Have You Heard...

• China lambastes Japan after Taiwan boat confrontation
• U.S. caught China buying more debt than disclosed
• Rice Supplies Tightening in China May Increase Imports, Bolster Inflation
• Buffett-Backed BYD Surges in Shenzhen Debut on Electric-Vehicle Incentives
• China repeals controversial technology trade rule
• Former Taiwan President Indicted
• Taiwan Raises Key Interest Rates
• China eases tax burden on poor with law change

China lambastes Japan after Taiwan boat confrontation

Source: Reuters

BEIJING (Reuters) - China's Foreign Ministry lambasted Japan on Wednesday after a confrontation between a Taiwanese fishing boat and a Japanese coast guard vessel near a group of disputed islands in the East China Sea.

"The Diaoyu Islands and attached islets have been Chinese territory since ancient times, and China has incontrovertible sovereignty over them," ministry spokesman Hong Lei said in a brief statement on the ministry's website (www.mfa.gov.cn).

"Any actions taken by Japan in the seas around the Diaoyu Islands are illegal and invalid," he added, referring to the incident with the fishing boat.

China and Japan have bickered for years over the group of uninhabited islets in the East China Sea, known as Senkaku in Japan and Diaoyu in China, which are also claimed by Taiwan.

Japan's Chief Cabinet Secretary Yukio Edano told a news conference in Tokyo that the Japanese Coast Guard found a Taiwanese fishing boat approaching the islands and warned the boat not to enter Japanese waters.

"From the viewpoints of history and international law, there is no doubt that the Senkaku islands are our inherent territory," Edano said.

The Japanese Coast Guard could not be reached for comment.

Japan's Yomiuri newspaper said that the boat was carrying several activists calling for the assertion of Taiwan's sovereign rights over the islands, and that it left the area later on Wednesday morning.

China considers self-ruled and democratic Taiwan part of its territory, and has in the past weighed in over disputes between Taiwanese and Japanese ships around the islands.

Activists from China, Taiwan and Hong Kong periodically try and visit the seas around the islands, or even the islands themselves, to promote sovereignty claims.

In September 2010, Japan detained a Chinese trawler captain after his boat collided with Japanese coastguard ships near the isles. Beijing canceled diplomatic meetings with Tokyo in protest until he was released.

The two countries are also at odds over China's exploration for natural gas in the same seas. In 2008, they agreed to resolve the feud by jointly developing gas fields.

But progress has been slow and Japan has accused China of drilling for gas in violation of the deal.

U.S. caught China buying more debt than disclosed

Source: Reuters By Emily Flitter

NEW YORK (Reuters) - The rules of Treasury auctions may not sound like the stuff of high-stakes diplomacy. But a little-noticed 2009 change in how Washington sells its debt sheds new light on America's delicate balancing act with its biggest creditor, China.

When the Treasury Department revamped its rules for participating in government bond auctions two years ago, officials said they were simply modernizing outdated procedures.

The real reason for the change, a Reuters investigation has found, was more serious: The Treasury had concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open - all without ruffling feathers in Beijing.

Treasury officials then worked to keep the reason for the auction-rule change quiet, with the acting assistant Treasury secretary for financial markets instructing subordinates to not mention any specific creditor's role in the matter, according to an email seen by Reuters. Inquiries made at the time by the main trade organization for Treasury dealers elicited the explanation that the change was a "technical modernization," according to a document seen by Reuters. There was no mention of China.

The incident calls into question just how clear a handle the Treasury has had on who is buying U.S. debt. Chinese entities hold at least $1.115 trillion in U.S. government debt, and are thought to account for roughly 26 percent of the paper issued by Washington, according to U.S. government data released on June 15.

China's vast Treasury holdings are both a lifeline and a vulnerability for Washington - if the Chinese sold their Treasuries all at once, it could undermine U.S. markets and the economy by driving interest rates higher very quickly. Scenarios of this sort have been discussed in Washington defense-policy circles for at least a year now. Not knowing the full extent of these holdings would make it even more difficult to assess China's political leverage over U.S. finances.

The Treasury has long said that it has a diversified base of investors and isn't overly reliant on any single buyer to digest new U.S. Treasury issuance. Evidence that China was actually buying more than disclosed would cast doubt on those assurances.

THE 'GUARANTEED' BID

The United States sells its debt to investors through auctions that are held weekly - sometimes four times per week - by the Treasury's Bureau of the Public Debt, in batches ranging from $13 billion to $35 billion at a time. Investors can buy the bonds directly from the Treasury at auctions, or through any of the 20 elite "primary dealers," Wall Street firms authorized to bid on behalf of customers. The Treasury limits the amount any single bidder can purchase to 35 percent of a given auction. Anyone who bought more than 35 percent of a particular batch of Treasury securities at a single auction would have a controlling stake in that batch.

By the beginning of 2009, China, which uses multiple firms to buy U.S. Treasuries, was regularly doing deals that had the effect of hiding billions of dollars of purchases in each auction, according to interviews with traders at primary dealers and documents viewed by Reuters.

Using a method of purchases known as "guaranteed bidding," China was forging gentleman's agreements with primary dealers to purchase a certain amount of Treasury securities on offer at an auction without being reported as bidders in that auction, according to the people interviewed. After setting the amount of Treasuries the guaranteed bidder wanted to buy, the dealer would then buy that amount in the auction, technically on its own behalf.

To the government officials observing the auction, it would look like the dealer was buying the securities with the intent of adding them to its own balance sheet. This technicality does not preclude selling them later in the secondary market, but does influence the outcome of bidding in the auction, by obscuring the ultimate buyer. In fact, the dealer would simply pass the bonds on immediately to the anonymous, guaranteed bidder at the auction price, as soon as they were issued, according to the people interviewed.

The practice kept the true size of China's holdings hidden from U.S. view, according to Treasury dealers interviewed, and may have allowed China at times to buy controlling stakes - more than 35 percent - in some of the securities the Treasury issued.

The Treasury department, too, came to believe that China was breaching the 35 percent limit, according to internal documents viewed by Reuters, though the documents do not indicate whether the Treasury was able to verify definitively that this occurred.

Guaranteed bidding wasn't illegal, but breaking the 35 percent limit would be. The Uniform Offering Circular - a document governing Treasury auctions - says anyone who wins more than 35 percent of a single auction will have his purchase reduced to the 35 percent limit. Those caught breaking auction rules can be barred from future auctions, and may be referred to the Securities and Exchange Commission or the Justice Department.

The Treasury Department generally does not comment on specific investors but a source in the department said China was not the only Treasury buyer striking guaranteed bidding deals.

People familiar with the matter named Russia as being among the guaranteed bidders. But Russia's total Treasury holdings, while significant, represent 2.8 percent of outstanding U.S. debt, versus one-fourth for China's.

CHANGING THE RULE

Traders at primary dealers did not have the same diplomatic concerns about the level of Chinese buying. But they did have reasons to dislike guaranteed bidding, and they began clamoring for a change. One trader said in an interview he first brought the issue to the attention of Treasury officials in 2007.

Some primary dealers began expressing concern that the deals were opaque in a way akin to the Salomon Brothers Treasury trading scandal in the early 1990s. In that case, traders from the securities firm submitted false bids under other bidders' names in Treasury auctions in order to more closely control the results, and their bids altered the auction prices. The idea that unseen bidders were again influencing auction prices raised similar concerns among traders.

There were also commercial concerns: Dealers say that knowing that the practice was going on at other firms made them less confident they could see and understand overall patterns of buying in the Treasury market. Such visibility can be one of the greatest benefits of being a primary dealer, since the service itself often doesn't pull in big profits directly.

Some traders at primary dealers say they simply refused to do the deals and ended up turning away customers, including China. That irked sales colleagues who were promising clients guaranteed bidding deals.

At the beginning of 2009, Treasury officials began discussing the issue of guaranteed bidders, with a focus on China's behavior, internal documents seen by Reuters show. The culmination of their efforts was a change to the Uniform Offering Circular published on June 1, 2009 that eliminated the provision allowing guaranteed bidding.

Treasury Secretary Timothy Geithner was in Beijing that day meeting with Chinese government officials on his first formal visit to China since taking up his cabinet post. There is no evidence he discussed the rule change with Chinese officials there.

A spokeswoman for the Treasury Department said: "We regularly review and update our auction rules to ensure the continued integrity of the auction process. The auction change made in June 2009 eliminated some ambiguity in auction rules and increased transparency, which ultimately benefits taxpayers and investors."

The rule change had an immediate impact.

In the first auctions conducted after guaranteed bidding was banned, a key metric rose sharply: the percentage of so-called indirect bidders, those who placed their auction bids through primary dealers. Indirect bidders are seen as a proxy measure for foreign central bank buying, because foreign central banks most often bid through primary dealers. With the elimination of the guaranteed bidder provision, far more buyers were put in this class in reports to the Treasury Department.

