China’s bank-reserve move may raise risks: analyst

By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) — Efforts by China’s central bank to take a more activist role in setting the amount of reserves individual banks must set aside could displace the role of market forces and even compound risks within the banking system, a Hong Kong-based analyst said Wednesday.

The People’s Bank of China plans to set lenders’ reserve requirements monthly on a bank-by-bank basis, and could also adjust the interest it pays for those reserves, according to a report Wednesday in the state-run China Securities Journal. See report on China’s reported bank-reserves plan.

New stealth fighter jet for China?

New photos indicate the possibility that the Chinese military has developed a new stealth fighter jet, confirming fears of a military buildup.

Dong Tao, chief economist for Asia ex-Japan at Credit Suisse, said the plan purportedly under study by the central bank would essentially see it play a huge role in assessing the financial health of individual banks.

“The central bank is playing the role of god, judging which bank is lending out too much and which deserves a higher reserve ratio, instead of leaving this to the market,” Tao said.

Tao said China’s interbank lending market is not as developed as comparable systems in the West and lacks the ability to discipline banks that take on excessive risk.

Still, he added, the new approach required the People’s Bank of China to make perhaps too many discretionary judgments on how banks should lend.

“And the more they do this, the more likely that at some stage some policy mistakes take place,” Tao said.

Tao said the central bank’s policy, though yet to be officially confirmed, amounted to a change in the banking infrastructure rather than a signal it is about to embark on an new round of monetary-policy tightening.

Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.

US prepares priority list ahead of Hu visit

THE Obama admiinstration has signalled its main priorities regarding China are its undervalued currency, Iran and North Korea.

The two countries are attempting to bolster ties over the next fortnight before the US visit of President Hu Jintao on January 19.

US National Security Adviser Tom Donilon met Chinese Foreign Minister Yang Jiechi this week to prepare for the visit.

"Mr Donilon stressed the importance of effective efforts to reduce imbalances in both the global economy as well as in US-China trade," a White House statement said.

"They discussed ways to advance our non-proliferation objectives, including working together to prevent Iran from acquiring nuclear weapons and to persuade North Korea to abandon its nuclear weapons program, to meet its commitments and international obligations, and to avoid destabilising behaviour."

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• Japan and South Korea eye pact The Australian, 3 hours ago
• Pictures reveal Chinese stealth fighter The Australian, 8 hours ago
• Asia a top priority Adelaide Now, 1 day ago
• China advances missile program Herald Sun, 8 days ago
• Burma's nuclear plans exposed The Australian, 10 Dec 2010

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On Sunday, US Secretary of Defence Robert Gates will make his first visit to Beijing after two years in the job in the Obama administration.

It will effectively end the freeze in military relations triggered by China after the US sold $US6.4 billion worth of arms to Taiwan last February.

In the months following the deal, China began testing its weight in the region, entered spats with Japan and Vietnam, and won few friends by implicitly backing North Korea after the sinking of the South Korean corvette Cheonan and the missile attack on Yeonpyeong island.

Much has been made in recent years of China's naval build-up, which is expected to culminate in the production of its first aircraft carrier by 2015. It is also developing the world's first anti-aircraft-carrier missile.

Now, ahead of the Beijing visit by Mr Gates, photos of what experts believe to be China's first stealth fighter plane have appeared online.

The photographs, published on several unofficial Chinese and foreign defence websites, appear to show a prototype plane known as a J-20 making a high-speed taxi test -- usually one of the final steps before an aircraft makes its first flight.

Observers predicted China could be three years ahead on its plans for the aircraft.

U.S. downplays Chinese stealth fighter status

(Reuters) - China is still years away from being able to field a stealth aircraft, despite the disclosure of images indicating that it appears to have a working prototype, a U.S. Navy official said on Wednesday.

The Wall Street Journal published images of what it said appeared to show a Chinese J-20 stealth fighter prototype making a high-speed taxi test. The images have also appeared on a number of websites.

The publication of the photographs comes just days before Defense Secretary Robert Gates is due to travel to Beijing.

Asked when China would be able to field the jet, Vice Admiral David Dorsett, director of naval intelligence, said it would be years.

Dorsett told reporters the published photos left a lot of questions unanswered. He did not immediately vouch for their authenticity.

"In terms of the stealth photos, the IOC (initial operational capability) on the stealth aircraft, it's still not clear to me when it's going to become operational," he said.

"Developing a stealth capability with a prototype and then integrating that into a combat environment is going to take some time," he said.