China's foreign reserves may exceed $1 tn by the time of the Beijing Olympics in 2008. That would be roughly equivalent to all the combined foreign reserves of the rest of the world outside of Japan today. We believe highly concentrated capital movements directed by the State Administration of Foreign Exchange (SAFE) mean this money will influence the world's financial markets, having an impact similar to that seen previously with the oil dollar in the 1970s and the Japanese dollar in the 1980s.

We think that the RMB will continue to be substantially undervalued to assist job creation and export promotion, despite a possible exit from the USD peg. If the RMB is held low, other Asian currencies will probably follow suit for competitive reasons. Asian central bankers' mandates are about job and export creation, not capital gains. With that in mind, the US deficits may be more sustainable than the market currently thinks, in our view.

This may all sound like a case for world trade retaliation. Although trade disputes will likely surface and some sanctions may be imposed, most countries are half-hearted about pushing for a RMB appreciation, in our view. China is now a key driver of the world economy, but domestically, many parts of its economy, the financial and agricultural sectors most noticeably, remain weak in terms of their ability to handle major currency appreciation shocks. Most politicians, especially those in Asia, have adopted a more pragmatic approach to China's RMB policy, which is reflected in the more restrained calls for RMB revaluation today, in sharp contrast to three years ago.

China is huge purchasing force in the commodity and capital goods world. China accounts for one fifth of the world's copper and nickel trade; one fourth of the world's steel trade and is the largest buyer of grain in the world. China has replaced the US as Asia's largest export destination, while Japan's recovery last year was almost single-handedly initiated by Chinese orders. European pension funds have pruned their purchases of USTs, so China and the rest of Asia are now funding the Bush administration's fiscal deficits and Greenspan's low interest rate policy. Furthermore, an increasing amount of cheap Chinese exports are produced for multinational corporations. Wal-Mart alone imported about $16 bn of Chinese products into the US last year, roughly equivalent to US's 11th largest importing country. Such dependence is evident from Motorola to NIKE, making real trade sanctions much harder to launch ¡ª a point of fundamental difference from the spate of trade wars between the US and Japan in the 1980s.

In today's world, only the US has the economic strength and political clout to launch full scale trade sanctions against ¡°made-in-China¡± products. However, it is not only Chinese exports that would suffer. US consumers who buy inexpensive Chinese products, US corporates that are deeply entrenched in China and US interest rates that benefit from a subdued inflationary environment would also suffer significantly from trade sanctions. Furthermore, the benefits may be limited. One senior official from the US Treasury department once remarked that trade sanctions against Chinese products might help Mexico or Malaysia, but not Milwaukee. This is because the trade deficits in the US reflect overspending in the US, and the gap in production costs between China and the US is considerable. If the US were to stop importing from China, the lost Chinese market shares would be picked up by other foreign countries instead of domestic firms. Meanwhile, the price of goods in the US would likely go up in the absence of cheap Chinese products. In other words, there would be lots to lose and little to gain, which explains the US's ¡°all bark but little bite¡± approach towards China and the RMB.

China and the rest of Asia have every incentive to finance the US deficits, in exchange for continued orders from the US. In a globalized world and from a goods and capital flow point of view, an overspending US and oversaving Asia are not fundamentally different from, say, an overspending US east coast and oversaving west coast, except that it involves an exchange rate and having to take into account central bankers' behavior.

The real question is how Asia will handle USD weakness. In the short run, with the USD expected to weaken, Asian central banks may act like OPEC members. Should one country start to diversify away from USD denominated assets, it would gain; if they all do, they would all lose. Still, the need to keep US buying power afloat is real and central banks should be more ¡°responsible¡± than commercial investors, so we expect a fragile balance to be maintained, but things could go wrong.

In the face of domestic political and media pressure about the falling value of their reserves, we expect periodic talk from Asian central banks about moving away from USD assets, but this would be politically challenging and practically difficult. We do not expect Asian central banks to aggressively sell their existing positions of USD assets, but less buying with new reserves is likely. Besides the obvious currency alternatives, gold and other natural resources, or even physical assets such as land, may be targeted.

China's labor supply is expected to peak around 2017, and Beijing is then likely to lose its incentive to maintain a low exchange rate. The recycling game in Asia may then start to unwind, which could spell big troubles ahead for the US bond market and the USD, if no pre-emptive measures are taken.