The seven-year U.S. Treasury note, which was sold in sizes of between $22 billion and $28 billion once a month from February 2009 to September 2009, had an average indirect bid percentage of 33 percent from February through May. But from June to September the average indirect bid rose to 63 percent.

BIDDERS REACT

Shortly after the Treasury revised the auction rules, U.S. officials learned from dealers that some bidders were seeking to continue using guaranteed bids. According to a Treasury document, a large client asked one primary dealer whether the Treasury might make an exception to the new rule for them. Neither the client nor the dealer were named.

Deutsche Bank, Goldman Sachs, JPMorgan, RBS Securities and UBS all received calls from clients asking for secret bid arrangements immediately after the rule change went into effect, according to the internal Treasury document, a summary of inquiries received seeking guidance from dealers after the rule change.

Deutsche Bank, according to the document, said their client canceled a bidding deal. Goldman told Treasury that a large client would be going to other dealers who in the past had done the deals after Goldman turned them away, the document said.

JPMorgan asked if there were any exceptions to the new prohibition on guaranteed bids. RBS said it actually struck a deal with a customer for a guaranteed bid after the rule change, but it used a different structure and wanted to know what was legal. UBS told the New York Fed that its former guaranteed-bidder client would now change its behavior and buy Treasuries in the secondary market directly after an auction, according to the document.

Spokespeople for Goldman Sachs and UBS declined to comment for this story. Deutsche Bank, RBS, and JPMorgan did not respond to requests for comment.

The change came at a delicate time in U.S.-Chinese financial relations. China, long a major buyer of American government securities, was at the time snapping up huge amounts of debt as Washington was suffering a sharp drop in tax revenue during a crushing recession.

Almost all of the business of buying Treasuries on behalf of the Chinese government is conducted by China's State Administration of Foreign Exchange (SAFE), an arm of the Chinese central bank which manages China's currency reserves, which include large amounts of U.S. Treasury bonds.

SAFE, for its part, was facing heat in China over the extent of its U.S. holdings. SAFE was hit hard by the collapse of Lehman Brothers, the doomed investment bank that was SAFE's trading counterparty in the U.S. overnight-lending market. And the potential losses SAFE faced upon the collapse of the U.S.-backed mortgage titans Fannie Mae and Freddie Mac whipped up such a storm in China that Chinese officials publicly berated the Americans for lapses in financial stewardship.
SAFE officials in Beijing did not respond to a request for comment.

After evidence mounted that China was disconcerted by the auction-rule change, U.S. officials moved to tweak the system, to offset some of the pinch of the stricter bidding rules. The move gave big buyers a way to maintain some anonymity, by increasing the amount of securities it was possible to buy at a single auction without having to declare the purchase in a letter to the New York Fed.

The old requirement stipulated that any purchase of $750 million in Treasury securities had to be declared by the buyer in a letter to the New York Fed. Officials increased the threshold to $2 billion.

'TECHNICAL MODERNIZATION'

The official explanation for eliminating guaranteed bidders did not mention foreign central banks at all. It focused instead on "technical modernization" of auction rules.

One government official warned others in a written message "not to include the words 'China' or 'SAFE' in email subjects." The Securities Industry and Financial Markets Association, the main trade organization for Treasury dealers, asked the Treasury in early June 2009 to explain the change. The Treasury's response: It had found that a detail in its auction rules no longer applied to the way auctions were conducted, and so the rule was changed, according to an internal Treasury memo.

Separately, the Treasury's acting assistant secretary for financial markets, Karthik Ramanathan, told subordinates in an email: "Please let's stick to the 'Modernization of Auction Rules' when outside requests come in on the (rule) change. Please DO NOT emphasize the guaranteed bid portion, or mention any specific investors."

Ramanathan, who left the Treasury in March of 2010 and is now senior vice president and director of bonds at Fidelity Investments in Merrimack, New Hampshire, declined to comment.

The Federal Reserve Bank of New York, which interacts directly with primary dealers on Treasury auctions, issued a strongly worded letter on June 23, 2009, dealers say, urging them to "comply with the spirit as well as the letter of this recent auction rule clarification."

"That was how we knew they wanted us to tell them who was buying what," said a trader at one primary dealer.

Rice Supplies Tightening in China May Increase Imports, Bolster Inflation

Source: Bloomberg News

Rice supply in China, the world’s biggest grower and consumer, may decline after drought and floods damaged crops, potentially boosting inflation and increasing imports.

The early indica harvest may drop in some areas, said eight of 12 officials, traders and farmers surveyed by Bloomberg News in Hunan and Jiangxi provinces, the top producers of the variety which represents 17 percent of annual output. The crop may increase or be about the same as last year, said four of those surveyed from June 21 to June 25. Output of this type already dropped last year to the lowest level since 2003, according to the statistics bureau.

Lower production may bolster rice futures in China that jumped 29 percent in the past year and increase imports that doubled in the first five months. Surging food costs because of drought and floods helped lift inflation to 5.5 percent last month, the fastest pace in almost three years. The rate may quicken to more than 6 percent in June, adding pressure on the central bank to increase interest rates, some economists said.

“Competition for the early rice harvest will be quite intense given expectations for low output, likely driving up prices,” said Zhang Ting, an analyst at Cngrain.com, a researcher owned by China Grain Reserves Corp., which manages the grain reserves. “Output may at best match last year” even as the planted area probably gained, she said in an interview.

Faster Inflation

Rough-rice futures in Chicago climbed 48 percent in the past year, trailing a 75 percent jump in corn. The export price from Thailand, the biggest shipper, gained 8.6 percent. The lagging performance of rice may be “separating us from a food crisis.” Abdolreza Abbassian, a senior economist at the FAO, said in March.

Inflation in China, the second-biggest economy, has been driven by gains in meat, grain and vegetables. The cost of food, almost a third of the consumer price index, jumped 11.7 percent in May from a year earlier, boosted by surging pork prices. The price of packaged rice climbed 19 percent in the year through June 24, according to the Ministry of Commerce.

Rising prices in China may boost imports from Southeast Asia including Vietnam, Cngrain.com’s Zhang said. Purchases in the first five months doubled to almost 300,000 tons, with imports shipped from Vietnam surging, according to customs data. Shipments were 366,192 tons for all last year, data show.

Early indica rice on the Zhengzhou Commodity Exchange climbed to 2,661 yuan a ton on May 30, the highest level in more than three months, and closed at 2,596 yuan today. The procurement price for unhusked early rice on June 23 was 19 percent higher than a year ago, according to a Cngrain.com index.

Lakes Drained

The total rice harvest in China may gain 1 percent to 197.6 million metric tons in 2011 from last year, according to the grain information center. State grain reserves amount to 40 percent of annual consumption, Zhang Ping, chairman of the National Development and Reform Commission, said in March.

Central China experienced the driest three months on record in the lead up to May, draining the biggest lakes and reservoirs and cutting irrigation. Between March and May, seven provinces including Hunan and Jiangxi recorded 60 days without precipitation, delaying the transplanting of early season seedlings, the China Meteorological Administration said June 2.

The drought was followed by devastating floods, which damaged at least 338,000 hectares (835,216 acres) in Jiangxi and Hunan this month, according to the Ministry of Civil Affairs.

Harvest Delays

In Xiangyin county of northern Hunan, one of the areas worst affected by drought, output may plunge as much as 40 percent from last year, according to Chen Youguang, general manager of Zhiyou Rice Industry Co., which processes the grain. Low temperatures also damaged the seedlings, while excessive rain since June flooded some crops, he said.

“Many of these plants haven’t formed heads,” which should have been completed by now, Chen said, standing next to green paddies. The harvest may be delayed by half a month, he said.

The government will set a price floor of 102 yuan ($15.75) per 50 kilograms for early-indica rice this year, 9.7 percent higher than last year, the State Administration of Grain said in March. Farmers will likely demand between 110 yuan to 115 yuan, according to the traders surveyed.

In Zhuantou village, eastern Hunan, 60-year-old farmer Yang Dawen said the drought was the worst he has seen. In addition to the drought, floods this month wiped out some crops, he said in an interview June 22. “Maybe I’ll get half as much as last year” from the half acre planted with early rice, he said.

Buffett-Backed BYD Surges in Shenzhen Debut on Electric-Vehicle Incentives

Source: Bloomberg News

BYD Co., the Chinese automaker part- owned by Warren Buffett’s Berkshire Hathaway Inc., surged on its Shenzhen trading debut today amid speculation it may benefit from government funding for electric-vehicle development.

BYD closed 41 percent higher at 25.45 yuan today. That compares with a 1.2 percent gain in the benchmark Shanghai Composite Index and a 46 percent jump for Sailun Co. Ltd, the other stock that debuted today in Shenzhen.

