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China Roundup: More Support for Asian Infrastructure Investment Bank

March 26, 2015

This week, the China-backed Asian Infrastructure Investment Bank initiative won more support; fluctuations in the value of the RMB caused concerns; and Tencent revealed its smart-car ambitions.

More Easing to Come

China’s factory activity, a key pillar of the economy, surprisingly slowed in March, according to the HSBC/Markit flash reading of the country’s manufacturing purchasing managers’ index (PMI), which stood at 49.2, an 11-month low. A poll of economists by Reuters earlier estimated a PMI of 50.6, only a bit weaker than February’s final reading of 50.7.

The contraction is pumping up the expectation of more monetary easing from China’s central bank. HSBC’s Chief China Economist Qu Hongbin said on his blog that “it’s time to… decisively cut interest rates and the required reserve ratio (RRR)”, while JP Morgan’s Zhu Haibin predicted that the next RRR cut could come as soon as in April.

China has cut interest rates twice since November last year; the latest RRR cut was in January, when China’s official manufacturing PMI dipped under 50.0 for the first time since mid-2012.

China’s Infra Bank Trade-off

More and more countries are joining the China-led Asian Infrastructure Investment Bank (AIIB), an initiative put forth by Chinese President Xi Jinping in 2013.

The UK came on board two weeks ago as the first western nation, and soon other European countries, including Germany, France and Luxemburg, followed suit. Now Australia wants a share of the bank too, while South Korea is inclined to make the same decision, despite America’s demand to stay clear of the venture.

The US has repeatedly expressed concerns about the bank’s governance standards and transparency. To lobby against the boycott call from the US, China had to give up its previous claim of the veto power to get western nations onboard, The Wall Street Journal reported. Jin Liqun, former Vice President of the Asian Development Bank and now in charge of setting up the AIIB, told the press last weekend that the bank is open to collaborators and has “zero tolerance” for corruption.

Headwinds for the RMB

Fluctuations of the Chinese currency, the Renminbi (RMB), have caused concerns for trading companies around the world, according to a survey by HSBC Holdings.

The survey of 1,610 firms showed that the overall use of the RMB by global companies dropped by 5% during the past year; Hong Kong companies that use the RMB to settle declined 6%.

Experts say that firms’ reluctance to use the RMB reflects that the currency is becoming more mature, which means its value will fluctuate along with market forces. For example, the RMB sharply strengthened against the US dollar last week after the US Federal Reserve showed signs to postpone an interest rates hike that many expected to happen in June.

On the other hand, China is continuing its effort to internationalize its currency despite mid-term depreciation pressure. The first international money market fund denominated in the RMB was listed in London on Wednesday, giving all European investors an option to buy Chinese bonds. The fund is offered jointly by China Construction Bank and Commerzbank AG of Germany.

Hard Sell or Not?

Earlier this month, China’s Finance Ministry launched a program that allows local governments to convert RMB 1 trillion of expiring debt into long-term municipal bonds with lower yields, easing their fiscal pressure and bringing shadow banking into the spotlight.

The initial reaction was: who would buy these bonds? Some believed that the central bank would step in, and therefore they called the swap “a Chinese version of quantitative easing”.

But it seems that market demand for those bonds will be abundant and China won’t need to print money to absorb them. Finance Minister Lou Jiwei told the South China Morning Post that the sales of the bonds will be market-oriented and People’s Bank of China won’t be involved.

Some analysts expect commercial banks and large institutional investors to be the major buyers of the bonds; others doubt that banks would willingly accept lower yields to reduce default risks. Chinese local governments had RMB 17.9 trillion of debt by mid-2013, about 36% of which will mature between 2015 and 2018, according to the national auditor.

BAT’s Car Bet

China’s three internet giants, namely Baidu, Alibaba and Tencent, are all making moves to make internet-connected smart cars.

On Monday, Tencent announced a partnership with Foxconn and luxury car dealership China Harmony Auto Holdings to develop cars, the latest among the three to join the frenzy. TechinAsia has neatly summed up which carmakers these tech companies (plus LeTV, a video streaming site) are teaming up with. Another tech company that wasn’t included in the list is Yidao Yongche, an Uber-like start-up that partnered with domestic carmaker Chery last month.

While some see this as Chinese companies finally trying to innovate, others see it as a herd mentality, which could blind companies from focusing on truly innovative products. It’ll be interesting to see whether (and if so, how much) the internet companies will be able to change the automobile industry in China.

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