Have You Heard...

• Analysis: China military risks treading on policy toes
• South Korea offers North aid, China wants nuclear talks
• Factbox: China's civilian-military ties
• Analysis: North Korea's "family firm" sidles up to China
• Vietnam attracts Chinese investors for S Asian market
• China Asks C.E.O.’s to Work for State
• Motorola Makes China Push

Analysis: China military risks treading on policy toes

Source: Reuters By Chris Buckley

(Reuters) - China's military, emboldened and ambitious for respect, risks steering a course that jars with the country's foreign policy soft-sell, raising the risk of confusion and blunders in a region already wary of its expanding reach.

People's Liberation Army officers have loudly warned that national interests are threatened by neighbors' rival claims in the South China Sea, and decried planned U.S.-South Korean drills in the Yellow Sea, between Korea and China.

"A country needs respect, and a military also needs respect," wrote Major General Luo Yuan in the PLA's paper.

Stressing the point, the PLA navy will hold artillery exercises on the Yellow Sea from Wednesday.

Beneath that public assertiveness, lie questions about evolving Chinese civil-military relations, a murky area with broader implications for foreign policy, especially in Asia.

The Chinese military remains firmly subordinated to the ruling Communist Party, but it has grown less finely meshed with civilian leaders, and that matters for coordinating and communicating policy, especially under pressure.

"Civil-military relations in China are very different from the old days. There used to be a symbiosis. Now they are more distinct spheres," said Nan Li, a professor at the U.S. Naval War College on Rhode Island, who specializes in the PLA.

"Inter-agency coordination is a big problem," he said.

With China exploring how to use its fast-expanding military, such internal uncertainties could have consequences in the region, where the U.S. keeps a big military presence.

"It clearly has tremendous implications for real policy choices both in Beijing and abroad," David Finkelstein, an expert on the Chinese military at CNA, an institute in Virginia that studies security issues, said of PLA-civilian ties.

"China's global security interests have expanded faster than the capacity of its traditional bureaucratic institutions to handle them," he said.

Lobbying or wrong-footing among civil and military players could make Chinese policy-making even less like a tightly-rehearsed orchestra, and more like a band with members competing for attention, risking miscues or confusion.

One PLA strategist recently warned as much.

"With no concrete leadership for national security, when many departments become involved, coordination is difficult, responses tend to be tardy, counter-measures lack focus, and constantly problems emerge in certain links among the institutions dealing with matters," the strategist, retired Rear Admiral Yang Yi, wrote in a study published late last year.

DEMANDING RESPECT

The PLA has received two decades of annual rises in its official budget that average out at a 12.9 percent increase every year. That rise has made it more powerful, and more impatient with foreign pressure, said PLA Senior Colonel Liu Mingfu.

"In the past, the focus was on economic development and our (PLA) budget was low and we were marginalized. But now it's very different. We understand that a prosperous country needs a strong military," he told Reuters earlier this year.

In June, the U.S. Defense Secretary Robert Gates took on what he saw as PLA pushiness. He claimed it was thwarting efforts to improve military ties, going against Chinese government efforts to ease tensions.

Gates' complaint came after vehement criticism of Washington by PLA officers, and Beijing's rejection of Gates' hopes to visit and revive military ties put on hold by China over U.S. weapons sales to Taiwan, the self-ruled island that China claims.

PLA officer-commentators have recently renewed tough words aimed at Washington. These public growls appear aimed at a domestic audience hungry for a strong voice, said Li, the analyst from the U.S. naval college.

But by creating public and elite expectations that China will stand tough, such talk may narrow room for quiet back-downs or sow uncertainty abroad about who is steering policy in Beijing.

"Compared to the past, the influence or constraining role of Chinese public opinion on Chinese foreign policy is striking," Wang Wen, a senior commentator at the Global Times, an often ardently nationalist newspaper, wrote recently.

NOT A ROGUE

In Zhongnanhai, the Chinese Communist Party's walled compound where big decisions are made, the real problem may be ill-coordination, not disloyalty or outright division.

The Party demands unswerving military loyalty, especially to the top leader, currently Hu Jintao, who is also chairman of the Central Military Affairs Commission, the top body on PLA affairs.

"The PLA is still the Party's army. They're not running a rogue foreign policy," said Finkelstein, the CNA analyst.

But under the canopy of Party-PLA unity, an "experience gap" has emerged, said Finkelstein.

Since the passing of China's revolutionary elders Mao Zedong and Deng Xiaoping, both deeply involved in military command, Chinese leaders have had little to do with the PLA until they reach the cusp of top power. In turn, PLA commanders are more focused on external priorities.

The naval analyst Li said an examples of the trouble that can create was China's anti-satellite test in 2007, when the foreign ministry appeared ill-prepared for the test, which created international worry over space debris and Beijing's space plans.

By saying that the South China Sea is also an area of "core national interest" for China, the country's policy-makers have also risked their credibility, because their navy is not strong enough to enforce control of the sea, said Li.

"By elevating it to a core national interest without the means to defend it, China's deterrence is weakened," he said.

South Korea offers North aid, China wants nuclear talks

Source: Reuters By Jeremy Laurence and Jack Kim

(Reuters) - China pressed regional powers on Tuesday to restart talks on ending North Korea's nuclear ambitions, and Seoul offered aid to its destitute neighbor despite a new round of U.S. sanctions against Pyongyang.

In a move that could ease tensions on the peninsula, South Korea made its first large-scale offer of humanitarian aid to the North since the sinking of one of its warships in March.

Seoul offered 10 billion won ($8.4 million) to North Korea after heavy rains in July and August in its northern and eastern provinces forced thousands from their homes and put farmland under water.

Seoul cut off most of its ties with Pyongyang after accusing the North of torpedoing the Cheonan corvette and demanded an apology.

North Korea says it did not carry out the attack, and has told its only major ally China it is committed to denuclearizing the peninsula and wants to resume the aid-for-disarmament talks.

Analysts say the North's willingness to return to talks could be a sign international sanctions are hurting the isolated state, whose battered economy is just 3 percent the size of the South.

China is lobbying neighbors to sign up for renewed talks, and on Tuesday Beijing's nuclear envoy met his Japanese counterpart in Tokyo to discuss a plan to get the six parties back to the negotiating table.

"Both of us agreed to work together to safeguard peace and stability of the Korean Peninsula, meanwhile, we also agreed to work together with the others to push forward the resumption of the six-party talks as soon as possible," Wu Dawei said.

A South Korean diplomatic source said at the weekend that China had proposed a three-stage process to Seoul to restart the talks. He said North Korea and the U.S. should first conduct bilateral talks that could open the way to the broader, six-party negotiations, the source said.

China's regional lobbying, and its courting of secretive Kim Jong-il, highlight the pressures that North Korea -- isolated, poor and with a brace of primitive nuclear bombs -- has brought to bear on the region that is home to the world's second and third biggest economies and a big U.S. military presence.

NEW SANCTIONS

President Barack Obama broadened financial sanctions on North Korea on Monday and froze the U.S. assets of four North Korean citizens and eight firms in part to punish the North for the sinking of the Cheonan.

U.S. officials hope the measures, which target North Korean entities that trade in conventional arms and luxury products and that counterfeit U.S. currency, will also sharpen pressure on the North to abandon its nuclear programmes.

A foreign ministry spokesman in Seoul welcomed the toughened U.S. sanctions. "It can be assessed that the U.S. sanctions regime on North Korea has been completed overall," he said.

The new U.S. sanctions steps aim to target the leadership of the isolated, authoritarian nation, which is preparing for a key party conference that analysts say could nail down succession plans, involving Kim's youngest son, Kim Jong-un.

Factbox: China's civilian-military ties

Source: Reuters

(Reuters) - China's ruling Communist Party keeps a tight grip on the country's military, but civil-military relations have been evolving in ways that could affect the country's conduct abroad.

Here are some facts about how the People's Liberation Army is run:

UNDER THE THUMB OF THE PARTY

The People's Liberation Army is under the control of China's ruling Communist Party. The ideological and organizational bond between the two was forged during the revolutionary wars that brought the Party to power under Mao Zedong in 1949.

