Have You Heard...

• Huntsman Plans to Resign as U.S. Ambassador to China
• Hong Kong IPOs Dent Shanghai's Global Ambitions
• Analysis: China bank gains political clout in inflation fight
• Inflation in China May Limit U.S. Trade Deficit
• Baidu's Profit Rises After Making Gains on Google in Advertising in China
• Cnooc Pays $570 Million for Chesapeake Shale Stake

Huntsman Plans to Resign as U.S. Ambassador to China

Source: Bloomberg News By Hans Nichols and Julianna Goldman

U.S. Ambassador to China Jon Huntsman has submitted his resignation to President Barack Obama, an administration official said, a sign the former Utah governor may be considering a bid for the 2012 Republican presidential nomination.

The resignation is effective April 30, the official said, speaking on condition of anonymity because the resignation hasn’t been formally announced.

White House press secretary Robert Gibbs said earlier that Huntsman had told White House officials he planned to leave. Obama believes Huntsman’s experience has been vital in a key diplomatic post and that he expects the envoy, while in the job, to devote his “full energy and time to that position,” he said.

A search for his replacement is under way, Gibbs said.

Huntsman, 50, a Republican, was in his second term as Utah governor when Obama nominated him to be ambassador on May 16, 2009. He speaks Mandarin Chinese and was ambassador to Singapore under former President George H.W. Bush. Huntsman’s plan to resign was reported earlier by the Washington Post.

Before being named ambassador by Obama, Huntsman was the campaign co-chairman of the president’s opponent in the 2008 election, Republican Senator John McCain. Immediately after the election, he was cited as a potential contender for his party’s nomination in 2012.

Praise From Obama

When Chinese President Hu Jintao was in Washington on Jan. 19, Obama had praise for Huntsman’s service as ambassador, saying it demonstrated that “he and I believe that partisanship ends at the water’s edge.”

He also joked about a potential challenge from Huntsman in 2012.

“I’m sure that him having worked so well with me will be a great asset in any Republican primary,” Obama said.

In an interview with Newsweek magazine published Jan. 1, Huntsman declined to comment on whether he might run for president in 2012, while saying, “I think we may have one final run left in our bones.”

When he was nominated, Huntsman called China the “most important strategic bilateral relationship” for the U.S. His departure comes as the administration is pressing China to allow faster currency appreciation to help narrow trade imbalances that threaten to trigger protectionism and imperil the global economic recovery.

Pressuring North Korea

The ambassador also has been involved in U.S. efforts to gain stronger Chinese cooperation in pressuring North Korea to give up its nuclear program and blocking the nuclear ambitions of Iran.

Still, his relationship with Obama’s White House may be an issue in a competitive Republican primary election.

“We are loyal to our country and our president,” Huntsman told reporters at a state dinner in honor of China’s Hu on Jan. 19, suggesting how he might respond to questions about his service in a Democratic administration.

Republican strategist Vin Weber, while calling Huntsman “enormously talented,” said his work for the administration would pose a “daunting” challenge in the Republican race.

“He’s going to have to bend over backwards to prove he is separate from Obama,” Weber said. “Republicans are going to be suspicious for that relationship.”

Tapping Family Contacts

Weber is the co-chairman of the political action committee of former Minnesota Governor Tim Pawlenty, another possible 2012 Republican candidate. He said Huntsman would likely tap his family contacts for early fundraising. Top Republican fundraisers said they had yet to be contacted by Huntsman or his supporters.

His father, Jon Meade Huntsman Sr., is the founder of the Salt Lake City-based chemical company Huntsman Corp. and worth $1 billion, according to Forbes magazine.

As governor, Huntsman came under criticism from some in his own party for supporting civil unions for gay couples and making Utah part of a regional alliance aimed at developing goals to cut greenhouse gas emissions.

Other potential Republican candidates in 2012 include former Massachusetts Governor Mitt Romney, who lost the nomination battle in 2008 to Arizona Senator John McCain; former Arkansas Governor Mike Huckabee, who also ran in 2008; and former Alaska Governor Sarah Palin, McCain’s running mate. Former House Speaker Newt Gingrich of Georgia also is exploring a bid.

Hong Kong IPOs Dent Shanghai's Global Ambitions

Source: Wall Street Journal

The Hong Kong stock exchange's recent success wooing foreign companies poses a new challenge to Shanghai's ambition to become a global financial center.

In the last week, an Italian luxury-goods icon and a secretive Swiss commodities trader became the latest fund-raisers from abroad to set their sights on Hong Kong. Prada SpA could launch an initial public offering in the city by the second quarter. Glencore International AG, a major force in trading metals and agricultural products, wants to raise as much as $10 billion with a dual listing in Hong Kong and London around the same time.

There are several noteworthy things about these two IPOs. Bankers see Prada as a door-opener for the luxury-goods sector, legitimizing Hong Kong as a venue to raise capital for an industry focused on selling its European heritage to Asian consumers. And Glencore adds heft to Hong Kong's underdeveloped resource sector, giving investors another way to bet on Chinese demand for commodities.

They bring to five the number of foreign companies now known to be staking out a home on Hong Kong's exchange since the beginning of the year. The others include a clothing retailer and a finance company, both from Japan, as well as a Kazakh copper miner.

One thing they have in common is a connection to Chinese growth, whether through sales of copper and cattle feed or Italian boots and Japanese blouses.

They also represent the kind of listing business that Shanghai's stock exchange hopes to win, too, through a much anticipated but long-delayed international board allowing foreign companies to issue stock directly to mainland Chinese investors. Only recently, the Shanghai's mayor stoked expectations when he declared "now is a good time to launch the international board."

But if Shanghai builds it, will they come? Not everyone is so sure.

Since their peak in August 2009, mainland Chinese shares have slid into bear territory. The Shanghai Composite Index has fallen 21% as domestic investors fret over Beijing's efforts to cool an overheated economy. Over the same period, the Hang Seng Index has risen 14%, reflecting foreign-investor optimism about China's long-term prospects.

That divergence has wiped out the premium that China's A shares, which are largely restricted to domestic investors, have traditionally enjoyed over the so-called Chinese H shares bought and sold by international investors in Hong Kong—and in fact has left many Hong Kong shares with a much richer valuation than those in Shanghai. So even if the international board were open for business, a company could get a better price for its shares in Hong Kong than in Shanghai, which is a "seismic change," in the words of one investment banker.

Higher valuations aren't the only reason companies choose to list on an exchange. Hong Kong's regulatory framework is more highly regarded and the market enjoys a broad investor base. Listing in Shanghai, for its part, could be a smart marketing ploy for a brand eager to raise its profile in a big consumer market. It also offers a chance to score political points with mainland Chinese authorities eager to promote the city's role as a financial hub.

Also, A shares won't stay cheap forever, says Jerry Lou, a China equity strategist at Morgan Stanley. China has a surplus of capital, restrictions on taking it offshore and few choices on where to invest at home, he notes—all forces likely to push A shares higher over time.

For now, though, Hong Kong has the edge in a contest on where to issue stock. Any company opting to sell shares in Shanghai would have to explain to board directors and shareholders why it chose to forgo the cheaper cost of capital.

This year, bankers expect a new wave of Hong Kong IPOs from multinationals looking to list their China operations, throwing out names of prospects like U.S.-based Yum Brands Inc., owner of KFC and Pizza Hut. Those are precisely the sorts of listings many expected Shanghai's international board to attract.

Hong Kong may not hold the edge forever. But it is making sure that if Shanghai is going to catch up as an international financial center, it will have to work a little harder to make up for lost time.

Analysis: China bank gains political clout in inflation fight

Source: Reuters By Kevin Yao

(Reuters) - China's central bank, more hawkish on inflation than other parts of the government, has gained more policy-making power in recent months by outmaneuvering pro-growth factions in wrangling over the economic outlook and bank loans.

That will give the People's Bank of China more leeway to tighten policy by further raising banks' required reserves, aggressively draining liquidity through open-market operations and restricting bank lending, according to analysts familiar with the policy debate in Beijing.

China is expected to raise interest rates only a couple of times this year, partly a reflection of the fact that the cabinet, not the central bank, makes the final call on rates and it must balance between rival groups in the government.

The highest echelon of leaders also decides on major changes to the country's currency regime given its political importance, but despite these limitations, the central bank is establishing itself as a stronger player in Beijing as the nearly decade-long term of Governor Zhou Xiaochuan draws to a close.

It was instrumental in tilting the official consensus to fighting inflation from supporting growth late last year, helped by its long-standing warning that rising prices would pose a threat, analysts say.

"The central bank's economic foresight is better than other state agencies, including the NDRC," said Gao Shanwen, chief economist at Essence Securities, referring to the National Development and Reform Commission, a powerful planning agency that sets economic targets and oversees investment projects.

That has allowed the central bank to gain the upper hand in the debate over inflation.

