Xinhua Finance/MNI China Business Survey: Sentiment Rises Again

Xinhua Finance/MNI China Business Survey: Sentiment Rises Again

March 30, 2007

    SHANGHAI, China, March 30 /Xinhua-PRNewswire/ -- Xinhua
Finance (TSE Mothers: 9399) and Market News International
(MNI), a part of the news service line of Xinhua Finance,
today announced the March Xinhua Finance/MNI China business
sentiment survey.  The results of the survey suggest that
expectations for tighter government policy, including
rising interest rates, don't appear to be hurting the
sentiment of Chinese companies.

    (Logo: http://www.xprn.com.cn/xprn/sa/200611140926.gif
)

    The survey index posted the highest reading in its
more-than-two year history for interest rate expectations,
but also the highest-ever result for overall business
conditions. 

    The findings come amid widespread concerns that the
central government is set to tighten monetary and
administrative policies further in the coming months
following the release of economic data showing a pick-up in
credit generation and industrial output at the start of the
year.

    The survey was conducted March 13-27 with 154 listed
companies responding. A result greater than 50 implies
growth or improving conditions (See accompanying story for
more on the survey methodology).  The full survey results
can be found at
http://www.xinhuafinance.com/en/main/chinabizsurvey.html .


   The index was suspended for February owing to
distortions created by the Chinese New Year holiday which
fell in that month.

    "The survey results seem to indicate that the
central government is going to have a tougher time slowing
rapid growth in lending and investment this year,"
said Logan Wright, an analyst with Stone & McCarthy
Research Associates, a sister company of Market News.

    Sub-indices measuring current new orders, production
and productive capacities all back at levels last seen at
the beginning of 2006. 

    The results suggest a broad pick-up in economic
activity from the mild slowdown seen in the second half of
last year and point to a further increase in the coming
months.

    "Despite higher interest rates, companies are
confident that conditions will improve and are keen to
expand productive capacity," Wright said.    
           
    The index measuring overall business conditions hit a
new high of 80.84 while that covering firm's expectations
out to three months rose for a third month in a row to
83.77, the second highest level in the survey's history and
the highest in a year.

    The strong overall business sentiment is underlined by
the strength seen in the index measuring new orders, which
increased to its highest level in a year. Orders are
expected to remain strong in the coming months too, with
the index measuring future expectations also at its highest
level since the January-March survey of 2006. 
 
    Production appears to be keeping pace with orders so
far, though the survey suggests the need, and ability, for
increasing output in the months ahead. The production index
rose to 73.90 in March from 72.46 in January, also the
highest level since the first quarter of last year. 
Moreover, the index measuring the backlog of orders fell
back below the 50 mark for the first time since the
July-September 2006 survey, indicating production is
keeping up with orders.

    But the index measuring inventory levels remained below
50 for a second consecutive month.  At the same time, that
covering production capacity jumped to 74.29, its highest
level in two years, while future capacity expectations are
also at their highest level since the beginning of 2005.

    The March survey results suggest that Beijing is going
to have to tighten monetary and administrative policies
further this year if it is to meet its stated goal of
keeping loan and investment activity under control.
    
    The People's Bank of China raised benchmark interest
rates for a third time in under twelve months on March 18,
less than a week after the March surveying period began. 
The impact of the higher rates is reflected in the survey,
the results suggest, with the index measuring the level of
interest rates paid spiking up from 54.89 in January to
66.04 in March -- the highest reading since the third
quarter survey last year, a period during which the central
bank also raised deposit and lending rates.  Respondents see
rates rising for the near future, the survey results
suggest, with the index measuring future rate expectations
hitting their highest level in the survey's history at
67.54.  

    Costs appear to be under control, the results suggest,
with the index measuring input prices standing at 60.95 in
March, above January's 59.71 and well below the average
65.04 during last year.

    Sales prices also remain stable, with the index
standing at 57.66 in March, down only slightly from
January's 58.21.  The index measuring currently received
prices for products has edged lower for three consecutive
months, while that for future price expectations rose for a
third month in a row.

    The index measuring the financial positions of
respondents remained comfortably above the 50 mark, but
nonetheless fell back to 75.99 in March from 77.70 the
previous month.

    But higher borrowing costs don't seem to have hurt
companies' access to funds, with the indices measuring
current and future credit availability both hitting record
highs in March.  One oft-stated reason for the inefficacy
of interest rates in China is that companies simply don't
need to raise funds in the current business environment. 
"Since we have a lot of cash, we don't need
loans," said one respondent.

    Analysts such as Nicholas Lardy of the Institute for
International Economics have noted that reinvested profits
are the largest source of investment capital in China while
data released earlier this week showed profits of industrial
firms rising 43.8% during the first two months of
2007 over the same period last year.  That could mean a
more draconian response from Beijing in the coming months
as policy-makers are once again forced to scramble to head
off the threat of another credit and investment binge. 

    "Market-based tools such as interest rates may be
less effective than blunter administrative instruments in
slowing economic activity in China, where a large portion
of the economy remains under the influence of the
state," said SMRA's Wright.

    Xinhua Finance/MNI China Business Survey Methodology

    The Xinhua Finance/MNI China Business Sentiment Survey
was conducted March 13-27 with 154 listed companies taking
part.

    Survey questions were modeled on Japan's Tankan survey
and the U.S. Institute for Supply Management's Report on
Business.

    Results were compiled for both current conditions
compared with a month ago and for expectations of
conditions one month ahead.

    Indexes were compiled using the Institute for Supply
Management's example: adding half of the percentage saying
conditions were unchanged to the percentage of those saying
conditions had improved generated the index. Therefore, a
result higher than 50 indicates a net positive response.

    Companies agreed to participate in the survey, and to
provide comments about business conditions, under the
assurance that individual survey responses would not be
divulged except as part of the overall results.

    Companies surveyed were all listed on domestic stock
markets or in Hong Kong, although some also have foreign
listings.  The companies chosen were a mix of manufacturers
and non-manufacturers with about 75% of the companies
responding to the survey in manufacturing.

    Notes to Editors:

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    About Market News International

    Market News International (MNI), a Xinhua Finance
company ( http://www.xinhuafinance.com ), is a financial
news and information company dedicated to the global fixed
income and foreign exchange markets.  MNI joined the Xinhua
Finance family in March 2004, bringing its niche expertise
and extensive distribution network.  Headquartered in New
York, MNI has news bureaus and offices throughout the US,
Europe and Asia.

    With more than twenty years of history, MNI is a fully
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and critical intelligence for market professionals.  Its
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