Have You Heard...

• Pentagon Loses Control of Bombs to China Metal Monopoly
• China releases 3 Japanese but isle dispute lingers
• China says U.S. yuan bill could harm ties
• U.S. Ban on Chinese Poultry Imports Violates Global Trade Rules, WTO Says
• Chinalco to Take Majority Stake in Jiangxi Rare Earth SOE
• Toyota Motor's 2010 China Car Sales May Overtake Europe's for First Time
• China raising a generation of left-behind children

Pentagon Loses Control of Bombs to China Metal Monopoly

Source: Bloomberg By Peter Robison and Gopal Ratnam

A senior manager at a company that churns out metals routinely used in U.S. smart bombs pauses in mid-sentence when his phone rings: a Wall Street stockbroker looking for information. He makes a note to have an assistant call back -- someone who is fluent in English, not just Chinese.

“It’s a seller’s market now,” says Bai Baosheng, 43, puffing a cigarette in his office in Baotou, China, where his company sells bags of powder containing a metallic element known as neodymium, vital in tiny magnets that direct the fins of bombs dropped by U.S. Air Force jets in Afghanistan.

A generation after Chinese leader Deng Xiaoping made mastering neodymium and 16 other elements known as rare earths a priority, China dominates the market, with far-reaching effects ranging from global trade friction to U.S. job losses and threats to national security.

The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts. China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements.

Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks.

Warning Signs

“The Pentagon has been incredibly negligent,” said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007. “There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”

China may already be flexing its muscles amid a diplomatic spat with its East Asian neighbor Japan. China last week imposed a “de facto” ban on exports to Japan of the metals used in liquid crystal displays and laptop computers, Japanese Economy Minister Banri Kaieda said Sept. 28. That followed Japan’s detention of a Chinese fishing boat captain whose ship collided with two Japanese Coast Guard vessels. Japan later released the man.

No such ban exists, China’s Ministry of Commerce spokesman Chen Rongkai said.

New Factor

“What it does, clearly, is bring a new factor into the consideration of supply of critical materials,” said Dudley Kingsnorth, director of Industrial Minerals Co. of Australia, a forecaster in Perth.

The U.S. Congress’s investigative arm, the Government Accountability Office, in April warned of “vulnerabilities” for the military because of the lack of domestic rare-earth supplies. The House of Representatives Armed Services Committee will hold a hearing in October, the same month a Pentagon report on how to secure future supplies of the metals is due.

“The department has long recognized that rare-earth elements are important raw material inputs for many defense systems and that many companies in our base have expressed concern regarding the future availability of the refined products of these elements,” Brett Lambert, director of the Pentagon’s Office of Industrial Policy, said.

While two rare-earth projects are scheduled to ramp up production by the end of 2012 -- one owned by Molycorp Inc. in California and another by Lynas Corp. in Australia -- the GAO says it may take 15 years to rebuild a U.S. manufacturing supply chain. China makes virtually all the metals refined from rare earths, the agency says. The elements are also needed for hybrid-electric cars and wind turbines, one reason supply may fall short of demand in 2014 even with the new mines, according to Kingsnorth of Imcoa.

Doggy Day Care

Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking. This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana. In 2003, the plant’s owner shifted work to China, costing 230 jobs.

Now the plant houses Coco’s Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop. On most days dogs outnumber the 15 metalworkers, said Kathy DeFries, co-owner of Excel Machine Technologies Inc.

“When things got slow for manufacturing, we had this big empty shop floor,” said DeFries, nuzzling a floppy-eared puppy. “It’s a great stress reliever.”

Expensive to Mine

The rare earths are chemically similar elements, with names such as yttrium and dysprosium. China has the largest share of worldwide reserves, about 36 percent, and the U.S. is second, with 13 percent, the U.S. Geological Survey says. While the elements aren’t rare, they’re less frequently found in profitable concentrations, expensive for Western producers to extract and often laced with radioactive elements.

China produced 120,000 tons, or 97 percent, of the world’s 124,000-ton supply last year, according to the GAO. Half of that came from Baotou, said Kingsnorth. The raw elements have many applications. Neodymium is used by Chinese companies including magnet makers, who sell to U.S. suppliers of defense contractors.

Export Quotas

Export quotas and taxes for overseas buyers that the GAO says can reach 25 percent are pushing up prices of elements even in relatively large supply. For example, the cost of a kilogram of samarium powder, needed for the navigation system of General Dynamics’ M1A2 Abrams tank, jumped to $34 in early September, from $4.50 in June, according to U.K. researcher Metal Pages Ltd.

The U.S. and the European Union consider Chinese restrictions on a range of raw goods part of a strategy to draw in higher-paying manufacturing jobs by making them cheaper to buy inside China. The export taxes violate World Trade Organization rules because China pledged to limit them to 84 product categories when it joined the trade group in 2001, said Terence Stewart, managing partner of Washington law firm Stewart & Stewart. In 2010, China had taxes on 329, he said.

The U.S. and the EU filed a WTO complaint over raw materials including bauxite and coke last year. China’s commerce minister, Chen Deming, said Aug. 28 that the policies comply with WTO rules.

Some manufacturers in China are lobbying the ministry to back off the latest quotas because a dispute will disrupt the market, said Constantine Karayannopoulos, chief executive officer of Toronto-based Neo Material Technologies Inc., which has rare-earth production facilities in China.

Risk of Trade War

“It was very sudden and didn’t give the industry any time to adjust,” he said. “This quota action could risk a trade war.”

For Western companies, China’s policies are creating the real “unobtanium,” the fictional mineral fought over in James Cameron’s 2009 film “Avatar.”

It’s taking as long as 10 weeks to get neodymium magnets, double the previous wait time, said Joe Schrantz, group supply chain manager at Moog Inc. in East Aurora, New York. He said the company buys hundreds of thousands of magnets a year to make motors for cars, trucks and weapons including Raytheon’s AMRAAM -- or Advanced Medium-Range Air-to-Air Missile -- and Boeing’s Joint Direct Attack Munition, a tail fin kit for making precision-guided “smart” bombs out of ordinary weapons.

Rising Prices

Rising neodymium prices are forcing up the price of magnets, which typically cost between $2 and $30 apiece. That’s having a “significant” effect on profit, and suppliers say costs will keep going up, Schrantz said. The company is considering buying blocks of raw material and storing it.

“If everybody does that, then it’s going to get really crazy,” he said.

Neodymium, a silvery metal, is essential in a magnetic alloy developed separately by engineers at General Motors Co. in Detroit and Sumitomo Special Metals Co. in Japan in the 1980s. The magnets are now in millions of stereo speakers, computer disk drives and motors.

In missiles, they replace a hydraulic system of pumps and fluids that was costlier and heavier. Motors in weapons like the JDAM might be three times as big without advanced magnets, said Todd Brewster, senior design engineer at Kollmorgen, a unit of Washington-based Danaher Corp. The JDAM has been used extensively in Iraq and Afghanistan.

Hybrid-Electric Motors

A Chinese supplier makes neodymium magnets for hybrid- electric motors the Navy is developing to cut fuel use of Arleigh Burke-class destroyers, according to the GAO. The agency also says Lockheed Martin Corp.’s SPY-1 radar on Aegis destroyers contains samarium-cobalt magnets that will need to be replaced over 35 years. China is virtually the only supplier of yttrium needed for laser gun sights in the General Dynamics Abrams tank, the U.S. Geological Survey says.

“It’s amazing how this issue seems to have caught the country off guard,” said U.S. Representative Mike Coffman, a Colorado Republican who was a U.S. Marine Corps infantry officer. He noted that China’s capabilities have expanded significantly since 2001, when the U.S. Army canceled plans to buy Chinese-made berets under pressure from Congress. “How ironic is that we were concerned about berets?”

Jon Kasle, a spokesman for Raytheon of Waltham, Massachusetts, said his company hasn’t experienced supply shortages. Spokesmen for Bethesda, Maryland-based Lockheed Martin; General Dynamics, of Falls Church, Virginia; and Chicago-based Boeing declined to comment. “There is a particular need to focus on rare-earth minerals,” said Alexis Allen, spokeswoman for the Aerospace Industries Association, an Arlington, Virginia-based lobby group for defense contractors. “The Department of Defense should consider many alternatives to reliable access.”

Stockpile

One option is to stockpile the metals with allies. Since 1994 the Pentagon has sold off excess raw materials for $7 billion.

Another is subsidies of U.S. manufacturing. The U.S. House of Representatives approved yesterday a proposal by Representative Kathy Dahlkemper, a Pennsylvania Democrat, that would set up a research and development program at the Department of Energy to help U.S. rare-earth manufacturers such as Molycorp with measures including loan guarantees. To become law the bill, which cleared the House on a 325-98 vote, must have a matching Senate version and be signed by the president. Currently there is no such measure.