China may announce a plan early next month to invest 100 billion yuan ($15 billion) to help companies develop vehicles powered by alternative energy, China Quality News reported on its website yesterday. BYD started selling its F3DM plug-in hybrid to corporate and government customers in December 2008, making it the world’s first mass-produced plug-in hybrid car.

“BYD will be one of the first companies that will benefit by incentives like this,” said Vivien Chan, a Hong Kong-based analyst at SinoPac Securities Asia Ltd. “Investors’ bet on the incentives are helping pushing up BYD’s shares.”

BYD reported an 84 percent plunge in profit yesterday for the three months ended March. Declining sales and higher expenses dragged net income to 266.7 million yuan from 1.7 billion yuan a year earlier, according to BYD.

“It may have gone through its worst performing period,” Chan said.

China IPOs

BYD’s Hong Kong-traded shares, which fell the most in more than three months yesterday, rose 5.7 percent to close at HK$25.25 today.

Companies that had their initial share sales in Shanghai and Shenzhen this year have declined by an average of 14 percent since their first day of trading, according to data compiled by Bloomberg.

BYD’s auto sales have slowed this year as the government removed incentives that spurred buying for cars with engines smaller than 1.6 liters, such as its F3 sedan. The carmaker raised 1.35 billion yuan in a share sale in Shenzhen to fund research and expand its manufacturing facilities.

The company plans to introduce the new G6 car model this year and appoint dealers in the U.S. for its E6 electric car, Stella Li, BYD’s senior vice president, said in a June 17 interview.

The automaker is aiming to match last year’s sales in 2011 and sees growth resuming at the start of 2012, Li said. BYD delivered 519,806 cars in 2010, compared with a forecast of 600,000 units.

On-Board TVs

Chinese billionaire Wang Chuanfu founded BYD as a lithium- ion battery maker in 1995, before expanding into auto making in 2003 with the purchase of Xi’an Tsinchuan Auto Co.

MidAmerican Energy Holdings Co., a unit of Buffett’s Berkshire Hathaway, bought 9.9 percent of BYD in September 2008 to tap rising demand for clean technology. BYD’s Hong Kong shares surged more than ninefold after Buffett’s investment, reaching a record close of HK$85.50 on Oct. 23, 2009.

The carmaker has lost 66 percent of its market value since and has declined 38 percent this year, compared with a 2.8 percent drop for the benchmark Hang Seng Index. (HSI)

BYD’s vehicle sales declined for 10 straight months through May as the popularity of its F3 sedan waned. Sales of the F3 dropped 30 percent to 97,300 in the first five months, ranking it behind Volkswagen AG’s Lavida and Jetta and General Motors Co.’s Excelle in China, according to the China Association of Automobile Manufacturers.

‘Fill the Holes’

The carmaker said May 5 it planned to use 1.14 billion yuan from the share sale for research and development and expand its production facilities in Shenzhen. The company will use 652 million yuan of the proceeds to expand its auto-parts unit and 400 million yuan on a lithium-ion battery project, it said.

BYD’s sales will struggle to recover as inventory remains high and dealers continue to exit the brand’s network, said Jack Yeung, an analyst at BNP Paribas Securities Asia Ltd. in Hong Kong.

“This is not looking good,” said Yeung, who has a “hold” rating on the stock. “The money they raised from their A shares is probably going to fill the holes, rather than for additional development,” he said, referring to the company’s Shenzhen sale.

Adoption of electric cars is still in its infancy and unlikely to contribute significantly to BYD’s profit in the near future, according to New York-based Chardan Capital Markets LLC.

Electric Cars

The carmaker will start fleet sales of the E6 in the U.S. at the end of 2011, it said at the Detroit Auto show this year, delaying a previous plan to begin deliveries in 2010. Retail sales will commence in the first quarter of 2012.

Under a pilot plan announced last year, China, the world’s biggest polluter, is paying as much as 50,000 yuan toward the purchase of plug-in hybrid models and as much as 60,000 yuan for vehicles running only on batteries in Shanghai, Changchun, Shenzhen, Hangzhou and Hefei. The government is also considering waiving annual taxes for such owners, the China Daily reported June 20.

Increasing demand for electric cars will boost BYD’s sales, Li said on June 17.

“We are talking about future cars, future needs,” she said. “The markets will need a green car, and then, BYD will play an important role.”

China repeals controversial technology trade rule

Source: Associated Press

BEIJING — China has repealed a policy favoring Chinese producers in government purchases of computers and other technology that triggered complaints by foreign companies and governments that it violated free trade.

The Finance Ministry announcement was the second time in a month that Beijing repealed a technology policy after complaints by its trading partners. The U.S. government announced June 7 that China was withdrawing measures that American officials said improperly subsidized Chinese wind turbine makers.

A brief ministry statement late Wednesday said it would no longer enforce procurement rules that are part of a decade-old "indigenous innovation" campaign to spur domestic technology development. They required government agencies to favor Chinese makers in six areas including computers, clean power and communications.

"This repeal represents a forward step toward leveling the playing field in the government procurement market in China," said Davide Cucino, president of the European Union Chamber of Commerce in China, in a written response to questions.

Foreign businesses had complained the rules would hamper or eliminate access to fast-growing technology markets in China, where the government often is the leading purchaser of computers and other advanced equipment.

Chinese officials agreed to repeal policies linking innovation to government purchasing during President Hu Jintao's visit to Washington in January.

The regulations were a core element in complaints by foreign companies that Beijing is trying to reserve China's most promising industries for domestic competitors in violation of its free-trading pledges.

The repeal is a "meaningful step by the Chinese government in delinking government procurement from indigenous innovation," said Ted Dean, chairman of the American Chamber of Commerce in China, in a written statement.

Dean said the group would watch to see whether the latest change was carried out at the local level.

The rules were especially sensitive at a time when the United States and other Western nations hope to revive economic growth by boosting technology exports.

Beijing has launched "Buy China" campaigns previously to favor local suppliers in construction and other projects. But the technology procurement rules were unusually explicit in rejecting a foreign role on such a large scale.

Former Taiwan President Indicted

Source: Wall Street Journal By Paul Mozur and Jenny Hsu

TAIPEI—Former President Lee Teng-hui, who ushered Taiwan into the democratic era and infuriated China with his pro-independence policies, was indicted on corruption charges on Thursday, an act likely to deepen the island's political divide.

State prosecutors accused Mr. Lee, 88 years old, of embezzling US$7.8 million between 1994 and 1999.

Prosecutors allege the money was stolen from a fund for conducting secret diplomatic activities, which was managed by Taiwan's National Security Bureau.

A spokesman at Mr. Lee's office said the former president was astonished by the charges and had no warning the indictment would be announced on Thursday. He added that Mr. Lee had faith in Taiwan's legal system and insisted he is innocent.

Mr. Lee presided over the rapid democratization of Taiwan after decades of autocratic rule by Chinese Kuomintang leader Chiang Kai-shek and his son Chiang Ching-kuo, who died in 1988.

Mr. Lee won the island's first popular presidential election in 1996, which went ahead in the face of Chinese missile tests off the coast of Taiwan that prompted the dispatch of two U.S. aircraft-carrier groups by then-President Bill Clinton. A furious China saw the elections as a grab for independence by the island, which it claims as a rebel province to be reunited with the mainland.

After stepping down as president in 2000 and being forced out of the Kuomintang, Mr. Lee set up his own pro-independence party, the Taiwan Solidarity Union. He has remained a powerful political figure in Taiwan.

The charges come seven months ahead of the next presidential election, and while it remains to be seen how the case will play out, analysts have said the indictment could help President Ma Ying-jeou to mobilize his base against his opponent Tsai Ing-wen, of the Democratic Progressive Party.

Mr. Lee and his Solidarity Union have been staunch supporters of the DPP.

The elections, scheduled for January, are widely seen as a referendum on recent steps by President Ma to thaw economic relations with China.

A spokesman for the presidential office said, "We respect the judicial process and we do not comment on any ongoing investigations."

The Taiwan Supreme Prosecutors Office said Mr. Lee used the funds to set up a private think tank called the Taiwan Research Institute.

Prosecutors have been investigating Mr. Lee since 2002, according to a 23-page statement from the prosecutors office. Mr. Lee has repeatedly denied charges of embezzlement.

Mr. Lee's attorney, Wellington Koo, told The Wall Street Journal that Mr. Lee was questioned by the prosecutor on May 31, but that there was insufficient evidence to charge him with the crime.

"Furthermore, the prosecutor never gave the defendant a chance to argue his case before the indictment was handed down. The rights of the defendant were completely ignored," said Mr. Koo, who also defended former President Chen Shui-bian against corruption charges.

Corruption investigations and indictments have become common in Taiwan politics, reflecting growing pains in a democracy still struggling to escape the legacy of strongman rule and the murky financial arrangements of that era.

