News Archive

China’s grand makeover plan a work in progress; fuzzy on implementation

Sun Sep 29, 2013 5:35pm EDT

BEIJING (Reuters) – China’s leaders will lay out plans to transform the world’s second-largest economy at a key party meeting in November, leaving the question of how to do it largely unanswered as much of the reform agenda is still a matter of heated internal debate.

People familiar with the discussions say that out of a long list of reforms that the Communist Party’s 200-member Central Committee is set to announce, only a mooted financial overhaul has reached a point where there is a plan and a roadmap.

Fiscal, land and residency registration reform – all key ingredients of China’s declared goal of boosting its urban population – are the major sticking points as politicians debate how to implement the changes and as they also face resistance from powerful interest groups, such as state-owned monopolies.

Still, the November meeting, the third plenary session of the Communist Party’s top body, is being billed as a watershed for China’s development, just like one in 1978 when Deng Xiaoping unveiled his historic reforms to open China to the rest of the world or in 1993 when the party endorsed a “socialist” market economy.

“The meeting will deepen reforms in all fronts,” said a senior economist with a government think-tank in Beijing, which has been involved in drafting the reform blueprint.

“The focus will be economic reforms – financial reform, tax and fiscal reform, resource pricing reform, and there will be reforms in related areas, such as social welfare and income distribution,” said the economist who declined to be identified because discussions of reform plans remain confidential.

The changes will layout how China intends to overhaul the economy to allow greater domestic consumption to drive growth, shifting away from an exports- and investment-led model that Beijing says has run its course after three decades of breakneck expansion.

A major part of that is an urbanization plan aimed at drawing hundreds of millions of Chinese to live in towns and cities. But to do that, China needs to overhaul land and household registration policies that currently make many rural Chinese reluctant to move.

Progress in working out those and other reform details will serve investors and observers as clues on whether and how soon China’s promised Great Transition will become a reality.


Financial reform is further along because it is already a work in progress. China has been gradually relaxing restrictions on the currency and in July freed up bank lending rates.

Thanks to the efforts of China’s veteran central bank governor, Zhou Xiaochuan, there is broad support for reforms to help correct economic distortions, such as over-investment at the cost of household consumption, surging local government debt and property bubbles.

“The direction on financial reforms is clear and a consensus has been reached on how to push ahead,” said Xu Hongcai, a senior economist at the China Centre for International Economic Exchanges (CCIEE), who is involved in the reform talks.

It is already clear that the next step will be creating a deposit insurance scheme, possibly by the end of this year. That will allow the central bank to free up deposit rates, which are now subject to administrative caps. Beijing worries some smaller lenders could go under as banks compete for deposits under a more open regime, so wants insurance in place first.

Government economists say Premier Li Keqiang has thrown his weight behind a free-trade zone in Shanghai, China’s financial center, as a testing ground for opening up financial services to foreign investors and lifting restrictions on the yuan.

There is less clarity about other parts of the reform agenda, which has been in the works since early this year and now is open to feedback from provincial leaders and selected policy advisers.

For example, Finance Minister Lou Jiwei is resisting calls from local governments to give provinces a greater share of revenues, sources close to the ministry say. He is worried they will use the money to fund grandiose schemes rather than much needed public services.

Right now local governments get half of tax and other revenues, but are responsible for more than 80 percent of public spending. The mismatch, together with a relentless pursuit of economic growth by local officials and Beijing’s stimulus launched in 2008, has driven many local governments to sell land to developers, fuelling a property frenzy, and rack up over 10 trillion yuan ($1.75 trillion) in debt.

“It will be problematic if they (local governments) embark on a construction spree. So, we need to be cautious,” said Sun Gang, a researcher with the Finance Ministry.

To ease the spending burden on local governments, Beijing is willing to assume greater responsibility for spending on social security, healthcare and education and take over expenses on environmental protection and food safety, people familiar with the discussions say.