While the central bank sounded the alarm bell early last year and moved quickly to tighten liquidity by raising banks' required reserves, the NDRC, which tends to be more pro-growth, insisted inflation would be benign.

The NDRC had to change its rhetoric after inflation continued to accelerate, racing to a 28-month high of 5.1 percent in the year to November. The agency made a quick about-turn to campaign for tough measures to control food prices.

INFIGHTING

To be sure, no one is saying that the central bank is about to win policy independence, just greater influence.

"Every government department has its own vested interest and the central bank has to fight with other state agencies," said Wang Hu, an economist at Guotai Junan Securities in Shanghai.

Another dispute between the central bank and the NDRC was over the bank lending target for 2011, with the former initially proposing a target of 6.5 trillion yuan ($988 billion) against 8 trillion yuan wanted by the NDRC, the Economic Observer reported last month.

The government appears to have split the difference, with local media saying that 7.2 trillion yuan will be the rough target. But with that representing a 10 percent decline from last year's new loan total, the central bank got its way on the bigger issue of whether to tighten or not.

The central bank has also fought a turf battle with the banking regulator over how to exercise day-to-day control of commercial loan issuance.

That more power has been vested in the central bank can be seen in the new "dynamic differentiated reserve requirement" system that the government plans to use this year to keep lenders in check.

Depending on their volume of lending, banks will face different reserve requirements -- something that the central bank, not the China Banking Regulatory Commission, imposes.

"The central bank will have more power to control lending because setting lending targets won't be that effective and there are still some uncertainties in the economy," said Guo Tianyong, an economist at Central University of Finance and Economics.

MORE CLOUT FOR NOW

The central bank's preference for raising reserve requirements instead of interest rates -- seven times versus twice, respectively, since the start of last year -- is partly because it needs no higher authorization for reserve decisions.

Combined with sustained cash withdrawals in open-market operations, where it also has a free hand, the central bank's tightening has started to seriously bite, with a money market crunch forcing commercial lenders to scramble for short-term funding.

The weighted average seven-day repo rate, the main barometer of short-term liquidity, hovered near a three-year high of 8.2 percent on Monday, more than three times higher than just two weeks earlier.

Most analysts expect inflation, driven by soaring food prices, to stay elevated in the first half of 2011, reinforcing the central bank's position of strength.

But the NDRC is not about to abandon its pro-growth stance. Zhang Ping, the agency's chief, said last month that the shift in monetary policy did not amount to "simple tightening."

And the central bank must tread cautiously after facing criticism for over-tightening before the global financial crisis struck the Chinese economy.

In its 2006-08 tightening, it increased lending rates by 162 basis points (bps) and reserve requirements by 950 bps, while letting the yuan rise about 15 percent versus the dollar. Hit by the global turmoil, the Chinese economy slowed sharply.

In its current tightening cycle, the central bank has been more conservative, raising rates by 50 bps and required reserves by 350 bps, and letting the yuan rise less than 4 percent since it was unshackled from its peg to the dollar last June.

"The central bank has greater clout as inflation is now the main problem. It may lose that power if growth becomes the main risk," said Jinny Yan, economist at Standard Chartered Bank in Shanghai.

Inflation in China May Limit U.S. Trade Deficit

Source: New York Times By Keith Bradsher

HONG KONG — Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific.

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. But from Vietnam to India, few low-wage developing countries can match China’s manufacturing might — and no country offers refuge from high global commodity prices.

Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

The trend, if continued, could ease tensions by beginning to limit America’s huge trade deficit with China. Those tensions were an undercurrent during Chinese President Hu Jintao’s recent Washington talks with President Obama.

Manufacturers and distributors across a range of industries say the likely result of the export slowdown is higher prices for American shoppers in the coming months, and possibly brief shortages of some products if Western retailers delay purchases too long while haggling over prices.

China exports more than $4 of goods to the United States for each $1 it imports from America, creating a trade surplus of about $275 billion. The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost.

Of course, the slowdown in the volume of imports could also prove temporary, if American consumers accept higher prices and Western corporate buyers end up renewing contracts at much higher cost. In the meantime, if the average price for each imported product rises faster than the volume of shipments falls, China’s surplus with the United States could continue increasing temporarily.

But whatever the eventual impact on trade, Chinese inflation might also reduce Washington’s pressure on Beijing over its currency, the renminbi. For more than a year, the Obama administration has been pushing China to let the renminbi rise in value against the dollar.

China’s intervention in the currency market has kept its currency artificially low. But that flood of money has also driven inflation, giving Beijing an incentive to let the renminbi move higher. Indeed, the renminbi has increased 3.6 percent against the dollar since last June.

The Obama administration is starting to suggest that the currency problem could gradually solve itself if Chinese prices rise so fast that American goods become more competitive.

The first signs of a potential slowdown in Chinese exports have shown up in shipping. As factories closed on Friday across much of China in preparation for weeklong Chinese New Year celebrations, ports in Hong Kong and elsewhere along the coast were working long hours to meet last-minute shipments.

But the annual pre-New Year rush has been nothing like that of recent years, causing shipping lines to reverse rate increases and cancel sailings they introduced last summer as the American economy improved. This winter, the scurrying started only two weeks before the holidays, instead of the usual four weeks, according to shipping executives. That is because many Chinese factories simply cut back production this month as their Western customers began resisting steep price increases.

China’s inflation is running 5 percent at the consumer level, according to official measures. But Chinese and Western economists describe these measures as based on flawed, outdated techniques and say the real figure may be up to twice as high.

In contrast, the annual inflation rate in the United States is low by historical standards — about 1.5 percent currently.

China imposed price controls on food in mid-November to limit inflation. But Chinese state media began warning the public on Wednesday that those controls might be ineffective, as a drought in northern China has damaged the winter wheat crop and frost has spoiled part of the vegetable harvest in the south.

China’s $6 trillion economy used to be heavily dependent on exports for growth. Exports still account for about one-fifth of the economy, after excluding goods that are merely imported to China for final assembly and then re-exported. But China’s economy has grown powerfully for the last two years mainly on the strength of investment-led domestic demand. That demand, partly fed by low-interest lending by state-owned banks, is another factor in China’s inflation.

Cities and provinces across China have tried to cushion inflation’s effect on consumers by sharply raising minimum wages. Guangdong Province, the export heartland of light industry next to Hong Kong, announced two weeks ago that its cities were raising their minimum wages by an average of 18.6 percent, effective March 1.

That follows a similar increase that took effect in Guangdong around eight months ago. Many other provinces and cities have also sharply raised minimum wages recently.

The wage increases are also driven by a growing scarcity of factory workers. The number of Chinese in their 20s and early 30s, the traditional age bracket for factory labor, is slowly shrinking because of the introduction of the “one child system” a generation ago. And a rapidly expanding university system has produced waves of graduates with no interest in factory work.

Some companies have responded by moving factories deeper into China’s interior, said Stanley Lau, the deputy chairman of the Federation of Hong Kong Industries, which represents exporters employing 10 million mainland Chinese workers. But inland wages are starting to catch up with coastal pay rates, Mr. Lau said, while higher transportation costs frequently offset the wage savings from moving to the interior.

Coach, the American company that is one of the largest marketers of luxury handbags and other accessories, announced on Tuesday that it planned to reduce its reliance on China to less than half of its products, from more than 80 percent now. It will shift output to Vietnam and India, particularly for smaller, more labor-intensive leather goods.

But Mike Devine, the company’s executive vice president and chief financial officer, said that it would take four years to carry out the shift.

Trying to move production elsewhere, some retailers are finding many factories are already fully booked: Vietnam and Thailand each have populations smaller than some Chinese provinces, while Cambodia and Laos have smaller populations than some Chinese cities.

Many manufacturers foresee further labor shortages looming in China that will push wages even higher. They are responding with plans to upgrade their factory equipment and product designs, which could turn them into more direct competitors with high-end manufacturers in Europe and the United States.

Baidu's Profit Rises After Making Gains on Google in Advertising in China

Source: Bloomberg News By Mark Lee

Baidu Inc., owner of China’s most popular search engine, said fourth-quarter profit more than doubled as the company outpaced Google Inc. in boosting advertising sales in the world’s biggest Internet market.

Net income climbed to 1.16 billion yuan ($176 million), compared with 427.9 million yuan a year earlier, Baidu said today in a statement. That exceeded the 1.03 billion yuan average of eight analysts’ estimates compiled by Bloomberg. Sales increased 94 percent to 2.45 billion yuan. The shares surged as much as 9.1 percent in late trading.

Baidu is stepping up its expansion into new businesses, including online video and e-commerce, as the threat from Google fades. The U.S. company moved its Chinese search service offshore last year to avoid Web censorship rules, prompting some customers and partners to defect to Beijing-based Baidu.

“The migration to Baidu from Google will continue this year, albeit at a reduced pace,” Jake Li, who rates Baidu shares “accumulate” at Guotai Junan Securities, said before the earnings. Baidu is bolstering its services, such as video, social networking and wireless search, Li said.

