TO THE POINT: In line with the Central Government's decision to carry out tightened monetary policy, China's central bank launched two special deposits, encouraging banks to deposit more money into the central bank in order to curb liquidity. China's state-owned investment firm is buying into Morgan Stanley's shares to divert the country's ballooning foreign reserves. Allowing foreign-invested companies to be listed in the mainland stock market could work as another measure to absorb the excessive money in circulation. Shanghai has established a financial arbitration court to resolve disputes arising from the booming financial market.

A Done Deal?

China Eastern Airlines is entering into a strategic partnership with two Singapore companies in a bid to boost its performance and expand market share.

The prenuptial agreement stated that Singapore Airlines and Temasek - the investment body of the Singaporean Government - will purchase a combined 24-percent stake of China Eastern's shares at the cost of HK$3.8 per share.

Both governments have approved the deal, but the final decision still awaits the vote of stockholders. If two thirds of the shareholders agree, the deal will be closed.

"I am confident the deal will be approved at the shareholders' meeting on January 8," said Li Fenghua, President of China Eastern.

If the deal succeeds, China Eastern will surpass China Southern Airlines as the second largest airline on the mainland. Li hopes to increase the market share in Shanghai from the current 36 percent to 50 percent after the deal is inked.

However, Air China, the largest mainland airline and the biggest stockholder of China Eastern's tradable shares, disagreed and complained the acquisition price was "too low."

Fan Cheng, Air China's Vice President, pointed out that Singapore Airlines once invested in many airlines like Air New Zealand and Virgin Atlantic, but all ended in failure. Fan said these failures indicate the enormous difficulties confronting international cooperation in airline operation. "It is hard to say whether China Eastern can truly learn advanced management experience from Singapore Airlines," Fan said, adding that Singapore Airlines mostly focuses on the North American and European markets, while China Eastern serves mainly the Asia-Pacific region. "There is hardly any experience to share," Fan argued.

Li Fenghua contended that the cooperation with Singapore Airlines "is a government decision," and that he was sure "stockholders will vote for the cooperation."

Sparing No Effort to Curb Liquidity

One week after it announced it would raise the reserve requirement ratio by another 1 percentage point to 14.5 percent, the Chinese central bank said it would start taking special deposits as of December 27.

The move was the second time in the fourth quarter that the central bank has decided to issue special deposits, a measure that had previously not been resorted to in the past two decades.

Under the special deposit agreement, financial institutions will deposit a certain amount of money with the central bank and they will receive interest payments on the deposits after a certain period.

This time, there are two kinds of special deposits, including a three-month and a one-year special deposit with annual interest rates of 3.37 percent and 3.99 percent, respectively, said the central bank. The special deposits target rural credit cooperatives and city commercial banks excluding primary dealers in the open market. The special deposits adopt voluntary declaration of quotas.

Experts said the move shows the central bank's determination to curb the excessive liquidity in the financial markets. It is also a demonstration of "tightened monetary policy," which was stipulated at the Central Economic Work Conference held on December 3-5.

Serving Justice

Shanghai established a special financial arbitration court to handle the increasing number of financial disputes and also to relieve pressure on other courts.

Shanghai's Vice Mayor Feng Guoqin said that the establishment of the new court was to ensure the ability of the city's legal system to keep pace with the rapid development of the city as a leading financial center.

By the end of November, the aggregate trading volume (excluding foreign exchange trade) in Shanghai reached 114 trillion yuan ($15.41 trillion), a surge of 110 percent from a year earlier, according to Fang Xinghai, Director General of the Shanghai Municipal Government's Office for Financial Services. The figure far outpaced the amount estimated in the 11 th Five-Year Plan for Shanghai published in 2006. The report had said that Shanghai's financial market trade value would reach 80 trillion yuan ($10.81 trillion) by the end of 2010.

Along with this rapid financial development, the number of financial disputes also grew.

"Most of the time, the law simply cannot keep up with the fast-evolving financial market," said Fang. "Without a transparent and efficient arbitration mechanism, financial innovation will be thwarted."

