Have You Heard...

• Analysis: Taiwan's Central American allies expand China ties
• Skype Says China Services Working Amid Crackdown
• China Expands Program for Exporters' Earnings

Analysis: Taiwan's Central American allies expand China ties

Source: Reuters By Mica Rosenberg and Alex Leff

(Reuters) - Friendlier ties between Taiwan and China are allowing Central American nations to deepen economic links with the communist giant, increasing Chinese influence in a region dominated by the United States.

Central American businesses say the isthmus has been held back by its long support of Taiwan, a self-ruled island claimed by Beijing as part of China, denying the banana and textile exporting countries free access to the world's No. 2 economy.

The region has been torn between Taiwan's generous aid and the promise of doing business with Beijing, enviously looking on while bigger economies like Brazil, Chile and Peru steadily increase their shipments of raw materials to China.

Costa Rica made the surprise move of breaking off its decades-long relationship with Taiwan in 2007, now only recognized by a handful of small countries.

El Salvador, Honduras, Nicaragua, Panama and Guatemala say they have no immediate plans to abandon Taiwan, but are worried they will be left behind after Costa Rica agreed to a free trade deal with China in April that lawmakers aim to ratify in 2011.

China has traditionally shunned business with Taiwan's allies, but in August this year the island and the mainland passed a landmark trade deal, binding their economies together and opening the door for similar pacts with other countries.

"It is not in Beijing's interest anymore to close off completely Taiwan's diplomatic ties ... it is willing to allow the government of Taipei to maintain some dignity," by holding onto recognition from countries in Central America, said Eugenio Anguiano, a China expert at Mexican think tank CIDE.

Central America, a generally poor region regularly hit by hurricanes and floods, is taking advantage of the thawing tensions by expanding commerce with China where it can.

Honduran President Porfirio Lobo signed a $1.2 million contract in September with Chinese firm Sinohydro Corporation to help build three hydroelectric dams in western Honduras to generate 524 megawatts of power. "We have an excellent relationship with Taiwan ... But we cannot close our eyes to reality," said the head of Honduras' industrial association, Adolfo Facusse. "The world has changed and it's in our interest to have more direct relations with China," he added.

El Salvador and Nicaragua hosted trade fairs this year promoting Chinese-made food, cars, machinery, high-technology and medical equipment as cheaper imports from China can cut costs for companies. Nicaragua imported $260 million of Chinese goods last year, mostly shuttled through intermediary countries like Mexico and the United States.

To sugarcoat China's new alliance with Costa Rica, Beijing bought $300 million of Costa Rican government bonds and is building a gleaming new 35,000-seat stadium in San Jose.

U.S. CONCERN?

China is already the second-biggest user of the Panama Canal, with around 20 percent of its exports passing through the waterway connecting the Atlantic and Pacific oceans.

The United States is carefully watching China's so-called soft power in the developing world in the form of foreign aid and investment. Central America is by no means a top priority for Washington, but the United States fought proxy wars in the 1980s to prevent the spread of communism. More recently, a Central America-U.S. trade deal has been designed to consolidate the region into a lucrative single market.

China's trade with Latin America grew ten-fold between 2000 and 2007, reaching $142 billion in 2008, still smaller than the United States but growing at a faster rate, according to the U.S. Congressional Research Service.

China's growing prowess prompted El Salvador's president, Mauricio Funes, to say last month that he would consider ditching Taiwan in the future.

Panamanian President Ricardo Martinelli talked about allying with China during his election campaign. "We have chosen to have diplomatic relations with Taiwan but commercial relations with both," Martinelli said in a recently published interview.

Skype Says China Services Working Amid Crackdown

Source: Bloomberg

Skype Technologies SA, the world’s largest carrier of international phone calls, said its services in China remain operational after the country said it’s cracking down on “illegal” Internet phone companies.

“Skype is not banned,” Jennifer Caukin, a Palo Alto, California-based spokeswoman for the service provider, said in an e-mail. “Our users in China currently can access Skype via Tom Online, our majority joint venture partner.”

China is working to fight “illegal Internet phone services,” the Ministry of Industry and Information Technology said in a Dec. 10 posting on its website. The notice, which didn’t define “illegal” services or name any companies, was primarily to announce a consumer hotline for reporting any unauthorized services.

Wang Lijian, a spokesman for the ministry, said today he couldn’t immediately offer any further details on the statement. There was no answer today at the hotline number provided in the ministry circular, 8610-6820-6134.

“Currently, our ministry is working with relevant departments to focus on the crackdown on illegal voice over internet protocol calls and we are now appealing to the public for clues for illegal VoIP cases,” the ministry said in its Dec. 10 circular. It supplied no information on what action would be taken against “illegal” services.

Smaller Companies

The Chinese government may be targeting smaller domestic companies offering the service, rather than a large international company like Skype, said Mark Natkin, managing director of Marbridge Consulting Ltd., a Beijing-based market research firm.

“A major purpose may be to clear out small, low-visibility companies that are difficult to regulate,” said Natkin. “It’s much easier to have 10 large companies with a lot on the line, and a lot to lose, because they are likely to be more cooperative.”

The South China Morning Post yesterday reported an unnamed official at the ministry as saying only the nation’s three state-owned telecommunications companies - China Mobile Ltd., China Telecom Corp., and China Unicom Hong Kong) Ltd. -- have the right to offer Internet phone services for calls that link telephones and computers.

Eunice Lim, a Singapore-based spokeswoman for Skype, said she couldn’t comment on Chinese regulations, or supply details of how the company’s services are licensed in China.

“Tom Online, like every other communications service provider in China, has an obligation to be compliant with local laws and regulations,” Lim said.

Skype may not be put out of business in China at this point, Natkin at Marbridge said.

“It’s not like they are operating out of some basement secretly,” he said. “If the authorities thought there was a real issue, they would have shut them down.”

China Expands Program for Exporters' Earnings

Source: Wall Street Journal By Aaron Back and Shen Hong

SHANGHAI—China said Friday it will allow the country's exporters to park their revenue overseas, expanding a trial program that marks a significant loosening of Beijing's currency controls and could reduce pressure on the yuan to appreciate.

Under the new rules, which will take effect Saturday, qualified Chinese exporters will be free to decide on the length of time they want to keep their income offshore and when to repatriate the funds to China, the State Administration of Foreign Exchange, said in a statement.

Previously, Chinese exporters were required to repatriate their foreign currency earnings and exchange them for yuan under the so-called surrender requirement. But the influx of foreign exchange caused problems for monetary authorities, contributing to inflation pressures and putting pressure on the currency to appreciate.

"The direction is clear. The authorities want less foreign exchange to come in, so they are giving exporters the right to keep it abroad," said UBS economist Wang Tao.

The move, which is modeled on a small pilot project that started Oct. 1, will also help Chinese companies conduct cross-border financing and support their overseas expansion, the foreign-exchange regulator said.

Relaxing the surrender requirement could help resolve several problems for Beijing. If firms aren't forced to repatriate their foreign earnings, it could reduce demand for the local currency, thus reducing pressure on the yuan to appreciate.

The change could also reduce inflation pressures, and slow the buildup of foreign-exchange reserves. China's central bank, the People's Bank of China, bought up the foreign exchange under the surrender requirement, which left it with an ever-growing stash of foreign currency that it recycled into foreign government bonds and other investments.

By buying up the foreign currency with newly issued yuan, the PBOC added to the domestic money supply and contributed to inflationary pressures. In a recent statement, PBOC Vice Gov. Hu Xiaolian referred to this process as "passive money issuance."

However, economists say many exporters will still prefer to exchange their foreign currency for yuan, given the yuan is still expected to appreciate in the coming months and years.

"The question is if exporters will want to keep money abroad," said Ms. Wang, noting the cost base for a lot of exporters is domestic, so they have a reason to repatriate foreign revenue.

Political factors and economic fundamentals still argue for yuan appreciation, she added. "At the end of the day, China still has a large and persistent trade surplus."

To qualify for the program, exporters will have to demonstrate that they have legitimate foreign income, and must have been in compliance with foreign-exchange regulations for the past two years, SAFE said.

Have You Heard...

