The Irish Independent reports that Allied Irish Banks' new boss Colm Doherty is set to press ahead with tackling a €1.26bn deficit in the group's defined pension plan by getting members to contribute 4pc of their salaries to the scheme within three months.
Addressing the shortfall, almost the size of AIB's market value, is a key issue for potential investors as the group looks to raise billions of euro of capital, as the discounted transfer of €24bn of loans to the National Asset Management Agency (NAMA) blows a hole in its equity reserves.
Bank of Ireland is also believed to be looking seriously at ways to narrow the €1.47bn deficit across its schemes.
Ciaran Callaghan, analyst with NCB Stockbrokers, said the issue had become all the more critical in light of recent proposals from the influential Basel Committee on banking supervision that pension deficits should be deducted from banks' core equity capital.
"Given the magnitude of the Irish banks current deficits, this would have a significant negative impact on their regulatory capital positions.
"While full implementation of the proposals is not planned until 2012 at the earliest, this should provide an incentive to management to address this problem as soon as adequately possible," said Mr Callaghan.
AIB managing director Mr Doherty is set to meet unions later this month, where the pension deficit is expected to be a key item for discussion.
Spectre
The spectre of voluntary redundancies is also likely to crop up, given Mr Doherty's thinly-veiled warning in a staff email last month, where he said "tough decisions are needed to further reduce our costs".
Both AIB and the IBOA finance union are considering proposals drawn up by independent mediator Kevin Foley before Christmas, which recommends that working members of the bank's defined benefit scheme start contributing 4pc from this April, rising to 5pc next year.
Staff who joined the bank before 1998 are part of the defined benefit scheme and do not currently make any contributions towards their pension.
Mr Foley also recommends that staff who still do not wish to contribute will see their pension fall from two-thirds of final salary to a lower level.
In addition, he proposes that final defined benefit pensionable salary should be based on the average salary a worker receives over the last five years before retirement, though he said the average figure should not come in below 87.5pc of actual final salary.
AIB first locked horns with unions last May over the prospect of non-contributory pension members doing their bit to shore up the deficit last May.
Mr Foley, of the Labour Relations Commission, was later brought in to unblock an impasse between the sides.
Larry Broderick, IBOA general secretary, said the union's members will not be balloted to accept the new proposals "until AIB confirms that a minimum funding standard be put in place and that it can keep the scheme viable into the future".
A minimum funding standard is a test of a pension scheme's ability to meet its liabilities if it were wound up.
AIB's scheme had its first ever minimum funding standard deficit at the end of 2008, of €519m, when the shortfall in its defined benefit schemes stood at €1.1bn.
The total deficit had risen to €1.26bn by last June.
The Irish Independent also reports that Ireland's top 10 developers have been ordered by NAMA to provide a complete list of all their assets and liabilities, cashflow forecasts for the next three years and estimates of where they think property prices are going.
"This is a full opportunity for the leading developers to come clean; they should see NAMA almost like their new bank manager,''said Brendan McDonagh, chief executive of the agency.
Mr McDonagh would not reveal the names of the developers, but most are household names with debts running into the billions. The normally publicity-shy developers will have to give NAMA up-to-date balance sheets and information on individual projects.
The average discount on thousands of toxic loans being moved into NAMA is still likely to be 30pc -- despite further falls in property prices here, the chief of the agency insisted yesterday.
The NAMA chief executive, moved to draw a line under mounting market speculation that the average haircut could be as much as 35pc because the property market has worsened since the agency was set up last year.
Mr McDonagh said that while some decline had been witnessed in Ireland, property prices in the UK and US had recovered, offsetting Irish declines. Not all the information was in yet, but UK commercial prices rose 8pc recently.
Markets in the south of England and in London were recovering strongly, he said.
Mr McDonagh also warned that court action against property developers could be initiated within months, particularly against those who refuse to co-operate with the agency.
