Highlights from the last week of China business news: Mattel toy recalls escalate the product safety issue; China’s forex reserves are safe – for now.
Child’s play no more
It’s no longer child’s play for the toy industry. On August 13, Cheung Shu-hung, the Hong Kong boss of Lida Toy Company (also called Lee Der), hanged himself in a company warehouse after it supplied Mattel with toys that had to be recalled. Two days after the suicide, Mattel announced that it would be recalling another batch of Chinese-made toys. Both recalls were due to fears that the toys were coated with paint containing dangerous levels of lead.
After the first recall and subsequent suicide, the Financial Times, carried this illuminating quote in an article on August 13: “[The Chinese authorities] are being more Catholic than the pope.” The product safety kafuffle has now become a full-blown debacle. Chinese industry associations are nervous, and the government is stepping up inspections. In the United States, politicians are getting political mileage out of bashing Chinese products. Perhaps the next escalation of the situation will depend on the US government’s reaction.
Escaping the subprime dip
As Wall Street reels from the US subprime mortgage crisis, China is moving forward with its plans to invest its foreign-exchange reserves abroad more aggressively.
The finance ministry began selling its first tranche of special government bonds, worth US$79.2 billion, to set in motion the mechanism that would allow a state investment agency to invest China’s forex reserves abroad. The ministry would sell the bonds to the Agricultural Bank of China, which acts as an intermediary, which then passes the bonds on to the central bank. An intermediary is required because it’s illegal for the central bank to buy bonds directly from the ministry. Once the central bank has the bonds, it can sell them to the as-yet-unformalized State Investment Company.
But the investment agency could be treading on dangerous ground. For now, China has been protected from the subprime crisis because its US dollar reserves have been invested conservatively in US treasury bills. It is estimated that about 6% of China’s reserves, or about US$100 billion, have gone into mortgage-backed securities. A certain class of these securities are at the heart of the subprime meltdown. But the securities China has bought so far were low-risk, so the country will likely emerge relatively unscathed (although China Merchants Bank and Bank of China are said to have suffered some losses; CMB has denied this). The new agency, however, is charged with making riskier investments, so China may not have the privilege of riding out future crises in relative isolation.
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