While Molycorp plans to mine almost 20,000 tons of rare earths annually by late 2012, it doesn’t yet have the capacity to refine the raw elements into metals.

‘No Substitute’

Complicating matters is that even the Pentagon has been unsure of its own needs. Stephen Luckowski, chief of materials manufacturing and prototype technology at the U.S. Army’s Picatinny Arsenal in New Jersey, told participants at a February conference in Cleveland that it took him a month to learn that rare-earth metals are in the nose of the Excalibur missile, and he still wasn’t certain of the exact supply route. Luckowski, a metallurgist, was sure the Army needed the rare earths. “That may be a case where you have no substitute,” he said.

China’s dominance in the materials comes as it scours the planet for resources to feed its economy, which is expanding more than 10 percent this year while the U.S. struggles with an almost 10 percent unemployment rate. The country has been snapping up oilfields, buying copper mines and investing in wind power. China is also expanding its military, developing an aircraft carrier, nuclear-powered submarines and ballistic missiles, the Pentagon said in an August report.

Deng’s Quotation

In the lobby of Bai’s company, a unit of state-owned Baotou Iron & Steel Group Co., a now-famous 1992 quotation by Deng is emblazoned in pink marble. It reads: “The Middle East has oil, and China has rare earths.” A May interview with Bai is regularly interrupted by calls from stockbrokers, analysts and fund managers looking to learn more about the company.

“Because export quotas are limited, we basically can choose our clients; we are no longer compelled to sell to just about anybody who comes knocking,” said Bai, who handles investor relations for Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. The shares have more than doubled in the past year, reaching 72.72 yuan on Sept. 29, giving the company a market value of $8.8 billion.

The company is especially proud of the samarium-cobalt magnets used in the Shenzhou 7 space capsule that lifted Chinese astronauts into space in 2008. They were developed at the nearby Baotou Research Institute of Rare Earths.

Environmental Costs

The export restrictions compensate for the heavy environmental toll, said Zhang Anwen, vice secretary of the Chinese Society of Rare Earths, a group of researchers in Beijing. “It’s unfair for the U.S. to be pointing fingers at China now,” he said. “To undo the damage done to the earth, we need to return the vegetation, increase water flow and treat the ground. It’s an extremely costly repair.”

Deng set China on its path with a 1986 initiative whose goals included acquisition of technology in “exotic materials” such as rare-earth metals, new energy compounds and high- capacity engineering plastics, according to a U.S. House of Representatives committee report.

That year Zhu Weiheng, an electrical engineer at the Chinese Academy of Sciences, wrote a report to Chinese officials suggesting they control exports of rare-earth minerals because of their high value in manufacturing. Zhu had studied at the Massachusetts Institute of Technology in Cambridge, Massachusetts, and in 1965 designed a motor for China’s first satellite, the East is Red. Later he spent part of Chinese leader Mao Zedong’s Cultural Revolution under arrest as a suspected spy.

‘Real Revolution’

By the early 1980s, Zhu was testing samples of neodymium iron boron, the alloy perfected by engineers at GM and Sumitomo. Two Chinese research institutes also developed it, said Zhu, 91. “It was a real revolution,” he said.

In 1990, Zhang Hong, the Chinese academy’s deputy director of technology, visited Magnequench, a GM unit in Indiana that used a spinning wheel to quench, or cool, the molten alloy into flakes to make magnets. Five years later, a group including then state-owned San Huan New Materials and Hightech Inc. agreed to buy Magnequench.

The Committee on Foreign Investment in the United States, a cross-agency board that reviews foreign takeover deals, allowed the purchase partly because the partners agreed to keep open facilities in the U.S.

Shipped to China

The company opened a new plant in Tianjin in 1998 and shut a former GM operation in Anderson, Indiana, four years later. Magnequench also purchased and later closed the factory in Valparaiso, where Kathy DeFries now boards dogs for $5 an hour. That plant’s tools were shipped to three San Huan operations in China, according to Shannon Song, a Beijing-based executive at Magnequench.

“What they were basically doing was replicating the production lines in China,” said Leitner, the former Pentagon official.

Indiana’s Bayh and Hillary Clinton, now U.S. secretary of state, both cited Magnequench as an example of the U.S. losing jobs and expertise to China. In the 1990s a dozen U.S.-based suppliers of magnets employed 6,000 people. Today there are four, employing 500, said Ed Richardson, vice president of Thomas & Skinner Inc. in Indianapolis, one of the survivors.

Business Decision

The plant closures were a business decision after the technology bust in 2000 hurt sales, Song said. Most of the Valparaiso factory’s business came from computer makers; defense was a minor share, she said. In 2001, labor costs in Anderson averaged $7.32 per kilogram of neodymium powder on top of $10.07 in direct production overhead, she estimates. In 2003 in Tianjin, labor costs were 16 cents and overhead $3.20.

“It was a question of letting the ship sink or doing something to cut the operating cost,” she said.

Toronto-based AMR Technologies Inc. bought Magnequench in 2005 and renamed the merged company Neo. The company’s shares rose to C$4.92 yesterday from as little as C$1.05 in early 2009.

San Huan, now known as Beijing Zhong Ke San Huan High-Tech Co., went public in 2000. Sales have risen more than fourfold, from 371 million yuan that year to 1.6 billion yuan in 2009. The stock has almost tripled in the past year, reaching 17.14 yuan on Sept. 29.

God and Magnets

“God created the universe from nothing and organized it with the help of a magnet,” the company declares on its website, in English and Chinese.

Shares of Aluminum Corp. of China Ltd. rose 18 percent over the past two days in Shanghai trading after its parent announced a plan to invest at least 10 billion yuan ($1.5 billion) to build a rare earth production base in Jiangxi province with a local partner.

A group of U.S. investors led by Denver-based private equity firm Resource Capital Funds wants to challenge China’s dominance by restoring the fortunes of Molycorp, the largest supplier of rare earths for much of the last century. Its mine, west of Las Vegas in California’s Mojave Desert, shut eight years ago, under pressure from Chinese competitors and regulatory scrutiny of wastewater spills.

Molycorp, based near Denver, says it needs $511 million to refurbish and expand. It raised $379 million in its July share sale, and has applied for a $280 million loan guarantee under a U.S. Department of Energy program for “innovative technologies.” The shares have almost doubled, closing at $26.73 yesterday from $14 in July.

Joshua Trees

Costs of environmental compliance will be steep, Molycorp warns in a filing that says it spent $3 million last year alone. Beyond a 300-foot-deep open pit, John Benfield, manager of quality assurance, points to a valley sheltering Joshua trees where slurry left after processing ore will be pumped and harden like concrete.

The trees, protected under California law, will be given new homes after their precise positions are measured with compasses. Their bark burns in the desert sun without the right orientation. Even so, only 20 percent of replanted trees survive, Benfield said.

The company will keep processing costs to $1.26 per pound, half the average in China, by recycling more water and using a single acid to separate elements, said Mark Smith, Molycorp’s CEO. Molycorp is also negotiating with potential partners to alloy metals and turn them into neodymium magnets in the U.S., creating as many as 900 jobs.

“It was a very, very strategic move that the Chinese made,” he said. “They created a very, very large number of jobs for the citizens of China. We ought to be looking at executing that exact same strategy here in this country.”

China releases 3 Japanese but isle dispute lingers

Source: Reuters By Chris Buckley and Chisa Fujioka

(Reuters) - China released three Japanese citizens on Thursday whose detention had added to tensions between Asia's two top economies, but a fourth remains in custody in a sign that the row is not yet over.

Tokyo and Beijing have been in a bitter feud since Japan detained a Chinese fishing boat skipper whose trawler collided this month with two Japan Coast Guard ships near uninhabited islands in the East China Sea that both sides claim.

Japanese prosecutors released the skipper late last week, but both sides have demanded compensation over the collision.

The release of three of the Japanese employees of construction firm Fujita Corp, held on suspicion of entering a restricted military zone, comes amid signs that Beijing and Tokyo are moving past the most vehement phase of their latest friction.

But Japanese Foreign Minister Seiji Maehara demanded the remaining Japanese being held be released quickly and for China to explain the reasons behind their detention.

"What's most important is that one of them hasn't been released yet," Maehara told reporters. "We will strongly urge that he be released soon."

Chinese Foreign Ministry spokeswoman Jiang Yu told a regular briefing that China did not want the on-going diplomatic spat with Japan to deteriorate further -- but also called on Tokyo to stop making "irresponsible statements."

"We hope that Japan will proceed from the fundamental interests of both countries peoples and stop issuing irresponsible statements, and take practical actions to protect broader development of China-Japan relations," she said.

Jiang said China's statements had "both demonstrated our determination to defend national territorial sovereignty and also our sincerity in developing China-Japan relations."