"For those who don't co-operate, there are two options. Pay back the money and that's fine, or otherwise we will take enforcement action against you,'' Mr McDonagh said. He said NAMA would take a very "hard-nosed'' attitude.
Asked would he call in personal guarantees given by developers, Mr McDonagh said NAMA would be very "rigorous'' in that area. Taking family homes from developers would be difficult because the family home had legal protection in Ireland. But developers who have second or third homes could have them confiscated, he said.
"Not all family homes are really family homes, if you know what I mean,''Mr McDonagh added, without elaborating.
The first tranche of Nama loans would move in February, he said. All that was holding up the process is the fact that EU approval is needed for the methodology used to value the toxic loans. Mr McDonagh said there was no reason to believe approval would not be granted.
The EU Commission had received "thousands of pages'' on NAMA from the Department of Finance, Mr McDonagh said, in an attempt to make sure the proposals comply with EU state-aid rules.
Mr McDonagh said he was aware that some foreign banks had expressed an interest in joining NAMA, but those negotiations were taking place with the Department of Finance, and not with him.All the loans would be transferred to NAMA by the third quarter of 2010.
The Irish Times reports that banks will begin transferring loans to the National Asset Management Agency (Nama) next month, with development loans valued at €19 billion to be transferred in the first tranche, the agency said yesterday.
Around half of the approximately €80 billion in loans to be acquired by Nama will be transferred by the end of April at the latest, according to Nama chief executive Brendan McDonagh.
Speaking at the annual business review of the National Treasury Management Agency (NTMA) – which will have responsibility for Nama – Mr McDonagh said Nama was on track to begin the process of loan transfers and was awaiting approval from the European Commission.
Mr McDonagh said the initial valuations showed that the average discount on loans transferred to Nama would be about 30 per cent, the discount originally mooted by the Government.
The loans of the top 10 borrowers, with a nominal value of €19 billion, will be transferred in early February, subject to approval. A second transfer will take place in early March, while Nama intends that a third transfer will take place by the end of March – or “by the end of April at the latest”.
At this point, about half of the loans earmarked for the agency, representing the debts of the 100 largest borrowers, will have been transferred to the State under Nama.
The process is expected to be completed by the end of the third quarter of 2010. The plan to cleanse the Irish financial system of its bad debts was to begin in December, but was delayed.
The original size of the loans to be transferred was late last year estimated at €77 billion, for which the State will pay €54 billion.
The NTMA’s new chief executive John Corrigan said he was confident the European Commission would approve the Nama scheme. “While we have no reason to doubt that we will get that approval, the timing is a moveable feast,” Mr Corrigan said.
The commission has asked the Financial Regulator to oversee the process and the regulator has in turn outsourced the task to a “major international firm”, Mr McDonagh said.
Shareholders at AIB voted on December 23rd to participate in Nama, while Bank of Ireland is to vote next Tuesday at University College Dublin, it said yesterday.
The State has already pumped €11 billion of capital into the banking sector, which collapsed in the wake of the Irish property bubble and the fallout from the global financial crisis. Mr McDonagh said he had received all of the necessary information on the top 10 borrowers from the five Nama lenders – AIB, Bank of Ireland, Anglo Irish Bank, EBS and Irish Nationwide.
The Nama chief executive added that a recent recovery in UK and other overseas property prices was good news for Irish taxpayers, as more than a quarter of the Nama loans relate to overseas assets.
The Irish Times also reports that financier Derek Quinlan has resigned as director of Quinlan Private, the property investment firm he founded more than 20 years ago.
It was signalled last summer that Mr Quinlan would step down as chairman and partner of the company, but no mention was made at that stage of resigning his directorship.
Filings received by the Companies Office this week show that Mr Quinlan’s resignation as director of Quinlan Private and associated company Quinlan Capital Partners took effect at the end of November last. The remaining directors at Quinlan Private are its four partners, Olan Cremin, Peter Donnelly, Thomas Dowd and Mark O’Donnell.