Some provinces may be allowed to issue bonds to help cover expenses linked to the urbanization push but most indebted local governments will be shut out of the debt market, they say.

To try to remove key obstacles to the urbanization drive, Beijing will loosen the grip on residence registration, or hukou, which prevents migrant workers and their families from getting access to education and social welfare outside of their home village.

Beijing is also pushing land reforms that would allow farmers to sell land when they leave villages. Currently, they cannot sell their land freely and often get a fraction of the market value as compensation from local governments. Many do not leave their farms for fear of land grabs by local governments for development.

Beijing wants to expand a property tax to help cool the red-hot sector, is considering an inheritance tax to help reduce the yawning rich-poor gap and an environmental tax to punish polluters, government sources say.

Political reform and an overhaul of China’s state-owned enterprises will be low on the agenda, think-tank sources familiar with the discussions say. Beijing sees reform of state giants – a key pillar of national security and a major employer – as less urgent, analysts say.

Under political reform, Beijing might propose some steps to streamline government administration and crack down on official corruption, the think-tank sources say.

When it comes to reforming China Inc, Beijing prefers an incremental approach of opening up key sectors to private competition. Economists say the approach is flawed though because private firms lack the access to state banks that state firms enjoy.

At the end of the day, government analysts expect Beijing to move slowly and carefully, employing Deng Xiaoping’s gradualist formula: “cross the river by feeling the stone”.

“The fear is that it could be chaotic if you push changes in all fronts and you may fall off a cliff if you take too big a stride,” said Zhang Bin, an economist at the Chinese Academy of Social Sciences (CASS), a government think-tank.

($1=6.12 yuan)

(Editing by Tomasz Janowski and Neil Fullick)

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Global Economy: Faith in revival put to test

Sun Sep 29, 2013 2:08pm EDT

LONDON (Reuters) – Yet another budget showdown in Washington and yet another government crisis in Italy herald more turbulence for a global economy growing well below trend.

On top of these recurrent pitfalls, banks and households in Europe are still shedding debt, several big emerging economies are slowing and markets are struggling to decode the Federal Reserve’s policy signals.

No wonder that words like ‘modest’ and ‘moderate’ pepper many of the latest growth outlooks. Yet there is a guarded confidence at some banks that a recovery, not powerful but worthy of the name, might finally be within reach.

Credit Suisse, for instance, is penciling in 3.8 percent global growth for 2014, up from 3.0 percent this year and surpassing what it sees as the trend rate of 3.5 percent.

A lessening of fiscal headwinds will be important in allowing the hoped-for pickup in the United States, said John Calverley, head of macroeconomic research with Standard Chartered Bank in Toronto.

“So you should start to see growth moving up well into the 2.5, 3.0 percent range, maybe more, over the next couple of years,” he said. The U.S. economy has expanded at an average pace of less than 2 percent in the last four quarters.


But that view could be sorely tested in coming days.

In Washington, a government shutdown from Tuesday drew nearer after the Republican-controlled House of Representatives voted to delay Democratic President Barack Obama’s landmark healthcare law for a year as part of an emergency spending bill.

The White House, in its fourth major budget standoff with Congress since 2011, has vowed to veto the bill.

Congress also needs to raise the federal debt ceiling to avoid an unprecedented default in mid-October.

The notion that the issuer of the world’s main reserve currency might be unable to meet its obligations is simply unthinkable for most in the market.

“Our basic view is that we will get through it as we’ve got through it time and time again,” Jim McCormick, head of asset allocation research at Barclays, said.

Italy’s political instability has also revived concerns about its stagnant economy. Centre-right leader Silvio Berlusconi effectively brought down the government of Prime Minister Enrico Letta by pulling his ministers out of the cabinet on Saturday, further delaying agreement on changes intended to reduce debt and revive growth.

