- China, Russia rush to rebuild North Korea's transport links
- Philippines’ Aquino Seeks $60 Billion, Oil Resolution on First China Trip
- Nuclear industry's growth to slow
- China’s Shoppers Sling a Gucci ‘Lifeline’ to Faltering Hong Kong Economy
- China Shipping Row Creates Wake
- Hurun Report: China's Most Valuable Brand Is Bank ICBC
- Y&R to handle launch of China's first Disney Store in 2012
Wednesday, August 31, 2011
Have You Heard...
China, Russia rush to rebuild North Korea's transport links
(Reuters) - Destitute North Korea's push to breathe new life into economic relationships with its neighbors China and Russia appears to be bearing fruit in its far north of the country where foreigners are busy helping rebuild a crumbling infrastructure.
A top local official told reporters on Tuesday that China and Russia had invested heavily in the region in order to gain access to its three east coast ports in the towns of Rajin and Songbon, which are the main centers for the secretive North's Rason Special Economic Zone.
"Rason is situated well geographically, and provides favorable conditions for investment," the city's vice mayor Hwang Chol-nam said through an interpreter.
The ports would more than halve the distance Chinese firms needed to ferry goods from landlocked Yanji in Jilin province to the major industrial center of Dalian which is also a shipping hub for northeast China.
Impoverished and squeezed by international sanctions for conducting a series of nuclear and missile tests from 2006, North Korea has reached out to Moscow and Beijing for help to fill the gap left by the drying up of South Korean and the U.S. economic assistance.
Over the past 15 months leader Kim Jong-il, who in the past rarely traveled abroad, has visited China four times and last week made his first trip to Russia in nearly a decade. Kim's visits were mainly aimed at winning economic support, and have raised speculation he may finally be opening one of the world's most closed economies.
The North announced in June it would work with Beijing to make the Rason zone work, along a similar zone in the west at Hwanggumpyong island near the Chinese city of Dandong.
VISIT TO RASON
North Korean authorities this week escorted a group foreign journalists to the lush Rason area where they are hoping to secure foreign investment and raise much needed hard currency.
Over 100 Chinese bulldozers and diggers were seen working on a new mountain road connecting the Chinese border post of Jing Xin and the North Korean ports, while a new railway line linking the area with Russia is all but complete.
Hwang said that the North had also agreed in principle with a Chinese company to build a coal-fired power plant in the so-called Rason Special Economic Zone, where like the rest of North Korea, there is little power.
"We have finished all the feasibility studies," he told reporters visiting the area, adding he hoped construction on the new thermal plant would start next year. Asked the name of the Chinese company, he said: "It's a secret."
Hwang said the power plant would be coal-fired with a maximum capacity of 600,000 kilowatts.
"Power is the lifeline of industry, that is the first urgent problem for developing the Rason Economic Development Zone," he said, adding the zone had introduced new laws permitting international banking transactions, as well as tax incentives.
The North faces acute energy shortages, and in Songbin a massive thermal coal-fired plant lies idle, while oil refinery, complete with 30 massive tanks, sits derelict.
At night, Rajin is pitch black except for the few buildings with their own generators.
Russian engineers were seen working on the new rail line just outside of Songbon, about 20 km north of Rajin. "The Russians have constructed the railroad from the border city of Khasan to Rajin port, and they are finishing the project this year," he said, adding Russia has leased one of the ports.
The special economic zone near the border with Russia and China, was initially instigated in the early 1990s, but the project fell by the wayside due to lack of interest from foreign investors.
Hwang said the country's leader Kim Jong-il visited the area in 2009, and issued a directive to push ahead with the plan to promote international trade in cargo, and to develop the local fishing and tourism industries.
But even with the improved infrastructure, the twin ports still have a long way to go. A port meant for timber appeared to be in ruins, while the ports in the Songbon were rundown. Rusted and hole-ridden giant water pipes ran along another port near the derelict thermal power plant.
In the biggest port, Rajin, a 250-meter Russian transport vessel, named "Friendship," was moored with a trickle of smoke coming from its engines. It was unclear if it was operational.
None of the 15 giant cranes cargo were operating on the any of the three piers. A few fishing trawlers and small boats were tied to the piers, the longest of which measured about 500 meters.
Foreign experts say the North's plans to develop the port may just work given China's close involvement but doubt it will ever turn into major cargo hub.
Hwang said there had been considerable interest, mostly from Chinese and Russian companies, but also from Thai and Swiss investors. He said China's biggest cement manufacturer, Jilin Yatai (Group) Co. had agreed to build a factory with a 1 million tonne per year capacity. Textile companies from China and Taiwan have also expressed their interest.
Hwang also had his eyes on even bigger things -- shipbuilding, auto manufacture and the hi-tech industry.
"I think one year after the completion of infrastructure we will be at a high stage."
Philippines’ Aquino Seeks $60 Billion, Oil Resolution on First China Trip
Philippine President Benigno Aquino and Chinese counterpart Hu Jintao signed an agreement targeting $60 billion in trade and investment as the Philippines played down a dispute over the South China Sea.
Aquino told Hu the conflict over oil and gas in the contested waters “requires a regional solution,” Edwin Lacierda, Aquino’s spokesman, told reporters in Beijing after the meeting. The South China Sea issue “is not the be-all and end-all of Philippine-China relations,” he said. China, which claims almost all the sea, has opposed moves to broker a regional accord and prefers to negotiate with individual claimants.