Baidu shares rose as much as $9.87 to $118.50 in extended trading following the announcement. Earlier, the stock climbed 2 percent to $108.63 on the Nasdaq Stock Market. It has gained 13 percent this year, after more than doubling in 2010.

Tencent, Alibaba

Tencent Holdings Ltd., China’s biggest Internet company by market value, has gained 20 percent in Hong Kong trading this year, while Alibaba.com Ltd., the leading local e-commerce company, has increased 10 percent.

Baidu’s revenue will range from 2.38 billion yuan to 2.45 billion yuan in the first quarter, the company said. That compares with the 2.3 billion yuan average of six analysts’ estimates compiled by Bloomberg.

Baidu accounted for 75.5 percent of China’s search-engine market by revenue in the fourth quarter, rising from 73 percent in the previous three months, according to research company Analysys International. Google’s share dropped to 19.6 percent from 21.6 percent, the research firm said.

Google’s search-engine business in China is “solid,” Daniel Alegre, the company’s head of sales in Asia, said in December, without disclosing details. Google’s combined revenue in China from display ads, online search and Chinese companies marketing on Google’s global sites increased last year, Alegre said at the time.

Cnooc Pays $570 Million for Chesapeake Shale Stake

Source: Bloomberg News By Jim Polson and John Duce

Cnooc Ltd., China’s largest offshore energy producer, agreed to pay $570 million in cash for a one- third stake in Chesapeake Energy Corp.’s Niobrara shale project, adding to its U.S. holdings in crude oil production.

The Chinese explorer also agreed to pay as much as $697 million, up to two-thirds of Chesapeake’s costs to drill and complete wells in the area, the companies said in a statement yesterday.

The deal follows Chinese President Hu Jintao’s first state visit to the U.S. this month to expand economic ties and would be Cnooc’s second U.S. energy asset purchase from Chesapeake, five years after political opposition derailed its $18.5 billion bid for Unocal Corp. The company will pay about $2,140 an acre for its stake in Niobrara and has the right to a one-third share in future acquisitions in the shale formation.

“If you look at President Hu’s recent trip to Washington, there seems to be a greater willingness in the U.S. to encourage Chinese investment,” said Wang Aochao, head of China energy research at UOB-Kay Hian Ltd. in Shanghai. “We don’t have all the details at hand, but it appears to be a fair price for these assets. The Chinese oil majors still think valuations generally for oil and gas assets are reasonable.”

Niobrara covers 8,400 square miles (21,756 square kilometers) in Colorado and Wyoming and may contain 103.6 million barrels of oil, the U.S. Geological Survey estimated in 2006 before Chesapeake, EOG Resources Inc. and other producers began drilling the formation.

‘Seems Rich’

Cnooc, which is listed in Hong Kong, has risen 54 percent in the past 12 months, outpacing the 16 percent gain in the benchmark Hang Seng Index. The shares fell 0.7 percent to HK$17.20 today. The Hang Seng also declined 0.7 percent.

Chesapeake rose $2.20, or 8.1 percent, to $29.53 at 4:02 p.m. in New York Stock Exchange composite trading, its largest gain in five weeks. Other U.S. oil and gas producers with Niobrara leases also rose, including Petroleum Development Corp. and Andarko Petroleum Corp.

“This price seems rich,” Eric Hagen, an analyst for New York-based Lazard Capital Markets, said in a note today to clients affirming a hold rating on Chesapeake shares. “Cnooc is seeking access to technology more than U.S. assets.”

The Chinese energy explorer forecast a 12 percent increase in oil and gas production in 2011 after spending about $8.4 billion in the past year acquiring assets in the U.S., Africa and Argentina. By contrast, output rose 44 percent in 2010.

Prior Shale Purchase

Cnooc, based in Beijing, completed its $1.08 billion purchase of a one-third interest in Chesapeake’s 600,000 acres in the Eagle Ford project in South Texas in November. The Niobrara deal may be completed in the first quarter of this year, according to yesterday’s statement.

“The win-win deal valuation is fair based on our estimates and Cnooc’s strategy to further expand into the oil-rich shale deposits in the U.S.,” said Gordon Kwan, head of regional energy search at Mirae Asset Securities in Hong Kong. “The total investment of $1.27 billion in the deal through 2014 is manageable and equates to about 14 percent of Cnooc’s budgeted $9 billion for 2011.”

The Niobrara deal will lead to a reduction in U.S. oil imports over time and the creation of thousands of jobs, Aubrey McClendon chief executive officer of Oklahoma City-based Chesapeake, said in the statement.

“This transaction will provide the capital necessary to accelerate drilling of this large domestic oil and natural gas resource,” McClendon added.

Doubling Rigs

Chesapeake expects to double its drilling rigs in Wyoming’s Powder River and Colorado’s Denver-Julesburg basins to 10 by the end of the year. It plans to have 20 rigs working by end-2012.

Chesapeake, the most active U.S. gas and oil driller, has 16 wells producing in those basins with initial output of as much as 1,000 barrels of oil and 3 million cubic feet of natural gas a day, according to the company.

The companies plan to eventually produce the equivalent of as much as 5 billion barrels of oil from the basins.

Have You Heard...

• China Opens a Door on Currency Swaps
• China blocks "Egypt" searches on micro-blogs
• China Welcomes the Year of the Rabbit
• Carrefour China promises refunds for deceptive pricing a "long-term policy"

China Opens a Door on Currency Swaps

Source: Wall Street Journal By Jean Yung and Esther Fung

SHANGHAI—China will allow banks to trade currency swaps for corporate clients starting March 1, extending the use of the financial derivative beyond the interbank market—a move that facilitates corporate foreign hedging as Chinese trade continues to expand and cross-border investments accelerate.

The announcement comes as Beijing steps up efforts to let the yuan be used more widely outside China, loosening its grip on the currency as it aims to become less dependent on the dollar for trade and investment. Earlier this month, China launched a pilot program to let domestic companies take Chinese currency overseas to invest, building on an experiment that allows Chinese and foreign companies to settle cross-border trade in yuan.

The currency swap is an arrangement in which two parties exchange specific amounts of yuan and another currency, and a series of interest payments on the cash flows.

Traders said foreign companies, in particular, are eager to enter into currency swaps as a way to hedge interest-rate risks from bonds, loans and other types of debt denominated in yuan.

Chinese banks have been allowed to trade currency swaps in the interbank market since August 2007, according to the State Administration of Foreign Exchange, but dealers said demand for the product was low and only a few transactions took place every year.

"Banks have been lobbying SAFE to allow corporates to enter into currency swaps for some time," said an Asian bank trader based in Shanghai.

Letting corporate clients enter into currency swaps could also pave the way for China to allow foreign companies to issue yuan-denominated bonds in China, traders said.

In a statement Sunday, SAFE said the new currency-swap rules are meant to simplify market-entry approval procedures by giving banks more flexibility. Banks that have been eligible for at least one year to issue foreign-exchange swaps, another foreign-exchange derivative, will be able to issue currency swaps to customers without seeking additional approval.

Currency swaps differs from foreign-exchange swaps in that they include interest-rate payments and typically have longer durations—one to five years. Currency swaps are used by investors to hedge both foreign-exchange risk and interest-rate risk, while foreign-exchange swaps hedge only foreign-exchange risk.

Lenders will also be allowed to determine the durations of swaps and the specific currencies they offer to clients; traders said most currency swaps will likely be between the dollar and the yuan.

The interest rates in currency swaps can also be decided by the two parties, though they must be in line with the central bank's rules on deposit and loan rates, SAFE said.

SAFE added the foreign-currency-denominated interest income received by a bank cannot be individually settled and must be managed as part of the bank's existing foreign-currency-income segment.

Traders said they expect currency-swap trading volumes to grow significantly after the new rule takes effect, though banks may initially have a hard time pricing longer-term swaps.

"There are few benchmarks to look at because forex swaps are usually much shorter in duration," said a trader at a North American bank based in Shanghai.

China blocks "Egypt" searches on micro-blogs

Source: Reuters

(Reuters) - China blocked the word "Egypt" from micro-blog searches in a sign that the Chinese government is concerned that protests calling for political reform in the country could spill into China's internet space.

Searches Sunday for "Egypt" on micro-blog functions of Chinese web portals such as Sina.com and Sohu.com -- sites comparable to Twitter -- showed phrases saying search results could not be found or could not be displayed in accordance with regulations.

More than 100 people have been killed in Egypt in five days of unprecedented protests that have rocked the Arab world.

Sunday, more than 1,000 protesters gathered in central Cairo, demanding President Hosni Mubarak step down and dismissing his appointment of a vice president.

China issued a warning to its citizens in Egypt Sunday, urging Chinese travelers to reconsider their plans or seek assistance from the Chinese government in Egypt.

Chinese state media has reported on the unrest, including coverage of the scores of deaths and Mubarak's first appointment of the vice-president, an announcement that may be a nod toward a political successor.