The capital recycling from China and the rest of Asia is likely to delay the eventual correction in the US's twin deficits. But the longer the delay, the greater the damage it could cause to the world economy and markets when the end game arrives. Also, the oil dollar led to global consumer inflation and the Japanese dollar led to property inflation. The Chinese dollar may lead to commodity inflation, in our view.

Sources: Excerpts from "China: The Chinese dollar and its global implications" in the "Emerging Markets Economics Research" contributed by Dong Tao with Credit Suisse First Boston.

The relentless growth of China's economy and its extraordinary rise as a supplier to the world's consumers has pushed it to third spot among global traders, behind only the United States and Germany.

New figures released by the World Trade Organization show China's total two-way trade in goods and services last year was $1283.8 billion, eclipsing Japan's figure of $1248 billion.

Surging demand for China's low-cost electronics, white goods, textiles, sporting goods and other commodities saw its merchandise exports jump 35 percent to reach almost $600 billion last year.

That was matched by a 36 percent rise in its merchandise imports, including oil, coal and iron ore to power its industrial base, to a figure of more than $560 billion.

China's services trade, however, was relatively small, with exports of $59 billion and imports of $70 billion.

The United States remains a clear leader in the global trade rankings, with a total of $2923.4 billion, followed by Germany on $1949.3 billion. France is in fifth spot, with $1118.1 billion, ahead of the UK with $1101.6 billion.

U.S. merchandise exports in 2004 were $819 billion, compared with imports valued at $1526.4 billion -- much of them from China. U.S. services exports were $319 billion, against imports of $259 billion.

The WTO said a "surprisingly strong" global economy boosted real world merchandise trade growth to 9 percent in 2004, despite record high crude oil prices. In dollar prices, world trade grew 11 percent.

It said Asia's merchandise trade growth was sustained by strong U.S. import demand and intra-Asian trade, stoked by a recovery in the electronics sector. Along with China's 35 percent export jump, south Korea's exports rose 31 percent by value, while Japan was up 20 percent.

But the WTO expects an easing of growth rates this year. It says projections for China suggest slowing investment growth will be a major factor in a "moderate slowdown" in GDP growth.

The latest real growth forecasts for China this year are around 7.0 percent, compared with 9.5 percent last year, 9.3 percent in 2003 and 8.0 percent in 2002.

Source: CNN

According to the China Gaming Market Analysis and Forecast 2004-2009 report, jointly released by IDC China and China Game Publishers' Association, a subordinate to the General Administration of Press and Publication of PRC, China's online gaming market revenue reached US$297.9 million in 2004, an increase of 47.9% over the previous year. The year was characterized by a lack of innovative products, forcing both game operators and vendors to seek new avenues for growth as competition increases. IDC expects mainland China's online gaming market to show steady growth over the next five years with a relatively high compound annual growth rate (CAGR) of 34.7%.

"Rapid Internet development has fueled the growth of online gaming, which has impacted various sectors like telecom, Internet, computer, software, and consumer electronics," says Grace Zheng, Senior Analyst, Cross-Product Research Group, IDC China. IDC estimates that the telecom revenue directly generated by online gaming in China in 2004 amounted to US$1,817.9 million, which is 6.1 times the revenue of the country's online gaming market.

IDC's market survey has also found the age span of online game subscribers widening with both younger and older people becoming gamers. Although there is an increasing number of older and higher-income subscribers in 2004, youth still remains the overwhelming majority of gamers. The online gaming market will therefore remain a top priority for game operators, developers, and players from other industries.
 
According to Ms. Zheng, the 2004 online gaming market presents both good and bad news, based on the following three major trends:

1. Sharp increase in locally-developed games
China's online gaming market started with imported game products from South Korea and other countries, which monopolized the market in the past. In 2004, IDC saw locally-developed online games making significant breakthroughs in both quality and quantity, leveraging their natural advantage of cultural compatibility. In fact, four locally-developed games found their way into the 2004 top 10 list of most-liked online games, demonstrating the local capability in game development.

As local online game developers join the fray, they will compete directly with their foreign counterparts who possess years of game developing experience. Nonetheless, Korean games will remain the dominant force in the online gaming market in mainland China as Korean companies continue to introduce new games into the market. Local developers will have a long way to go before they can catch up with, and eventually surpass, their Korean competitors.