Mr Quinlan’s decision in July to depart as chairman came as a surprise, particularly since he was and remains a significant investor in many of the firm’s projects.
Quinlan Private has typically been involved in large-scale syndicated property investments that attract the very wealthy. Among its early high-profile projects was the €1.1 billion purchase of the Savoy hotel group in 2004.
Like most other property interests, some of the group’s investments have come under pressure, leading to calls for syndicate members to advance new cash for refinancing purposes.
It is possible that some loans related to Quinlan projects will be moved to Nama when it becomes active next month. A spokeswoman for Quinlan Private said Mr Quinlan retained an interest in certain investments managed by the firm.
The Irish Examiner reports that a strong performance from the life science industry failed to provide any meaningful boost for the €154 billion export sector which had one of its worst years in 2009.
Export recovery is expected to continue this year but, according to the Irish Exporter Association (IEA), it will be a jobless recovery with return-to-job growth not expected until 2011.
On the bright side, exports to the US grew by 12% last year driven by the recession-proof pharmaceutical, medical devices and chemical sector.
Gains of 12% were reported on chemical and pharmaceutical exports and a gain of 4% on medical devices exports.
The IEA said the growth in pharmaceutical and medical devices exports last year confirms Ireland is one of the "leading international locations for the life science industry".
IEA chief executive John Whelan said despite the strong overall performance of exports, it is hard to overstate the difficulties faced by indigenous exporters last year.
Total exports of goods and services fell by 1% to €154 billion last year. Merchandise exports were €85.5bn and service exports were €68.4bn.
Indigenous export of goods fell by 9% to €13bn. Food exports were down 14% and drink exports fell further by 21%.
General manufactured goods exports were down by 26%.
"The resilience of manufacturing exports was tested to breaking point in 2009 with export sales falling by €6.1bn when the life sciences exports were excluded. This makes 2009 as one of the worst on record for the broad range of traditional Irish manufacturers selling on export markets," said Mr Whelan.
The British market which is the main export destination for indigenous exporters fell by 16% last year and this represented lost sales to exporters of €2.5bn, as the IEA said exporters were forced to abandon the market because of extreme exchange rate difficulties.
In the eurozone, Irish exports grew by 3% last year, which the association said showed the ability of Irish exporters to seize the opportunities when the global market turns and there is a level playing field in terms of currency exchange.
A sharp decline occurred in economic activity in the eight emerging EU countries outside the eurozone, with exports to these countries falling by 21%.
The IEA said exporters in the IFSC were heavily impacted by the crash in the financial market following the collapse of Lehman Brothers in late 2008, but it said there was only two complete closures, which augers well for a basis of return to growth over the next few years in this sector.
The Financial Times reports that Gordon Brown has been told by two of his most senior ministers to change his leadership style, clarify Labour’s election strategy and abandon “class war” rhetoric if he wants to rebuild cabinet unity after Wednesday’s failed leadership coup.
Harriet Harman, deputy Labour leader, and Jack Straw, justice secretary, demanded to see Mr Brown at the height of the drama, seeking assurances he would include them in a wider circle of advisers.
Ms Harman and Mr Straw, two of the party’s most experienced figures, urged the prime minister to stick to the centre ground, in spite of Downing Street’s denial that it is pursuing a class-based election strategy aimed at Labour’s core vote.
“There’s widespread frustration in the cabinet – people don’t know what the election strategy is,”said one Labour figure. “A lot of experienced people like Jack Straw, Harriet Harman, Alan Johnson and David Miliband feel out of the loop.”
Mr Brown is also under cabinet pressure to confirm his election team. Number 10 aides say Peter Mandelson will be in charge of day-to-day strategy and communications, but Ms Harman so far has only an undefined “very big role”.
Mr Brown on Thursday described the botched coup – led by former ministers Geoff Hoon and Patricia Hewitt – as “a storm in a teacup” but he knows that it was hatched in the belief it might provoke a series of cabinet resignations.