The Fujita employees were detained in northern China's Hebei province last week while Beijing and Tokyo were embroiled in the row sparked by Japan's detention of the Chinese boat captain.

They were in China for a project to dispose of chemical weapons abandoned by the Japanese military at the end of World War Two. A Chinese national and fellow employee detained with them at the same time has also been released.

Jiang said the case of the still-detained Japanese national awaited further investigation. She did not elaborate.

The tensions have underscored the fragility of a relationship long troubled by bitter Chinese attitudes toward Japan's wartime occupation as well as by present-day mistrust as China edges past Japan as the world's second-biggest economy.

LONG-STANDING ROW

The roots of the trawler dispute lie in a long-standing disagreement about sovereignty over parts of the East China Sea, which has potentially rich natural gas resources.

Fishery patrol boats from both sides have remained in waters near the disputed islands, called Diaoyu by China and Senkaku by Japan, although an expert said passions seemed to be subsiding in the bilateral feud.

"It looks like the Chinese side is letting the heat out of the argument," said Phil Deans, a professor of international affairs at Temple University's Japan Campus.

"It's not going to go away. It's very easy to reignite ... There is still a dispute (over the islands) and there are some very passionate figures on both sides that don't want a good relationship."

Japan and China have a long-running disagreement over China's exploration for natural gas in the disputed waters in the East China Sea, although in 2008 they agreed in principle to solve the argument by jointly developing the gas fields.

Japan's ambassador to China, Uichiro Niwa, has told China not to unilaterally develop a gas field in the disputed area, Kyodo news agency reported on Thursday.

China has canceled diplomatic meetings and student visits in protest at the trawler captain's detention, although Kyodo said Japan's defense minister may seek talks with his Chinese counterpart in Vietnam next month in a bid to repair ties.

Industry sources have cited concerns that Beijing was apparently holding back shipments to Japan of rare earth minerals vital for electronics and auto parts, but a Japanese trading firm source has said China ended its de facto ban on the exports.

China says U.S. yuan bill could harm ties

Source: Reuters By Chris Buckley

(Reuters) - China on Thursday warned that a House of Represenatives bill to penalize it for not letting the yuan rise faster could seriously affect bilateral ties.

In a relatively measured response, Foreign Ministry spokeswoman Jiang Yu said Congress should avoid steps that could harm relations, saying Beijing was "resolutely opposed" to the bill. But she declined to say whether China would retaliate.

The House of Representatives bill, which many analysts say is unlikely to become law, is aimed at pressuring Beijing to let its currency, also called the renminbi, rise faster by branding it in violation of world trade rules.

"Using the renminbi exchange rate issue as an excuse to engage in trade protectionism against China can only harm China-U.S. trade and economic relations, and will have a negative effect on both countries' economies and the world economy," Jiang told a regular news briefing.

"We urge the members of the Congress to understand clearly the importance of China-U.S. trade and economic relations, and put a halt to protectionism so as to avoid hurting the interests of the peoples of the two countries and of the world."

Whether China would take any U.S. law on the yuan to the World Trade Organization was "hypothetical," she said.

The bill would need to be passed by the Senate -- far from certain and not likely until after congressional elections on November 2 when the U.S. political landscape could be greatly changed -- and signed by President Barack Obama to become law.

China's tight leash on the yuan is under intense scrutiny as countries around the world look to export their way back to economic health, raising concerns they will intentionally weaken their currencies to gain an edge.

PRICE ADVANTAGE

The bill allows the U.S. Commerce Department to treat "fundamentally undervalued currencies" as an illegal export subsidy so that U.S. companies can request a countervailing duty to offset China's price advantage.

Earlier in the day, the official Xinhua news agency quoted China's Commerce Ministry spokesman, Yao Jian, as saying: "Starting a countervailing investigation in the name of exchange rates does not conform with relevant WTO rules."

That lawyer-like statement was relatively moderate compared with China's reaction to other disputes this year, including U.S. weapons sales to Taiwan, when Beijing froze military contacts with the United States.

"I don't think China will have any dramatic reaction to this bill's passing," said Jin Canrong, a professor of international relations at Renmin University in Beijing, who specializes in U.S.-China relations. "China wants to preserve the stability of overall relations."

The American Chamber of Commerce in China voiced its opposition to the Chinese currency legislation in an email, saying: "If enacted into law, the chamber does not believe the bill will be effective in achieving its objectives and would fail to create significant U.S. job growth."

China's central bank fixed the yuan's daily mid-point versus the dollar at a weaker level on Thursday.

Despite the weaker mid-point, the yuan has now gained almost 2.2 percent against the dollar since Beijing scrapped a 23-month-old peg to the dollar on June 19 and said it would let the currency resume a managed float. Nearly all of the increase has occurred this month.

The bill could fan the flames of a long-running dispute with China over trade and jobs.

It passed with solid bipartisan support just over a month ahead of mid-term elections as voters focus on the still-struggling U.S. economy and persistently high unemployment.

QUICK YUAN MOVES UNLIKELY

Chinese analysts were skeptical that the legislation would produce any quick movement on the yuan.

"If you are looking for another one-off revaluation of 3 to 5 percent, or are expecting a 20 percent rise in the yuan over a year ... forget it," said Fu Bingtao, an economist with the Agricultural Bank of China.

China, the largest foreign buyer of U.S. government debt with holdings of nearly $847 billion as of July, says its big trade surplus with the United States is due to Americans saving too little and no longer making the goods that China sells.

While Obama has not taken a position on the legislation, House Majority Leader Steny Hoyer said lawmakers worked with the White House to ensure the bill did not violate WTO rules.

Treasury Secretary Timothy Geithner told Congress two weeks ago that Washington would work with Group of 20 nations to push China for faster appreciation, but several allies expressed reluctance. G20 leaders are set to meet in Seoul on November 10-11.

U.S. Ban on Chinese Poultry Imports Violates Global Trade Rules, WTO Says

Source: Bloomberg By Jennifer M. Freedman

U.S. restrictions on imports of Chinese chicken, turkey and duck that are no longer in place broke global commerce rules, the World Trade Organization said.

WTO judges in Geneva agreed with China that a congressional spending bill preventing authorities from processing shipments of cooked Chinese poultry unfairly closed the American market. China, the third-biggest market for U.S. farm goods, called the measure discriminatory and protectionist because its poultry met international health standards and it was shipping chicken to Europe and Japan.

The U.S. measure has expired, negating the need for judges to order the Obama administration to bring the law into line with WTO rules. Judges also opted not to issue a recommendation, as China had requested, that the U.S. avoid language similar to the disputed measure in future legislation “because these other measures are outside our terms of reference.”

China, once the second-largest buyer of U.S. chicken, and the U.S. outlawed each other’s poultry in 2004 after an outbreak of bird flu. While China rescinded its ban, it now imposes tariffs on chicken imports from U.S. producers such as Tyson Foods Inc., Sanderson Farms Inc. and Pilgrim’s Pride Corp., a unit of Brazilian meat processor JBS SA, to counter what it calls unfair subsidies for U.S. poultry farmers.

The Department of Agriculture partly lifted the ban in 2006 by permitting China to ship cooked poultry to the U.S. provided it first imported the raw chicken from the U.S. or Canada. Even so, members of Congress added a provision in an appropriations bill, citing health concerns, that effectively prohibited the import of chickens processed in China.

Fourth Complaint

Trade tensions between China and the U.S. span concerns about product safety and agricultural health standards, American complaints about lax protection of patents and copyrights and calls for a stronger yuan. The complaint against U.S. poultry restrictions was the fourth by China since it joined the WTO in 2001.

China had a record $266 billion trade surplus with the U.S. in 2009, though it shrank 21 percent in the first seven months of 2010 from a year earlier, Chinese customs bureau data show. China is the third-largest market for U.S. exports, buying $70 billion worth of U.S.-made goods in 2008 compared with $19 billion in 2001.

China passed Canada in 2007 to become the largest source of products shipped into the U.S., capping a six-year period when its exports to the U.S. more than tripled. China is the biggest overseas market for U.S. poultry, purchasing almost 800,000 metric tons valued at $722 million in 2008, according to the USA Poultry & Egg Export Council.

Chinalco to Take Majority Stake in Jiangxi Rare Earth SOE

Source: 21 Century News Group

September 29, Aluminum Corp. of China Ltd. (Chinalco), China’s largest aluminum producer, said Monday the company had concluded an agreement with Jiangxi Provincial Government to take a majority stake in Jiangxi Rare Earth and Rare Metals Tungsten Group (JXTC).

State-owned Chinalco, which is seeking to diversify its portfolio to reduce risk from its core business, will invest as much as RMB 10 billion to help JXTC develop rare earth resources in the next three to five years, the company said in a statement on its website.

Nanchang-based JXTC is China's largest tungsten producer and maintains rare earth resource deposits of more than three million tons. In 2009, JXTC booked revenue of RMB 8.94 billion and had net assets RMB 11.14 billion.

