Category Investing in China

FTZ may get international board to lure yuan for gold

The Shanghai Gold Exchange plans to launch an international board in the pilot free trade zone to attract offshore yuan capital to invest in the Chinese mainland’s gold market, a senior official said yesterday.

“We want to tap the opportunity from Shanghai’s pilot free trade zone and launch an international board to attract offshore yuan to invest in the mainland,” Xu Luode, chairman of the bourse, said at a precious metals forum in Shanghai yesterday.

The board will ensure that the onshore gold market correlates with the global market, said Xu, without disclosing a timetable for the launch.

Financial reforms in the free trade zone will allow free fund transfers between the zone and offshore markets for the first time, according to a directive issued by the People’s Bank of China on Monday.

The Shanghai exchange will establish a system that publishes daily rates at which selected market participants are willing to lend gold in the mainland interbank market, which is similar to the Gold Forward Offered Rates by the London Bullion Market Association, according to Xu.

The world’s biggest exchange for physical gold in Shanghai will also offer custody for the metal to retail investors.

Foreign Investment into China: Where’s the Money Flowing?

Where’s the money going? The Ministry of Commerce gave a clearer picture with a press conference introducing foreign direct investment into China on Nov. 18.

First of all, China is on track for a big shift. Very soon, Chinese companies will be investing more money overseas than foreign companies bring to the mainland. In the first 10 months of the year, China nabbed $97 billion, up 5.8 percent. Meanwhile, outbound investment reached $69.5 billion, growing at a much more rapid 20 percent. “The trend for Chinese companies going abroad has just started,” said Zhang Yuliang, chairman of Greenland, a real estate developer, in a recent interview with Bloomberg News.

Who’s investing in China? The biggest surge is from the European Union, totaling $6.4 billion January through October, a 22.3 percent increase. U.S. companies, too, upped investment by 12.4 percent to reach $3 billion. And Japanese enterprises put in $6.5 billion, slightly more than the EU sum, a 6.3 percent rise. The largest amount came from Hong Kong due to its historical entrepot role; that totaled $63.5 billion, an increase of 10.5 percent.
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“We can see that foreign investment from Asian countries, the European Union, and the U.S. all kept relatively fast growth in the first 10 months,” Commerce Ministry spokesman Shen Danyang told reporters in a press briefing.

China’s service industries were the biggest draw for foreign investment, pulling in $50 billion, up about 14 percent in the first 10 months. That’s good news, with Beijing aiming to lift the proportion of its economy made up of the tertiary sector from today’s 45 percent to 47 percent by 2015.

Not surprising, given rapidly rising labor and other costs, investment in manufacturing fell by 5.2 percent, to $38 billion, making up just over two-fifths of the total. Investment in agriculture, animal husbandry, and fishery businesses dropped by 2.6 percent, to $1.4 billion.
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Eastern China continues to bring in the most investment, $81.4 billion in the first 10 months, up 6.0 percent, or about 84 percent of the total. That compares to $8.6 billion in the central part of the country, up 9.9 percent, making up 8.8 percent of total investment.

Meanwhile, western China, home to the restive Muslim region of Xinjiang, didn’t fare well—bad news for Chinese authorities who count on economic development to lessen ethnic tensions. Foreign investment of $7.1 billion was down 1.1 percent and amounted to only 7.3 percent of the total. Nine assailants and two auxiliary police officers were killed in an attack on a police station in Kashgar prefecture, Xinjiang, on Nov. 16, according to Xinhua News Agency.

Shanghai finance sector ‘in shape’

Active, growing financial markets and innovations in the sector are making Shanghai more prosperous as a financial hub for the world’s second-largest economy, a report released on Monday suggests.

The 2013 H1 Shanghai Financial Prosperity Index, released by Roland Berger Strategy Consultants and the Shanghai Financial Association, shows that the city’s financial industry is in good shape to grow.

The analysis covers six dimensions of the industry: markets, institutions, internationalization, innovation, talent and environment.

“Financial markets in Shanghai maintained relatively fast development in the first half of 2013 with a booming fund market, gold market and insurance market.