Mr. Chen, who succeeded Mr. Lee as president in 2000 and who served two four-year terms, is serving a 17-year prison sentence after being convicted on a range of corruption charges in 2009. Ahead of the 2008 presidential election, President Ma was indicted and tried for embezzlement. He was acquitted. His DPP opponent Frank Hsieh was investigated for graft but wasn't charged.

Taiwan Solidarity Union Chairman Huang Kun-huei, a confidant of Mr. Lee, said President Ma had pulled a "dirty trick" by using his influence to sway the prosecutors. "This is Ma's way of getting revenge against former President Lee, who has urged voters to vote against him to safeguard Taiwan. Ma knows Lee's rallying cry could greatly impact voter sentiment before the presidential election," Mr. Huang told a news conference.

Yen Chen-shen, a political science professor at National Chengchi University, said he didn't believe there was any political motive behind the charges or their timing.

"In Taiwan, there is no good time to announce a verdict because everyone will have their own interpretation," he said.

The prosecutor said if Mr. Lee is convicted he could face a prison sentence of 10 years to life. But he said that because of Mr. Lee's advanced age and his contributions to Taiwan, any sentence would likely be lenient.

Joseph Wu, who was Taiwan's unofficial representative to the U.S. during Mr. Chen's presidency, said he worried Mr. Lee's indictment would mar Taiwan's reputation. If Mr. Lee is convicted, it "would show that Taiwan still does not enjoy a smooth transition of power," he said.

"After all, we don't elect a president just to prosecute the former presidents. That is not a healthy democracy."

Taiwan Raises Key Interest Rates

Source: Wall Street Journal By Fanny Liu and Jenny Hsu

TAIPEI—Taiwan's central bank raised its policy interest rates by 0.125 percentage point as expected Thursday, the fifth increase in a year, as the island joins other Asian economies in normalizing ultra-low lending costs and containing inflationary pressure.

At its quarterly policy meeting, the Central Bank of the Republic of China (Taiwan) raised its benchmark discount rate to 1.875% from 1.750%. It also raised the secured loan rate to 2.25% from 2.125% and its unsecured loan rate to 4.125% from 4%.

Central Bank Gov. Perng Fai-nan said that inflationary pressure may increase further in the second half and warned that the external economic environment is showing signs of slowing, which could affect the domestic economy. He said the government will take more action to stabilize consumer prices and the economy if needed.

Although external risks are increasing because of the euro zone's debt troubles and global demand for Taiwan's exports has been weakening from the explosive growth seen last year, economists widely expect Taiwan's interest rates to continue to climb at a controlled pace at least for the rest of this year as the island's domestic economy remains resilient.

Accelerating inflation and solid economic growth have led central banks in countries such as China, India, South Korea, Thailand and Malaysia to raise interest rates over the past two months. The Philippines tightened its monetary conditions earlier this month by raising the banks' regular reserve requirements but kept policy rates unchanged.

"The only thing that I worry about is the possibility of typhoons later this year," Mr. Perng said, adding that the absence of typhoons last year meant food prices were lower, creating a low comparison base effect. Typhoons generally cause agricultural damage, leading to a rise in food prices.

HSBC economist Donna Kwok said the central bank will likely raise interest rates by 0.125 percentage point in each of the next six quarters to reach a "neutral" discount rate of 2.625%, probably by the end of 2012, "unless inflation unexpectedly spikes."

Australia & New Zealand Banking Group said: "We believe uncertainties in the global economic climate, notably the euro debt crisis, have prevented the central bank from making a more aggressive move."

Taiwan's central bank has raised its three key interest rates by 0.125 percentage point each in every quarter since June 2010. But the island's lending costs are still well below pre-financial crisis levels, before Taiwan slashed rates by a total of 2.375 percentage points between September 2008 and February 2009 as the economy went into a steep decline.

Revised data from the Directorate General of Budget, Accounting and Statistics showed the island's gross domestic product grew 6.6% in the first quarter from a year earlier, lower than the fourth quarter's 7.1% expansion. The island's GDP grew 10.9% in 2010.

Taiwan's consumer price index rose 1.7% from a year earlier in May, marking the biggest increase since March 2010. April's CPI rose 1.3% on year. The government forecasts a 2.1% rise in CPI in 2011.

"While today's action will slightly alleviate the problem of negative real interest rates, namely, the risk of asset-price bubble, Taiwan's inflation continues to outpace the level of interest rates," ANZ said.

Mr. Perng said board members of Taiwan's central bank have discussed the possibility of increasing the tax on transactions involving uncompleted homes, as the island intends to step up efforts against the boom in the real-estate market. He didn't elaborate.

China eases tax burden on poor with law change

Source: Associated Press By Joe McDonald

China's legislature raised the threshold for paying income tax, effectively exempting tens of millions of workers in a new effort Thursday to defuse tensions over surging inflation and a yawning wealth gap.

The change comes on the eve of celebrations of the 90th anniversary of the founding of the ruling Communist Party, which faces public rancor over high prices and corruption and protests over minority and migrant worker rights.

The Standing Committee of China's legislature raised the minimum personal income required to pay taxes from 2,000 yuan ($300) a month to 3,500 yuan ($540).

That will reduce the number of taxpayers from 84 million, or 28 percent of workers covered by the law, to about 24 million, or just 7.7 percent, said a tax official, Wang Jianfan. The income tax law covers about 300 million urban workers but not most of China's hundreds of millions of farmers, who pay tax under a different system.

The change is meant to ease the tax burden on low-income workers, Wang said at a news conference. The official Xinhua News Agency said lawmakers also wanted to "adjust the distribution of income" - a reference to narrowing the gulf between China's elite who have benefited from economic reform and the poor majority.

"It is a serious attempt to maintain social stability and redress the problems of inflation," said Steve Tsang, director of the China Policy Institute at Britain's University of Nottingham.

Inflation jumped to a 34-month high of 5.5 percent in May, driven by a double-digit jump in food costs and some economists forecast a bigger jump for June.

High prices are dangerous for the authoritarian government because they erode economic gains that underpin the ruling party's claim to power. Food costs are especially sensitive because poor families in China spend up to half their incomes on food.

Communist leaders declared controlling inflation their priority this year but prices have continued to climb despite four interest rate hikes since October and curbs on lending and investment.

The government also has promised hefty increases in social spending to help narrow the gap between an elite who have profited from three decades of economic reform and China's poor majority.

Thursday's announcement highlights the extremes of wealth and poverty in a society that had 115 billionaires in Forbes magazine's 2011 list of the world's richest.

The figures cited by Wang would mean only 24 million workers earn more than 42,000 yuan ($6,500) a year, while millions of families get by on less despite rapid economic growth.

The investment bank UBS said this week that June inflation might rise as high as 6.5 percent after the cost of vegetables and pork jumped following floods that damaged crops in China's south and east.

"A steady improvement in living conditions is what people have been led to take for granted" as part of an unspoken "social contract" under which the communists remain in power, said Tsang.

"If you were earning enough to pay tax so you are not at the bottom of the pile but what you can really afford has been eroded in the last couple of years, then this could not have come soon enough," he said.

Have You Heard...

• West queries China over Pakistan atom ties
• China says its naval drills no cause for alarm
• China Opens Oil Field in Iraq
• Brazil Set to Battle China Over African Copper With Priciest Bid: Real M&A
• Spreadtrum Says Muddy Waters Questions Over Its Accounting Are Groundless
• Special Report:China migrant unrest exposes generation faultline

West queries China over Pakistan atom ties

Source: Reuters By Fredrik Dahl

VIENNA (Reuters) - Western nations pressed China at closed-door nuclear talks to provide more information and help address concerns about its plans to expand an atomic energy plant in Pakistan, diplomatic sources said on Wednesday.

But China showed no sign of reconsidering its position on building two more reactors at the Chashma nuclear power complex in Pakistan's Punjab region, said the sources who attended a June 23-24 meeting of the Nuclear Suppliers Group (NSG).

Beijing's nuclear ties with Islamabad have caused unease in Washington, Delhi and other capitals. They are worried about Pakistan's history of spreading nuclear arms technology and the integrity of international non-proliferation rules.

Washington and other governments have said China should seek approval for the planned reactors from the NSG, a 46-nation, consensus-based cartel that seeks to ensure nuclear exports do not get used for military purposes.

Beijing is likely to shun such calls, arguing that the construction of two additional units at Chashma would be part of a bilateral deal sealed before it joined the NSG in 2004. China also supplied the facility's first two reactors.

The United States and European countries made statements at the meeting in the Dutch town of Noordwijk that "both expressed concern and asked the Chinese to provide more information," one diplomat who attended the talks said.

"The Chinese came back and said that as far as they were concerned Chashma 3 and 4 came under the agreement that was grandfathered when they joined in 2004 and that is as far as they feel they need to go," the diplomat added.

