• Beijing defending “Buy Chinese” Policy

Qin Gang, spokesman of China’s Ministry of Foreign Affairs, defended Beijing’s government purchase policies. In early June, China’s National Development and Reform Commission, together with a number of other ministries, issued a notice requiring government bodies to source domestically for projects financed by the state. According to Mr. Qin, the so called “Buy Chinese” position is based on a 2002 government procurement law issued long before the government stimulus measures. China’s decision to continue its government purchase policies faced widespread criticism among China’s trading partners worldwide. International Economists were surprised about Beijing’s position, emphasizing that China–as one of the world’s biggest exporting nations–had more to lose than other countries by protectionist restrictions.

• World Bank raises China growth forecast

In its quarterly report released today in Beijing, the World Bank raised its 2009 growth forecast for China to 7.2 percent, up from 6.5 percent in its March forecast. The World Bank acknowledged the positive effects of China’s stimulus measures, most notably booming loans and high fixed asset investment. While the World Bank analysts saw no need for additional fiscal measures this year they urged Beijing to retain room for stimulus measures in 2010 as consumption growth might slow down and the global economy might need longer to recover.

• No rapid recovery for China?

Chinese economists and high level officials expressed their doubts about a swift Chinese recovery. Li Yang, a former adviser to the People’s Bank of China, sees the biggest challenge for China in finding a new growth engine to replace the struggling export sector. In this point Mr. Li is supported by Yao Jian, a Ministry of Commerce spokesman, who also considers stabilizing China’s export sector an “arduous task”. While stimulus spending and fixed asset investment have helped to cushion the economic slump, domestic consumption is still far from replacing the once almighty export sector as China’s engine for economic growth.

• FDI in China declines further

Foreign Direct Investment (FDI) in China contracted 17.8 percent to US$ 6.38 billion in May from a year earlier, marking the eight consecutive month of falling investment from abroad. Companies worldwide are still trying to cut expenses wherever possible in an effort to survive the worst economic crisis since the Great Depression. China relies heavily on FDI for its economic growth and development, with foreign-invested businesses accounting for 30 percent of industrial output, 55 percent of trade and 11 percent of urban jobs.

• Manufacturing sector leads recovery

China’s official purchaser managers’ index (PMI) for May again reached a reading above 50, signalling a third month of expansion for the country’s manufacturing sector. While the index dropped slightly to 53.1 from April’s 53.3, it remained clearly above the contraction threshold of 50. Analysts see the positive PMI indicator as a sign that the government’s stimulus package is starting to have an impact and China’s recovery is under way. While export demand remains weak, it is more than offset by strong growth in domestic demand, especially government’s fixed asset investment.

• Stimulus plan for alternative energy sector in the making

China’s National Energy Administration said at a news conference on June 1 it would soon submit a stimulus plan for the alternative energy sector for approval by the State Council and the National Development and Reform Commission. The plan will cover wind energy, biomass and solar power, as well as clean coal and biofuel technologies.

• Geithner positive about China’s confidence in U.S.

China has expressed confidence in the strength and dynamism of the U.S. economy, U.S. Treasury Secretary Timothy Geithner said in an interview during his two-day visit to China. While Beijing remains positive about U.S. economic recovery in the long term, some officials expressed doubts about the immediate recovery and debt reduction of the U.S. Mr. Geithner’s visit will be followed by strategic and economic talks between China and the U.S. in Washington at the end of July.

• Geithner to reassure China on U.S. fiscal discipline

On his trip to China next week, U.S. Secretary of Treasury Timothy Geithner will try to reassure Chinese leaders on U.S. fiscal discipline. Promising to promote U.S. national savings and to reduce national debt, Mr. Geithner hopes to ease Beijing’s anxiety about potential losses in its U.S. investments. He will also emphasize the need for a more balanced and more sustainable global growth, with China and other economies boosting domestic demand to lower the reliance on the U.S. consumption for growth. While praising China for its bold stimulus measures amidst the global financial crisis, Mr. Geithner will urge Beijing to accelerate moves to shift the Chinese economy from export orientation to a stronger focus on domestic demand. Different from previous visits of U.S. treasury officials to Beijing, China’s currency will not be among the top issues for the talks.

• Tougher environment rules for Chinese outbound investment

China’s Ministry of Environmental Protection together with the Ministry of Commerce drafted guidelines for projects abroad requiring higher environmental standards. Chinese companies investing abroad will be asked to improve their environmental standards and to carry out environmental impact studies. The rules may take effect in a few months, and–if enforced–may affect Chinese investments in Asia, Africa and Latin America. In countries with lower environmental requirements, Chinese investors will have to follow the new standards. The new rules could require investores to install sewage and waste treatment facilities as well as to pay compensation for any environmental damage.

