What Is on China's Mind?

One week before the G20 Summit is scheduled to open in London, we had a rare opportunity to read the mind of the Chinese government, as top officials went on a publicity campaign this week to express opinions on hot topics ranging from currency to the international financial system. In a widely quoted article published on the central bank's official site, central banker Zhou Xiaochuan called for a super-sovereign reserve currency that is "disconnected from individual countries," echoing concerns expressed recently by the Chinese premier Wen Jiaobao that deficit spending in the U.S. will lead to a weaker dollar that may hurt major holders of U.S. Treasuries such as China. In the same week, China's vice premier Wang Qishan (who is in charge of finance and banking) published an article in The Times newspaper, directly addressing readers outside of China. He highlighted the importance of reforms in the international financial systems to give developing countries a bigger voice, and he said China will be a buyer of IMF bonds if quota-based contributions fall short of immediate funding needs of the organization.

Market Recap
Strong stock market performance overseas and optimism about China's stimulus package combined to boost investor confidence. The Shanghai Composite Index increased by 4.1% to 2,374 this week, while the Shenzhen Composite Index increased 4% to 8,994.

Macroeconomic and Financial
China Expands Influence in Region through Currency Swap Programs
China has signed bilateral currency swap agreements with South Korea, Hong Kong, Malaysia, Belarus, and Indonesia since December 2008. Central bank officials recently confirmed that China plans to set up an office in Hong Kong to facilitate the cross-border trade settlement in the Chinese currency.

Export Tax Rebate Raised on More Than 3,000 Products
Starting on April 1, China will raise tax rebate on electronics (such as color TVs) to 17%, on textile products to 16%, on furniture to 13%, and on automotive components such as rearview mirrors to 11%. The tax rebate on textile exports is higher than the previously anticipated 15%, as the government tried to help the industry battered by the global recession. In February, customs data showed that textile exports declined by 35% year over year and 56% sequentially.

Goldman Sachs Stays Put with Industrial and Commercial Bank of China (ICBC)
In a new share lockup agreement, Goldman has committed to holding at least 80% of its ICBC shares until April 2010. The firm currently owns 4.93% of ICBC's total outstanding shares. The previous lockup agreement expires this year.

Technology
China's Fixed-Line User Base Continues to Contract
According to the Ministry of Industry and Information Technology, China lost 3.1 million fixed-line subscribers but added 18 million mobile subscribers in the first two months of 2009. A growing number of consumers ditch fixed-line services altogether, as mobile services provide more convenience at attractive rates. China now has about 660 million mobile users and 337 million fixed-line subscribers.

Consumer
Yum Brands Salivating over China's Little Sheep
Fast-food group  Yum Brands (YUM) said it would acquire 20% of Little Sheep, a Hong Kong-listed hot pot franchise headquartered in China's Inner Mongolia. The company has 130 restaurants and 246 franchises in the mainland, plus more than 20 overseas outlets. Yum Brands will buy the stakes in Little Sheep from 3i and other private equity firms in this $63 million deal.

Contributions from Lun Lu, Iris Tan, and Peter Liu.