The two leaders met today after months of sparring over rights to exploit energy resources in waters they both claim. Aquino is seeking closer ties on his first trip to China, his nation’s largest trading partner and potential source of funds for the roads, ports and other facilities needed to revive economic growth that slowed for a fourth straight quarter.
“The Philippines is badly in need of foreign direct investments, particularly in infrastructure,” Jose Camacho, Asia vice chairman at Credit Suisse Group AG and a former Philippines’ finance minister, told Bloomberg Television today. “The best result for President Aquino is a general good feeling between the Philippines and China so we can then start seeing investments of Chinese companies in the Philippines.”
The two countries set a target to boost two-way bilateral trade to $60 billion, Lacierda said today. Two-way trade, including Hong Kong, reached $16.1 billion last year, eclipsing Japanese and U.S. commerce with the Philippines, government statistics show.
‘Change in Mindset’
Aquino will also meet with Premier Wen Jiabao during the five-day visit. Earlier today he met officials from State Grid Corp. of China. The nation’s biggest power distributor is “looking for projects,” Energy Secretary Rene Almendras said today in Beijing. After Beijing, Aquino travels to Shanghai.
“The biggest change between the Philippines under my administration and under the previous government is a change in mindset,” Aquino told businessmen in Beijing. “We will not take shortcuts in order to close deals; we will follow the correct procedures.”
Aquino is making the first state visit by a Philippine leader since Gloria Arroyo’s in 2004, which paved the way for an agreement on joint seismic surveys in disputed waters between the Philippines, China and Vietnam. That accord was abandoned on concerns it may have been unconstitutional.
A Senate probe of a $329 million contract Arroyo awarded to Shenzhen, China-based telecommunications company ZTE Corp. (000063) prompted her to cancel the project.
‘Corruption Allegations’
Arroyo “put the South China Sea issue on the back burner in return for these huge infrastructure and investment deals from China, all of which collapsed under the weight of corruption allegations,” said Ian Storey, a fellow at the Institute of Southeast Asia Studies in Singapore. “Aquino will be very keen to avoid a repeat of that.”
China is “ready and willing to add power to the winds” of the Philippine economy, Chinese Ambassador Liu Jianchao told reporters in Manila on Aug. 24. Philippine exports to China have more than doubled since January 2009.
Aquino is counting on investment to boost economic growth that slowed for a fourth straight quarter. Gross domestic product increased 3.4 percent in the three months through June from a year earlier, from a revised 4.6 percent in the first quarter, the National Statistical Coordination Board said today.
Lagging Investments
Net foreign direct investment in the Philippines fell 13 percent to $1.7 billion in 2010 from a year earlier, the central bank said in March. Between 1970 to 2009, the country lured $32.3 billion in FDI, compared with $104.1 billion for Thailand, according to United Nations data.
Higher returns on investments will come from resources “that have been untapped for such a long time,” Aquino said in an Aug. 18 interview, citing plans to explore for energy in the South China Sea. Two of 15 blocks put out for tender in June are in waters where Chinese vessels chased away a Forum Energy Pcl survey ship in March, rekindling tensions.
Secretary of State Hillary Clinton last year declared a national interest in the waters, a statement the Foreign Ministry in Beijing called “virtually an attack on China.”
The Philippines plans to boost hydrocarbon reserves by 40 percent in the next two decades. Mineral fuels accounted for 17 percent of total monthly imports on average last year, from 11 percent in 2000, data compiled by Bloomberg show.
“We want to resolve the conflicting claims so that we can have our own gas,” Aquino said Aug. 29. “Once we have our own, we will not be affected by events in other parts of the world.”
Nuclear industry's growth to slow
BEIJING - The expansion of China's nuclear power industry will slow from the rapid rate of the 11th Five-Year Plan (2006-2010), but the country should avoid drastic changes in nuclear development policies, said a former head of the National Energy Administration.
"China's nuclear industry base is still weak and we must ensure development stability and consistency," Zhang Guobao, who also serves on the Chinese People's Political Consultative Conference, said in a speech posted on Tuesday on the website of the China Nuclear Energy Association.
China will have 42 gigawatts (gW) of nuclear capacity by 2015, equal to 3 percent of total installed power capacity, according Zhang said.
After the accident at Japan's Fukushima nuclear complex caused by the massive March earthquake and tsunami, China's State Council said on March 16 that it would suspend approvals of new nuclear power stations and order comprehensive safety inspections at all nuclear plants, including those under construction.
The inspection concluded in early August. No information on the inspections has been released so far.
China hasn't approved any new projects so far this year and the industry's development will slow compared with the past five years, said Zhang.
Work on four previously approved plants, which hasn't yet started, was also halted by the safety inspections.
Before the Japanese accident, another 10 units using the latest Westinghouse Electric Co AP1000 technology were in the planning stages.
Preliminary work on these projects was also suspended, according to the State Nuclear Power Technology Corp, a major nuclear technology developer.
Billions of yuan had been spent on preliminary work, and the suspension meant a loss of orders for dozens of manufacturers.
Additionally, China has 27 units at some stage of construction, representing 30 gW of nuclear capacity, or 42 percent of the world's total units under construction.
Zhang also said that China should use the inevitable slowdown in construction to address weaknesses in the sector, including manufacturing capacity and technological innovation.
Last month, China connected its fourth-generation reactor to the grid. The plant is an experimental fast-breeder reactor, which produces less radioactive waste than current designs.
