George Chen

By George Chen
The opinions expressed are the author’s own.

Let’s talk about Italy.

Italy is about art — Leonardo da Vinci, Michelangelo Buonarroti and more names. Italy is about luxury — Prada, Salvatore Ferragamo and more brands. Italy is also about food.

But, right now, Italy is about debt — huge national debt that is putting the entire eurozone or even the rest of the world into market panic. So, who’s going to rescue Italy?

Perhaps Chinese investors. They are focused on Italy these days because the deepening debt crisis there has become a negative external factor dragging down the benchmark Hang Seng Index for two straight trading sessions. At the beginning, people were not fully aware of the situation, as some thought Italy could not be Greece.

After all, Italy is the No.3 economy in the euro zone. How can Italy be in crisis? If Italy is in trouble, what about the rest of Europe? Yesterday, I moderated an online forum where a former Trade Commissioner for the Italian government spoke. Mr. Romeo Orlandi, an old China hand, who’s now teaching globalisation at the University of Bologna in Italy, said Italy was “too big to fail”.

The European Union may find it difficult to work with the current Italian government given political dramas related to Prime Minister Silvio Berlusconi and the highly complex domestic politics in Italy, but one likely scenario is that Italy should survive from the growing debt crisis in Europe if Beijing decides to step in to help.

The Chinese government is already suffering from the “cheap dollar”, given its more than $3 trillion in foreign exchange reserves, in which U.S. dollar assets play a major part. As such, a “cheap euro” may be the last thing Beijing wants to see.

Beijing has already pledged to help at least two European nations — Greece and Portugal — solve their debt problems by buying government bonds. Mr. Orlandi expects that Beijing could take a similar approach with Italy.

The link between Beijing and Rome strengthened further after Prada floated shares in Hong Kong. The luxury handbag maker has already established a strong customer base among China’s fast-growing middle-class. Today, Italian media broke the news that Berlusconi’s AC Milan soccer club may consider Hong Kong for its planned IPO.

Chinese Premier Wen Jiabao traveled to Italy early this year to show his support for Sino-Italy business cooperation. Recent media reports also indicated that China Development Bank, a policy bank turned commercial lender strongly backed by the Chinese government, may pour more money into business opportunities in Italy.

The truth is the deeper you get in, the more difficult it is to get out. But let’s try to think positive. When a crisis occurs, it certainly also means opportunity. To Beijing, it’s time to consider what role it should play in Italy’s growing debt crisis. To the rest of the world, if Beijing steps in, then what else shall we worry about?

Of course, analysts at Moody’s may disagree with me as they have a fight in words and reports with Beijing on how financially healthy the Communist nation is, but that’s another story. Economists have been forecasting that the Chinese economy could collapse for the last decade, but nothing has happened yet.

So let’s focus on Italy — for now.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A man walks in front of a Prada store in Hong Kong June 12, 2011 REUTERS/Tyrone Siu

By George Chen
The opinions expressed are the author’s own.

There’s a new problem with the “one country, two systems” policy for Hong Kong and mainland China — the appreciation of the yuan can ease inflation in mainland China but not in Hong Kong.

In Hong Kong, the former British colony that returned to Beijing’s hands in 1997, things unfortunately work the other way round.

Peter Wong, HSBC’s Asia-Pacific top boss (and widely considered the most handsome banker in Hong Kong) said at a forum in Shanghai last week that because the Hong Kong dollar is pegged to the U.S. dollar, whose value is falling almost every day, food prices in Hong Kong are set to increase as Hong Kong needs to pay more to import food products from the mainland.

Former Hong Kong central banker Joseph Yam, now a senior representative of a Beijing-backed financial academy, added that he believed the Chinese government would let the yuan rise further and relax some policy restrictions.

So, a stronger yuan is in no doubt, and food prices in Hong Kong are certain to rise.

You may not care much about Hong Kong. When big investors are keen to trade stocks and make deals in mainland China, they of course pay more attention to Beijing’s monetary policy. Hong Kong? It’s more like the naughty child of Uncle Beijing these days.

But the naughty child can be a challenging problem and it’s becoming more rebellious. One of the world’s leading financial centers, these days it is also known as a city of protests, especially at weekends. In 2012, we will see a transfer of power in Beijing as well as in Hong Kong. And we will see elections in Taiwan and the United States. What a year!

