Have You Heard...

• China–U.S. Tensions Grow Over Sinking of Korean Ship
• China labor strains reflect a countryside in flux
• China’s Communists Pass Out Their Phone Numbers in Charm Blitz
• Google faces pressure as China to decide on license
• Carlsberg reaches impasse with Chongqing Brewery Company

China–U.S. Tensions Grow Over Sinking of Korean Ship

Source: Wall Street Journal by Brian Spegele

BEIJING—China brushed aside criticism by U.S. President Barack Obama over its refusal to blame its close ally North Korea for the sinking of a South Korean warship, as tensions between China and the U.S. over the incident escalated.

Mr. Obama said on Sunday that he raised the issue with Chinese President Hu Jintao at a meeting of world leaders in Toronto over the weekend. "I think there's a difference between restraint and willful blindness to consistent problems," Mr. Obama said.

Asked about those comments, Chinese foreign-ministry spokesman Qin Gang told a news briefing on Tuesday: "China borders on the Korean peninsula, and we have our own feeling on the issue, different from that of the countries tens of thousands miles away.…We have more direct and intense concerns."

In response to the sinking of the Cheonan in March, in which 46 sailors died, the U.S. is planning joint naval exercises with South Korea designed to signal strong support for its ally. China, North Korea's chief international supporter, has condemned the exercises as destabilizing to the region.

A U.S. military spokesman said on Tuesday that the drills could take place next month. U.S. Navy spokesman Cmdr. Jeff A. Davis said the drills weren't meant to intimidate China or destabilize the region, but "are designed to ensure we have the ability to maintain peace and defeat aggression on the Korean peninsula."

China has announced it will conduct its own drills in the East China Sea beginning Wednesday. Chinese state media have suggested those exercises are a direct response to the planned U.S. operations. Mr. Qin denied this, saying the Chinese drills have "nothing to do with the situation on the Korean peninsula."

South Korea, the U.S. and Japan are pushing for the United Nations Security Council to recognize North Korea's culpability in the ship sinking. Such a move would need the support of China, a permanent council member.

Some defense experts suggest the U.S.-South Korea exercises are partly intended to reassert the U.S. military's presence in the Pacific even as its forces appear heavily committed in Afghanistan and Iraq.

"Given recent economic problems and U.S. disarray in Afghanistan, it is necessary to show the world in general, and China in particular, that the U.S. is an active and committed Pacific power," said Nancy Bernkopf Tucker, a professor at Georgetown University and a former State Department official in Beijing.

China froze military relations with the U.S. earlier this year following President Obama's decision to go ahead with $6.4 billion in weapons sales to Taiwan.

Tensions flared openly at a conference of senior defense officials in Singapore last month after Secretary of Defense Robert Gates pointedly criticized China for its continued objection to Taiwan arms sales.

"Only in the military-to-military arena has progress on critical mutual security issues been held hostage over something that is, quite frankly, old news," Mr. Gates said in a speech.

Many analysts say military friction between the U.S. and China will be contained. They note that relations in other areas have improved markedly, particularly since a high-level dialogue in Beijing last monthin which both sides tempered their rhetoric.

"Let's face it, the balance of power remains where it is," said Brad Glosserman, executive director of the Pacific Forum Center for Strategic and International Studies. "China needs the United States on so many levels, just as the United States needs China."

Another source of tension—China's currency policy—has eased somewhat since China announced earlier this month that it would ease the yuan's peg to the dollar and allow greater exchange-rate flexibility. The yuan has since edged higher against the dollar.

Some scholars in China see the planned U.S.-South Korean naval exercises as an act of disrespect toward a rising power. Shi Yinhong, an expert on international relations at Renmin University in Beijing, said the drills are a "slap in the face" for the Chinese government. "The United States has not treated China as a great power," he said.

Cmdr. Davis, the U.S. Navy spokesman, noted that joint naval exercises between the U.S. and South Korea aren't out of the ordinary and U.S. Navy ships routinely patrol the Yellow Sea.

Chinese state media have reported the presence of a U.S. aircraft carrier near China's shores. An article Tuesday on the English-language website of the People's Daily, a Communist Party organ, said China is under the ship's "combat scope."

Cmdr. Davis declined to discuss the potential location or size of the fleet involved in the naval drills, saying details for the exercise hadn't been finalized.

Some foreign analysts say hawks within the People's Liberation Army are putting pressure on politicians to respond to what are viewed as aggressive acts by the U.S., and their leverage is growing as policy makers seek the military's support ahead of a leadership transition in 2012.

"This is one of the moments the PLA are in more power," Mr. Glosserman said. "No political leader can afford to be seen as weak."

China labor strains reflect a countryside in flux

Source: Reuters

China (Reuters) - Ma Xiangqian's house stands silent in a tree-shrouded village in central China, the inscription on its padlocked gate announcing the hopes for prosperity his family says drove him into the factory life that killed him.

The shy 19-year-old was among the first of a string of deaths this year at a vast Foxconn electronics complex of 400,000 workers in far southern China, that has cast a spotlight on the hard lives of the country's 150 million migrant laborers.

Foxconn and police believe Ma, like nine other young workers after him, killed himself. Ma's parents suspect he was killed.

The deaths have sparked an uproar about stressful conditions in the strictly-run complex and raised concerns about the damage to society from China's rush into industrialization that is luring millions to quit rural life.

Foxconn says its treats its workers humanely and follows labor laws and regulations. Ma Xiangqian's sister, Ma Liqun, who also worked at the company's same big complex as him, said many workers resented what they said were long hours, a relentless pace on the production line, and harsh discipline.

Ma's journey from his quiet village in Henan province to the humming industrial site, where he died on January 23, illustrates how the high expectations of China's migrant workers in search of better wages can darken life in their rural homes.

"Loud and bright, this year will be better than the last," says the traditional Lunar New Year couplet glued to the locked gate of Ma's now empty home. "Living dragons and tigers, next year will be better than this."

Ma took the job at Foxconnto help his family escape 60,000 yuan ($8,827) of debts from building the two-story house, meant to help him find a bride, said his family.

"In the countryside, no matter how hard up you are, you need to build a decent home so your son can get married," said Ma's father, Ma Zishan, speaking by phone from Guangdong where he and his wife continue to press police to look into their son's death.

"You need a son to keep the family together and keep the farmland, but now he's dead and I don't know where to turn."

Ma's parents were already saddled with fines for having four children, double what family planning rules usually allow. Like other villagers, they looked to their children to find work and send remittances to help pay for new houses, motorbikes and TVs.

RISING ASPIRATIONS, RISING COST

Rising rural aspirations, and the rising cost, are part of the reason for the increasing discontent of China's migrant workers, said Li Changping, a former rural official who won fame in China in 2000 by denouncing the economic burdens on farmers.

"These migrant worker kids carry expectations about building a home, getting married, having children, becoming successful, and there's a real pressure from trying to keep up," said Li, who now lives in Beijing, researching rural development.

Making a direct link between any particular death and these pressures was impossible, he said. "But, still, migrant workers certainly do feel the stress," he added.

Like much of modern rural China, Ma's home village is dominated by old people and children.

"Nearly all the young people go out to work," said Ma Zibing, a grey-haired 62-year-old, sunning himself outside his home. Most in this clan-based village of about 400 share the Ma surname.

"Most head south to Guangdong, but they go all across the country. All that's left here are old people and kids."

The villagers make thousands of yuan a year by growing sapling, shrubs and flowers that are then sold to urban markets.

This relatively lucrative farming niche is not enough for the young. They prefer to join the army of rural migrants, toiling on road works, building sites and production lines.

With nearly 100 million residents, close to 70 percent of them rural, Henan province is a vast source of migrants.

"You need to do it to make real money," said Ma Wenfang, a 21-year-old woman, who said she had come back to the village to marry after working at a factory in south China.

NOBODY FARMS

She saw no future in farming.

"Nobody our age farms anymore," she said with an amused snort. "Nobody my age could plant a stalk."

The torrent of cheap workers, most with a basic education, has helped make China a global base for manufacturing.

It has also brought change to villages such as South Maqiao. Two-story homes of brick and tile are displacing one-story mud-brick dwellings. Motorbikes and electric scooters outnumber bicycles. Farmers tending their plots of shrubs interrupt conversations to answer cell phones.