Mao and later Deng Xiaoping, who rose as China's reformist leader from the late 1970s, both had deep roots in the PLA, and their military prestige was an important part of their power.

Both men also served as chairmen of the Central Military Commission (CMC), the peak body through which the Party exercises control of the PLA.

LEADERS NOW LESS ENMESHED IN THE MILITARY

Since the death of Deng, China's leaders have not come to power with a strong resume of prior military experience.

Deng's successor, President Jiang Zemin, and Jiang's successor since late 2002, Hu Jintao, both rose through civilian Party and government postings that exposed them to limited dealings with PLA commanders until they emerged as top leaders.

The tradition of PLA deference to the Party leadership remains powerful. Both Jiang and Hu matured in their military role by having a hand in military appointments and giving speeches and statements setting out PLA tasks and doctrine.

The PLA is strongly represented on the Party's Central Committee, the body that usually meets once a year to consider and bless broad policies. In the current Central Committee, PLA officers make up around 18 percent of the more than 370 full and alternate member members.

But the PLA has nobody on the Party's Standing Committee, the Party's nine-strong inner-council, which steers day-to-day policy and key decisions.

"PROFESSIONAL" PLA FOCUSED ON EXTERNAL TASKS

Observers say the diluting of the old bonds between Party leaders and the PLA make coordination more difficult in the country's top-down bureaucracy, as does the modernization of the Chinese military, which has made it a more complex organization.

Chinese President Hu has tended to follow CMC nominations on PLA promotions, giving him less of role in directly cultivating followers in the military.

"Under Hu, PLA nominations have basically become professional and functional, with fixed terms and little connection to civilian factional networks and major policy debates," wrote You Ji and Daniel Alderman.

ROOM FOR MIS-COORDINATION AND MISCOMMUNICATION

Some analysts say, however, that China's civil-military relationship also opens the way for problems, such as tardy communications, poor coordination and troublesome bureaucratic jostling that has to be taken to the very top for resolution.

The civilian government led by Premier Wen Jiabao has limited direct say over military affairs, and the government's Ministry of Defense serves as the PLA's window for dealing with the outside world, and not as an effective policy-maker.

Analysis: North Korea's "family firm" sidles up to China

Source: Reuters By Chris Buckley

(Reuters) - Think of North Korea's Kim Jong-il as the autocratic, ailing boss of a family firm -- sanctioned, cash-strapped, and worried about who will take over -- and his weekend tour to woo main backer China makes sense.

Kim's visit to China was, as usual, cloaked in secrecy until it ended on Monday. But even the opaque official reports made clear enough that the shuffling 68-year-old leader wanted to reassure China, whose economic help and diplomatic muscle he needs as much as ever to support a dynastic succession.

The reclusive leader told President Hu Jintao he was willing to return to nuclear disarmament talks -- which China wants -- and praised China's economic success. In return, Hu welcomed Kim's position on the nuclear talks and nudged him on economic reform.

"Economic development should be self-reliant and also cannot be separated from opening up and cooperation," Hu told Kim, according to the state-run Xinhua News Agency.

"That is an essential route for keeping with the tide of the times and accelerating national development."

But don't expect any dramatic steps from Kim.

Like a defiant company boss seeking help, he needs China but bristles at being a supplicant to the much richer neighbor, said John Park of the United States Institute of Peace in Washington.

"It's like a government credit agency talking to a bailed out company that by all measures would otherwise be bankrupt," the former banker said.

"Kim Jong-il needs the Chinese, because there's no other party out there ... But at the same time, if Kim is seen more and more as China's man in Pyongyang that puts a huge bull's eye on him."

That tension is at the core of their relationship.

NUCLEAR TALKS

But even if the two do want to resurrect the long-stalled nuclear talks, others are less keen, as emphasized by the Obama administration's new sanctions on Pyongyang this week.

Washington and its allies want North Korea to do more than just talk before they will go back to nuclear disarmament negotiations.

Anyway, Kim for the moment is preoccupied by a congress in September that analysts believe will pave the way for his youngest son -- who reportedly accompanied him on the China trip -- to emerge as the successor running the impoverished country, with its 24 million citizens and stockpile of nuclear bombs.

"North Korea is hard-up now and has been hoping for more aid, and especially now he probably wants more food to ensure a good atmosphere for the congress," said Zhang Liangui, an expert on North Korea at the Central Party School, an institute in Beijing.

"But North Korea's words and actions can differ," Zhang also said. "It might well be these words of Kim are more a tactical expediency than a real breakthrough."

EYE TO EYE FOR NOW

In May, Kim abruptly ended his previous visit to China, apparently unhappy that his demands for support were not met, said Shi Yinhong, a professor of International Security at Renmin University in Beijing.

"To some extent, this latest visit was coming back kow-towing to China for support now that he's in even deeper need and needs a tolerable environment for the congress," said Shi.

"I'd guess he made more reasonable demands this time, and China is worried about North Korea's stability, so the two sides saw eye to eye at least for now."

Hu gently pressed Kim to learn more from Beijing's reforms, and Kim said he was "deeply astonished" by the example of northeast China, where he was for his five-day stay.

If Kim's record offers any clues, however, he is likely to seek greater distance from China and its expectations if the North's isolation eases, possibly through fresh nuclear disarmament talks, said Shi, the Beijing professor.

"If Kim's days get better, he won't be so malleable," said Shi.

Vietnam attracts Chinese investors for S Asian market

Source: By Lan Lan (China Daily)

BEIJING - Chinese companies are investing more in Vietnam in order to get better access to the Southeast Asian market and its comparative cost advantages, Vietnamese trade officials said on Monday.

"Investment from China has continued to increase in the past few months thanks to Vietnam's comparative cost advantages," Bui Quoc Trung, deputy director-general of the Foreign Investment Agency under Vietnam's Ministry of Planning and Investment, told China Daily in Beijing.

By the end of July, Chinese enterprises had invested in 743 projects in Vietnam, with China's total investment in the nation amounting to $3.1 billion. Chinese companies have invested in 53 of Vietnam's 63 provinces, said Trung.

Compared to other Asian cities such as Bangkok and Shanghai, costs in Vietnamese cities such as Hanoi are relatively low in terms of tariffs and minimum wage standards, Trung said.

Average labor costs in Vietnam are only around half of those in China.

On average, it costs about $100 to hire an unskilled worker in Vietnam, said Wan Hailong, assistant manager of HydroChina International Engineering Co's overseas department.

At the same time, in China, labor shortages in some areas have led Chinese enterprises and local governments to raise salaries.

A total of 27 provinces, autonomous regions and municipalities have so far raised their minimum wage levels this year.

Rising labor costs in China have pushed domestic companies to alleviate cost pressures by looking at countries such as Vietnam.

However, it's unlikely that multinational companies operating in China will move to countries like Vietnam on a large scale since China's vast domestic market is very attractive, said Lu Hang, director of the Fortune 500 Brand Research Center under the Ministry of Science and Technology.

Sino-Vietnamese bilateral trade is expected to reach $25 billion in 2010, said Nguyen Van Tho, Vietnam's ambassador to China.

Trade between the two nations hit $12.8 billion in the first half of 2010, up 49.5 percent year-on-year after a free trade agreement between China and the Association of Southeast Asian Nations went into effect in January, said Tho.

China Asks C.E.O.’s to Work for State

Source: New York Times by Michael Wines

BEIJING — The Chinese government ran an enormous help-wanted advertisement on Monday seeking professional managers for some of its biggest state-controlled companies, a novel but not unprecedented move that apparently reflected unhappiness with the companies’ current performance.

The advertisement, two broadsheet-newspaper pages of small type, sought applicants for 20 senior management jobs in industries like nuclear power, auto manufacturing and textiles. While some of the positions were restricted to Chinese citizens, many of the posts were open to foreign applicants, and several required proficiency in languages like English and French.