Some investors think the potential for H-shares is much greater than A-shares, but political risks for H-shares could be greater if Hong Kong loses its political stability and thereby financial stability, thanks to a stronger yuan.

And if Hong Kong becomes unstable, Beijing will become naturally nervous.

George Chen is a Reuters editor and columnist based in Hong Kong.

By George Chen
The opinions expressed are the author’s own.

Few people outside of China really know what B shares are.

“B shares? Does that mean they are not as good as A shares?” That’s a typical question I hear from foreign friends when they first come to the mainland market and by chance learn some buzz about the B-share index.

B shares probably only attract public attention when trading gets excitable, as is the case now. The U.S. dollar-denominated B shares index sank more than 7 percent at one point on Thursday after ending down more than  5 percent on Wednesday.

So, what happened?

First, the B shares index tumbled on Wednesday without any clue or warning, surprising most people in the market. On Thursday, it retreated further, even after Beijing attempted to clarify a rumour about capital gains tax that was believed to have triggered the market panic. China was  not likely to start taxing investors on capital gains any time soon, a tax official told Reuters on Thursday.

China first launched the B-share market in the early 1990s, as part of the government’s “opening up” policy, with shares traded in U.S. dollars on the Shanghai stock exchange, and in Hong Kong dollars on the smaller Shenzhen bourse. They were mainly intended for foreign investors, especially those from Hong Kong, neigbouring  Shenzhen.

At the time, investors from outside mainland China were not allowed to buy yuan-denominated A shares, until Beijing launched the Qualified Foreign Institutional Investor scheme (QFII) in 2002 allowing licensed foreign investors to invest in A shares.

Also in the early 2000s, B shares, China’s only equity market fully open to foreigners became marginalised when Beijing stopped new B-share offerings by Chinese companies. In comparison with Shanghai, only few B-share companies are listed in Shenzhen for legacy reasons, with the Shanghai exchange playing the dominant  role.

Since the B-share market became marginalised, market speculation has been prevalent.  A merger with the much larger  A-share market is widely anticipated and, in the view of many investors, should benefit B shares, partly because of the appreciation of the yuan, in which A shares are traded.

Recent media reports suggest a number of large multinational corporations, for example, HSBC (born in Hong Kong and Shanghai, not London), have been selected for a yuan-denominated share issuances on the Shanghai stock exchange, where a brand new “international board” will be set up for such foreign IPOs.

This is exciting news and exactly what Shanghai officials want to fulfill the city’s ambition of becoming a leading financial centre, as it was in the golden era of the 1930s.

The prospect of an international board makes the B-share market seem even more boring, lowering expectations for the merger of B-share and A-share markets. Investors say B shares are not a priority for the Chinese securities regulator on and all  Beijing wants is probably to offer a plan to close the B-share market as painlessly as possible.

In other words, as Chinese leaders often like to say, the historical mission (for B shares in this case) has been achieved.

One institutional investor told me, “Now we feel it (B shares) are just like the Titanic – a sinking ship. It may not sink if the government wants to save it, but nobody wants to risk waiting to see what happens next.”

An even sadder truth is that today’s B-share market has more domestic investors than foreign. As domestic institutional investors are not allowed to trade B shares, the main direction of trade comes from domestic individual investors. Many foreign investors, in particular some early birds to the unique B shares market have already shifted their focus elsewhere, for example, preparing to buy HSBC’s new shares in Shanghai soon.

Those who quit B shares early may be the real winners. The unexpected B-share tumble this week came after big gains over the past one or two years, especially among real estate companies, which were believed to be a good bet on the appreciation of the yuan.

As the old Chinese saying goes: “Even the finest feast must end at last.” When the feast is over, who will be the last to sing?

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A man reads information on an electronic screen at a brokerage house in Shanghai August 17, 2009. REUTERS/Aly Song

By George Chen
The opinions expressed are the author’s own.

There are growing signs that something is brewing in relation to China’s foreign exchange rate regime.

When Hong Kong traders returned from the Easter break, many were surprised to be told by their mainland colleagues about growing market speculation that Beijing might be planning a one-off deal to lift the value of the yuan — some say by as much as 10 percent.

Others are more cautious. They say a one-off revaluation sounds unlikely although Beijing may relax foreign exchange controls by setting new “game rules” around the upcoming Labour Day holiday in the first week of May. The Financial Times yesterday ran a nice scoop about sovereign wealth fund China Investment Corp being set to win new funds, likely $100-200 billion, as Beijing seeks to diversify its massive foreign exchange reserves, now exceeding $3 trillion.