Ma's first name, Xiangqian, means to "move forward." As the sole son among four children he carried the hopes of his parents to find a foothold in this rising wealth. In rural China, boys are often seen as bearing the family line.

But achieving those hopes left a heavy financial burden on the family. The parents defied family planning rules by having four children -- Ma Xiangqian was the youngest, with three sisters -- rather than the two usually allowed.

They struggled with fines of 20,000 yuan ($2,928) imposed by village officials, said Ma Xiangqian's mother, Gao Caoying.

"If you didn't pay you'd be locked up. But the village chief too pity on us and let us pay a little bit at a time," she said.

ATTRACTING SUITABLE BRIDE

They borrowed 60,000 yuan from kin and friends to help pay for the two-story house, which cost 80,000 yuan unfurnished, in the hope it would help their son attract a suitable bride.

"Everyone builds homes for their children whether they have the money or not. The big task in life is to have a good house for your son and his wife," said Ma Jianfu, a fellow villager and cousin of the family. "But everyone depends on working away. If you don't work away, you're living standard won't keep up."

Ma Xiangqian quit junior secondary school to train as a cook. Then he turned his hopes to joining his older sisters in Guangdong, where they worked in factories.

After a stint in a garment factory, in November last year he joined his sister in the Foxconn complex, owned by Taiwan's Hon Hai Precision Industry Co, which make products under contract for Apple Inc, Dell and Hewlett-Packard among big electronics brands.

Other Foxconn workers who died in the recent rash of suicides also came from struggling rural backgrounds, according to profiles in Chinese newspapers and magazines.

"There'll come a day when I give you a big house to live in so you can live a good life," Lu Xin, a 24-year-old who jumped from a dormitory in May told his mother before his suicide, Phoenix Weekly, a Chinese magazine, reported this month.

Ma Xiangqian was bullied by supervisors who pushed him off production work to cleaning toilets, said his parents. His first full month's wages at Foxconn amounted to 1,943 yuan.

Back in their home village, the saplings that once boosted the family income were dead and yellow from neglect and overgrown with weeds. Neighbors said they sympathized, but did not have the time to look after the neglected plot.

"Nobody has the time to help," said Ma Shujian, an elderly neighbor. "We're all too busy looking after ourselves."

China’s Communists Pass Out Their Phone Numbers in Charm Blitz

Source: Bloomberg

June 30 (Bloomberg) -- China’s Communist Party handed out phone numbers and resumes to foreign media in an unprecedented gesture of openness for an organization that has ruled from behind a walled compound since Mao Zedong took power in 1949.

Eleven arms of the party sent spokespeople to a briefing in Beijing today, including the Organization Department, which appoints the heads of China’s biggest state-owned companies.

“The party wants to increase the openness of its work,” said Wang Chen, director of the international communication office. Doing so is important to “improve the party’s governing capacity,” he said.

Increasing transparency within a party that boasts 78 million members may reflect efforts to address increasing unrest among workers, the backbone of its legitimacy. Strikes over pay last month that affected Honda Motor Co. and Toyota Motor Corp. exposed growing dissatisfaction that China’s economic boom has left many people behind.

The strikes are a “kind of wake-up call, and they have finally realized -- I hope -- that they simply cannot stop the flood no matter how tall and strong their dam is,” said Huang Jing, a visiting professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy. “They have done all this not necessarily because they want to, but they have to embark on this road given the rapidly changing situation in China.”

‘Confucius’ Centers

Today’s briefing is also part of a larger push by China to burnish its international image. The country is expanding the reach of the state-run media, increasing programming in English and other foreign languages and setting up a network of “Confucius” centers around the world, including the U.S., to teach the Chinese language and introduce outsiders to the nation’s culture.

Deng Shengming, the secretary general of the Organization Department, acknowledged that expediency, not ideology, persuaded some people to join the party in an attempt to further their careers. Some applicants “may not have very correct motives,” he said, adding that the party maintained a “very strict procedure” for selecting members.

Corruption, another bugbear afflicting the party, was also addressed. The Central Commission for Discipline Inspection is undertaking an investigation of the construction industry, said Wu Yuliang, its secretary general. Of 340,000 building projects probed since last July, 140,000 were found to have graft “problems,” and of those, 60,000 had been “dealt with,” he said without elaborating.

The Communist Party celebrates its 90th anniversary next year. China’s top leaders, including President Hu Jintao, live behind the oxblood-colored walls of the Zhongnanhai leadership compound in central Beijing. The party was founded in 1921 and came to power 28 years later when Mao led the communists to victory in a civil war.

Google faces pressure as China to decide on license

Source: Reuters

(Reuters) - Google Inc could face further pressure for its other products in China as Beijing is due to decide whether or not to renew a license for the firm's flagship search engine in the world's largest Internet market.

In an effort to keep its China license, Google said on Wednesday it will stop automatically redirecting China users to its uncensored Hong Kong site within the next 48 hours.

Beijing has been silent on whether a compromise system will be enough to allow Google to stay in the lucrative market -- the world's largest with nearly 400 million users, where local powerhouse Baidu Inc is the top dog.

If they lose this license, the trend is moving in the wrong direction for Google, it seems likely they will have trouble with their other licenses in China as well," said T.R. Harrington, chief executive of search consulting firm Darwin Marketing.

Google unexpected warned in January it might quit the country over censorship concerns and after suffering a hacker attack it said came from within China.

Now, Google also faces the hurdle of needing to get a license for its popular Google Maps product in China.

China recently released new requirements for firms keen to provide online mapping services, and unveiled a preliminary list of companies allowed to get the license.

Google, with its popular Google Maps product, was not on the list, although a source familiar with the situation said the handful of approved companies was not final.

Google said it was examining the impact of the new regulations on its products.

A total of 23 domestic firms, including Baidu Inc, were given preliminary approval to have online mapping services, according to a document posted on China's State Bureau of Surveying and Mapping. (here)

A senior government official said on Wednesday he did not know the specific details of Google's new approach, but reiterated the government's long-standing position that foreign companies operating in the country must respect local rules.

"We've long said that to develop in China, you must abide by Chinese laws," Wang Chen, head of the Information Office of the State Council told reporters. "Our stance is very clear in those statements."

Every China-based website needs an Internet Content Provider (ICP) license from China's Ministry of Industry and Information Technology, which must be renewed on a yearly basis. Google's ICP license ends in 2012 but comes up for renewal on Wednesday.

Without the license, Google would not be able to run a search website in China. Some users visiting Google.cn now get a webpage with the Google logo and search box, but clicking anywhere on the page brings them to the Hong Kong search site.

On Wednesday, France's antitrust regulator accused Google of a "lack of transparency" over its keyword advertising service and ordered ordered it to clarify conditions for the product within four months.

MURKY OUTLOOK

Analysts said the non-renewal of Google's ICP license would in China yank the company back to the years when Google had virtually no presence in the country. It would also make it tougher for Google to see its other business licenses renewed.

China's search market was worth 7.15 billion yuan in 2009, with search leader Baidu Inc dominating at around 60 percent while Google had 30 percent.

Edward Yu, chief executive of technology research firm Analysys International, said Google China's search traffic and revenue had stabilised in the second-quarter and advertisers were returning to the company.

However, Yu said Google not getting its ICP license would be disastrous for its search business in China. It is unclear how China will respond to Google's landing page reminding users to click through to its unfiltered search site.

It is possible China could block the URL of the landing site.

"It's the worst case scenario, if users can't access Google.cn and there is no reminder page for them to click through to Google Hong Kong, there will be an impact on traffic and in turn advertisers," Yu said.

Carlsberg reaches impasse with Chongqing Brewery Company

Source: Global Times

The World's fourth-largest brewer, Danish brewer Carlsberg, met another impasse in its purchase process of China's Chongqing Brewery Company (CBC) Tuesday. The firm exposed that, as the acquiring party, its Hong Kong branch was not qualified to acquire a firm since it reported consecutive losses for three years, according to media reports.

The occasion creates uncertainties over the deal, which is still waiting for the government's approval.

According to relevant rules in China, the acquiring party needs to have made profits for two consecutive years.

