Have You Heard...
Saturday, July 30, 2011
Trouble on the China Express
The wreck of a high-speed train has enraged the Chinese public and focused attention on the corruption and corner-cutting behind the country's breakneck economic growth.
Chinese have always lived by the saying "the sky is high, and the emperor is far away," even when the emperor was a Communist Party official hidden behind a crimson-walled compound in Beijing. The meaning is obvious enough: that the realities of provincial life are distant from the exercise of power in the Chinese capital.
But this week the contemporary rulers discovered that the provinces have never been closer, not only to Beijing but to each other. Rarely before have Chinese felt so connected, so e-empowered as they have in the outpouring of grief and outrage over a tragedy on a high-speed railway line that was meant to be a symbol of modernity and centralized power but has instead become an emblem of political vulnerability. The point was apparent to all when one of those far-away emperors, Premier Wen Jiabao, was forced to pay homage in the provinces at the scene of the accident.
Many Chinese recognized that this was not just a train wreck but a collision between China's past and future, between its ambitions and limitations, and between the necessity of rapid economic growth and the inability of a political system to change.
And like any major event in this country of endless over-interpretation, there has been a chain reaction, in Beijing and beyond, whose consequences defy the divination of even the most astute China watcher. As a train carriage dangled perilously over the edge of a damaged track, the fate of passengers, of politicians, of policies, of visions and of vanities hung in the balance.
The past week might be compared to similar events at the start of the 20th century, when China's weak and corrupt imperial court made a belated bid to transform the country into a modern, industrialized power. Its key gambit was to create a national rail network, using foreign loans.
Beijing's attempt to nationalize the few local railways was met, however, with angry resistance. Investors in the merchant class erupted into riots, and the newly emerging modern Chinese press helped to spur the violence. The upheaval contributed to the downfall of the Qing dynasty, a century ago.
The current crisis over China's high-speed rail network shows no sign of directly threatening the current regime. But it has provoked an online media storm, driven by China's new middle class, and highlighted the weaknesses of China's current leadership, whose rampant corruption and reflexive secrecy could undermine its rule in the long term.
Not unlike a century ago, faith in the central government is eroding rapidly—a deeply troubling parallel for the country's ruling Communists. Party leaders are anxious to avoid the fate of Chinese emperors who were traditionally deemed to have lost the "mandate of heaven"—the divine right to rule—in times of national crisis.
China's high-speed rail system is an apt metaphor for the country's hurtling economy over the past decade: a colossal investment project, born of the state, steeped in corruption, built for maximum velocity, and imposed paternalistically on a public that is at once amazed and skeptical. The rail system has married foreign technology with national ambition in a network billed as the biggest and most advanced in the world, in a country whose per capita income ranks below that of Jamaica.
"Do not be desirous to have things done quickly," said Confucius, China's most famous philosopher, some 25 centuries ago. "Desire to have things done quickly prevents their being done thoroughly." China's leadership is now suffering the consequences of ignoring this traditional wisdom.
The train crash a week ago in eastern China sent several carriages plummeting off a viaduct, killing 40 people and injuring more than 190. It has transformed a symbol of Beijing's pride into an emblem of incompetence and imperious governance.
The accident, and the government's bungled handling of the aftermath, has triggered national outrage, much of which has been expressed on Internet microblogging sites watched anxiously by Communist cadres.
When Premier Wen Jiabao—famous for flying to disaster scenes to commiserate with victims—visited four days later, a reporter from China Central Television, the government's primary propaganda outlet, asked pointedly why the site where he was speaking had been scrubbed of all traces of the accident. After railway officials on Thursday blamed the crash on "serious design flaws" in railway signaling equipment, the official Xinhua news agency carried an English-language article headlined "Train crash explanation raises more public doubts."
In its latest attempt to quell the crisis, the government on Friday agreed to almost double compensation for the family of each victim to 915,000 yuan ($140,000).
The torrent of outrage seems to be leading toward a watershed. Serious questions are being asked not only about the causes of the pile-up and the flaws in the response to it but about whether the whole disaster was produced by a style of governance that recklessly pursues rapid economic growth above all else.
The tragedy has highlighted a paradox at the heart of Communist Party rule. To survive, the Party needs high-speed growth that creates jobs and keeps social tensions in check. But rapid growth has spawned regime-threatening risks—deadly accidents, many of them preventable, and an upsurge of scandals in areas like food safety and illegal land seizures. As critics have stressed, a modern economy demands transparency and accountability.
Though the public fury has been mostly online, it has also spilled into the mainstream media. "The speed of China's development at the moment is like a high-speed train—it's the envy of the whole world—but while satisfying our need for speed, we might be forsaking many things," said Qiu Qiming, a popular anchor on the state broadcaster's CCTV 13 channel, in an extraordinary on-air plea after the accident. "Can we drink a glass of milk without worrying? Can we live in a house that won't collapse? Can we drive along a street in a big city without it caving in? Can we ride a train that arrives safely? And if there's a big train accident, can we be sure that the engine won't be buried? In short, can we have a basic sense of security necessary for people's happiness?"
The train scandal has arrived at a particularly inauspicious moment for party bosses, ahead of a once-a-decade leadership change next year, when seven of the nine members of the Party's Politburo Standing Committee—its top decision-making body—are due to retire. It has the potential to complicate the already intricate political process of determining who will fill their spots on the roster.
Xi Jinping, the heir apparent to President and party chief Hu Jintao, has so far avoided public discussion of the train crash, perhaps in an attempt to insulate himself from the damage. But he will be under pressure to oversee efforts to address the governance issues that have been exposed once he takes the party's top post next year.
The public relations disaster for the party has been compounded by the name of the railway line, "Hexie"—Chinese for "harmony"—which is clearly visible in many images of the wreckage. One of the party's stated goals under Mr. Hu has been to create a "harmonious society." Even before the rail crash, the term was widely ridiculed, used as slang for political suppression. In the wake of Saturday's wreck, some Internet users have been calling the train line "hexue," meaning "drink blood."
A decade or so ago, it would have been impossible for Chinese to react the way they have the past week. Traditional media were tightly controlled by the state, and the Internet was in its infancy—China had less than 10 million Internet users at the start of 2000.
Today, some 485 million Chinese are estimated to use the Internet, and within that group there is a growing and increasingly vocal minority. Weibo, the Chinese Twitter-like service started two years ago by Sina Corp., by itself boasts more than 140 million users—more than a tenth of China's population. Weibo and sites like it have become like a national nervous system, transmitting pulses of opinion and news almost instantly to networks of friends and "followers." Its most avid users are young people and members of the urban elite—those the party has worked hardest to coopt in recent decades.
The government censors much content on the Internet, but it has allowed a surprising degree of openness on Weibo and other sites. In part, experts say, that's because it sees online commentary as a release valve for the public, but the government also fears the fury that would erupt if it took away those outlets.
The new technology has fundamentally changed the relationship between China's government and the governed. The extensive controls on information in the pre-Web days meant that most Chinese were aware of corruption only among local officials, who were convenient scapegoats for national leaders. Now Internet users are aware that issues like food safety problems, land-use abuses and corruption are pervasive.
In a blistering essay titled "The Derailed Country," posted online this past week and then quickly removed by censors, Han Han, one of China's most popular bloggers, mocked the leadership for what he characterized as a heartless approach to development. "They think: 'We built this. We built that. You don't need to care what happens along the way, or who gets the benefits, as long as you get to use it,'" Mr. Han wrote. "Why aren't you grateful? Why all the questions?"
The high-speed rail system was an object of some derision even before Saturday's accident. China began building the system in earnest less than a decade ago, using imported technology, but its companies have integrated that technology into what they say are their own designs and have been trying to sell Chinese-made high-speed rail equipment overseas. The network is already the world's largest and is planned to stretch some 16,000 kilometers (about 10,000 miles) when it is completed in 2020, at an estimated total cost of more than $300 billion.
Chinese officials have hyped high-speed rail with abandon. Mr. Wen was among the inaugural riders on the system's most prized line, connecting the political capital of Beijing to the commercial capital of Shanghai, when it opened several weeks ago, timed for the Communist Party's 90th anniversary. Earlier this month, the spokesman for the Railways Ministry bragged that its technology was so superior to Japan's famous Shinkansen that they "cannot be mentioned in the same breath."