The advertisements were placed by the Chinese Communist Party’s central organization department and the State-Owned Assets Supervision and Administration Commission, the high-level government body that oversees the operations of China’s 129 biggest state-controlled corporations. They appeared in major Chinese and English-language newspapers, including the Communist Party newspaper, The People’s Daily, and on most major Internet portals.

Most of the 129 companies, nicknamed the national champions, dominate industries like mining, power generation and transportation, which are considered by the central government to be vital to China’s national security. But some, including most state-owned auto manufacturers, have struggled to gain traction against nimbler private competitors, and the assets commission has warned lately that it plans to merge its weakest companies into its more successful companies.

State-owned companies that monopolize their industries, like those in tobacco, telecommunications and oil production, are quite profitable. But the profitability of state companies in competitive industries is generally much poorer than the average, according to a World Bank analysis this year.

The advertisement sought five general managers — roughly the same as a chief executive officer — for the Dongfeng Motor Corporation, the China State Construction Engineering Corporation, China Travel Service (Hong Kong), the State Nuclear Power Technology Corporation and the Chinatex Corporation, a textile manufacturer.

More junior executives were being sought for posts at mining, communications, construction, nuclear power and shipping companies, among others.

The solicitation quickly drew hundreds of comments on Internet chat boards, some less than complimentary. On one major Web site, Sohu.com, the 800 comments were briefly led by one anonymous posting that referred to the state companies’ longstanding practice of giving jobs to relatives of well-placed party and government officials.

“They are doing this because the sons and daughters of the leaders are now coming back from their overseas studies,” that person wrote.

Censors quickly deleted the comment.

Motorola Makes China Push

Source: Wall Street Journal by Loretta Chao

After Steady Market-Share Drop, Company Adds Smartphones with Google's Android

BEIJING—Motorola Inc. unveiled a new smartphone version of its handsets that feature a popular Chinese handwriting technology, in hopes that the company can make a comeback in China, where it was once the market leader.

Motorola's Ming handsets were introduced in 2006 as phones designed for Chinese users who prefer to input Chinese characters using a stylus on a touch screen. The phones now have been re-released as third-generation, or higher-speed, smartphones running Google Inc.'s Android operating system.

Motorola said the Ming smartphones will cost up to 5,000 yuan, or $740, without a contract.

The smartphones come in three versions, one for each of China's state-run mobile operators. Two of the phones offer high-definition video cameras and other features to attract the growing number of smartphone users in China's increasingly competitive market, where Apple Inc. and HTC Corp. are preparing to expand. China is the world's largest mobile market by number of subscribers.

Apple, which offers the iPhone 3G and 3GS in China, has said it plans to open 25 stores in China by the end of next year.

Apple partner China Unicom (Hong Kong) Ltd., meanwhile, has said it hopes to release the iPhone 4 in China by year-end. Taiwan handset maker HTC is preparing to unveil its brand and introduce four handsets in China this fall, including three Android phones.

Motorola's market share in China has dropped dramatically. It stood at 2% in the second quarter, down from 23% in the same quarter of 2006, according to research firm IDC. Motorola held a leading market share in China's cellphone market until several years ago.

The handset maker's share of China's nascent smartphone market is significantly higher than Motorola's share of the total market, with 13.6% of sales in the second quarter, according to research firm Analysys International. Motorola ranked third after Nokia Corp., which had a 26.7% share, and Samsung Electronics Co., which had a 17.9% share. Apple and Research In Motion Ltd., had 7.1% and 6% of the market, respectively.

Motorola, based in Schaumburg, Ill., has adjusted its focus in recent years to create high-end devices based on Android. It is pursuing the strategy in China, betting that smartphone penetration will continue to rise quickly. IDC expects 26 million smartphones to be sold in China this year, up 50% from last year.

"The smartphone segment in China is growing very fast," said Frank Meng, president of Greater China for Motorola's mobile-devices business. "Countries like the U.S. are at the front of the curve, but China is catching up quickly."

Mr. Meng said the company is using the new line of Ming phones to introduce smartphone capabilities to existing Ming users and to expand the target audience beyond high-end business users.

He said he expects Android to become the mainstream smartphone platform in China as it has elsewhere, and that Motorola is "100% dedicated to Android." Including the new Ming handsets, Motorola has launched 11 smartphones in China since December, he said.

Mr. Meng estimates that in the first six months of this year, more than half of Android cellphones shipped in China were Motorola phones.

Ming cellphones are one of the most prominent examples of localization by a multinational handset vendor in China. The company estimates there have been roughly five million Ming users since the line was introduced four years ago. The phones have distinctive transparent covers that flip up to provide access to the touch screens.

Motorola is making other attempts to localize its products. It has created a mobile-application store called SHOP4APPS, which accepts widely used Chinese online-payment methods such as Alibaba Group's AliPay and Chinese credit cards, according to Bin Shen , who is in charge of product development in Asia for Motorola Mobility. The company also is working with content providers to package applications that it expects Chinese consumers to use.

Have You Heard...

• China announces navy drill ahead of U.S. show of force
• In China, Western Firms Keep Secrets Close
• Beijing Pressures Japanese on Wages
• China Fortifies State Businesses to Fuel Growth
• Nike, Adidas readjust marketing strategy
• L'Oreal puts on a good face
• Cosmetics safety to receive a makeover

China announces navy drill ahead of U.S. show of force

Source: Reuters

(Reuters) - The Chinese navy will hold a live-ammunition exercise in the Yellow Sea, where Washington and Seoul announced their own plan for a military exercise that has riled Beijing, China's Ministry of Defense said on Sunday.

The Ministry said a naval fleet will stage the drill this week from Wednesday to Saturday in the sea between China and the Korean peninsula, the official Xinhua news agency reported.

"This is an annual routine training exercise, mainly involving the firing of shipboard artillery," the Ministry said, according to Xinhua.

The announcement, nonetheless, follows a pattern of China publicizing its own military exercises in parallel to those held by Washington and Seoul, which Beijing has criticized as destabilizing at a time of tensions over North Korea.

China said its naval exercise will be held off its coastal city of Qingdao, meaning they will be well away from the U.S.-South Korea exercises in waters closer to the Korean coast.

The North's secretive leader Kim Jong-il appears to be now visiting China, his country's only major ally, Chinese and South Korean sources have said.

Friction between Beijing and Washington over Chinese maritime claims and U.S. naval activities has added to irritants between the two countries, which have also sparred this year over Taiwan, Tibet, the Internet and Chinese exchange rate policy.

The United States has criticized Chinese claims to swathes of the South China Sea, where Taiwan and several Southeast Asian states also assert sovereignty.

The United States has said it will conduct an anti-submarine warfare exercise with South Korea in the Yellow Sea in early September. That is intended to send a warning to North Korea that Washington is committed to defending its ally, South Korea, the Pentagon said this month.

Last month, the United States and South Korea held a naval drill in the Sea of Japan off the Korean peninsula, prompting condemnation from China, which answered with its own heavily publicized military exercises.

The July drill was initially scheduled to take place in the Yellow Sea, but was moved to the other side of the Korean peninsula after objections from Beijing.

The United States and South Korea accuse North Korea of torpedoing a South Korean naval ship in March, killing 46 sailors.

Chinese military newspapers have said the U.S.-led military exercises in the Yellow Sea would be unduly provocative at a time of volatile tensions over North Korea.

Chinese Rear Admiral Yang Yi also said that those exercises would be provocatively close to north China's political and economic heartland.

In China, Western Firms Keep Secrets Close

Source: Wall Street Journal By Dana Mattioli

Western companies are changing the way they do business in China, as they become more focused on protecting their intellectual property.

For years, part of the cost of entry to China in certain industries has been pairing up with a Chinese company to form a joint venture.

Often, that involves Western firms agreeing to a "technology transfer"—sharing their technology or intellectual property with a Chinese partner—in order to establish the joint venture.

Even when joint ventures aren't compulsory, some Western firms enter into them to gain access to local manufacturing capacity and contacts, and find they need to share technology as part of the deal.

But Western companies are increasingly expressing concerns about the safety of their intellectual property in such arrangements.

