China to widen yuan trading band against dollar

China's central bank said it would widen the yuan's trading band against the dollar following international pressure to allow its tightly controlled currency to appreciate.

The yuan is currently allowed to trade 0.5 percent on either side of a midpoint price set by the central bank every trading day.

The new rules will come into effect on Monday and allow the currency to fluctuate by up to 1.0 percent either side, the bank said in a statement.

Beijing's trading partners have long criticised its yuan exchange rate, saying it is kept artificially low, fuelling a flow of cheap exports that have helped trigger huge trade deficits between some countries and China.

China has repeatedly vowed to loosen its grip on the yuan as it moves towards full convertibility but it has rejected calls for a faster appreciation for fear of hurting its manufacturing sector, a key driver of its economy.

Saturday's announcement means that the yuan will be allowed to fluctuate further against the dollar but not necessarily appreciate as much as is demanded by China's trading partners, including the United States.

The bank said the change was decided "in order to meet market demands... (and) enhance the flexibility of RMB (renminbi, as the yuan is officially known) exchange rate in both directions".

"In view of the domestic and international economic and financial conditions, the People's Bank of China will continue to fulfil its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable."

Ting Lu, China economist at Bank of America Merrill Lynch, said the move would ease international pressure to allow the yuan to appreciate and was bigger than market expectations of a 0.7 percent trading band.

"External pressure for RMB-USD appreciation will be alleviated," he said in a note.

China said Friday its economy grew by 8.1 percent in the first three months of 2012, its slowest pace in nearly three years.

However, analysts predicted the world's second-largest economy would avoid a hard landing, which could trigger massive job losses and spark social unrest.

The central bank called in February for the government to move faster to loosen currency controls to make it easier for Chinese companies to invest overseas and boost the yuan's global status.

China restricts the movement of money outside the country such as investment in real estate, stocks and bonds to prevent sudden inflows and outflows of capital that could destabilise its financial system.

Beijing has vowed to increase the use of the yuan in international trade and encourage foreign investment in Shanghai's financial markets, according to a five-year blueprint unveiled this year by the National Development and Reform Commission, a powerful state planner.

But in its study released in February, the central bank said reforms were taking too long and China could loosen investment controls and encourage more enterprises to take opportunities abroad in the next three years.

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The U.S. and China: A Duel to the Debt (The Motley Fool)

In this period of "exceptional uncertainty" (to quote Federal Reserve Chairman Ben Bernanke), where can investors turn for a considered perspective on the current environment? Produced to feed the beast of the 24-hour news cycle, the bulk of financial journalism and commentary today isn't worth the servers it is stored on. One notable exception to that rule is Buttonwood, the financial markets column of The Economist. Philip Coggan is the columnist -- arguably the most influential position in financial journalism (along with the head of Lex at the Financial Times).

Deciphering the headlines
With the developed world facing fiscal and monetary crises, Coggan's new book, Paper Promises: Debt, Money, and the New World Order, is a veritable enigma machine for investors who wish to decipher today's headlines (the U.S. edition was released Monday). In an email interview last week, Coggan shared his observations on some of the most pressing topics of the day. In the first of two articles, he explains why the current international monetary system is on its last legs and discusses the possibility of the Chinese renminbi replacing the dollar in a successor system:

"The thesis of the book is that economic history is a battle between creditors and debtors, with the nature of money the territory over which they fight. Money has two core functions; as a means of exchange (paying for your daily Starbucks) and as a store of value (making sure you can still afford a Starbucks in old age). Historically, those two functions have been in conflict; some groups have wanted to expand the supply to encourage economic activity; others have wanted to restrict the supply of money to protect the value of savings. Broadly speaking, the money expanders have been debtors and the money restricters have been creditors."

Debtors and creditors: a historical struggle
As he makes clear, that dichotomy is at the root of the rise -- and fall -- of different monetary systems:

"Over history, creditors have tended to impose systems that control the supply of money -- the gold standard, the Bretton Woods system of fixed exchange rates, the euro -- that prevent borrowers from repaying their debts in debased currencies. The strain of keeping up this discipline is intense in democracies where more people are debtors. The gold standard broke down in the 1930s, Bretton Woods in the 1970s and the euro is struggling today, as is what might be called the post-Bretton Woods system of independent central banks and inflation targets. A new world order will emerge from the ashes."