But the project has been beset by problems. Many people have complained that tickets are too costly. Activity on two lines was halted for environmental reasons. And service on the Beijing-Shanghai line has been suspended repeatedly since it started because of technological glitches caused by bad weather and other issues.
Most significantly, the high-speed rail project—and China's railway system more broadly—appears to have been riddled with corruption. Liu Zhijun, railways minister since 2003 and high-speed rail's chief champion, was suddenly sacked in February on allegations of "severe violation of discipline"—party jargon for graft. A month later, the government sacked the Railways Ministry's second-ranking engineer, Zhang Shuguang—who had also been a prominent advocate of high-speed rail—on the same charges.
It's unclear what role, if any, graft played in Saturday's accident, which occurred when one high-speed train rear-ended another that the government has said was crippled by lightning.
Whatever the details, the accident is already seen—even by officials—as an indictment of breakneck growth. "China wants development, but it doesn't want blood-smeared GDP" said a front-page commentary Thursday in the People's Daily, the Communist Party's official mouthpiece. Development "should not come at a reckless price, nor be practiced by a handful of people as if it overrides everything," it said.
Mr. Wen and other Chinese leaders have talked for years about the need to emphasize the quality of growth rather than simply its speed. They have stressed the importance of narrowing a widening wealth gap and curbing widespread environmental degradation. Yet even as they have made those calls, the government has poured money into massive public works projects—often built on land taken from farmers by force or with insufficient compensation.
This approach has pointed up the difficulties for the leadership in adjusting its growth policies when it also needs to continue generating enough jobs to placate a massive, increasingly urbanized population. China's gross domestic product grew 10.3% last year and is expected to grow at least 9% this year—far above the largely symbolic target of 7% annually that Mr. Wen set for the 2011-to-2015 period in a speech to China's legislature in March.
Ken Jarrett, a former U.S. diplomat in China who is now chairman for greater China at consultants APCO Worldwide, said that there appears to be an effort on the part of China's economic leadership to use Saturday's deadly accident to call attention to their efforts to adjust China's growth model. The accident could give Mr. Wen's government "new momentum to try to fight off local officials who are not eager to move in that direction…and enforce their policy more successfully," he said.
Still, it's unclear whether such efforts will be adequate to soothe public anger or effect real change. The train disaster has fed what was already intensifying cynicism and despair among many Chinese about corruption and regulatory problems that have triggered a series of scandals in the past several years, from poisoned baby formula to bridge collapses to embezzlement and other abuses of power by officials and their families.
"When a country is corrupt to the point that a single lightning strike can cause a train crash, the passing of a truck can collapse a bridge, and drinking a few bags of milk powder can cause kidney stones, none of us are exempted," wrote one Chinese Internet user after Saturday's accident. "China today is a train traveling through a lightning storm. None of us are spectators; all of us are passengers."
China to guard bond investors from government shuffle
SHANGHAI/BEIJING (Reuters) - China has ordered companies that have issued bonds to submit any asset restructuring plans to bond holders for approval, sources said, as Beijing steps up its efforts to rein in the risks from a mounting pile of local government debt.
The order by the National Development and Reform Commission (NDRC) would protect bond investors from arbitrary shifting of assets out from under the companies whose debt they have taken on. It addresses what appeared was becoming a strategy of some provincial and city governments as they start to face challenges in repaying debt they took on to pay for infrastructure and other projects.
Chinese media have reported that, as they seek to restructure loans of some local government financing vehicles (LGFVs), some local authorities have sought to shift assets away from other such entities, leaving their bond investors without the promised collateral.
The NDRC's order requires that companies that have issued bonds submit any asset restructuring plans to bond holders for approval before they proceed with such plans, two sources with direct knowledge of the order told Reuters on Friday.
It follows a rare move by one of the country's top ratings agencies to put on review for potential downgrade two financing platforms of the government of Yunnan province.
That step, by Chengxin International ratings agency, resulted from plans for a shifting of assets among Yunnan's LGFVs that could have hurt investors in two specific bonds.
"It is a clear ban on random restructuring of LGFV assets," said an investment bank analyst in central China, who asked not to be quoted by name because he is not authorized to speak to the media.
"These companies must from now on take responsibility (to their creditors)."
Analysts saw the NDRC's step as necessary to stave off a rash of similar shuffling of assets by other local governments, at a time when the banking regulator too is trying to tighten up banks' dealing with such entities.
SORTING WHEAT FROM CHAFF
The NDRC's move coincides with the banking watchdog telling lenders that they need to step up their efforts to make sure they are able to sort credit-worthy LGFVs from those not deserving of credit.
In a recent quarterly meeting, the China Banking Regulatory Commission (CBRC) said that around 40 percent of loans to LGFVs will come due this year and next, increasing the urgency of tackling the risks arising from such debt, two sources with direct knowledge of the situation told Reuters.
The CBRC also urged banks to speed up their efforts to set up a better risk management system for making decisions on loans to LGFVs, the sources said.
Still, regulators also signaled a potential loosening of its stance, according to the sources, saying banks would still be allowed to lend to LGFVs for some projects, including for affordable housing and completing large construction projects approved by central authorities.
"Recently, in a meeting that updated the situation on economic and financial situation, the CBRC pointed out that after more than a year of thorough inspection and correction of misbehaviors, there has been some success in defusing the risks arising from loans to government financing vehicles," the CBRC said in a statement in response to a Reuters query.
"During the next phase, financial institutions in the banking industry should classify such loans and set aside provisions on a risk-weighted basis according to their actual cash flow situations, with a focus on reaffirming interest and principal payment clauses in loan contracts and making sure there is adequate and legal collateral."
FIREFIGHTING APPROACH
Still, there is little sign of a coordinated approach among regulators to the problem of local government debt, which officials say has hit 10.7 trillion yuan ($1.66 trillion) and which analysts say could turn into a damaging pile of bad loans.
Reuters reported in May that regulators planned to shift 2-3 trillion yuan in debt off local governments as part of a solution, but so far no official announcement on such plans has been made.
Instead, for now authorities appear to be addressing problems as they come up. Chengxin, 49 percent owned by Moody's, first highlighted the risks from such asset transfers which has now been followed up by regulators, for example.
In its directive, the NDRC also ordered local governments and shareholders of debt issuers to obtain ratings regarding the impact of any restructuring on the issuers, the sources said. Those ratings must not be lower than the previous ratings if the restructuring is to move forward, the sources added.
Under China's complex regulatory system for bond issuance, the NDRC is responsible for approving issuance of corporate bonds of one year and above by non-listed companies.
The agency also urged local economic planners to monitor the repayment of corporate debt and communicate with issuers six months ahead of their scheduled repayment of principal.
It added that bond proceeds must be used in line with the bond issue prospectus.
An official with the NDRC's news department declined to comment.
($1 = 6.443 yuan)
China approves Sinohydro $2.5 billion IPO plan
(Reuters) - China's securities regulator on Friday approved a plan by Sinohydro Group Ltd, the builder of the Three Gorges dam, to raise more than $2.5 billion in what could be mainland China's biggest initial public offering this year.
Sinohydro plans to issue up to 3.5 billion new shares to raise cash to fund 17.3 billion yuan ($2.7 billion) in new projects, according to the company's draft IPO prospectus.
It will not be clear exactly how much Sinohydro will raise until it sets its IPO price.
The regulator said in a statement it had approved the IPO plan, confirming what a source had told Reuters earlier. It did not elaborate further.
The new issue would represent close to 35 percent of its expanded share capital, with the funds being used for equipment purchases and investments in clean energy projects, the prospectus said.
Sinohydro is a leading dam builder in China, having built 65 percent of the medium- and large-sized dams in the country, including the Three Gorges dam on the Yangtze river and the Xiaolangdi dam on the Yellow River.
As part of an overseas expansion drive, the firm has taken on projects in Malaysia, Sudan, Laos and Ghana, according to the company's website.
It is also involved in other infrastructure projects, including the recently launched Beijing-Shanghai high-speed rail link, it said on its website.
Sinohydro Corp posted operating revenue of 101 billion yuan and net profit of 2.91 billion yuan in 2010.
China Securities Co. and Bank of China International are the lead underwriters for the listing.