President Giorgio Napolitano signaled that he would like Letta to try to forge a new coalition rather than call elections, but the uncertainty risks a further damaging rise in Italian bond yields, which hit a three-month high on Friday.

“We are paying for our political instability,” Labour Minister Enrico Giovannini said.


To date bond investors have been largely reassured by the conditional promise that European Central Bank President Mario Draghi gave a year ago to buy the bonds of struggling euro member states if necessary to keep the single currency afloat.

Draghi could use the power of the pulpit to send a message to Rome’s feuding politicians when he holds a news conference after an ECB meeting in Paris on Wednesday.

With the euro zone economy gathering modest momentum, no change in interest rates is on the cards.

But the ECB chief is likely to reaffirm his readiness to provide a new round of cheap, long-term funding if need be to prevent an unwanted rise in money market interest rates.

Some reckon the ECB could act in December, which is when the Fed might start to reduce its bond buying from $85 billion a month.

‘Might’ is the operative word because markets are no longer sure how to anticipate the Fed’s reactions since the central bank shocked them by deciding this month not to start withdrawing monetary stimulus yet.

The Bank of England, and the ECB to a lesser extent, have also struggled to provide clear ‘forward guidance’ of how economic developments might shape their policy thinking.

“The most visible risk at the moment is the learning curve associated with new central bank procedures. The process of their learning how to talk to us and our learning how to listen to them is fraught with risks to financial stability,” the Credit Suisse report said.

With Fed Chairman Ben Bernanke emphasizing that his timetable for reducing stimulus depends on the economy, investors could start to price in an October start if Friday’s employment report is strong.

The economy is forecast to have added 180,000 non-farm jobs in September, above the latest three-month average of 148,000.


In Japan, Prime Minister Shinzo Abe is expected on Tuesday to confirm that sales tax will rise in April to 8 percent from 5 percent, the first significant effort in 20 years to rein in the country’s galloping debt.

To cushion the economic blow, Abe is preparing a stimulus package that will include tax breaks for companies that increase wages or capital expenditure.

Abe’s announcement will follow the Bank of Japan’s closely watched “tankan” business sentiment survey, with economists polled by Reuters expecting a bullish report.

If they are wrong, BOJ Governor Haruhiko Kuroda is likely to redouble his efforts to expand the monetary base and so banish 15 years of deflation, said James Malcolm, a foreign-exchange strategist with Deutsche Bank in London.

“Disappointing results would almost certainly bring forward expectations of additional central bank easing,” he said in a note, suggesting that such a move “might even become a live option” when policy makers conclude their next meeting on Friday. A more realistic date, however, was the BOJ’s October 31 meeting.

(Editing by Ruth Pitchford)

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Insurance crews help protect well-heeled from wildfires

SALMON, Idaho |
Sun Sep 29, 2013 1:47pm EDT

SALMON, Idaho (Reuters) – Bill Potter wasn’t eager to abandon his high-end house last month during evacuations forced by a massive Idaho wildfire, but he felt reassured when his insurance company sent a team to protect his home near the world-class ski resort of Sun Valley.

“I was more than impressed,” he said of the water tanker truck and crew privately contracted by his insurer to patrol his road and keep watch over his family’s home, custom-crafted from parts of antique barns.

Potter is a member of the AIG Private Client Group, which is geared toward wealthy policyholders and offers a personal wildfire-protection program for customers in select areas in the western United States.

The program, still considered a novel service in a niche market, operates under the premise that it is cheaper to defend multimillion-dollar homes against fire than to replace them.

Companies such as AIG, Chubb and Fireman’s Fund are competing to offer extra layers of protection to “gold-plate” properties owned by the well-heeled, said Jim Whittle, assistant general counsel with the American Insurance Association.

Services range from clearing trees and brush from around a home before a fire can start to applying flame-retardant chemicals to the perimeter of a property in the midst of a blaze, according to industry literature.