CBC announced on June 10 that Carlsberg would increase its stake in CBC to 29.71 percent from the current 17.46 percent for about 2.1 billion crowns ($378.7 million). But on June 17, more than 500 employees of CBC held a strike opposing the firm's (CBC) decision.

Have You Heard...

• China fends off Obama pressure over North Korea
• China denies military exercise aimed at U.S.
• Taiwan and China sign trade pact
• China Resources Buys Hong Kong Coffee Chain, Takes on Starbucks
• Google May Lose China Permit on Government

China fends off Obama pressure over North Korea

Source: Reuters

(Reuters) - China on Tuesday rejected President Barack Obama's suggestion that it was hiding from the risks posed by North Korea, and said it felt the dangers on the divided Korean peninsula more deeply than Washington.

Chinese Foreign Ministry spokesman Qin Gang made the rebuke in answer to repeated questions from reporters about comments by Obama over the weekend.

Beijing has refused to take a firm position on who is to blame for the sinking of a South Korean naval ship, the Cheonan, in late March, killing 46 sailors.

South Korea and other powers say the ship was undoubtedly sunk by a North Korean torpedo, and Pyongyang should suffer consequences. Beijing has urged restraint in dealing with the North, a long-time ally and strategic buffer.

"Now, I am sympathetic to the fact that North Korea is on China's border," Obama told a news conference at the end of the G20 global leaders' summit in Toronto.

"And so when they adopt a posture of restraint, I understand their thinking. But I think there's a difference between restraint and willful blindness to consistent problems," he added.

Chinese spokesman Qin suggested that his government had to be more cautious in handling its neighbor, whose struggling economy depends on Beijing for aid and trade. He said China did not want to "pour petrol on the flames."

"China is a neighbor of the Korean Peninsula, and on this issue our feelings differ from a country that lies 8,000 kilometers distant," Qin told a regular news conference, referring to the United States.

"We feel even more direct and serious concerns," he added.

The North's secretive leader, Kim Jong-il, appears to be in poor health, and his ruling communist party has called a rare meeting in September to elect a new leadership, a move analysts said could formally set in motion succession plans for him to set in place his son, Kim Jong-un, as his successor.

Beijing fears harsh condemnation of Pyongyang over the ship sinking could erode its already-limited leverage over Kim Jong-il, dash any hopes of persuading him to abandon his nuclear weapons, analysts say.

China's 1,415-km (880-mile) border with North Korea could also be overwhelmed by an influx of refugees if the North suffers political and economic collapse.

"On the Cheonan incident, we don't play favorites with any side," said the spokesman Qin. "Conflict on the (Korean) peninsula would suit no sides' interests, and so on this issue, China's position and efforts are beyond reproach."

China denies military exercise aimed at U.S.

Source: Reuters

(Reuters) - China denied on Tuesday media reports that an artillery drill in the East China Sea was in response to a planned military exercise between South Korea and the United States.

The 6-day, live ammunition exercise starting on Wednesday in the East China Sea off China's coast was seen by some analysts as a "response to a (planned) joint exercise between the United States and Republic of Korea navies in the Yellow Sea," said the China Daily, the country's official English-language newspaper.

A Chinese Foreign Ministry spokesman, Qin Gang, said there was no such link and a Chinese military officer said the timing was coincidental.

"This is a regular military exercise," the spokesman Qin told a regular news conference. "This is not related to the situation on the Korean Peninsula."

Li Daguang, a professor at China's National Defense University and a People's Liberation Army (PLA) officer, said the exercise was "not aimed at the U.S.-South Korea joint exercise."

"The PLA artillery exercise in the East China Sea and the joint U.S.-South Korea exercise in the Yellow Sea are a complete coincidence," Li told the Wen Wei Po, a Hong Kong newspaper under mainland control.

"The outside world shouldn't read anything into this."

The Yellow Sea lies to the north of the East China Sea and the areas of the two exercises would not overlap.

China's Foreign Ministry said last week it was concerned about reports a U.S. aircraft carrier may join the anti-submarine exercise with South Korea following a standoff with North Korea over the sinking of a warship from the South.

"Though the Chinese government did not say anything about the drill, anybody with common sense on military strategy will bet that they are related," one expert on China-U.S. relations, Shi Yinhong of Renmin University in Beijing, told the China Daily.

The joint exercise that had been expected this month will most likely take place in July, although a date has yet to be set, the Pentagon said on Monday.

Washington has not said officially whether an aircraft carrier would participate, as some news reports citing Pentagon sources have suggested.

Beijing has been angered by U.S. navy ships engaging in surveillance in waters close to China's southern coast.

Earlier this year, Beijing curtailed contacts with the Pentagon over continued U.S. arms sales to Taiwan, the self-ruled island that China claims as its own territory.

U.S. Defense Secretary Robert Gates said this month China's decision to break off military-to-military contacts could undercut regional stability.

Gates said the PLA was the main obstruction in the way of improved relations and suggested its position was at odds with that of the country's political leadership.

Taiwan and China sign trade pact

Source: Reuters

China (Reuters) - China and Taiwan signed a landmark trade deal on Tuesday that could boost trade already worth $100 billion and ease political ties between the export-reliant island and the world's third-largest economy.

The Economic Cooperation Framework Agreement (ECFA), which has triggered protests by the opposition in Taiwan fearful of Chinese moves to unify with the self-ruled island, cuts tariffs on 800 products and opens up service industries, giving a major boost to around $100 billion in annual two-way trade.

But it covers only the easiest of potentially thousands of items targeted for tariff cuts in years ahead and euphoria could fade quickly as the two move to much tougher negotiations.

Taiwan believes the ECFA will open the door to free trade agreements with major economies like Japan and the United States. Beijing had encouraged that hope before saying last month it would try to block FTAs because Taiwan lacks sovereignty.

The biggest deal in 60 years between the political rivals was signed in Chongqing, the hilly, foggy wartime capital of China for the Kuomintang (KMT) party, which now rules Taiwan after losing a civil war to Mao Zedong's Communists in 1949.

"This agreement not only influences the development of the economies on both sides of the Straits, it is also a new milestone for them," said Chiang Pin-kung, the chairman of Taiwan's Straits Exchange Foundation.

Tuesday's signing stems from 2008 talks launched by Taiwan President Ma Ying-jeou, reversing 60 years of antagonism. China has considered Taiwan a renegade province since the end of the Chinese civil war in 1949 and insists on unification, by force if necessary.

Bringing the two sides closer together would be a major achievement for Chinese President Hu Jintao, who is due to step down after the Communist Party selects a new top leader in 2012.

The Taiwanese "have very limited expectations over ECFA, but keeping the process going is important for them ... Ultimately the Chinese have a political agenda behind which is not shared by the Ma administration," said Steve Tsang, a China-Taiwan relations expert at St Anthony's College, Oxford University.

"As part of a long-term strategy it is part of the process of embracing Taiwan and making Taiwan closer within the orbit of China, and therefore reducing the scope of pro-independence people in Taiwan to push for an independence agenda."

The pact will cut tariffs to zero within two years on 539 Taiwanese export items, worth $13.84 billion, versus only 267 valued at $2.86 billion headed from China to Taiwan.

That could help lift Taiwan 2010 GDP growth past 6 percent, private forecasts show. The official target is 4.72 percent.

Still, Taiwan's stock and currency markets lost ground in late trade despite stronger starts on Tuesday.

"People in the market have talked about the ECFA for a while and after the two sides signed the deal, we thought the effect from this positive factor came to an end," said Tom Tang, a vice president at Masterlink Investment Advisory.

Exports from Taiwan's top industries, such as PVC plastics and high-tech goods, compete closely with industries China wants to develop, making those negotiations much more difficult.

A second agreement would increase intellectual property right protection, which Chiang said was important for Taiwanese high-tech investment in China.

On Saturday, thousands of Taiwanese rallied against the deal in Taipei, but their opposition is not expected to prevent it.

Opposition could get louder if the ECFA fails to create the promised 260,000 jobs in Taiwan or bring an economic payoff.