Government extends food-tracking project
MOFCOM instigated the second phase of pilot scheme on Friday
BEIJING - The Ministry of Commerce has expanded a pilot meat and vegetable tracking system to 10 more cities on Friday, aiming to improve food safety.
Officials from the ministry signed cooperative agreements with senior government officials from 10 cities including Harbin, Jinan and Urumqi on Friday, to start the second phase of a pilot project for a meat and vegetable tracking system.
The ministry started the first-phase pilot of the system in October 2010 in 10 cities, including Shanghai and Dalian. The system will allow consumers to check the provenance of meat and vegetables by the use of bar codes on the products once the system is in place.
The system will standardize the transportation of meat and vegetables, two key agricultural products, and will lead to changes in the current system to provide a higher standard of food safety.
"The tracking system will boost the development of modern transportation of agricultural produce with electronic commerce. Transportation is an important factor in the price fluctuations of agricultural products," Jiang Zengwei, vice-minister of commerce, said at a news conference on Friday.
"By the end of the year, the tracking system piloted in the first 10 cities will be put into full use. By the end of the 12th Five-year Plan (2011-2015), the tracking system should cover the transportation of meat and vegetables across the country and will be expanded to other areas such as fruit and marine products on a step-by-step basis," Jiang said.
Approximately 80 percent of meat and vegetables in the larger cities are produced in rural areas, while more than 80 percent of the transportation is done through wholesale markets. The first-phase of the system now covers 176 slaughterhouses, 100 large wholesale markets, more than 3,000 food markets, 1,400 supermarkets and more than 4,400 bulk buyers in the 10 pilot cities.
A series of food safety scandals in recent years, including contaminated milk and pork from pigs fed with illegal additives, has greatly heightened public concern about food safety. The tracking system is part of the government's efforts to improve the situation.
Huang Guiheng, a manager at Bric Global Agricultural Consultants Ltd, said that the tracking system is in the interests of consumers, who will be able to check the source of the produce.
"Consumers will choose meat or vegetables verified by the tracking system, providing the cost of the system does not add much to the price," he said.
However, he said the greater significance of the tracking system lies in establishing food safety standards by involving leading enterprises in the system. "The tracking system should start with leading enterprises to set safety standards and then be extended to the entire food industry. Businesses will welcome the tracking system which will promote their brands," he said.
Friday, July 29, 2011
In Baring Facts of Train Crash, Blogs Erode China Censorship
BEIJING — “After all the wind and storm, what’s going on with the high-speed train?” read the prophetic message posted last Saturday evening on the Chinese microblog Sina Weibo. “It’s crawling slower than a snail. I hope nothing happens to it.”
They were a few short sentences, typed by a young girl with the online handle Smm Miao. But five days later, the torrent that followed them was still flooding this nation’s Internet, and lapping at the feet of government bureaucrats, censors and the state-controlled press.
The train the girl saw, on a track outside Wenzhou in coastal Zhejiang Province, was rammed from behind minutes later, killing 40 people and injuring 191. Since then, China’s two major Twitter-like microblogs — called weibos here — have posted an astounding 26 million messages on the tragedy, including some that have forced embarrassed officials to reverse themselves. The messages are a potent amalgam of contempt for railway authorities, suspicion of government explanations and shoe-leather journalism by citizens and professionals alike.
The swift and comprehensive blogs on the train accident stood this week in stark contrast to the stonewalling of the Railways Ministry, already stained by a bribery scandal. And they are a humbling example for the Communist Party news outlets and state television, whose blinkered coverage of rescued babies only belatedly gave way to careful reports on the public’s discontent.
While the blogs have exposed wrongdoers and broken news before, this week’s performance may signal the arrival of weibos as a social force to be reckoned with, even in the face of government efforts to rein in the Internet’s influence.
The government censors assigned to monitor public opinion have let most, though hardly all of the weibo posts stream onto the Web unimpeded. But many experts say they are riding a tiger. For the very nature of weibo posts, which spread faster than censors can react, makes weibos beyond easy control. And their mushrooming popularity makes controlling them a delicate matter.
Saturday’s train disaster is a telling example — an event that resonated with China’s growing middle class, computer-savvy, able to afford travel by high-speed rail, already deeply skeptical of official propaganda.
As state television devoted Saturday evening to reports of mass murder in Norway, Sina Weibo weighed in four minutes after the train accident with a post from the crash scene, by a passenger reporting a power blackout and “two strong collisions.” Nine minutes later, another passenger posted a call for help, reposted 100,000 times: “Children are crying all over the train car! Not a single attendant here!” Two hours later, a call for blood quickly clogged local hospitals with donors.
Then the reaction began to pour in. “Such a major accident, how could it be attributed to weather and technical reasons?” blogged Cai Qi, a senior Zhejiang Province official. “Who should take the responsibility? The railway department should think hard in this time of pain and learn a good lesson from this.”
From a Hubei Province blogger: “I just watched the news on the train crash in Wenzhou, but I feel like I still don’t even know what happened. Nothing is reliable anymore. I feel like I can’t even believe the weather forecast. Is there anything that we can still trust?”
There is no clearer sign of the rising influence of microblogs than their impact on government itself.
Last weekend, Wenzhou bureaucrats ordered local lawyers not to accept cases from families of victims without their permission. After weibos exposed them, they withdrew the order and apologized.
Railway workers had quickly buried the first car of the oncoming train at the site of the accident. On Monday, after an online outcry charging a cover-up, they unearthed it and took it to Wenzhou for analysis. China Daily, the state-controlled English-language newspaper, noted that they had met the request of “many netizens.”
“I call it the microblogging revolution,” Zhan Jiang, a professor of international journalism and communications at Beijing Foreign Studies University, said in an interview on Thursday. “In the last year, microbloggers, especially Sina and Tencent, have played more and more a major role in coverage, especially breaking news.”
The few newspapers and magazines here that consistently push back at censors with investigative journalism are not just printing the results of their digging into the train wreck, but posting them on weibos for millions to see. So were hundreds of more traditional state-controlled news outlets.
Even the Communist Party organ People’s Daily maintains a weibo. But the field is dominated by two players. Sina Holdings Ltd.’s Sina Weibo (pronounced SEE-nah WAY-bo) counts 140 million users, generally better-educated and more interested in current events than those at competitors. Tencent Inc.’s weibo hosts 200 million generally younger users who are more interested in socializing.
In some ways, the Chinese weibos replicate their Western counterparts: they limit posts to 140 characters (though in Chinese, where many characters are words by themselves, much more can be said). Posts can be re-tweeted, too, although in China, tweeting is called knitting, because the word “weibo” sounds like the word for scarf.
There are also differences. Bloggers can comment on others’ posts, turning a message into a conversation. Users also can include photographs and other files with their posts, to telling effect: on Thursday, fact-checking bloggers posted photos of Prime Minister Wen Jiabao’s recent official activities to counter his assertion at a Wenzhou news conference that illness had kept him from visiting the disaster site earlier.
While Western social networks like Twitter and Facebook are blocked here, their Chinese counterparts thrive, largely because their owners consent to government monitoring and censorship — and perhaps because the government fears the reaction should it shut them down. The outpouring over the rail tragedy appears to have enjoyed at least some official approval; many analysts believe the government sees microblogs as a virtual steam valve through which citizens can safely vent complaints.
If needed, the weibos have literally dozens of electronic levers they can press to dilute, hide or delete offending posts, according to one Tencent Web editor who spoke on condition of anonymity for fear of dismissal in disclosing that information. Yet the weibos also play cat and mouse with the censors.
“If we did not have any free speech then this company would not have any influence, so the company must act proactively to safeguard our space,” he said. “So that’s why they must go through this process of bargaining with the government departments.”
And even dedicated censors find the weibos hard to restrain. Government minders can electronically delete posts with offending keywords like “human rights” and “protest.” But like Twitter, the ability to instantly forward posts to dozens of fellow users means that messages can spread, well before censorship orders can be implemented.
And there are always screenshots to preserve posts that are deleted, such as this one by Ge You, one of China’s most distinguished actors:
“If a higher-level leader died,” he wrote, “there would be countless wreaths; however, when many ordinary people died, there was only endless harmony” — a euphemism for censorship. “If a higher-level leader died, there would be nationwide mourning; however, when many ordinary people died, there was not a single word of apology. If a higher-level leader died, there would be high-end funerals; however, when many ordinary people died, there were only cold numbers.”