“The financial innovation index also surged, with more financial products designed and the Free Trade Zone approved by the State Council,” said Lian Ping, an executive member of the Experts Committee of the Shanghai Financial Association and chief economist of the Bank of Communications Ltd.

Shanghai’s financial industry “has become more stable since 2010, and the growth rate of this sector slightly improved in the first half of 2013”, the report said.

The report said that Shanghai achieved more progress than other financial centers, including Hong Kong, Singapore, Mumbai, New York, London and Seoul, in the past six years in terms of the “development index”.

The index incorporates indicators of financial markets and the development of the financial environment.

“It is not a comparison of absolute value,” said David Ye, partner and vice-president of Roland Berger, lead author of the report.

“It is meant to compare how the financial industry is evolving and progressing in these markets. Shanghai achieved more in the past six years, but Singapore, Hong Kong and Mumbai showed a stronger growth trend in the first half of 2013,” he added.

The Shanghai Financial Association and Shanghai United Assets and Equity Exchange also released their Shanghai Merger and Acquisition Index report on Monday.

That report said that during the first half of 2013, there was marked growth of merger and acquisition transactions in primary industry.

Private companies were more active in this market than State-owned ones. Outbound M&A cases surged in May and June, and the quality of the deals improved.

Patrick Becker, chief executive officer of Bexuco Ltd, an M&A project consulting and service company based in Shanghai, said that although Chinese companies have become more willing to pursue outbound cases, they still lack the experience and management skills to handle and execute an overseas investment.

This can lead to strategic mistakes, inappropriate deal structures and overpaying for the target firm, he said.

“But I see a substantial improvement in the past 12 months. Chinese companies are more and more willing to engage foreign M&A advisers acting in their interest,” he said.

What is this GEM manager’s golden rule for investing in China?

Investing in Chinese equities is not easy – even the most experienced investors can get their fingers burnt trying to find the right stocks to back in an opaque and volatile market – but one manager has a tip for would-be investors.

Mirabaud Asset Management’s Daniel Tubbs has one golden rule to invest successfully in the region – align yourself with whatever the government wants to do.

The group’s head of GEM and manager of the $108m Mirabaud Equities Global Emerging Markets fund said he has been choosing his investments according to government policy, backing the property and infrastructure sectors recently after an uptick in state support.

Tubbs (pictured) said the government’s spending on infrastructure such as railways is accelerating, while it is becoming more relaxed about the property market after three years spent trying to dampen the bubble.

“Average house prices have increased 6% year on year, in line with wage inflation,” said Tubbs. “We bought Yuexiu Property Company in January. It has a business on the eastern seaboard where there is still pent-up demand.

“It is one of the few property companies which has an investment grade rating, leading to a cheaper cost of capital, which is a big advantage for a property company. It has a 5% yield, trades on six times earnings, and has rallied a lot in the last few weeks,” he said.

One of the government’s long-term aims is to rebalance the Chinese economy towards domestic consumption, and it will do this by boosting income levels, said Tubbs. He owns China State Construction in the fund’s top ten holdings as a proxy to this theme.

The manager argued investors are too fixated on economic deceleration in the BRIC countries, especially China, and said a hard landing is not cause for concern as long as the corporate sector remains robust.

Low summer trading volumes have meant swings in sentiment are exaggerated, he added. This has combined with incremental positive data in the developed world to create a home bias, which is why emerging market equities have been at the sharp end of a sell-off in the last few months, said Tubbs.

He is overweight Russia, Turkey, and China because he is still able to find quality companies to own in those markets and, in China especially, he is seeing encouraging signs of stabilisation.

“It is wrong to be pessimistic on China – it was hard for it to continue to grow at 10% a year,” he said.

“I am not worried about growth decelerating as long as companies are still doing well. The Chinese companies we hold reported average net profit growth of 38% year on year in Q2, which is not bad considering the consensus forecast for the whole of China was in the teens.

“People have not given the government enough credit that it can manage the recovery.”

Over the year to 27 August the Mirabaud fund has lost 2.91% against an average 0.11% gain from the Equity – Emerging Markets sector, according to FE.