China Resources Buys Hong Kong Coffee Chain, Takes on Starbucks

Source: Bloomberg By Sophie Leung and Marco Lui

June 29 (Bloomberg) -- China Resources Enterprise Ltd., the state-backed company that’s China’s largest brewer, will buy control of Hong Kong’s second-largest coffee chain, aiming to expand and surpass Starbucks Corp. on the mainland.

Chevalier Pacific Holdings Ltd. said in a statement today that China Resources will pay HK$326.6 million ($42 million) for 80 percent of Pacific Coffee Group. The chain has 83 outlets in the city, compared with more than 100 for Starbucks, the largest coffee-shop operator in both China and the world.

China Resources plans to expand Pacific Coffee into China’s largest chain from five existing mainland outlets, in part by opening branches in its 200 hypermarkets, Deputy Managing Director Frank Lai said today. Starbucks now has about 380 stores in China, and plans to have “thousands” there eventually, Chief Executive Officer Howard Schultz said in April.

“With the extensive distribution network of China Resources, Pacific Coffee can expand its business in China a lot faster than it could by going solo,” Kenny Tang, a Hong Kong- based analyst at Redford Assets Management Ltd., who rates China Resources a “buy,” said by phone today. “They could compete with Starbucks for market share.”

Pacific Coffee is “complimentary” to China Resources’ more than 2,800 retail stores in China as it may attract “more sophisticated consumers,” the company’s Lai told reporters in Hong Kong today.

Retail Focus

State-controlled China Resources is concentrating on consumer businesses to tap increasing spending in China. Monthly retail sales in China have risen an average of 17 percent from a year earlier in the past 12 months, according to government data.

American technology executive Thomas Neir founded Pacific Coffee after being unable to find a good cup of coffee in Hong Kong. The chain opened its first outlet in 1992, eight years before Starbucks arrived in a venture with Jardine Matheson Holdings Ltd. unit Maxim’s Caterers Ltd. Neir and his partners sold Pacific Coffee to Chevalier for HK$205 million in 2005.

In addition to 86 company-owned outlets in Hong Kong and China, Pacific Coffee has four shops in Singapore and five franchised outlets, in Macau, Malaysia and China. Lai said the company plans to own most of the new stores in China.

“China Resources would like to diversify along food and retail, and now they want to take an established Hong Kong brand to explore the Chinese market,” Keith Li, an analyst at CIMB-GK Securities (HK) Ltd., said in a phone interview today. “It’s too early to say whether the company could successfully maximize the interest to shareholders, as Pacific Coffee may not be as profitable as Starbucks.”

Head Start

Still, Starbucks has a head start of more than a decade on the mainland. The company opened its first coffeehouse in China in Beijing in 1999 and entered Shanghai a year later, in a venture with Taiwan’s Uni-President Enterprises Corp.

Starbucks won’t comment on the Pacific Coffee deal, spokeswoman Caren Li said by phone from Shanghai today, confirming that the company is the biggest specialty coffee company in China.

Chevalier Pacific, 54 percent held by Chevalier International Holdings Ltd., said it will keep 20 percent of Pacific Coffee. The chain will gain greater consumer recognition in China and “seize a bigger market share in a more efficient manner,” Chevalier said.

Pacific Coffee Earnings

Pacific Coffee had had an after-tax profit of HK$17.6 million in the year through March 31, 2010, against a year- earlier net loss of HK$20.3 million, Chevalier said.

“Profit contribution from this acquisition will be limited in the short run; still, it’s a good buy for strategic development,” Redford’s Tang said. This “will help to raise the company’s image, as it’s shifting focus to the more high-end market.”

Google May Lose China Permit on Government

Source: Bloomberg By Brian Womack and Mark Lee

June 29 (Bloomberg) -- Google Inc. may lose the right to operate a website in China, forcing the search-engine operator to abandon the world’s largest Web market, after the government objected to its efforts at avoiding censorship controls.

Authorities probably won’t renew Google’s Internet license if the company keeps automatically redirecting users of the Chinese service to its Hong Kong site, Google said in a blog post. To keep Google.cn running, the search-engine operator is planning to stop taking users directly to the unfiltered site, according to statement.

“Google would effectively go dark in China,” Chief Legal Officer David Drummond said in the blog posting. “It’s clear from conversations we have had with Chinese government officials that they find the redirect unacceptable.”

The dispute has cost Google partnerships with China Unicom (Hong Kong) Ltd. and Motorola Inc. in the country. The operator of the world’s most-used search engine said in January it would stop self-censorship of the Chinese portal, ending cooperation with the laws of a state that bans references to content deemed politically unacceptable.

“If the Chinese government isn’t happy with them running uncensored search results out of the Hong Kong site -- I don’t see why they’ll be any happier just because it becomes one click away,” said Danny Sullivan, who runs the search-analysis website Search Engine Land.

Compliance With Law

Authorities will review the Google issue, Foreign Ministry spokesman Qin Gang said at a briefing in Beijing today. Overseas Internet companies should comply with Chinese law, Qin said.

Google, based in Mountain View, California, said it plans to stop redirecting users automatically in a “few days,” according to the blog posting. It re-submitted an application for a license today ahead of a deadline tomorrow and expects to hear back from the government soon, Jessica Powell, a Tokyo- based spokeswoman for the Internet company, said in an e-mail.

The new arrangement is an “inconvenience” that will probably lead to further loss of business in China for Google, said Eric Wen, head of Internet research at Mirae Asset Securities in Hong Kong. Chinese market leader Baidu Inc. will gain business from Google in the country, Wen said.

Directing Users

Google in March closed its China search engine and began directing users to the Hong Kong site. The shift led to its market share in China to fall to 30.9 percent in the first quarter from 35.6 percent three months earlier, according to data from research firm Analysys International. Baidu’s share increased to 64 percent from 58.4 percent, according to Analysys.

Baidu’s American depositary receipts have gained 81 percent in U.S. trading this year, outperforming other Chinese Internet stocks, as the scaling back of Google’s operations in China helped the Beijing-based company gain sales. Google shares have fallen 24 percent in 2010.

By moving the Chinese service offshore in March, Google avoided local rules for websites to self-censor content deemed unacceptable by the government. Search results served by Google’s redirected site to Chinese users have since been screened by China’s so-called “Great Firewall,” the monitoring system operated by government censors to block overseas services such as Facebook Inc. and Google’s YouTube.

The “Great Firewall” limits Chinese Web users’ access to information on topics ranging from Tibet’s independence to the 1989 crackdown on democracy protesters in Tiananmen Square.

“Stay True”

The latest approach allows Google to “stay true” to a commitment not to self-censor search results in China while adhering to local law, according to Drummond’s posting.

For Google, a closure of the Chinese site would end four years of clashes with the government over censorship and highlight the challenges global companies face operating in a one-party state that controls the flow of information.

The company in January said it would stop censoring content after its computers were hacked from within China. The company said then its systems were targeted by “highly sophisticated” attacks aimed at obtaining proprietary information, as well as personal data belonging to human-rights activists who use the company’s Gmail e-mail service.

Google would have generated $600 million in annual sales this year in China, according to estimates by JPMorgan Chase & Co. in January. That’s about 2 percent of the company’s projected total revenue this year, according to the average of 28 analyst estimates compiled by Bloomberg.

Biggest Internet Market

Chief Executive Officer Eric Schmidt said last month the situation for Google in China was “stable.” The company was maintaining its business relationships and engineering centers in the country, he said.

China had 384 million Internet users at the end of 2009, the government estimates. That’s more than the total U.S. population. The number may grow to 840 million, or 61 percent of the Chinese population, by 2013, according to EMarketer Inc. in New York.

“If Google wants to continue operating in China, it will have to get used to more vacillations from the authorities,” said Charles Mok, chairman of the Hong Kong branch of the Internet Society, an international industry body. “In this confrontation between Google and the Chinese government, there are quite a few instruments at the disposal of the government that could be brought to bear on Google.”

Have You Heard...