• India Digs In Its Heels as China Flexes Its Muscles
• Swellfun to Sell 40% Stake in Liquor Maker for $7 Million to Bright Food
• Carlyle sells $860 million stake in China Pacific
• Fosun and Chindex form joint venture
• China orders state firms to pay higher dividends

India Digs In Its Heels as China Flexes Its Muscles

Source: New York Times By Jim Yardley

NEW DELHI — It has been the season of geopolitical hugs in India — with one noticeable exception. One after the other, the leaders of the five permanent members of the United Nations Security Council have descended on India, accompanied by delegations of business leaders, seeking closer ties with this rising South Asian giant. The Indian media, basking in the high-level attention, have nicknamed them the “P-5.”

Prime Minister David Cameron of Britain got a warm reception last summer. Then President Obama wowed a skeptical Indian establishment during his November visit. President Nicolas Sarkozy of France signed nuclear deals in early December, while President Dmitri A. Medvedev of Russia departed last week with a fistful of defense contracts after winning praise for Moscow as a “special partner.”

The exception to the cheery mood was the mid-December visit of Prime Minister Wen Jiabao of China. Mr. Wen did secure business deals, announce new trade goals and offer reassurances of friendly Chinese intentions. But the trip also underscored that many points of tension between the Asian giants — trade imbalances, their disputed border and the status of Kashmir — are growing worse. And the Indian foreign policy establishment, once reluctant to challenge China, is taking a harder line.

“The Wen visit has widened the gap publicly between India and China,” said Ranjit Gupta, a retired Indian diplomat and one of many vocal analysts pushing a more hawkish line toward China. “And it represents for the first time a greater realism in the Indian establishment’s approach to China.”

India aspires to membership on the United Nations Security Council, and China is now the only permanent member nation that has not explicitly endorsed such a move. But what has rattled Indian leaders even more is their contention that China is being deliberately provocative in Kashmir as it grows closer to Pakistan, China’s longtime ally and India’s nemesis. China has also been expanding its diplomatic and economic influence around South Asia, stepping up its involvement in the affairs of Sri Lanka, Nepal and the Maldives.

Mr. Wen’s visit was supposed to help address those tensions at a time when India is starting to draw closer to the United States. Among Chinese leaders, Mr. Wen is perceived as a friend of India, and his 2005 visit was regarded as a breakthrough after he and Prime Minister Manmohan Singh agreed on a broad framework to address the border dispute.

For decades since fighting a brief border war, the two countries had argued over the boundary lines, with China making claims to Arunachal Pradesh, an eastern Indian state, and India claiming portions of Tibet that abut Indian-controlled Kashmir. The 2005 deal fostered optimism that some sort of quid pro quo compromise could be reached, enabling the two countries to concentrate on trade. And trade took off: it has risen tenfold to almost $60 billion, with Mr. Wen setting a new goal of $100 billion.

But Indian leaders now complain that trade is far too lopsided in China’s favor and say that Indian corporations face too many obstacles in entering the Chinese market. Mr. Wen promised to help Indian corporations sell their products in China, but Indian officials are skeptical.

Meanwhile, China infuriated India by starting to issue special stapled paper visas — rather than the standard visa — for anyone in Indian-controlled Kashmir traveling to China on the grounds that Kashmir is a disputed territory. China later objected to including a top Indian general responsible for Kashmir in a military exchange in China. In response, Indian officials angrily suspended all military exchanges between the countries. Indian officials had thought Mr. Wen might reverse the stapled visas policy on his trip, but he instead only called for more diplomatic consultations.

Indian commentators have noticed that articles in the Chinese state-run media have renewed Chinese claims that the disputed border between the nations is roughly 1,240 miles in length — even as India puts the length at about 2,175 miles. The difference roughly represents the border between Indian-controlled Kashmir and Tibetan China. By omitting this section, the Chinese are questioning the status of Indian-controlled Kashmir, a position that buttresses Pakistan’s own claims, several Indian analysts have argued.

The most visible evidence that these problems were deepening came in the joint communiqué issued by the two nations at the end of Mr. Wen’s visit. China typically demands that nations voice support for the one-China policy, which holds that Taiwan is an inalienable part of China. In past communiqués, India has agreed to such language, but this time it was omitted, a clear sign of Indian irritation.

It has been in every communiqué, but the Chinese didn’t even bring it up,” said a senior Indian official, speaking on the condition of anonymity. “I think they knew if they had brought it up, they knew we would have demanded some movement on the stapled visa issue and the Kashmir issue.”

The senior official added: “They must understand that there is a prospect of the relationship really going south. They will have to somehow moderate their stand on Kashmir. And they will have to take concrete steps to address the trade imbalance.”

India and China still cooperate on climate change and international trade policy, and some Indian diplomats grumble that the positive aspects of the relationship are too often overlooked by aggressive media organizations and an emboldened group of strategic analysts pushing for a harder line. China’s state-run media outlets recently broadcast images of a new tunnel being completed through the Himalayas near the Indian border. These reports looked to some like boasting about the country’s engineering prowess. In India, they were presented as a warning that China was building its infrastructure ever closer to India.

At the same time, India is watching warily as China pursues hydro projects that could affect the downstream flow of the Brahmaputra River in India.

Some Indian analysts note that tensions with China have increased in lockstep with the warming trend between India and the United States. During his visit, Mr. Obama spoke of a “defining partnership” between India and the United States and encouraged India to play a bigger role not only in South Asia but also in East Asia, China’s backyard. Mr. Singh, in fact, had just finished a trip to Japan, Malaysia and Vietnam as part of India’s “Look East” policy to build trade and diplomatic ties in the region.

“Our challenge will be to build our own leverage,” the senior Indian official said.

“That is why the relationships with the United States, with Japan, with other Southeast Asian parties, all that will become even more important.”

Swellfun to Sell 40% Stake in Liquor Maker for $7 Million to Bright Food

Source: Bloomberg

Sichuan Swellfun Co. said it has agreed to sell a 40 percent stake in the company that produces Quanxing Daqu liquor to Bright Food Group Co. for 47.15 million yuan ($7 million) , according to a statement to Shanghai’s stock exchange.

Carlyle sells $860 million stake in China Pacific

Source: Reuters By Vikram Subhedar and Denny Thomas

(Reuters) - Carlyle Group CYL.UL has sold a 2.5 percent stake worth around $860 million in China Pacific Insurance (Group) Co Ltd, sources said, helping the buyout fund recoup its investment in what could be one of its best Asian deals to date.

That would mean that Carlyle, which paid just over $800 million in a series of investments between 2005 and 2007 for a 15.4 percent stake in the Chinese insurer, is still sitting on an unrealized profit of about $4 billion, based on Thursday's closing prices, as per Reuters' calculations.

Carlyle's stake in China Pacific will drop to about 12.9 percent after the sale and the private equity fund is poised to make nearly six times return on its initial investment.

Leveraged buyout deals, which dropped dramatically after the credit crisis, have started to rebound. A total of $211 billion of buyside private equity deals were struck globally this year, up from $121 billion in 2009, and the fourth quarter of this year is the busiest fourth quarter since 2007, Thomson Reuters data shows.

Asia has seen a flurry of private equity exits this year. Prominent among those include Lone Star's LS.UL $4.1 billion sale of a controlling stake in Korea Exchange Bank and MBK Partners's $2 billion sale of China Network Systems.

STOCK OVERHANG

Carlyle sold 215 million shares in China Pacific at HK$31.15 each, a source who had direct knowledge of the matter told Reuters.

"You never know the reason why the seller wants to sell but at least it made a profit from the deal," said Alex Wong, a director at Ample Finance Group.

Some traders were expecting Carlyle to offload part of its stake in China Pacific after the lock-up period for its investment expired last week. As a result, China Pacific's Hong Kong-listed shares rose 2.4 percent to HK$32.00 on Thursday, outpacing the Hang Seng Index.

The fact that the market absorbed such a big deal is a vote of confidence on China Pacific's prospects, Wong added. "It has also removed one of the overhangs on the stock."

Carlyle declined comment, while China Pacific could not immediately be reached for comment. UBS AG, the sole arranger for the deal, also declined to comment.

The sources declined to be identified as the details of the sale were not made public.

China Pacific, the nation's third-largest life insurer, raised $2.04 billion through a Hong Kong initial public offering in December 2009. That paved the way for Carlyle to exit its investment, although it was restricted from selling any shares for a year from the listing.

Carlyle built its China Pacific stake over a series of investments. In late 2005, Carlyle and U.S. firm Prudential Financial Inc jointly invested $410 million for a near-25 percent stake in the life insurance unit of China Pacific Group, beating off rival bidders including AIG, Citigroup and Singapore state investor Temasek.