I support the idea of further empowering CIC. If Beijing wants to reduce its exposure to U.S. debt, expanding direct investment worldwide is a very workable solution. Will Beijing make a formal statement on its ambition to boost CIC’s shopping power abroad during the Labour Day holiday?

Don’t forget we will soon have one of the most important U.S.-China summits with the annual Strategic and Economic Dialogue (S&ED) meeting in Washington on May 9-10. Of course, the yuan exchange rate will naturally be a focus of the dialogue. If CIC invests more in the United States, that may help the U.S. add more jobs. But then you may naturally think of another question — will the U.S. be happy to take so much money from China yet restrict its investment to some “boring” sectors?

Before the new S&ED meeting, Senate Majority Leader Harry Reid and other U.S. lawmakers back from a trip to Beijing said on Tuesday they had been assured that China would allow its currency to continue to rise against the U.S. dollar.

The yuan rate is now indeed a double-edge sword. Chinese leaders including Premier Wen Jiabao have repeatedly indicated at recent meetings and in state media reports that the government may consider allowing the yuan to rise to help curb rising inflation. That may well explain why the market is full of speculation about possible new yuan policy changes in the coming weeks.

Beijing does have a habit of making surprise policy announcements during holidays.

But April is almost over. It’s also the last month for Jon Huntsman as the top U.S. representative in China. He will officially leave the post of U.S. Ambassador to China at the end of April. Some speculate he may run for the 2012 U.S. Presidency. I am more persuaded by other opinions that he would have better chance by teaming up with a Republican candidate to run for vice-president.

Even if he and his presidential candidate fail, the media and public attention should be enough to allow him to aim for the White House in 2016.

Wait a minute … did I just suggest that President Barack Obama is too strong to fail? If you’ve seen Inside Job, the award-winning documentary film about the financial crisis, you may have different thoughts on Obama and his core values.

George Chen is a Reuters editor and columnist based in Hong Kong.

By George Chen
The opinions expressed are the author’s own.

Mao Zedong led his Communist comrades to defeat the Chinese Nationalists in a civil war, founding a “new” China in 1949. Today, the Hu Jintao administration is fighting a new civil war and the enemy is inflation.

Beijing announced the latest interest rate rise — the second of 2010 — on Christmas Day, effective on Dec. 26, also the birthday of Chairman Mao. I suspect, central bankers in Beijing didn’t really want to celebrate the Western holiday, they just wanted to give the market a surprise Christmas gift.

I asked some friends in the financial industry if the rate increase was a surprise. The responses were very mixed. The 0.25 basis point increase for the benchmark deposit and lending rates was a sort of uniform move. If the central bank had gone for a 50 basis point rise, that would have been a very big surprise. The timing of the increase was a surprise, especially after Beijing raised bank required reserve ratios about a week earlier.

We thought Chinese officials also needed a break after a very busy month but they have proved themselves to be unpredictable once again, not to mention tireless.

Just one day after Beijing raised the interest rate, Hu Xiaolian, deputy governor of the People’s Bank of China, published an article on the PBOC’s website, saying the central bank would make good use of a combination of monetary policy tools next year, including interest rates, bank reserve ratios and open market operations, to make interest rates more market-oriented. How often will these tools be implemented? She didn’t say in the article, but now many analysts are predicting the next rate increase could take place in two or three months — within the first quarter.

Clearly, China has entered a new cycle of rate increases.

Many economists believe the newest rate rise shows Beijing’s determination to curb inflation, giving that task greater priority than maintaining economic growth. Some analysts also said the cabinet and some ministries were finally on the same page for tackling inflation after earlier disputes over how to balance the interplay between GDP and CPI.

To be honest with you, I am not a big fan of interest rates. If you really rely on interest rates to improve living standards, it’s almost like living in a daydream. Hong Kong broadcaster TVB interviewed some residents of nearby Guangzhou city after the announcement of rate rise. Most of them said the move and even the prospect of more interest rate increases in 2011 would not do much to help them feel better about inflation, which is rising much faster than the pace of rate rises.

Can Beijing raise interest rates once a month? I don’t think so. Will inflation continue to rise above 5 percent in coming months? That’s my guess. To feel the real inflation, not just read the official numbers, you may want to go to a local supermarket in China to do your own research.