5 Eye-Popping Numbers Behind China’s Rise

China’s a big place. The world’s most populous country and second-largest economy has become a global star, ranking as the hottest emerging market and an investor target for growth, while previous top economies such as the U.S. and Europe have slowly staggered back from the recession. In China, the present is only part of the story: Growth investors have their eyes trained firmly on this nation’s massive opportunity in the future.

But just how big is that opportunity? Let’s look at five numbers that sum up China’s present and future — and just how this king of the emerging markets shapes up for investors everywhere.

1. 1.4 billion
China boasts around 1.35 billion people under its flag today, but Thomson Reuters estimates that the country’s population will only increase to around 1.4 billion by 2050. This is a country looking at a low-growth environment over the next 35 years as it modernizes and urbanizes — and it signals a major shift on how investors should look at this emerging market.

For decades, China has translated its massive population’s burgeoning potential into double-digit annual economic growth. China’s slowdown today is coming as the country faces a pair of demographic challenges that will probably prevent China from achieving its old, eye-popping annualized growth rates again. Indeed, many economists project that India will surpass China as the world’s most populous country before then.

Beijing’s one-child policy has gutted China’s youth, leaving a swelling senior population too heavily reliant on a thin corps of young, productive workers. Thomson Reuters projects that more than 20% of China’s population will be above age 65 by 2040, with that percentage growing even higher by 2050. Beijing will be forced to allot more attention and funds away from its current resource-oriented strategy — one that has given rise to massive state-owned corporations, with many of the largest listed on American markets — and toward services that can care for its elderly and increase the efficiency of its smaller working class.

Combined with a national birth trend that sees more than 120 boys born for every 100 girls — one of the highest such ratios among top economies in the world — China will be hard-pressed to bolster its youth population in the next few decades. But while that will hit the country’s long-term growth rates, China does have other statistics firmly in its favor.

2. 651.3 million
China had an estimated rural population of 651.3 million people in 2012, according to figures from the World Bank. That’s as many people as the populations of the United States, Russia, Japan, and France combined all living in China’s rural fringes that, for the most part, haven’t caught up with the country’s advances in recent decades.

Urbanization has fueled China’s growth, as some of the country’s largest cities, from Shanghai to Wuhan, have grown into metropolises large and tall enough to rival America and Europe’s biggest cities. As more and more Chinese citizens have flocked to the cities, companies both domestic and foreign have tapped into this source of new, cheap labor as a means to reduce manufacturing costs and boost their balance sheets.

But the face of China’s urbanization is changing. The cheap “made-in-China” era is coming to an end as labor costs rise and companies look for cheaper means of production. Increasingly, China’s leading companies of the future will need to tap into the nation’s growing urban population not as a source of labor, but as a massive consumer market unrivaled on a global stage. This strategy’s already paid off in a big way for international leaders in the auto industry that have tapped into China’s burgeoning auto market as the revenue base of the future.

Yum! Brands (NYSE: YUM ) is one company that’s already hitched its wagon to China’s urban potential, for better or worse: Yum!’s KFC and Pizza Hut brands have thrived in China’s market, but a 13% year-over-year same-store sales decline in July hammered the stock recently. Consumer stock investors should expect more hits and misses as companies look to cater to this lucrative market in the years to come.

3. 624 million
Not every industry is still emerging in China, however: The materials industry has come to be dominated by China lately, as exemplified by the 624 million tonnes of steel the nation used in 2011 alone. That was more than six times the amount of steel that the U.S., the second-place nation, used — and China further beat a second-place America six times over in steel production for 2011.

It’s a symbol of how China’s investment in its growing nation has fueled its global ambitions — and also a sign of how those ambitions can be a poison for investors. A caustic mix of oversupply and weak demand in the steel industry has taken down America and Europe’s top steelmakers, which have ceded the lead in the industry to China’s state-run behemoths, such as Wuhan Iron and Steel.

Wuhan’s stock has suffered as a result, but the contagion has plagued former titans of the industry. China’s quest to lead materials industries, combined with the general economic slowdown in the wake of the recession, has led to lean times in the materials sector. U.S. Steel (NYSE: X ) in particular has seen its stock fall more than 40% over the past two years, and the company’s earnings have turned into the red for the past three fiscal years. Beijing has ramped down production across its state-run companies this year as a result of its slowdown, but China’s materials giants are still dominating this hard-hit sector.

