MARKET WATCH

MARKET WATCH

TO THE POINT: China scooped up Japanese government bonds in a bid to diversify its holdings of foreign exchange reserves. The gold market gained a chance to shine while stocks and properties lost their fzz. Despite concerns over intensifying competition, European companies showed confdence in the Chinese market in a survey conducted by the European Union Chamber of Commerce in China. Hot money is leaking into China, though no signs of torrential fows have been found. After surviving industry fallout, U.S. auto giants seek refuge in the booming Chinese market.

By HU YUE

Buying Spree

China has boosted its buying of Japanese government bonds this year, snapping up a net $6 billion of mostly short-term notes between January and April, double the record amount logged for all of 2005, said the Ministry of Finance of Japan.

In April alone, China bought a net 197.8 billion yen ($2.25 billion) of Japanese government bonds, the second biggest after Britain among foreign buyers, said the ministry.

The purchases do not indicate a shift in China’s long-term investment strategies, said Guo Tianyong, Director of Research Center of China’s Banking Industry of the Central University of Finance and Economics.

It was mostly a short-term move to seek safety in the yen while concerns proliferate over the euro, he said.

The euro has plunged more than 14 percent in value against the U.S. dollar this year due to the European sovereign debt crisis.

In a recent statement, China’s State Administration of Foreign Exchange said the country would continue to diversify investments of foreign exchange reserves and Europe remained one of its key investment markets.

Gold Bonanza

The gold market glitters with vitality amid other faltering markets. Now the question is: How much longer will this boom last?

Prices of gold futures at the Shanghai Gold Exchange have gained more than 11 percent so far this year while the Shanghai Composite Index dived 27 percent.

Meanwhile, the country’s gold output rose nearly 6 percent year on year to 127.34 tons in the frst fve months, said the Ministry of Industry and Information Technology. Gold frms reported a combined net proft of 7.95 billion yuan ($1.17 billion) in the first fve months, up 76.8 percent from last year.

Risk aversion came to the fore as fears about the European sovereign debt and global economy rattled investors, said Jiang Shu, a senior analyst at the Industrial Bank Co. Ltd.

But the long gold rally also is stoking fears of a bubble. Many fret that the market is bound for some corrections given rampant speculation. The precious metal will also receive a blow from volatility in international markets. Gold for August delivery dropped 1 percent to finish at $1,195.1 an ounce on July 6 at the COMEX Division of the New York Mercantile Exchange, after touching $1,189.5, the lowest price since May 24.

But with the consumer price index creeping higher in China, gold will maintain its appeal as a hedge against inflation, said Yang Yijun, chief analyst at the Chengdubased Wellxin Consulting Co. Ltd.

In addition, physical demand for the yellow metal is also on the rise as Chinese consumers dig deeper into their pockets for gold jewelries, he said.

Investment Destination

European companies remain optimistic about China’s surging economic growth, but are concerned about uncertainties in the business environment, said the European Union Chamber of Commerce in China in a recent report. The report is based on a survey of more than 500 European companies in China.

The survey shows that the Chinese market has recovered well and European companies anticipate that this impressive performance will create opportunities for their own industries. Some 78 percent of respondents see a bright outlook in their sector over the next two years while 49 percent reported that China has become an even more important element of their global business strategies.

“The results clearly show that European companies are confident about China’s growth perspective and that the Chinese market offers many opportunities,” said Charles-Edouard Bouée, Asia President of Roland Berger Strategy Consultants and coorganizer of the survey.

But growth is only one side of the coin.“In the long run it is proftability that deter-mines the success of a company,” he said.“One factor impacting this sentiment is rising competition. As the Chinese market matures, so do domestic competitors, who are perceived to be a risk for future business by 58 percent of respondents.”

European companies need to “raise their game” in China and continue to differentiate their products and services in this complex market, he added.

Hot Problem

The State Administration of Foreign Exchange (SAFE) this year launched an investigation into hot money in 13 provinces and municipalities, and uncovered 190 illegal cases involving $7.35 billion, said Deng Xianhong, SAFE Deputy Director.

While the speculative capital is sneaking in, there are no signs of massive fows of the hot funds, he said.

Much of the capital found its way into the stock and real estate markets of China to cash in on the country’s economic boom. In addition, an expected appreciation of the yuan offers a risk-free source of proft, said Deng. Usually through companies overstating foreign direct investment or over-invoicing exports, speculators are able to dodge regulatory controls, he said.

It is necessary now to step up a stringent handle over the hot money and fend off simmering fnancial risks, said Deng.

Meanwhile, there is a growing need to further improve the renminbi exchange rate regime and strike at illegal financial activities, he added.

Steel Independence

As international iron ore prices continue to soar, Chinese steelmakers are gearing up to wean themselves off their dependence on imports for raw materials.

The Liaoning Province-based Angang Steel Co. Ltd., the nation’s fifth largest steel mill, aims to double its output to 92 million tons by 2020. In another move, the Benxi Iron & Steel Group Co. Ltd. (Bxsteel) is working to develop the Dataigou Mine, the world’s largest iron ore reserve near Benxi, Liaoning Province. It plans to triple its iron ore production to 60 million tons by 2012.

China relied on imports for 70 percent of its iron ores in 2009—and this dependence has put steelmakers in a tight spot as global miners are expected to demand a 30-35 percent price increase for the third quarter for 2010. In addition, they are pushing for a new quarterly pricing system linked to the volatile spot market.

“We can’t just wait around and let soaring costs eat up our profits,” said Gao Lie, Chairman of the Board of Bxsteel. “We need to dig for more deposits on our home soil.”

Chinese steelmakers must be more innovative in technology research and lower the costs of iron ore exploration to be successful with its mining operations, said Wang Guoqing, an analyst with the Beijing-based Lange Steel Information Center.

Auto Refuge

For global auto giants struggling after the sweeping industry meltdown, the thriving Chinese market has become a safe haven.

General Motor’s sales in the Chinese market totaled 1.21 million vehicles from January to June, topping the U.S. deliveries of 1.08 million.

This is the frst time any overseas market has “consistently outsold” GM’s home market in the carmaker’s 102-year-old history, said Michael Albano, a Shanghai-based GM spokesman.

Also basking in the China boom was Ford that saw its frst-half sales in the country surge 53 percent year on year to reach 301,524 units.

Such explosive growth in China coincided with deep gloom in the United States where consumers hunkered down in the wake of the recession.

Also, as a vivid illustration of how fast the axis of the global auto industry is shifting eastward, China toppled the United States earlier this year from its decades-long position as the world’s largest auto market.