X.D. Yang, a Hong Kong-based managing director for Carlyle's Asia buyout fund, was the dealmaker for the China Pacific investment in 2005.

Fosun and Chindex form joint venture

Source: By Tang Zhihao and Wang Ying (China Daily)

SHANGHAI - Fosun Pharmaceutical (Group) Co Ltd announced on Wednesday that it will establish a joint venture with the US-based healthcare company Chindex International Inc to explore the domestic medical device market.

Fosun will hold a 51 percent stake after injecting $20 million, with Chindex holding the remaining 49 percent after shedding its medical device department.

Shanghai-listed Fosun is owned by Guo Guangchang, a former Fudan University graduate and has appeared several times on Hurun's Rich List.

According to the deal signed on Dec 28, Chindex Medical Limited will independently operate the medical device business. This will cover Fosun's dental products and consumables. However, Fosun's clinical-diagnostic products will not be distributed by the joint venture.

"The formation of the new joint venture will upscale Fosun's medical device division and optimize Fosun's industry chain from research to marketing, both in foreign and domestic markets," said Chen Qiyu, general manager of Fosun Pharmaceutical.

"This integration of complementary businesses, in our opinion, offers synergies, economies of scale and a presence in China not available to either of the businesses on a stand-alone basis," said Roberta Lipson, president and chief executive officer of Chindex.

Analysts said the creation of the joint venture is an important step for Fosun in becoming a more integrated pharmaceutical company.

"Fosun's business has covered almost all the major industrial chain including research and development, retail, medical equipment, and diagnosis," said Li Ying, an analyst from Taiwan-based Capital Securities Corp.

Fosun's revenue surged more than ten times from 340 million yuan ($51.3 million) in 1998 to 3.87 billion yuan in 2009, Li said.

The deal is part of Fosun's share-purchase agreement released on June 14 to acquire more than 1.9 million common shares from Chindex. According to the agreement, Fosun planned to increase its stake in Chindex to 25 percent.

Fosun acquired 933,022 shares of Chindex's common stock in August, and the rest will be acquired upon the establishment of the joint venture.

Medical reforms in China guarantee that the pharmaceutical industry will be one of the best-performing sectors in the stock market, said Jin Yan, an industrial analyst from Zheshang Securities.

Sectors such as medical devices production, medical services and biopharmaceuticals have the brightest outlooks, said Sun Liang, an analyst at China International Capital Corporation Limited.

According to Sun, the pharmaceutical industry is promoting a structural change to boost its production scale and market value to a higher level. China may have pharmaceutical companies with market values of more than 100 billion yuan in the next three to five years.

Shares of Fosun closed at 13.38 yuan in Shanghai on Wednesday, up 1.29 percent.

China orders state firms to pay higher dividends

Source: Bloomberg

(Reuters) - China will increase the dividends paid by state-owned firms to as high as 15 percent, the finance ministry said on Thursday, a move that will harness a bigger share of their profits for government spending on everything from education to the military.

In a statement on its website, the ministry said it was mainly firms in the resource, power and tobacco sectors that would pay the highest dividends at 15 percent of their after-tax profits, up from 10 percent now.

These companies include PetroChina, China National Offshore Oil Corp (CNOOC), Sinopec Corp, China National Tobacco Corp and mobile operator China Unicom.

Companies that fall into the next dividend bracket of 10 percent include most steel makers such as Baosteel and airlines including Air China.

Firms with the smallest dividend burden -- at 5 percent -- include weapon and heavy machinery makers such as China National Nuclear Corp and China Aerospace Science Industry Corp.

Until now, most Chinese state firms have paid 5 percent dividends. The increased rates, which have been approved by the State Council, or cabinet, will start from next year.

The ministry said only two firms need not pay any dividends: China Grains Reserves Corp and China Cotton Reserves Corp.

Many development organizations including the World Bank have called on China's government to increase its share of state-owned firms' profits so as to plough the money into social spending.

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China Squeezes Foreigners for Share of Global Riches

Source: Wall Street Journal By Shai Oster, Norihiko Shirouzu and Paul Glader

BEIJING—Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world's biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe.

General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market.

General Motors Co. established a joint venture this year with SAIC Motor Corp., its longtime partner in China, to produce and sell their no-frills Wuling-brand microvans in India, and eventually in Southeast Asia and other emerging markets as well.

The two deals show China Inc.'s growing international ambitions, as well as its increasing leverage over foreign partners. To make the GE deal happen, GE Chief Executive Jeffrey Immelt made an extraordinary concession, agreeing to fold into the venture all of GE's existing world-wide business in nonmilitary avionics. GM, in its deal, contributed technology, its manufacturing facilities in India and use of its Chevrolet brand name in that market.

Several forces are motivating China's foreign partners to strike global deals that would have been unthinkable a few years back. China's big government-backed companies now have enormous financial resources and growing political clout, making them attractive partners outside China. In addition, the Chinese market has become so important to the success of multinational companies that Beijing has the ability to drive harder bargains.

But such deals also carry risk. Several earlier joint ventures inside China have soured over concerns that Chinese partners, after gaining access to Western technology and know-how, have gone on to become potent new rivals to their partners.

"Foreign partners are seeing they will have to sometimes sacrifice or share the benefits of the global market with the Chinese partner," says Raymond Tsang, a China-based partner at consultancy Bain & Co. "Some of the [multinational corporations] are complaining. But given the changing market conditions, if you don't do it, your competitors will."

Big energy companies, too, have been pursuing international deals with Chinese companies. China has supplanted the U.S. as the world's biggest energy consumer, making access to its market vital for global companies. Foreign firms hope that teaming up with Chinese companies abroad will help on that front. Foreign companies supply technology and experience, and their Chinese partners provide geopolitical clout, low-cost labor, and easy access to credit that China's government-backed companies enjoy.

State-owned China National Petroleum Corp. was one of the first foreign oil companies to sign a major contract in Iraq. BP PLC teamed up with it last year for a $15 billion investment to increase output at the giant Rumaila field. Over the summer, Royal Dutch Shell PLC joined with PetroChina Co., a publicly traded subsidiary of China National Petroleum, on a $3.15 billion acquisition of assets from Australian energy company Arrow Energy Ltd.

China has been gaining clout in some resource-rich parts of the developing world where U.S. companies don't have strong footholds, partly by spending lavishly on infrastructure projects, and it can help broker deals in places like Venezuela and Myanmar, where it has good relations.

In financial services, foreign banks long have coveted access to China's fast-growing securities business. China has allowed a number of companies into the market in recent years through joint ventures, with their stakes capped at about 33%. Chinese regulators also restrict which parts of the securities business they can do.

Crédit Agricole SA already is involved in such a joint venture through its Asian brokerage arm, called CLSA Asia-Pacific Markets, but it is a minor player in China. In May, its investment-banking unit announced a preliminary deal with China's government-owned Citic Securities Co. to form a joint venture beyond China's borders. The French company plans to contribute CLSA and other pieces of its international operation. Citic Securities would throw in its small international unit, based in Hong Kong. Crédit Agricole hopes that helping Citic Securities realize its international ambitions will enable the French bank to expand its business in China.

But talks have gone slower than expected. The two companies said this month that they had agreed on certain key terms, but extended a year-end deadline for a final deal to June 30, without explaining the delay.

Some joint ventures in China have stumbled because of spats with local partners or because the partnerships enable Chinese companies to learn enough about industries to become new competitors to their Western partners.

Kawasaki Heavy Industries Ltd. and Siemens AG, for example, worked with Chinese partners to help build China's high-speed rail network. Now the Chinese companies are bidding against them for international contracts—using products at least partly based on the foreign firms' technology. Last year, France's Groupe Danone SA accepted a cash payment to terminate its joint ventures with China's Hangzhou Wahaha Group Co. after a nasty public feud. The French company had alleged that Wahaha's boss had produced and sold Wahaha-branded beverages supposedly owned by the joint venture through a separate network he owned. Wahaha denied the accusation.

GE's avionics deal with Aviation Industry, or AVIC, also is vulnerable, says Jim Wasson, president of Growth Strategies International LLC, an aerospace and defense consulting firm, and a former GE Aviation executive. The fear is that "once AVIC knows enough about how to do this, they'll kick [GE] out and be on their own," he says.