Technological work on the CAP1400 model, which has a larger generating capacity than the AP1000 on which it is based, is also in progress.
Despite the vibrant development of renewable energy, nuclear power remains an irreplaceable choice for China to achieve the target of generating 15 percent of its electricity from non-fossil fuels by 2020, said Zhang. "We should take this crisis as an opportunity to catch up as the world's leading nuclear power country."
China’s Shoppers Sling a Gucci ‘Lifeline’ to Faltering Hong Kong Economy
Queuing outside a Louis Vuitton shop in Hong Kong, Lin Shasha says she’s visiting from Shenzhen to buy leather belts and handbags because the products are genuine and her yuan goes further.
Lin, 30, is among the millions of Chinese visitors driving a retail-sales boom in Hong Kong even as weakness in global demand threatens to tip the city into its second recession in three years. A 25 percent increase in sales for the first seven months was the biggest since data began in 1981, the statistics department said in an e-mail yesterday.
Tourists from China are “a crucial lifeline for Hong Kong’s economy,” said Donna Kwok, a Hong Kong-based economist at HSBC Holdings Plc. “Hong Kong shoppers seem immune to inflation and global financial market turmoil.”
A stream of customers in Tsim Sha Tsui’s Canton Road yesterday carrying bags of Vivienne Westwood, Gucci and Burberry brand products and speaking in Mandarin, showed that a $350 billion decline in the value of stocks in China since mid-April has failed to kill off the tourist trade. Their spending may help to limit what Morgan Stanley and Daiwa Capital Markets say is set to be a second straight quarterly contraction in Hong Kong’s economy.
In July, sales jumped 29 percent to HK$35.2 billion ($4.5 billion), also a record gain excluding January and February figures that are distorted by a Lunar New Year holiday. Sales of jewelry, watches and clocks soared 52 percent from a year earlier. For electronics, the increase was 65 percent.
Spending Power
Besides the increase in the value of sales, volumes also rose by records in the first seven months and in July alone, excluding the seasonal distortions, the government says.
A gain in the past two years of about 8 percent in the yuan against Hong Kong’s dollar, which is pegged to the U.S. currency, has boosted the spending power of shoppers from China. Some of those visitors, including Lin, say that items in Hong Kong are less likely than in China to be counterfeit. In addition, buyers avoid the Chinese government's taxes on luxury goods.
The number of visitors from China surged 33 percent to 2.68 million last month from a year earlier, Hong Kong Tourism Board figures show.
Visitors from China staying one night or more spent an average of HK$7,453 ($956) each per trip last year, the highest amount of any group, according to the Hong Kong Tourism Board. The nation also provided the top spenders in the same-day category at HK$2,356 each.
‘Bullish’ on Gold
Chow Sang Sang Holdings International Ltd. (116), a Hong Kong- listed maker and retailer of jewelry, said this month that its sales of gold ornaments in Hong Kong and China jumped 37 percent by weight in the first half of the year because of “pervasively bullish” sentiment even as the price of the metal soared.
Shares of Chow Sang Sang, which operates in Hong Kong, Macau, China and Taiwan, are up 41 percent this year, compared with a 12 percent decline in the benchmark Hang Seng Index. (HSI) The company’s stock rose 3.7 percent as of noon local time.
In Shanghai, Xu Qing, who coordinates tourist trips to Hong Kong for Shanghai Jinjang Travel Company, said today that Apple Inc. (AAPL) products such as the iPhone and iPad2 are at the top of clients’ shopping lists because they are available earlier in the city.
Threat From Inflation
Hong Kong reported its fastest inflation since 1995 in July as rising rents and food costs and changes to government housing subsidies boosted the rate to 7.9 percent. HSBC’s Kwok said that she sees a risk that consumers will “eventually cave in” if inflation stays high and financial markets are turbulent.
The strength of retail sales in July was “certainly a surprise” and the numbers for August and September may be weaker, said Denise Yam, a Hong Kong-based economist for Morgan Stanley.
At Daiwa, analyst Kevin Lai said yesterday that he forecasts that the city’s economy will shrink 1.5 percent this quarter from the previous three months “due to weakening global demand and intensifying global financial turmoil.”
The technical definition of a recession is two straight quarters of contraction. In April-through-June, the economy shrank 0.5 percent from the previous quarter as export growth slowed.
Lin, who is a saleswoman, emerged from the Louis Vuitton outlet empty-handed, saying that as a frequent visitor she wasn’t in a rush to buy and would continue her search elsewhere.
“I know nothing about Hong Kong’s economy, but it seems to me it must be doing well -- the shops that we visit are always so crowded.”
China Shipping Row Creates Wake
LONDON—China's largest shipping company, China Cosco Holdings Ltd., finds itself in hot water, taking criticism from across the industry in the wake of charges that it halted payments for long-term ship charters that were costing it too much money.
The controversy expanded Monday after Moody's said that China Cosco's charter-rate dispute could threaten the ability of companies in the dry-bulk shipping industry to get credit.
The global ratings agency said that China Cosco's failure to make good on the contracts it signed in 2008 could reduce the payments to other ship owners, hurting their creditworthiness. China Cosco is the publicly traded flagship of state-owned China Ocean Shipping (Group) Co.
"Charter rates are currently much lower than they were in 2008," Moody's said in its weekly credit outlook report. "Renegotiation of contracts could set a precedent that spurs other Chinese shipping companies to seek more favorable terms in their existing agreements."