Friday, China's official Xinhua news agency reported that cell phone and internet access were cut in Cairo.

But China's censorship of its micro-blogs appears to be aimed at preventing events in Egypt from setting an example of political opposition at home.

China says the Internet is free and open for its 450 million users, but the government blocks numerous social networking sites like Twitter, Flickr, Facebook and YouTube, which have been used to mobilize protests around the world.

It also routinely closes sites or scrubs content considered harmful to China's security or in breach of the Chinese law.

The Global Times, a popular tabloid published by China's Communist Party, said in a commentary Sunday that democracy was not compatible with conditions in Egypt or Tunisia, and that "color revolutions" could not achieve real democracy.

Color revolutions, a term first coined to describe democracy protests in former Soviets states, lead to "street-level clamor" in African and Asian emerging democracies, the Global Times said.

Protesters in Tunisia's "Jasmine Revolution" forced President Zine al-Abidine Ben Ali into exile in mid-January.

"Democracy is still far away in Tunisia and Egypt. The success of democracy takes concrete foundations in economy, education and social issues," the Global Times said.

"But when it comes to political systems, the Western model is only one of a few options," the paper said.

China Welcomes the Year of the Rabbit

Source: Voice Of America

Millions of Asians mark the start of a new Lunar New Year on February 3. The year of the rabbit is expected to bring some uncertainty.

Across China, millions of people already have commenced sometimes days-long journey to return to their hometowns for the Lunar New Year celebrations.

Most factories and offices are closed for several days starting Saturday, and migrant workers from the cities pack trains and buses. For some it is their only chance to see their families each year. The Ministry of Railways forecast 230 million passengers this season, up 12.5 percent from last year.

Some will head Hong Kong, where the Tourism Board has spent about $2 million to attract mainland tourists to its annual New Year’s parade.

Residents of Hong Kong and Taiwan also are traveling, with flights booked months ago, to take advantage of the three-day holiday.

In the Chinese almanac, the year that starts February 3rd year will be the year of the rabbit - which Chinese feng shui experts say is marked by volatility and conflicts.

Feng shui is a popular Chinese system of harmonizing nature’s elements - water, wood, earth, fire and metal.

Investment bank CLSA Asia Pacific Markets publishes an annual feng shui report on the stock market. This year, the report tells investors to buy metal, marine, airline, financial and gaming stocks to take advantage of the strong metal and water elements during a rabbit year.

Philip Chow, an analyst at CLSA in Hong Kong, says earth-related stocks will lag behind.

"The presence of wood is bad for earth in Chinese feng shui," said Chow. "The relatively unexciting sectors would include real estate, construction and building materials."

Taiwan, Singapore, South Korea and Vietnam will also be celebrating the new Lunar New Year. Although Thailand marks its new year separately, in Bangkok, large department stores display rabbit decorations and showcase Chinese food.

But higher food prices damp the celebratory atmosphere. In Vietnam, consumers complain about expensive cooking oil, vegetables, fruit and even the flowers used for traditional decorations. Consumer prices in January surged more than 12 percent.

In Taipei, the city government says prices of popular holiday foods have risen as much as 13 percent from last year. In mainland China, inflation reached 4.6 percent in December.

Carrefour China promises refunds for deceptive pricing a "long-term policy"

Source: Xinhua

BEIJING, Jan.29 (Xinhua) -- Carrefour China promised customers Saturday that it will always refund five times the difference between the advertised price and the one charged at the register, after it was blacklisted by Chinese authorities for deceptive pricing.

Chen Bo, spokesperson with Carrefour China, apologized to Chinese customers in an exclusive interview with Xinhua.

Chen said the company has started to work on the pricing issue.

China's price regulator announced last week it had found several retailers cheating customers, including 11 of Carrefour's China stores.

The Carrefour stores must pay a fine five times the amount they overcharged, or 500,000 yuan (75,757.5 U.S. dollars) if they can't calculate that amount, according to the National Development and Reform Commission.

Carrefour China has established both short-term and long-term measures to solve the issue, Chen added.

"We will have our special control group to conduct internal price inspections, with wide coverage and high frequency," Chen said.

Chen said the refund policy will be permanently implemented at Carrefour's 182 outlets in China, with non-implementation of the policy being regarded as violation of company rules.

Have You Heard...

• China Said to Plan to Raise Capital Ratio When Credit Excessive
• CBS unit expands online reach in China
• GM Takes on Geely in China's Poorer Cities With `Treasured Horse' Models
• Chinese ready for upheaval, sex in Year of the Rabbit
• Wal-Mart apologizes for price cheating

China Said to Plan to Raise Capital Ratio When Credit Excessive

Source: Bloomberg News

China may order its biggest lenders, including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., to raise capital ratios to as high as 14 percent when credit growth is judged excessive, said a person familiar with the matter.

Newly proposed rules would require increasing capital adequacy buffers by as much as 2.5 percentage points when the banking regulator determines loan growth to be too fast, said the person, declining to be identified as the plan isn’t public. In normal conditions, lenders deemed systemically important will need to have a minimum 11.5 percent ratio, unchanged from the current requirement for China’s biggest banks, said the person.

China is tightening oversight of banks, limiting mortgages and raising interest rates to prevent a record $2.7 trillion of credit extended in the past two years from inflating asset bubbles that may saddle lenders with bad loans. Some banks may need to raise additional capital to meet the new requirements, the person said.

“This shows further tightening as the regulator worries about excessive lending,” Xu Guangfu, an analyst at Xiangcai Securities Co. in Shanghai, said by telephone. “The banking sector’s valuation is already depressed and this may drag it lower. The market will be more concerned about those banks that were lending aggressively.”

No Decision

An official with the regulator’s news department, who declined to be identified because of the agency’s rules, said a decision hasn’t yet been made on the ratios and that the process is still ongoing.

Under the China Banking Regulatory Commission’s proposed rules, systemically important banks will have to comply with the capital ratio requirements by the end of 2013, three years earlier than other lenders, the person said. China’s five biggest banks, which also include the Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co., are currently deemed systemically important, the person said.

All banks would be required to have a capital adequacy ratio of at least 8 percent, with an additional 2.5 percentage points as a buffer during normal credit conditions, the person said. Systemically important banks would need to maintain an additional percentage point, the person said.

Excessive Credit

During periods when loan growth is too fast, the regulator will require all lenders to increase their ratios by as much as 2.5 percentage points, the person said. It isn’t immediately clear what standards would be used for determining when credit expansion is excessive, the person said.

Regulators are taking advantage of record bank profits and double-digit economic growth to set stricter rules at a faster pace than agreements announced in July by the Basel Committee on Banking Supervision. China’s economy, set to surpass Japan’s to become the world’s second biggest, grew 10.3 percent in 2010, the fastest pace in three years, according to government data.

An earlier version of the rules would have required China’s biggest banks to have capital adequacy ratios of 11 percent to 15 percent by the end of 2012, a person with knowledge of that proposal said in September. That compares with ratios from 11.5 percent to 14 percent stipulated by the latest proposal.

The previous version also called for Tier 1 capital of 8 percent. The new proposal’s requirement for Tier 1 capital, which includes common equity, retained profits and perpetual preferred stock, is 6 percent, same as the Basel rules, according to the person.

China vs. Basel

China would, under the new rules, require core Tier 1 capital, which excludes perpetual preferred stock, of at least 5 percent by 2013 for the nation’s biggest banks, the person said. The Basel rules require banks to have 4.5 percent of such capital within five years, and to add an additional 2.5 percent buffer by Jan. 1, 2019.

Domestic lenders had an average capital adequacy ratio of 11.6 percent as of Sept. 30, with their Tier 1 ratio standing at 9.5 percent, according to the CBRC.

The new rules would also require banks to have a 4 percent so-called “leverage ratio,” which measures Tier 1 capital as a percentage of total assets that are both on and off the lenders’ balance sheets, the person said.

Systemically important banks will also need to have bad- loan provisions that are no less than 2.5 percent of total outstanding credit by the end of 2013, or 150 percent of non- performing debt, whichever indicator is higher, the person said. Other lenders with relatively strong profitability should meet the requirement by 2016, the person said.

December Provisions

Chinese banks’ provisions were 218.3 percent of their outstanding bad loans as of Dec. 31, the regulator said Jan. 24.

Initial assessments show that the new rules won’t have any major impact on bank lending or the nation’s economic growth in the near term because most lenders are currently capable of meeting the requirements, the person said.

At the same time, factors including bad loans and China’s move to more market-based interest rates may lead to the rules having a greater impact than what’s expected by the regulator, the person said. As a result, the government will seek to improve conditions for fund raising by banks and provide incentives to set aside adequate loan provisions, according to the person.