• Trade Deal Draws Taiwan Closer Into China’s Embrace
• G20 drops China-sensitive plaudits on yuan reform
• West worries China may undermine Iran sanctions efforts
• Surging China Debt May Weaken Growth, Limit Stimulus
• Pratt & Whitney, AVIC discuss possibility of a JV
• Labor issues top the agenda
• Foxconn Plans Factory With 300,000 Workers in Central China
• Sinopec Continues To Build Retail Network In China Opening Convenience Stores
• Vuvuzela sounds clarion call for China's manufacturers

Trade Deal Draws Taiwan Closer Into China’s Embrace

Source: Bloomberg By Frederik Balfour

June 28 (Bloomberg) -- Taiwan is scheduled to sign its first trade treaty with China tomorrow, strengthening commercial ties with the fastest-growing major economy and the island’s biggest trading partner and investment destination.

The accord to be signed in the Chinese city of Chongqing, former headquarters of Taiwan’s ruling Kuomintang when they battled Mao Zedong’s Communists during China’s civil war, shows how much relations with the mainland have warmed since Taiwanese president Ma Ying-jeou took office in May 2008.

“This would not be imaginable two or three years ago,” Carl Chien, senior country officer at JPMorgan Chase & Co. said by telephone in Taipei. “The mere fact that the two governments are signing some kind of treaty is already a record-breaking thing.”

China set aside its claim that Taiwan is a renegade province to negotiate the Economic Cooperation Framework Agreement, betting that ever-tighter economic integration will achieve what six decades of military threats did not. For Taiwan, opening China’s market restores the island’s competitiveness in the world’s third-biggest economy and may pave the way for similar agreements with other trading partners.

China will cut tariffs on 539 items from Taiwan valued at $13.8 billion, or about 16 percent of the island’s 2009 exports to the mainland, Zheng Lizhong, vice chairman of the Association for Relations Across the Taiwan Straits, said last week. Taiwan will cut tariffs on 267 items from China worth $2.86 billion, or about 10.5 percent of the country’s shipments to Taiwan in 2009.

Chinese Visitors

The trade deal is the latest sign of rapprochement between the two civil war foes. Since Ma took office, direct air, shipping and postal links have been established. In the first five months of this year, 70,445 Chinese visited Taiwan, 70 percent more than in the corresponding period a year earlier, according to Taiwan Tourism Bureau numbers.

Taiwan’s benchmark stock index gained 16 percent in the past year as Ma’s administration pushed for a trade pact with China. Taiwan’s dollar appreciated 0.5 percent to NT$32.036 against its U.S. counterpart as of 9:55 a.m. local time, according to Taipei Forex Inc.

Taiwan is keen to reach the trade deal with China in order to secure for its companies the same preferential treatment the mainland now offers 10 Southeast Asian countries.

Southeast Asia

In January, a separate trade accord took effect between China and the Association of Southeast Asian Nations, lowering tariffs on two-way trade. Similar deals for China with Japan and South Korea are under discussion.

“It’s vital for us economically, it’s a matter of life and death,” said Philip Yang, a professor of political science at National Taiwan University in Taipei. “If we sign we won’t be in a disadvantageous position with Asean and Korea, our major economic rivals in China.”

Still, the proposed trade pact doesn’t include items some Taiwanese companies had wanted, such as tariff cuts for polyvinyl chloride, or PVC, one of the island’s top exports, and easing restrictions in the semiconductor industry.

Under the pact, China will open up 11 service sectors such as banking, insurance, hospitals and accounting, while Taiwan agreed to offer wider access in seven areas, including banking and movies, the two sides said.

“China is incorporating Taiwan into its supply chain and Taiwan’s economy will become part of China’s economy, and that is the biggest worry for Taiwan people,” Tsai Ing-wen, chairwoman of the opposition Democratic Progressive Party, said at a rally on June 26 to protest the accord.

The opposition claims the agreement will give the Beijing government too much clout over Taiwan and may cost jobs by allowing cheaper Chinese goods to flood the island’s markets.

Ma ‘Cooperating’

Ma is “cooperating with the Chinese communists to unify Taiwan,” former Taiwanese president Lee Teng-hui, who supports independence for Taiwan, said at the start of the march by more than 30,000 people, the Taiwan News reported.

Trade with the mainland, Taiwan’s largest export market, rose 68 percent in the first four months of 2010 compared with same period last year, and Taiwan investment rose 44.7 percent, China’s Tang Wei, head of Taiwan, Hong Kong and Macao affairs at China’s Ministry of Commerce said on June 13. China and Hong Kong accounted for 43 percent of Taiwan’s exports, according to data from the island’s Ministry of Finance.

Under the deal, tariff reductions on items including petrochemicals, auto parts, textiles and machinery will be implemented in three stages over two years, by which time tariffs will be brought to zero.

Vital For Taiwan

A trade agreement with China is also vital to Taiwan as it seeks similar accords with other regional trading partners.

The agreement will “ease the concerns of most of the countries in the world and start to bring Taiwan back to a normal position in establishing FTA relationships with its important trading partner countries,” J.T. Wang, chairman of Acer Inc., the world’s largest notebook computer supplier, said in an e-mailed reply to questions.

Opposition fears that China will use its economic embrace of Taiwan as a way to achieve its ultimate goal of reunification may be overdone, said Liu Bih-rong, a professor of political science at Soochow University in Taipei.

“The economic track and political track are separate,” he said. “China may hope economic links will lead to political negotiation, but in Taiwan the majority don’t want to move that fast.”

G20 drops China-sensitive plaudits on yuan reform

Source: Reuters

(Reuters) - World leaders ditched plans to welcome Beijing's shift toward greater exchange rate flexibility at a G20 summit in Toronto on Sunday, highlighting China's sensitivity over the issue.

But U.S. President Barack Obama, who has been pressing for a yuan revaluation to help ease trade disparities, welcomed Beijing's move and said he believed over time the currency would appreciate significantly.

Negotiators had hoped a statement to be signed by the leaders in Canada would include a line welcoming last week's announcement that Beijing was ending a de facto peg that had locked the yuan to the U.S. dollar for nearly two years.

"The majority of the members of the G20 welcomed the plans of the government of China on introducing a floating yuan rate," Andrei Bokarev, a Russian finance ministry official, told reporters.

But a phrase saying as much was included in an early draft communique but dropped from the final version "at the request of the Chinese side," he said.

Two officials said the line that had been present on Saturday had been erased less than 24 hours later. "China did not want to be explicitly mentioned, even as a good case," one of the officials said.

Chinese officials say discussion of its currency has no place in international forums and President Hu Jintao made no mention of currency policy in a speech to G20 leaders on Sunday.

Instead, he said China recognized it had a critical role to play in helping to rebalance the global economy but necessary changes could not happen overnight.

Many economists argue that the yuan is undervalued by about 20 percent versus the dollar and that a more realistic valuation is vital to help balance the world economy.

U.S.-CHINA CONTENTION

It has become a major point of contention between Washington and Beijing. U.S. Congress members are pressuring Obama to get tougher with China, saying the mismatch in trade is making bad U.S. jobless rates even worse.

Obama said he believed China's pledge of greater currency flexibility is serious. "We didn't expect a 20 percent revaluation in a week. That would be disruptive to the Chinese economy. It would be disruptive to the world economy," he said.

"We do expect that as more and more market forces come to bear, that given the enormous surpluses that China has accumulated, that the RMB is going to go up, and it is going to go up significantly," he said. The yuan is also called the RMB or renminbi.

Chinese officials present in Toronto said it was fair for the G20 to discuss currency issues as a part of a broader consultation about economic policies. But they insisted that Beijing alone would determine yuan policy and argued that it was not the only important part of economic restructuring.

"If you only rely on exchange rate reform, it is very difficult to address trade imbalances or trade frictions," Yu Jianhua, a director-general in the commerce ministry, said.

U.S.-CHINA TRADE DISPUTE

In a separate but related development, China's ambassador to the World Trade Organization in Geneva told Reuters on Sunday that excessive demands from the United States explained why the Doha round of talks on global trade liberalization, launched in 2001, were going nowhere.

"The U.S. is the sole member who insists that we're still far away from the conclusion of the round," Sun Zhenzyu said.

"Their new excessive request on an elevated level of ambition is in fact equivalent to a restart of the round and a flagrant deviation from the original negotiation mandates."

West worries China may undermine Iran sanctions efforts

Source: By Paul Richter, Los Angeles Times

Officials fear that China, which has questioned the value of sanctions and is hungry for energy, will step up its trade with Iran as other countries scale back.

