China Economy Weekly: Foreign Reserves; Investment and Trade Surges; Co-operation with India and with General Motors

China's Foreign Exchange Reserves: China has diversified its foreign reserves by cutting US Treasury bond holdings and increasing Japanese debt holdings.

According to data released by the US Treasury Department, China held nearly $843.7 billion of US debt at the end of June, $94.6 billion less than the peak of $938.3 billion it held in September 2009. Despite the fall, China is still the largest US debt holder, followed by Japan and the United Kingdom.

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As the nation trims its US exposure, it has been expanding its Japanese debt buys. China has purchased $20 billion worth of Japanese treasury debt for six consecutive months, almost five times the total increase of its holdings during the past five years.

China has alsodoubled South Korean debt holdings and bought more mortgage bonds of Fannie Mae and Freddie Mac, the two largest US home funding companies.

South Korean treasury bonds held by Chinese investors rose 111 percent to 3.99 trillion won ($3.4 billion) in the first half of the year, while mortgage bond holdings, including those of Fannie Mae and Freddie Mac, by nearly $5.6 billion in June.

China Moves to quell concerns over Foreign Innovation: Addressing concerns about local bias in government procurement, Minister of Commerce Chen Deming said innovation by foreign-invested companies enjoys equal support if at least 50 percent of a product's added industrial value comes from operations in China.

Chen made the remarks during a meeting in Beijing with Doris Leuthard, president of the Swiss Confederation and minister of Swiss Economic Affairs.

In November, China's Ministry of Science and Technology, National Development and Reform Commission, and Ministry of Finance jointly announced that China-made innovation would be given priority in government procurement. The policy stirred unease among foreign investors concerned they could be locked out of China's vast government purchases.

China-Related Mergers and Acquisitions Rebound:  Most China-related merger and acquisition deals have rebounded strongly in the first half of the year, and set the scene for robust activity for the remainder of 2010 and into 2011, accounting firm PriceWaterhouseCoopers (PwC) reported.

Chinese outbound merger and acquisition deals for the first six months of 2010 reached record levels, up by more than 50% over the same period last year.

Natural resources are the main industry target for Chinese investors overseas. Though Australia is identified as the main target destination, Africa is growing in prominence for Chinese resource investors.

"Although natural resources continue to be the priority industry target for Chinese investors overseas, we are seeing other industries starting to get increased attention, including technology, manufacturing and services industries," said Andrew Li, Transaction Services Partner at PwC. "Meanwhile, investors are broadening their target regions to include the United States, Japan and the European Union."

India aims to Double Trade with China: India is striving to double bilateral trade with China, its largest trading partner, within four years, according to Subas Pani, chairman of the India Trade Promotion Organization.

Bilateral trade between India and China has risen dramatically over the last decade. From a modest $3 billion at the turn of the century, annual trade reached $42 billion in 2008-09. The level reached $32 billion in the first half of 2010 and is expected to exceed $60 billion for the year.

China's Trade Surplus to Shrink: The Ministry of Commerce on Tuesday said China's trade surplus is expected to shrink gradually in the next few months, as the government adopts more stimulus measures to boost imports.

China's trade surplus for July surged unexpectedly to an 18-month high of $28.7 billion as exports grew 38.1% year on year to a record high of $145.5 billion. Growth in imports fell to 22.7% from 34.1% in June.

The slower growth in imports is the latest sign that China's curbs on the real estate sector are affecting demand, and many economists said the trade surplus will remain high as import growth continues to decelerate.

Foreign Direct Investment Surge: The Ministry of Commerce reported that the foreign direct investment (FDI) rose by 29.2% year-on-year to $6.92 billion in July, the 12th consecutive monthly gain and the fourth month this year that the increase was above 20 percent.

The high growth was buoyed up by larger volume of foreign funds into the service sector and China's western and northeastern regions, and the trends will continue, analysts said.

"No systemic risk" for local borrowings: The Chinese government said risks related to borrowing by local government-backed investment units are "controllable" and would not cause systemic damage to the economy, as it worked out detailed measures to clean up financing of these vehicles.

Some economists are concerned that the problem of local government debt could destabilize the financial system of the world's fastest-growing major economy if not managed properly. They especially cite the central government's tightening of the housing market, which could affect local fiscal revenue and make debt repayment more difficult.

Local governments are not allowed to borrow directly from banks or issue bonds to fund deficits and support infrastructure construction. In consequence, many have set up investment vehicles by using land and fiscal revenue as collateral.

Alliance Promotes Electric cars: An alliance of sixteen of the largest State-owned companies wants to accelerate development of electric vehicles in China, a move which underscores the country's ambition to be a world leader in new energy vehicles.

The alliance, formed on Wednesday, is gearing up to invest 100 billion yuan ($14.7 billion) on electric vehicles by 2012. Guided by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), it was formed by almost all the major players in related sectors, including the country's top three oil majors, top two power grid operators, and two major automakers --- China FAW Group Corp and Dongfeng Auto Corp.

SAIC, GM Form New Business Model: China's biggest automaker SAIC Motor Corp Ltd and General Motors Co announced plans to jointly develop fuel-efficient engines and transmissions on Wednesday.

Under the agreement both sides will together develop a new small-displacement gasoline engine family and an advanced transmission, which will be used by GM and SAIC in China and future vehicles worldwide.

"The cooperation kicks off a new business model for China's automobile industry", said Hu Maoyuan, chairman of SAIC.

Chinese "Investor Immigrants" Inject Money Into Canada: Billions of yuan may be transferred to Canadian banks every year from China after the media reported that Chinese are now the top seekers of permanent residency in the country.

In 2009 alone, Canada admitted more than 25,000 permanent residents from the Chinese mainland. Around 2,000 applicants moved there after being wooed by Canada's immigration policies for overseas investors, which require a minimum net personal worth of C$800,000 ($771,395) and investment of C$400,000.

Both before and after arrival in Canada, applicants can transfer at least C$500,000 to Canadian banks for living expenses, according to sources familiar with the immigration industry.

Total yuan deposits in Canada may reach 6.7 billion yuan this year if another 2,000 Chinese investor immigrants enter.

E-Commerce Surges: China's e-commerce industry is expected to see rapid growth in the next few years, with the average annual increase surpassing 35%.

Qian Xiaoqian, deputy director of the State Council Information Office, said online shopping is become more and more popular in the nation. "E-commerce sales volumes surged to 3.6 trillion yuan ($530 billion) last year," said Qian. He said the Internet industry is also changing from an entertainment-oriented approach to a more balanced structure offering diversified services.