In July, Jürgen Hambrecht, chairman of chemical giant BASF AG and Peter Löscher, chief executive of industrial conglomerate Siemens AG reiterated foreign criticism in a meeting with China Premier Wen Jiabao about "technology transfer" rules, according to people present. The remarks echoed concerns by General Electric Co. CEO Jeff Immelt at a private dinner in Rome in June.

Also in July, Motorola Inc. sued Huawei Technologies Co. alleging that China's largest telecom-equipment company engaged in an elaborate plot to steal its trade secrets via a U.S.-based front company. Huawei has denied the claims.

These concerns are changing the China playbook for Western firms, counterbalancing the prospect of cheap manufacturing and a massive consumer market.

"They are definitely much more careful, and they are not just willy-nilly going and making partnerships in China," says Mark Gottfredson, a senior partner at Bain & Co. "From our advising clients perspective, the whole thing has changed. It's no longer about getting into China, it's about how you do China."

Some strategies that companies are adopting, and consultants are recommending: Not sharing the most sensitive intellectual property; sending more of their own employees to oversee manufacturing; partnering with a smaller firm that's less able to become a rival; and structuring joint ventures more carefully so that the Western firm has more control.

Consultants also recommend splitting up the manufacturing process. Bain partner Mr. Gottfredson worked with a Western appliance manufacturer that decided to make electric motors and electrical cords in China, but send all the components to a plant in Mexico to be assembled.

That way "nobody in there had all of the capabilities to actually make that refrigerator and start selling it," Mr. Gottfredson says.

More Western firms are also using technology safeguards. Rich Bergmann, global managing director of Accenture PLC's manufacturing practice, says U.S. firms are encrypting design plans and creating plans that "expire" and cannot be saved, forwarded or printed.

Users can't access encrypted files unless they have a special code. Another kind of file, called time bombs, live for a certain amount of time before disappearing. That helps limit and control who sees the information.

Setting up a joint venture so that the Western firm has its own employees in charge of running the plant, or at least in key roles managing the intellectual property is important, consultants say. That desire for more control is driving some Western firms to seek majority stakes in joint ventures, when possible.

Construction equipment manufacturer Terex Corp., for instance, has been establishing joint ventures in China since the 1990s, but Chief Executive Ron DeFeo says that he now prefers to strike deals that give him majority control. That's partly because he feels majority ownership provides better intellectual property protection.

In May, the Westport, Conn., based company completed a joint venture with China's Fujian South Highway Machinery Co. where Terex is majority owner. Terex agreed to share its mobile rock-crushing and screening technology as part of the deal.

Mr. DeFeo declined to detail the specifics of the arrangement. But he notes that he will be able to tap the partner's knowledge of the local market.

Some firms are avoiding Chinese joint ventures entirely. Cree Inc., a Durham, N.C., based manufacturer of light-emitting diode lights and components, doesn't have any joint ventures in China, in part because of intellectual property concerns. John Kurtzweil, Cree's chief financial officer, says Cree wouldn't rule out entering into a joint venture, but would set a high bar for intellectual property protection.

For now, Cree has decided to manufacture LED wafers in the U.S., and ship them to be inserted into its products at a factory it owns in China.

"We don't want intellectual property outside the U.S. We want to control the intellectual property and keep it as close as possible," Mr. Kurtzweil says.

At least once within the past year, Cree executives decided against moving wafer-making outside the U.S. The firm might have saved money, but executives felt "the protection of our IP is more important than short-term cost savings," says Mr. Kurtzweil.

In addition, Cree owns its manufacturing site in China, rather than running it through a joint venture or with a partner. That's been the case since 2007, when Cree bought a Chinese company called COTCO Luminant Device Ltd., which had been one of Cree's chip customers. COTCO at the time had 1,300 employees and a manufacturing facility.

"We wanted to control the tech and distribution of the tech and control the IP associated with that," Mr. Kurtzweil says. "The best way to do that is with a team we knew for a number of years and be able to control the whole venture."

Beijing Pressures Japanese on Wages

Source: Wall Street Journal By Andrew Browne and Norihiko Shirouzu

BEIJING—Chinese Premier Wen Jiabao bluntly warned Japan that its companies operating in China should raise pay for their workers, part of a testy exchange on an issue that threatens to become a new irritant in relations between the Asian neighbors.

Mr. Wen's comments Sunday follow a call by Japan's foreign minister, Katsuya Okada, for an improvement in business conditions for Japanese companies in China. Mr. Okada raised the issue at a high-level Japan-China meeting on Saturday. A wave of labor disputes that has swept China this year has affected a number of high-profile Japanese investors, including Honda Motor Co. and Toyota Motor Corp.

Mr. Wen responded by telling Japanese officials that the background to labor troubles in China is the relatively low level of pay at some foreign companies, a Japanese foreign ministry statement said. "We would like [the Japanese government] to deal with this issue," the statement quoted Mr. Wen as saying.

Mr. Wen's comments showed sympathy for workers who crippled production at auto-parts makers supplying Honda and Toyota. The strikes disrupted car production and called into question the investment strategy of the companies, which had previously assumed a relatively docile labor force in China.

The China-Japan meeting covered a range of diplomatic and economic issues between the neighbors, but the subject of labor proved to be contentious.

Among foreign companies in China, Japanese companies have borne the brunt of the labor unrest. U.S. and European companies also have been complaining about what they see as a souring of the investment climate in China, although for different reasons.

Western firms complain that the playing field is tipping against them in favor of domestic state-owned companies. They especially resent rules that force them to share their most advanced technology in return for market access.

At a news conference on Saturday, the press secretary for the Japanese foreign ministry, Satoru Sato, said that "Japanese companies are facing difficulties in continuing operations in China due to threats in the factories."

When the Japanese side brought this up with their Chinese counterparts, they were told that "requests by Chinese workers at Japanese companies to increase wages are quite understandable" after two years of pay freezes during the global economic crisis, Mr. Sato said.

The Japanese delegation was dissatisfied with the response and might discuss the issue with China again in the future, he said.

Mr. Wen's warning to Japanese companies to raise wages is a politically motivated message in part aimed at a domestic audience—including the millions of rank-and-file workers who power the country's massive manufacturing machine, but who are now becoming restless.

His words are likely to create consternation within Japanese companies in a country where government support is an essential part of business success.

Hitoshi Yokoyama, a Beijing-based spokesman for Toyota, said the company pays "appropriate wages" to workers at several assembly and other manufacturing plants it runs with Chinese auto makers.

"We determine the appropriate wage levels by considering prices in each region we operate in and general wage and compensation packages out there in the auto industry and beyond," Mr. Yokoyama said. "We will continue to do so in the future and try to determine appropriate wage levels in close dialogue with our employees."

China's Communist Party wants to be seen as supporting better conditions for workers, and has pledged that the party is committed to eradicating the widening gap between rich and poor in the country. The government wants to engineer higher wages as part of its efforts to shift the driver of economic growth toward consumption.

Premier Wen has previously called in general terms for better treatment of migrant laborers, the core of the work force in manufacturing plants along the export-oriented eastern seaboard.

He has said he recognizes that a new generation moving from villages to work in factories won't be satisfied with the harsh conditions their parents endured. Those comments, published in the state-run People's Daily newspaper, didn't directly address the recent labor unrest.

Labor-market analysts, citing anecdotal evidence, say Mr. Wen is right in suggesting that some Japanese companies are less generous than their Western counterparts in terms of pay for both their shop floor and office workers.

When labor strikes hit Japanese-owned auto-parts factories in and around the southern Chinese industrial city of Guangzhou and the northeastern port city of Tianjin, a senior Volkswagen AG executive told The Wall Street Journal that the German auto maker had little fear of similar labor militancy. "We typically pay much more generously than Japanese-owned factories," the executive said, declining to provide concrete data to back up his claim.

A consultant with Singaporean executive-placement firm HRnet One said Chinese managers looking for jobs at Japanese companies in China often gripe about the low pay on offer. Job candidates often say they should have studied English or German, because those languages "would have helped them land much better-paying jobs," said the consultant, who declined to be named.