Today, the struggle between debtor and creditor pits the United States -- the world's largest debtor nation -- against rising superpower China. With more than $15 trillion in outstanding public debt, Uncle Sam is in hock to China to the tune of a cool $1.1 trillion. In light of these numbers and China's growing confidence, it's not hard to imagine that the relationship between the two nations will be instrumental in shaping a new monetary order. How fast will it emerge and how far will it go? Could we witness the renminbi (China's currency) replace the dollar as the world's reserve currency? I asked Buttonwood.

A long way behind
"Could we see the renminbi replace the US as the reserve currency in our lifetime? It depends on how long you think you will live. Reserve currency status is not just a matter of having the largest economy; it is a function of liquidity and trust in the legal system. In both cases, the renminbi is a long way behind. Remember that sterling was still being used as a reserve currency in the 1950s, 60 years after the US overtook Britain."

Nevertheless, the future stability of the dollar is at risk, as projected increases in unfunded liabilities related to Social Security and Medicare/Medicaid threaten to upend a delicate equilibrium that is based on trust and confidence. That problem -- serious as it is -- is compounded by a fractious political class that is unable (or unwilling) to address the problem in a mature manner. Since optimism is a trait of the American character, let's take a "glass half-full" approach. What are the reasons to believe that the U.S. can tackle its debt problem effectively? I asked Buttonwood.

Three hopeful signs
"The most hopeful signs for the US in dealing with its debt problems are threefold; demography, economic vitality and energy. America has a higher birth rate than Europe and (at the moment) benefits from lots of immigration. Whereas in Italy there are currently 3 people of working age for every pensioner, in the US there are 4.6. By 2050, there will be only 1.5 Italian workers per pensioner but the US will have 2.6, better than much of Europe today. Secondly, the US is in the forefront of new industries like software, biotechnology and alternative energy that could boost productivity in the future. Since economic growth is a function of a) worker numbers and b) productivity, both are positive news. Third, the recent development of shale gas makes the US much more energy sufficient than Europe."

The old continent: No question about it, Europe is in a real jam right now. In our concluding article, Buttonwood lays out one way in which the European sovereign debt crisis may play out and discusses whether a new gold standard would make a good replacement to the current regime of floating fiat currencies. Finally, he highlights the extraordinary shift by which orthodox thinking in the U.S. regarding the currency has been turned on its head -- stay tuned.

China may overtake the U.S., but three American companies are set to dominate the world.

Fool contributor Click here to see his holdings and a short bio. You can follow him considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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No More "Made in China"? (The Motley Fool)

By Adam J. Crawford Adam J. Crawford – Thu Oct 6, 3:45 pm ET

Wal-Mart (NYSE: WMT - News) recently unveiled a new ad campaign: "Low Prices. Every Day. On Everything." But "Rising Prices. Every Day. On Everything." might more accurately describe Wal-Mart's price policy if the flow of Chinese goods dries up.

A perfect couple?
As you probably know, a substantial portion of the products sold in Wal-Mart come from China. A strong dollar relative to the Chinese yuan allows Wal-Mart, and many other retailers, to purchase Chinese products on the cheap and pass the savings on to the American consumer.

A perfect marriage, right? Americans are happy because we can go to Wal-Mart and buy a waffle iron for 10 bucks. And the Chinese are happy because making the products we consume creates jobs. But this marriage is on the rocks because it was never built on a solid foundation in the first place.

A possible decouple?
The Chinese intentionally devalue the yuan in order to maintain an export economy. Some economists claim this manipulation artificially depresses the value of the yuan by as much as 40%. The problem is that devaluing the yuan is creating inflation -- thus causing China to reconsider its monetary stance.

A reversal in monetary policy could result in fewer cheap Chinese products for American consumers. The big retailers seem to be preparing for this.

Wal-Mart, Best Buy (NYSE: BBY - News), and Target (NYSE: TGT - News) are shifting from the big-box model into smaller locations. But it might be too little too late. A potential situation in which big retail is stuck with excess floor space and decreasing volume is feasible if China pulls the plug on the dollar peg. Internet retailers like Amazon.com (Nasdaq: AMZN - News) will likely be in a stronger position to weather the storm.

The bottom line
For now, China continues to supply America with an abundance of low-priced products, but a change in China's monetary policy could lead to rising prices for American consumers.

Fool contributor Motley Fool newsletter services have recommended buying shares of Amazon.com and Wal-Mart Stores, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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McDonald's Is Betting Big on China (The Motley Fool)

There's good news for the fans of McDonald's (NYSE: MCD - News) in China. Now they all can enjoy burgers, fries, and shakes from their favorite international food chain, as the company has decided to open more stores in the country. While fans of the Happy Meal are probably happier now, how should investors feel?