China Regulator Said to Tell Banks Provisions for Bad Loans Are Inadequate
China’s banking regulator told lenders they haven’t set aside sufficient funds to cover losses on loans to local governments and ordered them to accelerate debt collection, a person with knowledge of the matter said.
The lenders were told this month that they are lagging behind the China Banking Regulatory Commission’s schedule for revising the loan agreements on infrastructure projects, the person said, declining to be named because the information is confidential. The agency had asked banks to collect two repayments a year after construction is completed.
The comments reflect persistent concerns that $1.7 trillion of lending to local governments may spur a wave of bad debts that could lead to the nation’s third banking bailout in less than two decades. As much of 30 percent of the credit may sour, Standard & Poor’s estimates, after a surge in lending that powered China’s recovery from the global financial crisis.
“The banking regulator is getting tougher on the local government debt risk, and that should to some extent increase the pressure on banks to boost their provisions,” said May Yan, a Hong Kong-based analyst at Barclays Capital Inc.
Efforts to curb risks in the loans have achieved “initial results, and the overall risk is controllable,” the regulator said in an e-mailed response to questions from Bloomberg. Going forward, banks should amend debt agreements, get better collateral and refine calculations on capital levels based on risk-weightings assigned to such loans, it said.
Underestimating Debt
China’s first audit of local government debt last month found liabilities of 10.7 trillion yuan ($1.7 trillion) at the end of 2010, 79 percent of which were bank loans. That estimate fell short of the actual figure by about 3.5 trillion yuan, Moody’s Investors Service said July 5, adding that lenders may be left to manage a portion of bad debt on their own.
Direct lending by banks to local government financing vehicles has surged over the past few years, from roughly 1.7 trillion yuan at the beginning of 2008 to about 4.97 trillion yuan at the end of 2010, Steve Wang, the Hong Kong-based head of fixed-income research at BOCI Securities, said July 26.
Much of the loan growth came amid a record $2.7 trillion two-year credit boom from the start of 2009 that drove China’s economic-stimulus program. The lending spree left the nation with almost $8 trillion in outstanding debt by the end of June, exceeding the combined size of China and India’s economies.
Potential Defaults
Loans to local government financing vehicles, set up mainly to fund infrastructure projects such as roads and airports, may sour and become the biggest contributor to banks’ bad debts, Liao Qiang, a Beijing-based director of financial institution ratings for S&P, said in April.
“Concerns over China’s local government financing vehicle loans have resurfaced in recent weeks,” analysts at UOB Kayhian Investment Co. led by Sheng Nan in Shanghai, wrote to clients July 25. “There have also been talks of local governments overvaluing the land used as collateral for their LGFV loans.”
Standard Chartered Plc, which gets more than half its income from Asia, estimates that at least 4 trillion yuan of the loans -- and possibly much more -- will ultimately not be repaid by cash flows generated by the infrastructure projects, according to a June 29 report.
Stocks Drop
Wang Zhenning, a press officer at Beijing-based Industrial & Commercial Bank of China (1398) Ltd., the world’s largest lender, declined to comment. Bank of China Ltd. (3988) said it doesn’t comment on market rumors, and China Construction Bank Corp. (939) said it hasn’t received any information on the issue.
ICBC fell 2 percent to HK$5.84 as of 1:44 p.m. in Hong Kong trading, reversing earlier gains, and is headed for its biggest drop in almost three weeks. Bank of China dropped 1.9 percent, while Construction Bank tumbled 1.3 percent.
China has at least two years to sort out its mountain of local government debt, which poses a “very serious” risk for the world’s fastest-growing economy over the longer term, People’s Bank of China adviser Zhou Qiren said on July 23.
The central bank on July 11 became the second agency to dismiss speculation that local-government debt may be as much as 14 trillion yuan. The National Audit Office denied understating the liabilities, according to a report issued by the official Xinhua news agency earlier that day.
Still, the regulator is concerned that lenders haven’t moved fast enough to curtail risks, the person said.
Revising Loan Terms
The agency told lenders their reported bad loans are too low in comparison to the real risk, and their 1 percent provision coverage ratio for local government lending is unacceptable, the person said.
The banks, which were told to revise the loan accords by the end of May to ensure two scheduled payments by the borrower every year after the projects are completed, have ensured the desired terms on fewer than half of the loans, the person said.
About 17 percent of medium and long-term loans, which account for more than 90 percent of all local government credit, have failed to require paying down the principal until maturity, and almost 40 percent demand only one payment annually, the person said.
The repayment capacity of the local governments has been eroded as debt climbed to 116 percent of their revenue from 85 percent in early 2009 because of the government’s stimulus program, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, said in a July 4 note.
“There will always be the risk that the CBRC may be forced to allow the larger banks to absorb some of the losses of the banking system,” Werner wrote. “Investors in the listed Chinese banks must deal with this overhang until the government arrives at a comprehensive solution.”
Taiwan Says Arms Deals Will Get Harder
TAIPEI—Taiwan President Ma Ying-jeou said that the changing relationship between the U.S. and China will make it increasingly difficult for Taiwan to purchase weapons from the U.S., even as he pressed again for Washington to sell the island advanced fighter jets.
In a wide-ranging interview with The Wall Street Journal, Mr. Ma also said Thursday that debt problems in the U.S. and Europe could slow global economic growth in the second half of this year and may impact Taiwan's export-reliant economy.
Mr. Ma played down concerns about the consequences that a potential U.S. default or a downgrade of the U.S. credit rating could have on the fifth largest foreign holder of U.S. Treasury bonds, adding that he "fundamentally has confidence in the U.S. financial situation."
Taiwan has seen sharp economic growth in the past year and a half, driven by increased demand for the island's electronics exports. In presidential elections slated for January, Mr. Ma will square off against opposition Democratic Progressive Party candidate Tsai Ing-wen, a 54-year-old former law professor and the country's first female presidential candidate.
Under Mr. Ma, ties between Taiwan and China have warmed as he encouraged high-level talks that paved the way for direct flights and greater economic cooperation, a move that has drawn opposition criticism that China may use its newfound economic sway in Taiwan to influence the island's politics.
Tensions have flared repeatedly recently in the South China Sea as Southeast Asian nations and China have squabbled over conflicting territorial claims that could provide access to its rich oil and natural-gas reserves and busy sea lanes.
To end tension, Mr. Ma argued that the countries competing for resources in the South China Sea devise a peaceful way to broker an agreement. "All parties have become more restrained in their words and behavior recently, as they all understand it's not good for anyone if conflict arises."
Taiwan relies on the U.S. for a large part of its defense equipment and it awaits a U.S. decision on whether or not to sell the island 66 new F-16 C/Ds, an updated version of the F-16 fighter jet. U.S. Secretary of State Hillary Clinton has said a decision will be made by Oct. 1, but many analysts expect the U.S. to carry out an already agreed-upon upgrade of the island's existing F-16 A/Bs in place of new sales.
U.S. weapons sales to Taiwan have derailed Sino-U.S. military relations in the past, something Washington increasingly wants to avoid as China asserts itself militarily and diplomatically in the region.
Mr. Ma, 61 years old, took office in May 2008 after winning the island's fourth direct election for president. He received a doctorate in law of the sea and international economic law from Harvard Law School in 1981, before he returned to Taiwan and started as the English interpreter for then-president Chiang Ching-kuo. He rose to minister of justice and then mayor of the capital, Taipei, before winning the presidency amid widespread corruption accusations against his opponent's party and outgoing President Chen Shui-bian.
Mr. Ma has come under attack during his first term for moving Taiwan too close to China as he has sought to thaw economic relations with China, when he agreed with China to table ideological differences, paving the way for talks that led to the landmark Economic Cooperation Framework Agreement, which removed some tariff barriers and liberalized investment regulations.
Economists say some of Mr. Ma's agreements with China—including relaxed restrictions on tourism and cross-Strait flights—have spurred growth for real-estate development, tourism and airline sectors. But they disagree about the effects of other agreements such as reduced tariffs and investment liberalization.