China Minsheng Banking Corp., the nation’s first non-state lender, announced plans this month to raise about 21.5 billion yuan ($3.3 billion) in a share sale in Shanghai to plug a capital shortfall. Bigger rivals have already tapped investors, led by $56 billion in equity sales by the nation’s five largest state-owned banks in Shanghai and Hong Kong last year, as the regulator prepared to tighten capital rules.

CBS unit expands online reach in China

Source: By Shen Jingting (China Daily)

The company, with 23 Chinese websites, is already a top brand

BEIJING - CBS Corporation, the media giant who owns the most-watched US broadcasting network, has found a right way to realize its business ambition in China - by establishing the biggest vertical interactive media empire in the country.

Despite Chinese restrictions on allowing foreign players to launch television broadcasting services, CBS Corp, through its entertainment subsidiary CBS Interactive (CBSi), gained ownership of 20-plus Chinese Internet companies after it acquired CNET in 2008 for $1.8 billion.

CBSi launched a new round of acquisition bids for three Chinese websites focused on women's interests last week. The websites are Haibao.cn, Kimiss.com and 51jiemeng.com. The company declined to reveal the financial terms of the acquisitions.

It has been the first purchase worldwide for CBSi since global financial crisis hit the company and sent CBS Corp's stock to as low as $3.06 a share in the early 2009. The NYSE-listed CBS Corp closed at $20.58 on Wednesday.

"Our websites mainly fall into three categories - IT, cars and women's fashion, because in those areas, customers are most likely to rely on the Internet to get their information," Wang Lu, president of CBSi (China), told China Daily.

He added the US-based company, with 23 Chinese websites in hand, is already the top vertical Internet brand in China. But it continues to pursue the top place in every separate field in terms of traffic and revenue, since it already leads in the IT segment.

"In the car segment, we are still competing for first place with Bitauto.com, which was listed on the NYSE last November. We are relatively weak in the women's interests segment, so we bought another three websites," Wang said.

The company plans to redesign the newly acquired 51jiemeng.com. The website provides dream interpretation and attracts good traffic, but achieved little profit. Wang said the website may bring in horoscopes - a service loved by many Chinese women.

China, with 450 million Internet users, has surpassed Britain and become the biggest overseas market for CBSi, according to Wang. In 2009, revenue of CBSi China reached 400 million yuan ($60.78 million). It contributed 10 percent of the company's total revenue, and has a growth rate of 40 percent annually - far exceeding CBSi's average global growth rate.

CBSi owns more than 60 websites worldwide, with 425 million unique visitors each month, according to company statistics in 2010.

"China may not be a cash cow for CBS Corp now, but the US high-level management has great hopes for the market," Wang said.

Leslie Moonves, chief executive officer of CBS Corp, said in a corporate internal document that CBS Corp wants to expand its international footprint. To have a profitable business in China is a pretty amazing thing to expand from, he said. And China is a market "that's going to be exploding in the next few years".

In addition to the present three categories, CBSi China looks forward to expanding in new segments. The next two targeted fields are sports and health.

"We operate differently at CBSi in the United States, where threshold is high if the company wants to enter a new category. The US websites are mainly in the IT category," Wang said. New websites sprout every day in China and every player has its own advantages and room to grow, he added.

But the Chinese Internet industry has been getting too hot recently. The ample money influx resulted in unreasonable company valuation, which makes future acquisition difficult.

"At first, I only looked for the top 5 websites in a certain category, but now I have to look down to see the top 10, or top 20," Wang said.

The star Internet websites of CBSi China include ZOL.com.cn, PChome.net, Xcar.com.cn and 55bbs.com.

According to figures from the Internet traffic tracker Alexa.com on Tuesday, the leading IT portal ZOL.com.cn ranks 32nd among all Chinese websites. Xcar.com.cn, which runs China's biggest car-user community, is listed as 85th, and the consumer information sharing website 55bbs.com, ranks 151th.

Two-thirds of CBSi's US acquisitions were not successful, but in China, almost all the purchases have made good returns, according to Wang.

For example, before it was acquired, ZOL.com.cn ranked fifth among Chinese IT websites in 2004, but it is the biggest professional IT site now.

"We are a content provider. I hope to integrate the resources of all these websites to create various services for Chinese people," Wang said.

Liu Xiaodong, senior vice-president of CBSi (China), expressed a similar view that in the future CBSi China will strive to present everything of interest to Internet users in their daily lives.

Mark Natkin, managing director of Marbridge Consulting, said in China, since foreign media companies are restricted to providing broadcasting services, they have to turn to other areas where they are not restricted, like CBSi's move in China. "And the Chinese online market is full of opportunities," he said.

"We see CBS Interactive bought some relatively small Internet companies in China. When compared with Baidu or Dangdang, the revenue is not significant," said Duncan Clark, chairman of the research firm BDA. But the company can achieve a good profit from the stock market if the websites go for a listing, he said.

CBSi China said there is no listing plan for any website, but conceded the biggest reward from its Chinese business may come from stock exchanges, whether that's in Shanghai, Hong Kong or New York.

Though CBS Corp is a content provider and produced popular TV series in the US, Wang said he saw little chance to introduce US TV drama to Chinese television stations or video websites.

"The major reason is that they offered copyright fees which were too low, perhaps up to $2,000 per episode, far lower than what we get from countries like Australia and Britain," he said.

But cooperation with Xinhua News Agency is under discussion, as the Chinese media wants to utilize CBS's network to land in its products in the US. CBS Corp also suggests collaborations in areas such as outdoor advertisement and photo sales.

GM Takes on Geely in China's Poorer Cities With `Treasured Horse' Models

Source: Bloomberg News

Tour guide Chen Libin is waiting for General Motors Co. and Honda Motor Co. to roll out their new China-only brands before replacing his Xiali A+ sedan.

Chen will spend up to 80,000 yuan ($12,153) on a car he’ll drive 300 kilometers a day around the Inner Mongolia grasslands. Models by domestic automakers like Tianjin FAW Xiali Automobile Co. start breaking down after two years, while foreign cars go at least five years without major problems, he said.

“These brands are definitely something I will consider,” Chen, 30, said of GM’s Baojun and Honda’s Li Nian marques. “Foreign technology offers drivers more comfort, fuel efficiency and a lower cost of maintenance.”

GM, Honda and Nissan Motor Co. are creating unique brands for the world’s biggest car market as they try to boost sales in China’s interior, where incomes rose almost 11 percent last year. The cheaper nameplates will help them compete on price against local manufacturers without diluting their cache among Chinese buyers, said John Zeng, an industry analyst at J.D. Power & Associates in Shanghai.

“It’s a win-win situation,” Zeng said. “Consumers pay a lower price for foreign-brand technology, and the foreign makers benefit from an increase in sales volume without hurting their brand image.”

BYD, Chery Competition

These “low-budget cars” will use older model platforms and have few extra features, said Leah Jiang, an analyst with Macquarie Research Ltd. in Shanghai. Anti-lock brakes, automatic air-conditioning and reclining seats may be excluded to keep prices as low as 50,000 yuan, said Koji Endo, an auto analyst at Advanced Research Japan in Tokyo.

That market segment is dominated by domestic automakers BYD Co., Geely Automobile Holdings and Chery Automobile Co. Local brands sold three of every four cars priced below 50,000 yuan, and more than half of those costing between 50,000 and 80,000 yuan, according to Jiang.

“I’m not worried about these new brands at all,” said Jin Yibo, assistant general manager for Wuhu-based Chery, whose sales increased 36 percent last year. “Chinese cars offer better value for money, and we understand the local market and consumer very well.”

18 Million Sold

Vehicle sales grew more than 32 percent to almost 18.1 million in 2010. Sales are expected to grow about 15 percent this year, with about two-thirds of buyers coming from cities where the average annual income is less than $5,000, according to JD Power figures.

“If these brands are successful, they are going to have a much higher growth rate,” said Bill Russo, a Beijing-based senior adviser at Booz & Co. “The number of people that can shop at that price point is much larger.”

Consumer purchasing power was boosted by economic growth of 10.3 percent last year, the government said. Per capita net income in rural areas rose 10.9 percent -- the biggest gain since 1984.

The economy likely will grow 9.8 percent this year, the state-run China Daily newspaper reported this week, citing a government academy. Government officials have indicated that the country’s upcoming five-year plan will make a renewed push to boost domestic consumption.

‘Treasured Horse’

GM, the largest foreign automaker in China, will start selling the four-door Baojun 630 compact sedan early this year through its SAIC-GM-Wuling Automotive Co. joint venture. The car will be available at more than 100 dealers, the company said.

GM, which hasn’t announced Baojun prices, is targeting 15 percent growth next year after sales increased 29 percent last year to 2.35 million vehicles. The Detroit-based company’s shares have gained about 15 percent since a November initial public offering.

“There is tremendous potential in tier-two and tier-three cities,” Kevin Wale, GM’s China president, said last month after unveiling the Baojun, which means “Treasured Horse.”