Aluminum and other industries have fared just as poorly, as oversupply has forced factory closures and worse. It’s just one way that bigger isn’t always better for investors in China.

4. 44%
Forty-four percent isn’t even a majority, but it’s a huge number when dealing with a population like China’s. That’s the percentage of Chinese citizens on the Internet as of the end of June, according to the Chinese Internet Network Information Center. It’s an amount that adds up to 591 million people, more than the populations of the U.S. and Indonesia combined and a gain of 27 million Web-linked Chinese citizens since just the end of last year.

Out of all the industries standing to benefit from China’s growth, Internet companies may top the list. China’s increasing urbanization will only lead to more citizens on the Web, but Beijing’s restrictive Internet regulation has prevented many U.S. or other international companies from establishing a strong base in the country.

That’s led to a huge opportunity for Chinese search engine king Baidu (NASDAQ: BIDU ) and other Chinese companies that have quickly filled the Internet vacuum. Baidu’s not only captured a majority of the Chinese search-engine market in its young life, but it’s also established itself as a dominant force to come by pushing hard into the mobile market. Mobile revenue made up more than 10% of Baidu’s total revenue last quarter, a first for the company. China’s mobile market stood at 420 million users at the end of last year, according to the China Internet Network Information Center, and Baidu’s opportunity here is enormous.

5. 8.7 million
The auto market has exploded in China, and the 8.7 million passenger cars sold in the first six months of 2013 is a staggering amount. Even more eye-popping: That figure represented a 13.8% year-over-year gain, showing that the Chinese auto market’s only getting started in the country’s growing urban and middle-class segments.

Just how large is that number? America’s auto industry has bounced back well this year, and even that success has rewarded automakers with only 7.8 million American auto sales over the year’s first half. And that push came from the built-up demand caused by the advanced age of the average car on U.S. roads. China’s appetite for cars should only continue to increase its lead on all rivals.

The world’s leading automakers have taken notice. China has become Volkswagen’s (NASDAQOTH: VLKAY ) largest market, as the German auto king has soared to take the No. 1 spot there. Consequently, Europe’s slump hasn’t hit VW anywhere nearly as much as it’s affected fellow European companies, as VW’s stock has roared higher by more than 45% over the past year.

Even Detroit’s finest companies have turned to China for their bread and butter, as China recently became General Motors’ (NYSE: GM ) top market as well. GM’s behind only Volkswagen in China, and strong sales on the other side of the Pacific helped the company’s overall sales climb 4% over the first half of the year. For auto investors and China investors alike, the Chinese auto market is one industry you can’t afford to take your eyes off.

Making money on China’s rise
China’s a huge, growing, and valuable market; there’s no other way to say it. The country’s growth from a minor power in Asia to one of the world’s economic powerbrokers has been nothing short of astounding over the past few decades. While some areas in China still need much work to thrive — the materials sector, the country’s weak transportation infrastructure, and the economy’s housing struggles are notable examples — China’s in it for the long run.

Investors can’t just throw money around in a nation that’s still finding its feet, but by sticking to the basics, investing in great, solid companies, and buying for the long term, you might just make the most of China’s rise.

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Chinese fixed asset investment fall more-than-expected

China’s urban fixed-asset investment fell more-than-expected last month, official data showed on Thursday.

In a report, National Bureau of Statistics of China said that Chinese Fixed Asset Investment fell to a seasonally adjusted 20.4%, from 20.6% in the preceding month.

Analysts had expected Chinese Fixed Asset Investment to fall to 20.5% last month.

Retail Investment in China

China’s retail development and investment opportunities are progressively spreading to large second- and third-tier cities – all with populations above 1 million – which puts added importance on building the right contacts and partnerships in China’s real estate market.