Jeremy Penn, the chief executive of the Baltic Exchange, which monitors chartering activity around the globe, isn't persuaded that the issue will affect the entire dry-bulk industry. But he said on Tuesday that the alleged nonpayment by China's top shipping company is a cause for concern and that valid contracts must be honored.
"The exchange has a motto, 'Our word, our bond,' to ensure that people deal honestly and correctly with each other," he said. "Where there is a written contract, we defend the applicant of that contract."
On Friday, China Cosco's president, Zhang Liang, said that the company had negotiated new agreements with ship owners affecting 18 dry-bulk-vessel leasing contracts that were signed at the peak of the market. He declined to disclose the new terms and couldn't be reached for comment Tuesday. Dry-bulk vessels haul coal, iron ore, grain and other commodities.
There have been media reports that some ship owners, citing leasing-contract disputes, have seized several vessels operated by China Cosco after the Chinese shipping company halted payments.
Mr. Zhang said on Friday that the vessel seizures haven't affected the company's operations and that he is confident that China Cosco can settle the payment disputes.
The Moody's report cited DryShips Inc. as one of the ship owners locked in a payment dispute with China Cosco. DryShips couldn't be reached for comment on Tuesday.
Back in 2008, the largest category of dry-bulk ships, which can carry 150,000 metric tons of goods, were rented by China Cosco and other shipping companies for around $230,000 a day as industrialized nations demanded fodder for their booming economies.
Then, as the economic downturn hit and demand for bulk goods dried up, rental earnings slumped. Recently, they have dropped as low as $16,000 a day.
But even though the market is no longer as profitable for China's dominant shipper, Baltic Exchange's Mr. Penn argues that Cosco should still be able to meet its contractual obligations.
"It would be a different scenario if Cosco could not honor contractual obligations for financial reasons," he said. "But it seems they are able to."
Hurun Report: China's Most Valuable Brand Is Bank ICBC
China's most valuable brand is a bank most foreigners have never heard of, highlighting both the enormous size and strength of China's domestic market as well as the challenges facing Chinese companies as they try to go international.
The Industrial and Commercial Bank of China, better known as ICBC, just toppled China Mobile as the most valuable brand in China, according to the new annual ranking of China's 100 most valuable domestic brands by the Hurun Report. ICBC's brand is worth $43.6 billion.
China Mobile held the top spot for five years "so this is quite a big day for ICBC," said Rupert Hoogewerf, Hurun's chairman and chief researcher, who appeared on this week's episode of "Thoughtful China," an online marketing affairs talk show produced in Shanghai.
Hurun's ranking is based on a combination of research into consumers' brand preferences, carried out by international market research firm GMI, brand analysis and economic data. Then a dollar value is assigned to each brand. Only direct-to-consumer brands created in mainland China were evaluated. Business-to-business brands such as Huawei, an increasingly international giant that provides IT and communications services to other companies, were not assessed.
China Mobile, the largest telecommunications company in the world with over 600 million cellphone subscribers in China, dropped to second place at $42.2 billion, followed by China Construction Bank ($35.9 billion), search giant Baidu ($24.4 billion) and Bank of China ($22.4 billion). Baidu, the highest-ranking privately-owned brand, benefited from Google pulling out of mainland China's search market last year and increased its own share of China's search market to almost 70%.
"The big surprise from my point of view was seeing the top [internet] companies come shooting up," Mr. Hoogewerf said. "Baidu has broken into the top-five most valuable brands in China today. That's a phenomenal achievement."
China now has nine brands worth more than $10 billion. After the top 5, they are: China Life ($15.6 billion), Tencent's QQ instant messaging service ($11.8 billion), Agricultural Bank of China ($11.6 billion) and insurance company PingAn ($11 billion). Real estate, financial services, apparel and internet brands showed the most significant growth over the past year.
While the top tier of Chinese companies has become adept at building brands at home, very few are able to take those brands overseas, despite a strong desire and government support to do so. Many Western consumers would find it difficult to name a Chinese brand beyond Tsingtao, a local beer sold at Chinese restaurants worldwide.
While privately-owned companies "move faster and focus a lot on cost savings, compared to government-owned companies," said Elan Shou, Ruder Finn's senior VP and managing director, China, state-run enterprises tend to move faster abroad.
"It's a government initiative, [China's leaders] want Chinese companies to go overseas," Ms. Shou said. But China's most successful local companies were built through strong domestic distribution networks, savvy understanding of local consumers and low costs--advantages that local companies lose when they leave China.
China's domestic market "does a terrible job of preparing brands for the outside world. [Almost all] brands from China working overseas are selling based on value, and are very early stage at brand-building," said P.T. Black, Thoughtful China's senior creative director in Shanghai.
There's another challenge, said Jonathan Chajet, Interbrand's Shanghai-based executive strategy director, Asia-Pacific. "Local companies haven't figured out the difference between low price and value, and there is a big difference. A brand like Toyota is low-priced but it's low price plus reliability. Dell is low price plus personalization. Chinese companies haven't been able to figure out what is their plus in that equation. That's a big mind shift for those companies."
So will China produce any world-class brands in the near future? Most likely yes. Sportswear marketer Li Ning, white-goods maker Haier and Air China "have made fantastic progress," said Tim Schlick, DDB Group's head of strategic planning, Greater China.
And for innovation and product development, Mr. Black singled out beverage-maker Wahaha, the Midea white goods company, and apparel retailer Metersbonwe.