China supplies more than 95% of global rare earth oxide output and sits on half of the world’s reserves.

Inner Mongolia, Guangxi, Guangdong, Hunan, Fujian and Sichuan are the country’s other main producing regions.

The central government has indicated that it wants big companies to spearhead the consolidation of the nation's rare earth sector, which has been largely undervalued by over-exploitation and poor management.

Market watchers said the central government's plan to keep most of China’s rare earth mining under the control of state-owned enterprises is in line with Chinalco’s plan to diversify away from its core business.

In the first half of 2010, Chinalco’s Hong Kong listed arm, Aluminum Cop. Of China Ltd., (2600.HK 601600.SH) reported a net loss of RMB 96 million due to over-capacity and fluctuating aluminum prices.

In July, Chinalco received approval from the central government to move into mining resource exploration, non-ferrous metal processing and related trade and engineering technology services.

"Rare earth accounts for a small proportion of Chinalco's business. The move to gain rare earth mines is a strategic plan and in line with the government’s thinking," Huatai Securities analyst Liu Minda told the official China Daily in August.

Chinalco has also approached the State-owned Assets Supervision and Administration Commission of Guangxi province to discuss developing rare earth mines with local companies and participating in processing projects.

Toyota Motor's 2010 China Car Sales May Overtake Europe's for First Time

Source: Bloomberg By Makiko Kitamura

Toyota Motor Corp.’s sales in China may overtake those in Europe for the first time this year.

The world’s biggest carmaker expects sales in Europe to reach 800,000 units in 2010, down 10 percent from 886,000 vehicles last year, Didier Leroy, president of Toyota’s European unit said in Paris yesterday.

The forecast contrasts with the carmaker’s plan to boost deliveries in China 13 percent this year to more than 800,000 vehicles, outlined by Masahiro Kato, president of the company’s China business, on Aug. 24. In the past, Toyota’s sales in China have never exceeded deliveries in Europe, said Shiori Hashimoto, a spokeswoman in Tokyo.

“Toyota’s China share will remain about 5 percent, and as the market grows, sales will approach 1 million units” within a few years, said Mamoru Kato, a Nagoya, Japan-based auto analyst at Tokai Tokyo Research Center. “Meanwhile, the European market is not growing.”

The Japanese automaker and rivals including General Motors Co. and Nissan Motor Co. are expanding in China as economic growth boosts car buying in the world’s largest vehicle market. Passenger-car deliveries in China accelerated in August, the China Association of Automobile Manufacturers said Sept. 9, and sales in the nation are on course to outstrip the U.S. for a second year.

Toyota’s China sales still lag behind those in North America and Japan.

The automaker, based in Toyota City, Japan, slipped 2.5 percent to close at 2,998 yen in Tokyo.

To boost sales, Toyota plans to make its Verso and Wish compact minivans in China with local partners in 2011, and will also import the luxury Alphard, a larger minivan, Marvin Zhu, a senior analyst at J.D. Power & Associates, said in a report this month. The Verso will be produced with Guangzhou Automobile Group Co. in Guangdong province, while the Wish will be manufactured with China FAW Group Corp, Shanghai-based Zhu said.

Industry-wide vehicle sales in western Europe will dip 8.2 percent this year to 12.5 million units, the lowest figure since 1995, according to consulting company IHS Automotive. Sales will likely be little changed next year, according to Ian Fletcher, an IHS analyst in London.

The decline is largely due to the end of government incentives in countries including Germany, the U.K. and Italy, which prompted many consumers to push forward their car purchases, Fletcher said.

Toyota is introducing new hybrid models in Europe as new emissions regulations from 2014 may benefit hybrid and electric cars over diesel-powered vehicles. The carmaker started selling the U.K.-built Auris hybrid in Europe in July and will begin building a small hybrid model in France from 2012.

China raising a generation of left-behind children

Source: By Megan K. Stack, Los Angeles Times

The tradition of tightknit families is eroding as increasing numbers of villagers head to cities to look for work, leaving their children, estimated at 58 million nationwide, behind with grandparents.

Reporting from Lizhuang, China — This is a village of empty rooms, children left behind and frail grandparents who struggle to hold it all together. Most of the able-bodied adults have left the hamlet of rutted, muddy roads and drought-withered fields of corn.

House after house, the same family tale repeats itself: The parents migrated to the big cities for work; their young children stay with grandparents, great-grandparents or any other relatives who can shelter and feed them. At the age of 10 or so, when the youngsters are considered old enough, many move into packed boardinghouses attached to their public schools.

A generation of left-behind children is growing up in China. Researchers estimate that at least 58 million — nearly a quarter of the nation's children and almost a third of its rural children — are growing up without one or both of their parents, who have migrated in search of work. More than half of those were left by both parents.

The youngsters face stark psychological and emotional challenges; many struggle to keep up with their lessons and end up abandoning school in their teens to join their parents on the road, say researchers.

Migration rates exploded over the last two decades as residents left their fading villages in droves to seek jobs in the cities. The left-behind children are the fallout of a rapid dissolution of traditional Chinese values in the rush for economic opportunity and growth, and a vivid reminder of how routine migration is in the country's lifestyle.

"Their education is always lagging behind," said Nie Mao, author of "Hurt Village," a book on the fate of the separated children. "Their safety is always compromised because they are far from their parents. Their future is not clear.

"This is a social problem in China and, as a society, we have to find a solution," Nie said.

At 77, Cai Zhongying is matriarch of a nearly empty homestead. From a mud road where scraggy dogs roam, the cluster of family homes looks almost splendid — a string of buildings adorned with turquoise trim and statues of birds perched on curled rooftops, still being built piece by piece with wages from Cai's faraway children.

Inside, the rooms are mostly bare. Her children and the grandchildren who left have spent virtually every bit of their money — scraped together during shifts in far-flung urban factories — to build the rooms. The cash to furnish them will have to come later. They come home once a year, if they can earn the fare and get the time off.

It's the job of Cai, along with her 78-year-old husband, to keep an eye on the houses and raise the younger children until they too become teenagers old enough to work. The couple had six children, and hopes of being cared for in old age. Instead they are locked into perpetual parenthood, raising waves of grandchildren and great-grandchildren.

These days, they are tending to two youngsters, ages 4 and 6; fields of vegetables; and a pomegranate orchard in the mountains.

"My husband just cries sometimes because the little boy is always clinging to his neck and climbing all over him," Cai said. "And my husband is exhausted."

Still, caring for these two youngsters is an improvement from recent years, when the couple had as many as six small children under their roof. Back then, they struggled to find enough food for everyone. Bitter arguments would erupt at mealtimes.

"The whole scene was a mess," Cai said. "Some of them really needed to be taken away to be with their parents. Thinking about it now, I want to cry."

Once home and inspiration to Pearl S. Buck, Anhui province is one of China's poorest regions. For years, people here tried to stay ahead of hunger as subsistence farmers. There is a coal mine nearby, but only a few villagers have been lucky enough to land jobs there.

For the rest, there's the road. Villagers go south and east, to the massive coastal cities of skyscrapers and suburban factories, or to bigger coal mines in more prosperous towns. To Shanghai, Pinghu and Xuzhou.

Bringing their children along means paying city school costs, sheltering them despite their own dubious living arrangements, and keeping them supervised during long work shifts. Chinese children are entitled to nine years of free public education but must pay steep fines to enroll in schools outside the town or village where their residence is registered.

"People choose to be separate from their children because they don't have any other choice," said Shi Zhengxin, secretary general of the China Social Assistance Foundation.

Despite the hardships, Shi urges parents to try to keep their children with them. Most of them will eventually end up migrating anyway, he argues, so they might as well get used to urban life.

"If they get left behind, they grow up into the second generation of migrant workers," he said. "They'll still have to come to the city to work, and it will take them much longer to adjust and learn how to live here."

There is general unease, among government officials and the intelligentsia, about the plight of the left-behind children and the fraying of the Chinese family, which traditionally prized togethernesss and intensive parenting.

The government has created migrant schools, and this year launched a program that gave children the chance to travel to the city to spend summer holidays with their parents.

But the migrant schools are notoriously inferior to the mainstream public schools, and so far just one trainload of children has gone to Beijing for a reunion with their parents.

As noon rolled around, Cai's husband, Li Jiachen, arranged their 6-year-old great-granddaughter on the rear rack of his bicycle and pedaled her home from school for a lunch break. Li's is a farmer's face, weathered with deep ruts; his pants were smeared with mud. He sat, lighted a cigarette and began to cry as he described the choices his family has faced.

"When I was raising my grandchildren, I could only provide them with food, nothing more," he said sorrowfully. "And then when they were 15, they all left to go work."