The call for a secret ballot on the leadership was backed by only a handful of Labour MPs but some ministers – including Mr Straw, Ms Harman and David Miliband, foreign secretary – offered their support to the prime minister only once it was clear the coup had failed.
Alistair Darling also met Mr Brown that afternoon but his aides denied reports the chancellor suggested that the prime minister resign. It is thought Mr Darling sought reassurances that Mr Brown would not revert to his “Labour investment versus Tory cuts” election strategy. Mr Darling says cutting the £178bn deficit is the government’s top priority.
Mr Harman, Mr Straw and other ministers, including Bob Ainsworth and Douglas Alexander, denied being part of the plot. Last night Mr Brown’s aides rejected suggestions he was adopting a “core vote” strategy and said that Labour’s battle plan would become clear in the coming weeks.
Mr Brown, who convenes a weekly cabinet meeting on Friday, was said by aides to be “increasingly” seeking political advice from ministers such as Mr Straw, Mr Darling and Mr Miliband, as evidence of a more inclusive style. He offered similar promises to change his style in June 2009 after the last leadership challenge.
The FT also reports that Iceland faces a battle to maintain united Nordic support for its economic recovery plans after Finland warned crucial financial aid could be held up by the dispute over €3.9bn of lost bank deposits owed to Britain and the Netherlands.
Finland’s admission that planned loans from Nordic countries to Iceland were likely to be delayed was the first concrete sign of international pressure after the Icelandic president this week blocked legislation to reimburse the UK and Dutch governments.
Steingrimur Sigfusson, Iceland’s finance minister, flew to Oslo on Thursday night to meet his Norwegian counterpart and is due in Copenhagen on Friday for talks as Reykjavik scrambles to shore up Nordic support for its crisis-hit economy.
Nordic countries could determine the fate of its recovery plans because they are the biggest contributors to the rescue programme agreed with the International Monetary Fund after the Icelandic banking sector collapsed in 2008.
Finland’s finance ministry said the next round of loans from the €1.8bn ($2.5bn, £1.6bn) pledged by Nordic countries was likely to be put on hold while consultations took place over the standoff. Norway and Denmark said they were watching the situation closely. Sweden said the matter needed to be considered with the IMF board.
Nordic countries face a conflict between their regional loyalty to Iceland and their strong political and economic ties to the UK and the Netherlands, which are demanding reimbursement of money lost by British and Dutch savers in the failed Icesave online bank.
Olafur Ragnar Grimsson, the president, on Tuesday refused to sign legislation approving repayment, triggering a referendum on the issue that is likely to take place next month.
He cited public opposition to the deal as justification for his decision after more than a quarter of the electorate signed a petition against it. But an opinion poll on Wednesday indicated Icelanders may be having second thoughts. A Gallup survey found that 53 per cent of people would support the bill in a referendum, in which a simple majority is required for it to pass, marking a turnround from the 70 per cent opposition found in previous polls.
Britain and the Netherlands have warned that Iceland risks isolation if it rejects the deal, hinting that they would veto its bid to join the European Union and block IMF loans. Resolution of the issue is a condition of the Nordic loans, which are crucial to the broader IMF programme.
Iceland received the first €300m loan from its Nordic partners last month. A similar amount was expected to follow the next IMF review, scheduled for this month. That review is now likely to be delayed.
Fitch, the credit rating agency, downgraded Iceland’s main sovereign rating to “junk” status in response to the president’s decision and Standard & Poor’s said it could follow suit. Moody’s said its financial position was strong enough to cope with a delay of “weeks or even months” to international loans.
The New York Times reports that in the game of chicken between American retailers and consumers this holiday season, the retailers won.
For most of November and December, traffic in the nation’s stores was light, with many people seemingly holding out for the eye-popping bargains of the year before. But figures released Thursday showed that retailers, by keeping tight control over their inventories, were able to avoid deep discounting. And many consumers finally surrendered, buying what they needed in a last-minute sales surge right before Christmas.