The NSG's annual plenary session addressed a range of nuclear-related issues, and agreed to tighten guidelines for the transfer of sensitive enrichment and reprocessing technology that can be used to develop nuclear weapons.

But a statement about the talks did not mention Chashma.

"It is a very sensitive topic," said one European official.

POSSIBLE COMPROMISE?

Another diplomat who declined to be named said: "A number of countries expressed concern and requested more information. There was a brief response from China."

Close relations between China and Pakistan reflect a long-standing shared wariness of their common neighbor, India, and a desire to hedge against U.S. influence across the region.

Chinese nuclear companies have not issued detailed information about when they will start building the new units, but contracts have been signed and financing is being secured.

To receive nuclear exports, nations that are not one of the five officially recognized atomic weapons states must usually place all their nuclear activities under the safeguards of the U.N. International Atomic Energy Agency, NSG rules say.

When the United States sealed a nuclear supply deal with India in 2008 that China and other countries found questionable because Delhi -- like Islamabad -- is outside the nuclear Non-Proliferation Treaty (NPT), Washington won a waiver from that rule after contentious negotiations.

Pakistan wants a similar civilian nuclear agreement with the United States to help meet its growing energy needs.

But Washington is reluctant, largely because a Pakistani nuclear scientist, Abdul Qadeer Khan, admitted in 2004 to transferring nuclear secrets to North Korea, Iran and Iraq.

Pakistan tested nuclear devices in 1998, soon after India, and both nations refuse to join the NPT, which would oblige them to scrap nuclear weapons.

The first diplomat suggested that a possible way forward on Chashma was if China said that the two new reactors would be the last it claims do not need approval from the NSG.

"What in reality is needed is something that says: this is it, this is the end. And if Chashma 3 and 4 are the end, that is possibly a price worth paying," the diplomat said.

Nuclear analyst Mark Hibbs said he believed China would press ahead with its Pakistan reactor plans and that there were divisions among other NSG states on how to respond to this.

"A kind of 'don't ask, don't tell policy' ... would be very damaging for the credibility of the NSG," said Hibbs, of the Carnegie Endowment for International Peace.

China says its naval drills no cause for alarm

Source: Reuters

BEIJING (Reuters) - Recent drills by the Chinese navy are routine and not connected to tension over the disputed South China Sea, the country's Defense Ministry said on Wednesday, calling for people to view the exercises in a "rational" way.

Harsh rhetoric and an occasional stand-off have long been part of the jousting over the contested South China Sea. But there are more frequent incidents and the complaints from Southeast Asian capitals about China's actions are louder.

"What needs explaining is that a series of recent naval drills are routine and planned annually and have no connection with the situation at present in the South China Sea," ministry spokesman Yang Yujun told a news conference, according to a transcript posted on the ministry's website(www.mod.gov.cn).

"We have seen that some reports have been excessively speculative and overly interpretative. We hope that everyone can objectively and rationally view these normal naval exercises," he added.

China's growing military clout had added to regional jitters about the country's rise. China says that it needs to upgrade its outmoded forces and that its plans are not a threat to any country, pointing out that its Defense budget is far smaller than that of the United States.

Still, tensions have risen sharply in the South China Sea in recent months on concern China is becoming more assertive in its claim to the disputed waters believed to be rich in oil and natural gas.

Vietnam and the Philippines have expressed particular concern about China's growing assertiveness in the seas, including harassment of ships. An Australian think tanks said on Tuesday that risks were growing that incidents at sea involving China could lead to war in Asia.

The United States and the Philippines are scheduled to hold maritime security exercises near the disputed waters this week.

Yang said U.S-Philippines Defense cooperation "ought not to be directed at any third party, nor damage the interests of any third party."

"We hope that relevant countries can put regional peace and stability at the forefront and do more to benefit regional peace and stability," he added.

On Monday, the U.S. Senate passed a resolution that deplored China's use of force against Vietnamese and Philippine ships in the South China Sea.

But Yang repeated Beijing's stance that the United States should stay out of the matter.

"The peace and stability of the South China Sea accords with the common interests of all countries in the Asia Pacific, including China and the United States," he added.

China, Vietnam, the Philippines, Malaysia, Brunei and Taiwan all claim territories in the sea, which covers an important shipping route and is thought to hold untapped oil and gas reserves.

China's claim is to most of the sea's 648,000 square miles (1.7 million square km), including the Spratly and Paracel archipelagos.

China Opens Oil Field in Iraq

Source: New York Times By Edward Wong

BEIJING — China’s largest oil company has begun operations at Al-Ahdab oil field in Iraq, making the field the first major new area to start production in Iraq in 20 years, according to an official news report on Tuesday.

Operations began June 21, and the field is expected to produce three million tons of crude oil per year, reported China Daily, an official English-language newspaper. The oil field was discovered in 1979 and is believed to contain a billion barrels of crude.

The Chinese company, the China National Petroleum Corporation, a state-owned enterprise, secured rights to the field under a technical services contract signed with the Iraqi government in November 2008. Under the contract, the company has development rights for 23 years, China Daily reported. It is investing $3 billion.

The contract, the renegotiation of a deal first signed in 1996 with the government of Saddam Hussein, was postponed after the United Nations imposed economic sanctions on Iraq and the American military toppled Mr. Hussein in 2003. Analysts say the Ahdab operation is China National Petroleum’s largest in the Middle East.

The contract stipulates that the company receive a fee for every barrel of oil produced, rather than an equity interest in the oil field, as it would have under the original agreement with Mr. Hussein’s government. A Chinese oil executive said in 2009 that the company would make a profit of less than one percent, but that the contract was a way to “get a foot in the door” of the Iraqi oil industry, which has much larger fields than Ahdab.

The deal began drawing intense criticism from residents and officials in Wasit Province, where the field is located, shortly after the contract was signed. Some people demanded that Wasit be granted a royalty of $1 a barrel to improve access to clean water, health services, schools, roads and other public needs in the province, which is among Iraq’s poorest. The Iraqi government rejected the demands.

Local residents complained in 2009 that Chinese development of the field would have no benefits for them, other than providing several hundred people with jobs as laborers and security guards for less than $600 a month. At the time, China National Petroleum said it was in an exploration phase and did not need much labor. Now, with the start of production, it is unclear whether the company has hired more residents. At the time, the 100 Chinese workers at the compound were too scared to leave the area for fear of being kidnapped.

The Ahdab field’s estimated reserves are small by Iraq’s standards. The Rumaila field near the southern city of Basra, for which China National Petroleum and BP signed a development deal in June 2009, is Iraq’s largest oil field, with an estimated 17.8 billion barrels. Iraq as a whole is estimated to have reserves of more than 100 billion barrels.

China’s energy needs have soared, and it has been scouring the world for energy sources. On Tuesday, President Omar Hassan al-Bashir of Sudan, in which China has large oil interests, arrived in Beijing for talks with Chinese leaders. Mr. Bashir faces indictment by the International Criminal Court on war crimes and genocide charges, but China is not obligated to arrest him because it is not a signatory to the Rome Statute that established the court. He is scheduled to meet President Hu Jintao on Wednesday.

Brazil Set to Battle China Over African Copper With Priciest Bid: Real M&A

Source: Bloomberg News By Tara Lachapelle and Rita Nazareth

Brazil and China are heading for a battle of strategic necessity over copper in Africa that will leave the winner walking away with the most expensive acquisition of a diversified minerals company.

Jinchuan Group, the biggest Chinese nickel producer, is considering a bid for Johannesburg-based Metorex Ltd. (MTX) to rival Vale SA (VALE5)’s offer, two people familiar with the deal said yesterday. Metorex yesterday closed 6.1 percent above Rio de Janeiro-based Vale’s proposal of 7.35 rand a share, the most of any pending deal in Africa, making it the likeliest to garner a higher price tag, according to data compiled by Bloomberg.

Vale, the world’s largest iron-ore producer, and Jinchuan are seeking Metorex’s copper and cobalt mines in the Democratic Republic of Congo and Zambia after demand in China for copper used in construction and appliances pushed the metal to a record this year. Vale’s 7.9 billion rand ($1.2 billion) offer already values Metorex at 30.2 times earnings before interest, taxes, depreciation and amortization, the richest diversified minerals takeover greater than $1 billion, the data show. Bids may reach 10 rand a share, said First Asset Investment Management Inc.

“The Chinese and the Brazilians have voracious appetites” for mining, said Andrew Ross, partner and global equity trader at First New York Securities LLC, a New York-based proprietary trading firm that bets on stocks, commodities, currencies and derivatives. “They view themselves in direct competition for these strategic natural resource assets.”

Competing Bid

A Vale official in Rio de Janeiro, who declined to be named citing corporate policies, said the company had no comment. Jacques de Bie, a spokesman for Metorex, referred to the company’s June 17 statement disclosing an “unsolicited, non- binding expression of interest” from another party.