First-tier cities include wealthier Shanghai, Beijing and Guangzhou, according to the National Bureau of Statistics. The second tier includes provincial capitals and the third includes smaller cities.

Honda, Japan’s second-largest carmaker, and local partner Guangzhou Automobile Group Co. expect to start selling the Li Nian S1 sedan early this year. The brand, which means “Ideal,” uses the City platform and targets entry-level consumers with 1.3-liter and 1.5-liter engines, the Tokyo-based company said.

‘Morning Star’

“We are aiming that these Li Nian users will step up to the Honda brand,” said Takayuki Fujii, a Beijing-based spokesman for Honda.

The company declined to comment on the price. Honda sales in China increased 12 percent last year are expected to grow 10 percent this year, the company said.

Nissan, Japan’s third-largest automaker, and local partner Dongfeng Motor Group Co. said their upcoming Qi Chen, or “Morning Star,” will meet rising demand for cheaper models. They wouldn’t comment on price, though Endo said it likely will be priced between 50,000 and 70,000 yuan.

The car will have the “technologies, quality level, engineering standards” of a foreign brand, said Toshiyuki Shiga, chief operating officer of the Yokohama, Japan-based company.

“I can see some optimistic forecast in this market,” Shiga said last month.

Volkswagen AG, China’s second-largest foreign car manufacturer, and local partners SAIC Motor Corp. and China FAW Group Corp. also may create a China-specific brand, Karl-Thomas Neumann, the company’s China chief executive, said last week.

Hao Hongfu, 32, is waiting for the Baojun before deciding on a replacement for his Beiqi Foton Motor Co. pickup truck.

“I want to buy the car because I think cars made by companies backed up by foreign automakers have better quality,” said Hao, a fruit wholesaler in Shandong province. “I have been driving local automakers’ vehicles and would very much like a change.”

Chinese ready for upheaval, sex in Year of the Rabbit

Source: Reuters By Ben Blanchard and Michael Martina

(Reuters Life!) - The Chinese Year of the Rabbit promises to bring political upheaval from restless youth and sex scandals for the amorous, but in China the government is at least likely to bring inflation under control.

Twelve animals make up the traditional Chinese zodiac, with each year having its own peculiar and unique beliefs, some specific to certain provinces, such as being an auspicious time to give birth or open a new business.

The rabbit is believed to be one of the happiest signs, with people born in that year renowned for their kindness, reliability and loyalty, though with an air of mystery and propensity to cry.

"The Rabbit represents mid-spring when trees and plants are prospering," said Raymond Lo, a Hong Kong-based feng shui master.

"It represents youth, motion and activity and so it will be an energetic year with new movements of young people and more young people demanding changes and reform in politics," he added.

The rabbit, whose year begins on February 3 and is marked by a week-long holiday in China, is also known for romance.

"As such, it will be a year of more sex scandals and sexual affairs," Lo said.

A-list Hollywood couple Brad Pitt and Angelina Jolie, both of whom are rabbits, born in 1963 and 1975 respectively, may be taking a risk if they choose the coming year to finally tie the knot, said well-known Taiwan fortune teller Chan Wei-chung.

"Angelina Jolie has two guardian gods, which means one will make sure that her career will flow like a fish in water, and she will make a great fortune. The other god will take care of her relationship," he told Reuters.

"She is very stable in her relationship and won't be too influenced by it; she will be very relaxed about it. But the one who will feel pressure and discomfort, who is likely to feel hurt and want to escape, will be her partner, Brad Pitt."

Economically, China will finally manage to get inflation under control in the second half of the year, CLSA Asia-Pacific Markets said in its light-hearted annual outlook based on the ancient Chinese art of feng shui.

TRADITION AND SUPERSTITION

While such traditional beliefs are widespread in Hong Kong, Taiwan and the overseas Chinese world, they have been discouraged by the officially atheist Communist Party in mainland China.

Yet superstition is common in China, and certain popular beliefs have surged in popularity following landmark economic reforms started in the late 1970s.

Chinese cities will resound with firecrackers and fireworks during the festival, which are believed to scare off evil spirits and attract the god of wealth to people's doorsteps.

There are many taboos too. Washing your hair signifies washing away good luck, while the word for "four" is avoided, as it sounds like the word for "death."

"My father says we can't pick up the red fireworks casings from the ground in the courtyard. If we leave them it will be a good omen for next year and everyone will get wealthy," said Wang Fang, 24, a Beijing accountant.

Feng Rongxin, a 52-year-old Beijing office worker, said people born in the Year of the Rabbit must wear red clothing and jewellery to ensure good fortune, and that setting the right atmosphere at home was important.

"In my family, we'll make sure the house has a decorative rabbit feel. We'll put at least one rabbit (decoration) in the house for each member of the family, and with 14 people, that's a lot of rabbits," she said.

Chinese pet shops are reporting a brisk trade in the animals.

"Rabbits are easy to take care of. People who frequently travel for business are especially fond of owning rabbits," said rabbit seller Chen Yuan.

But People for the Ethical Treatment of Animals objects.

"There's no better time to help rabbits than during the Year of the Rabbit, and you can do so by refusing to support the pet trade that causes so many animals to suffer," the group's Maggie Chen said.

Wal-Mart apologizes for price cheating

Source: Xinhua

SHENZHEN - Wal-Mart (China) late Thursday apologized to customers after being blacklisted by Chinese authorities for cheating on prices.

The Wal-Mart (China) Investment Co., Ltd. expressed "sincere apology" to affected customers in a written interview with Xinhua.

Further, the company has been cooperating with authorities' investigation into the cheating. It has also launched self-examinations in stores nationwide.

As the Spring Festival approaches, the company will strengthen its price monitoring, the company said.

The company, which entered China in 1996 and has opened 189 stores in 101 cities across the country, promised to continue the self-examination regularly. Its 700 price inspectors perform millions of examinations weekly.

The National Development and Reform Commission (NDRC), China's top economic planner and price regulator, said Wednesday that some Carrefour and Wal-Mart stores in China are involved in deceptive pricing practices.

The NDRC ordered local pricing authorities to urge involved stores to correct wrongdoing, and pay fines five times the illegal income. Their ill-gotten money will be confiscated and those that cannot calculate their illegal income will pay a fine of up to 500,000 yuan.($75,987).

Carrefour "sincerely apologies" and offered to refund customers five times the difference between the price charged and that on the label, China Daily said, citing a statement from the company late Wednesday.

An investigation into the price cheating had been launched in Guangzhou, capital of south China's Guangdong Province, as it continues in Shanghai.

One case was found in the Carrefour store in Tianheyuan Village in the city. A kind of rubber gloves was sold for 0.4 yuan (about $0.06) higher than the price on the label here.

Have You Heard...

• Chinese Firms Set Sights on U.S. Investments
• China to Allow Select Cities to Impose Property Taxes
• McDonald's No Match for KFC in China as Colonel Rules Fast Food
• Disney plans Chinese stores by mid-2012
• Home Depot shuts Beijing store due to difficulties
• Carrefour apologizes for overcharging

Chinese Firms Set Sights on U.S. Investments

Source: Wall Street Journal By Rebecca Blumenstein and Laura Meckler

DAVOS, Switzerland—Key Chinese companies are considering stepped-up investment in the U.S., particularly in infrastructure, and the White House is encouraging them to move ahead.

The prospects for fresh Chinese investment were discussed at a meeting last week between Chinese business leaders and the American and Chinese presidents during a state visit to Washington.

One of the participants, Liu Chuanzhi, chairman of Chinese computer company Lenovo Group Ltd., said in an interview Wednesday at the World Economic Forum at Davos that he was among those seeking to deepen his U.S. investment.

At the meeting, President Barack Obama and the head of China's Investment Corp., the country's $300 billion sovereign-wealth fund, talked about the Chinese investing in infrastructure projects in the U.S.

"The United States is open for investment and would welcome it," Mr. Obama told the group, which included four Chinese CEOs, 14 American CEOs and Chinese President Hu Jintao.

Mr. Liu on Wednesday said Lou Jiwei, the chairman of CIC, had told Mr. Obama that he "was interested in exploring the opportunity."

"If it's complementary and good for both sides, why not?" said Mr. Liu, one of China's most respected business leaders.

The talk of U.S. investments comes as waves of capital are going in the opposite direction—from developed countries like the U.S. into emerging economies like China—as companies chase higher growth rates. But Mr. Liu said Chinese companies continue to see opportunities to invest in the U.S., because it addresses Chinese companies' need to expand abroad while furthering the U.S. goal of keeping jobs.

"These Chinese companies, when they go abroad, do so out of business necessity," said Mr. Liu, who co-founded Lenovo, the world's fourth-largest computer company by sales, and is also chairman of its parent, Legend Holdings Ltd. "I call this the evolution of Chinese business."

From the U.S. perspective, foreign investment generally translates into jobs. White House officials see potential for foreign companies to build manufacturing plants in the U.S., despite higher U.S. labor costs, to bring goods closer to consumers in the world's largest economy.