“The consumer blinked first,” said Bill Dreher, a senior research analyst with Deutsche Bank Securities.
On Thursday, retailers reported robust December sales gains, suggesting that stores might be in the early stages of a comeback. The industry collectively turned in a 2.9 percent year-over-year sales increase at stores open at least a year, according to Thomson Reuters. Some 75 percent of retailers beat analysts’ estimates — the most companies to do so since March 2007, said Jharonne Martis, director of consumer research for Thomson Reuters.
Several retailers — including Macy’s, Nordstrom, Aéropostale, TJX Companies, Ross Stores, American Eagle Outfitters and Limited — expressed their growing confidence by raising their earnings estimates.
“The window shoppers are turning into spenders,” Mr. Dreher said.
The Christmas results were the latest sign that the economy, while still a long way from boom times, has turned a corner. On Friday, the government is to release employment figures for December that many economists say they believe will show further progress.
A truly robust recovery for retailers requires that the nation’s unemployment rate begin to fall.
“Until the unemployment number heals, we’re not going to see consumers come back,” Ms. Martis said. “That is the one economic indicator that all consumers understand.”
The International Council of Shopping Centers, a trade group, said that for the crucial holiday shopping season, November and December combined, the industry posted a 1.8 percent sales increase for stores open at least a year, a figure known as same-store sales. That is a marked contrast from the 5.6 percent decline in 2008. By the council’s calculations, it is the best seasonal pace since 2006, when sales increased 4.4 percent.
“You’re starting to feel stability, and hopefully we’ll start to see growth from here,” said Stephen I. Sadove, chairman and chief executive of Saks, the luxury retailer.
December’s best sellers were electronics, shoes and toys. In fact, Toys “R” Us said its same-store sales rose 4.6 percent at United States stores and 1.1 percent at international stores.
A cold spell and snowstorms helped drive sales of clothing and gift cards. The weather also prompted more consumers to shop on the Web rather than don their boots. Macy’s, for one, said its online sales soared 29.4 percent in December.
Analysts were pleased that the results were at the high end of estimates and that retailers managed their inventory well — ordering far less merchandise but selling it at full or almost full price.
Yet the industry’s 1.8 percent increase is not an all-clear signal. Retailing professionals are careful to characterize any signs of life as fragile. Consumers are still not spending at the levels they were before the recession. And in December, the stores were measuring their performance against the bleak numbers of 2008. Chains also benefited this winter from an extra selling day before Christmas, as well as pent-up demand from consumers who had been pinching pennies all year.
Nonetheless, December was a reversal of the recent gloomy trend, with sales growth the norm across retail chains rather than the exception.
Luxury chains, among the stores hit hardest by the downturn in 2008, are seeing especially robust growth. Sales in December were up 9.9 percent at Saks, 7.4 percent at Nordstrom and 4.9 percent in the specialty retail segment of Neiman Marcus, which includes Neiman Marcus and Bergdorf Goodman stores.
Saks’s results were helped by a year-over-year shift in the timing of the chain’s designer clearance sale. Nordstrom introduced new lower-priced merchandise, which it sold at full price, a tactic that served the company well.
“Is the high-end consumer fully back?” Ms. Martis said. “No. They’re still being frugal. They’re only buying if it’s a promotion or a good value.”
It should come as no surprise, then, that discount retailers were among the month’s best performers. Same-store sales climbed 9 percent at Costco, 4.8 percent at BJ’s Wholesale Club and 1.8 percent at Target. (Wal-Mart, the nation’s largest retailer, stopped reporting monthly sales figures last year.)
Clothing chains that sell designer names at low prices also continued to shine. TJX Companies, which owns T.J. Maxx and Marshalls stores, had a 14 percent same-store sales increase. Ross Stores, a TJX competitor, posted a 12 percent increase. Same-store sales at value-priced retailer Kohl’s rose 4.7 percent.