Lorraine Bolsinger, chief executive of GE Aviation Systems, acknowledges there were concerns within GE about protecting technology. "It was very controversial," she says of the proposed deal. "It was really us knuckle-dragging technology guys that think we had a lot to protect." In the end, she says, "when we and the Chinese together create intellectual property, we are darn right going to protect it."

These days, big Chinese state companies with access to cheap funds and other government support are gunning to dominate some of the same industries that firms like GE have targeted as growth opportunities, from clean technology to turbines.

Even so, GE has such high hopes for China that Mr. Immelt has called it "our second home market." Two years ago, Mr. Immelt said China revenue would double to $10 billion by 2010. But last year it reached just $5.3 billion.

GE saw working with AVIC as a chance to boost its avionics business, which has lagged behind Honeywell International Inc. and Rockwell Collins Inc. The planned venture, to be based in Shanghai, has been chosen to supply China's planned C919 jet, which has the potential to grab a big slice of the Chinese civilian-aviation market. Boeing estimates that market will be worth more than $400 billion over the next 20 years, second only to the U.S.

In negotiations, GE is asking AVIC to match the value of the technology GE is contributing with a cash investment, according to people at GE. If a deal is finalized, all of GE's existing and future civilian avionics contracts will go to the joint venture. Negotiations were supposed to be done by mid-2010, but the parties now hope to finish them by early 2011.

GE executives say the AVIC deal is their closest cooperation ever with a Chinese partner. GE has 45 people in China on the project now, and it is hiring or moving several hundred more people there, even before final terms are hammered out.

AVIC, which makes fighter jets and helicopters in addition to civilian products, has ambitions outside of China. "For the aviation industry, there is no regional market, only the global market," the company said in a statement. "AVIC's strategy is to actively integrate itself into the industrial chain of the world's aviation industry, and to become a truly global company."

Last month, China unveiled the first life-size mock-up of the C919. Other foreign companies have negotiated similar joint ventures to make other parts.

"Our hope and desire is that this joint venture maintains a working-together partnership that benefits both," says Kent Statler, executive vice president at Rockwell Collins, which has a joint venture to supply the C919 with communications systems. "But let's not be naive. We realize that this could turn into a competitor."

For GM, the stakes are especially high: China became the world's largest auto market last year.

Back in 1997, GM decided to plow more than $1 billion into a 50-50 joint venture with SAIC to make Buicks. At the time, it was seen as a risk because car sales had yet to take off in China. This year, GM's China ventures are on track to sell nearly 2.27 million vehicles in the country, compared to 2.18 million sold by GM in the U.S., according to research firm IHS Automotive.

Much of GM's recent growth in China has come through a second joint venture set up in 2002 with SAIC and another Chinese company. The venture, SAIC GM Wuling Automobile Co., makes boxy microvans costing as little as $4,500, which have proven popular in China's smaller cities and towns. Last year Wuling became the first brand in China to sell a million cars in a year. This year, it's expected to account for nearly one-sixth of GM vehicle sales world-wide. Last month, GM reached a deal to buy an additional 10% interest in Wuling for $51 million from the venture's third investor, raising GM's stake to 44%. SAIC owns 50%.

The India joint venture, which began operating in February, is part of GM's effort with SAIC to replicate its China success in other markets. It will produce cars based on its Chinese Wulings, but will sell them under the Chevrolet brand. GM contributed its brand, India factories and dealer network, while SAIC contributed about $300 million to $350 million, a senior GM executive said when the deal was announced.

"We think the business model we have in China with SAIC and the product lineups we have in China are ripe for export to other parts of the world," says Kevin Wale, chief of GM's China operations.

GM and SAIC already have made less ambitious forays abroad together. They export Chevy Sail compacts designed and made in China to Chile and Peru, and are jointly developing more new models to be sold globally, such as the Buick LaCrosse, a sedan designed by teams in Shanghai and Warren, Mich., and sold in China and the U.S.

The India deal takes that cooperation a step beyond shipping jointly produced vehicles overseas. GM and SAIC executives and engineers will be posted in India to design, produce and market cars locally—something SAIC currently has almost no experience with.

One risk to GM is that the venture will better position SAIC to compete abroad on its own—against GM.

Already, SAIC has grown into a powerhouse at home, in part through learning from GM. In 2006, SAIC launched its own solo brand in China, called Roewe. It now competes domestically with the Buicks that SAIC makes with GM. The Roewe brand, which is based it on technology acquired from the now-defunct MG Rover Group Ltd., along with a related nameplate, MG Mingju, sold 146,323 cars in the first 11 months of this year, up 78% from the year-earlier period, according to J.D. Power & Associates. Buick's sales in China, while more than three times as large, grew one-third as fast over the same period.

"Roewe offers comparable products at lower price points and is taking away from GM and others," says Michael Dunne, an auto-industry veteran who heads Hong Kong-based investment advisory firm Dunne & Co.

Last year, GM agreed transfer 1% of its stake in Shanghai GM, its main Chinese joint venture, to SAIC, giving its Chinese partner 51% and effective control. GM said at the time the move would give it better access to credit from Chinese banks, and pave the way for its bigger stake in the Wuling venture.

Last month, GM said the two companies are looking at the possibility of selling SAIC's MG-branded cars through GM's world-wide sales channels. The move could open the door for SAIC's cars to make inroads into Britain, where the MG brand was once based, according to an individual close to GM. Also last month, SAIC paid $500 million for a 1% stake in GM as part of the Detroit auto maker's initial public offering.

SAIC is "very well situated to meet Western [car companies] head on," says Michael Robinet, a U.S.-based senior analyst with consulting firm IHS Automotive. "There's no doubt in my mind, MG and Roewe are going to be both very good launch pads for SAIC to look at new markets beyond China."

China issues first anti-corruption white paper

Source: Xinhua

BEIJING - China expressed its resolve to strengthen the fight against corruption Wednesday as it released its first ever white paper on anti-graft efforts.

The document, titled China's Efforts to Combat Corruption and Build a Clean Government, was issued by the Information Office of the State Council, or Cabinet.

China's efforts to combat corruption and build a clean government, which is managed systematically and promoted comprehensively, has "achieved results," the report said.

From 2003 to 2009, prosecutors at all levels investigated more than 240,000 cases of embezzlement, bribery, dereliction of duty and rights' infringements, according to the report.

Over 69,200 cases of commercial bribery, involving 16.59 billion yuan in total, were investigated from 2005 to 2009, it said.

In 2009, some 7,036 officials were held responsible for acts like making serious mistakes in decision making, breaching of duty, and failing to manage and supervise subordinates, the report said.

The report quoted a National Bureau of Statistics survey as saying that 83.8 percent of Chinese thought corruption was reduced to some extent in 2010, up from 68.1 percent in 2003.

The document warned that the task of curbing corruption remains tough.

China has undergone dramatic economic and social changes. The ideas and concepts of the people have evolved, leading to increased social conflicts, the report said.

"Since the relevant mechanisms and systems are still incomplete, corruption persists, some cases even involving huge sums of money, " the report said. "Breaches of law and discipline tend to be more covert, intelligent and complicated."

The Communist Party of China (CPC) and the government understand the "long-haul, complicated and arduous" nature of anti-graft missions, the report said.

"They will resolutely punish and effectively prevent corruption with more resolutions and powerful measures," the report said.

The report introduces principles, working mechanisms and legal framework for China's anti-graft system. It also sets out the progress made in combating corruption and international anti-graft cooperation.

EBay's Paypal to Set Up International E-Commerce Hub in Chongqing, China

Source: Bloomberg

EBay Inc.’s PayPal business will set up an international e-commerce hub in Chongqing, China, as the company aims to boost exports from the nation by helping merchants conduct faster cross-border trade.

PayPal agreed with Chongqing’s municipal government to set up the center to offer foreign exchange settlement, telesales, training, verification and other services, Dickson Seow, a Singapore-based spokesman, said in an e-mail today. He didn’t disclose financial terms.

Helping local companies connect with global customers will boost EBay’s transaction volume from China more than 80 percent to $4 billion this year, Chief Executive Officer John Donahoe said in September. EBay is counting on PayPal and local partnerships to expand revenue from China after failing to gain a foothold to compete against Alibaba Group.

“This is the first time in the world for PayPal where we are doing such a wide-ranging, comprehensive partnership with a government,” Seow wrote in the e-mail. “In this case, we are looking to develop the local e-commerce industry in inland China to help Chinese merchants build up their capabilities to conduct cross-border trade.”

