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touchring 16th April 2007 07:07 AM

April 16 (Bloomberg): What Grows $1 Million a Minute?

What Grows $1 Million a Minute? China's Reserves: William Pesek

By William Pesek

April 16 (Bloomberg) -- Economists don't like to admit to being stunned by anything, even in unpredictable Asia. Last week, UBS AG's Jonathan Anderson couldn't seem to help himself.

The cause of the Hong Kong-based economist's dismay: China's currency reserves rose $1 million a minute in the first quarter.

``This is more than just a jump,'' Anderson said in a report released yesterday. ``The magnitude and the abruptness of this acceleration are simply stunning.''

After average reserve growth of about $20 billion a month in 2006, February and March this year had increases of almost $50 billion -- and $136 billion for the quarter. The total is now $1.2 trillion. ``Just when we had convinced ourselves that China's 2007 releases had nothing left to shock us, the first quarter FX reserve numbers came in,'' Anderson said.

While all this raises many questions, three are probably foremost on investors' minds. One, why are reserves increasing so fast? Two, what in the world will China do with that money? Three, can China continue avoiding big gains in the yuan?

The answer that Wang Qing, an economist at Bank of America Corp. in Hong Kong, offers for the first question is capital inflows averaging $25 billion per month during the first quarter. They may have been related to so-called forward currency swaps that were carried out last year. Also, he wonders if there was some easing in controls allowing Chinese banks to repatriate offshore assets in order to extend credit domestically.

What to Do?

The second question -- what to do with the money -- is a more important one and impossible to answer. The 37 percent surge in reserves over the last year coincides with China's move last month to set up a fund that may invest in companies in a similar manner to Singapore's Temasek Holdings Pte. It's part of efforts to better manage its rapidly growing reserves.

The trend also means the People's Bank of China will have to work harder.

``This set of numbers will continue to put pressure on the central bank to tighten monetary policies further,'' says Ma Jun, an economist at Deutsche Bank AG in Hong Kong.

Ma says China needs to ``come up with more rate hikes, more reserve-requirement increases, more foreign-exchange swaps, more central-bank bills and more window guidance to mop up liquidity.'' In other words, whatever officials have done to date to slow the growth of China's money supply, it's not working.

No Precedent

The third question -- what this means for the yuan -- is the touchiest of all. The kinds of inflows China is experiencing are curious. They suggest that much of the so-called hot money that exited China in 2006 suddenly rushed back in record amounts in the first three months of 2007.

``There's no precedent for this in China's own history,'' Anderson said. ``And the only time we saw anything remotely close to this in Asian practice was during the 1997 crisis, one of the biggest financial cataclysms we had ever seen in this region.''

The most obvious remedy, of course, is a big yuan revaluation. So far, there haven't even been hints that it's possible. Gains in China's currency will be a political decision, one made not on the economics, but in spite of them. For China's leaders, job creation is still the most important goal and that means a competitive exchange rate to support exporters.

Yet negative side effects from that strategy keep popping up. In March, China's money supply grew by more than the central bank's target for a second month. M2, which includes cash and all deposits, increased 17.3 percent from a year earlier, above the central bank's target of 16 percent.

Stock Bubble

It's not that the central bank has lost control; it has done a yeoman's job keeping inflation under control even as booming exports flood the economy with cash. Yet policy makers' past performance offers few clues about whether they can continue to keep China from going off the rails.

A clear signal that could happen is the stock market. China's benchmark CSI 300 Index of yuan-denominated A-shares has gained more than 55 percent this year and almost tripled over the last 12 months. It would appear China's stock investors have found a way to defeat the laws of gravity for now.

As stock prices soar, China's currency is defying global conventional wisdom that it's undervalued. So far, China has been able to avoid big gains in the yuan by amassing more and more currency reserves. One wonders how much longer that approach will work.

``If those reserve numbers continue to grow at $50 billion per month for the rest of the year, then it becomes much more likely that we have a very significant inflows problem on our hands,'' Anderson said. ``As always, stay tuned.''

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek through the Tokyo newsroom at .
Last Updated: April 15, 2007 13:13 EDT

Rubber Duck 16th April 2007 12:32 PM

Re: April 16 (Bloomberg): What Grows $1 Million a Minute?
Yes, one or two Western economist have begun to realise that it is just possible that they have not even began to understand what is going on here.

The basic problem is that they think that models of controlling inflation with money supply in Europe and the States are directly transferable to China. In short they are not. The potential labour pool is so massive that in the short-term no amount of inward investment is going to prove significantly inflationary in the short-term.

Even the amount of money in system is not going to make much difference. If all the peasants that are supposed to be on $100 a year are suddenly on $1000 a year the only thing that needs to happen to ensure that prices do not rocket is to ensure that adequate goods in circulation to spend that money on. There is easily adequate potential to absorb the greater supply of money by simply speading it wider rather than deeper. The greatest inflationary pressure in the short-term would arrive from an inadequate supply of consumable such as cars and washing machines to spend the money on. Somehow, I don't think that is going to prove an insurmountable problem. What caused hyper inflation in Russia? It wasn't so much too much money, as nothing to buy!

The main problem that our economist are having, is that most of their conventional measures are still telling them that compared with the US, the Chinese and Indian economies are still tiny. The problem is they are not, but discrepancies in the way things are measured, even on a PPP basis, is huge.