"For China to invest in the U.S., in much the same way the Japanese did in the '90s and beyond, to create jobs and manufacture products here, could be quite a constructive contribution to our growth and to better relations between our two countries," a senior White House official said. "We see foreign investment as a key part of our effort to create jobs and growth."

The interest in infrastructure, which the Chinese have brought up in earlier meetings, also fits into the White House push for more investment in roads, airports and other projects, a point Mr. Obama highlighted in Tuesday's State of the Union address.

Foreign investments must clear regulatory hurdles under certain circumstances, including when there are national-security implications. On those grounds, China's Huawei Technologies Ltd. was thwarted last year from investing in a U.S. telecommunications company, and in 2006 a Dubai-owned company unsuccessfully sought to take over operations at five American ports.

The Obama administration is aware of the dicey politics that could surround Chinese ownership of key infrastructure projects, such as an airport or a toll road. U.S. officials have encouraged the Chinese to be thoughtful about how they approach this and consider taking minority, passive stakes in larger projects.

During their visit last week, Messrs. Obama and Hu both spoke warmly of Chinese investment in the U.S. at the start of the meeting with the business executives.

"We've got some Chinese business leaders here, who I know are already doing business in the United States, making investments in the United States, engaging in joint ventures in the United States, and helping grow the economy here in the United States," Mr. Obama said. "I know they're interested in finding ways that they can expand their activities in the United States."

Mr. Hu voiced a similar sentiment. "I also have a message to Chinese entrepreneurs. That is, the Chinese government will, as it has always done, support you in making investments and doing business here in the United States," he said.

A CIC spokeswoman declined to comment on Mr. Liu's remarks last week with Mr. Obama. But CIC has made infrastructure investments before. In March, it finalized a deal to pay $1.58 billion for a 15% stake in AES Corp., a major U.S. power generation and distribution company.

Last fall, a CIC official said the fund would be interested in financing U.S. infrastructure projects as a passive investor, not as a majority owner.

"We are advocating that the U.S. government start a program to invest a massive amount of equity, in the form of public and private-equity partnership, in U.S. infrastructure," Zhou Yuan, head of asset allocation at CIC, said at a conference in New York in October.

He said infrastructure projects, such as high-voltage transmission lines, will help create more jobs in the U.S. than the Federal Reserve's quantitative-easing policy.

Lenovo is one of the most active Chinese investors in the U.S., with some 2,000 employees in the country, according to the company. It set a milestone for Chinese investment in the U.S. with its 2005 purchase of International Business Machines Corp.'s PC business.

And Mr. Liu said Legend was looking at a U.S. medical-equipment company and purchases in the hospitality sector, to accommodate waves of Chinese tourists.

Legend Holdings is an investment conglomerate partly owned by the Chinese government. It has property, private-equity and other holdings in addition to its controlling stake in Lenovo, of which it owns more than 40%.

In the PC business, Mr. Liu said he was optimistic about Lenovo's prospects of lifting market share in emerging markets and the U.S.

In the U.S., Lenovo is the fastest-growing vendor, with a market share of 5.6% in the third quarter, according to research firm International Data Corp.

China to Allow Select Cities to Impose Property Taxes

Source: New York Times by David Barboza photo: Bloomberg

SHANGHAI — China said Thursday that for the first time it would allow some cities to impose a property tax on homeowners in the hope of curbing speculation in the housing market and also reducing the government’s reliance on land auctions for income.

China’s State Council, or cabinet, announced the decision a day after releasing a broader set of measures aimed at taming housing prices and preventing a property bubble from threatening the nation’s fast-growing economy.

The government did not offer many details about the new property tax but said two big cities, Shanghai in the east and Chongqing in the west, would be the first cities to experiment with the new property tax on a trial basis.

Shanghai and Chongqing had already signaled a desire to experiment with a property tax. The government said Thursday that they would impose property tax rates of 0.4 to 0.6 percent of the value of a home in Shanghai and 0.5 to 1.2 percent in Chongqing.

It is not clear how the tax will be applied. But Chongqing has suggested that it would impose the tax only on high-end properties, while Shanghai is expected to apply to a broader array of properties, such as second homes or larger units.

The government announcement on Thursday suggests that several other cities could also be allowed to impose property taxes.

Analysts have been anticipating the introduction of a property tax, saying the government could use it to raise huge amounts of money without holding land auctions. The tax could also be used to penalize speculators who purchase homes and then leave them unoccupied while waiting for the value to appreciate.

“It’s a move in the right direction,” said Patrick Chovanec, an associate of professor of business at Tsinghua University in Beijing. “They’re setting a hurdle rate for idle property. You have a situation in China where people are stockpiling idle units. And that’s because there’s no cost for doing so. But it may not be enough to push people out of property if it’s the best thing to invest in.”

The raft of new measures is clearly Beijing’s strongest attempt in years to gain control over the housing market.

On Wednesday, the State Council ordered cities to better manage land supplies, to raise tax rates on the sale of existing apartments or houses held for less than five years and to set price control targets for newly built homes.

The government also said that it would raise the minimum down payment for buyers of second homes to 60 percent from 50 percent.

Soaring housing prices in China have created social anxieties, helped drive up inflationary pressure and created new risks in an economy that is already sizzling hot.

McDonald's No Match for KFC in China as Colonel Rules Fast Food

Source: Bloomberg News By William Mellor

On the edge of Tiananmen Square, just across the street from Mao Zedong’s tomb, He Yingying munches on a piece of chicken and gazes at the benign-looking figure beaming down at her.

“We love him,” she says, bursting into an impish smile.

The 21-year-old student from Beijing’s Capital University of Economics and Business isn’t referring to Mao, whose iconic official portrait dominates the square. She’s talking about a long-dead, white-bearded Kentucky colonel on the logo of the KFC restaurant where she’s feasting on her favorite fast food, Bloomberg Markets reports in its March issue.

In its home market, the U.S., KFC is struggling, an also- ran to McDonald’s Corp., the world’s biggest restaurant company, and feuding with some of its own franchisees over how to halt declining profits.

In China, KFC has achieved such dominance over McDonald’s and local rivals that Colonel Harland Sanders’s image is a far more common sight in many Chinese cities than that of Mao. That accomplishment is striking in a country where foreign companies often stumbled and ran into roadblocks in the past.

The secret to the success of KFC’s parent company, Louisville, Kentucky-based Yum! Brands Inc., can be traced to its use of local ingredients -- both in its management team and on its menus. In the 24 years it has been operating in China, Yum has hired Chinese managers to build partnerships with local companies in its expansion drive and used their expertise to offer an array of regional dishes that appeal to domestic tastes.

Local Flavors

Today, KFC customers can purchase a bowl of congee, a rice porridge that can feature pork, pickles, mushrooms and preserved egg, as well as buy a bucket of its famous fried chicken. In 2010, Yum expected to make 36 percent of an estimated $2 billion operating profit from 3,700 restaurants in China -- eclipsing for the first time its total earnings from the 19,000 Taco Bell, Pizza Hut, KFC, Long John Silver’s and A&W restaurants it owns in America. Yum announced on Jan. 18 that it will sell its Long John Silver’s and A&W chains in part to focus on China.

In the third quarter, Yum’s China profits soared 23 percent compared with a 2 percent decline in the U.S. Yum said in December it expected its U.S. business to return to profit over the whole of 2010. The company will announce fourth-quarter results on Feb. 2.

In a country that Western companies ranging from Dunkin’ Brands Inc. to EBay Inc. have struggled to penetrate, Yum has been opening one new restaurant every 18 hours. It now has a 40 percent market share among fast-food chains compared with 16 percent for McDonald’s, according to Euromonitor International, a London-based market research firm.

Regional Reach

Starting with one restaurant in 1987, Yum now operates 3,200 KFCs and 500 Pizza Huts in 650 Chinese cities --stretching from the tropical southern island of Hainan to the North Korean border and the desert oases of the ancient Silk Road. KFC’s target: to lift that number fivefold to 20,000.

“Yum has become the most successful foreign company in China,” says James McGregor, a former chairman of the American Chamber of Commerce in China and author of One Billion Customers: Lessons From the Front Lines of Doing Business in China (Free Press, 2005). “They got in early, they adapted the product, they expanded aggressively and they gave their Chinese managers real decision-making power.”

China Dependent

Yum’s Chinese success story also brings risks. Bearish investors such as hedge-fund managers Hugh Hendry and Jim Chanos are predicting that the world’s second-biggest economy, which has surged an average of 10 percent a year for more than three decades, could slow to a halt if asset bubbles burst and rising labor and food costs bite businesses.

Within four years, Yum will be dependent on China for more than half of its global revenue and profit margin, according to Warren Liu, a former Yum vice president who’s now China chairman of Investindustrial Advisors Co., a $2.7 billion European private-equity firm.