At other moments, Li and Cai are more sanguine. The children have never known their parents well enough to miss them, they shrug. And anyway, there is nothing unusual in their circumstances. Most of their neighbors are also grandparents raising the younger generation.

The family has faced worse. Years past, when the harvest was particularly thin, Cai was reduced to begging in order to feed her children. That seems like a long time ago now.

And like the other villagers, the family regards the en masse exit from the village as a double-edged sword. For all the emotional turmoil of shattered families, there is a new gleam of prosperity on the landscape.

The dirt roads are littered with construction materials: bricks, roofing tile and cement. Old-style houses, built from rocks bound together with a paste made from ashes, are regarded as evidence that the household's migrants haven't done their part.

Inside their home, Cai's great-granddaughter hides from visitors in the double bed she shares with her great-grandparents. There is another bed nearby, the mattress still sheathed in plastic from the factory. On the label, a Western-looking woman reclines dreamily under a nonsensical English slogan: "Salubrious endless imagination you life."

Nobody sleeps there.

"It's my son's," explains Li. Then the family turns to examine in silence the newly bought bed.

Have You Heard...

• China Row Fuels Japan's Right
• China moving heaven and Earth to bring water to Beijing
• Chinese Government to Speed Up Property Tax Introduction to Cool Market
• Chinese Sports-Apparel Moves to Counter Nike, Adidas
• Buffett-Backed Dairy Queen Plans More Than 60% Increase in China Stores
• Toyota Forms Task Force on Rare Earth Metals Amid China Export Ban Report

China Row Fuels Japan's Right

Source: Wall Street Journal by Yuka Hayashi

TOKYO—A bitter confrontation with China following a ship collision in the East China Sea is fueling nationalism among Japan's conservative politicians and right-wing activists, energizing them in their attacks on Prime Minister Naoto Kan's center-left government.

As the dispute over the collision continues unabated, conservative lawmakers such as former Prime Minister Shinzo Abe and Tokyo Gov. Shintaro Ishihara have harshly criticized the government's decision to release the captain of the Chinese trawler that slammed into Japanese coast guard ships in disputed waters, saying Japan needs to stand firm to defend its territory.

While Japan's general public, increasingly acclimated to the idea of a rich and powerful China, has shown a muted response to the latest tension, right-wing groups are beginning to raise their voices, with one group preparing for a big anti-China rally in Tokyo on Oct. 2. "China made a foolish mistake in awakening Asia's sleeping tiger," wrote one Internet commenter. "Now every Japanese is tuned in on maritime disputes."

On Tuesday, a group of about 100 conservative politicians led by Mr. Abe held a meeting in parliament and adopted a harshly worded statement criticizing the release Friday of the captain of the Chinese trawler that slammed into Japanese coast guard ships in disputed waters.

"We are standing at a watershed where our ability to defend the Japanese people and this nation itself is tested," the group named Sosei Nihon, translated roughly as Creation Japan, said in its statement. "We hereby declare we will resolutely seek to overthrow the Kan administration which has damaged our nation's interest, trust and dignity."

Such criticism could add to the headache of Mr. Kan, who is already fighting an internal party fight and attacks from empowered opposition parties.

Government leaders tried to fend off the criticism. Foreign Minister Seiji Maehara said at a parliamentary committee meeting Tuesday that Japan wouldn't hesitate to take similar action again if a Chinese ship commits a violation in what it considers its territory. "The Senkaku islands are our unique territory. It's our natural right to defend their sovereignty," he said. To gain the international community's understanding for Japan's stance vis-à-vis China, Mr. Kan will attend an Asia-Europe meeting in Brussels next week, said the chief government spokesman, Yoshito Sengoku.

The U.S. has applauded the decision by Mr. Kan's government to release the captain, but has expressed concern that both China and Japan have continued heated rhetoric in the aftermath of the release.

The spat has prompted regionwide concern. Leaders of the Association of Southeast Asian Nations and President Barack Obama last week met in New York and sent a firm message about keeping the critical South China Sea stable and free of territorial disputes. Asked about it and about China's growing assertiveness in the South China Sea in an interview Tuesday with The Wall Street Journal, Thai Foreign Minister Kasit Piromiya said it is important for China to behave responsibly in the region. "The ability to give and to cooperate is the mark of a great power," he said. "If there were to be a perception [of aggression] there would be regional and global reaction. At the moment I don't think that's the case."

China continues to demand apology and compensation for the sea captain's detention. However, its Foreign Ministry on Tuesday sounded a somewhat less confrontational tone than in other recent comments. "China places importance on relations with Japan," Foreign Ministry spokeswoman Jiang Yu said at a routine briefing. "For China-Japan ties to maintain healthy, stable growth requires both sides to work together in a common direction, and requires Japan to take genuine, practical action."

Meanwhile, China kept up its pressure on Japanese businesses. Chinese customs agents maintained their heavy scrutiny of goods bound for or coming from Japan at Chinese ports Tuesday, shipping agents said. Japan's trade ministry said Tokyo is investigating how slowing imports from China are affecting Japanese companies and their overseas operations.

Amid the continued tension, some Japanese politicians are flashing nationalistic sentiment. Mr. Ishihara, a popular Tokyo governor known for his often-radical views, spent nearly all the 20 minutes of his weekly press conference on Friday pounding on China and the Kan government.

"What China is doing is very similar to what organized crime groups do to expand their turf," said Mr. Ishihara, who once helped raise money to build a lighthouse on the main island of the disputed Senkaku islands known in China as Diaoyu. He later helped have its successor lighthouse recorded on official navigation charts.

Asked if the rift may affect an agreement for Tokyo's Ueno Zoo to get two giant pandas on loan from China early next year, Mr. Ishihara said: "Are you asking if we will give up the Senkakus for pandas?" He added, "The answer is quite obvious, isn't it?"

Right-wing nationalism—usually directed at Japan's immediate neighbors rather than the U.S.—has been a relatively small force in a country that has played down such sentiments and played down nationalism since World War II. But conservative activists often emerge as noisy voices—sometimes literally, driving around urban streets in high-volume sound trucks—during contentious debates. They came out in force in recent months, for example, to oppose a now-stalled government proposal to give foreigners voting rights. The nationalism sometimes turns violent, such as the 1990 shooting that seriously injured the mayor of Nagasaki, who had questioned the role of Emperor Hirohito during the war. It has never been clear just how much power and influence right-wing nationalists really have, but incidents like the China tiff elevate their profile.

Despite the rising voices from conservative politicians like Mr. Ishihara, there have so far been only few reported incidents of right-wing activists taking to the streets. A 39-year-old man was arrested after hurling a flare at the Chinese Consulate General in Fukuoka Tuesday night, following a similar incident at the consulate in Nagasaki on Sunday, according to Kyodo News. No one was injured. One 32-year-old man was arrested with a cooking knife in his bag in front of the prime minister's residence in Tokyo on Saturday. The man said he was there to protest the release of the sea captain.

The biggest anti-China action will likely take place Saturday when an alliance of activist groups led by Toshio Tamogami, former chief of staff of Japan's Air Self Defense Force, is organizing a rally in central Tokyo. Mr. Tamogami has become an admired figure among Japan's right-wingers after a 2008 essay—in which he denied Japanese aggression in China during World War II—caused him to lose his job.

"China is clearly aiming to annex the Senkaku islands and annex Okinawa so we need to put a stop to it at the entrance door," Mr. Tamogami, who had reached the rank of general, said in a phone interview. "The government's action this time was totally wrong in that respect." He said the captain's release only emphasized the notion that Japan is a weak nation that caves under pressure.

Mr. Tamogami expects "thousands" of participants in Saturday's rally, planned in Tokyo's busy Shibuya shopping and entertainment district. In June, more than 1,000 conservative politicians, academics and pundits gathered at his group's conference. Attendants included Mr. Abe, the former prime minister, and Yuriko Koike, a former defense minister and top opposition lawmaker.

China moving heaven and Earth to bring water to Beijing

Source: By Barbara Demick, Los Angeles Times

The $62-billion South-North Water Diversion, which will bring water to the parched capital, is being compared to the Great Wall. But environmentalists are up in arms about the 'replumbing' of the nation's great rivers.

Reporting from Zhengzhou, China — It might be the most ambitious construction project in China since the Great Wall.

The Chinese government is planning to reroute the nation's water supply, bringing water from the flood plains of the south and the snowcapped mountains of the west to the parched capital of Beijing. First envisioned by Mao Tse-tung in the 1950s and now coming to fruition, the South-North Water Diversion — as it is inelegantly known in English — has a price tag of more than $62 billion, twice as expensive as the famous Three Gorges Dam. It is expected to take decades to complete.

This is on a par with the Great Wall, a project essential for the survival of China," said Wang Shushan, who heads the project in Henan province, where much of the construction is now taking place. "It is a must-do project. We can't afford to wait."