The arbitration court will involve a team of financial legal experts from home and abroad. The court has hired 78 people, including 14 from the United States, UK, Germany, Canada, Japan, French, South Korea, Singapore and the Hong Kong Special Administrative Region.

Removing Grain Rebates

The export tax rebates for wheat, grain, rice, corn and soybeans and related flour products were removed starting December 20. Altogether 84 kinds of products are affected. The current rebate rate stands at 13 percent, according to the Ministry of Finance.

China is the world's largest grain consumer and also a major exporter. The country exported 4.9 million tons of corn, 1.2 million tons of rice and 400,000 tons of soybeans in the first 11 months, according to figures from the General Administration of Customs.

The government had already stopped corn and wheat exports in the second half of the year to meet domestic demand.

Experts believe the rebate elimination is a bid to ease the nation's rising consumer prices.

China's consumer price index, a barometer for inflation, surged 6.9 percent in November, its highest mark in 11 years, mostly caused by soaring food prices. Food prices, which make up one third of the consumer basket, rose 18.2 percent in November.

Water Prices Up

The National Development and Reform Commission (NDRC), China's top economic planner, claimed that urban water prices will rise in 2008 at an appropriate time.

Spurred by the news, the stock prices of water-related companies, like Shanghai Municipal Raw Water Co. Ltd., rose considerably - an average 5 percent on December 10.

Officials from the NDRC explained that the costs for upstream water processing companies were rising due to increasing labor costs and environmental protection charges. Currently, the water price in Beijing is 2.8 yuan per cubic meter and 0.9 yuan per cubic meter for sewage processing.

The price of water used for agriculture production will also be raised to a rational level. Meanwhile, the fees for processing sewage will be increased by 1-2 yuan per cubic meter.

Beverage industries will be most impacted by the hike in water prices, said experts.

"All companies will be affected by the water price rise, which will eventually cause serious inflationary pressure," said Chen Wei, a researcher at the Shanghai Academy of Social Sciences. But Chen said the price hike will be a double-edged sword: The rising water price will add costs to users but can also force companies and individuals to make full use of water and cut waste.

More Foreign Companies Eye Listing

As one of the achievements of the Third China-U.S. Strategic Economic Dialogue (SED), China will allow foreign-invested companies, including banks, to launch yuan-denominated A-share initial public offerings in the mainland stock market. In addition, the qualified listed foreign companies will be able to issue yuan-denominated corporate bonds.

U.S. Treasury Secretary Henry Paulson urged China to establish a sound supervisory system and adopt relevant policies to make sure the implementation is successful.

The Fourth SED will be held in the United States in June 2008.

Investing Muscle Overseas

The China Investment Corp. (CIC), the country's state-owned investment body, stated that it will invest up to $5 billion in the second largest U.S. investment bank Morgan Stanley, despite recent U.S. stock market turbulence.

Morgan Stanley is expected to be the least affected by the devastating sub-prime mortgage crisis, largely because it was less involved in collateralized debt obligations than other major investment banks like Merrill Lynch.

Earlier this year, the CIC invested $3 billion in the U.S. private equity firm Blackstone Group. This time it will purchase equity units that are automatically convertible into 9.9 percent of Morgan Stanley common shares. The equity units carry a fixed annual interest rate of 9 percent before conversion on August 17,2010.

"It is a good time to invest in U.S. financial institutions, as many of them are undervalued due to the subprime mortgage crisis," said Li Yang, a financial expert with the Chinese Academy of Social Sciences.

NUMBERS OF THE WEEK

7th and 29th
The U.S.-based Petroleum Intelligence Weekly listed the top 50 global oil companies and China National Petroleum Corp. ranked 7th in the list, the highest ranking for Chinese petroleum companies. Sinopec Corp. ranked 29th.

Writing Competition for Foreign Students Kicks Off

The "China and I" themed essay writing and photography competition for foreign students in China, which is hosted by the Service Center for Studying Abroad of the Ministry of Education and supported by Beijing Review magazine, will be launched soon. The competition is to demonstrate foreign students' bonds with ancient and modern China and the upcoming Olympic Games. For more information please visit: www.studyinchina.net.cn or www.bjreview.com