U.S. and European officials in charge of efforts to tighten sanctions against Iran have expressed new concerns that China is quietly positioning itself to undermine the latest measures.

In the last two weeks, the United States and the European Union imposed new sanctions to pressure Tehran to curtail its nuclear program. The measures, which augment United Nations sanctions adopted this month, aim to discourage international investment in Iran, particularly its energy sector.

But U.S. officials fear that China, which is skeptical of sanctions and hungry for energy, will step up its trade and investment with Iran as other countries scale back to comply with trade restrictions.

The concerns point to the possibility that new unilateral sanctions approved by the Obama administration and its European allies could, in effect, backfire by putting Western firms at a disadvantage while benefiting China and failing to affect Iran's nuclear program.

"This is a significant challenge that we face," Stuart Levey, the Treasury Department's top sanctions official, told a Senate committee last week.

Levey added that the Obama administration will "push and urge" China to scale back an economic relationship that has flourished over the last decade.

Sanctions have been widely questioned as an effective means of persuading a defiant Iran to give in to demands for opening its nuclear program to international inspectors and scaling back its ambitions.

CIA Director Leon E. Panetta said Sunday in an ABC interview that the sanctions would have "some impact" on Iran, but by themselves would "probably not" deter Tehran's nuclear ambitions.

China, despite its misgivings, supported a fourth round of U.N. sanctions this month after Iran refused to scale back its expanding uranium enrichment program. U.S. officials and allies charge that Iran's effort is aimed at developing nuclear weapons, which Tehran denies.

The U.N. measures were diluted during negotiations among the 15 members of the U.N. Security Council, and passed on a split vote. China's support depended on the inclusion of language that permits continued foreign investment in Iran's oil and gas sector.

Within days, U.S. and European officials quickly added their own tougher measures in hopes of discouraging petroleum sales, energy investment and foreign financing.

But U.S. officials fear that China could secretly sell gasoline and other refined petroleum products to Iran through intermediaries in the Persian Gulf. And they worry that China could expand its growing investments in the oil and gas sector.

Rep. Howard L. Berman (D-Valley Village), chairman of the House Foreign Affairs Committee and a leading advocate for U.S. sanctions legislation approved last week, said in an interview that Chinese "backfilling" — taking the place of businesses with Western roots — is "a huge concern."

U.S. officials have received complaints from allied countries that have trimmed their ties with Iran, only to see the Chinese fill any void.

Japanese officials have complained regularly to the Americans in private, said Fariborz Ghadar, a former Iranian official now at the Center for Strategic and International Studies. A typical complaint, Ghadar said, is: "You asked us to cut back — we backed out — and now the Chinese are stepping in."

In North Korea, Chinese cooperation with U.N. sanctions against Pyongyang has been considered spotty. Beijing has been unwilling to disclose information about Chinese business contacts with the North Koreans, experts said.

"There's a track record of China not cooperating with the mechanisms set up to implement the international sanctions," said Mark Hibbs of the Carnegie Endowment for International Peace. "In the case of unilateral sanctions by the United States, cooperation is likely to be even less."

In Iran, China "has given no commitment not to take up the slack," said a Western diplomat, who spoke on condition of anonymity in keeping with diplomatic protocol. Iran's trade with China has been growing and reached an estimated $36.5 billion last year, surpassing trade with the European Union.

In some cases, the U.S. may find it difficult to pressure Chinese firms to limit business ties with Iran because many do no business in the United States and won't care about U.S. threats to cut off access to the American market, as allowed under the sanctions legislation.

For Chinese companies that could be punished under the U.S. sanctions measure, the U.S. would risk complicating its relationship with one of its largest trading partners.

Nevertheless, U.S. officials insist they intend to police the new sanctions vigorously.

One senior official assigned to the task is Robert Einhorn, a veteran State Department nuclear nonproliferation specialist whom the Chinese have called "the dentist" because of his willingness to come down hard on foreign officials.

Still, there are some positive signs for the Obama administration.

Although China wants to expand economic ties with Iran, it is moving slowly in areas as it assesses the potential effects of international pressure. The Chinese government may not want to invest large sums in major gas and oil projects if there is a risk that Iran's isolation could make it difficult to complete the projects, analysts said.

Surging China Debt May Weaken Growth, Limit Stimulus

Source: Bloomberg

June 28 (Bloomberg) -- China’s efforts to contain the risks from a surge in local-government debt may hurt growth in the world’s third-biggest economy, investment bank China International Capital Corp. said.

A report by the chief auditor last week indicated officials may take “relatively forceful measures” including strictly controlling new borrowing, CICC economists led by Hong Kong- based Ha Jiming said in a report today. The effect may be to “limit the source of funding for infrastructure projects and affect future economic growth.”

Chinese policy makers are grappling with the risks posed by the credit boom that fueled the nation’s comeback from the global recession. Fitch Ratings says lenders’ weakened financial positions as asset quality deteriorates could limit the nation’s ability to respond to any renewed global slump with more stimulus measures.

Next year, after the end of existing fiscal stimulus, “the funding of infrastructure projects will face greater pressure, so fixed-asset investment growth may decelerate and we can’t be optimistic about the outlook for the economy,” the CICC economists said.

Chinese banks may face a wave of bad loans from lending to local-government financing vehicles under the stimulus program begun in November 2008, Victor Shih, a political economist at Northwestern University, and Citigroup Inc. have warned separately.

Weakening Asset Quality

According to Fitch, lending so far may have limited the government’s options in the future.

A future deterioration in lenders’ asset quality is a “near-certainty,” Charlene Chu, a senior director in financial institutions ratings for Fitch in Beijing, told a conference in Hong Kong last week. “Chinese banks’ financial positions are more strained than it appears,” she said.

In an e-mail, she said that in the wake of last year’s record $1.4 trillion of lending, banks would be less able to engage in as large a stimulus as in 2008 and 2009. This could make any potential double-dip recession more protracted, she said.

The China Banking Regulatory Commission estimates that outstanding loans to funding vehicles set up by local governments rose 70 percent to 7.38 trillion yuan at the end of 2009 from a year earlier. In the first quarter of 2010, about 40 percent of new loans went to such entities, according to the CBRC. The vehicles are used because local governments can’t borrow directly.

Slowing Growth

China’s growth will decelerate to 9.3 percent in 2011 from 10.1 percent this year, according to the median forecasts in Bloomberg News surveys of economists. CICC didn’t give a forecast for next year’s growth.

In a “worst-case scenario,” the non-performing loans of local-government financing vehicles could reach 2.4 trillion yuan ($350 billion) by 2011, Citigroup said in March. Shih said separately that a crackdown on lending could lead to a “gigantic wave” of bad debts.

The CICC analysts said today that the borrowing won’t lead to a crisis for China for reasons including the government’s growing revenue, relatively low level of debt overall and large asset base.

Liu Jiayi, the nation’s chief auditor, indicated last week in a report to a standing committee of the National People’s Congress that some local governments’ debt burdens are excessive.

Fiscal Risk

The official cited cases of debts amounting to more than 100 percent of local governments’ available fiscal resources in an audit of 18 provinces, 16 cities and 36 counties. In one case, the level is 365 percent, Liu said.

Officials must “strictly control” local government borrowing and prevent “the financial risk evolving into a fiscal one,” Liu said.

China’s gross domestic product grew 11.9 percent in the first quarter of 2010 from a year earlier, the fastest pace in almost three years. The risk that the nation could have a “hard landing” has been one of the biggest sources of anxiety for global investors this year, Tim Condon, a Singapore-based economist at ING Groep NV, said last week.

In November 2008, the government scrapped quotas that limited banks’ lending and pressed them to support a stimulus program devised to shield the economy from the effects of the global financial crisis. The result was a flood of cash.

Some of the money went into property, fueling speculation that contributed to record price gains, and some was channeled into the local-government financing vehicles.

China’s banking regulator said June 15 that it sees growing credit risks in the real-estate industry and warned of increasing pressure from non-performing loans. The State Council, China’s cabinet, this month ordered local governments to ensure repayment of debts by the financing vehicles and concentrate on completing projects already underway.

