

Is a wall of Chinese money about to hit global markets? On Friday regulators prised open the window and gave mainland investors their first opportunity to invest in foreign equities – raising the prospect that China will start decanting $4,400bn of bank savings into overseas markets.

That is some way off. Beijing has lifted restrictions on investing up to half the existing quotas for overseas investment – dubbed qualified domestic institutional investor, or QDII – in equities. That implies potential outflows of just $7bn-$9bn. Hong Kong's bourse, the obvious first port of call, can turn over more than that in a day. And even that amount may not be unleashed immediately. The attractions of, say, Hong Kong stocks pale when contrasted to the domestic market, up 48 per cent this year in local-currency terms.

Opportunities for meaningful arbitrage, too, are slim. The 40-odd stocks listed on both the domestic-currency A-share market and in Hong Kong trade on vastly differing multiples. China Life, for example, is 65 per cent more expensive in Shanghai. But the mechanics of QDII preclude stock selection; instead investors will have to buy funds or similar products sold by the banks. Given the inaugural role of these funds, the emphasis will be on conservatism and quality rather than exploiting valuation gaps.

Nonetheless, the move marks another milestone on the road to a fully convertible currency. It also demonstrates the extent of pressure on Beijing both to offset surging capital inflows and to cool the domestic stock market bubble. The stock market performance is almost wholly driven by captive liquidity, so broadening the investible universe would remove some of the froth. For now, however, the numbers are too small to have much impact on either front – or on overseas markets

CHINA MOVES TO EXPLAIN $136BN FOREX SURGE

China has taken the unusual step of trying to explain the recent surge in its foreign exchange reserves after they rose by the equivalent of $1m a minute in the first quarter of this year, or by more than half the total increase of 2006.

The explanation yesterday by Wu Xiaoling, a deputy governor of the People's Bank of China, prompted a number of analysts to firm up their expectations that the central bank would introduce further monetary tightening measures.

Economists also expect first-quarter economic growth figures, due to be released on Thursday, to put more pressure on the PBoC. Goldman Sachs, in a note to investors, yesterday said it expected gross domestic product growth for the first quarter of 2007 to accelerate to 11.2 per cent, up from 10.4 per cent in the final three months of last year.

China has already increased six times in less than a year the amount it requires commercial banks to keep on deposit with the authorities, to control liquidity in the financial system. It has increased interest rates three times during the same period.

Beijing supports fast growth but has been increasingly worried about the political, environmental and structural economic impact of the current model, which is driven by high net exports and energy-intensive heavy industry.

Speaking at a seminar in Guangzhou, southern China, on Sunday, Ms Wu said the first-quarter rise in foreign exchange reserves of $135.7bn (�00bn, £68bn) to $1,202bn was caused by a number of factors beyond the sharp rise in the trade surplus, which had already been made public.

Ms Wu said the unwinding of swap agreements between the central banks and Chinese commercial lenders had resulted in foreign exchange coming back on to the PBoC's books.

Some of the funds raised in huge offshore initial public offerings by Chinese banks and other enterprises had also been brought back onshore, driven by the desire to take advantage of the rising renminbi.

CHINA'S STOCK EXCHANGES

Stock exchanges are no strangers to rivalry �C just ask London and New York. Beijing, however, appears to have taken competition to new heights by reportedly ordering all but the biggest issuers to spurn Hong Kong and stay home.

Chinese regulators clearly have an interest in promoting the home markets, which are now on a roll. The Shanghai B-share market rose 130 per cent last year and together with the country's two domestic currency A-share markets recently overtook Hong Kong in terms of market capitalisation. Diverting more initial public offerings to the domestic markets means more choice for local shareholders, who are largely prohibited from investing overseas. More paper also helps mop up the funds pouring into the home market. And, unpalatable as it may be, Chinese regulators have no qualms about dictating where companies should go to raise funds.

This (unofficial) policy also cuts into Hong Kong's biggest client base. Last year, mainland IPOs accounted for almost 90 per cent of the $43bn worth on the Hong Kong exchange. Trading in shares of Chinese entities made up almost one-third of market turnover. But Hong Kong is less vulnerable than the numbers suggest.