“I worry about too much reliance on a single market no matter how financially attractive that market is,” says Liu, who wrote the unauthorized KFC in China: Secret Recipe for Success (Wiley, 2008). ”If Yum’s China business went south, it would kill the stock,” McGregor says.

David Novak, Yum’s Louisville-based chairman and chief executive officer, says that’s not going to happen. He cites estimates from Morgan Stanley and Euromonitor that China’s economy will triple in size over the next decade, lifting another 200 million Chinese into the fast-food-consuming class.

“China is the best restaurant opportunity in the 21st century,” Novak, 58, says in an e-mail.

Doubling Down

Novak has doubled down on China. In 2004, he launched a new chain, East Dawning, which serves only Chinese fast food. Then, in 2009, he acquired a 27 percent stake in Little Sheep Group Ltd., a Hong Kong-listed company that operates 480 restaurants specializing in Mongolian hot pot dishes.

Investors are betting that Novak is right. In 2010, Yum shares jumped 40 percent on the New York Stock Exchange compared with a 23 percent rise in McDonald’s shares and a 13 percent increase in the Standard & Poor’s 500 Index. Earnings in the third quarter rose 6.9 percent to $357 million thanks to the surge in China profits. Since Yum Brands was spun off from PepsiCo Inc. in 1997, the stock has risen more than sixfold, compared with the 37 percent rise in the S&P 500 to Jan. 25.

”If you want an easy way to get a piece of the China consumer story, Yum is a good stock to buy into,” says Shaun Rein, Shanghai-based managing director of China Market Research Group.

Margins Squeezed

Yet Liu Yang, chairman and chief investment officer of the Chinese unit of London-based Atlantis Investment Management Ltd., says she wouldn’t buy the stock because higher regional minimum wages have pushed up labor costs by as much as 21 percent in major cities and food inflation that hit 9.6 percent in December will increase the price of raw materials.

“Yum used to be a good China consumer play, but they will face a squeeze on their margins,” says Hong Kong based Liu, who helps manage $4 billion.

Yum executives said at an investor conference in New York in December that the growing importance of the China business could lead to more volatility in the bottom line.

“We want to become less China dependent,” Novak told investors. ”I don’t know if there’s another China, but I think India, Russia -- you combine a few of these opportunities, and you’ll create another China over time.”

Yum’s success in China has resulted in large part from its ability to create a menu that combines its traditional finger- lickin’ Western fast food with chopstick-lickin’ dishes that appeal to Chinese tastes.

Dragon Twister

While McDonald’s restaurants in China mostly sell the same U.S.-style burgers, KFC’s menu features dishes that would be un- recognizable to its patrons in the U.S. Alongside the Colonel’s ”secret recipe” fried chicken, Chinese KFCs also offer options such as the Dragon Twister, a chicken wrap in a Peking duck-type sauce, and spicy tofu chicken rice based on the cuisine of Sichuan province, home of China’s hottest dishes.

Pizza Huts in China bear even less resemblance to their Western counterparts. While a KFC in the People’s Republic still looks like a Western-style fast-food restaurant, Chinese Pizza Huts are marketed as sophisticated venues for the legion of increasingly affluent and status-conscious Chinese. Seated in comfortably cushioned booths, customers can choose from a 106- item menu that includes wine and Chinese-influenced dishes such as scallop croquettes with crushed seaweed and even French- inspired escargot.

Circumcision Parties

Yum’s cultural flexibility doesn’t end with the localized menu. While fast-food restaurants in the West often host kids’ birthday parties, KFCs in Urumqi, capital of the Xinjiang autonomous region that’s home to the Muslim Uyghur people, advertise parties for the families of boys who have just undergone the religious ritual of circumcision.

“KFC is certainly doing better than McDonald’s at becoming more Chinese,” says Su Yi, 28, a lawyer, as he pauses between spoonfuls of mushroom, bacon and rice one recent lunchtime in a packed KFC opposite Beijing’s Jishuitan subway station. “I have lunch at KFC twice a week because there’s always one close by. And when I’m out on a date and want to impress a girl, I take her to Pizza Hut.”

China’s embrace of Yum’s brands -- and vice versa -- is most apparent in the center of Beijing, where Colonel Sanders meets Chairman Mao in Tiananmen Square. On the ground level of the three-story KFC, an elaborate mural of the Great Wall greets diners.

‘Fast-Food Culture’

On the second floor, the decor is meant to resemble a hutong -- the traditional Beijing neighborhoods that are disappearing to make way for high-rise office and apartment blocks. The third floor doubles as a gallery for local photographers and painters. A plaque at the entrance describes it as “an exchange channel between KFC fast-food culture and Chinese folk culture.”

KFC was founded by entrepreneur Harland Sanders, a former farmhand and streetcar conductor, in 1952. His handwritten recipe for the chain’s fried-chicken batter remains under lock and key in Louisville. The colonel -- an honorary title bestowed by the state of Kentucky -- sold out for $2 million in 1964 to private investors who took the company public four years later, though Sanders continued to be the main spokesman for the chain.

Losing ‘Fried’

In 1986, Kentucky Fried Chicken Corp., as it was then known, was acquired by PepsiCo, which changed the restaurant unit’s name to KFC in 1991 as health-conscious Americans began shunning fried food.

In 1997, PepsiCo spun off KFC and its other fast-food businesses into a new company called Tricon Global Restaurants Inc. The company changed its name to Yum! Brands in 2002.

KFC’s push into Asia faltered at first. In 1973, the company opened 11 restaurants in the then British colony of Hong Kong but closed them within two years because it couldn’t win over local consumers. A decade later, it returned to Hong Kong and entered Taiwan, where an early joint venture with Japanese partners also ran into trouble.

“KFC’s early failure in Hong Kong and Taiwan served as valuable and inexpensive lessons in preparation for its entry into China,” author Liu says. When KFC arrived in 1987 beside Tiananmen Square, China’s population was looking to the West with anticipation, Liu says.

Local Management

“The first KFC restaurant opened to the warmest embrace imaginable,” Liu writes in his book on KFC. The company had also chosen the right joint-venture partners -- Beijing Corp. of Animal Production, Processing, Industry & Commerce and Beijing Travel & Tourism Corp. -- that were both state-owned, providing the guanxi, or connections, that were essential when setting up a business in China back then.

An even more important decision was to entrust management of the China business to ethnic Chinese from Taiwan, Liu says.

While other foreign companies entering China recruited American or Southeast Asian-born Chinese managers, Yum hired Chinese from Taiwan, who speak the same Mandarin Chinese as mainlanders and understand their culture better, he says.

Those employees were key in helping open up supply lines to allow Yum to reach Chinese locations out of the reach of rival food companies run by overseas managers. The leader of what Taiwan-born Liu describes in his book as the “Taiwan Gang” is Sam Su, 58, chairman of the China business, who in 2008 was promoted to vice chairman of the main board in Louisville and who earned $6.7 million in 2009 -- second only to the $13.1 million earned by CEO Novak.

“Sam is a legend in China business,” says McGregor, the former chamber of commerce chairman. Su wasn’t available for comment for this article.

U.S. Struggles

Yum’s performance in China contrasts with its struggles in the U.S., where revenue declined in 2008 and 2009.

Even a promotion involving Oprah Winfrey backfired. In May 2009, Winfrey’s television show offered free meals with online coupons. The result sparked such a rush that KFC stopped redeeming the coupons two days into the scheduled two-week promotion, prompting consumers to sue Yum. KFC President Roger Eaton was forced to apologize for the fiasco.

After the free-meal giveaway, grilled-chicken sales continued to slide, the dissident franchisees claim. In 2010, some of Yum’s franchisees sued the company in an attempt to prevent it from promoting the healthier grilled chicken ahead of the more popular fried product, saying it was damaging the brand. Both the customer and franchisee lawsuits are continuing in the U.S.

New Competitors

It isn’t all roses in China either. Western companies making everything from fast food to autos are being challenged by lower-cost local upstarts. In fast food, Yum is also facing increased competition from Asian chains such as Dicos, a unit of closely held Ting Hsin International Group; Yoshinoya, owned by Tokyo-based Yoshinoya Holdings Co.; and Yonghe King and Hongzhuangyuan, both owned by Manila-based Jollibee Foods Corp., a company that already outsells McDonald’s and Yum in the Philippines.

McDonald’s is also mounting a belated challenge. It aims to almost double its 1,100 China stores by 2013, China CEO Kenneth Chan said in an interview in December.

For now, though, China’s love affair with Yum’s brands continues. In the KFC overlooking Mao’s tomb, student He Yingying swallows her last morsel of chicken, pronounces it “hao chi,” or delicious, and takes another glance at the colonel’s portrait.

“Did he really only sell the business for $2 million?” she asks incredulously. “He must have regretted it later.”

Sanders died in 1980, never imagining that his Southern specialties would one day lure millions of Chinese customers, thanks to KFC’s not-so-secret recipe of local business knowledge, Western glamour and spicy regional fare.