Jack Dies, head of Sun Valley Insurance and an AIG broker, said premiums for such policies average up to $7,000 a year but those costs are dwarfed by the value of properties at stake.

Whittle could not quantify how widespread privately funded wildfire protection has become since first emerging less than a decade ago. But insurance plans offering such services have grown more popular as homes increasingly encroach on the “wildland-urban interface,” where the fringes of communities meet undeveloped, often rugged terrain.

Between 2000 and 2010, 10 million U.S. homes were built in or bordering fire-prone wild lands, representing two-thirds of all houses built during that period, according to research conducted by the U.S. Forest Service and others.

“It’s entirely likely it will be a continued pattern and approach,” Whittle said of private fire protection.

The presence of private firefighters gained greater attention this summer as dozens of large blazes raging across the drought-parched West strained traditional government firefighting resources at the local, state and federal levels.

Property losses are estimated to have run into the hundreds of millions of dollars.


Potter was one of thousands of residents forced in August to flee a wildfire in Idaho’s Sawtooth Mountains that threatened a scenic river valley whose homeowners included celebrities such as actor Tom Hanks. Land and properties in the area are collectively valued at up to $8 billion.

Hundreds of federal firefighters fought the blaze, battling flames door to door with support from water-dropping helicopters and airplane tankers. By the time it was over, the so-called Beaver Creek blaze had blackened 112,000 acres of tinder-dry pine forests and sagebrush flats.

Just one home was lost in the blaze.

None of several insurers – including AIG – that underwrite multimillion-dollar homes in fire-prone regions agreed to interviews about wildfire protection services.

On its website, AIG Private Client Group pledges to use a proprietary wildfire mapping system to determine which of its insured homes are most vulnerable and to automatically send crews to take measures such as blanketing a house with fire-resistant foam. Homeowners are not required to alert the company or even be on the premises for the emergency fire protection clause to kick in.

Potter said he was unaware that his policy provided for such services until the AIG private fire crew arrived on his street.

“It must have been in the fine print of the contract. But I was duly impressed with their presence,” Potter said.


Dies said crews hired by the company consist mostly of trained firemen with extensive fire-protection backgrounds.

“The theory is, if they can save one house, their bottom line is a whole lot better,” he said.

Firefighting experts still are evaluating how to best integrate insurance-hired resources.

Private crews out to protect specific individual properties in the midst of mass evacuations can pose a challenge to federal fire managers trying to marshal manpower and resources over a wide area, said Steve Gage, assistant operations director for fire and aviation management for the U.S. Forest Service.

He said the agency has sought to accommodate insurance company contract crews and engines in recognition of the valuable services they provide for certain homeowners. But tactics and objectives sometimes differ between traditional wildland firefighters and private asset-protection operations.

In some cases, the industry can end up competing with the government for a limited supply of contract fire engines and residents become concerned about what seems to be government crews working their neighbor’s home but not theirs, Gage said.

“The industry is about profit and loss and they’re in business to make money,” he said.

(Writing and reporting by Laura Zuckerman in Salmon, Idaho; Editing by Cynthia Johnston, Steve Gorman and Bill Trott)

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LOT Dreamliner forced to land in Iceland after system fails

Sun Sep 29, 2013 1:36pm EDT

WARSAW (Reuters) – A Boeing 787 Dreamliner (BA.N) operated by Poland’s LOT LOT.UL airline had to land unexpectedly in Iceland on Sunday due to a fault in its air identification system, a spokeswoman for the airline said on Sunday.

The plane was flying from Toronto to Warsaw when it was forced to land at the island’s Keflavik airport.

“The aircraft had to land due to an air identification system fault. The Norwegian authorities have refused permission to fly over its territory, even though other countries gave permission to fly over theirs,” Barbara Pijanowska-Kuras said.

The Dreamliner was expected to be a game-changer for the aviation industry, but there have been delays getting it into service and setbacks including the grounding of all the planes due to battery problems.