Under Mr. Ma, Taiwan saw a sharp recovery from the global economic downturn as it posted 10.88% GDP growth in 2010. But Mr. Ma's support rate has not kept apace with the breathtaking growth statistics, due partially to unemployment, wealth distribution and local scandals, say analysts.
Mr. Ma concedes that he could face a "severely challenging" election against the opposition's Ms. Tsai. He chalks up his lack of popularity in part to a persistent wealth gap in Taiwan.
According to a July 22 poll carried out by Taiwan's Global Views Survey Research Center, Mr. Ma's support rate was at 37.3% compared to Ms. Tsai's 37.2% rate. The election is widely tipped to be a referendum on his many China-friendly policies.
Mr. Ma enjoys considerable support in China, where he has become a celebrity online as some social media users have praised him for a variety of reasons, from his record of donating blood to his frugality in selecting suits, but perhaps most commonly for his good looks.
Theorizing on the reasons for his popularity among some in China, Mr. Ma said, "As we are continuing to improve cross-strait relations…there are still lots of issues that can't be solved, but I basically think we are on the right path, because if we are not doing this, and become confrontational to each other, that will be very bad for both of us."
Yahoo, Alibaba Reach Deal
Yahoo Inc. and Alibaba Group resolved their dispute over the abrupt transfer of the online-payments company Alipay to a new entity controlled by Alibaba Chief Executive Jack Ma, ending a public spat between Yahoo and Alibaba.
The deal ensures Alibaba, which is 40% owned by Yahoo, will participate in Alipay's future profits but limits the amount of money it could receive in a sale or initial public offering of the business at $6 billion. Shares of Yahoo declined 2.1% to $13.22 on the news.
The placement of a cap on how much Alibaba—and therefore Yahoo—could receive from an Alipay deal surprised some. Yahoo's chief financial officer, Tim Morse explained, "When you have a $2 billion floor, or guaranteed minimum payment, it kind of makes sense that there's a call to it as well."
The deal was structured to preserve the value of Taobao, the Alibaba-owned e-commerce company that accounts for the vast share of Alipay's revenue, and ensure "that Alibaba group is appropriately compensated for the value of Alipay," Mr. Morse said on a conference call with analysts.
In May, Yahoo disclosed that Alibaba had transferred ownership of Alipay to a company owned by Mr. Ma without seeking board approval or notifying the U.S. company. Yahoo said it was blindsided by the move, while Alibaba said Alipay was transferred to Chinese ownership to make sure it is among the first wave of companies licensed by China to be online-payments companies.
Alibaba Chief Financial Officer Joe Tsai defended the transfer decision Friday. "If you own 100% of a business that doesn't have a license to operate, that's 100% of zero," he said. Japan's Softbank Corp. also is a major investor in Alibaba.
Under the deal announced Friday, Alipay will pay royalties and software technology services fees and a 49.9% share of its pretax income to Alibaba. In addition, Alibaba would receive between $2 billion and $6 billion in proceeds from any initial public offering or "other liquidity event" involving Alipay.
Yahoo's stock has dropped about 22% since first disclosing the transfer. Alipay has been considered a valuable asset for Yahoo, and some investors--such as hedge-fund manager David Einhorn of Greenlight Capital--have argued Yahoo's stake in Alibaba could be "ultimately worth Yahoo's entire current market value."
The deal will continue to see Taobao receive "very preferential" payment terms from Alipay, Alibaba's Mr. Tsai said. Growth in Alipay's profits relies largely on its ability to boost its nascent business of processing payments for companies other than Taobao, Mr. Tsai said, noting that Alipay's non-Taobao revenue was less than $60 million last year and that Alipay is only marginally profitable.
As expected, the agreement allows Alipay to continue to provide payment-processing services to Alibaba and its e-commerce unit Taobao on preferential terms. Alibaba will provide licensing of intellectual property and technology to Alipay.
Analysts often compare Taobao to eBay.com, the U.S.-based auction site run by eBay Inc., and Alipay to PayPal.
Thursday, July 28, 2011
Have You Heard...
- China defends carrier plans, neighbors fret over buildup
- China High-Speed Rail Crash That Killed 39 Likely Caused by Signal Fault
- Profit at Avon Rose but China Sales Slip
- U.S. says cooperating with China to repatriate graft fugitives
- Mandarin Becomes Mandatory as U.K. Executives Flock to Confucius Institute
China defends carrier plans, neighbors fret over buildup
(Reuters) - China's neighbors are worried its aircraft carrier program may in time intimidate regional rivals but its military on Thursday defended the plan as vital for maritime security.
A day after China confirmed it was refitting an old Soviet vessel, and sources told Reuters it was building two of its own carriers, the official Liberation Army Daily stressed the mix of patriotic glory-seeking and future security worries behind the decision.
China's humiliations at the hands of Western powers in the past centuries "left the Chinese people with the deep pain of having seas they could not defend, helplessly eating the bitter fruit of being beaten for being backward," said a front-page editorial in the paper.
That trend is changing as Beijing ramps up its military spending while Washington discusses cutting its much larger defense budget. Growing Chinese military reach is triggering regional jitters that have fed into longstanding territorial disputes, and could speed up military expansion across Asia.
In the past year, China has had run-ins at sea with Japan, Vietnam and the Philippines. The incidents -- boat crashes and charges of territorial incursions -- have been minor, but the diplomatic reaction often heated.
"The issue of transparency regarding China's defense policy and its military expansion itself are concerns not only for Japan but for the region and the international community," Japan's Chief Cabinet Secretary Yukio Edano said on Thursday.
In the 2012 budget submitted to Congress this week, the Philippines wants to raise military spending to 8 billion pesos ($190 million) per year from a previous 5 billion.
"(China's military modernization) serves as a clarion call for the Philippines to also upgrade its military capability to patrol its waters," said Rommel Banlaoi, executive director at the Philippine Institute for Peace, Violence and Terrorism Research.
The Chinese carrier program could fuel the drive for submarines in Southeast Asia, said Rory Medcalf, program director of International Security at the Lowy Institute for International Policy in Sydney.
"There is already a submarine race, or submarine capability competition, in the region. This could add to that dynamic but I do not think it will be fundamental driver of it," he said.
COUNTER MEASURES
Japan's plan to boost the number of its submarines to 22 from 16, announced last year, was mainly a response to China's naval buildup, said Narushige Michishita, associate professor at Japan's National Graduate Institute for Policy Studies.
"Japan is already taking some countermeasures," he said.
As well as refitting the old Soviet-era carrier bought from Ukraine in 1998, China is building two indigenous aircraft carriers as part of a broad modernization program, sources told Reuters on Wednesday.
"Putting it in the overall context of China's expanding and modernizing military, there is some cause for concern," said Daniel Pinkston of the International Crisis Group in Seoul.
South Korea disputes territory with China, which is the major backer of the principal threat to security on the Korean peninsula, the North.
Taiwan, the self-ruled island China claims as its own and has never renounced the use of force to recover, will also be watching closely. It warned again last week about Beijing's growing military threat.
"In the previous 60 years, the threat to Taiwan was all from the west," said Alexander Huang, professor of strategic studies at Taipei's Tamkang University. "But with a moving platform, China can pose a threat to Taiwan from the eastern side, which means that Taiwan is threatened from all directions."
Others point to India, China's great rival as an emerging Asian economic and military powerhouse.
"If the Chinese leave the west Pacific, there's only one areas they're interested in, the Indian Ocean. In that sense, competition with (India) is inevitable," said Raja Menon, a former rear admiral in the Indian navy.
China's Liberation Army Daily identified future risks as a rationale for the carrier program, which will take many years to create an operational carrier force.
"The struggle to win maritime interests is increasingly intense," the editorial added. A powerful navy is "an inevitable choice for protecting China's increasingly globalised national interests," said the paper.
President Hu Jintao has made the navy a keystone of China's military ramp-up, and the carriers will be among the most visible signs of the country's rising military prowess.
China has repeatedly denied its military modernization is for anything other than defensive purposes, pointing out it that it spend far less than the United States on its military. ($1 = 42.110 Philippine Pesos)
China High-Speed Rail Crash That Killed 39 Likely Caused by Signal Fault
A Chinese high-speed railway crash that killed 39 people was likely caused by a design flaw in a signaling system, state-run Xinhua News Agency said, citing a preliminary investigation by the Shanghai Railway Bureau.