At the weekend meeting, Japanese officials also raised the issue of Chinese restrictions on the export of "rare earth" minerals, which are critical raw materials for high-tech industries. A top Chinese official said the restrictions were meant to protect the environment.

Tokyo isn't alone in its concern that Beijing will hold back high-tech companies is it clamps down too hard on exports of minerals such as dysprosium, terbium, thulium and yttrium. Washington has also expressed a hope that Beijing will allow free trade in the minerals, used in electronics, aviation and atomic energy.

China Fortifies State Businesses to Fuel Growth

Source: New York Times By Michael Wines

BEIJING — During its decades of rapid growth, China thrived by allowing once-suppressed private entrepreneurs to prosper, often at the expense of the old, inefficient state sector of the economy.

Now, whether in the coal-rich regions of Shanxi Province, the steel mills of the northern industrial heartland, or the airlines flying overhead, it is often China’s state-run companies that are on the march.

As the Chinese government has grown richer — and more worried about sustaining its high-octane growth — it has pumped public money into companies that it expects to upgrade the industrial base and employ more people. The beneficiaries are state-owned interests that many analysts had assumed would gradually wither away in the face of private-sector competition.

New data from the World Bank show that the proportion of industrial production by companies controlled by the Chinese state edged up last year, checking a slow but seemingly inevitable eclipse. Moreover, investment by state-controlled companies skyrocketed, driven by hundreds of billions of dollars of government spending and state bank lending to combat the global financial crisis.

They join a string of other signals that are fueling discussion among analysts about whether China, which calls itself socialist but is often thought of in the West as brutally capitalist, is in fact seeking to enhance government control over some parts of the economy.

The distinction may matter more today than it once did. China surpassed Japan to become the world’s second-largest economy this year, and its state-directed development model is enormously appealing to poor countries. Even in the West, many admire China’s ability to build a first-world infrastructure and transform its cities into showpieces.

Once eager to learn from the United States, China’s leaders during the financial crisis have reaffirmed their faith in their own more statist approach to economic management, in which private capitalism plays only a supporting role.

“The socialist system’s advantages,” Prime Minister Wen Jiabao said in a March address, “enable us to make decisions efficiently, organize effectively and concentrate resources to accomplish large undertakings.”

State vs. Private

The issue of state versus private control is a slippery one in China. After decades of economic reform, many big state-owned companies face real competition and are expected to operate profitably. The biggest private companies often get their financing from state banks, coordinate their investments with the government and seat their chief executives on government advisory panels.

Chinese leaders also no longer publicly emphasize sharp ideological distinctions about ownership. But they never relaxed state control over some sectors considered strategically vital, including finance, defense, energy, telecommunications, railways and ports.

Mr. Wen and President Hu Jintao are also seen as less attuned to the interests of foreign investors and China’s own private sector than the earlier generation of leaders who pioneered economic reforms. They prefer to enhance the clout and economic reach of state-backed companies at the top of the pecking order.

“China’s always had a major industrial policy. But for a space of a few years, it looked like China was turning away from an active and interventionist industrial policy in favor of a more hands-off approach,” Victor Shih, a Northwestern University political scientist, said in a recent telephone interview.

Mr. Shih, among others, now believes that the 1980s reforms that unleashed China’s private sector and the 1990s reforms that dismantled great sections of the state-run sector are being partly undone.

“The problem is that the reforms of the first 20 years, from 1978 to the end of the ’90s, actually did not touch on the power of the government,” said Yao Yang, a Peking University professor who heads the China Center for Economic Research. “So after the other reforms were finished, you actually find the government is expanding, because there is no check and balance on its power.”

Divining Government’s Role

There are no comprehensive statistics to catalog the government’s influence over the economy. So the shift is partly inferred from coarse measures like the share of financing in the economy provided by state banks, which rose sharply during the financial crisis, or the list of the 100 largest publicly listed Chinese companies, all but one of which are majority state owned.

The statistic showing an uptick in the share of industrial production attributable to the state sector is regarded by some analysts as a blip rather than the start of a trend. The World Bank’s senior economist in Beijing, Louis Kuijs, said the state sector’s unusually rapid growth will most likely moderate with the ending of the government’s stimulus spending.

“As the growth process normalizes again, the traditional trend toward a declining SOE share will take over again,” he wrote in an e-mail message, using the shorthand for state-owned enterprise. “I don’t think that the senior leaders had a strategy of reversing this trend.”

But others argue that officials had always intended to create a vibrant state sector that would tower above the private sector in important industries, even as they sold off or shut down money-losing state enterprises that drained capital from the government budget and banking system.

Recent alarm over the expanding role of the state, said Arthur Kroeber of Dragonomics, an economic forecasting firm based in Beijing, is mostly “perception catching up with reality.”

In some ways, the differences in this debate are small. Everyone agrees that China runs a bifurcated economy: at one level, a robust and competitive private sector dominates industries like factory-assembled exports, clothing and food. And at higher levels like finance, communications, transportation, mining and metals — the so-called commanding heights — the central government claims majority ownership and a measure of management control.

Yet the two camps’ view of China’s future are markedly different. Those who see little evidence of an expanding state sector generally believe that China has a decade or more of robust growth awaiting it before its economy matures. Theirs is a Goldilocks view of state intervention — not too much or too little, but just enough to push a developing economy toward prosperity.

The skeptics have a darker view: they believe distortions and waste, in no small part due to government meddling, have resulted in gross misallocation of capital and will end up pushing growth rates down well before 2020. What drives their pessimism, the skeptics say, is that China, like Japan a generation ago, has too much confidence in a top-down economic strategy that defies conventional Western theory.

The skeptics also point to what they say is the growing political and financial influence of China’s state-owned giants — 129 huge conglomerates that answer directly to the central government, and thousands of smaller ones run by the provinces and cities.

While no public breakdown exists, most experts say the vast bulk of the 4 trillion renminbi ($588 billion) stimulus package that China pumped out for new highways, railroads and other big projects went to state-owned companies. Some of the largest companies used the flood of money to strengthen their dominance in their current markets or to enter new ones.

In the last year or so, many of the 129 central government companies have moved forcefully into China’s real-estate industry, with hundreds of billions of dollars in construction projects and land deals. State-owned steel giants have cut deals to buy out more profitable and often more efficient private competitors. A host of government conglomerates have snapped up coal mining companies in Shanxi Province.

“In 2009, there was a huge expansion of the government role in the corporate sector,” Huang Yasheng, a leading analyst of China-style capitalism at the Massachusetts Institute of Technology, said in a telephone interview. “They’re producing yogurt. They’re into real estate. Some of the upstream state-owned enterprises are now expanding downstream, organizing themselves as vertical units. They’re just operating on a much larger scale.”

Local Interests

At the local level, governments set up 8,000 state-owned investment companies in 2009 alone to channel government dollars into business and industrial ventures, Mr. Huang said. One example suffices: a private Chinese automaker, Zhejiang Geely Holding Group, made worldwide headlines in March when it agreed to buy Sweden’s Volvo marque from Ford. Much of the $1.5 billion purchase price came not from Geely’s relatively modest profits, but from local governments in northeast China and the Shanghai area.

Geely reciprocated this month, announcing that it will build its Volvo headquarters and an assembly plant in a Shanghai industrial district.

The reasons for the state’s push for greater involvement in business vary. State control of energy supplies is crucial to China’s growth, and the Shanxi coal takeovers will increase production, guarantee fuel to some state-owned utilities and give Beijing new power to control coal prices. State mining companies also argue that they have a superior safety record to their accident-prone private competitors.

But in other areas the state looks more mercenary.

Take telecommunications. Upon joining the World Trade Organization, China committed itself to opening its communications market to foreign joint ventures for local and international phone service, e-mail, paging and other businesses. But after eight years, no licenses have been granted — largely, the United States says, because capital requirements, regulatory hurdles and other barriers have made such ventures impractical. Today, basic telecommunications in China are booming, and are virtually 100 percent state-controlled.