Even by the standards of a country where moving heaven and Earth is all in a day's work, it is a project of enormous hubris. In effect, the Chinese are "replumbing" the entire country, says Orville Schell, a China scholar and an environmentalist, something "no country has ever done successfully in the past."

China is plagued by extreme weather. Vast river deltas in the south are inundated each year by deadly flooding, while the steppes of the north are swept by sandstorms. To remedy this, the engineers are creating a vast, hydra-like network of canals, tunnels and aqueducts that will extend thousands of miles across the country.

In complexity, it is something of a Rube Goldberg machine. The middle route — there are three in all —would siphon water from a tributary of the Yangtze River 570 miles southwest of Beijing. The water is then funneled through a canal that transverses three provinces and passes underneath the Yellow River.

"It is a little like building the tunnel under the English Channel to connect France and England — except we're moving water, not vehicles," said Yang Sheya, 38, an engineering supervisor working on the underground aqueduct along the banks of the Yellow River, where it passes just north of Henan's provincial capital, Zhengzhou.

Here, the Chinese hydro-engineers have scooped out a 1,000-foot-wide canal from the dun-colored land. It plunges 180 feet underground to pass beneath the Yellow River. (The Yellow itself is too polluted to supply drinking water.)

From a footbridge at the spot where the canal begins its descent, there is a man-made abyss that looks like the Grand Canyon. Everything is massive, from the mountains of excavated dirt to the huge riverside drills that will be used to install underground pipes almost 25 feet in diameter.

The Chinese have studied water works from ancient China to Israel, updated with the latest technology, to design a system that uses no pumps, relying only on gravity to have the water run from the higher elevations of the south to Beijing. A spur will also feed the port city of Tianjin to the east.

The outsized scale of the project has left many Chinese activists sputtering with indignation.

They point out the affront to river ecosystems and fish and bird life, the damage to the archaeological sites in what is widely considered the cradle of Chinese civilization, and the forced relocation of hundreds of thousands of people. And, most of all, the underlying arrogance of an undertaking that in essence rearranges the nation's great rivers.

"They are robbing the water of the rest of China to supply Beijing — and it probably won't work anyway," said Dai Qing, a pro-democracy activist who was imprisoned during the run-up to the Tiananmen Square protests in 1989 and who now focuses on water issues.

Dai said there wasn't enough clean water in southern China to supply the north and that whatever water does reach Beijing might be too polluted to be usable. In fact, the Chinese government has acknowledged that the water from an eastern spur of the diversion project, which follows the route of the 1,400-year-old Grand Canal waterway, is so toxic that it is unclear whether it can be used even for agriculture.

Beijing, Dai said, should never have been developed as a major economic and industrial hub.

"We've been saying this for years: Beijing was just the political and cultural capital of China, and if the population were kept under 6 million, we wouldn't have this problem," she said. "But now there are too many vested political and real estate interests."

Yet with Beijing's population topping 17 million and projected to double in the next 40 years, there's no turning back.

Politically speaking, the project is sacrosanct, its genesis tied to an offhand remark Mao reportedly made in 1952: "There's a lot of water in the south, but not much in the north. If we could borrow some, then everything would be OK."

The Communist Party has staked enormous prestige on the success of the project, which is supposed be a showpiece for President Hu Jintao's theories of "scientific development." Hu is a hydraulic engineer by training who began his career at Sinohydro, the state-owned dam builder responsible for much of the construction.

"The ability to control water in China has always been seen as one of the benchmarks of a leader who is able to manage the country. It goes back to the idea that the emperor is the go-between to protect the people from the heavens," said Jonathan Watts, author of a new book, "When a Billion Chinese Jump," about China's environment. "The fact that they are still doing it shows their desperation."

There are three major components to the project: The 885-mile eastern line from Hangzhou to Beijing, which mostly follows the route of the Grand Canal and is hoped to be ready by 2013. The middle line, which is supposed to open in 2014, runs 766 miles, although it might be extended. The western section, which is still in the planning stages, would funnel water from the Tibetan plateau. But with serious cost overruns and delays on the eastern and middle routes, there are doubts about whether the third line will be built at all.

The mega-project has also been complicated by the massive relocations of populations that stand in the way of the water. "In the old days, people were willing to sacrifice their homes for Chairman Mao. But nowadays, their attitude is: 'If you don't give me money, I won't go,' " Dai said.

To get enough water, the engineers have raised the height of the Danjiangkou dam in Hubei province, where the middle line originates, forcing 330,000 people from their homes — the latest generation of people in China known as "dam refugees."

Hoping to avoid the type of public protests that dogged the Three Gorges project, Chinese authorities have raised compensation levels and built entire new villages, complete with schools, clinics, general stores and community centers.

One such model village, Guanggou (the name was transplanted from the original community 240 miles away) looks like a cross between a California housing development and a prison, with rows of two-story red-roofed townhouses painted pale yellow, all surrounded by a high iron fence.

The 1,600 people relocated in August are undergoing training to farm their new land, which is drier than their old fields, and are even being taught to change their diet from noodles to rice, which is more popular in this part of Henan province.

"We have given up everything for the greater good of the country, but the party has been good to us too," said Yao Ziliang, 74, sitting on the curb in front of the community center with many of the other old men. He said he was confident that the water diversion project would be a success.

"Of course it will bring water to Beijing," he said. "The party would not lie to us."

Chinese Government to Speed Up Property Tax Introduction to Cool Market

Source: Bloomberg

China will speed up the introduction of a trial property tax in some cities and then expand the levy to the whole country to curb rising real estate prices, the government said, without giving a timetable.

The state also asked commercial banks to stop offering loans to buyers of third homes and extended a 30 percent down payment requirement to all first-home buyers, according to a statement posted on the government website. The down payment level previously applied only to homes larger than 90 square meters (969 square feet).

Property prices in 70 major cities rose 9.3 percent in August from a year earlier, prompting the government to extend a crackdown on speculators and multiple home purchases. The state may implement the property tax soon in cities including Shanghai, Shenzhen and Chongqing, according to Credit Suisse Group AG.

“The new measures are not dramatic, but they convey a clear policy message: Beijing is serious about controlling the property prices,” Qu Hongbin, a Hong Kong-based economist with HSBC Holdings Plc, said in e-mailed comments today. “This should help damp the expectations” that housing prices will rise quickly, Qu said.

China will halve the transaction tax for buyers of non- luxury homes for use as sole residences starting Oct. 1, the Finance Ministry said in statement on its website today. The rate will be 1 percent for units of 90 square meters or smaller, it said.

Exemption Ends

The country will also end an income-tax exemption on profits from the sale of real estate reinvested within one year, the ministry said.

Banks will be ordered to stop lending to property developers that violate industry regulations, the government said earlier today.

Credit Suisse analysts led by Jinsong Du recommended “reducing exposure” to Chinese property stocks in the near term, saying a tax would hurt real-estate market sentiment, according to a note to clients dated yesterday.

China may announce property taxes as early as the October National Day holidays, China Business News reported Sept. 21, citing an unidentified person. The break runs Oct. 1 to Oct. 7.

The trial measure, which extends the existing commercial property tax to homes, is more likely to be implemented at the start of next year, the Chinese-language newspaper said.

China has since April raised the down payment and interest rates on second-home mortgages and restricted the number of new homes residents can buy in some cities.

Chinese Sports-Apparel Moves to Counter Nike, Adidas

Source: Wall Street Journal By Laurie Burkitt

BEIJING—Li Ning Co., one of China's leading sports-apparel makers is expanding in the country's biggest cities to win market share, as competitors are turning their focus to the country's less developed markets, Chief Executive Zhang Zhiyong said.

In an interview, Mr. Zhang also discussed Li Ning's nascent effort to compete on Nike Inc.'s home court in the U.S. The Chinese company, which opened a Portland, Ore., showroom in January of this year, struck retail deals in August with Champs Sports and Eastbay, divisions of Foot Locker Inc., to sell Li Ning shoes in the U.S.

On Tuesday, Li Ning reported weaker-than-expected orders for the first quarter of 2011. Orders for the period rose only 12%, compared to a 20% rise for the third and fourth quarters of this year. The news pushed down the price of Li Ning's Hong Kong-listed shares, which fell 8.3% to 23.15 Hong Kong dollars, or $2.98 each.

In June, Beijing-based Li Ning rolled out a new logo and global slogan, "Make the Change." It has since unveiled a fashion line, Urban Sports, and increased its presence in basketball, one of the most popular sports in China, by signing a multi-million dollar sponsorship deal with Evan Turner, the college basketball player recently taken as the No. 2 pick in the National Basketball Association draft by the Philadelphia 76ers. Li Ning already has endorsement deals with Shaquille O'Neal of the Boston Celtics and a few other less well-known players.

"Everything we're doing...signals that we are ever-more global," Mr. Zhang said.