Budget airline Norwegian Air Shuttle (NWC.OL) on Saturday took one of its brand new Dreamliners out of long-haul service and demanded that Boeing repair the plane after it suffered repeated breakdowns.

For state-owned LOT, which has struggled for years with huge operating losses, the incident adds to a list of problems with the Dreamliners. Last week it had had to delay flights after check-ups showed two planes lacked gas filters.

LOT is demanding from Boeing compensation for lost revenue and has given Boeing time until the end of the year to settle on compensation over faults or face court action.

Pijanowska-Kuras said that LOT had sent two planes to get the Dreamliner passengers to Poland, while Boeing’s service company will be working to solve the issue so that the Dreamliner could be taken to Poland “as soon as possible”.

She said it is too early to say whether the unexpected landing in Iceland would be added to LOT’s list of claims from Boeing.

(Reporting by Agnieszka Barteczko; editing by Patrick Graham)

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Investors brace for volatility as shutdown seems likely

Sun Sep 29, 2013 1:11pm EDT

NEW YORK (Reuters) – As a last-minute deal to resolve tense spending negotiations in Washington appeared less and less likely, U.S. stock investors braced for an outcome that had previously seemed thinkable: a shutdown of the U.S. government.

The House of Representatives early Sunday voted for an emergency spending bill that includes a delay of President Barack Obama’s healthcare reform laws despite veto threats from the White House.

While a deal could be reached before the government’s fiscal year ends at midnight on Monday, the unanimous passage of a bill to continue paying U.S. soldiers in the event the government runs out of money was viewed as a sign that there would be no agreement between Republicans, who hold a majority in the House, and the Democrats, who control the White House and Senate.

A shutdown is expected to have a catastrophic impact on markets, injecting massive amounts of uncertainty into major asset classes. If the shutdown is prolonged, it could also have significant implications for economic growth. Many government employees will be furloughed, and the Labor Department said it would not issue its monthly employment report scheduled for next Friday.

“Markets had been expecting an 11th hour resolution, but it seems increasingly clear that won’t happen, which means all bets are off,” said Kristina Hooper, head of portfolio strategies at Allianz Global Investors in New York. “Investors need to become more comfortable with volatility.”

While the threat of a shutdown has weighed on markets recently, with the SP 500 .SPX snapping a three-week streak of gains to fall 1.1 percent last week, many investors considered the prospect unlikely. The SP is up 3 percent this month, and is a mere 2 percent away from its all-time high.

The CBOE Volatility index .VIX spiked about 18 percent last week, but remains down 14 percent on the year, suggesting little of the fear is priced into markets.

Analysts had viewed a shutdown as unlikely, with many citing other government stalemates that were resolved in the past few years. However, political infighting in 2011 prompted the loss of the United States’ triple-A credit rating and was the primary driver of the stock market’s last full-on correction.

“A shutdown is just one domino; if it falls, it will cause a series of unknowns, and those unknowns are impossible to quantify,” said Adam Sarhan, chief executive of Sarhan Capital in New York, citing the risk of a U.S. government debt default.

Historically, Wall Street has managed to avoid steep downside during similar incidents. During the federal government shutdown from December 15, 1995, to January 6, 1996, the SP 500 added 0.1 percent. During the November 13 to November 19, 1995, shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of

That precedent may not hold this time given that growth continues to lag. The U.S. Federal Reserve recently held off on slowing its stimulus program, saying economic growth was not meeting its targets.

Since the market is near all-time highs and has seen little in the way of a sustained pullback this year, Sarhan said the downside potential was vast, with major indexes “slicing through” resistance levels.

“The immediate shock could be 200 Dow points, could be 1,000 Dow points. Those moves may be exaggerated at first, but if things aren’t resolved quickly that could just be the start.”

Essentially all market sectors could see a reaction to a shutdown, with industries tied to the pace of economic growth- like energy and financials- seeing outsized impacts.