Take the passenger airline industry. Six years ago, the central government invited private investors to enter the business. By 2006, eight private carriers had sprung up to challenge the three state-controlled majors, Air China, China Southern and China Eastern.

The state airlines immediately began a price war. The state-owned monopoly that provided jet fuel refused to service private carriers on the same generous terms given the big three. China’s only computerized reservation system — currently one-third owned by the three state airlines — refused to book flights for private competitors. And when mismanagement and the 2008 economic crisis drove the three majors into financial straits, the central government bought stock to bail them out: about $1 billion for China Eastern; $430 million for China Southern; $220 million for Air China.

One private passenger carrier that remains is Spring Airlines, a tenacious startup run by a founder so frugal that he shares a 100-square-foot office with his chief executive and takes the subway to business meetings.

That founder, Wang Zhenghua, survived in part by building his own computer reservation system. He canceled a planned interview. But in Chinese news reports, he was caustic about the state subsidies given his competitors. “Now with the injection of 10 billion yuan” for China Eastern and China Southern, “everything is in chaos,” he told Biz Review, a Chinese magazine.

China’s private entrepreneurs have a catchphrase for such maneuvers: “guo jin, min tui,” or “the state advances, the private sector retreats.”

State-owned enterprises in China have taken the best of the economy for themselves, “leaving the private sector drinking the soup while the state enterprises are eating the meat,” Cai Hua, the vice director of a chamber-of-commerce-style organization in Zhejiang Province, said in an interview.

First in Line

Mr. Cai says he believes that China needs government-run industries to compete globally and manage the country’s domestic development. But locally, he said, their advantages — being first in line for financing by state banks, first in line for state bailouts when they get in trouble, first in line for the stimulus gusher — have created a “profound inequality” with private competitors.

Some analysts argue that the state-owned conglomerates, built with state money and favors into global competitors, have now become political power centers in their own right, able to fend off even Beijing’s efforts to rein them in.

Of the 129 major state enterprises, more than half the chairmen and chairwomen and more than one-third of the chief executive officers were appointed by the central organization department of the Communist Party. A score or more serve on the party’s Central Committee, which elects the ruling Politburo. They control not just the lifeblood of China’s economy, but a corporate patronage system that dispenses top-paying executive jobs to relatives of the party’s leading lights.

China’s leaders have sought occasionally in the past year to curb speculative excesses by state-controlled businesses in real estate, lending and other areas. In May the State Council, a top-level policy body sometimes likened to the cabinet in the United States, issued orders to give private companies a better shot at government contracts — for roads and bridges, finance and even military work — that now go almost exclusively to state-owned companies. Virtually the same rules were issued five years ago, to little effect.

Yet it is hard to argue with success, other economists say, and China’s success speaks well of its top-down strategy. Asian powerhouses like South Korea and Japan built their modern economies with strong state help. Many economists agree that shrewd state management can be better than market forces in getting a developing nation on its feet.

Experts on both sides of the debate have but two questions. One is how much longer state control of vast areas of the economy will generate that growth.

The other is whether, should that strategy stop working, China will be able to change it.

Nike, Adidas readjust marketing strategy

Source: By Bao Chang (China Daily)

BEIJING - Leading sportswear makers are readjusting the marketing strategies of their brands in China with two of the top sellers moving into lower-tier cities in order to be more competitive.

Nike Inc, the best-selling global sports brand, which is expecting record sales growth in China this year, is launching a range of low-priced products across the country rather than just focusing on high-end buyers.

Chinese market was Nike's fastest growing and the brand's largest market outside the United States. A similar drive is also being undertaken by Adidas AG, another major overseas sportswear brand in China. Managing Director Christophe Bezu said the company's strategy was to maintain its strong position and spread its influence throughout new areas of the country.

Bezu said: "In the near future, we want to bring our innovative products and the Adidas experience to more Chinese consumers. This is why we are planning to widen our product offering in lower-tiered Chinese cities. Even though we are a premium sports brand, we plan to offer competitively priced products to different segments of the market," he added, without going into specifics.

Liang Yuchang, an analyst with UBS Securities, said: "The launch of low-priced products (by Nike) is surprisingly fast but it confirmed our conclusion that the US brand will compete with domestic brands in low-end markets."

Liang predicted that the first batch of Nike's low-priced products would be sports shoes retailing at 300 yuan a pair, significantly lower than its normal prices in China.

According to UBS Securities, sports shoes priced between 170 and 250 yuan (between $25 and 36.8) are best sellers in China's second- and third-tier cities.

Nike's China branch declined to comment on prices of the proposed collection.

Currently, most Nike sports shoes cost between 500 and 1,500 yuan in China. They sell to mid- to high-end consumers in large cities. For an ordinary white-collar employee in Beijing, one pair of Nike shoes costing 1,500 yuan would account for nearly half of his monthly wages.

In Europe, Nike shoes cost the equivalent of between 400 and 600 yuan, making them more accessible to ordinary consumers as a leisure brand.

Guo Nan, a 26-year-old Chinese student studying in London, said: "We have many options here such as Nike, Adidas and Vans and their prices are almost all at the same level."

Liang of UBS Securities added: "If Nike insists on maintaining the high price strategy in China, it will definitely yield the fast growing market to its domestic rivals Li Ning and Anta."

Lured by the vast potential of the sports goods market in China, Nike is trying to get closer to more Chinese consumers, aiming to conquer China's second- and third-tier markets.

By the end of this year, China's sports shoes market will be worth 69 billion yuan and by 2020 the market value will be 297 billion yuan, analysts said.

According to Nike's five-year program, the company is expecting a 10 percent increase in year-on-year in sales in the Chinese market, which now accounts for nine percent of Nike's worldwide market share.

"Nike's low-priced products would have a serious impact on domestic brands such as Li-Ning and Anta," said Liang of UBS Securities.

At present, Chinese brands including Li-Ning, the majority of whose sports shoes sell for 300 yuan, are dominating China's rural markets because of the lower price.

Li Ning, Nike's largest domestic rival, rebranded itself and changed its slogan to "Make the Change" from "Anything is Possible" to attract more young consumers earlier this year.

According to Fang Shiwei, chief marketing officer at Li Ning, the brand overtook Adidas in sales last year to become the second-largest sportswear brand in China after Nike.

"To catch up with our rivals, Li Ning is increasing its strength in second- and third-tier cities and also changing tack and spreading its focus in top-tier cities," said Fang.

L'Oreal puts on a good face

Source: By Li Fangfang (China Daily)

Cosmetics company shows off its sustainable colors with new report

BEIJING - The L'Oreal Group, the largest cosmetics corporation in the world, doesn't just bring beauty to its Chinese customers; it puts a good face on society at large.

The French company has officially issued its first country-specific report on sustainable development - called the 2009 L'Oreal China Sustainability Report.

"From when we were a small company with a single hair-dye product until we grew into the largest cosmetics group in the world, we have ensured sustainable values have played a dominant role in our success. We have extended the spirit of pursuing excellence and sustainable development in the dynamic and fast-growing cosmetics market in China," said Jean-Paul Agon, chief executive officer of L'Oreal Group.

"By publishing the first specialized and localized sustainability report in China, we will show our confidence and commitment to the China market. We believe that with the sustainability vision and driving forward sustained innovation L'Oreal will better meet diversified beauty needs in whichever market we enter."

China represents one of the most dynamic and untapped cosmetics markets for L'Oreal. Over the last six to seven years, the Chinese cosmetics and toiletries market has undergone rapid transformation and expansion, making it the second-largest in the Asia-Pacific region after Japan and seventh-largest in the world.

"In such a dynamic market, L'Oreal China has made significant process since it entered in 1996. We now offer 19 brands here. In 13 of the past 14 years, we have seen consecutive double-digit sales for nine years of growth, making us the largest 'beauty kingdom' in China," said Francis Quinn, director of L'Oreal Sustainable Development. "The greater our development in China, the stronger is our commitment. It's important to emphasize our commitment to developing here in a sustainable and responsible manner. That's why we have decided to make China the first country in which we publish a specialized and localized country report on our sustainable development efforts."