Duty officers in Wenzhou, the station closest to the site of the July 23 crash in southeast China, also didn’t know that the signals could be wrong and weren’t focused enough on safety, the report said, citing An Lusheng, head of the Shanghai bureau, which oversees rail operations in the area of the accident.
Premier Wen Jiabao pledged a greater focus on rail safety and an “independent” investigation into the accident after visiting the crash site today. The government fired three officials, including An’s predecessor, following the crash and started a two-month review of railway safety.
“The deadly accident has reminded us to attach more importance to the safety of high-speed railway construction,” Wen said, according to Xinhua. “Without safety, high-speed trains will lose their credibility.”
Wen also said that if corruption was found to have contributed to the crash, it would be punished. Victims’ families will receive “reasonable” compensation, he said. Payouts will be 500,000 yuan ($77,600) per victim, Xinhua said yesterday, citing an unidentified official.
Lightning Strike
The results of the investigation may be released around mid-September, Xinhua said today, citing Luo Lin, the head of the State Administration of Work Safety who is overseeing the probe.
In the disaster, a high-speed train that stopped after a lightning strike was rear-ended by another locomotive. The crash, which pushed four coaches off a viaduct, also injured 192 people, according to the Ministry of Railways. Two Chinese-Americans and an Italian woman were among those killed.
The crash happened after lightning hit the signaling system, which caused a warning light at Wenzhou South Station to fail to turn from green to red, causing the collision, An said, according to Xinhua.
Beijing National Railway Research & Design Institute of Signal & Communication Co. apologized to the families of people killed or injured in the crash and said it would cooperate with the investigation, according to a letter posted today on its website. The company, a unit of state-owned China Railway Signal & Communication Corp, didn’t say what equipment it had supplied or designed.
Upgraded Line
The stretch of track where the crash occurred had been upgraded for high-speed railways, so trains were only able to run as fast as 250 kilometers per hour (155 miles per hour). By contrast, trains on purpose-built lines, including the Beijing- Shanghai railway, travel as fast as 300 kph.
China has improved its rail technology over the past few years as it invests in research and development, said T.C. Kao, a professor with the University of Illinois’s Railroad Transportation & Engineering Center. The country, which opened its first bullet-train line in 2007, plans to have 16,000 kilometers of high-speed track by 2015.
“They have to develop the country on a fast track, and when you do that, inevitably there will be some hard lesson you have to learn,” Kao said.
Profit at Avon Rose but China Sales Slip
Avon Products Inc.'s second-quarter earnings rose 23% but revenue dropped in North America and Asia Pacific, most notably in China.
Year-over-year revenue in China fell 31% in the first quarter, excluding the benefits of currency exchange, though China reported a "modest" operating profit, reversing an operating loss in the year-ago period.
The cosmetics seller is among the many U.S. companies that have been relying on growth abroad to offset recent softness in North America, though competition from Procter & Gamble Co. and other household-product companies is heating up. Avon has identified China as a priority growth market and also has been making acquisitions that complement its direct beauty business.
Despite weakness in China, other regions of the world demonstrated strong growth, with Latin America revenue up 19%, driven by Brazil, Mexico and Venezuela, and its European regions, the Middle East and Africa also grew, though that was sometimes a case of foreign-exchange benefits that more than erased declines on a constant-currency basis.
Overall revenue rose 9% to $2.86 billion. Revenue was up 2% excluding the benefits of foreign-currency exchange.
Hanging over Avon is the specter of a federal probe, reported in May by The Wall Street Journal, into allegations of past bribes paid to officials overseas. Avon has been conducting its own investigations for over three years, since an employee brought the possibility of "improperly incurred" expenses in China that related to travel with Chinese officials. Avon voluntarily reported its internal investigation, which began in June 2008, to the U.S. Securities and Exchange Commission and U.S. Department of Justice in October 2008, and the company has said it continues to cooperate with the agencies.
Citing a person familiar with the matter, the paper said the investigations have turned up evidence of potential wrongdoing in several countries, with questionable payments, totaling millions of dollars, to officials in Brazil, Mexico, Argentina, India and Japan. Avon has declined to comment on any federal probe or a timeline to conclude its own investigation, but Avon has terminated several executives responsible for its Chinese operations.
Business in China has been a problem for Avon, even without alleged bribery worries, as Avon moves toward direct selling and away from a complex, hybrid business model. The transition to direct sales will continue to plague near-term results in China, it said, but it remains upbeat about long-term revenue and operating profits there.
The company reported net income attributable to Avon of $206.2 million, or 47 cents a share, up from $167.6 million, or 39 cents, a year earlier.
Gross margin grew to 64.4% from 63.5%. Advertising costs fell 16% to $82 million, given its rebalanced spending between advertising and on its representatives.
Avon's beauty sales rose 8%, reflecting increases of 11% in fragrance, 8% in color, 3% in skincare, and 11% in personal care.
U.S. says cooperating with China to repatriate graft fugitives
(Reuters) - The United States is cooperating with China to repatriate Chinese fugitives facing corruption charges, a senior U.S. official said on Thursday, a move that could pave the way for the return of hundreds of government officials wanted for graft.
U.S. Department of Commerce General Counsel Cameron Kerry, in Beijing on a five-day visit focused on anti-corruption and commercial rule of law issues, said that "there's good cooperation" between Chinese and U.S. prosecutors "in finding ways to repatriate corrupt officials or ill-gotten assets."
"Our prosecutors on both sides yesterday discussed a number of specific cases and they look forward to increasing cooperation on those cases," Kerry told reporters at a briefing.
Some of these cases include U.S. investigations into alleged bribes paid to Chinese officials by companies from the United States or registered in the United States, under the Federal Corrupt Practices Act, he added.
He declined to be more specific and said he was not in a position to comment on whether the United States was close to extraditing anyone.
"The United States currently does not have an extradition treaty with China, but there are other mechanisms available to pursue fugitives," Kerry said.
"Most fugitives from justice immigrated to the United States illegally, many of them have been repatriated through our immigration laws, and deportation, under those laws."
Beijing's lack of extradition treaties and other countries' misgivings about its widespread use of the death penalty have allowed corrupt officials to escape Chinese dragnets, creating a problem of capital flight for the world's second-largest economy.
Last weekend, China arrested its most wanted fugitive, Lai Changxing, in Beijing after Canada deported him to end a decades-long saga that had plagued Sino-Canadian relations, but concerns remained among activists about whether he would receive a fair trial.
The cooperation between Chinese and U.S. prosecutors started in 2007, Kerry said, adding that there's been an "increased energy on the Chinese side" over the past two years that he's been involved in the discussions.
Police statistics in 2010 showed that there were nearly 600 Chinese suspects at large overseas, who are wanted for economic crimes, mostly corruption, according to the official Xinhua news agency.
Most of the fugitives had fled to North America or Southeast Asia, the China Daily reported last December, citing Meng Qingfeng, head of the economic crime investigation department under the ministry of public security.
In 2006, Yu Zhendong, a former Bank of China manager convicted in the United States before being deported on corruption charges at home, was sentenced to 12 years in prison. China had promised he would not be tortured or executed.
Mandarin Becomes Mandatory as U.K. Executives Flock to Confucius Institute
Sebastian Powell, a new graduate of Britain’s Nottingham University, spends three evenings a week learning Chinese at the London School of Economics.
He studies business Chinese on Monday and China’s legal system on Wednesday. On Friday night, instead of hanging out at a pub, he sees a Chinese film to “learn more about the culture.”
“China is the future,” says the 25-year-old Powell, who wears a pink shirt and yellow suspenders and starts his training as an accountant with Deloitte LLP in September.
Interest in learning Chinese has surged among U.K. companies and professionals as firms cut costs at home and expand in China. HSBC Holdings Plc (HSBA), Europe’s largest bank, said in June it will cut 700 employees in the U.K., a month after saying it plans to add 2,000 employees in China and Singapore over the next five years. Burberry Group Plc (BRBY), Britain’s largest luxury retailer, saw store sales in China increase 30 percent in the second quarter, twice as much as elsewhere. The U.K. is China’s second-biggest trading partner in Europe behind Germany, and Prime Minister David Cameron said on June 27 he expects bilateral trade to double to $100 billion by 2015.