San Jose, California-based EBay first entered China in 2002. Competition from Alibaba’s auction business Taobao.com cut its market share by half, prompting it to shut down its China site in 2006.

PayPal will have more than 1 million merchants in Greater China, which includes Hong Kong and Taiwan, by the end of this year, Seow said.

The foreign exchange settlement solution that PayPal will develop with the Chongqing government is needed because China currently allows individuals to convert to yuan overseas payments of only up to $50,000 a year, Seow said.

The Chongqing government will work with agencies including the State Administration of Foreign Exchange to get regulatory approval for a settlement service that is expected to begin in the middle of next year, he said.

Factbox: How various industries use rare earth elements

Source: Reuters

(Reuters) - Rare earth elements are in the the forefront of global worries over fears that China's policy of curbing exports will increasingly cause shortages in other industrialized economies, given its status as the dominant global supplier.

China announced on Tuesday it will cut its export quotas for rare earth minerals by more than 11 percent in the first half of 2011, further shrinking supplies of metals needed to make a range of high-tech products after Beijing slashed quotas for 2010.

Despite their name, rare earth elements are a relatively abundant group of 17 chemical elements. They were originally described as rare because they were unknown in their elemental form and difficult to extract from the rocks that contained them.

Here is a summary of rare earth industrial applications and some key areas where they are employed:

Catalysts - Petroleum cracking catalysts and auto catalysts use lanthanum and cerium.

Glass - Cerium is the major constituent of this sector, where it is used in ultra-violet light filtering.

Polishing - A rapidly growing sector that is based on the unique chemical and mechanical properties of cerium in the polishing of glass, including multi-level electronic components.

Metal Alloys - Nickel metal hydride (NiMH) batteries are the key driver of demand and could put pressure on lanthanum supply.

Magnets - Currently, the most dynamic market for rare earths with growth in demand increasing at 15 percent a year for the past 10 years, causing neodymium and terbium to increase by more than 40 percent over the past 12 months.

Phosphors - Necessary for the production of phosphors for TVs and energy-efficient lamps. This is the smallest sector by volume (only 6-8 percent) but the largest sector by value (30-40 percent) as europium and terbium are among the rarest of rare earths.

Ceramics - Yttrium stabilized zirconia is used throughout the resources industry where a material with high-wear resistance is required.

USES IN DEFENSE INDUSTRIES

Lanthanum night-vision goggles

Neodymium laser range-finders, guidance systems, communications

Europium fluorescents and phosphors in lamps and monitors

Erbium amplifiers in fiber-optic data transmission

Samarium permanent magnets that are stable at high temperatures

Samarium precision-guided weapons

Samarium "white noise" production in stealth technology

MAGNETS

Rare earth magnets are widely used in wind turbines. Some large turbines require two short tonnes of rare earth magnets, which are very strong and make the turbines highly efficient. Rare earth magnets are used in turbines and generators in many alternative energy applications.

HYBRID CAR BATTERIES

Every hybrid-electric and electric vehicle has a large battery which is made using several pounds of rare earth compounds. The use of electric vehicles is expected to increase rapidly, driven by energy independence, climate change and other concerns. This is a key growth area for rare earths.

MOBILE PHONES, LAPTOPS

Rechargeable batteries used in mobile phone and portable computers require rare earths, which were the key to smaller more efficient battery technology.

WORLD MINE PRODUCTION AND RESERVES (2009 data)

Country Production (Metric Ton) Reserves (Metric Ton)

United States insignificant 13,000,000

Australia insignificant 5,400,000

Brazil 650 48,000

China 120,000 36,000,000

CIS not available 19,000,000

India 2,700 3,100,000

Malaysia 380 30,000

Others not available 22,000,000

World total 124,000 (rounded) 99,000,000

Source: Arafura Resources Ltd, USGS, Thomson Reuters

Have You Heard...

• Lenovo Hones Sales Pitch for Russia, India
• ChemChina to buy 60 percent of Israel's MA Industries
• China Cuts First-Round Rare Earth Export Quotas by 11%
• China Will End Tax Breaks for Small-Engine Vehicles, Finance Ministry Says

Lenovo Hones Sales Pitch for Russia, India

Source: Wall Street Journal by Loretta Chao

BEIJING—Lenovo Group Ltd. is notching gains in emerging markets, picking up market share in such places as Russia and India, where the Chinese company can use experience gained at home to woo lower-income customers.

The world's fourth-largest personal-computer company by volume is tailoring its approach in emerging markets to first-time buyers, who account for a larger chunk of sales in such areas than they do in more-developed markets, Chen Shaopeng, senior vice president of Lenovo's emerging-markets business, said in an interview.

To attract such buyers, Lenovo has employed tactics that have made it China's PC market leader: offering colorful models and products that can cost less than $300, as well as using retail franchisees who have insight on their individual markets. Lenovo also has increased advertising, using one of the world's biggest billboards, a 1,300-foot-long spot near the Kremlin.

Lenovo increased its share of Russia's market to 8.3% of PCs shipped in the third quarter from just 1.4% in the same period in 2008, according to research firm IDC. Lenovo is now the fifth-biggest PC vendor in Russia, up from No. 14.

In India, where the company aims to add 1,000 franchised retail stores to the 350 it has already, Lenovo has grown to 9% of the market from less than 7% at the end of 2008. The company ranks fourth in India, after Dell Inc., Hewlett-Packard Co., and Acer Inc. by volume.

Lenovo has been trying to steer away from relying on advanced markets like the U.S. to fuel overseas growth. The company struggled with weak consumer sales and declining market share after its purchase of International Business Machines Corp.'s PC business in 2005.

Co-founder Liu Chuanzhi returned as chairman, and then-Chairman Yang Yuanqing was named chief executive. The new leadership vowed a renewed focus on China and other developing markets.

Russia and India are only the eighth- and ninth-biggest PC markets in the world, respectively, with the U.S. and China the two biggest. And emerging markets outside China accounted for only 18% of Lenovo's revenue in the quarter through September, with 36% coming from mature markets and 46%, from China.

But Mr. Chen said emerging markets are Lenovo's fastest-growing regions, and helped Lenovo achieve a company-high global market share of 10.3% in the quarter, according to IDC. "In the long term, we expect the percentage mix [of revenue] contributed by emerging markets outside of China to increase as these markets grow," Mr. Chen said.

David Wolf, chief executive of Wolf Group Asia, a Beijing-based marketing strategy firm, said that while Lenovo's international push is yielding progress, the company still has to show it has a solid long-term strategy.

"After many years of having the hell kicked out of them, it's nice to have some positive results," he said. "But it's still very early days. Whether they can scale on whatever modest results they've been getting is a significant question."

Lenovo is struggling to show that it can branch into innovative new product segments that are increasingly important for PC companies. Lenovo introduced its LePhone smartphone this year based on Google Inc.'s Android operating system, but so far the phone is for sale only in China.

The company created a separate videogame-console company but hasn't released a product yet. Lenovo also has been working on a tablet PC, the LePad, but the status of that effort isn't clear. The company also delayed the release of the IdeaPad U1, a hybrid laptop with a screen that can be detached and used as a tablet, which created buzz when Lenovo unveiled a prototype at the January Consumer Electronics Show in Las Vegas.

Lenovo's "strategic vision and execution in new-product development remain weak," said Charles Guo, a J.P. Morgan analyst in Hong Kong. He said the company needs to be more aggressive to capture an opportunity left by management troubles at H-P, whose CEO was ousted in August.

Mr. Chen said concepts like the IdeaPad U1 establish that Lenovo is "a leader in innovation." The company declined to say when the product might be released, however.

After taking the reins of Lenovo's emerging-markets business last year, Mr. Chen said he traveled to such places as Russia and India, where IBM's ThinkPads were well known but Lenovo's brand wasn't, and saw similarities with China.

Lenovo's strategy in emerging markets is what it calls "best fit" computers rather than "best" computers. Much of that has to do with price. Mr. Chen said the company modified a desktop model for India to lower costs, though he declined to elaborate. The machine sells for about $280, including taxes.

The strategy also means knowing which basic features are most attractive to new buyers. Lenovo's Z-series laptops, which come in a variety of colors, are popular in India because "a lot of young users, even at the entry level, want something stylish," Mr. Chen said. In Russia, Lenovo became one of the first PC vendors to offer a laptop with built-in WiMax wireless capability.