The core cause of China’s high inflation is food but people are also very interested to see how much property prices can fall and how property prices can be better reflected in China’s CPI statistics. Premier Wen Jiabao does realise that curbing property prices is much harder than controlling food prices.

In a rare state radio interview yesterday, Wen acknowledged that the measures Beijing took this year to cool the property market were “not very well implemented” and changed his tone on getting housing prices to return to “a reasonable level”. Previously, he was usually more straightforward in his statements about wanting to see prices under control during his final term, which ends in 2012.

Besides inflation, it will also be interesting to see how Beijing deals with yuan appreciation. With higher bank deposit rates for yuan, a hopefully more bullish stock market in 2011 and prices of houses and villas rising across the vast nation regardless of policy curbs in 2010, do the factors sound perfect for seeing the yuan increase in value too? In fact, as many economists have already pointed out, a stronger yuan can also allow China to import commodities and other items more cheaply, helping  the government get to grips with inflation.

My grandmother, more than 80 years of age, once told me there were still many old people in China who miss the days when Chairman Mao was the leader and the distribution and balance of wealth were considered by some to be better shape than they are nowadays. China’s late paramount leader Deng Xiaoping wanted to “let some people get rich first”. Deng’s wish did came true, however, today we also see more and more ordinary Chinese people complain of feeling increasingly poor. What’s the answer for them?

It was not easy for Chairman Mao to win the civil war for control of mainland China, and the new civil war on the economic front is going to be a real test of the intelligence and strength of the younger generation of Chinese Communists.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A 100 yuan banknote is placed next to a U.S. 100 dollar banknote in this picture illustration taken in Beijing September 24, 2010. REUTERS/Petar Kujundzic

By George Chen
The opinions expressed are the author’s own.

“Hot money” is the hot discussion among Chinese officials, investors and the media these days. The “hotter” the fund flows are, the more risk there is to China’s financial system, many officials believe. Naturally, “hot money” has become a top enemy of the central bank, just like inflation.

Almost the same story took place about five years ago, just ahead of China’s landmark yuan revaluation in July 2005. At the time, we saw media reports about “hot money” every day, but they often disagreed about the amount of “hot money” that China had and could afford.

Some official media preferred to give a vague yuan figure in the tens of billions. I remember a central banker in Guangzhou once disclosed a more specific number and then received an immediate warning from his boss in Beijing. Hot money — how hot? That’s pretty much considered another state secret.

After China’s deputy central bank governor, Ma Delun, helped explain the “pool concept” offered by his boss, Zhou Xiaochuan, to fight an inflow of hot money, other officials joined the chorus. In an article published early this week, Deng Xianhong, deputy chief of the State Administration of Foreign Exchange, urged the government to watch the situation more closely.

China risks becoming a prime target for speculators as developed countries pump cash into the global economy, Deng told China Forex Magazine, an official industry monthly authorized and supervised by the State Administration of Foreign Exchange, Deng’s employer. “If we do not control the property bubble, let a stock bubble inflate and allow the yuan to rise freely, China will face the risk of large-scale cross-border capital flows,” he said.

Beijing may deploy a mixture of policies to deal with hot money flows, Ma explained to the official Shanghai Securities News in a report published on Nov. 15, expanding on an earlier remark by his boss Zhou. “The pool mentioned by Governor Zhou Xiaochuan does not refer to a specific market, but an array of policies,” Ma said.

If you can recall the situation facing China’s financial markets between 2004 and 2005, many officials gave very similar warnings when the whole world had high expectations for Beijing to allow the yuan to appreciate. The so-called hot money rushed into the country, into stocks, property or anything of value, day and night. Inflation was high. Property prices were high. People complained. And what happened? Beijing revalued the yuan.

Property prices rose to a new high. Inflation? Isn’t it the tough living problem that most Chinese still complain about now?

So, what is “hot money” really? According to a definition given by the Financial Times, hot money refers to “money that moves from one currency to another or one asset class to another as investors (including speculators) seek the best possible yields.”

One thing Beijing learned from the yuan revaluation in 2005 is that when fighting hot money, you can’t simply block it but also need to find a way to dredge it, just like dredging your plumbing at home. When sentiment about hot money becomes a crisis, it may not necessarily be a bad thing — after all, nobody wants to see the bubble burst.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A watermelon vendor looks at yuan banknotes at a market in Changzhi, Shanxi province June 21, 2010. REUTERS/Stringer