China Announces A $586 Billion Stimulus

China has unveiled a two-year, $586 billion economic stimulus program.

The announced sum represents about 16% of China's economic output last year, and is roughly equal to the total of all central and local government spending in 2006, according to WSJ.

The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies.

As per usual, the Chinese government followed the step of other governments and did not detail where it expected to get the $586 billon it planned to spend.

Since this plan sounds an awful lot like Barack Obama's, maybe he should run both countries.

Chinese Sovereign Wealth Fund Has Cash Frozen In US Money Market

This is not making officials back at the home office happy, and can only mean one more straw on the camel's back that will cause China to continue to distance itself from the dollar.

Sovereign wealth fund, China Investment Corp (CIC), has funds frozen in Reserve Primary Fund (RPF).

RPF suspended redemptions last month when it became the first money market mutual fund to 'break the buck'.

CIC said Wednesday that it had asked RPF to return CIC's funds in full, prior to the US fund's move to freeze redemptions, claiming that the US fund also had sent a written confirmation that it will return CIC's principal in full along with interest.

CIC also claimed to be a creditor of RPF, suggesting it will be among the first in line to be repaid, but an RPF statement indicates it classifies CIC as an investor.

Neither CIC nor RPF have stated how much CIC invested with the fund.

CIC was established by the Chinese government in late 2007 with 200 bln usd in capital. Its mission is to obtain better returns on China's foreign exchange reserve holdings.

Heavy Losses Overnight; BOJ Injects Funds

Asian stock markets sustained heavy losses overnight.

Japanese and South Korean exchanges  dropped 4.95% and 6.1% respectively. These exchanges were closed Monday for a holiday.In Tokyo, the Nikkei 225 Stock Average ended at 11609.72, a three-year low. Exporter stocks were hurt by the rising yen, while banking stocks were also hard-hit. Mizuho Financial Group went limit-down while Aozora Bank tumbled 16% on its relatively large exposure to Lehman, while Tokio Marine Holdings ended down 13%.

Meanwhile, the Bank of Japan injected ¥2.5 trillion into Japanese money markets Tuesday and said it would work to ensure stability in the market.

In Korea, the Kospi Composite ending down 6.1% at 1387.75, its lowest close since March 2007.

Hong Kong's Hang Seng tumbled 5.4% to 18300.61 amid weakness in China-related shares. The mainland's Shanghai Composite Index, which tracks both Class A and Class B shares, ended down 4.5% at 1986.64, despite Monday's surprise interest rate cut.

-EPJ Newsdesk

China Cuts Rates

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point.

This is the first interest rate cut by China in six years.

-EPJ Newsdesk.

The Start of an International Run On the Dollar? China May Cut Its Dollar Holdings

China is getting nervous about its dollar holdings and may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks, China Daily is reporting.

"The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote Hong Kong-based Ha. "This will likely lead to greater diversification of foreign exchange reserve investments."

It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, Ha said.

China holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt. It held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

The Dragon is spooked.

-Robert Wenzel

Paulson: Hopeful Stabilty In Housing Market By End Of The Year

Business Week just posted a Maria Bartiromo interview with Treasury Secretary Paulson. Here are key excerpts, including Paulson hinting at subtle pressure from China:

BARTIROMO: One fund manager said to me: "Look, the Chinese government, which owns billions in Fannie and Freddie paper, basically said to Paulson, 'We're not buying any more unless it is explicit that you are guaranteeing this.'"

PAULSON: That's not true. There was growing concern and questions about what Treasury was going to do, and we were reassuring investors. But I received no threats or anything as direct as you're suggesting.

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BARTIROMO: Most Americans just want to know when we will see this dramatic move stop the slide in home prices.

PAULSON: I'm hopeful we would have more stability in home prices by the end of the year, but I'm not prepared to project it.

Note: Stability won't occur for a long time unless the Fed reverses its current tight money policy. M2 money supply is growing at only a 1.8% annualized rate.

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BARTIROMO:One day after the market reacted positively to the Fannie and Freddie takeover, fears of Lehman's inability to raise capital led the S&P 500 to its biggest drop since February '07. Are there plans afoot for a takeover of Lehman?

PAULSON:I can't comment on any specific company in the news today. I've got to hop, and I thank you very much.

-Robert Wenzel

Chinese Inflation Falls Sharply

Inflation in China dropped sharply in August for the fourth month in a row.

Consumer price inflation was 4.9 per cent last month, down from 6.3 per cent in July, according to China's National Bureau of Statistics. In February, China's inflation had hit a 12-year high of 8.7%. -EPJ Newsdesk

Hardball From China: "We Don't Know What The Bailout Means"

It's not an official comment from China, but this is certainly a hardball comment out of The People's Republic, which holds some $376 billion in U.S. government agency debt.

"The impact of the U.S. government's bailout of Fannie Mae on China's holdings in the mortgage giants is unclear, an official from the State Administration of Foreign Exchange said Monday," MarketWatch is reporting.

The official, who declined to be named, didn't elaborate, according to MarketWatch.

This is a difficult to figure. Given that the Treasury is basically guarantying the entire $376 billion portion of debt that is Freddie and Fannie paper, what else could the Chinese possibly want?