Lenovo's rollout in India of franchised stores carrying its products exclusively is similar to its practice at the company's network of 20,000 stores in China. The locations are outfitted by Lenovo but owned and operated by local business owners who can tailor their services and offerings to local buyers.

Vipul Jain, director at Unique Infoways Ltd., which owns three Lenovo stores in New Delhi, said his company invested $40,000 to open its first such outlet in Nehru Place, a hub consisting of hundreds of electronics shops. Lenovo provided training for the store's staff and pays a commission to Unique Infoways, which expects to open another ten stores with Lenovo around the nation over the next year.

While PC users in mature markets feel comfortable buying computers online, first-time buyers in emerging markets want to see and touch the machines, Mr. Chen said, "so our strategy was is to build the retail coverage."

ChemChina to buy 60 percent of Israel's MA Industries

Source: Reuters By Tova Cohen

(Reuters) - China National Chemical Corp (ChemChina) plans to buy 60 percent of Israel's MA Industries in China's latest move to expand in the global agricultural chemicals market.

The deal, which values the world's biggest maker of generic crop protection chemicals at $2.4 billion, would see MA parent company Koor Industries retain 40 percent of the maker of fungicides, pesticides and herbicides.

ChemChina will buy the 53 percent of MA held by the public for $1.272 billion and pay Koor $168 million for another 7 percent, the companies said on Tuesday.

Koor, which also owns 3.24 percent of Credit Suisse, will post a capital gain of 149 million shekels ($42 million) from the sale, which is priced at 19.98 shekels a share at the present exchange rate.

This reflects an 18 percent premium to Monday's closing price of 16.9 shekels.

Shares in MA, the world's No. 7 agrochemicals maker, surged 7.5 percent to 18.17 shekels in afternoon trade in Tel Aviv. Koor shares were up 6.6 percent.

As part of the deal, ChemChina is expected to arrange a seven-year non-recourse loan of $960 million to Koor, which will be secured by Koor's shares in MA.

"We think Koor is guaranteeing itself a bottom for the valuation of MA, since in seven years it can choose not to pay back the loan and forfeit the shares, while it's getting the money now," Noam Pincu, an analyst at brokerage Psagot said.

Koor, controlled by Discount Investment Corp, a subsidiary of conglomerate IDB Holding Corp, did not say what it intends to do with the funds but Pincu said he believes it will distribute a substantial dividend.

Koor said it expects to sign the agreement with ChemChina within about two weeks and the deal is expected to close in the second or third quarter of 2011, though it added there is no assurance it will be completed.

MA, which competes with Monsanto, Bayer BAYG.DE and Syngenta, ultimately will become private.

PRICE OF DEAL LOWERED

The deal is the latest in a hungry China's search for global agricultural chemical production and distribution capabilities, areas that would cost a lot of money and take time to be developed domestically.

ChemChina and Sinochem, both state-run companies, have each made failed bids for Australian farm chemicals group Nufarm.

In October, Koor announced ChemChina was in talks to buy 70 percent of MA at a company valuation of $2.7 billion but a month later the Chinese company sought to reduce the valuation to $2.4 billion. The two sides also discussed ChemChina buying a smaller stake from Koor than originally planned.

"We believe the chances now of the ChemChina deal going ahead are very high, at a lower price than was originally announced," Bank Hapoalim analyst Yaron Fridman said.

"The price reduction was necessary due to the significant worsening of MA's results in the second half of 2010."

MA, also known as Makhteshim Agan, posted a wider net loss of $56.2 million in the third quarter, hit by a writedown at its Brazilian unit, rising costs and a one-off tax charge.

The transaction is subject to approval of MA's shareholders and government authorities in China.

ChemChina will sign with Koor a shareholders' agreement organising their rights in MA, including nomination of directors on a proportional basis. ChemChina will be obligated to remain the largest shareholder in MA for a number of years, and Discount Investment will commit not to sell control in Koor for at least three years.

In September, MA halted talks to acquire U.S. firm Albaugh for about $1 billion, blaming its findings during due diligence.

China Cuts First-Round Rare Earth Export Quotas by 11%

Source: Bloomberg

China cut its export quotas for rare earths by 11 percent in the first round of permits for 2011, threatening to extend a global shortage of the minerals needed for smartphones, hybrid cars and guided missiles.

The government allotted 14,446 metric tons of rare earth exports split among 31 companies, the Ministry of Commerce said today in a statement. That compares with the first round this year of 16,304 tons and the second round of 7,976 tons, according to previous ministry statements. The government usually issues two rounds of export quotas every year.

China, which accounts for more than 90 percent of world supplies, slashed export quotas by 72 percent in the second half of this year, sparking a surge in prices. Japan, the world’s biggest user, has sought alternate supplies with companies including Hitachi Metals Ltd. and Toyota Motor Corp. seeking cooperative ventures at home and abroad to secure the minerals.

“This is in line with government officials’ comments that we need to protect the environment and resources,” said Chen Jiazuo, an analyst at metal researcher Beijing Antaike Information Development Co. “Controlling domestic production capacity, output and exports will continue to be the theme.”

Chinese government departments are still negotiating full- year rare earth export quotas for 2011, the ministry said in a separate statement today. Full-year permits should not be forecast based on the first-round limits announced earlier, according to the statement.

Industry ‘Sustainability’

The government will decide on the full-year quotas after evaluating domestic output and demand, as well as global requirements, the ministry said. The “sustainability” of the industry in China also will be reviewed, according to the statement.

Last year, China’s government clamped down on its rare earth industry, setting production quotas to bolster prices. China said in July that it would reduce export quotas in the second half to supply its own electronics industry and overhaul a mining sector blamed for causing widespread environmental damage.

“As China has advanced technologies in rare earth production, companies can seek cooperation to develop mines abroad,” Antaike’s Chen said.

China will also raise export taxes for some rare earth elements to 25 percent next year, the Ministry of Finance said this month. That was up from the 15 percent temporary export tax on neodymium, used in batteries for hybrid cars including Toyota’s Prius and Honda Motor Co.’s Insight.

U.S. Tensions

The latest move to curb exports may further exacerbate tensions with the U.S., which last week said it may file a World Trade Organization complaint over restraints on supplies of the minerals. Rare earths are 17 chemically similar elements including neodymium, cerium and lanthanum that are used in the production of electronics.

Molycorp Inc., the owner of the world’s largest non-Chinese rare-earth metals deposit, agreed this month to form joint ventures with Japan’s Hitachi Metals Ltd. to produce alloys and magnets in the U.S. Hitachi Metals, Japan’s largest maker of rare-earths magnets, uses as much as 600 tons of the metals each year.

Shares of Molycorp rose $2.85, or 5.8 percent, to $52.29 at 10:33 a.m. in New York Stock Exchange composite trading. Rare Element Resources Ltd., a Vancouver-based rare-earth miner, jumped $2.29, or 20 percent, to $14.02 in New York. General Moly Inc., which is developing a molybdenum mine in Nevada, climbed 42 cents, or 7.1 percent, to $6.32.

Toyota Venture

Toyota Tsusho Corp., a trading company affiliated with the carmaker, formed a venture with Sojitz Corp. and a Vietnamese state-run mining company to export rare earth metals to Japan from 2012, spokesman Katsutoshi Yokoi said in September.

Toyota spokeswoman Shiori Hashimoto declined to comment on China’s latest move today, saying the company already was exploring alternative sources of rare earth.

The price of neodymium oxide, used in magnets in BlackBerrys, has surged more than fourfold to $88.5 a kilogram from $19.12 in 2009 because of rising demand and reduced supply from China, according to Sydney-based Lynas Corp., which is building a A$550 million ($542 million) rare earths mine in Western Australia.

Demand growth for neodymium and dysprosium may be 15 to 20 percent per annum, Damien Krebs, a metallurgy manager at Australia’s Greenland Minerals and Energy Ltd., said in an interview on Nov. 10. Neodymium is also used in mini hard drives in laptops and headphones in Apple’s iPod.

‘Guide’ Industry

China is close to establishing an association that will work under government oversight to “guide” the domestic rare earths industry, Wang Caifeng, a member of the committee overseeing the group’s formation, said at a conference in Beijing today.

The China Association for Rare Earth will be organized under the authority of the Ministry of Industry and Information Technology and include the biggest 93 domestic producers of the minerals, Wang said.

Output and export of rare earths from China have been reduced because some of the companies mining the minerals were causing “severe” environmental damage and had to be closed, Wang said.