For now, Li Ning remains overwhelmingly China-focused. The company, named after a former Olympic gymnast who founded it 20 years ago, reported revenue of 4.5 billion yuan, or $672 million, in the first half of this year, up 11% from the same period in 2009—making it far smaller than Nike or Adidas, which dominate China's sportswear market. Sales outside China accounted for only about 1% of Li Ning's revenue.

Mr. Zhang said Li Ning, which runs 7,478 stores in China selling footwear and sports apparel, plans to open 400 new outlets by the end of this year. A fourth of them will be in just a handful of the biggest cities, including Shanghai, Beijing, and Guangzhou. Li Ning is also increasing its marketing budget to 16% of its annual revenue from 13%, Mr. Zhang said.

Li Ning faces stiff competition in China from Nike and Adidas AG, which dominate the market. Deutsche Bank analysts noted in a recent report that the company may have to use lower prices to distinguish its brand in China, which has put pressure on profits.

In the interview on Sunday, Mr. Zhang said urbanization is the key driver of growth in China's sportswear market, which is less than a fifth of the size of the U.S. market by revenue. Mr. Zhang said gaining brand awareness is increasingly important as Chinese consumers continue to move into larger cities, develop urban lifestyles, and trade up old products for new ones.

"Consumers who are just starting to shop are buying Nike and Adidas because those were the names they know," said Mr. Zhang. "We want them to know Li Ning and what distinguishes this brand."

Li Ning's continued emphasis on top-tier cities comes as many international companies shift focus to China's less developed regions, where salaries are steadily rising and consumers have yet to establish shopping preferences and brand loyalties. Nike, the global leader in sportswear, plans to extend distribution of its lower-priced products from licensed brand Converse, in addition to its premium Nike products, said a company spokesperson.

Giving its brand a unique identity remains Li Ning's biggest challenge. Ad agency Leo Burnett in Shanghai has been working with Li Ning, developing a youthful look that also appeals to older audiences.

"American brands try to be rebellious," said Mr. Zhang. "We want people to look out our brand and feel proud that they are part of something—proud of China's growth."

Li Ning is also improving the efficiency of its supply chain, designing this year a new logistical hub that will sit near two supplier factories in the central province of Hubei.

Last year, Li Ning launched an online sales site, adding to its existing Internet shopping through China's biggest e-commerce site Taobao. Revenue from the Internet is growing, but Mr. Zhang said he is cautious about pursuing larger growth in the channel, as China's shoppers expect to get only discounted products online.

Buffett-Backed Dairy Queen Plans More Than 60% Increase in China Stores

Source: Bloomberg

International Dairy Queen Inc., the U.S. fast-food and ice-cream chain owned by Warren Buffett’s Berkshire Hathaway Inc., plans to increase its outlets in China by more than 60 percent by the end of next year.

The company aims to have more than 500 stores in the world’s most populous nation by December 2011 from more than 300 now, Jean Champagne, chief operating officer of Dairy Queen’s international groups division, said today in Shanghai.

Dairy Queen, Nestle SA’s Haagen-Dazs and Allied Domecq Plc’s Baskin-Robbins are setting up more stores in the world’s fastest-growing major economy as consumers in their home countries curtail spending in the wake of a global recession. China is Dairy Queen’s fastest-growing and second-largest market globally, trailing only the U.S., Champagne said at a briefing.

“As the country continues to develop, there will be a whole new customer base that will continue to know about DQ,” Chief Executive Officer John Gainor said at the same press conference. “We’re very excited about our growth in China.”

The Edina, Minnesota-based chain plans to introduce 15 new flavors in China next year to cater for local customers, Champagne said. The new flavors will include goji berry, which will be exclusive to China, he said.

Dairy Queen targets 130 to 135 new outlets this year and more than 145 in 2011 in China, Champagne said.

Smaller Cities

While the company will continue to grow in Beijing and Shanghai, it also plans to expand in smaller cities, Gainor said.

“As China’s disposable income increases, it allows us to penetrate into second and third-tier cities,” he said. “In the next 10-15 years, China will be a very significant part of our portfolio.”

China’s retail sales climbed 18.4 percent in August, according to the National Bureau of Statistics.

Dairy Queen has about 6,000 stores worldwide, Gainor said. More than 700 of these restaurants are in 17 countries outside the U.S. and Canada, according to a company statement.

The fast-food and ice-cream chain is a unit of Omaha, Nebraska-based Berkshire Hathaway Inc., the holding company Buffett built through acquisitions and stock picks.

Toyota Forms Task Force on Rare Earth Metals Amid China Export Ban Report

Source: Bloomberg By Makiko Kitamura and Jason Scott

Toyota Motor Corp. has set up a task force on rare earth minerals used in hybrid cars amid reports of China’s ban on exports of the materials to Japan.

The carmaker, the world’s largest producer of gasoline- electric vehicles, said it formed the committee, confirming a report in the Nikkan Kogyo newspaper today. Japanese companies are looking to diversify supply with Lynas Corp., a Sydney-based miner of rare earth metals, saying it had signed a contract with an unnamed Japanese customer.

Rare earth minerals such as neodymium and dysprosium are used in electric-motor magnets in hybrid cars, including Toyota’s Prius and Honda Motor Co.’s Insight, and in mobile phones and rechargeable batteries. China, which controls more than 90 percent of the global market for the metals, imposed a “de facto” ban last week on exports to Japan of the materials, a group of 17 metals used in weapons, hybrid vehicles and laptop computers, Japanese Economy Minister Banri Kaieda said yesterday.

“The Chinese won’t hesitate to change the rules to improve their situation,” Peter Strachan, a Perth-based analyst for independent advisory firm StockAnalysis, said in a phone interview today. “China has restricted rare earths sales to everyone, not just Japan.”

Chen Rongkai, a spokesman for China’s Ministry of Commerce, reiterated yesterday that the nation hasn’t imposed an export ban.

Export Restrictions

Toyota rose 0.5 percent in Tokyo to 3,090 yen as of the 11 a.m. trading break, while the benchmark Nikkei 225 Stock Average gained 0.6 percent.

Japan’s Ministry of Economy, Trade and Industry said it will investigate China’s export policy on rare earth metals. The government will check with about 30 domestic companies including manufacturers and trading houses to confirm whether China has banned the shipments, Tsutomu Murasaki, director of the ministry’s non-ferrous metals division, told reporters at a briefing in Tokyo on Sept. 28.

Restrictions disproportionately affect Japan because it accounts for 65 percent of Chinese rare earth metal exports, according to a Sept. 24 report by Macquarie Group Ltd.

Prices for rare earth metals have risen this year with surging demand and cuts to China’s export quotas, affecting automakers such as Toyota, Honda and Nissan Motor Co., which require the elements for vehicle development, Macquarie said.

Toyota spokesman Paul Nolasco confirmed the company has set up such a task force. 31.

Alternative Sources

The automaker began exploring alternative sources before the recent reports on export restrictions, Nolasco said.

Toyota Tsusho Corp., a trading company affiliated with the carmaker, has formed a joint venture with Sojitz Corp. and a Vietnamese state-run mining company to export rare earth metals to Japan from 2012, spokesman Katsutoshi Yokoi said. The company acquired Tokyo-based rare earth metal importer Wako Bussan Co. in December 2008, which will import materials from India from next year, Yokoi said.

Lynas., building a A$550 million ($532 million) rare earth minerals project in Australia, said today it had agreed to supply a Japanese customer and that it is also in talks with potential customers in Europe, Japan and the U.S.

“Lynas is extremely pleased to sign this contract with one of the leading companies in their specific market,” Executive Chairman Nicholas Curtis said, without naming the buyer. The rare earth materials will be supplied from the company’s Mt. Weld project and produced at its plant in Kuantan, Malaysia, when it starts up next year.

Shiori Hashimoto, a Tokyo-based spokeswoman for Toyota, declined to say whether Toyota is the customer, adding that the carmaker indirectly procures rare metals through parts suppliers.

The automaker has said it plans to sell 1 million hybrid cars a year during the early part of this decade and offer hybrid versions of all of its models by 2020.

Have You Heard...

• China, Japan Take New Jabs at Each Other
• China tells Japan not to interfere in disputed isles
• Analysis: Regional disputes testing China's regional ambitions
• Factbox: Sino-U.S. trade disputes pile up
• China-Russia energy deals mark 'new era'

China, Japan Take New Jabs at Each Other

Source: Wall Street Journal By James T. Areddy, Yoshio Takahashi and Christopher Rhoads

Beijing Slows Customs Inspections; U.S. Expresses Concern as Neither Side Lets Captain's Release Be Last Word in Rift

SHANGHAI—A rift between China and Japan showed no signs of easing, as Chinese customs appeared to be targeting some goods bound for Japan with meticulous inspections and as Tokyo also kept up the heat on Beijing.