Midprice department stores, which have been struggling for a while, posted some of the month’s weakest numbers. Sales declined 7 percent at Dillard’s, 3.8 percent at J. C. Penney, 2.6 percent at Bon-Ton Stores and 2 percent at Stein Mart.
At Macy’s, sales ticked up 1 percent. Terry J. Lundgren, the president and chief executive, said in a statement that sales at both Macy’s and Bloomingdale’s were better than in 2008, and that Bloomingdale’s had a particularly good December, with strong sales in gifts and designer brands.
Analysts at Thomson Reuters have noted that consumers were still holding fast to their discretionary dollars, and they cited as an example the weak numbers posted by stores that cater to teenagers. That sector fared the worst in December, posting a 2.5 percent same-store sales decline, according to Thomson Reuters.
Same-store sales fell at Abercrombie & Fitch (down 19 percent), Hot Topic (down 10.9 percent), American Apparel (down 5 percent), Wet Seal (down 4.6 percent) and Limited Brands, which owns chains like Victoria’s Secret and Bath & Body Works (down 2 percent).
The declines did not extend across the entire teenage clothing category, though. Sales increased at Aéropostale (up 10 percent), American Eagle Outfitters (up 7 percent), Buckle (up 6.6 percent), Urban Outfitters (up 5 percent), Gap (up 2 percent thanks largely to its value-priced Old Navy division) and Zumiez (up 0.3 percent). Sales at Children’s Place increased 4 percent.
Analysts expect retailers to have healthier profit margins this year. What remains to be seen is whether, against a backdrop of high unemployment and tight credit, consumers will go back into hiding again now that Hanukkah and Christmas are over.
With no major holiday to spur shoppers and little inventory in stores, the International Council of Shopping Centers is predicting that in January same-store sales will be at best up 1 percent.
Mr. Dreher of Deutsche Bank Securities said caution might prevail in the coming weeks, as credit card statements for the Christmas spending arrived in mailboxes.
The NYT also reports that China’s central bank raised a key interest rate slightly Thursday for the first time in nearly five months, in what economists interpreted as the beginning of a broader move to tighten monetary policy and forestall inflation.
After breaking stride a year ago during the global economic slowdown, the Chinese economy resumed galloping growth over the summer. Government investments, real estate construction and consumer spending are all rising briskly, thanks to a surge in lending by government-controlled banks.
Even exports have begun to recover despite continued economic weakness in the European Union and the United States, China’s two biggest overseas markets.
Raising interest rates may help discourage speculative investments by Chinese companies and individuals in real estate projects and other areas of economic activity. China’s dilemma is that higher rates may also prompt overseas investors seeking higher returns to redouble their efforts to push money into China, despite the country’s stringent capital controls.
The People’s Bank of China announced Thursday that the yield from its weekly sale of three-month central bank bills had inched up to 1.3684 percent. The yield had been stuck at 1.328 percent since Aug. 13.
An increase of less than 0.05 of a percentage point might sound small, but economists said it was a harbinger of more interest rate increases to come.
They cited expectations that consumer and producer prices would rise in the months ahead, particularly compared with low price levels a year ago, when demand temporarily slumped in China as well as the rest of the world.
“It is a turning point,” said Ben Simpfendorfer, an economist in the Hong Kong offices of Royal Bank of Scotland. “There is a convergence of events that will lead to higher rates.”
The increase in the interest rate turned mainland China’s stock markets into Asia’s worst performers Thursday. The CSI 300 index of shares on the Shanghai and Shenzhen stock markets slumped 1.98 percent.
Air freight capacity out of mainland China and Hong Kong was almost fully booked in December, according to shippers, making it likely that China would post strong exports when it released a flood of monthly and annual economic data next week. But in interviews this week, senior corporate executives voiced a range of opinions about whether this strength would continue into the new year, or whether the surge in December represented a flurry of restocking by retailers who went into the Christmas season with meager inventories.