The report delivers a full picture of L'Oreal's sustainable achievements and commitments made in 2009 from the aspects of performance development, scientific research and innovation, corporate social responsibility and information transparency.

L'Oreal's dependence on the environment and consumption of resources has been significantly reduced despite a very rapid growth in sales for the company in China over the past nine consecutive years.

Statistics from L'Oreal China showed that in 2009, for each finished product water consumption has decreased by 36 percent, and energy consumption was reduced by 5.26 percent, compared with the figures for 2005.

Its waste recycling and utilization rate has reached 99 percent. Furthermore, L'Oreal China employees have spent a total of around 14,475 hours participating in environmental, health and safety training.

In the process of ensuring its own development, L'Oreal has not forgotten its employees and social responsibilities. The company's Chinese employees have received an average of 41 hours of training per person. The company also shared 16.9 million yuan of profits with them.

L'Oreal's external public welfare donations in China amounted to 7.69 million yuan, up by more than 14 percent compared with 2008.

Paolo Gasparrini, president of L'Oreal China, said: "A high degree of corporate social responsibility has contributed to an outstanding performance by L'Oreal China. From original innovation to green products, security procedures to environment protection, we will continue to integrate sustainable development concepts throughout our business development model."

By 2015, on the basis of what the company had achieved in 2005, L'Oreal China will reach its goal of reducing total greenhouse gas emissions by 50 percent, reducing 50 percent of the water consumption of the unit finished products and a reduction of 50 percent of waste generated from the unit finished product.

"That means that our environmental performance will be further enhanced," said Gasparrini.

L'Oreal China says it has always regarded sustainability as a core value. By dedicating itself to sustainable innovation, minimizing its impact on the environment, establishing transparent communication with consumers and persistently investing in its corporate social responsibility, L'Oreal China says it has achieved rapid growth and increased significance.

"Innovation is the bedrock of L'Oreal's success in China. In research and development (R&D), we are at the cutting edge of scientific research, constantly innovating to create the most value for our consumers. Through our evaluation processes, we strive continuously to understand how consumers use our products, directly informing product design for the China market," said Quinn.

"In manufacturing and distribution, we make every effort to take advantage of the newest technologies and processes that improve operational efficiency, reducing cost, reducing our impact on natural resources and minimizing waste."

L'Oreal has made great progress and achievements in R&D and innovation. More than 300 products have been specifically developed for the China market since 2006. The team of scientists at its research laboratories has grown from 7 in 2004 to 120 in 2009.

To coincide with the report, the French company also inaugurated the L'Oreal Research and Innovation Center in Pudong, Shanghai, which has been awarded the internationally-recognized Leadership in Energy and Environmental Design golden certification.

Cosmetics safety to receive a makeover

Source: China Daily

YIWU, Zhejiang - China's State Food and Drug Administration (SFDA) has moved to create the country's first safety assessment and monitoring system for cosmetics and skin care products, an administration official said.

The SFDA would soon issue a plan for monitoring the safety of cosmetics and skin care products as part of the system, said the official, who declined to be named, during an SFDA meeting on safety supervision that ended Friday in Yiwu city, east China's Zhejiang province. The official did not reveal a date for issuing the plan.

The SFDA was re-examining the qualifications of agencies that approve cosmetics and skin care products, and was screening candidates for a safety commission, he said.

Safety watchdogs across the country would strengthen emergency response capabilities by making emergency plans and securing enough technological, personnel and material support, the official said.

It would be China's first system to assess and monitor the safety of cosmetics and skin care products.

In 2006, Japanese-made products in China of SK-II, a brand of the US firm Procter & Gamble Co., were found to contain chromium. Chromium is an element that causes skin allergies and is widely prohibited in the production of cosmetics and skin care products.

The findings stirred waves of consumer demand for refunds nationwide and P&G temporarily pulled SK-II from Chinese mainland stores.

As it later turned out, the banned element was not added deliberately, but was contained in other ingredients of the products.

Have You Heard...

• Kashmir visa row stokes India and China tensions
• China's Banks Face Hangover as Lending Slows
• China Eases Some Forex Controls
• Submersible dives into ocean elite of nations
• Lenovo to Develop Game Console

Kashmir visa row stokes India and China tensions

Source: Reuters By Krittivas Mukherjee

NEW DELHI (Reuters) -India summoned China's ambassador Friday to protest against the refusal of a visa to an Indian general from the disputed Kashmir region, the latest spat between two Asian giants jostling for global influence and resources.

A defense ministry source and some local media said defense ties, so far been limited to visits by military officials and the occasional exercises, were suspended, but the Indian government did not confirm this. Defense Minister A.K. Antony said "ties with China will continue."

Last year, India protested against a Chinese embassy policy of issuing different visas to residents of Indian Kashmir. New Delhi bristles at any hint that Kashmir, where a separatist insurgency has raged for two decades, is not part of India.

"While we value our exchanges with China, there must be sensitivity to each others' concerns," an Indian foreign ministry spokesman said in a statement.

Underlining fresh tensions, India summoned Chinese ambassador Zhang Yan to complain about the denial of visa to the army general, according to senior foreign ministry officials.

Despite decades of mistrust, China is now India's biggest trade partner and the current spat, one of several over the last few years, is unlikely to snowball. The value of bilateral deals was expected to pass $60 billion this year, a 30-fold increase since 2000, raising the stakes in maintaining peace.

Distrust between the two economic powerhouses dates back to a 1962 border war, partly over the northeastern Indian state of Arunachal Pradesh that China claims in full.

China's support for India's arch-enemy Pakistan, which backs the Kashmir separatists and also claims the region in full, has not helped defuse tensions.

India is also unhappy with China's economic and political ties with Pakistan and says Chinese involvement in Pakistan-held Kashmir is intended to undermine it.

China defeated India in the 1962 war, but they still spar over their disputed 3,500 km (2,170 mile) border and the presence of exiled Tibetan spiritual leader, the Dalai Lama, in India.

"TIES HEATING UP"

Last year, the Indian media reported on Chinese incursions along the border, incidents the India government shrugged off.

But tension has simmered, particularly over Chinese development projects in Pakistan-controlled Kashmir.

New Delhi is also angry at talks to encourage Chinese university research on Indian Kashmir after a meeting between a Kashmiri separatist leader and Chinese officials this year.

Every time a Chinese action has irritated India this year, New Delhi has responded by upping its engagement with the Dalai Lama, including a meeting between Indian Prime Minister Manmohan Singh and the Tibetan leader this month.

"All this is an indication of bilateral ties heating up because India sees this as interference in its sovereignty," said Srikanth Kondapalli, professor at India's Jawaharlal Nehru University.

India holds 45 percent of the disputed Himalayan region while Pakistan controls a third. China holds the remainder of Kashmir, an icy desert plateau known as Aksai China.

China and Pakistan's close military and political ties are underpinned by long-standing wariness of common neighbor, India, and a desire to hedge against U.S. influence in South Asia.

India and Pakistan, which claim Kashmir in full, have fought two of their three wars over Kashmir since their independence from Britain in 1947.

India has very limited military ties with China, mainly focused on visits by respective military chiefs and government officials and occasional war exercises agreed on in May 2006.

But both Indian and Chinese analysts agree the latest row is unlikely to affect the two country's broader relations.

"Security and military ties are among the weakest aspects of the China-India relationship," Zhang Li, professor of South Asian politics at Sichuan University, told Reuters.

"But because security and military ties are under-developed to begin with this won't have a big impact on the overall relationship."

China's Banks Face Hangover as Lending Slows

Source: Wall Street Journal by Andrew Batson

BEIJING—China's big banks are starting to cut back lending to local-government projects, walking a delicate line between addressing risks to the financial system and keeping up the flow of money to the infrastructure boom that supports the nation's economy.

The willingness of local governments to borrow—through off-budget companies they set up—and build public-works projects helped power China through the global financial crisis. But regulators have warned that loose standards for all this off-the-books borrowing will end up generating bad debts and have been tightening the rules in recent months.

