Bank of Qingdao

Yuan revaluation? If yes, only in baby steps.

Copthorne Hotel Qingdao, March 10,th 2010.

Qingdao International Club

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Bank of Qingdao at glance

1996 - Qingdao City Cooperative Bank establishes through the merge of 21 Credit Cooperatives

1998 - The Bank was renamed as Qingdao City Commercial Bank

2001 - Haier Group becomes the major shareholder of the Bank

2008 - QCCB was renamed as Bank of Qingdao launching a new image to the public

2007-2008 - The Bank pursued an new phase of development through the strategic cooperation with Intesa Sanpaolo S.p.A. and Rothschild Continuation Holding AG.

2008 - Intesa Sanpaolo S.p.A. becomes officially shareholder of BoQ with a participation of 20%, becoming the single largest shareholder in Bank of Qingdao;

2008 - Rothschild Continuation Holding AG becomes officially shareholder of BoQ with a participation of 5%;

2008 - The Bank started its cross regional expansion with its first opening of Jinan Branch

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Bank of Qingdao, a growing Bank with solid shareholders Intesa Sanpaolo Bank S.p.A.

The Italian leading Banking group has the leadership in the Italian market and a strong international presence focused on Central Eastern Europe and the Mediterranean basin.

Intesa Sanpaolo intends to became a benchmark for the creation of value in the European banking sector.

Currently it is listed among the Top 10 European banks.

Haier Group World’s largest manufacturer of white goods and

one of China’s Top 100 Companies.

Owner of more than 240 subsidiary companies and 50,000 employees throughout the world.

Qingdao city Represents the historical roots of the foundation of

the Bank backed in 1996.

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Pro revaluation topics

The revaluation cause is stronger than ever The discussion is justified, according to most economists, by looking-forward to

macroeconomic fundamentals:

Chinese exports are getting stronger than before with a + 20% increase recorded in January 2010 on YoY basis Chinese global export share reached 9% in 2009, from 7% in 2006. The single largest increase.

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Pro revaluation topics

Around the world, some economist are convinced about the revaluation topic in argue that there is no question whether China will revaluate, but only by how much and when.

Besides, they also argue that a revaluation would also be in China’s own interest.

The excessive capital inflow has contributed to a sharp increase in fixed assets.

The risks of asset-bubbles and misallocation of resources amidst abundant liquidity need to be solved

Stock market also increased, raising the brows of some experts.

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Pro revaluation topics

Even the political arena is contributing to the increase of the pressure with political and rhetorical statements:

“China is stealing jobs from developing countries and hindering a global recovery by keeping the RMB low”;

“China’s bad behavior is posing a growing thread to the rest of the world economy”;

Senator Chris Dodd “You can’t give your competitor, your adversary in this case, a 40 percent advantage in the global economies”.

Apparently many side deem the RMB revaluation inevitable, except for

…..CHINA ITSELF

The Chinese officials motivate the decision that China is keeping a stable exchange-rate policy, that is, in reality,

good for the global economic recovery

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The current situation:

Who is wrong?

Well, as it often happens, the matter is too complicated to be solved just supporting one side or taking a single action to solve all the problems at once (like a snapshot revaluation of RMB).

It is time to analyze which are the arguments that support a non revaluation of the RMB, and why, in some extend, the RMB appreciation should not be so supported.

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Revaluation cons: First, let me clarify that an imminent RMB revaluation is almost to exclude

This is because China never acts under foreign pressure. The stronger the pressure is, a more rigid attitude will be taken by Chinese officials.

Second, analyze the trend of RMB in the recent years. China with the new reform of the Exchange Rate Regime in force since July 21, 2005, let the

RMB appreciated gradually versus the US dollar from 8.1 to 6.8 (almost 20%).

Only since July of 2008, the Chinese Government has intervened heavily to keep the value of the RMB steady relative to the US dollar.

During 2008 and 2009 with the drop of US dollar, the United States did not suffer at all about this artificial exchange rate. And since many currencies of developing countries are also fixed, this leaves only an handful currency to absorb the shock.