According to U.S. Treasury Department data, China was by far the largest investor in long-term debt issued by U.S. government agencies, holding $376 billion as of June 2007, which is the latest figure available.

It isn't clear how much China has invested in debt issued by Fannie and Freddie alone.

Morgan Stanley Raising $10 Billion Property Fund

Morgan Stanley is raising $10 billion for a global property fund. The Morgan Stanley Real Estate Fund VII Global, the latest in a series of property investment funds, is expected to begin investing worldwide before the end of this year. Plans are to put $1.5 billion or more of that into China.

Buffett: China Will Do Better Than The U.S. In Coming Years

In his near final comments during a three hour marathon on CNBC's Squawk Box Warren Buffett said he would be surprised if Berkshire doesn't "do something" in China in the next few years. Any investment there would probably be an extension of his existing businesses. He says the U.S. will do well, but the Chineses will do better because they're starting from a lower base and have really learned how to unleash the potential of their people.

Alert: Paulson Conference Call in Chna

Tuesday, August 19, 2008, 11:15 a.m. EDT
Secretary Henry M. Paulson, Jr.
Foreign Affairs Magazine Conference Call on China

George H. W. Bush Call Your Offce

Carlyle Group said it dropped its plan to invest in China's Xugong Group Construction Machinery Co., citing "significant changes in the market environment."

"Both parties have decided not to proceed with the investment and Xugong will embark independently on its restructuring," Carlyle said in joint statement with the Chinese building machinery maker, without elaborating.

Carlyle was forced to abandon the purchase after its failure to gain approval from China's government for the transaction even after changing its bid three times and cutting the size of the stake.

But, Carlyle isn't completely taking no for an answer, "We believe that Xugong's expansion will create opportunities for partnership with both Carlyle and its portfolio companies worldwide," today's statement said.

Carlyle, said it has invested more than $1.3 billion in China during the past two years. It has stakes in 30 different Chinese companies.

China's government raised scrutiny of foreign buyouts after Carlyle signed an agreement to buy 85 percent of Xugong for $375 million, the first offer by a private-equity company for a major government-owned enterprise in China. A year later, the buy-out firm offered to cut the size of the planned purchase to 50 percent for about $230 million. The last offer, for 45 percent of Xugong, was made in March last year.

China's government in August 2006 decreed that overseas investors would need Ministry of Commerce clearance to buy controlling stakes in key industries, well-known trademarks or ``old Chinese brands.'' Deals can be vetoed or scaled back if they affect the ``security'' of China's economy.

Mao Is Gone

The Chinese have thrown Mao Zedong under the bus.

For the first time in nearly a decade, China is issuing banknotes without the image of the mass murderer, Chairman Mao.

The 10 yuan notes instead feature Beijing new Olympic stadium on the front, with an ancient Greek statue of a discus thrower on the back.

Both are set against the backdrop of the Temple of Heaven, sited in Beijing.

The BBC Quentin Sommerville in Shanghai reports that "the Mao personality cult that once dominated China was largely killed off by the architect of China's modernisation, Deng Xiaoping."

In Profile: Zhao Danyang

So who is Zhao Danyang, the man who paid $2.1 million to have lunch with Warren Buffett?

Mr. Zhao manages Pure Heart Asset Management, based in Hong Kong. He says he invests based on "logic and reviews of financial statements", but he told Euromoney that "...he has [also] sneaked into factories to talk directly to workers of a manufacturer, checked sell-by dates on bottles of pills to ascertain stock turn levels for a Chinese medicine company and even resorted to counting cars on the highways of a toll road operator."

The former consumer electronics factory owner is dong well as a fund manager. According to data supplied to us by Pure Heart Management.

In 2003, Pure Heart China Growth Investment Fund showed a return of 46.51% (versus 29.7% for the Hang Seng Index). In 2004, a return of 23.86% (versus 13.5% for the Hang Seng Index). In 2005, a return of 31.64% (versus 4.5% for the Hang Seng ndex). In 2006, a return of 141.75% (versus 34.2% for the Hang Seng index). In 2007 a return of 10.70% (versus 37.02% for the Hang Seng Index) and for the first 5 months of 2008, a decline of 9.70% (versus a declne of 7.4% in the Hang Seng Index).


Mr. Zhao claims to use "the spirit of the professional paparazzi" to probe deep into the companies he examines. He is dedicated to fundamental research and holds long term, with turnover that is below average for an institutional investor.

Pure Heart's web site states:

We may find ourselves standing at the starting point of a new era in the Chinese capital market when looking forward 30 years from now on this historical chapter. Pure Heart China Growth Investment fund will accompany you to reap the rewards from these changes.

Mr. Zhao graduated from Xiamen Universty in 1994. He received a Bachelors Degree in Systems Engineering. He began his career in the securities business in 1996.

He was invited by Guotai Junan (HK) Securites Ltd in 2002 to oversee the fund management of Pure Heart China Growth Investment Fund. Mr. Zhao is currently the General Manager of Pure Heart Asset Management Ltd., Pure Heart China Growth Investment Fund. He is also acting in the post of Chief Investment Officer of "ICBC Custody Trust", "Ping An I Unit Trust", "Ping An II Unit Trust", and "SZITIC Investment Trust" .