The defensive sector “will feel an immediate impact since its biggest customer is the U.S. government,” said Sarhan. “We’re talking billions of dollars in income. If that goes away, what could replace that?”

Even utilities, which are considered a defensive group, may see steep moves if a shutdown impacts interest rates.

Among other asset classes, the uncertainty could been a boon for U.S. Treasuries as investors seek shelter. Benchmark 10-year Treasury notes rose 10/32 on Friday, with yields easing to 2.62 percent.

Even if a last-minute deal is reached, investors face a second Washington cliffhanger as Congress must agree to increase the $16.7 trillion limit on federal borrowing by October 17. If Capitol Hill fails to act in time, the unthinkable could happen and the United States could default on its debts.

“We’re in a game of chicken. Once it became clear that people were willing to risk Federal employee jobs, that’s when it became a real concern,” said Len Blum, managing partner of Westwood Capital LLC in New York.

“We’ve become somewhat desensitized to this kind of apocalyptical thing coming out of D.C., but as time goes on with no resolution, it will get increasingly bad.”

(Editing by Marguerita Choy)

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China to offer tax breaks to solar power manufacturers

Sun Sep 29, 2013 12:43pm EDT

SHANGHAI (Reuters) – China’s Ministry of Finance announced it will offer tax breaks to manufacturers of solar power products on Sunday, as China moves to support an industry still struggling to deal with massive overcapacity and weak demand.

The ministry said in a short statement on its website that producers of solar power products will receive immediate refunds of 50 percent of value-added taxes.

The National Development and Reform Commission provided subsidies for solar power stations in late August.

“China’s bloated photovoltaic industry still faces a grim outlook as many companies are deeply mired in debts,” said a report on the official Xinhua news service discussing the announcement.

It cited data from the China Renewable Energy Society saying that the country’s top 10 solar panel makers are up to 100 billion yuan ($16.34 billion) in debt, with a debt to asset ratio above 70 percent on average.

Beijing has said it wants to consolidate the industry, but the sector continues to enjoy protection at the central and local level; the latter is particularly strong because solar power companies are frequently major employers.

China’s LDK Solar Co Ltd partly defaulted on a bond payment in April, then failed to meet another payment on time in August.

China’s Suntech Power Holdings Co Ltd (STP.N) said Chief Executive David King had resigned from the company in mid September, weeks after three directors left amid the solar panel maker’s efforts to restructure its debt.

Suntech’s Chinese lenders dragged its unit Wuxi Suntech into insolvency proceedings after it defaulted on $541 million in bonds after the business was hit by a glut in solar panels.

(Reporting by Pete Sweeney; Editing by David Cowell)

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Absa Capital wins regulatory approval for South African palladium ETF

Sun Sep 29, 2013 12:00pm EDT

ROME (Reuters) – South Africa’s Absa Capital has received regulatory approval for its planned Johannesburg-listed palladium exchange-traded fund and hopes to launch the product by the end of the year, a spokesman for Absa said on Sunday.

The fund will be backed exclusively by palladium sourced in South Africa, Absa’s head of investments Vladimir Nedeljkovic said on Sunday on the sidelines of the London Bullion Market Association’s annual conference.

“We have regulatory approval, and we’re now basically just finalizing a couple of small things,” Nedeljkovic said. “We definitely want to list before the end of the year.”

A similar fund backed by platinum (NGPLTJ.J) that Absa launched in April saw huge inflows from investors, growing in just four months into the world’s biggest platinum-backed ETF by metal under management.

Palladium has been the best performer of the main precious metals this year, with prices up 3.5 percent since the end of 2012, compared with an 8 percent drop in platinum prices and a 20 percent fall in gold.