So what's cooking?
McDonald's aims to open at least 700 new stores in the country by 2013. At present, there are 1,300 Big Mac outlets in China, marking its largest expansion strategy ever deployed there. The newly announced goal sharply accelerates its December plan to open just 200 locations. So why the sudden move?

Mickey D's is no stranger to the Middle Kingdom. In fact, McDonald's has been in China for about two decades and, therefore, understands the market better than many of its rivals who may be just jumping in.

McDonald's bet on China is clearly a play on the country's growing attractiveness as an investment destination and as an opportunity to capitalize on the "Westernization" of consumers. To boost sales and improve profitability, companies have raised stakes in emerging markets where availability of cheap labor and raw materials often help these companies improve margins.

The second reason for this expansion can be the pressure McDonald's is facing from its competitors. The fast-food market is heating up, and this is the time to expand. McDonald's is looking at Asia for growth as it prepares to take on key rival Yum! Brands (NYSE: YUM - News) in its pursuit for growth in China.

In the battle for market share, Yum!'s KFC appears to have a head start in China with more than 3,000 stores already in place. But that's not all. Starbucks (Nasdaq: SBUX - News), the world's biggest coffee chain, has also decided to boost its presence to 70 Chinese cities and triple its presence to 1,500 stores by 2015. A fight for market share would, in all probability, lure other established players such as Domino's Pizza (NYSE: DPZ - News), Wendy's/Arby's (NYSE: WEN - News), and hopefully Chipotle (NYSE: CMG - News) into the fold.

A Fool's take
It's evident that the rivalry is heating up in the fast-food market even in emerging markets such as China. If McDonald's succeeds in its Chinese expansion, it would see an immediate impact on sales and bottom line. The company has the advantage of a two-decade-old presence and such an experience fused with a well-planned strategy should further strengthen its foothold there.

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Goldman bets on China insurance with $900 mln Taikang stake buy (Reuters)

HONG KONG (Reuters) – Goldman Sachs (GS.N) has bought a 12 percent stake worth more than $900 million in China's Taikang Life Insurance Co Ltd, giving the Wall Street giant a foothold into the world's biggest insurance market.

Goldman's long-overdue purchase could pave the way for Taikang's planned initial public offering next year, bankers and analysts said, as the insurer seeks more capital to fund its rapid growth in China.

Credit Suisse estimates China's life insurance market --which generated $124 billion premium income in 2009 -- will grow more than 20 percent per annum for the next decade.

But some analysts doubt if Goldman can earn the same big returns that Carlyle Group (CYL.UL) and TPG Capital (TPG.UL) reaped from their investments in Chinese insurance companies.

"Goldman has come in pretty late into the game relative to Taikang's planned IPO timeline, so the returns might not be as high as previous investors have got," said Sally Yim, senior analyst of financial institutions group at Moody's.

Carlyle's investment in China Pacific Insurance (Group) Co (2601.HK) is already on course for its best ever exit, after it sold down a $2.6 billion stake over the past few months.

Last year, TPG sold a $2.4 billion stake in China's Ping An Insurance Group Co (2318.HK), which analysts estimate delivered strong profits for the buyout fund.

RIVAL BIDDERS

Goldman is not new to the China insurance industry, having previously bought a stake in Ping An along with Morgan Stanley (MS.N) in 1994. But Goldman is using its balance sheet to buy the Taikang stake, while the previous investment was made through its private equity arm.

Goldman acquired the Taikang stake from French insurer AXA SA (AXAF.PA), which last month said it agreed to sell its 15.6 percent in Taikang to a group of investors for $1.2 billion.

Goldman beat several bidders, including Kohlberg Kravis Roberts & Co (KKR.N), Blackstone Group (BX.N) and Singapore's Temasek Holdings (TEM.UL), to win the Taikang auction.

China Guardian Auctions Co. and New Deal TEDA Investment Co., Ltd were the others who bought the shares sold by AXA, the China Insurance Regulatory Commission (CIRC) said on its web site. AXA put its stake on the block nearly two years ago and Goldman was picked as the preferred bidder last year.

The stake purchase was approved by CIRC, Goldman and Taikang said in a joint statement.

Taikang and New China Life Insurance Co. are among insurers which are looking to tap the public market over the course of the next year or so. Taikang has about $44 billion in assets and 54 million clients across China.

"The regulators are a bit reluctant to allow insurance companies to raise subordinate debt to replenish capital. So all these companies are looking to shareholders to help inject capital to support growth," Yim of Moody's added.

(Editing by Michael Flaherty and Muralikumar Anantharaman)

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