“It’s not yet a bid or a firm offer or a firm intention to make an offer,” de Bie said. “It’s just an expression of interest at this stage.”

Jinchuan has not made a decision regarding a bid, one person said yesterday, asking not to be identified because it’s too early in the process. Wang Wanshou, a Jinchuan official, said yesterday that he had no information on the deal. A call to the company office outside business hours wasn’t answered.

Metorex owns the Ruashi copper and cobalt open-pit mine in the Katanga province of Congo, as well as the Chibuluma underground copper mine in Zambia. The company has an estimated 4.74 million tons of copper resources, it said in April.

‘Hard to Find’

“Good copper assets are hard to find and Zambian copper assets are prized,” said John Stephenson, who helps manage C$2.7 billion ($2.8 billion) at First Asset Investment in Toronto. “Both Vale and Jinchuan could use the copper exposure and it would be a huge benefit for both.”

Metorex shares climbed 0.8 percent to 7.86 rand as of 4:24 p.m. in Johannesburg. Vale slipped 0.1 percent to 44.44 reais in Sao Paulo.

Vale is aiming to increase production of copper almost fivefold to 1 million metric tons by 2015. The company, which made 75 percent of its revenue last year from iron-ore mining, cut its target this week for 2015 output of the steelmaking ingredient by 10 percent.

It already has a presence in Zambia via its joint venture with Johannesburg-based African Rainbow Minerals Ltd. to develop the Konkola North copper project. Vale Chief Executive Officer Murilo Ferreira, who started in the role in May, told investors that month that the company needs to speed up its studies on how to increase copper output.

‘Very Strategic’

“Vale has not been successful thus far in building out a meaningful copper business with their assets in Brazil,” said Anthony Rizzuto, an analyst at Dahlman Rose & Co. in New York. “You’re looking at a company that has and needs to pay up to be able to expand this business, which they regard as being very strategic in nature.”

Brazil’s gross domestic product grew 7.5 percent in 2010, the fastest pace in more than two decades, according to a central bank survey of economists published May 30. The country overtook Italy last year to become the world’s seventh-largest economy, according to the International Monetary Fund.

Vale’s bid at 30.2 times Ebitda of 262.3 million rand in the most recent 12 months for which finalized financial statements were available was about three times the next highest valuation ever paid in the diversified minerals industry for a takeover greater than $1 billion, Bloomberg data show. The prior record was Xstrata Plc’s purchase of Jubilee Mines NL for 10.1 times Ebitda, or $2.5 billion, announced in 2007.

Estimated Earnings

The offer by Vale is much cheaper based on Metorex’s projected earnings. The Brazilian company would be paying 3.7 times the Ebitda of 2.1 billion rand estimated for this year, data compiled by Bloomberg show.

Metorex’s biggest shareholder, Industrial Development Corp., said it’s “premature” to take a position regarding other bidders. IDC, which is South Africa’s state lender, in May threw support to Vale’s bid.

“We don’t have a position on a new offer as no new offer has been presented so far,” Mbuyazwe Magagula, the new head of mining for IDC, said in an interview yesterday.

Shareholders are scheduled to vote on Vale’s offer July 22. Metorex’s agreement allows other potential acquirers to review the same information that was given to Vale, leaving the door open to other bids.

‘Doesn’t Surprise Me’

Jinchuan Chairman Yang Zhiqiang said in a March interview that the closely held company is looking to buy stakes in overseas copper mines. The Gansu Province-based company produced about 400,000 tons of copper, 130,000 tons of nickel and 6,000 tons of cobalt last year.

“Copper and cobalt are in strong demand in China,” said Bernard Horn Jr., president of Boston-based Polaris Capital Management LLC, which manages over $4 billion and more than 25 million Metorex shares. “So it certainly doesn’t surprise me that some Chinese buyers are potentially interested.”

China agreed in January 2008 to help rebuild Congo in return for access to copper and cobalt. Congo has a third of the world’s cobalt, which is used in medical implants and rechargeable batteries.

Premier Wen Jiabao said in February that China, the world’s largest user of copper, plans to build 36 million affordable homes in the next five years.

“Copper demand will continue to expand,” Dahlman Rose’s Rizzuto said. “Copper is a basic building block of infrastructure development.”

Copper Prices

Copper for delivery in three months on the London Metal Exchange has nearly tripled to $9,072 a ton as of June 28 since the end of 2008 and climbed as high as a record $10,190 on Feb. 15. The metal, which is used in electric cables and plumbing, will average $9,750 this year and $10,000 in 2012, according to the median of analysts’ estimates compiled by Bloomberg. Mining companies haven’t kept pace with demand because reserves are becoming harder to find and the quality of ore is declining, meaning less copper is extracted from each ton of rock.

Metorex closed at 7.80 rand yesterday, the highest price since October 2008 and 6.1 percent above Vale’s offer, data compiled by Bloomberg show.

“The share price has been trading above the offer price, so obviously there are some investors out there who are pretty convinced there is going to be a better offer,” said Stephen Meintjes, head of research at Imara SP Reid in Johannesburg.

A “knockout bid” may be closer to 9 rand a share, he said. First Asset Investment’s Stephenson said a bidding war may reach 10 rand a share or more.

Congo Mining Projects

The deal isn’t as expensive based on future earnings from three mining projects in Congo that haven’t started operating, Meintjes said. Two of the projects are “within a few kilometers” of the Zambian border, according to Metorex’s website, which is where Vale and African Rainbow Minerals are developing the Konkola North copper mine.

Even though Metorex’s assets are “worth a lot of money,” they will require additional capital from a buyer to bring them into production, Polaris’s Horn said.

“There’s a potential bidding war for this African asset,” First New York’s Ross said. “There’s a race for assets worldwide going on. China and Brazil are at the forefront of that race.”

Spreadtrum Says Muddy Waters Questions Over Its Accounting Are Groundless

Source: Bloomberg News

Spreadtrum Communications Inc. (SPRD), the Chinese chip designer questioned by short-seller Muddy Waters LLC over its accounting, said a report suggesting it misstated financial results is groundless.

“Our performance is very solid,” Leo Li, the chief executive officer, chairman and president of the Shanghai-based company, said in an interview in his office today. “The allegations, none of them are true.”

Spreadtrum tumbled as much as 34 percent yesterday after Carson Block’s firm wrote it saw a “high risk of material misstatements.” Chinese companies trading in North America including Sino-Forest Corp. (TRE) have had almost $5 billion in market value erased since Muddy Waters published reports questioning their accounting, according to data compiled by Bloomberg.

“If companies are the target for Muddy Waters, their shares will drop eventually,” said Castor Pang, head of research at Core-Pacific Yamaichi International Ltd. in Hong Kong. “It’s difficult to tell whether the research is trustworthy or not, but it triggers concerns over enterprises in China. Investor confidence is weak.”

Spreadtrum shares pared declines, closing down 3.5 percent in New York trading yesterday, after Needham Group Inc. and Chardan Capital Markets said the Muddy Waters assertions were overblown. The Chinese company was taken public in a June 2007 initial offering led by Morgan Stanley (MS) and Lehman Brothers Holdings Inc. (LEHMQ), with help from Needham and Piper Jaffray Cos. (PJC), according to data compiled by Bloomberg.

‘Wrong Company’

“We believe this organization is trying to target China companies with questionable accounting practices,” Shannon Gao, chief financial officer at Spreadtrum, said in a separate interview, referring to Muddy Waters. “In this case, they picked the wrong company. We do not fit their profile.”

Spreadtrum isn’t the only Chinese company having to defend its financial statements this month. Sino-Forest on June 3 denied overstating assets after a Muddy Waters report said city records didn’t match the amount of land the Hong Kong-based timber company said it owned in China’s Yunnan province.

China Yurun Food Group Ltd. (1068) tumbled 20 percent June 27 on speculation Muddy Waters would issue a negative report on the pork producer. Titus Wu, an analyst at DBS Vickers Hong Kong Ltd., said this week Yurun Chairman Zhu Yicai told investors the stock fell because of “hedge funds and market rumors.” Yurun climbed as much as 9.4 percent in Hong Kong today.

Former Victim

Orient Paper Inc. (ONP) Chairman Liu Zhenyong, whose company was labeled a fraud by Muddy Waters last year, said this month overseas-listed Chinese companies should conduct investigations by independent third parties to counter questions about their financial statements. A four-month probe found no evidence to support the short-seller’s claims, according to Orient.

Quinn Bolton, an analyst at Needham, wrote in a report yesterday in New York that the Muddy Waters letter raised “nothing new.” Bolton reiterated a “buy” recommendation and $30 stock-price estimate on Spreadtrum.

Short selling, or the sale of borrowed stock to profit from a decline, rose to a record 14 percent of Spreadtrum’s outstanding shares as of June 24, up from 6.7 percent at the beginning of the month and 1.5 percent at the end of 2010, according to Data Explorers, a New York-based research firm.