For starters, listing fees comprise only one-tenth of total income and the bulk of that comes from annual payments. More pertinently, Hong Kong has stolen a march on fast-growing derivatives �C it is home to one of the world's biggest equity warrants markets �C and is staying ahead through innovation. A new retail-friendly derivative instrument launched in June was responsible for 83 listings and $1.5bn of turnover by the end of the year. Besides, as the caveat for $1bn-plus issuers suggests, China cannot afford to dispense with Hong Kong just yet. That could only happen when China has a fully convertible currency. Until then, Hong Kong can bank on hosting issuers needing to tap international investors

CHINA WARRANTS MARKET IS BIGGEST

Less than 18 months after the first warrant was issued on China's stock exchanges, the country now boasts the world's biggest market for the financial instrument.

Chinese investors' love affair with warrants was an accidental outcome arising from a set of last-gasp stock market reforms and has been stoked up by a speculative fever that may not last.

Like options, warrants allow investors to buy a security at a future date for a fixed price. Warrants can also be bought and sold in their own right, making them potential objects of speculation as well.

According to data compiled by Goldman Sachs, warrant turnover on the Shanghai and Shenzhen stock exchanges reached $221.2bn over the first 11 months of 2006, against $207.8bn in Hong Kong.

Hong Kong's full-year turnover came in at $230bn, with incomplete statistics for China suggesting its final figure would exceed $244bn.

This is in spite of only 27 warrants being traded in China compared with more than 2,000 in Hong Kong.

Zhu Huacheng, derivative products analyst with Xiangcai Securities, said China warrants could change hands up to 150 times before exercise, compared with just 10 times in more mature markets. Warrants were embraced in China to help listed state-owned enterprises out of an awkward bind. Listed state companies had two classes of shares, one that could be traded on stock exchanges and the other that could not.

To realise the value of their non-tradeable "state shares", state-owned enterprises needed to render them tradeable. This required approval from minority shareholders, who feared dilution from the release of a large overhang of state shares.

To win their minorities over, state companies gifted investors free bonus shares and, in some cases, free warrants as well. In Hong Kong and other markets, investors buy warrants issued by independent third parties, such as investment banks.

Cheril Lee, executive director and head of Goldman's securitised derivative products in Hong Kong, said the market's momentum would depend on further initiatives from China's regulator, which has not yet given blanket approval for third-party issues but approves them on a one-off basis.

"It seems like they are quite supportive of warrants," Ms Lee said. "If the regulator allows third party warrants the market can stay [at current levels]."

China´s forex reserve tops 1.2 trillion USD

BEIJING, April 12 (Xinhua) -- China's foreign exchange reserve reached 1.2 trillion U.S. dollars by the end of March, up 37.36 percent from the same period last year, the People's Bank of China announced here Thursday.

"I'm not surprised at the figure," Cai Zhizhou, an economist with Beijing University, said and added that forex sharp rise has become "normal".

China's forex reserve came to 609.9 billion U.S. dollars by 2004, 818.9 billion U.S. dollars by 2005 and 853.6 billion U.S. dollars by the end of last February, making the country overtake Japan to become the biggest foreign reserve holder of the world.

"The rising trade surplus is the major factor contributing to the forex reserve boom," Cai said and pointed out that low prices of Chinese goods contributed to the rising trade surplus.

"China needs forex reserve to avoid financial risks as the country's dependence on foreign trade is going up," said Cai.

China's foreign trade has risen by more than 20 percent annually since 2002 while the ratio of foreign trade to GDP has risen from 30 percent to nearly 70 percent during the same period.

The country's trade surplus reached 46.44 billion U.S. dollars in the first quarter, nearly double the 23.3 billion U.S. dollars surplus in the same period last year.

However, the rising trade surplus has brought increasing trade frictions between China and its trade partners.

To balance, the country has lowered and is considering to further lower export rebates on certain goods, ranging from steel to textile.

The trade surplus in March went down to 6.87 billion U.S. dollars, cracking the 10 billion mark for the first time since March 2006 and showing a downward trend.

"A large-scale forex reserve may backfire," said Cai. "It is the major reason leading to the excess liquidity in China."

The central bank has to spend quantities of basic money to purchase foreign exchange, thus aggravating the problem of surplus fluidity

On the other hand, continuous growth of forex reserve has in fact increased the pressure on appreciation of the Chinese currency, which in turn has exerted greater pressure on value preservation of China's forex reserve.

It is estimated that by 2010, China's forex reserve will reach 2.9 trillion U.S. dollars. China thus plans to launch a state forex investment company.

The investment company will issue 200 billion to 250 billion U.S. dollars of RMB-denominated bonds. Money to be raised will be firstly used as strategic investment for energy enterprises like CNOOC, earlier reports said.