• Emissions reduction: common responsibility, differentiated levels

After meeting with Chinese Vice Premier Li Keqiang during his China trip, U.S. Senator John Kerry sees China to play a “positive and constructive” role in the global fight against climate change. The results of Senator Kerry’s trip sparked hope that China and the U.S.–the two largest emitter of greenhouse gases–are generally willing to cooperate and could resolve their differences ahead of upcoming negotiations on emissions reductions. Xie Zhenhua, the Chinese president’s special envoy for climate change underscored China’s commitment to fight climate change in an article in the South China Morning Post, saying that China views global warming as more serious than the financial crisis. In its original statement China–together with other developing countries–recently called for industrialized countries to cut their emissions by at least 40 percent from 1990 levels by 2020. The various statements following Senator Kerry’s China trip are signs that there may be mutual understanding for more realistic emissions targets.

• Protectionist stimulus measures

Joerg Wuttke, president of the European Union Chamber of Commerce in China, has accused Beijing of protectionism in its stimulus measures. According to Mr. Wuttke, foreign companies were deliberately locked out of the contracts for new projects financed by the stimulus package. By setting the bidding criteria for new wind energy projects in a way that made it difficult for foreign suppliers to win, China is said to give domestic companies an edge over their foreign competitors. None of the world’s leading wind turbine makers–including Vestas, Gamesa, Suzlon and GE–made it into the second round of bidding.

• More support for export sector

China’s State Council has vowed to increase the support for the country’s struggling export sector. The support policies announced at an executive meeting presided over by Premier Wen Jiabao include expanded export credit insurance, tax breaks and improved financing opportunities. China’s trading companies and exporters are among the ones worst hit by the slump in global demand, most notably in the U.S. and EU. Previous support measures included financing guarantees and higher tax rebate rates for exporters.

• China’s U.S. dollar quandary

There has been a lot of talk recently about China pushing for dethroning of the U.S. dollar as the world’s dominant currency. Topping the discussion, China’s central bank governor Zhou Xiaochuan called for the International Monetary Fund’s Special Drawing Rights to eventually replace the dollar as omnipresent global reserve currency. Seen from this background, today’s statement by senior official Guan Tao from China’s State Administration of Foreign Exchange (SAFE) seems all the more surprising. Mr. Tao said in a statement that instead of the global financial crisis and the constant talk about currency reserve diversification the U.S. dollar will retain its dominant international role. SAFE manages China’s $1.95 trillion currency reserves, giving Mr. Tao’s statement–although declared private–significant weight in the ongoing discussion about the future role of the dollar as international currency. Mr. Tao sees severe lacks in reserve alternatives to the dollar. Although the share of gold among China’s currency reserves has strongly increased over the last years, the precious metal is of little practical value and not in suited to replace the dollar. Diversifying reserve baskets by adding more currencies will increase the risk of greater turbulence in non-dollar currencies. Finally, replacing the dollar by another super-sovereign currency is impeded by numerous technical implementation problems and cannot function without the backing of the United States. So, although obviously not content with the status quo, China can be expected to rely on the U.S. dollar in the short to medium term.

• Details of China’s economic stimulus package revealed

For the first time since it was announced in November last year, China’s National Development and Reform Commission gave details of the central government’s 4 trillion yuan economic stimulus package. According to the government statement, the central government will provide 29.5 percent–1.2 trillion yuan–of the stimulus funding. The remaining 2.8 trillion yuan will come from local governments, policy loans, local government bonds issued by the central government, corporate bonds, medium-term notes, and bank loans. As to the investment portfolio of the stimulus package, infrastructure is the biggest beneficiary with 37.5 percent of the stimulus spending to be spent on construction projects.

• Tough stance ahead of climate change negotiations

Spelling out its initial bargaining position for the upcoming climate change negotiations, China adopted a hard line. Most notably, Beijing called for developed countries to cut their greenhouse gas emissions 40 percent by 2020 from 1990 levels. Beyond that, China also required rich countries to help pay for reduction schemes in poorer countries–including itself. The Chinese move was not welcomed in Washington and Brussels, indicating tough negotiations in the meetings leading up to the final climate change summit in Copenhagen in December. While concerned that other developing nations might get encouraged by China’s tough stand, analysts and diplomats pointed out that Beijing’s demands were just an initial negotiations position. There was still enough room for movement and negotiations.

• U.S. firms more concerned about China risk

U.S. manufacturers and retailers that source from China see the country’s products as more risky than three months ago, according to a study published on Thursday. Concerns about product quality, intellectual property and labor costs were among the most cited risks when sourcing from China. The study was conducted by AMR Research Inc., a Boston based market research firm, surveying 133 U.S. companies that source products from China, including Boeing, Cisco Systems and Intel. 26 percent of surveyed companies considered China as a risk to their supply chain, up from 21 percent three months ago. 51 percent cited concerns about product quality, up from 45 percent in the first quarter. Intellectual property protection in China was seen as a risk by 59 percent, compared with 8 percent who said so about India.

• Hopes about China recovery premature?