Letter to Chairman

“We have identified a number of issues in Spreadtrum’s filings, and we believe that there is a high risk of material misstatements in the reported financials,” Muddy Waters said in a letter addressed toLi.

Part of the Muddy Waters report focused on the departure of Ping Wu as chief executive officer in February 2009 and the resignation of Richard Wei as chief financial officer in April 2009 a month before the disclosure that a unit received about $44 million in new financing from a Chinese bank. In October that year, Spreadtrum said David S. Wu, another chief financial officer, resigned for personal reasons.

The company’s revenue in the third quarter of 2009 was $38.4 million, up 92 percent from a year earlier and 137 percent from the second quarter, according to a PR Newswire statement on Nov. 16, 2009.

“Why would the board have lost confidence in Mr. Wu when the sales pipeline was so promising?” Muddy Waters wrote. “Because it would be unusual to fire a CFO during the financing process, is it fair to assume he chose to leave? If ‘yes,’ why would he have left with such strong sales in the pipeline?”

‘Ancient History’

In a form 6-K filed with the SEC on Nov. 3, 2009, the company said it replaced Deloitte Touche Tohmatsu CPA Ltd. with PricewaterhouseCoopers Zhong Tian CPAs Ltd. as the independent auditor.

Needham’s Quinn said that the management changes were related to a board plan from the beginning of 2009 to “get the company back on a solid footing with customers” following the hiring of CEO Li in May 2008. The changes are “ancient history,” the analyst wrote.

At the end of 2008 and early 2009, the company ’’almost had no customers,’’ no sales pipeline and a $20 million loss, Li said. He turned around the company by developing new products after becoming president in November 2008, he said.

Analysts Say ‘Buy’

Li, promoted following Wu’s departure, “was responsible for an increased focus on product quality, software stability and customer support at SPRD, issues that plagued the company’s products in 2007 and 2008,” New York-based Quinn said. “This focus on product/software quality and customer support is directly responsible for the company’s significant market share gains made over the past two years.”

Spreadtrum has “buy” recommendations from 12 of the 13 brokerages tracked by Bloomberg News. Among them is Jay Srivatsa, an analyst with Chardan Capital Markets LLC with a $31 price estimate, who said in an e-mail there is “little to no merit” to the Muddy Waters report.

“Some of the allegations, especially those about why the company had a great 2010, or the history about the ex-CFO, and ex-chairman, to me, they don’t have a lot of legs,” said Jack Lu, who rates Spreadtrum’s stock “buy” at Royal Bank of Scotland Group Plc in Taipei. “I don’t think they understand the company too well.”

Special Report:China migrant unrest exposes generation faultline

Source: Reuters By James Pomfret and Chris Buckley

ZENGCHENG, China (Reuters) - In a backstreet pool hall in southern China's factory belt, young migrant workers gather around the tables, their eyes flitting between the worn green baize and the anti-riot police patrolling the grimy alleys.

The police search cars at roadblocks just outside in Dadun, an urban village in the city of Zengcheng, where sweatshops make so many millions of blue jeans that the city promotes itself as the "jeans capital of the world".

"Are you a plainclothes policeman?", one spiky haired migrant sitting on a moped outside the pool hall jokingly asks a visitor.

Weeks after workers rioted in anger over the manhandling of a 20-year-old pregnant migrant hawking wares on the street, resentment simmers and authorities are taking few chances. For three days, the migrants trashed and torched government offices, police vehicles and cars -- local symbols of authority -- before security forces overwhelmed them.

For a nation that will absorb hundreds of millions of rural migrants into cities over the coming decades, the riots that Wang inspired left an acrid taste of what could go wrong if the government mismanages this huge shift.

The ruling Communist Party, which celebrates its 90th anniversary on Friday, fought to power on the back of restive peasants. Now young migrants from the villages are making greater demands to be heard and respected in the cities.

"They look down on the outsiders, so we let them know we won't be bullied anymore," said a lanky 19-year-old migrant worker in Dadun, one of the many factory towns and villages that as made the Pearl River Delta, "the workshop of the world" in Guangdong province next to Hong Kong.

"People have been waiting a long time for a chance to get them back, they (security guards) discriminate against us," he said as he watched his friends hammer away on a street fighter video game called Killer in a games parlor.

Interviews with dozens of migrants in Dadun and other nearby factory neighborhoods revealed raw resentment of harassment and shakedowns from public security teams and local security guards.

Such treatment has gone on for years, they say, even as their material conditions have improved, especially in the past two years as a tightening labor market lifted wages.

But like a ripple of strikes across Guangdong last year, the Dadun riot revealed a younger new generation of migrants still impatient with their lot in cities that can treat them as burdens or threats, not the residents they want to become.

"The police treat you differently if you're a migrant," said Fang Wuping, a migrant worker in Dongguan, the vast manufacturing zone next to Zengcheng.

"I can understand why they have to keep an eye out here" he added, describing a recent bout of detention by wary police.

"But when you're singled out as a criminal like that, you get angry and think, 'What gives you the right?'"

This generation does not share the self-sacrificing ethos of their farmer parents. They are jacked into the World Wide Web, they text like their cohorts elsewhere in the world, and their walks through the streets of Chinese cities are a direct education in the gaps in income and privilege that irk them.

Nowadays when migrant workers finish work at factories across southern China's manufacturing belt, they slip into bleached jeans, bright T-shirts, and sequin-covered blouses that are a gaudy renunciation of rural dullness.

They disdain the plain blue jackets and canvas shoes their farmer-migrant parents usually wore and sport tattoos and dyed hair, proclaiming that this generation yearns for a future far from the villages where they were born.

"Our mentality is different from our parents'. We don't save money like they did," said Li Bin, a 20-year-old worker in Dongguan, who sported a mullet haircut and an earring.

"We spend it as we make it, spend it on ourselves -- restaurants, the Internet, karaoke. But in their time, people were simpler. They were saving money so they could come home."

"I'd never go back to farming," cut in Li's friend, Fang Wuping. "If you threatened to kill me, I wouldn't. If you're a farmer, people despise you, look down on you," he said.

China has 153 million rural migrants working outside their hometowns. By 2009, 58.4 percent of rural migrants were born in 1980 or after, and ninety percent of this "new generation" have barely ever farmed, a National Bureau of Statistics survey found.

VOLCANIC ERUPTIONS

Wang Lianmei, the pregnant woman who guards pushed to the ground trying to move her goods off the street, will almost certainly not become China's version of the vegetable seller in Tunisia whose mistreatment by a policewoman sparked protests that touched off the "Arab spring".

The Communist Party is armed with fast economic growth, a powerful security apparatus and an aura of public authority to shield it from such risks. Significantly, the unrest did not spread to other nearby towns crammed with migrant workers.

But like a ripple of strikes across Guangdong province last year, the Dadun riot revealed a strong undercurrent of discontent, said Huang Yan researcher at South China Normal University in Guangzhou, capital of Guangdong, who studies unrest among migrants in the Pearl River delta.

"This is like a volcano that is dormant for a long time until it finds a point to erupt from. I'm not saying that this is a volcano that will erupt across the entire country, but in areas where migrant workers are concentrated, there are accumulated tensions," Huang said.

The Party is the primary symbol of authority in a country whose people have scant legal or political channels to press grievances, especially against officials, police or bosses.

China's official trade union noted in a report last year that migrants are getting more assertive -- and more organized.

"The rights mentality of the new generation of rural migrant workers is already clearly different from the traditional rural migrants," it said.

"There are signs that their mode of defending their rights is shifting from individual to collective action," the report said, noting a survey that found over half of migrant workers born after 1980 said they would be willing to join in "collective action" to defend their personal interests.

China has become greatly concerned with collective action since February, cracking down on dissent in response to fears that the "Arab spring" could inspire challenges to its one-party rule, especially before the leadership succession late in 2012.

LOOKING FOR CHAIRMAN MAO

Not every migrant worker has heard of the pregnant hawker and the riot. But the incident resonated with those interviewed for this story.

Zheng Chao, 20, one of the young migrant workers milling about the recruitment stalls in a factory towns near Shenzhen, said he had heard of trouble in Zengcheng but not the details.

"It's normal here for people to take a beating inside the factory and outside," said Zheng, a shirtless 20-year-old from Hunan province.

"What we need is our own Chairman Mao. He was a migrant worker too," he joked. Mao Zedong, who was from rural Hunan, worked briefly as a library assistant in Beijing before embracing a career as a communist revolutionary.

Few people in China want to revisit the chaos of Mao's rule, although nostalgia about the Great Helmsman himself has grown recently. The frustrations of life on the fringe of urban prosperity is the kind of discontent Mao was able to channel in another era.