Victor Fung, the nonexecutive chairman of Li & Fung, a Hong Kong-based trading and supply chain management company that is one of the world’s largest, said that overseas demand had not been strong enough to sustain the strength in China's shipments seen last month. But he added that his own staff was somewhat more optimistic than he is, as are some investment bank economists.
Thursday's slight increase in interest rates could prove even more significant if it marks the start of an effort by Chinese regulators to limit bank lending. Chinese banks have not only lent heavily at home, but stepped up lending in other countries as well, taking market share from Western banks hobbled by the global financial crisis.
Top officials at the People's Bank of China concluded an annual two-day policy review on Wednesday with a lengthy statement that had particularly strong cautions against bank lending to sectors of the economy with overcapacity or excessive energy use. Chinese bank regulators also warned banks in late November to show more caution in lending and raise more capital to underpin the surge in lending they have already done; the publicly traded Bank of China is widely expected to take the lead in raising money this year.
Thursday's interest rate increase is not the first since the bottom of the economic downturn. After cutting interest rates on the same 3-month central bank bills by 2.4 percentage points in the last quarter of 2008 as the world's financial system trembled, the People's Bank nudged up interest rates by 0.363 from late June to early August last year in a series of increasingly large weekly increases.
But the central bank has been on hold ever since, watching for more evidence of the economy's health. Thursday's increase appeared to confirm that the central bank was starting to become concerned again about rising prices, economists said.
Central banks around the world have a history of taking small steps at first when they begin raising interest rates after a long period of keeping them low in response to an economic downturn. Because China does not have a well-developed bond trading market, the yields on the weekly sales of central bank bills are widely watched as a barometer of the central bank’s intentions.
The central bank sells its bills mainly to banks, which pay in renminbi that the central bank then effectively takes out of circulation, slowing growth in the country’s money supply.
Weekly sales of central bank bills are part of a process that economists describe as “sterilization” of China’s extensive intervention in currency markets.
As U.S. dollars and other foreign currencies pour into China from its trade surplus and foreign investment, the central bank prints vast sums of renminbi and issues them to buy those dollars and other currencies.
To prevent all those extra renminbi from feeding inflation, the central bank then claws back the renminbi from the market through a series of measures that include the sale of central bank bills. China also requires commercial banks to keep large reserves on deposit at the central bank, partly to keep the banks from lending too recklessly but also so that the central bank can use that money to finance further purchases of dollars and other foreign exchange.
The goal of sterilization is to keep inflation under control in China while keeping the renminbi weak. That helps make China’s exports competitive overseas and preserves jobs in China, while contributing to unemployment in countries producing rival goods.
The U.S. dollars and other currencies go into China’s foreign exchange reserves, which stood at $2.27 trillion at the end of September; monthly figures through the end of December are due for release next week. China has the biggest foreign exchange reserves of any country, by far.
Because the central bank has essentially borrowed at home to finance that accumulation of reserves, there is considerable worry in China about losses on those reserves if the value of the U.S. dollar weakens further.
Comments on Internet bulletin boards in China about possible currency losses on the foreign exchange reserves are quickly deleted by censors, a sign of officials’ sensitivity.
China’s foreign-exchange regulators have redoubled their efforts in the past two months to prevent inflows of so-called hot money — capital that moves on a short notice to any country providing better returns.
With the exception of investments that bring the transfer of scarce technologies or management expertise, China has a dwindling need for foreign capital. A domestic savings rate of close to 40 percent has made ample money available for new projects.
The central bank is already buying more than $300 billion a year of foreign currencies, mainly dollars, to keep the renminbi weak and preserve the competitiveness of Chinese exports in foreign markets. So the central bank has had little appetite to buy more foreign currencies so as to allow foreigners to invest in China’s growth while preventing the renminbi from appreciating.