The real burden has been taken by the Euro, the Yen, and do not forget the Korean Won, Indian Rupee, Malaysian Ringhit have also faced strong upward pressure.

So, I would like to understand why recently the United States has again put on the agenda the revaluation of RMB so aggressively since they did not take any burden about the trend of Chinese currency?

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Revaluation RMB? No thank you! But even considering that a revaluation is technically possible, are we so sure that with a 10% - 20% revaluation most of the problems will be solved and commercial unbalances between China and other countries will be solved?

First, China appreciate its currency, it does not mean the US trade deficit will be lowered, and it is very likely that the United States would buy from others instead of China. Actually, there is no scientifically viable assessment on whether a currency is undervalued. The reality is that China’s trade surplus since 2005 has been a result of over-consumption in the United States.

Second, a potential revaluation of the RMB will not automatically reduce the trade surplus of China. If we analyze what happened from 2005 (When China introduced the new forex regime) we see that while China’s export continued to rise, its imports began to fall relatively in value. Therefore China’s surplus was not caused by a surge of export but by a relative fall in the value of imports. This because the export and imports in China does not move independently. Therefore the consequences of RMB revaluation against the dollar could be very unpleasant for the rest of the world (China will increase its already large surplus).

Third, and by far the most important: the current status quo is not sustainable anymore. I am referring to the dollar’s role as the world’s reserve currency.

My answer is NO. Unfortunately larger and heavier problems are

hanging on the world order for the exchange rate.

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The world dilemma!

Dear colleagues, I want to say that if somebody is thinking that the RMB isartificially low, well the US dollar as well is kept artificially high.

There is a big dilemma that for sure the Chinese officials are trying to solve. The extra surplus of China is invested back into the USA, therefore the effect on the currency

(American) is zero.

By contrast, if China stops to buy American bonds and the US consumer recovers, well the US dollar should decline much more. China actually, is not contributing to slow the process of a weaker US dollar.

The only reason why the dollar has not collapsed completely is because China and other countries with large surplus largely continue the recycle their surplus back into dollar denominated assets.

China has a currency dilemma that is the world dilemma.

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A new world order is needed A new order for the currency is needed. Dollar’s role as reserve currency is in jeopardy and not sustainable. The international community should take gradual steps to solve this reality and find out alternatives to the dollar.

Step should be taken:

Stopping to price the oil in US dollar. The international community should analyze the implications of such move. Middle East alone has more than 2.1 trillion of US dollars.

A new global currency to reduce reliance on the US dollar is needed

This year, the massive deficit of the United States will climb to the record of 1.5 trillion and the United States expects that new debt will be bought by Japan, China, Europe etc…;

Only a strong country, like China, could initiate the process of a new order.

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Conclusion I conclude my intervention by just pointing out that the RMB revaluation is only one aspect of the problem and definitely not the most important.

In the short term I do not see any change in RMB USD exchange rate. China will not use the exchange rate to rein in inflationary pressure adopting other measures to reach this target (recent increase rise in commercial bank reserve requirements and possible increase of capital adequacy ratio to 11.5 percent from an earlier 11 for large commercial banks).

China will keep its long-standing policy stance of keeping the renminbi’s value basically stable. If the world economy condition will improve, China may end the peg to the dollar letting a very mild appreciation. In addition, China will continue to reform the exchange rate regime in a pro-active, controllable and gradual manner. The implementation will turn at the end in a gradual and slow revaluation of the Chinese currency in the medium term, baby steps I would call it.

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Conclusion

I hope that China will voice stronger the necessity for a new currency world in order to avoid trade unbalances will become more evident in the future.

If a new order will not be considered, with every passing day, we are only postponing what is inevitable with the consequences that the future adjustment will be only more painful.

I thank you for your kind attention!

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BANK OF QINGDAO

Hongkong Middle Road N. 68

Huá Pŭ Dà Shà

香港中路 68 号华普大厦 266071 Qingdao 青岛 www.qdccb.com

VIVONA Paolo

Vice President – 副行长