The World Bank sees hopes about an economic recovery in China as “premature”, according to David Dollar, country director for China. The main reason for the World Bank’s doubts about China’s recovery is low private investment. While stimulus measures have helped boosting fixed-asset investment and stabilizing the Chinese economy, private investment lags far behind government spending. Private investment is seen as the main driver of sustainable growth and job creation. For China, with its export sector down and large-scale stimulus packages unsustainable over the long run, private consumption is necessary to achieve sufficient growth over the next years.

• New stimulus package for home appliances

China is intensifying its efforts to boost domestic demand by offering consumers a 10 percent subsidy for home appliance purchases. To make up for the continued lack in export demand, China desperately needs to push domestic consumption. Together with the home appliance stimulus, Beijing also announced that it would continue and expand an existing stimulus program for the automobile industry. Owners of old, less fuel-efficient vehicles are encouraged to trade them in for new cars by financial incentives such as purchase tax cuts. The new home appliance stimulus with a total volume of Rmb2 billion ($292 million) is aimed at China’s wealthiest cities, including Beijing, Shanghai and Guangdong.

• IMF pushes for social security reform in China

Vivek  Arora, the IMF’s chief representative in China, urged Beijing to step up efforts for a social security reform in order to push domestic consumption. Mr. Arora emphasized that reliable and secure social security, such as health care, pension funds and education, were needed to encourage higher consumer spending. China’s current social security system is far from being reliable and so far fails to cover the majority of the people. As a result, Chinese saving rates were at a record 49.9 percent in 2007, compared to 4.2 percent in the U.S. and between 5 and 12 percent in the EU. By securing a sufficient level of social security China could encourage private consumers to spend a larger part of their income, thereby boosting economic growth.

• China to increase strategic petrol reserves

After reaching storage capacity in crude oil reserves, China now plans to build up its strategic reserves in refined oil products. The decision follows the same pattern of using low commodity prices and high company inventories to increase strategic reserves of raw materials. China is planning to pile up on refined oil products as well as fertilizers. Also, inefficient and low-end petrochemical production facilities will be replaced. High strategic crude oil reserves combined with stockpiles of refined oil products will shield China better against disruptions in oil supplies as well as problems arising in refineries.

• Overseas investment encouraged

China’s State Administration of Foreign Exchange (SAFE) announced on Monday a new plan to encourage overseas investment by Chinese companies. The plan, which was made public on SAFE’s webpage for public opinion, calls for easier approval procedures, more financing options and more efficient supervision.

• It’s loans for oil again
  

China and Brazil announced a new loans-for-oil agreement. José Sérgio Gabrielli, CEO of Brazilian oil giant Petrobras, worked out the deal with the China Development Bank during a visit in Beijing by Brazil’s President Luiz Inácio Lula da Silva. Brazil needs new capital to develop newly discovered oil fields off its coast. It turned to China to finance the $174.4 billion plan, with an investment of $28.6 billion in 2009 alone. In exchange for a $10 billion loan, China would receive up to 200.000 barrels of oil per day. In February of this year, China sealed a similar deal with Russia, granting loans for new oil and gas field developments in exchange for oil deliveries in the future.

• New challenge for the US dollar

China continues its efforts to replace the US dollar as global currency. Following a meeting between China’s President Hu Jintao and Brazil’s President Luiz Inácio Lula da Silva in Beijing, China’s central bank announced a new Chinese-Brazilian deal. The two countries will work towards using their own currencies in trade transactions rather than the greenback. Instead of a currency swap, as recently agreed upon between China and Argentina, the new agreement calls for Brazil paying for Chinese goods with real and China paying for Brazilian goods with renminbi. While the talks are still at an early stage, the governors of the two countries’ central banks are expected to meet soon to further discuss the details of the bilateral plan.

• China’s IMF quota may raise significantly by 2011

There is a possibility that China may become the third largest voting power at the International Monetary Fond (IMF) after the European Union and the United States. China, which currently holds a quota of 3.7 percent, may overtake Japan (6.1 percent) and establish itself right behind the U.S. with 17.1 percent and the EU member states with 32 percent. The IMF decided in a meeting in April to reform its governance structure in order to better reflect the economic importance of emerging economies. The reform process is scheduled to be completed by January 2011. With a higher quota China would also have to provide the IMF with more funding and take more responsibilities in the IMF’s decisions.

• Slower industrial production growth in April

China’s industrial output growth last month slowed down from March and was less than half the rate of April 2008. With a comparatively weak growth of 7.3 percent industrial production was mainly backed by government’s economic stimulus measures. The new data raised uncertainty whether Chinese recovery is under way and sustainable yet. Generally, officially released statistics tend to overstate consumer demand and are inflated by stimulus measures. Analysts point to drops in electricity production and crude steel output in April, while industrial output and car production grew in the same period.

• China’s shipyards severely hit by recession

Chinese shipbuilders reported a drop in new orders of 95 percent for the first four months this year. Demand for new ships is on a record low due to overcapacity and low international trade volumes. The bleak financial situation for China’s shipyards is exacerbated by cash shortages and higher financing costs.