“Understanding a local market – its incomes and consumer preferences – is becoming the single most important challenge for developing and investing in China, and that is really only done with local partners,” said Rong Ren, chief executive officer of Harvest Capital Partners, a Hong Kong-based real estate investment, development and management firm that launched two successful retail investment funds in 2010. “You need to come to China with a longer-term vision and strategy. It’s not for speculators looking for quick deals,” said ULI member, Ren.

China remains one of the hottest economies emerging from the global recession, making it an increasingly favorable environment for property investment. China’s GDP is forecast to grow at a torrid 8%-10% pace during the next few years, and China is expected to surpass the United States in total commercial real estate development during the decade of 2009 to 2019, according to Pramerica Real Estate Investors, part of Prudential Financial Inc.

Retail is already playing a significant part in this growth. Across Asia, retail property deals jumped 38% in the first half of 2010 compared to the same period of 2009, and in China’s largest cities, retail sales surged on a year-over-year basis, rising 19% in Shanghai through May and up 16% in Beijing in the second quarter, CB Richard Ellis reported. Total retail sales in China are predicted to double in coming years, from $2.09 trillion (US$) in 2010 to $4.21 trillion in 2014, according to Business Monitor International’s third quarter China Retail Report.

“In the current climate, China’s retail market has greater potential as an investment vehicle than almost any other retail market in the world,” KPMG and property service firm Knight Frank concluded in an investment trends report earlier this year.

The main drivers of China’s retail potential are the country’s continuing urbanization and rising consumer culture. Although Chinese per-capita spending remains below U.S. levels, annual consumer consumption in China is forecast to grow six-fold during the next three decades, according to Goldman Sachs economists. Meanwhile, the proportion of China’s population living in urban cities has jumped from 19% in 1980 to an estimated 45% today. This is resulting in a dramatic shift in geographic distribution, with 200 cities in China now boasting populations of at least 1 million.

China has four giant first-tier metropolises – Beijing, Shanghai, Guangzhou and Shenzhen, along with Hong Kong off the mainland. The national government also ranks two-dozen other cities as “second-tier,” generally provincial capitals with populations near or above 10 million — places like Chengdu, Hangzhou, Suzhou and Zhengzhou. At an International Council of Shopping Centers conference in Beijing in November, many of those cities were viewed as under-retailed and ripe for development.

“Foreign investors are entering such cities to explore potential investment opportunities, as it’s much easier for them to find suitable investment inventories in those cities, and the continuous improvement in retail sales and consumer spending is also convincing them of the market’s potential upside,” Danny Ma, director of CB Richard Ellis’ China Research, said in an interview.

Developers and investment firms such as Turkey’s Star Mall Group, Singapore’s Keppel Land and Hong Kong investors Hang Lung Properties and Harvest Capital Partners have been actively pursuing projects in China’s so-called smaller cities. Harvest raised $600 million (US$) this year, primarily from North American pension funds and individual investors, to develop and manage family-oriented shopping centers. These centers typically involve 100,000 square meters (1,076,391 sq ft) in a 4- or 5-story building, anchored by a Wal-Mart or Sam’s Club and including electronics outlets, brand-name stores like Nike and Zara, a movie theater and sometimes a skating rink.

The concept is designed to appeal to children, and with China’s one-child-per-family policy, each child typically brings two or more adults. “Our type of shopping mall, the family destination mall, is a popular trend,” Harvest’s Rong Ren said in an interview.

Still, retail development and investment in China come with plenty of challenges. These include: long delays in the regulatory approval process; occasional government regulations to limit foreign investment; onerous requirements such as developing super-blocks instead of single sites; and lots of domestic competition – domestic purchasers accounted for more than three-fourths of Asian real estate deals in the first half of 2010, according to CB Richard Ellis.

In a nutshell, it’s difficult for foreigners to get a foothold in China, which is why Harvest’s Ren and others recommend establishing investment partnerships there to manage the risks. “If you have no contacts in China, it will be difficult for you to get the approvals,” said George von Liphart, managing director of Peninsula Real Estate Capital Advisors in San Francisco and a veteran China deal broker who is chairman of ULI’s Global Exchange Council. “It is still very much a question of who you know and how you cultivate that.”