Automotive brands like Chery, Geely and BYD, an electric car company in which Warren Buffet has a stake, "are likely to do well overseas over time. They'll be able to change the value equation, similar to the way electronics companies from Japan and South Korea did it many years ago," Mr. Chajet said.
Y&R to handle launch of China's first Disney Store in 2012
SHANGHAI - Disney Store has appointed Y&R to handle the launch of its first retail outlet in Mainland China, after a three-way competitive pitch with Ogilvy and BBDO.
Y&R China will take charge of Disney Store's market entry strategy to create a retail proposition that is relevant to Chinese consumers, sources have said.
Disney Store, a separate business unit from Disneyland, is aiming for the opening of the Shanghai store within the first half of 2012.
Disney Store senior vice president Paul Gainer said just three months ago that 40 new stores will be opened in “premier mall locations” around the world this year, up from its projection of 25 earlier this year.
The concept of China's inaugural store is reportedly modeled after Disney's Oxford Street store in London. Its store features include a 28-foot high showpiece castle, magic mirrors, animated trees, and lessons in how to dance like Disney characters.
Stanley Cheung, Disney's Greater China executive vice president and managing director, said the "kids' branded retail market in China is growing and we are uniquely positioned to provide a family shopping environment."
"Our Disney stores aim to deliver the best 30 minutes of a child's day," Cheung added.
Operating synergy with the future Disneyland Shanghai when it is completed as early as 2015 - in the form of resort tickets sold at the Disney store - may be possible.
There was a storm of controversy over the Chinese government's decision to let Disney into China during 2009, with critics in official newspapers denouncing the insidious influence of Hollywood. One commentator even said Disney characters are "an insult to China’s ancient culture" and would destroy the nascent Chinese cartoon industry.
It remains to be seen if Disney's magic will be recreated in the Middle Kingdom. Other global brands have struggled in China’s consumer sector, with Mattel’s closure of its flagship Barbie store in Shanghai being the most recent high-profile case. Industry experts blame the store's failure on the Barbie brand having no resonance with Chinese culture.
Tuesday, August 30, 2011
Have You Heard...
- China announces plans to boost secret detention powers
- Video Leaked of Frank Talk About Spying Inside China
- China Central Bank Moves in Secret to Curb Lending
- BofA Sells China Construction Stake for $3.3 Billion Gain, Raising Capital
- China Faces Dwindling Labor Supply
- China Takes Aim at Rural Influx
- Chinese films explore ways to compete with Hollywood
China announces plans to boost secret detention powers
(Reuters) - China wants to cement in law police powers to hold dissidents and other suspects of state security crimes in secret locations without telling their families, under draft legislation released on Tuesday that has been decried by rights advocates.
The critics said the proposed amendments to China's Criminal Procedure Code could embolden authorities to go further with the kind of shadowy detentions that swept up human rights lawyers, veteran protesters and the prominent artist-dissident, Ai Weiwei, earlier this year.
"If this was already law, then people like me, Ai Weiwei and many others could have been detained with even fewer problems and obstacles and with a firmer legal basis," said Jiang Tianyong, a lawyer in Beijing.
Jiang was detained for two months without any contact with his family earlier this year, when the government cracked down on dissent over fears that unrest in the Arab world could spill into China.
"This would be a big step backwards, but I wouldn't discount the strong possibility of it becoming law," added Jiang. "More people would face the risk of being disappeared."
Ai Weiwei, whose detention sparked an international outcry, said in a commentary published on Sunday that "the worst thing about Beijing is that you can never trust the judicial system."
Crime suspects and defendants detained under "residential surveillance" should usually be held in their own homes, says the proposed law released by China's National People's Congress, the Communist Party-controlled parliament. But politically sensitive crimes can be treated differently.
"Those suspected of committing state security crimes, terrorist crimes and major bribery crimes" can be held at locations outside usual detention centers, says the draft released on the parliament's website (www.npc.gov.cn).
Likewise, the families of ordinary suspects and defendants held under "residential surveillance" should be notified of their status within 24 hours. But in state security and other sensitive cases, police do not have to tell the families "if notification could hinder investigations," says the draft.
In China, "state security crimes" include subversion and other charges often used to punish dissidents who challenge the ruling Communist Party.
China's police already have broad powers to hold people, and the party-controlled courts rarely challenge how those powers are exercised. But critics said the amendment would add an extra veneer of legitimacy to arbitrary powers.
"This is in complete contravention of international standards. One of the key principles of international human rights law is deprivation of freedom can only take place if it has been decided by the court," said Nicholas Bequelin, a researcher on China for Human Rights Watch, an advocacy group based in New York.
The Chinese government appeared to be bristling at the uproar triggered by its secretive detention of Ai Weiwei and other dissidents, said Bequelin, who was interviewed before the full draft of the proposed amendments was issued.
"The response is not to be more respectful of the law, but simply to change the law and remove the protections that were there," he said.
China's parliament said citizens were welcome to comment until the end of September on the proposed amendments to the Criminal Procedure Code before lawmakers take them up. The country's state-run news agency said the rules on residential surveillance were enlightened.
The draft amendment "will further help protect human rights, and conforms rather than contradicts international conventions," the Xinhua news agency said, citing several Chinese legal scholars.
The clauses authorizing police not to tell families where detainees are held "are an exception, and will not become regular," Song Yinghui, a law professor at Beijing Normal University told Xinhua.