The metal, which is chiefly used in autocatalysts, has benefited from growth in car sales in its core markets, the United States and China, as well as speculation that supply from main producer Russia and South Africa could fall. PREC/POLL

Nedeljkovic said he expected most interest in the fund to come from institutional investors. “It’s primarily going to be an institutional product,” he said. “There are several asset managers, large institutional investors in South Africa that are potentially interested.”

He said he did not expect the fund to struggle to find metal within South Africa to back the new ETF, saying South African investors’ particular affinity with platinum meant the new fund would probably grow more slowly than NewPlat.

“In principle it’s more complicated, just because of the fact that only 30 percent of global palladium supply is South African, rather than 80 percent,” as it is for platinum, he said. “But we’ve worked on this for a while, so it’s not likely to be a problem.”

South Africa is the world’s second largest producer of palladium after Russia, with output of 2.33 million ounces last year, or about a third of global supply.

Precious metals ETFs, which issue securities backed by physical stocks of a given commodity, have proved a popular way to invest in the sector since they were launched a decade ago.

There are currently around 1.8 million ounces of palladium held in ETFs, and nearly 2 million ounces of platinum. Nearly a third of that platinum, just under 659,000 ounces, is held by the NewPlat ETF operated by Absa.

(Reporting by Jan Harvey; Editing by David Cowell)

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Intesa Sanpaolo calls snap board meetings on CEO position:sources

Sun Sep 29, 2013 11:59am EDT

MILAN (Reuters) – Intesa Sanpaolo (ISP.MI) has called a snap meeting of its two boards on Sunday evening to discuss the possible ousting of Chief Executive Enrico Cucchiani, two sources close to the situation said on Sunday.

Cucchiani, at the helm of Intesa since late 2011, has clashed with the chairman of the supervisory board and key shareholders, several sources with knowledge of the situation have told Reuters.

“The dice is cast,” one of the sources said.

The second source confirmed the meeting of the management and supervisory boards had been called to discuss the position of the CEO.

Several people familiar with the situation have said Cucchiani may be replaced by his deputy Carlo Messina.

(Reporting by Paola Arosio, writing by Stephen Jewkes, Editing by Lisa Jucca)

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China opens new trade zone in Shanghai, reform plans unveiled

Sun Sep 29, 2013 11:55am EDT

SHANGHAI (Reuters) – China opened a new free trade zone in Shanghai on Sunday in what has been hailed as potentially the boldest reform in decades, and gave fresh details on plans to liberalize regulations governing finance, investment and trade in the area.

Officials gave no details on when specific initiatives will be implemented but the government has said most will be introduced in the next three years.

The Shanghai FTZ, which covers an area of nearly 29 sq km on the eastern outskirts of the commercial hub, was approved by China’s State Council, or cabinet, in July.

State-run Xinhua news agency quoted Commerce Minister Gao Hucheng as saying that the creation of the FTZ was a crucial decision for China’s next wave of reform and opening-up.

“It follows the trend of global economic developments and reflects a more active strategy of opening-up,” Gao said at the launch ceremony.

The State Council said on Friday it would open up its largely sheltered services sector to foreign competition in the zone and use it as a test bed for bold financial reforms, including a convertible yuan and liberalized interest rates.

Economists consider both areas key levers for restructuring the world’s second-largest economy and putting it on a more sustainable growth path.

Some Chinese and foreign firms are already setting up subsidiaries in the zone.

A total of 25 companies so far have been approved to start operations in a variety of sectors, alongside 11 financial institutions, most of which are domestic banks but including the mainland subsidiaries of Citibank and DBS.

Ralph Haupter, corporate vice president of Microsoft Corp, speaking on the sidelines of the opening ceremony, said Microsoft was excited about the zone’s potential.

“Details and sizes of business are hard to predict at this stage. But business is continuously growing and the entertainment business is very important for us at Microsoft.”

A Xinhua report quoted a document from China’s Ministry of Culture saying the ministry would remove a 13-year old ban on video game console manufacture and sale for companies registered in the zone, provided the products were approved.