Overall, retail development and investment in China promise the tradeoff of low initial yields – usually 4.5% to 6.5% – in exchange for greater longer-term asset appreciation. Harvest Capital Partners is trying to buck that trend, with its new retail investment funds targeting 15% and 20% net returns over 5 and 6 years, respectively.

“Overseas investors must have a business presence in China before they can make any actual acquisitions, while the Chinese government is posing stringent control over the approval of investment funds in China,” said CB Richard Ellis’ Ma. “Therefore, the most viable option for foreign investors would be to source an equity deal via an offshore structure, such as looking for an equity investment in Chinese developers that are listed (on the Hong Kong Stock Exchange) and have some investable-grade retail assets.”

Zhejiang opens uninhabited islands to private developers

Individuals could apply for the right to use uninhabited islands in Zhejiang Province for business development, with the longest possible lease 50 years, according to new local regulations formally implemented on Saturday.

Among the 2,639 uninhabited islands in Zhejiang Province, 31 are listed in the first published batch of 176 usable uninhabited islands nationwide, said Liu Xiangdong, an inspector with the Zhejiang Province Ocean and Fisheries Bureau at a press conference on Thursday.

The islands can be used for purposes from tourism to industry. Individuals could choose one from the 31 islands and submit an application including a concrete development plan to the county-level maritime authorities, Liu said.

After receiving an application, the authorities will publish the applicant’s name, the island involved, and the development plans to the public. They should also look for comments and receive approval from county-level governments, provincial maritime authorities and the provincial government, he said.

A bidding process will determine who gets the islands. If these islands have not been developed within three years, their rights could be withdrawn by the provincial government.

“The regulation is worth promoting nationwide,” Dong Liming, a vice director-general at the China Land Science Society, told the Global Times Friday. “With individuals working on the inhabited islands, our maritime economy could be developed and national defense could be strengthened.”

In China, European Companies Investing More Than Americans

China may not be home to the low cost factory labor it once was, but corporations are not giving up on it despite rising costs.

As Americas, we always hear how our corporations love exploiting cheap labor. Not as much as the Europeans do, however.

More importantly, China is no longer about cheap labor. The smart money knows it. Rising prices are trumped by rising wealth every time.

Here’s some proof:

Foreign direct investment rose for the third month in a row in April with more money coming from European countries for the first time this year rather than the United States, the Ministry of Commerce said on Thursday. Foreign firms pumped $8.43 billion into China last month, up 0.4% from a year earlier, according to the ministry. While the pace slowed from the gain of 5.65% in March and 6.32% in February, it was much better than January’s fall of 7.3%.

What do investors like? They like wage growth and the rise of the Chinese middle class.

According to a report by consulting firm KPMG, China has become the top destination for sourcing among multinational companies outside their home country with these companies moving more of their research units close to production bases. This year, the U.S. China Business Council conducted a survey of multinationals who have a presence in China and each one said that China was their number one investment choice.

All told, European companies are the most enamored with China.

During the January-April period, investment from European Union companies rose 29.7% to $2.5 billion, while corporate investments from the United States rose 33.2% to $1.4 billion.

From January to March there were 4,822 foreign investment projects approved in China, down from 5,379 in the first quarter of 2012.

PBOC faces balancing act with rate, inflation

Amid a wave of interest rate cuts by major economies around the world, Chinese monetary authorities will face a policy dilemma in the coming weeks.

Financial specialists said authorities will have to decide between cutting the interest rate to curb capital inflows from overseas, and tightening the money supply — usually by keeping a relatively high interest rate — to ward off inflation.

Zong Liang, deputy head of the International Finance Research Institute under the Bank of China, said: “While recent figures show that the domestic liquidity condition is too loose, the global situation is making it difficult for the central bank to initiate an interest rate hike.”

The People’s Bank of China, the central bank, said on Friday that growth of M2, the broad measure of money supply that covers cash in circulation and all deposits, increased by the end of April by 16.1 percent, 0.4 percentage point higher from March.

That was higher than the yearly growth limit of 13 percent for the indicator, which the PBOC had set earlier.