2. With a lack of online gaming products, operators seek new opportunities for risk mitigation
Commenting on Shanda's recent purchase of 19.5% of the common shares of Sina.com, Mr. Lianfeng Wu, Research Director, Cross-Product Group of IDC China, believes that such a move was not only aimed at expanding Shanda's foray into digital entertainment, but also to mitigate market risks in online gaming, including policy risks, stock market pressure, market competition, and new product pressure.
According to IDC, only two out of the 10 most liked online games in 2004 were new products launched that year. Most operators still rely on a single product for most of their profit. Such lifeline products that are approaching the decline stage of the product life cycle poses tremendous risks for the operators concerned.

New online games also found it hard to outperform previous market favorites. As more products are launched to entice end-users in the online gaming market, competition became extremely fierce in the MMORPG (Massive Multiplayer Online Role-Playing Game) segment. As a result, developers and operators are eager to identify new avenues to grow profits and mitigate operational risks.
Leisure games and peripherals became the crowning source of profits in the 2004 online game product line. Another significant source of profit is virtual commodity trading. Research shows approximately 20% of online gamers buy virtual commodities and the per capita annual consumption is about US$84.40. The virtual commodity trading market is huge.

3. Mobile gaming will emerge as the new market favorite with huge potential
The mobile gaming market has become the hot favorite of the capital market and the secret weapon for many developers and operators. Facing a market with such huge potential, various players on the mobile gaming industrial chain, such as game developers, operators, service providers, and handset vendors, have developed initiatives to take advantage of the market.
Large handset manufacturers such as Nokia, Sony-Ericsson, and Motorola are continuously improving the gaming performance of their mobile handsets, and adopting open platforms as their mobile OS to support multiple mobile gaming services. Local game vendors, such as Shanda and Netease, have made their way into the community of mobile game developers. Leading portals like Sina.com and Sohu.com have also expanded into mobile gaming and launched special mobile gaming channels and columns. The launch of more game websites have also accelerated the pace of mobile gaming development. In 2004, Shanda successfully acquired Digital-Red Mobile Software, a leading mobile device-based game developer in China. This takeover has further focused the gaming industry on the very promising wireless gaming services.

IDC's China Gaming Market Analysis and Forecast 2004-2009 report was jointly conducted by IDC China and CGPA (China Game Publishers' Association), subordinate to the General Administration of Press and Publication of PRC. The report provides an in-depth analysis of the ecosystem of China's online gaming market, including government policies that impact the industry, competitive analysis of operators and game developers, gamers' behavior and expectations, distribution channels, etc.
 
Source: IDC

China's years-long power shortages are expected to be alleviated by 2007, according to Sun Jiaping, director of Energy and Information Committee of Chinese Society of Electrical Engineering.

Sun said that electricity is a necessity for the development of a modern society and its sustainable development depends on the coordinated growth of electricity supplies with the economy as a whole. The experience of other countries demonstrates that in the industrialization phase of economic development, the rate of electricity supply growth should surpass that of GDP growth, he added.

In accordance with its energy and resources conditions, China attaches great importance to the restructuring of the electric power infrastructure, its efficiency, pollution reduction, and safe operation, according to Sun. Based on extensive investigation and calculation, the installed power generation capacity of the country should increase by an average of 6% over the next 20 years to reach 950 million to one billion kW by 2020. Electricity production and per capita electricity consumption should also reach 430 million-480 million kWh and 3,000 kWh, respectively, by then.

Sun said that the dominant position of thermal power would remain unchanged before 2020, when its production would reach more than 600 million kW. Meanwhile, China will optimize the operation of its thermal power facilities and increase their efficiency. At the same time, the country will develop LNG power and clean coal technology.

The exploitation of hydropower, nuclear power and renewable energy is also on the agenda. Sun said that China has 370 million kWh of hydropower reserves, of which 100 million kWh has been developed. By 2020, 245 million kWh are expected to have been developed. There are also good prospects for the development of wind power in Inner Mongolia and the Xinjiang Uygur Autonomous Region. However, the wind power currently developed is only 570,000 kW, less than one third that of India, ranking ninth in the world. The exploitation of renewable energy sources including wind power, solar and biomass energy, should reach 20 million kW by 2020 and installed nuclear power capacity should amount to 40 million kW.

In addition, power grid construction is regarded as a project of strategic importance. The national power grids, transnational power grids and the transmission of electricity from the west to the east could transmit 120-million kW of electricity, while supply exchanges between north and south China could reach 12 million kW.