Four out of five of the roughly 50,000 people who live in Dadun are migrants. Wang Limin, an older migrant from Sichuan who runs his own jeans workshop, said it was the unrelenting discrimination and petty corruption with little legal recourse or help from police that was most dispiriting.

"For the entire day, they mess around with your money. If you go to apply for a residency permit, they say it's free at first, but then they ask for more and more money. They don't give you a free meal for nothing," Wang said at his workshop in Dadun.

"We just want to come here to work, but they manipulate us to death. If the security guards weren't here, things would be good," he added. "They mess with the migrants all the time."

Restive migrants are far from the only source of discontent in China.

The country saw almost 90,0000 "mass incidents" of riots, protests, mass petitions and other acts of unrest in 2009, according to a 2011 study by two scholars from Nankai University in north China. Some estimates go even higher.

By contrast, in 2007, China had over 80,000 mass incidents, up from over 60,000 in 2006, according to an earlier report from the Chinese Academy of Social Sciences.

Many of these outbursts sprang from farmers protesting land seizures, laid-off workers demanding better benefits, and decommissioned soldiers and rural teachers dismissed from jobs.

But the protests by migrant workers pose a tricky challenge for a government steering China toward bigger cities and fewer farmers.

China's urban population is projected to expand up to 400 million by 2040, Han Jun, a policy expert who advises the government said last year. That means cities will absorb 15 million new residents every year, many of them rural migrants.

They will need jobs, housing, hospitals and schools for their children. More will also hunger for the sense of dignity and belonging that the Dadun riot showed was missing for many.

"They don't want to live in the countryside or to farm. They imagine their future lives are in the cities, so their sense of relative poverty and deprivation is also stronger," said Cai He, a sociologist at Zhongshan University in Guangzhou, capital of Guangdong, who studies rural migrant workers.

"In recent years, rural migrants' wages have risen quickly, but after all this is a floating group," said Cai.

"It lacks roots ... in the cities, and lacks a sense of security, and it's also difficult for them to feel secure about their futures."

FALLING LEAF RETURNS TO ROOTS

At the prodding of the central government, local governments are trying to make it easier for migrants to send their children to state-funded schools, and get other social-welfare benefits.

The "City Garden" apartment complex in Dongguan, a factory-filled city next to Zengcheng, embodies the kind of life poor migrants yearn for. Its residents are skilled workers, such as Song Xiaoyong, a 34-year-old quality control technician.

"He'll be able to go to school here, but that's impossible for poorer families," Song said of his two-year-old son, who was cared for by his parents from the central province of Hubei.

Zhang Qin, a poor young migrant worker in Dadun from the poor, southwest province of Guizhou, said her two daughters were unlikely to get into any local school and she would probably send them back to her home village for schooling, a choice many migrant workers have to make.

"There's no money to be made back home. You have to work even harder," Zhang said as she worked with a pair of seamstress scissors trimming garments.

"Urbanizing" rural migrants so they can get schooling and welfare roughly equal to that of established city residents would cost the government about 80,000 yuan ($12,340) for each migrant, the recent government think tank study of rural migration said.

That does not even include housing, which is what worries Niu Xiaoling, a skinny 27-year-old from rural Sichuan in southwest China.

"To get a girl, you need a house and to have a career, but nowadays it's so expensive to pay for a home," Niu said. "Even in my village, a house would cost at least 100,000 yuan."

He and other frustrated migrant workers talk about moving to another part of China, where they might get better pay and the cost of living might be lower. But nobody wants to go back to home villages where off-farm work is scarce.

An old Chinese proverb says a falling leaf always returns to its roots. Wang Jiaoguang, a 48-year-old former farmer from Hunan province who works in south China's factory belt, says he's not so sure that applies to the younger generation.

"It's not good to know you have no roots anymore."

Have You Heard...

• Analysis: China carrier will add to tensions but no threat yet
• Sudan’s Bashir Arrives Late in China After Turkmenistan Turns Back Plane
• China Development Bank Agrees to Loan Ecuador $2 Billion, Bolstering Bonds 
• China Firms Face Research Armies
• China Yurun Extends Slump as Muddy Waters Speculation Spurs Short Sellers
• Mainland Chinese Begin Visiting Taiwan
• Wikileaks airs Communist Party's dirty linen

Analysis: China carrier will add to tensions but no threat yet

Source: Reuters By Ben Blanchard

BEIJING (Reuters) - China's expected launch soon of its first aircraft carrier will add to a growing military clout just as other powers in Asia are becoming uneasy about Beijing's more strident claims over disputed seas in the region.

In practical terms, though, it is likely to take the Chinese navy years to have a credible carrier operation in Asia's seas, which have largely been the domain of the U.S. navy since World War Two.

The former Soviet carrier, one destined to become a floating casino, is part of President Hu Jintao's push to modernize the navy and could be presented to the world as soon as this week to coincide with the 90th anniversary of the founding of the Communist Party on July 1.

China is already busy upgrading its destroyers and submarines to sail further and strike harder, building a "blue water" navy to project power far from its shores and to protect the sea lanes on which its trade-reliant economy depends.

An aircraft carrier fits neatly into that strategy. It could end up being based in the southern island province of Hainan, which sits strategically atop the disputed and potentially energy-rich South China Sea.

"It will be the clearest possible signal that China intends to operate at sea in a sustained fashion," said Dean Cheng, a China security expert at the Washington-based Heritage Foundation.

"Given the ongoing tensions in the South China Sea, it is an unmistakable signal to Manila, Kuala Lumpur, Jakarta, as well as Hanoi and any other regional capitals that the Chinese are serious when they describe their maritime territories as 'blue soil,'" he added.

"Indeed, given the rising tensions, this is something that can be expected to ratchet up tensions."

Other powers in Asia are already alarmed at China's growing military prowess -- defense spending is growing fast and in January it confirmed it had held its first test flight of the J-20 stealth fighter jet.

RISK OF WAR

In recent weeks, China has been flexing its muscles more aggressively in the South China Sea, where a territorial dispute with Taiwan and several Southeast Asian nations, including Vietnam and the Philippines, has festered for years.

Australian policy think tank the Lowy Institute warned on Tuesday that risks are growing incidents at sea involving China could lead to war in Asia, drawing in the United States and other powers.

Earlier this month, Chen Bingde, chief of the People's Liberation Army's general staff, confirmed via Hong Kong media that the country was indeed building a carrier.

The 300-meter (1,000-foot) Varyag is undergoing refit at a state-run shipyard in northeastern city Dalian, sources have told Reuters. Images of the rust-stained ex-Soviet ship have appeared on Chinese websites, apparently being re-fitted.

A Chinese firm bought the then-engineless Varyag from Ukraine in 1998 for $20 million, planning to convert it into a floating casino in Macau, but it then ended up in the hands of China's military.

China says it needs to upgrade its outmoded forces and that its plans are not a threat to any country, pointing out that its defense budget is far lower than the United States.

Beijing in March said it would boost defense spending by 12.7 percent in 2011, for a total of 601.1 billion yuan ($92 billion), marking a return to double-digit growth.

The cost of building a medium-sized conventionally powered, 60,000-tonne carrier similar to the Russian Kuznetsov class is likely to be more than $2 billion. China is likely to acquire at least two, sources say.

CARRIER OPERATIONS DIFFICULT

But China, which would be the third Asian country to have a carrier after India and Thailand, needs hardware, software and pilot training in order for the ship to present a credible deterrence.

Chinese pilots have yet to master takeoffs and landings from carriers, and it is far from certain what aircraft would use it as a base.

While they have been undergoing training, they have far fewer flying hours than their U.S. peers and are in any case considered by analysts to be far more poorly trained overall.

"It could take up to five more years before you could say that thing is operationally deployed and then they have to learn how to do carrier battle group operations," said Richard Bitzinger, a senior fellow and regional defense expert at Singapore's S. Rajaratnam School of International Studies.

"The bottom line is, it's going to take them a long time before they can say they have a fully operational carrier, and it's going to take them a lot longer before they can actually say that PLA is a carrier-based navy."

PROTECTING TRADE ROUTES

For Beijing, the rationale of an aircraft carrier is more than just about modernizing a navy whose most notable engagements of the past few years have been skirmishes in the South China Sea with some of the other claimant nations.

China's sending of naval vessels further afield, to the waters off Somalia to fight pirates, and through the southern Japanese islands, has also partly been about ensuring trade routes are protected.

"We are a major trading nation and need to have the ability to ensure the security of the sea lanes," said Xu Guangyu, a retired major general in the People's Liberation Army who now works for the government-run China Arms Control and Disarmament Association.

"(The carrier) is hardly going to be used to attack Tokyo, New Delhi or Hanoi," he added.

To complain about the country's naval air ambitions smacked of hypocrisy, Xu said.

"The United States has 11 aircraft carriers and nobody makes a fuss about them ... But it will take time for other countries to become used to the idea of China having an aircraft carrier." ($1 = 6.483 yuan