Much of the US economy is accounted for in terms of people preparing food for one another, and people being paid to argue with one another. Frankly, the value of this in China and India is four time larger because they are dealing with four times as many people. The general standard of nutrition in these countries is actually in many ways better than the US because the people are generally healthier as a consequence. So what is actually often termed as a main service industry in the US is not only much bigger in China and India, but by any reasonable measure is much better. Do the Chinese and Indians argue or dispute less than Americans? Does the fact that American lawyers charge such massive fees make any of those argument more valid?

touchring 16th April 2007 02:10 PM

Re: April 16 (Bloomberg): What Grows $1 Million a Minute?
Well, actually to me, this just shows the incredible amount of dollars the US Federal Reserves has printed the past year.

Notice that gold and oil is rising fast and quick - the dollar is losing value.

Rubber Duck 16th April 2007 02:49 PM

Re: April 16 (Bloomberg): What Grows $1 Million a Minute?
The dollar is finished as the World's Reserve currency.

China has been the main new source of finance to the US and it is now getting its money out.

The dollar will inevitably fall in value, especially as it becomes ever more apparent that the Bush Administration and the Federal Reserve are helpless to stem the tide.

Down is inevitable. Gradual decline in my book is just wishful thinking. It is really just a question of when it will happen and how much damage it will do. To minimise the outfall, it should have happened about 3 years back. To delay the necessary hard decision that will be necessary to get the US economy back on an even keel will only serve to exacerbate the damage that is eventually wrought by the markets.

John W 17th April 2007 03:33 AM

Re: April 16 (Bloomberg): What Grows $1 Million a Minute?

Much of the US economy is accounted for in terms of people preparing food for one another, and people being paid to argue with one another.
Dang, ain't that the truth.

touchring 17th April 2007 04:00 AM

Re: April 16 (Bloomberg): What Grows $1 Million a Minute?

Originally Posted by John W
Dang, ain't that the truth.

Sometimes, the economy itself doesn't paint an accurate picture of overall well being.

China's economy in RMB has doubled since 2000, but blue collar wage is stagnant (500-1200RMB), many new graduates can't find jobs, and cost of living is rising like 5% a year. Accumulated wealth has gone into the hands of capitalists, government officials, and white collared professions.

As Duck put it, the economy can grow, inflation sets in, but there is still an endless supply of unskilled workers.

China union says U.S. fast food chains broke wage law


By John Ruwitch | April 4, 2007

GUANGZHOU, China (Reuters) - U.S. fast food chains, including McDonald's and KFC, broke minimum wage laws in the southern Chinese city of Guangzhou, the state-backed labor union said on Wednesday, urging tougher enforcement of employment laws.
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Guangzhou set the minimum wage for part-time workers at 7.5 yuan ($0.97) an hour at the start of this year, but outlets of McDonald's <MCD.N>, and KFC and Pizza Hut, which are part of Yum Brands Inc <YUM.N>, paid workers less than that, said Li Shouzhen of the All-China Federation of Trade Unions.

"This conduct violates the relevant rules of our nation's labor law," said Li, head of the union's Social Security Work Department, according to a report in the official People's Daily.

A Yum spokeswoman said the company had followed Chinese laws. It was awaiting the results of an investigation into the companies' wage practice by the Guangdong province labor bureau.

McDonald's head of government relations in China said they were working with officials to investigate the salary issues, but the firm had not been in touch with the union. It has said it follows relevant laws and regulations.

The People's Daily article did not say what evidence Li based his comments on, but the All-China Federation of Trade Unions -- China's only union -- is not independent and functions much like an arm of the government or Communist Party.

Workers at McDonald's and KFC in Guangzhou confirmed reports by a local newspaper last week that many workers were receiving less than the minimum wage, particularly university students working part time without contracts.

One 22-year-old college student, who spoke to Reuters on condition that his name not be used, said he had worked at McDonald's for six months and earns 5.3 yuan ($0.69) an hour.

Another woman who said she had recently graduated from college but had worked at KFC for the past couple of years said she still made less than 7.5 yuan. She also declined to be named.

The workers said they were not alone. Between 75 and 90 percent of colleagues at their restaurants, each with 40-50 workers, also made below the legal minimum, they estimated.

The story, originally confined to Guangdong province, where there are 231 McDonald's restaurants and 330 KFCs and Pizza Huts, according to the companies, snowballed earlier this week when reports accused the companies of underpaying workers in several other cities around the country, including Beijing and Shanghai.

Within days, authorities had launched an investigation, which some political observers said reflected a new willingness to challenge business practices of multinational corporations.

Fu Minrong, a Shanghai lawyer and former journalist who follows such issues, said that until recently employees' rights might have been overlooked in the interest of foreign investment.

"In the past, we perhaps gave too much consideration to the investment interests of multinationals in China, so there were very few open reports about them," he said.

The spate of reports now "reflects the amount of openness there is in terms of media freedom in China," he added.

They also highlight a focus from Beijing on equality and the alleviation of potentially destabilizing factors, said Liu Cheng, a member of the Faculty of Law and Politics and Shanghai Teacher's University.

"Livelihood problems in China are at a point now where they must be resolved," he said. "These reports fit into such a policy environment."

(Additional reporting by Jerker Hellstrom in Shanghai)

and earns 5.3 yuan ($0.69) an hour. -> To put into perspective, a big mac meal costs maybe 23yuan??, so the kid has to work 5 hrs to earn a meal!

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