Almost 100,000 Britons are learning Chinese, 54 U.K. universities have Chinese courses and seven of them have Chinese majors, according to the Chinese embassy in London. Sixteen percent of British state schools taught Chinese in 2010, up from 4 percent in 2006, according to CILT, the National Centre for Languages in the U.K. The number of independent schools in England teaching Chinese rose to 37 percent in 2010 from 18 percent four years earlier, the center said. The Chinese government had 322 Confucius Institutes, the nation’s language and culture promotion agency, in 96 countries by the end of 2010, including 13 in the U.K.
Demand Rising
“Demand for Mandarin is rising dramatically in the U.K.,” said Katharine Carruthers, director of the Chinese program with Specialist Schools and Academies Trust, a network that includes 90 percent of English secondary schools. “Some schools cut their European languages to set up Chinese departments. If British kids want to be a global citizen, speaking Chinese gives them a way to do that.”
The Confucius Institute at the London School of Economics, funded in part by U.K. banks such as HSBC and Standard Chartered Plc (STAN), was the world’s first focused on teaching Chinese and China’s business culture to the business community. Started in 2006 with about 20 students, it now has more than 100. The institute’s instructors also teach at companies such as HSBC, Norton Rose LLP, and Ernst & Young LLP.
‘Role Model’
A statue of Confucius, the philosopher born in 551 B.C., stands at the entrance, a gift of the Chinese government. The institute’s first student was Stephen Green, HSBC’s former chairman and now Cameron’s U.K. trade minister. “He decided to do so as a role model so that more people will follow,” said Hong Lu, the institute’s director.
Lu spends four mornings a week at HSBC’s London headquarters, teaching one-on-one classes to senior executives. The bank also has a weekly HSBC Chinese Club, where other workers can study the language and business culture.
“HSBC has its roots in greater China, so a lot of people here have an interest in China to start with, and many of them anticipate working in Asia or China,” said Alex Hungate, chairman of HSBC Singapore, who began studying Chinese six years ago. “There is both an interest and a purpose in learning.”
HSBC’s Roots
HSBC’s origins date to 1865, when it operated as the Hong Kong & Shanghai Banking Corp. to finance trade in opium, silk and tea. Today, it focuses on emerging markets and gets about a third of its operating profit from Hong Kong. The bank has more than 5,000 employees in China.
Hungate, 45, joined HSBC in 2007 as the head of its consumer-banking unit, which accounts for one-third of the bank’s pretax profit, after leaving Reuters Group Plc as its managing director in Asia Pacific. “He is the most diligent student, and the one that I feel the most proud of,” Lu said.
Learning Chinese hasn’t been easy, said Hungate, who moved to Singapore in 2010 to head HSBC’s operation. He found two things difficult: it doesn’t have an alphabet and it has different tones. Chinese has four tones, and slight differences can carry completely different meanings. Hungate had to memorize Chinese words one by one in the beginning.
‘No Shortcuts’
“The only way is to keep on studying them,” said Hungate, who also speaks German and French. “There is no shortcut.”
In addition to teaching the language, the Confucius Institute focuses on the culture and etiquette of doing business in China. Western entrepreneurship doesn’t immediately connect with Confucius values, which emphasize hierarchy over equality and collectivism over individualism, said Dong Zhicheng, an associate manager at the institute.
Those values manifest themselves in many customs in formal occasions that can be daunting for Westerners, Dong said. He recalls a time when a top executive gave an expensive clock to his Chinese business partner while negotiating a deal in London. The Chinese executive threw it into the River Thames after the event. The reason: in China, giving a clock to someone can have the connotation of attending that person’s funeral.
Manners at the dinner table can be crucial and confusing for those doing business in China, Dong said.
When being seated, the most important people need to face the entrance, Dong said. He cautions his students not to leave chopsticks stuck in the rice bowl when eating as only prisoners facing death penalty would do that in ancient China. They also need to pay attention to the difference between serving wine and tea: wine is poured until the glass is full; stop when the cup is 70 percent full with tea.
‘Very Pragmatic’
Powell, the Nottingham graduate, said one valuable lesson he learned was to give and receive business cards with two hands as a sign of respect.
“I hope I can help bridge Western business in China, or vice versa,” said Powell, whose uncle’s family once had a merchant-trading firm in Shanghai, shipping textiles to England.
While Confucius taught that it is best to learn things slowly, most Western executives learn what they need quickly, Dong said. “They are very pragmatic and very direct,” he said.
Hungate said Green, then the bank’s chairman, didn’t know he was learning Chinese at first. When an HSBC colleague left London for Asia, friends gathered to write farewell dedications in a book. Hungate wrote four Chinese words: “Ma Dao Cheng Gong,” which means “Horse Arrives, Success Comes,” to the colleague, who was born in the year of horse. Green noticed his inscription, and they had a brief conversation in Chinese.
“The most enjoyable part is to talk with colleagues in their native language,” Hungate said. “When they don’t have to adapt to a different culture, they are more natural.”
Wednesday, July 27, 2011
China boosts naval power with carrier program: sources
(Reuters) - China is building two aircraft carriers as part of a military modernization program that is causing concern among other Asian countries, sources said on Wednesday.
President Hu Jintao has made the navy a keystone of China's defense upgrade and the carriers will be among the most visible signs of its rising military prowess.
China is ramping up its military spending as the United States considers cutting its defense budget, although Washington still far outspends China on security and is much more technologically advanced.
"Two aircraft carriers are being built at the Jiangnan shipyard in Shanghai," one source with ties to China's Communist Party leadership told Reuters, requesting anonymity because he was not authorized to talk about the program.
The Defense Ministry has confirmed the existence of one carrier, a former Soviet vessel which was bought from Ukraine in 1998 and was once destined to become a floating casino.
That will be used for training and research purposes, ministry spokesman Geng Yansheng said, seeking to reassure other countries that China would stick to its defensive military policy.
But he said it had a right to protect its extensive maritime territory and coast.
"This is the sacred responsibility of China's armed forces," Geng said in a statement.
"Building a carrier is extremely complex. We are currently refitting an old aircraft carrier, to be used for research and testing."
"An aircraft carrier is a weapons platform; it can be used for offensive or defensive purposes. It can also be used to maintain global peace and for rescue and relief work," he added.
Geng gave no timetable for starting sea trials but said pilots were being trained to operate from the carrier.
Sources with ties to the Communist Party and the military said that the ship would likely be based in the southern island province of Hainan, which sits atop the trade lanes of the sensitive South China Sea.
China has been flexing its muscles more aggressively in those waters, where a territorial dispute with Taiwan and several nearby countries, including Vietnam and the Philippines, has festered for years.
Geng said the timing "had nothing to do" with the tension there though the message will be clear to many in Asia.
"China can now project its power to even further away from its coastline," said Alexander Huang, professor of strategic studies at Taiwan's Tamkang University.
"That will have significant security implications to forces operating in the Western Pacific, including the U.S., Japan and Australia, so this is a watershed development."
The carrier will add to regional concerns about China's military modernization and arms build-up. Defense spending is rising fast and Beijing continues to test new high-tech equipment, including a stealth fighter.
"China's next moves have to be watched carefully, or there eventually could be a negative impact on maritime safety in Asia," said Yoshihiko Yamada, a professor at Japan's Tokai University.
Xinhua news agency said it was the first time the government had confirmed it was pursuing a carrier program.
WORST KEPT SECRET
The old Soviet carrier's refitting has been one of China's worst-kept military secrets. Pictures of it sitting in Dalian harbor have circulated on Chinese websites for months, and it has been widely discussed in state media.
China would be the third Asian country to have a carrier after India and Thailand but it will take time before it can go to sea in Asian waters that have largely been the domain of the U.S. Navy since World War Two.
"It will be a long while before China develops a fully-fledged carrier capability, it will take a long time to train the necessary crews... it may be up to decade until China has carrier capability," said Tim Huxley, director for defense and military analysis at the International Institute for Strategic Studies in Singapore.
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.
Sending 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.
China frets about the powerful U.S. military presence close to its shores, in particular U.S. bases in Japan and South Korea, and Washington's close but unofficial ties with Taiwan, the self-ruled island Beijing claims as its own.