Rancor has continued between the two Asian powers even though Japanese prosecutors on Friday decided to release the captain of a fishing vessel, whose detention after a collision with Japanese coast guard boats three weeks ago enraged the Chinese government.

As the captain, Zhan Qixiong, received a celebratory welcome in southern China over the weekend, Japanese Prime Minister Naoto Kan rejected Beijing's request to apologize for his detention. On Monday, Tokyo said it would ask Beijing to pay an unspecified sum in restitution for alleged damage to its patrol boats that it says were rammed by Mr. Zhan. "The ball is in China's court," said Yoshito Sengoku, Japan's chief government spokesman, told a news conference.

Later, Japanese officials said China's envoy to Tokyo was summoned by the Foreign Ministry to discuss other wrinkles in the relationship. Adding to tensions were reports of fresh movements by Chinese vessels in the disputed waters.

Referring to the reports that China had slowed exports to Japan, Kurt M. Campbell, the U.S. assistant secretary of state for East Asian and Pacific affairs, said, "I don't think such actions lead to an increase in confidence." He added, "Quite the contrary, they are worrisome."

Speaking in a briefing Monday afternoon following United Nations meetings in New York, Mr. Campbell said the U.S., Japan, and China are "deeply engaged in the global economy," so each has a stake in making sure such matters are resolved quickly and peacefully.

Mr. Campbell, in referring to the area of the East China Sea where the trawler dispute occurred, near islands both China and Japan claim, said the U.S. stands strongly behind its treaty obligations to Japan as they relate to territory, but "we don't take a position on territorial issues with regard to the [islands]. , and this is a long-standing U.S. position."

Shippers in several Chinese cities said customs officers have stepped up spot inspections of goods being loaded onto ships bound for Japan and being imported from the country. Traders said officers in some cases weretaking the highly unusual step of looking at every item in a container instead of following normal practice of examining a small sample.

The heavy searches, which can add costly delays to shipments, appeared to represent the latest sign of Beijing's anger about the Sept. 7 detention of the captain. China and Japan both celebrated holidays over the past week, but import-export agents said this alone couldn't fully explain the trade disruption.

The broad processing slowdown by Chinese customs could be why executives in the rare-earth minerals industry last week reported signs that shipments to Japan from China had stopped. Both Tokyo and Beijing have denied there was any rare-earth embargo, and the cause of the reported shipping problems has remained unclear. Added customs inspections don't appear to target rare earth materials, though such shipments may have been caught up in the wider slowdown.

In the past, China has sometimes appeared to use foot-dragging at ports to make a point with a trading partner. Traders said that for now the added inspections were slowing, rather than halting, trade. China Customs declined to comment.

China is expected to overtake Japan as the world's second-largest economy this year. China and Japan are major trading partners, with trade between them valued at around $138 billion in the year's first half, according to Japanese data.

"Some private-sector companies notified us of the tightened inspections," an official at Japan's Foreign Ministry said Monday, adding that the ministry is looking into the situation.

In Japan, a spokesman for shipper Nippon Express Co. said it has seen inspection rates on goods being exported to Japan in Shanghai, Beijing and other cities rise to 30%-40% in recent days, from 10% or 20% normally.

Shenzhen Tenglong Logistics Co. said nearly all Japan-bound goods that it handled were being inspected. At Blue Express (Shanghai) International Trade Inc., a manager said some 50% of goods for Japan were being inspected, up from 10% or 20% normally.

The Chinese action didn't affect all goods. Several Chinese sellers of Japan-bound perishable fruits and vegetables said they faced no delays. Gao Dazhao, chief executive officer of a Jiangsu province exporter of broccoli and onions, Xuzhou Runjia Food Co., said he is used to dealing with occasional customs clearance delays but he added that currently "we do not have any problem at customs."

Shanghai, which is positioning itself as a global logistics center, has restructured customs procedures with a grading system for trading companies. Companies with higher grades appeared to be having fewer difficulties with Japan-related trade.

Kevin Huang, business manager of Pan-Pacific Logistics & Trade Co., for instance, said his company has a grade-A rating and while it hasn't seen a higher percentage of goods being examined, inspections took place on more days than usual in the past week. "So it's fair to say the checks have been tightened to some extent," he said.

It remains unclear how long the procedures might remain in place. "We received September delivery, [but] we're very worried about October delivery," said an official with Japan Coal Development Co., a coal-trading joint venture owned by 10 Japanese utilities.

The difficulties reported by rare-earth executives Sept. 21, on the eve of China's national holiday, prompted media reports that China had embargoed shipments of the minerals in retaliation for Japan's detention of the Chinese fishing-boat captain. Those reports, in turn, prompted international concern because China has a near-monopoly on rare earths, which are essential for producing electric-car batteries and other high-tech and defense products.

While Mr. Zhan, the captain, received a public welcome upon his return to his home province of Fujian, Chinese authorities appeared to otherwise keep him largely out of the limelight.

Mr. Campbell, the U.S. State Department official, on Monday praised Japan's release of the captain, adding the Japanese prime minister has handled the difficult issue "in a very statesman-like fashion, which shows that it showed "vision and appreciation for how important it is for a peaceful, diplomatic process in an issue like this."

Jerome Cohen, an adjunct senior fellow for Asia studies at the Council on Foreign Relations, said the tensions underline the need to establish better communication channels to ensure that a small incident does not "provoke a much bigger incident."

China tells Japan not to interfere in disputed isles

Source: Reuters By Chris Buckley and Yoko Nishikawa

(Reuters) - China told Japan on Tuesday to stop interfering with Chinese fishery protection vessels operating in seas claimed by both countries that are at the center of a deepening diplomatic row between the two.

Japan's Foreign Ministry has repeatedly complained to China about the presence of two Chinese fishery patrol boats which it says have been in the area near the disputed islands in the East China Seas since Friday.

Chinese Foreign Ministry spokeswoman Jiang Yu said the seas there were traditional fishing grounds.

"China sending fisheries ships to enforce the law is based on the relevant laws and regulations, and they carry out fishery administration activities to protect the fisheries' ecology and protect the safety of Chinese fishermen's lives and property," she told a news briefing.

"We hope that Japan will halt interfering with Chinese fisheries law enforcement vessels."

Japan's detention of a Chinese trawler captain, whose fishing boat collided with two Japanese coastguard ships, has sparked renewed tensions between Beijing and Tokyo, highlighting the fragility of relations between Asia's biggest economies.

Tokyo has struggled to repair worsening ties with Beijing.

Chief Cabinet Secretary Yoshito Sengoku said Japanese diplomats might try to arrange a meeting between Prime Minister Naoto Kan and Chinese Premier Wen Jiabao, who will both attend the October 4-5 Asia-Europe summit in Brussels, if the environment was right.

But he added: "The ball is in China's court."

Japanese ruling party officials had earlier said Kan would skip the meeting due to a parliament session beginning on Friday.

"There's no question that (this dispute) is not desirable for economic growth and peaceful security conditions in Asia," Sengoku, the top government spokesman, told a news conference.

"We need to discuss with ASEAN (Association of Southeast Asian Nations) and European leaders what kind of a relationship Japan and China will nurture within Asia, how we can enrich our strategically, mutually beneficial ties," Sengoku added.

Jiang had no comment on whether Wen and Kan would meet in Europe, saying only: "We hope that Japan will take practical steps to repair Sino-Japanese relations."

A verbal tug of war has continued even after the Chinese trawler captain was released and returned home on the weekend. The collision took place in waters near disputed islands -- called the Diaoyu in China and Senkaku in Japan -- that both sides claim.

The spat has raised concerns about damage to Sino-Japanese trade ties at a time when Japan is becoming increasingly reliant on China's dynamism for growth.

China became Japan's biggest trading partner last year.

Concerns have grown that Beijing is holding back shipments of rare earth minerals vital for electronics and auto parts, although China's Commerce Ministry has denied an export ban.

"China's de facto ban on rare earth exports to Japan could have substantial impact on the Japanese economy, so we need to restore economic ties between Japan and China as soon as possible," Economics Minister Banri Kaieda told a separate news conference.

Japan has urged calm, but the government is under fire from domestic media, opposition lawmakers and some in the ruling party for "caving in" to Chinese pressure by releasing the captain after China detained four Japanese citizens on suspicion of violating a law protecting military facilities.

Japan has denied a link between the two matters.

Experts have said the sudden bitter feud between Tokyo and Beijing will likely push Japan to mend ties with close ally Washington and reach out to other countries in the region that are also wary of an increasingly aggressive Beijing.

Sino-Japanese ties have long been plagued by mistrust born of China's bitter memories of Japan's past military aggression.

But Tokyo is hardly alone in worrying about China's growing assertiveness. China claims swathes of the South China Sea, where Taiwan and several of the 10-member Association of Southeast Asian Nations also assert sovereignty.