In addition, total social financing, an index that covers all loans, bond issuance and stock sales, stood at 1.75 trillion yuan ($284.6 billion) in April, higher than the market forecast of 1.5 trillion yuan.

“As the reserve requirement ratio for banks is already high, it seems that the PBOC can only turn to open market operations to tighten the money supply,” Zong said.

On Thursday, the Bank of Korea lowered its benchmark interest rate by 25 basis points to 2.5 percent, the first cut in seven months. The move came after central banks in Europe, India and Australia all took actions to lower their borrowing costs.

Having cut Europe’s interest rate to a record low, policymakers are ready to make further cuts when needed, said Mario Draghi, president of the European Central Bank, early last week.

Monetary easing in those economies all followed the United States policymakers’ overwhelming endorsement of the Federal Reserve’s plan to keep buying bonds to spur growth and employment, and the Bank of Japan’s effort to double its monetary base over the next two years.

The PBOC is vigilant on the policy-based monetary easing in other countries and implications for China, according to its quarterly report on monetary policy released on Thursday.

The central bank report described the issue as one of a potential “major risk” for the Chinese economy, and called for “strengthening effective monitoring of cross-border capital flows”.

Lu Zhengwei, chief economist with the Industrial Bank Co Ltd, said he does not believe the PBOC wants a Chinese monetary easing because the monetary policymakers are still using the rhetoric they used during the economy’s overheating cycle.

For example, he said, the PBOC still declares it will “keep the overall liquidity in check” to maintain stability of the domestic monetary environment when the country is faced by increasing capital inflows resulted from all the monetary easing programs overseas.

Although the economy witnessed a slowdown in the first quarter, it has seen four straight months of net foreign exchange purchases by the central bank and commercial lenders, which suggest a continuous capital inflow.

The central bank data showed that banks brought in nearly 1.2 trillion yuan worth of foreign exchange in the first quarter on a net basis, a record high in recent years.

A large part of the capital inflow came from dollar-denominated bonds issued by Chinese companies, especially property developers, in the overseas markets, said Ding Zhijie, dean of the School of Banking and Finance of University of International Business and Economics in Beijing.

The rising purchase of foreign exchange by domestic banks will directly multiply the money in circulation, create excessive liquidity, and exert an inflationary pressure, said E Yongjian, an analyst at Bank of Communications Co Ltd.

“Throughout the year we expect such purchases to continue to grow, but the pace of increase may slow down somewhat from the first quarter,” he said.

The threat from the inflow may become moderate in the coming few months because of China’s slowdown in economic growth and interference from its monetary regulators.

And a possible exit of US quantitative easing would also help soothe the capital flood, said Zhu Haibin, chief China economist at the JPMorgan Chase & Co.

The Wall Street Journal reported on Monday that the US Federal Reserve is getting ready to wind down its $85-billion-a-month bond-buying program in careful steps, but the timing is still uncertain.

Zhu said that it’s most likely that Fed will slow down purchasing the bonds and start to exit before the end of this year. “The transform probably will take six to nine months.”

For the time being, the PBOC remains on high alert against inflation, as it states in its first quarterly report that it cannot afford to be “blindly optimistic” about the price situation in the next phase. It must fend off the inflationary risks proactively, and stabilize the market’s inflationary expectation “in a forward-looking way.”

China’s consumer price index rebounded to 2.4 percent year-on-year in April from 2.1 percent in March, stronger than expected.

“We expect it to rise further in the coming several months,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc, adding that he expects the authorities to continue to tighten monetary policy in the second quarter, and a slowdown in credit growth as a result.

He added as inflation is edging close to the one-year benchmark deposit rate of 3 percent, it reduces the possibility of an interest rate cut. “A rate cut would also contribute to more speculative pressure in the property market.”

The impact of major economies’ quantitative easing on China would be less than some people fear, and the nation should continue to deepen its ongoing reforms, especially currency reform, to better cope with the overall global uncertainties, said Fred Hu, chairman of Primavera Capital Group and a former economist at the International Monetary Fund.

By improving the yuan’s convertibility for the capital account and increasing the flexibility of its exchange rate, China will free itself from the necessity of injecting money into the market passively whenever the yuan exchange rates