But independent Chinese rights advocates said the amendment would mark a big setback for legal rights if it passed into law under parliamentary approval.
In principle, residential surveillance is a more humane kind of detention, allowing suspects and defendants to stay with their families, said Li Fangping, a Beijing lawyer who has defended dissidents and protesters.
In practice, he and other critics said, it is used as a pretext to spirit detainees away to informal detention sites, including hotels, without telling their families or lawyers.
"If you can hold someone somewhere without effective means of oversight, without allowing detainees to see lawyers, then their rights guarantees face dreadful prospects," said Li.
Some lawyers said the proposed amendment was likely to become law, despite the controversy that has spilled onto China's Internet; others said the amendment could be diluted or even dropped. All were unsure when the parliament would next consider the amendments.
"This is going to be controversial, because it marks an excessive expansion of police powers," said Li. "I don't know if opposing this can work, but we'll certainly try."
Video Leaked of Frank Talk About Spying Inside China
BEIJING (AP) — Video of a Chinese officer discussing sensitive spying cases has been leaked onto YouTube, in what appears to be an embarrassing failure of secrecy for the usually tight-lipped Chinese military.
It was unclear when or where the officer, Maj. Gen. Jin Yinan, made the comments, and the Defense Ministry did not immediately respond Monday to questions about the video. Calls to the National Defense University, where General Jin is a lecturer, were not answered.
While some of the spy cases had been disclosed before, few details had been released, while others involving the military had been kept secret.
Among the cases General Jin discussed in the video was that of a former ambassador to South Korea, Li Bin, sentenced to seven years in prison for corruption. He said that Mr. Li had been discovered passing secrets to South Korea that compromised China’s position in nuclear disarmament talks with North Korea, but that the accusation was too embarrassing to make public, and so corruption charges had been brought instead.
Similar circumstances apparently led to corruption charges against the former head of China’s nuclear power program, Kang Rixin, who was sentenced to life in prison in November. General Jin said that Mr. Kang had actually peddled secrets about China’s civilian nuclear program to a foreign nation that he did not identify, but that the spying was considered too sensitive to bring up in court.
Mr. Kang, a member of the Communist Party’s Central Committee, was one of the highest-ranking officials ever involved in spying, General Jin said. His arrest was a shock to the party leadership, the general said.
“The party center was extremely nervous,” he said. “They ordered top-to-bottom inspections and spared no individual.”
General Jin also talked on the video about Tong Daning, an official from China’s social security fund, who was executed in 2006 after being convicted of spying for Taiwan. He said that Mr. Tong had passed information to Taiwan’s leaders about China’s currency regimen, allowing them to avoid huge losses because of changes in exchange rates.
Among other cases involving military personnel, General Jin spoke about Col. Xu Junping, who defected to the United States in 2000. He said that Colonel Xu had not disclosed technical secrets, but had relayed to the Americans his knowledge of the military leaders’ personalities, attitudes and habits gleaned from many years of accompanying senior military leaders on trips abroad.
The video was also posted on Chinese Web sites; it was removed from most locations, but screen shots, audio files and transcripts of General Jin’s comments could still be found on sites like Sina Weibo’s popular microblogging service.
China Central Bank Moves in Secret to Curb Lending
BEIJING—As policy makers from the U.S. and Europe gathered in Jackson Hole, Wyo., to discuss ways to revive a fragile global recovery, China's central bank was issuing a secret memo to further rein in lending in the world's second-largest economy.
The tightening move by the People's Bank of China, which was reported Monday by the official Xinhua news agency, highlights two key points about China's economic management: how starkly it is diverging from that of other big economies—which continue to seek ways to pump money into the financial system—and how it remains shrouded in secrecy that some call unbefitting such an important global player.
Under the new policy, the PBOC informed Chinese banks on Friday that it is changing how it calculates the reserve-requirement ratio over the next six months in a way that will require lenders to keep more money on hold at the central bank instead of lending it out. The move is designed to close a loophole that has allowed banks to partially circumvent existing lending curbs. The measure signaled yet another tack on tightening the economic reins to fight inflation, which is at a three-year high of 6.5% as of July.
That places China's policy makers at loggerheads with their counterparts in the U.S. and Europe. In Jackson Hole, International Monetary Fund Managing Director Christine Lagarde exhorted central banks to keep monetary policy "highly accommodative" and U.S. Federal Reserve Chairman Ben Bernanke, while stopping short of announcing further easing moves by the Fed, stressed the need for moves to bolster the U.S. economy.
In China, where growth has cooled but there are no signs yet of a sharp slowdown, policy makers face different needs: to mop up funds and keep bank lending in check. The latest move could take a total of roughly $140 billion out of the system by the time it is fully implemented in February. By comparison, China's banks issued an average of around $103 billion in new loans each month in the first seven months of this year.
The move sparked a sharp reaction in China's markets. The benchmark stock index fell 1.4% on Monday, bucking rises elsewhere in the region, and the one-week lending rate rose to 4.39% from 4.06% last Friday.
The central bank's move offered analysts and investors a frustrating reminder of the secrecy that often surrounds policy making in China. Word of the measure, which came as markets were on tenterhooks ahead of Mr. Bernanke's speech, first surfaced in reports on the Chinese microblogging service Sina Weibo Friday.
Despite Xinhua's report three days later, the PBOC has yet to confirm the policy. It didn't respond to faxed questions Monday.