Pratt & Whitney, AVIC discuss possibility of a JV

Source: Global Times

Pratt & Whitney Group (PW), one of the world's top three aero engine manufacturer, and Aviation Industry Corporation of China (AVIC), China's largest aircraft and components maker, are discussing the possibility to set up a joint venture (JV) in the mainland, PW's chief executive David P. Hess said. The JV will produce components for the PW PurePower 1000G engine.

Hess said that the JV will not only serve the Chinese market, but act globally.

He also said that the company has already received orders of 400 units of the engine from Mitsubishi Regional Jet (MRJ), Bombardier C series jets and Irkut MC-21 planes, and that it will make efforts to start cooperations for the supply of the engine to the Airbus 320 and Boeing 737 to expand the firm's market share.

PW hopes to reenter the Chinese market through the cooperation with AVIC, according to Hess. In 2009, the firm failed in participation of the C919 project, China's first home-grown large commercial airliner.

He said that one of the purposes of this visit to China is to recommend the PW 1000G engine to the Commercial Aircraft Corporation of China, the major maker of C919.

Labor issues top the agenda

Source: Global Times By Li Qiaoyi

Weeks of labor frictions and strikes at plants across the country have finally registered on the central government's radar.

Measures need to be adopted to foster good relations between workers and employers so that wages can rise and employment levels remain stable, Premier Wen Jiabao said over the weekend.

His speech came one day after a sit-in was resolved at a Japanese auto parts plant located in Nansha, Guangzhou Province.

The 1,200 workers at the plant were given a raise of 800 yuan ($117.78) per month, xinhuanet.com reported Sunday.

The latest round of labor issues is only the most recent in a long-term nationwide trend toward higher wages.

Average workers' cost of living has risen with economic expansion in the labor-intensive coastal regions due to soaring housing prices, said Lian Ping, chief economist with Bank of Communications.

"This brings on a need for higher wages."

Many provinces and cities recently announced an increase of roughly 20 percent in minimum wages effective July 1. Several ministries and commissions have also mulled an income distribution reform plan, the revision of which is expected later this year.

Economists don't think wage increases will put pressure on inflation in the near term while raising concerns over its long-term implications.

Pay rises will have an influence on the consumer price index (CPI) consisting mainly of food prices, but it is not likely to greatly affect the CPI in the near future, Lian said.

The higher labor cost in costal regions will prompt companies to transfer their production to central and western regions, which could limit the impact of wage increases on inflation nationwide, he said.

"Monetary policy is likely to become more accommodative to inflation over time as wage hikes accelerate," Peng Wensheng, head of China research at Barclays Capital, also said in a note distributed June 14.

He added higher productivity together with infrastructure investment and better education would offset a slow down in economic growth as less people enter the labor force and the rate of investment falls gradually. Peng warned, "China is likely to see slower growth but a higher rate of inflation than in the past decade."

Foxconn Plans Factory With 300,000 Workers in Central China

Source: Bloomberg

June 28 (Bloomberg) -- Foxconn Technology Group, the contract maker of Apple Inc. iPhones and Hewlett-Packard Co. computers, plans to establish a factory with 300,000 workers in central China’s Henan province, the local government said.

The company is looking to hire 100,000 workers in the near- term from Henan province that will be sent for training at Foxconn’s facilities in the southern Chinese city of Shenzhen, the government of the city of Hebi, in Henan, said in a statement on its website. After completing training, the workers will have the option of returning to work in Henan, according to the June 25 statement.

Foxconn’s plans for the Henan factory come after at least 10 of its employees in Shenzhen committed suicide this year, spurring the company to hire counselors, install netting on buildings and double pay for its workers in the southern Chinese city. The Taipei-based company last week hired outside managers to run employee dormitories in Shenzhen in what it called a shift to a “more open” style of management.

Of the 800,000 workers Foxconn has in China, 157,000 of them are from Henan, the Henan Daily, based in the province, reported June 24, citing an unidentified provincial government official. Henan, China’s largest province by population, is home to almost 100 million people.

Individuals hired by Foxconn will work eight hours a day, five days a week, according to the statement on the Hebi government’s website. Workers may work a maximum of three hours overtime each day and must have at least one day per week off, according to the statement.

Basic Salary

The minimum basic salary for new workers will be 1,200 yuan ($177) a months, which will increase to 2,000 yuan after three months if individuals pass an examination, the statement said.

The statement on the Hebi government’s website didn’t say where the Foxconn factory would be located, when it may begin operations or any other details about the plans. Calls to Foxconn spokesman Edmund Ding seeking comment today weren’t immediately answered.

Sinopec Continues To Build Retail Network In China Opening Convenience Stores

Source: China Retail News

According to Zuo Xingkai, deputy general manager of Sinopec Chemical Products Sales Company, to date, Sinopec has opened convenience stores in 13,077 of its gas stations, accounting for 44% of its total 29,698 gas stations and these convenience stores have reportedly formed the largest non-oil retail network in China.

Sinopec launched its non-oil business in 2008. Over the past two years, this business has developed rapidly. In 2009, the sales at Sinopec's non-oil business were CNY3 billion, a year-on-year increase of 166%. In 2010, the number of Sinopec's convenience stores is expected to reach 15,000 and the operating revenue of these stores will reach CNY4.5 billion.

Zuo revealed that the revenue of Sinopec's non-oil business in 2010 has already reached CNY1.236 billion, an increase of 165% compared with the same period in 2009.

At present, sales of non-oil products reportedly account for over 50% of revenue of large international oil companies. Another Chinese state-owned oil and gas producer, China National Petroleum Corporation, also started building its non-oil retail network. In 2008, it launched the uSmile brand to implement unified management of its convenience stores. The company's financial report showed that by the end of 2009, its sales of non-oil business increased by 69% year-on-year; and over 8,800 of its gas stations had started the non-oil business, accounting for 51% of its total 17,262 gas stations in China.

Vuvuzela sounds clarion call for China's manufacturers

Source: Global Times Photo: Los Angeles Times

At the South Africa World Cup, the ubiquitous buzzing of vuvuzelas has triggered complaints from both players and television audiences -- despite their widespread popularity.

While the vuvuzela is widely seen as a South African tradition, few people know that 90 percent of the instruments were made in China.

But few Chinese manufacturers are feeling secure in their conquest of of the vuvuzela market.

The stresses of cut-throat competition have been exacerbated by rising labor costs, renewed flexibility of the yuan and the rolling back of export rebates.

For some the bee-swarm buzz of the plastic trumpet, which can hit 127 decibels, might be the last post.

BIG HIT

Chinese plastics manufacturer Wu Yijun first glimpsed a possibility for the vuvuzela in 2001 when he saw a cartoon on the Internet featuring Africans blowing bamboo vuvuzelas to drive away baboons.

In 2004, Wu, general manager of Jiying Plastic Product Corp., in Ninghai County, an industrial town in Zhejiang Province, two hours drive from Shanghai, saw his opportunity when South Africa was awarded the 2010 World Cup.

In August last year he sold 1,000 plastic vuvuzelas at three yuan (44 US cents) each to an African merchant through Alibaba.com, China's largest e-commerce platform.

"They were the first batch of plastic vuvuzelas sold for the South African World Cup," Wu says. "It was also my only order with relatively big profits."

Wu has seen explosive increases in orders since January and by the end of April, he had sold 1 million vuvuzelas.

The vuvuzelas sell well in traditional and online shops in many countries. China has exported an estimated 50 million of them, Wu said.

He says only his firm had the product mold early on. "I might have sold up to 10 million units if I had have enough production capacity."

LOW PROFIT

The seeming success has brought Wu publicity, but failed to fill his bank account. Huge sales of the plastic horns, like many other China-made low-end products, do not bring in handsome profits.

The export price of the horns, which are up to 60 cm long, has dropped to just 30 US cents each, he says.

"For each vuvuzela, the profit is just 0.1 yuan."

Wu says he only earned 100,000 yuan ($14,720) after working overtime for half a year -- and the profits did not come from tax rebates.

Chinese manufacturers have profit margins as low as 5 percent even with 11 percent tax rebates for plastics exports included.

"When foreign traders make orders, they take into account the export tax rebates," he said.

The vuvuzelas are sold at up to 60 South African Rand ($7.8) each, 26 times the export price. Traders and retailers rather than Chinese exporters make huge profits, he says.