At the same time, Beijing has argued that most of the projects local-government debt has funded were needed and will ultimately prove viable, and China's banks remain profitable. On Thursday, Industrial & Commercial Bank of China Ltd., the country's largest bank, reported first-half profits rose 27% from a year earlier to 84.6 billion yuan ($12.44 billion). Earnings at Bank of China Ltd., another major state bank, also jumped 27% from a year earlier, to 52.02 billion yuan.

The early results of the government's drive to clean up local-government lending are also appearing. Bank of China President Li Lihui told reporters that its loans outstanding to companies backed by local authorities fell to 419.7 billion yuan at the end of June, down 4.6 billion yuan from December. The bank's total loans grew 9.8% over the same period.

China Construction Bank Corp., which reported earnings earlier this week, said its loans to local-government entities had fallen to about 580 billion yuan at the end of June, which implies a contraction of about 68.5 billion yuan, or 11%, since it last reported its exposure at the end of December.

"This is really a soft landing for local governments," said Wang Yongjun, a professor at the Central University of Finance and Economics in Beijing. "The idea is not to forbid these localities from raising funds, but for them to do it in a more regularized way. China's local governments will have a great need to raise money for a long time to come."

China's recovery is already slowing as the impact of its stimulus program wears off, and the government faces a tough choice between addressing the risks of the past year's lending boom, and sustaining growth in a weakening world economy. It is moving cautiously because local-government companies still play an important role in the economy that can't be quickly replaced: their borrowing funded most of the nation's stimulus projects. While growth in spending on infrastructure has slowed this year as scrutiny of local-government lending has gotten tougher, Beijing is trying to avoid cutting off projects before they are completed.

"Central-bank authorities have already taken steps to throttle back the growth of credit…[and] repair what looks to be fairly substantial damage done to the financial system," Barry Naughton, a specialist on the Chinese economy at the University of California, San Diego, said at an academic conference in Shanghai last week.

Yet even after the banks have been cleaned up, the massive expansion they have funded of these government-sponsored companies could continue to have effects on China's economy. Mr. Naughton said that is likely to result in more of the resources of the economy flowing into state-owned companies rather than the pockets of consumers—the opposite of the government's professed desire to boost household incomes.

ICBC and Bank of China said their assets remained healthy despite mounting concerns about their loan books. ICBC's nonperforming loan ratio fell to 1.26% at the end of June from 1.54% at the end of last year, while Bank of China's nonperforming loan ratio dropped to 1.20% from 1.52%.

"We remain alert that there are many new risks and uncertainties in our business operation and development," ICBC said in a statement, adding the government's tightening moves in the property market and crackdown on local governments' financing vehicles also will pose challenges for banks.

Despite market expectations of a strong earnings performance, the ICBC's and Bank of China's shares have been falling since the start of the year because of investor concerns about the long-term health of China's lenders following last year's government-directed stimulus. ICBC's shares are down 23% year-to-date, while Bank of China's are down 19%.

The banks said only a small percentage of loans to local government financing vehicles had turned sour by the end of June. ICBC said 0.02% of its loans to the sector had turned bad, while Bank of China said just 0.07% of its loans to the vehicles had.

"There are definitely risks in loans to local-government financing platforms, but currently the overall risk is controllable and will not become a systemic risk," four government agencies, including the ministry of finance, said in a joint statement on Aug. 19. Most of the local projects can generate enough cash flow to cover their debts, the statement said.

In another sign that the crackdown isn't a harsh one, Beijing has largely kept open the local-government companies' access to the bond market. The National Development and Reform Commission temporarily suspended approvals for bond issues by such firms in June, but debt sales resumed shortly afterward and have continued at a brisk pace.

This week, Yunnan Investment Group raised two billion yuan by selling seven-year bonds, funds that will to go to a hydropower project on the Lancang River. A holding company for the southwestern province's interests in railroads, power generation, forestry and other businesses, Yunnan Investment says it will raise and spend a total of 10 billion yuan this year on its mission to develop the local economy.

China Eases Some Forex Controls

Source: Wall Street Journal By Aaron Back and Andrew Batson

BEIJING—China will start allowing exporters to keep some of their foreign-currency earnings offshore, beginning a new relaxation of the nation's currency controls that could eventually slow its buildup of foreign-exchange reserves and reduce pressure on the yuan to appreciate.

The trial program announced Friday by the State Administration of Foreign Exchange eases the so-called "surrender requirement" that forces exporters in China to convert most of their overseas earnings into local currency. China's central bank then buys up those dollars, euros and other currencies, and adds them to its stockpile of official reserves, which is the world's largest at $2.45 trillion.

But dealing with that rapid accumulation of reserves has become an increasing headache for the central bank: It bought $81.1 billion worth of foreign reserves just in the second quarter of this year, most of which was parked in U.S. government debt. While China has increased purchases of Japanese and Korean bonds this year, few markets are big enough to handle the amounts of money China's export sector generates. And the yuan the central bank prints to buy that foreign currency also adds to inflationary pressures within the country, complicating its management of the economy.

Having to buy up less foreign currency could help address several issues for China's monetary authorities. "If you don't force firms to surrender their foreign-exchange proceeds, then they won't be exchanged for renminbi, which is a source of appreciation pressure," said Tim Condon, Asia economist for ING, using the official name of China's currency.

Still, a major shift in the dynamics of China's currency market is unlikely in the short term, given the limited scope of the new effort. Under the new one-year trial program, which starts Oct. 1, a total of 60 exporters in Beijing and the provinces of Guangdong, Shandong and Jiangsu will be able to deposit a designated fraction of their foreign currency earnings overseas, rather than repatriating all of it into China, SAFE said.

While exporters who need foreign currency to buy imports and other supplies may want to take advantage of the program, there are still incentives for exporters to bring their money into the country. "People would prefer to bring forex earnings to China and convert them to yuan, as the yuan is likely to appreciate in the future," said Bank of America-Merrill Lynch economist Lu Ting. Programs that allow Chinese nationals to invest abroad have also met with only limited interest so far.

Economists say China's plans for gradual reforms to its currency system were put on hold in 2008 with the outbreak of the global financial crisis. But once political leaders signed off on the June decision to loosen the currency's de-facto peg to the dollar, other long-awaited changes have been rolled out. In recent months, China has expanded a program that allows exporters to settle trade in yuan rather than dollars, made it easier for the yuan to circulate among banks in Hong Kong, and widened foreign banks' access to the domestic bond market.

"In the last couple of weeks it's been moving much faster than we anticipated," said Jinny Yan, an economist for Standard Chartered in Shanghai. "This is all a series of moves that is putting across a message, at least, that China is ready to take action on opening the capital account."

The new program does not have a direct affect on how China sets its exchange rate, which is still closely linked to the dollar. While its limited scope is typical of China's cautious approach to rolling out new policies, such efforts have often been gradually expanded if successful.

"They are testing the water to see if it's something the country can afford and manage. If it works out well, I think they will be emboldened to do more," said Shang-Jin Wei, a professor of finance and economics at Columbia Business School. "The authorities want to relax capital controls de-facto, but without formally relaxing the rules."

SAFE has in fact been preparing the ground for the trial program for several months, arguing that China is now long past the point where the government needs to aggressively accumulate foreign exchange. In a July statement, SAFE said "we encourage businesses and ordinary people to hold and invest in foreign exchange, and diversify the currencies in which they hold their wealth." Although that process will be gradual, SAFE said it would "greatly ease the pressure from foreign exchange being concentrated in the hands of the nation."

According to SAFE, China's official foreign exchange reserves accounted for two thirds of all of country's foreign-currency assets, while the ratio in Japan—where firms and households can hold on to their own foreign currency—was only about a sixth. The dominance of the state in those holdings abroad is one reason why China has faced political resistance to its investments in some countries, particularly the U.S.

"This is part of an incremental move towards the privatization of China's foreign currency holdings," said Tom Orlik, an economist with Stone & McCarthy Research Associates in Beijing. "In the long run, it will mean less flows into SAFE's coffers, and more money for Chinese companies to invest overseas themselves."