"It is extraordinary and disappointing for the central bank of such a significant economy to make a major policy move without disclosing it to the public," said Andrew Batson, research director at Dragonomics, a Beijing-based research and advisory firm.
Similar moves in the U.S. would typically be flagged by senior Fed officials ahead of time and then explained in detail to markets and the public.
The impact of tighter credit will be felt across the Chinese economy, but analysts say regulators are mainly targeting loans to China's runaway real-estate sector. Policy makers are concerned that continued loans to developers have frustrated their attempts to control high house prices.
In a separate move on Monday, Taizhou, in eastern Zhejiang province, became the latest city to extend controls on home purchases. China's Housing Ministry is in talks to roll out similar restrictions to 20 other cities. And the National Development and Reform Commission, China's main planning agency, sounded a fresh note of caution on rising inflationary pressure and high residential-property prices.
The central bank's move will also dent China's demand for steel and copper, a key contributor to global demand. Henry Liu, head of commodities research at Mirae Asset Securities, says that the policy shift will "seriously cut off" traders' access to short-term finance, affecting 50% to 60% of China's commodity traders.
Still, analysts say a gradual phasing in of the policy, and funds entering China's markets in other ways, will mean that the central bank has the ability to offset any impact on economic growth. In a typical month, $20 billion or more enters China's financial system through such inflows as trade or speculative capital.
The central bank would normally offset those inflows by increasing the reserve-requirement ratio or requiring the banks to hand over cash in return for low-yielding bonds. With this latest move doing some of the work of draining funds from the system already, the need for these other offsets is reduced.
BofA Sells China Construction Stake for $3.3 Billion Gain, Raising Capital
Bank of America Corp. (BAC) agreed to sell about half its stake in China Construction Bank Corp. (939) for a $3.3 billion gain as the biggest U.S. lender bolsters capital ahead of new international standards.
A group of investors will buy 13.1 billion shares this quarter in a private transaction that will generate $8.3 billion in cash proceeds, Charlotte, North Carolina-based Bank of America said yesterday in a statement, without identifying the buyers. The companies are also discussing an expansion of strategic ties.
Construction Bank shares jumped, heading for their biggest two-day gain in more than two years, after the U.S. firm said it would keep a 5 percent stake in the world’s second-biggest lender by market value. The partnership has been “mutually beneficial,” Bank of America Chief Executive Officer Brian T. Moynihan, 51, said in the statement.
“The sale has removed concern that BoA’s shares would be dumped into the market,” said Danny Yan, a Hong Kong-based portfolio manager at Haitong International Asset Management, which oversees $600 million. “A few investors were able to buy the shares, so it reduced market uncertainty about an oversupply.”
Moynihan has been selling businesses and assets as the firm seeks to comply with international capital standards set by the Basel Committee on Banking Supervision. The bank, the largest in the U.S. by assets, has slid 37 percent this year in New York trading amid investor concern that it may need to issue stock as mortgage-related losses deplete capital.
Tougher Capital Rules
Selling the shares helps Bank of America raise capital to comply with tougher minimums that may be imposed by regulators as they try to prevent a repeat of the 2008 financial crisis. The CCB deal will generate about $3.5 billion in additional Tier 1 common capital and reduce risk-weighted assets by $7.3 billion under Basel I, Chief Financial Officer Bruce Thompson said in the statement.
The stake is being sold at a discount of about 11 percent, based on CCB’s closing price yesterday in Hong Kong. It has returned 77 percent since the shares were acquired in 2008, according to Jerry Dubrowski, a Bank of America spokesman.
Construction Bank advanced 4.1 percent today to HK$5.78 as of 11:33 a.m. local time in Hong Kong, stemming its drop this year to 17 percent. Bank of America climbed 8.1 percent to close at $8.39 on the New York Stock Exchange yesterday, leading the 4.5 percent advance of the 24-company KBW Bank Index. (BKX)
‘Overall Costs’
The cost to protect debt issued by the U.S. firm fell for a fourth straight day, dropping 38 basis points to 295 basis points as of 4:01 p.m. yesterday in New York, according to data provider CMA. JPMorgan Chase & Co. data show the contracts have fallen from a record 445 basis points last week, after Warren Buffett’s Berkshire Hathaway Inc. agreed to invest $5 billion in Bank of America. A basis point is 0.01 percentage point.
Paul Miller, an analyst at FBR Capital Markets, said he’s keeping his rating of “market perform” on Bank of America shares as the sale doesn’t alleviate balance sheet “problems” mainly stemming from the 2008 purchase of subprime lender Countrywide Financial Corp.
“It all goes back to the Countrywide acquisition,” Miller said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “I don’t think the bank itself has any more clarity on what those overall costs are going to be.”
CCB said earlier this month that it was in talks to extend an agreement allowing the firms to work together on retail and corporate operations, as well as wealth management and investment banking.
Asset Sales
The U.S. bank’s decision to sell the stake remove will remove a “major overhang” on CCB’s stock and drive it higher, Nan Sheng, a Shanghai-based analyst at UOB Kayhian Investment Co., said in a note to clients today.
Bank of America, which began investing in CCB before the Chinese bank’s 2005 initial public offering, owned 25.6 billion shares at the end of June, the firm said in a regulatory filing. The stake equaled about 10.6 percent of CCB’s Hong Kong-listed shares, according to data compiled by Bloomberg.