“Excessive mining in southern provinces is still severe and it severely damages the environment. That’s why China is controlling mining, and naturally output and export will be reduced,” Wang said.

China Will End Tax Breaks for Small-Engine Vehicles, Finance Ministry Says

Source: Bloomberg

China will end tax incentives for vehicles with engines of 1.6 litres or smaller on Dec. 31, the Ministry of Finance said in a statement on its website today.

China will levy a 10 percent sales tax for those vehicles, up from the current 7.5 percent, according to the statement. The new policy will be effective from Jan. 1.

Have You Heard...

• China Says It Can Subdue Prices
• Maersk puts more focus on imports
• State-Owned Companies Agree to $45 Billion of Projects in China's Guizhou
• Finding a Gap in the market

China Says It Can Subdue Prices

Source: Wall Street Journal by Jason Dean

Premier Wen Addresses Concerns on Economy After Central Bank Raises Rates a Quarter Point to Contain Inflation

BEIJING—Chinese Premier Wen Jiabao voiced confidence Sunday that his government can contain rising prices, seeking to reassure the public about inflation a day after the central bank raised interest rates for the second time in 10 weeks.

Speaking to listeners Sunday during a visit to state radio headquarters, Mr. Wen acknowledged that recent price increases have "made life more difficult" for middle- and lower-income Chinese. But, pointing to measures the leadership has taken in recent months, he said: "As it looks now, we are completely able to control the overall level of prices."

The remarks, in a session where Mr. Wen was asked repeatedly about prices, reflect the issue's political sensitivity for Beijing.

Accelerating inflation in recent months has been driven largely by increasing prices for food and housing that disproportionately affect the lower-income people Mr. Wen's government has publicly championed.

Yet the leadership is trying to balance concern over prices against a desire to avoid tightening so aggressively that it harms growth in what's expected to be the world's second biggest economy after the U.S. this year. The rate increase announced Saturday, in which the People's Bank of China increased benchmark lending and deposit rates by a quarter percentage point, followed a series of other steps targeting inflation, including price controls on certain commodities and several increases in the reserve-requirement ratio, or the share of deposits that banks must keep on reserve instead of lending. The central bank also announced an interest-rate increase on Oct. 19—its first since late 2007.

The October rate rise, also a quarter percentage point, was unexpected, and spooked global investors. Prices of stocks, commodities and emerging-markets currencies all fell amid fears that one of the world's main economic engines might decelerate.

Since then, the government has repeatedly signaled that it plans further tightening—plans the markets have at least partly digested—and economists were widely anticipating additional interest-rate increases, if not necessarily quite so soon.

"We expected a rate hike by the end of the year, though Christmas Day is something of a surprise," said Brian Jackson, China economist at the Royal Bank of Canada. He called the rise a "prudent" move, and said it signaled recognition that measures like the reserve-ratio increases were proving inadequate.

He and others expect more increases, but so far most economists aren't predicting a sharp drop in growth. China economists at J.P. Morgan Chase forecast in a note Sunday that China will raise rates three times in 2011. They also projected that China's economy will grow 9% in 2011, from an estimated 10% this year.

Many economists say China could better fight inflation by allowing its currency to appreciate, which reduces the prices of imports in local-currency terms. The yuan has gained close to 3% against the dollar since Beijing unpegged it from the U.S. currency in June. If sustained, that would equate to an annual pace of 6%. But few analysts think China's government has the stomach for faster appreciation than that because of fears it would make China's exports too pricey in dollar terms.

China's rate increases heighten the already stark contrast with the U.S. economy—a contrast that is complicating Beijing's policy choices.

Higher rates in China are meant to soak up cash in its economy by increasing the incentive to park money in bank deposits and by deterring borrowing. But they also widen the gap between returns on capital here and in the U.S., where the Federal Reserve is battling economic weakness by holding rates near zero and pumping liquidity into economy through its quantitative easing program.

That widening rate spread increases China's attraction for speculative investors to shift funds into China. Chinese authorities detest such "hot money" because it weakens their control over the economy and adds to upward pressure on the yuan. Existing capital controls make it difficult to bring funds into China, but speculators have used regulatory loopholes and other tools to bypass restrictions.

Chinese officials have openly criticized the Fed's quantitative easing program, in part because they say it burdens emerging economies with potentially excessive capital inflows that could fuel inflation.

Ting Lu, China economist for Bank of America-Merrill Lynch, said in a note that to curb hot-money inflows after the rate increase, authorities are likely to impose more capital-control measures. That also could damp any pressure to step up appreciation of the yuan that might result from such inflows, he said.

The interest-rate increase, which took effect Sunday, lifted the rate on one-year yuan loans to 5.81% from 5.56%, and on one-year yuan deposits to 2.75% from 2.50%.

China's consumer prices rose 5.1% in November from a year earlier, the biggest increase since July 2008. Food prices have largely eased in recent weeks, which could help slow the rise, but economists say increases have picked up for other products. Last week, the government raised state-set fuel prices for the second time in two months amid resurgent global crude-oil costs.

Early this month, the Communist Party's leadership group, the Politburo, announced a formal transition to "prudent" monetary policy from the "moderately loose" stance China has had during the global economic downturn. Despite that resolve, the government has acknowledged that average prices will continue trending higher, raising its official inflation target to around 4% for next year, from 3% for full-year 2010.

Maersk puts more focus on imports

Source: By Wang Xiaotian (China Daily)

Container carrier to strengthen regional base to secure trade flows

BEIJING - Maersk Line, one of the world's largest container carriers by volume and market value, is planning to further combine intra-Asia imports with its global export network to strengthen its advantages in the region.

Tim Smith, the chief executive officer for the North Asia region of the company, said it is very much linked to China's increasing imports as the country usually buys in raw materials or partly processed goods from other parts of Asia, before assembling and sending them for export.

"I think we have to put more focus on the import market than we have done. If you look at our organization design, it is mostly focused on servicing the export business. We have to step up, for example the number of sales people we have looking into the import market," he told China Daily.

Smith said the company also needed to look very carefully at the rotation of vessels because most designs were produced to ensure better export connections to principal destinations.

"The port rotation should be different because the ports for imports are not necessarily the same as the main ports for exports," he said.

Boosted by regional free trade development and strong growth, the intra-Asia sector will become the new focal point of the shipping market, said Bronson Hsieh, vice-group chairman of Evergreen Group and chairman of Evergreen Marine Corporation.

In 2009, intra-Asia cargo volume decreased 2.6 percent year-on-year. During the first half of this year, cargo volume increased 16.9 percent from the same period last year. The performance of both periods outstrips the long-haul markets from Asia to the United States and Europe.

Smith said he was very surprised by how quickly the industry has picked up from the global economic crisis despite some major economies still facing uncertainties over recovery, but the golden time of shipping has already gone.

"I was wishing the horrible downturn was going to end this time last year. We were optimistic that things were going to improve. But I think we've been surprised by how fast it's come good," he said.

According to the World Trade Organization, global trade growth will increase 13.5 percent this year, the biggest year-on-year increase since 1950, following a faster-than-expected recovery in trade flows. In 2009, world trade declined by 12 percent, the biggest slump since World War II.

After an historic loss of $2.1 billion in 2009, Maersk Line witnessed a dramatic upturn to a profit of nearly $2.3 billion in the first nine months this year, contributed to by a 34 percent year-on-year increase in average freight rates and a 7 percent increase in transported volume.

"The situation in 2010 is a little bit better than the normal level," said Smith, a 25-year veteran of the shipping industry. He described the business situation in 2010 as "strange" following unpredictable growth patterns quarter-on-quarter.

The second quarter this year saw strong growth followed by unexpected average growth in the third quarter, and a slight decrease in the fourth quarter, which is unusual due to the annual expected year-end seasonal demand, he said.

But it's hard to predict whether the flourishing situation will continue next year. "The year 2011 will not necessarily be as good as this year as demand may slow," said Smith, adding the company needs to carefully monitor the demand and supply situation in order to react quickly.

He estimated a global demand growth of 8 percent next year compared with 2010, mainly driven by a continuous rise of freight demand in Asia, Latin America and Africa, but with more fluctuations month by month.

"Given the sophisticated global economic environment, cyclical turbulence will become more obvious, while volatility will grow more dramatically," said Wei Jiafu, president of China Ocean Shipping (Group) Company (COSCO Group), which describes itself as China's largest and the world's leading organization specializing in global shipping, modern logistics and ship building and repairing, at the World Shipping (China) Summit on Nov 9.