"Aircraft carriers are essential for China primarily to defend its territory and territorial waters and bring a semblance of parity among the world's big powers," Wang Baokun, a defense studies professor at Beijing's Renmin University, wrote in the China Daily earlier this month.
China protests against U.S. spy flights near its coast
(Reuters) - China warned that recent U.S. surveillance flights near the Chinese coast have severely harmed strategic mutual trust and were a major obstacle hindering military ties between the two countries, state media reported on Wednesday.
Admiral Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, vowed on Monday to press ahead with surveillance flights near China despite opposition from Beijing, following reports that Chinese jets crossed a boundary with Taiwan to pursue a U.S. spy plane.
Two Chinese Sukhoi-27 fighters last month briefly crossed a line in the center of the Taiwan Strait that is considered an unofficial air boundary between both sides. Asian media reported the Chinese jets were attempting to intercept a U.S. U-2 reconnaissance plane.
"We demand that the U.S. respect China's sovereignty and security interests and take concrete measures to boost a healthy and stable development of military relations," the Global Times newspaper quoted the Ministry of National Defense as saying.
The comments followed Mullen's visit to China two weeks ago, which was part of efforts to improve ties with the People's Liberation Army. Their ties have been rocky, with China unhappy with U.S. reconnaissance patrols near its coast and is suspicious of its bases in South Korea and Japan.
China's rapid military buildup and territorial disputes in the South China Sea have also sparked concerns in the region.
The United States for its part wants greater military transparency from China over its military modernization, and has warned about China's growing missile and cyber capabilities.
Self-ruled Taiwan, claimed by China as part of its sovereign territory, has been another major irritant in Sino-U.S. military relations. China has been furious about a 2010 package of U.S. arms sales to Taiwan worth up to $6.4 billion.
China hypermarket operator Sun Art surges 41 pct on debut
HONG KONG, July 27 (Reuters) - China's top hypermarket operator Sun Art Retail Group Ltd surged 41 percent on its debut on Wednesday, the best first-day pop for a major Hong Kong IPO this year as investors bet on a sector expected to double in size by 2015.
The strong debut for Sun Art, which raised $1.1 billion, could lift some of the gloom over the Hong Kong IPO market. After the summer lull, an estimated $12.4 billion worth of IPOs are expected to be launched in Hong Kong by 18 companies, said IFR, a Thomson Reuters publication.
It contrasts sharply with other big deals, including Samsonite International SA , which slumped 7.7 percent, and a flat debut from Italian fashion house Prada SpA .
"The stock is overpriced but you have no choice but to pay a high premium if you buy a pure China growth story," said Alex Wong, a director at Ample Finance Group.
"The stock can jump further as investors are seen excited by its growth story."
Sun Art's 41 percent jump makes it the biggest first day move this year for a Hong Kong initial public offering of more than $500 million. Three much smaller IPOs rose more.
Sun Art -- a joint venture between Taiwan conglomerate Ruentex Group and privately held French retailer Groupe Auchan SA -- sold shares at the top of the marketing range in early July.
The stock ended at HK$10.14 versus the IPO price of HK$7.20, while the benchmark Hong Kong share index eased 0.1 percent. The stock had risen as much as 47 percent, touching a high of HK$10.58.
WILLING TO PAY PREMIUM
The company is China's top hypermarket operator by sales, with a 12 percent market share, ahead of Wal-Mart Stores with 11.2 percent, China Resources Enterprise at 9.8 percent and Carrefour with 8.1 percent, the company's IPO prospectus said.
"Sun Art is very well positioned. It is the leader in the future biggest retail market worldwide," said Oscar Chung, a fund manager at Capital Securities Investment Trust in Taipei.
"For Sun Art's leading edge, investors would be willing to pay a higher P/E to its shares, at 35-40 times compared with the 30 times average for the retail sector," said Chung, whose fund had $462 million under management and owned shares of Ruentex .
At the IPO price, Sun Art was valued at 31.5 times expected 2011 earnings and 24.1 times 2012 earnings, based on the consensus estimate of banks underwriting the deal. Rival China Resources Enterprise trades at a P/E of 32.4 times for 2011 and 26.4 times for 2012.
Sun Art had delayed its debut by nearly two weeks due to a discrepancy in the IPO prospectus relating to historical earnings per share figures.
HYPERMARKET BOOM
Investor appetite for Sun Art was whetted by the prospects for China's hypermarket segment, the fastest growing in the mainland's grocery retail industry. Hypermarkets have grabbed about 14 percent of the grocery retail market from just 1 percent in 2000, Euromonitor estimates.
The hypermarket sector is forecast to grow at a compounded annual rate of 10.1 percent between 2010 and 2015, Euromonitor says, with the total market size projected to double to 911 billion yuan ($141 billion) by 2015.
Hypermarkets are chained or independent retail outlets with a selling space of over 2,500 sq.m and with a primary focus on selling food, beverages, tobacco and other groceries as well as a range of non-grocery merchandise.
Despite the strong growth, China has just 2.4 hypermarket stores per million people, compared with 25 in France, 12.3 in the United States and 7.6 in South Korea, the IPO prospectus said.
Sun Art has 197 hypermarkets across 21 of China's 33 provinces and is building 51 more stores in the mainland and has secured 121 locations for future openings.
Around half of the IPO proceeds will be used to open new stores, while 30 percent will be set aside to pay down debt.
The rest of the funds will be used to upgrade and remodel existing hypermarkets and set up new distribution centres.
The deal was only the second $1 billion-plus Hong Kong IPO this year to price at the top of price range, after casino operator MGM China Holdings Ltd in May.
UBS AG , Citigroup Inc and HSBC Holdings Plc were joint global co-ordinators for the deal.
BNP Paribas SA , China International Capital Corp, Goldman Sachs Group Inc and Morgan Stanley helped underwrite the offering as joint bookrunners.
Sun Art also sold $420 million in shares to cornerstone investors, including sovereign wealth fund Government of Singapore Investment Corp and Malaysian state investor Khazanah.
China's Runaway Investment Train
Beijing's heavy investment in high-speed rail has lurched from scandal to tragedy. On Saturday, a crash in eastern China claimed the lives of 39 people, with 192 injured. The former minister of railways, Liu Zhijun, was already languishing in detention, charged with embezzling millions of dollars. His replacement was earlier this year forced to admit that the high-speed trains would be less speedy than promised.
China's glittering new rail network suddenly looks less like a monument to the benefits of state-driven investment and more like evidence of its shortcomings. Total fixed-asset investment, running at 46% of gross domestic product in 2010, already appeared wasteful and excessive. With speculation that a failure of train control systems contributed to the crash, part of it now looks potentially lethal.
The disaster calls the financial logic of the high-speed network into question. The Ministry of Railways took on $276 billion in debt, equal to 4.6% of China's 2010 GDP, to pay for its investment spree. Ticket sales alone were never likely to cover the cost. They may now take a further hit if commuters shun the new rail links. Airline companies rose sharply Tuesday as investors bet they would be the big beneficiaries. China Eastern rose to its 10% daily limit.
The rail binge started well enough. First, foreign companies were lured in and encouraged to hand over their technology with promises of a share of China's domestic market. One of the trains involved in the crash was built by a joint venture between Chinese firm CSR Corp. and Canadian firm Bombardier Inc.
Second, the domestic market was used as a testing ground. Chinese manufacturers assimilated the technology and leveraged economies of scale in production. Finally, Chinese companies combined foreign technology with native low-cost labor and capital to undercut foreign firms in international markets. China is already involved in high-speed projects in Venezuela and Turkey.
Buying the technology and frontloading the cost of building the domestic network made stages one and two expensive. Exports were meant to provide the payback. Saturday's crash, however, deals a nasty blow to China's marketing efforts. Foreign train manufacturers were already challenging the legality of Chinese exports that included their technology. Now deals with potential purchasers in the U.S., Thailand and Russia may be even harder to pull off.
The markets aren't taking any chances. Hong Kong-listed shares in CSR fell 14% on Monday, and another 1.3% Tuesday. Among the main losers from CSR's woes are its 54% majority shareholders: the Chinese government.
Tuesday, July 26, 2011
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