LABOR SHORTAGE

Wu's 80 workers left the factory after production for orders ended in April. However, he received a large number of new orders after the horns became a hit at the opening of the World Cup.

Wu now has around 40 workers and is recruiting more to cope with growing overseas orders. "I raised the workers' pay to 0.1 yuan from 0.08 yuan for each vuvuzela," he says.

Without the labor to meet orders, Wu refers some potential customers to to toymakers in Shantou, in the southern industrial province of Guangdong, but this has also fueled competition.

At a time when Chinese workers are increasingly agitating for higher pay, he finds it difficult to hire staff for what many see as low-paid hard work.

Employees work 12-hour shifts in a sweltering workshop. Two electric fans struggle to disperse the heat from the plastic injection moulding machines, which can exceed 100 degrees Celsius.

He Zongjun, a migrant worker from the southwestern province of Yunnan, produces around 1,000 vuvuzelas each nightshift, but he has no idea what they are used for.

"I don't watch the World Cup. I need to sleep after working a whole night," he says.

Chen Shida, head of the Zhejiang Academy of Work Security says, "Labor-intensive industry is becoming less attractive to workers born in the 1980s and 1990s. They find that their returns do not match their work."

CHALLENGES

Labor shortages and rising labor costs are new challenges for China's manufacturers. The appreciation of China's currency, the Renminbi, and the scrapping of export tax rebates are nibbling away their meagre profits.

The yuan, appreciated about 0.56 percent against the US dollar last week after China's central bank made the exchange rate more flexible.

Economists at China International Capital Corp. projected on June 21 that yuan is likely to strengthen by 3 percent to 5 percent against the US dollar by the end of the year.

"I can only tolerate a 2-percent appreciation against the US dollar," Wu says. "If it goes to 5 percent, we won't make any profits."

His firm will face further pressures after the 11-percent tax rebate for plastics exports stops in July next year.

"Without the tax rebates, Chinese exporters will need to raise prices. Otherwise, we will have to close the factories," he says.

Luo Weidong, economist and vice president of Zhejiang University, says, "While the world enjoys cheap China-made products, China pays a huge price.

"The results are meagre salaries, environmental degradation, dissatisfaction and lack of adequate care for the tens of millions of children left in the countryside by migrant laborer parents."

Ultimately the currency appreciation and scrapping of export tax rebates are aimed at helping China's low-end manufacturers move up the value chain.

But it could also result in factory closures and lay-offs of migrant workers, says Chen Yixin, head of the Policy Research Office of Zhejiang Provincial Party Committee.

Increasingly calls for pay rises in wake of strikes at parts suppliers of Japanese automakers Honda and Toyota in China will increase pressure on already struggling manufacturers, Luo says.

"The end to cheap labor in China will bring long and hard times to manufacturers because industry upgrading cannot be easily achieved," Luo said.

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China’s Export Economy Begins Turning Inward

Source: New York Times by Edward Wong

BEIJING — For years, Chinese leaders looked to the millions of poor workers from the country’s interior as the engine of a roaring export economy. They would move to coastal provinces, toil in factories and churn out the world’s household goods.

These days, the workers are crucial for China’s economy in another way: They must start buying the very products they manufacture, spending their paychecks on lipstick and lingerie, plastic lawn chairs and plasma television sets. Officials see them as the linchpin of China’s move away from a lopsided economic model that relies too heavily on foreign consumption.

Some of China’s top leaders, including Prime Minister Wen Jiabao, have emphasized the need for that restructuring for years, especially since the global financial crisis pummeled the export industry. But China’s move this week to make its currency, the renminbi, more flexible and the authorities’ apparent tolerance of recent factory strikes that have led to significant wage increases both signal that Chinese leaders could be serious about re-engineering the nation’s economic model.

The currency shift brings immediate political benefits, since China will now presumably come under less pressure at the Group of 20 summit meeting this weekend. But there are important domestic considerations as well. The breaking of the renminbi’s de facto peg to the dollar means the currency is likely to appreciate in value, making Chinese exports somewhat less competitive in the global marketplace but strengthening the purchasing power of Chinese consumers. Likewise, government policies to encourage wage increases for poor laborers — there are an estimated 150 million migrant workers in cities — could also spur consumption, if the pay increases outpace inflation.

“The central government attitude toward raising wages is undoubtedly positive because it’s directly tied to boosting domestic consumption and restructuring the economy,” said Liu Cheng, a scholar of labor law at Shanghai Normal University. “For a long time, wage growth has lagged behind economic growth, and that has forced China to continue to depend on exports.”

Chinese leaders have little choice but to overhaul the model. For one thing, the pool of cheap labor is drying up. China’s population of 15- to 24-year-olds has already peaked and will continue to shrink over the next decade, even if China were to change its one-child policy, according to projections by the United Nations. Just as important, young workers these days are no longer willing to toil under the same conditions tolerated by laborers a decade ago.

Some Chinese leaders have been vocal in recent months about the need to raise household consumption. Li Keqiang, the vice prime minister who is viewed as a likely successor to Mr. Wen, stressed that as a priority in public addresses this year. On June 1, Seeking Truth, an official journal of the Communist Party, published an article by Mr. Li in which he wrote that “increasing citizens’ consumption is the key to expanding domestic demand.”

Raising wages is only one of several actions the government must take if it wants to stimulate household consumption. The savings rate in China is much higher than that in Western nations, at least partly because people rely on savings to finance much of their education and health care needs. In January 2009, China announced that it intended to spend $123 billion by 2011 to set up universal health care for its 1.3 billion people, but that plan is vastly underfinanced, scholars say.

Keeping a lid on inflation is also crucial. Low wages have helped hold down the inflation rate despite years of extraordinary double-digit growth and huge government investments in projects. But in May, the consumer price index edged up to 3.1 percent from the previous May; the government wants the average in all of 2010 to be no higher than 3 percent. That was most likely one factor that pushed the People’s Bank of China to announce last Saturday that the renminbi would become more flexible.

Analysts say that a currency revaluation by itself will not necessarily make China’s exports significantly less competitive or rein in China’s dependence on its export industry. From mid-2005 to mid-2008, the renminbi appreciated 21 percent against the United States dollar, but China’s trade surplus with the United States continued to grow by an average of 21 percent during that period. In recent months, China’s exports have shown a strong recovery, with nearly 50 percent growth year-on-year in May. Chinese officials obviously felt confident enough in the recovery to go forward with the currency shift.

Besides exports, China’s economic growth has depended on state-led investment, especially infrastructure building, and that too leads to big risks, some analysts say. Stimulus spending and a surge in lending by state banks during the economic crisis helped China power through the slump. But the lending spree has contributed to inflationary pressures and a soaring property market that the central government is trying to cool down.

Victor Shih, an associate professor at Northwestern University who studies the political economy of China, said a significant portion of $1.6 trillion that has been lent to companies run by local governments is likely to pile up as bad loans, posing a risk to state banks, and thus the entire economy. “There will be a big cost,” he said. “China is trying to recapitalize its banks before a lot of these bad loans show up on the balance sheets.”

As with export dependence, some Chinese leaders are starting to see the danger and have moved to slow bank lending.

But effective infrastructure projects are literally the road to more widespread wage increases across China, and thus greater domestic consumption. An explosion of highways and rail lines in the central interior provinces means companies are now operating more factories in those areas, where costs are lower. Some workers in the interior are seeing wages increase at the same rates as those on the coast, or at even higher rates.

Anne Stevenson-Yang, head of the Beijing office of Wedge MKI, an equity analysis firm, said her research into at least 15 companies across China showed that some in the interior had raises of up to 30 percent this year, a higher rate than those on the coasts. But absolute wages are still lower in the interior, so more and more low-margin manufacturing companies are setting up shop there, especially as provincial governments on the coast slowly push out some assembly-line factories in favor of higher-end businesses.

In theory, many laborers will no longer have to flock to the coast, and consumption in the interior will rise, leading to more uniform economic growth across China.

“Probably the factory cities and dormitories of the ’80s will disappear,” Ms. Stevenson-Yang said, “and one day people will think, ‘Wow, what was that all about?’ ”