In addition to an unstable economic situation, increasing freight capacity would also affect freight rates negatively. "New deliveries and over-capacity are hurting the recovery of shipping," said Wei.

Smith predicted a 10 to 12 percent year-on-year capacity growth as more new ships are delivered to owners in 2011, but calculating how much of it would be deployed is a different matter.

"I think it (overcapacity) is manageable if the industry learns from what happened in 2009. I'm optimistic," he said.

Carriers will continue to practice slow steaming because of rising fuel prices despite the fact the toughest times are already far behind, said Smith, who added 5 to 8 percent of capacity was taken out of circulation during the downturn.

Smith said it is difficult to predict how much freight rates will increase in the future but, based on current levels, the company expects to see good profits ahead.

Although the crisis is already behind and the industry is back to a normal situation, the "normal" will be different in coming years, he said.

Before the crisis, the industry witnessed an average annual demand increase of more than 10 percent. Globally, the average demand increase for containers was usually three times growth in gross domestic product. "But it will be more like 6 or 7 percent growth in the future," said Smith.

Another change in the market will be clients' increasing concern over clean and green transportation, according to Smith.

"This is a coming mega trend. The customers over a period of time will ask for us to be more environmentally friendly. They will maybe select the carriers more based on their environmental performance in the future. We want to prepare for it early."

Maersk Line vessels on September 7 officially began using low-sulfur fuel in their engines while at berth in Hong Kong, marking the first voluntary fuel-switch scheme in Asia.

Switching from bunker fuel, which is used in the high seas, to low-sulfur fuel will reduce Maersk Line's emissions of unhealthy sulphur oxides (SOx) and particles by at least 80 percent, said the company. It will come at an added cost of $1 million annually to Maersk Line.

"Shipping is very efficient in terms of cutting CO2 emissions compared with other means of transportation. But shipping's SOx emissions need to be dealt with," said Morten Engelstoft, chief operating officer at Maersk Line. He expects the voluntary initiative will inspire authorities to raise the regulatory bar.

For Tim Smith, the recovery brought not only benefits and new challenges, but also some disappointment as opportunities for consolidation within the industry dispersed.

"Our feeling (one year ago) was that when the crisis hit, probably some weak companies should have gone out of business, but that didn't happen. Now that the global economy is improving again, probably the opportunity for consolidation has been missed," he said, adding it would be a disappointment for the industry because it could become stronger and more stable after more consolidation.

State-Owned Companies Agree to $45 Billion of Projects in China's Guizhou

Source: Bloomberg News

China’s southwestern province of Guizhou signed almost 300 billion yuan ($45 billion) of contracts with state-owned companies as part of government efforts to spur economic growth in poorer inland regions.

China Petrochemical Corp., Aluminum Corporation of China Ltd. and China Railway Group Ltd. were among companies that signed the 47 contracts, according to a statement published in the People’s Daily newspaper today. All of the projects are slated to begin before 2012, it said.

Premier Wen Jiabao has pledged to increase growth in the nation’s central and western provinces as part of the government’s bid to spur domestic consumption and to narrow the income gap between inland regions and coastal cities such as Shanghai and Guangzhou. Guizhou’s per capital gross domestic product last year was one eighth that of Shanghai’s.

“Guizhou is very rich in coal, bauxite resources,” said Heng Kun, a Shanghai-based analyst at Essence Securities Co. “Companies can enjoy much cheaper labor costs building plants in the western provinces.”

Projects announced for Guizhou include a 52 billion yuan petrochemical and coal chemical complex to be constructed by China Petrochemical Corp., the parent of Hong Kong and Shanghai- listed China Petroleum & Chemical Corp.

Aluminum Base

Aluminum Corp of China Ltd. also agreed to build a 17.5 billion yuan base that includes alumina and aluminum smelting plants and a bauxite mine, according to the statement.

Bauxite is the ore refined to make alumina, a semi-finished material to make aluminum, which is used in cars, aircrafts and window frames.

The alumina plant is capable of producing 1 million tons a year, the aluminum smelter has an output capacity of 400,000 tons a year, and the bauxite mine can produce 2 million tons, according to the statement. The facilities will be located in the city of Qingzhen, it said.

Chalco, as the company is also known, has another 1 million ton alumina plant in production in the city of Zunyi, also in Guizhou province.

Shen Hui, a spokesman from Beijing-based Chalco, couldn’t confirm the project immediately when reached by Bloomberg.

Finding a Gap in the market

Source: China Daily

Apparel retailer uses online presence to promote its wares, services

BEIJING - It's a common scene in Gap Inc stores for shoppers to point at pictures they are carrying and tell assistants: "I want this".

These customers will have visited the shop's website, decided what they like and printed off the pictures before moving from the virtual domain to the real one.

Shopping at Gap could not be more convenient because the US' largest specialty clothes retailer not only sells its products on its website, but also offers a free delivery service.

Furthermore, the website provides dressing tips and hosts interactive programs to attract consumers.

According to Glenn Murphy, chief executive officer of Gap, having an online store is vital in the e-commerce era.

The fashion brand has now introduced its online strategy to the world's fastest-growing economy, with a Chinese-version website and online store, gap.cn, launched in China last month.

The virtual shop is a joint venture with a Shanghai-based information technology company looking after order management and Gap controlling the e-commerce and storage side.

So far, Gap China's online store has received orders from places as far apart as Harbin in Northeast China, Kunming in Southwest China, Xinjiang in Northwest China and Guangdong in South China.

Gap initiated its online business in 1997 in developed markets. It cooperated with the global deal-of-the-day website Groupon.com in August to have discount activities in 85 cities in North America and created sales of $11 million, Global Entrepreneur magazine reported.

Early in November, social website Facebook.com developed a platform for retailers to provide potential consumers with discount products. Gap immediately launched a marketing initiative by sending free jeans to the first 10,000 netizens who joined and attracted lots of customers to its stores.

Compared with its global competitors such as Zara and H&M, Gap is a late-comer. But Murphy said, "We are not in a hurry."

Settling himself on a comfortable sofa in a luxury meeting room at Beijing's Grand Hyatt hotel, he told China Daily that the company would develop multiple channels. "Our online service can help the brand stretch to cities without stores," he said.

Before the interview, Murphy had just completed a grueling visit to all of Gap's new stores in China. The company opened its first outlets in China in Beijing and Shanghai.

According to Murphy, online stores promote word-of-mouth marketing. He said that if customers could talk to their friends about its products, it would make for the most important marketing tool in the world.

"If someone says to his friend, 'Have you ever heard of Gap? You can find it online', that's way more powerful than billboards, television and advertisements in the newspaper. It is really cool," Murphy said.

Online sales

Online retail sales in China, which has the world's largest web population of at least 420 million, soared 117 percent last year to $39 billion, according to iResearch, a Shanghai-based research firm. That's the reason why so many retailers use Internet platforms to grow in the emerging market.

Italian fashion designer Giorgio Armani launched an online store in China in November and told Agence France-Presse that it was "the first fashion brand to offer a 'flagship store' online experience in China".

Zhao Ping, a professor at Beijing Institute of Fashion Technology, said online sales were the trend for the clothing industry and developing a buying habit was very important.

"Online clothing sales are promising, accounting for almost 60 percent of all apparel sales in China," said Zhao. "Gap can take advantage of this channel to promote its brand."

Zhao also said China's biggest online apparel retailer, Vancl.com, was fostering loyal consumers but had not realized a profit. However, it would pay off when people adapted to that way of shopping.

According to Bloomberg, sales of Vancl will triple to 20 billion yuan ($3 billion) in 2010 as more people in the world's largest Internet market go shopping online.

Yue Sanfeng, a partner at Hejun Consulting company, said Gap should speed up to enhance brand awareness, otherwise many small companies could seize the market using lower labor costs and imitating successful lines.

Yue said that in the United States, ordinary people only spend 1 percent of their income on a pair of trousers from Gap, but in China it should be about 5 to 10 percent.

"Under pressure from high housing and car prices, many middle-income people would rather choose cheaper clothes, only buying a luxury item after saving money for a long period of time," said Yue.

Murphy added that the global specialty apparel retail industry was highly competitive and its first month of booming business will not guarantee its future popularity in China. But he said the company was determined to enter China.

"It's a huge market, and we are sure to expand new stores in Hong Kong next year," Murphy said. "An online store will be opened in advance for promotional purposes."