China's electricity utilization ratio - i.e., the fraction of generated power that actually reaches end users - is quite low, said Sun. If better management practices were adopted to reduce waste, about 200 billion kWh of electricity could be saved annually.
  
Sources: Asia Pulsa/XIC

After a stunning growth rate of 9.5 percent for the past 15 months and 9.3 percent for the year before that, most analysts expect China's government-induced cool-down finally will start to have an effect later this year.

They expect growth this year will slow to about 7 or 8 percent -- still better than any other significant economy in Asia and more than enough to keep China's mantle as a global engine of expansion.

But a credit tightening is on the cards, with an interest rate hike of 27 basis points expected by the end of June.

That follows the move last October, when China's central bank raised rates for the first time in nine years and pushed the benchmark rate to 5.81 percent.

Some analysts, such as Morgan Stanley's Hong Kong-based Andy Xie, believe China could maintain its frantic pace.

He recently lifted his 2005 forecast from 7.8 percent up to 9.5 percent, after Chinese government statistics showed no sign of a slowdown in the first three months of the year.

Even so, along with the internally mandated slowdown of investment in overheated sectors such as property and urban construction, there are some clouds on the horizon.

China's voracious demand for energy and raw materials to feed its industrial base has pushed up prices for oil, iron ore, coal and other base metals, and added to inflation pressures.

Its banking system is in poor shape, with a mountain of bad debts still to be digested, and it remains heavily reliant on oil imports.

On top of that are the international political factors: recent stresses such as the deteriorating relationship with Japan, rising protectionist sentiment in the United States, and the continued pressure from the EU and the U.S. for a more flexible currency rate for the yuan. This environment is behind what Morgan Stanley's global economist Stephen Roach calls an "unbalanced global economy" at risk of becoming unhinged.

Roach noted on April 18 that China's import demand in the first three months of the year eased to 12 percent growth year-on-year -- just a third of the 36 percent growth rate of last year.

"A softening of import demand is also a classic warning sign of a slowdown in Chinese domestic demand," he said.

Xie, too, expects that 2006 will see a slowdown and is tipping growth to drop to 7 percent next year.

"Global monetary tightening should eventually end the liquidity party and arrest the seemingly unlimited capital flows into China," he wrote in a commentary on April 21, a day after figures released by Beijing showed China's economy grew at a sizzling 9.5 percent in the first quarter of 2005.

Global bank HSBC says the Chinese authorities are serious about slowing investment. Its view is that this, along with more restrained U.S. consumption, creates the risk of a growth slowdown in Asia in the second half of this year that is "quite sharp."

China's export push over the last few years has flooded the world with cheap consumer goods, and has attracted billions of dollars of investment from U.S., European, Japanese, South Korean and Taiwanese makers relocating their factories to China.

Industry leaders such as GM, Toyota, VW, Honda, Sony, Samsung, Dell and IBM have poured huge sums into their "China plays", creating production platforms both for their global markets and domestic Chinese forays.

At the same time, Chinese companies have been seeking to make a name for themselves internationally. In white goods, electronics, textiles, food & drinks, auto components and sporting goods, brands like Haier, TCL, Huawei, Lenovo and Tsingtao are on the march.

But some analysts say the hitherto optimistic mood about China may be changing.

"Once viewed as an unparalleled opportunity, the Chinese miracle is now being viewed as a threat by both the U.S. and Japan," Roach noted in a commentary on April 18.

He said that even in Europe, China was a source of political conflict via debate over ending the arms embargo and mounting concerns on its currency rate.

Roach says recent tensions with Japan -- one of China's biggest investors and trade partners -- unmasks what he calls "one of Asia's deepest fault lines" -- the struggle for pan-regional leadership.

Japan is clearly the world's second-largest economy behind the United States and has been for years. China now ranks fourth behind Germany, after overtaking the UK and France.

This red-hot economic growth means it has gained rapidly on the industrialized nations, both in consumption and gross domestic product. At an average 7.0 percent a year, its economy doubles in a decade; at 9.5 percent, the doubling effect comes in less than eight years.

But that same sizzling growth rate has prompted protests from the U.S. and Europe, which claim that an artificially low value for the Chinese currency gives the country an unfair competitive advantage in its trade dealings.

Now the risk factor has been ratcheted up and China can expect more of that pressure to come.
 
Sources: Reuters