“Foreign game machine manufacturers will be eligible to sell their products in China, merely via their entities registered in the zone,” the report said.


Some have compared the FTZ, which integrates three existing zones, to Deng Xiaoping’s creation of a similar zone in Shenzhen in 1978 which was crucial to China’s economy opening up to foreign trade and investment.

Optimism among mainland investors that the zone will trigger fresh investment and infrastructure spending has sent property prices and FTZ-related stocks soaring in recent weeks.

Skeptics point to a similar scheme launched last year near Shenzhen, in Qianhai, that so far has failed to meet expectations.

But analysts and economists say that the Shanghai plan is more ambitious and specific, such as in regulations on how foreign and Chinese individuals can invest across borders.

Foreign and Chinese investors have only been allowed to invest cross-border by buying into funds regulated through either the Qualified Foreign Institutional Investor (QFII) program or the Qualified Domestic Institutional Investor (QDII) program, both of which are restricted by quotas.

But Dai Haibo, deputy director of the zone administrative committee, said on Sunday foreigners and Chinese in the zone would be allowed to invest funds directly for the first time. He did not say whether they would also be subject to a quota.

He also said that foreign banks in the zone would be allowed to issue bonds in the domestic market.

Officials said China would develop an international oil futures trading platform in the zone and encourage foreign participation, part of attempts to upgrade commodities markets and hedge risk in the world’s largest energy consumer.

The insurance regulator added on Sunday that it would support allowing foreign health insurance providers to operate in the zone and would also back the development of yuan-denominated cross-border reinsurance, among other reforms.


Regulations of Chinese and foreign banks will also be eased, said Liao Min, head of the Shanghai branch of the China Banking Regulatory Commission (CBRC), adding the CBRC will adjust loan-to-deposit ratios and other regulatory requirements related to cross-border financing for banks in the zone.

Cross-border financing could potentially drastically reduce funding costs for Chinese firms and expose domestic banks to more foreign competition, but would also provide Chinese banks an outlet to find new clients overseas.

Liao said that the government would consider easing regulatory requirements for foreign banks when they apply to upgrade representative offices to full-fledged branches in the zone, and it would accelerate the application process for foreign banks applying for yuan settlement licenses.

Both functions are key for foreign banks seeking to do business in China, and the slow pace of approval has been a subject of frequent complaints from foreign bankers.

Given the mixed history of other capital account reform projects and the current speculative environment, regulators have been signaling caution in recent weeks.

The project is widely considered to be a pet program of Premier Li Keqiang but he did not attend the opening ceremony. The heads of the central bank and the foreign exchange regulator were also absent.

The highest ranking official from the central government was Commerce Minister Gao.

State media have run commentaries warning against undue property speculation, and have said that the most dramatic reforms were unlikely to be enacted this year.

“All reforms to interest rate and exchange rate systems will be based on the premise of risk control,” Zhang Xin, head of the Shanghai branch of the People’s Bank of China, told a press conference on Sunday.

Experts also doubt Beijing will be able to implement major changes in the zone without them spilling over into the rest of the country. Numerous high profile academics and officials have argued publicly against introducing them in this way.

There have also been reports of bureaucratic turf wars over which agency will drive financial reform.

Liao Qun, China chief economist at Citic Bank International, said the tone of the master planning document remains cautious given the challenges.

“Liberalization may not be realized all at once.”

Foreign investors continue to await the publication of a “negative list” of banned investment targets and industries.

In the past foreign investors were put off by vague explanations of what industries could be invested in and what remained off limits. The negative list concept would allow free foreign investment in any industry not specifically on the list.

Shanghai government officials told Reuters the list would be published at some point on Sunday. Reuters was unable to find such a list on any major government website at time of reporting.

(Additional reporting by Jiang Xihao and David Lin in SHANGHAI and Michelle Chen in HONG KONG; Editing by Jeremy Laurence and David Cowell)

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