Bank of America was the second-biggest shareholder in CCB at year-end, the data show. Temasek Holdings Pte was the third- largest investor with a 7 percent stake. CCB has 240.4 billion shares outstanding in Hong Kong and 9.6 billion yuan-denominated shares listed in Shanghai.
Temasek, Singapore’s state-owned investment company, was among firms that agreed to buy CCB shares from Bank of America, Reuters reported, citing two people it didn’t identify. Jeffrey Fang, a spokesman for Temasek in Singapore, didn’t immediately return a call seeking comment.
Profit on Investment
Bank of America has been selling assets including its Canadian credit-card unit, First Republic Bank and holdings in BlackRock Inc. to boost capital and focus on core clients. The firm can build capital through earnings and doesn’t need to issue common stock, Moynihan has said.
Bank of America will raise about $5.8 billion in capital this month through measures including its sales of non-core assets, Thompson said. The transactions also have pared the firm’s risk-weighted assets under Basel I by about $16.1 billion, he said.
Under former CEO Kenneth D. Lewis, Bank of America paid $3 billion for a 9.9 percent CCB stake. The U.S. lender later exercised an option to buy an additional 11 percent, paying $9.2 billion.
Bank of America sold its initial stake in CCB in May 2009, reaping a pretax gain of $7.3 billion, as loan losses mounted amid the recession. Last year, the bank sold rights to buy 1.79 billion CCB shares to Temasek.
China Faces Dwindling Labor Supply
Lin Chang Jie is battling to save a family business making towels, cushions and robes in the eastern Chinese city of Ningbo as a dwindling supply of workers forces him to pay higher wages.
“I have to find a new way,” says Lin, 29, who is turning his Dejin Textile Co. into an online fashion retailer to cut costs and keep the business from closing. “Wages are going up, up, up. If we don’t like somebody’s work we can’t say anything, in case they leave.”
China’s three-decade-old, one-child policy will accelerate declines in the workforce, forcing companies to upgrade to higher-value products in the way Japan did in the 1960s and 70s. China may have as little as five years to make the transition to avoid a slump in economic growth, according to Sun Mingchun, an analyst at Daiwa Capital Markets in Hong Kong and former economist at China’s State Administration of Foreign Exchange, part of the central bank. He said growth may decline in 2016-20 as low-cost producers fail and investment falls away.
“This is the big issue in China on which everything will turn,” said Barry Eichengreen, an economics professor at the University of California at Berkeley and former senior policy adviser to the International Monetary Fund, who contributed to the 2010 book: “Emerging Giants: China and India in the World Economy.” “China needs to really accelerate this transition.”
Factory Workers
The pool of 15 to 24-year-olds, a mainstay for factories making cheap clothes, toys and electronic products, will fall by almost 62 million people to a total of 164 million in the 15 years through 2025, United Nations projections show. The demographic shift is a result of the one-child policy implemented in 1979.
Products such as clothes, shoes and furniture that the General Administration of Customs doesn’t classify as “high- tech,” accounted for about 68 percent of China’s exports last year, or $1.09 trillion, little changed from the 71 percent share in 2005, when they were worth $544 billion, the agency’s figures show. Exports account for more than a fifth of China’s gross domestic product. High-tech industries include aerospace and aviation, medical instruments, software, computers and telecommunications.
“The low-end manufacturing industry is tough and will be getting tougher day by day as both labor and land costs are rising,” says Xu Hui, 39, the owner of Wenzhou Dazhan Photoelectricity Co. in Zhejiang province, south of Shanghai. She’s switched to making LEDs and solar parts after starting off in the 1990s manufacturing sunglasses that sold for a dollar or two. “Either you go for high-tech, high value-added industry or you just perish.”
Japan in 1969
China’s income growth and stage of economic development is similar to Japan in 1969 and South Korea in 1988, before their rates of expansion fell, according to Morgan Stanley. Japan’s growth slid to an average 5.2 percent in 1970-79 from 10.4 percent in the previous decade, the bank said. South Korea’s expansion cooled to 6.3 percent in 1989-98, from as much as 12.3 percent during the previous decade, government data shows.
Only five economies -- Japan, South Korea, Taiwan, Hong Kong and Singapore -- have moved from middle-income nations to developed country status while maintaining relatively high growth rates, according to Nobel laureate Michael Spence, a professor of economics and business at New York University’s Stern School of Business.
‘Inflation is Serious’
China’s economic growth may ease to 9.2 percent this quarter from 9.5 percent in the previous three months, the China Securities Journal reported Aug. 16, citing the State Information Center. The country’s inflation may rise to about 6.2 percent in the same period, from 5.7 percent in the previous quarter, the report said.
“Inflation is serious now,” said Chen Mei, 23, during her lunch break in the southern manufacturing city of Dongguan. Chen, a migrant, said she’s earning about twice the monthly minimum wage of 1,100 yuan ($172) and expects pay at the garment factory where she works to keep rising as prices increase.
The yuan’s gain of about 7 percent against the dollar since June last year has intensified cost pressures faced by China’s exporters, which price their products in the American currency. The yuan closed at 6.3805 per dollar in Shanghai today, close to a 17-year high.
While the bulk of China’s producers have yet to upgrade, high-technology exports are rising, recording a 31 percent jump in 2010 to $492 billion. That’s more than double the $218 billion in 2005 and almost a third of total shipments, according to the customs bureau.
Investment Theme
Economists including Deutsche Bank AG’s Ma Jun say companies that successfully make the transition will reap huge benefits.
“The single most important investment theme for China’s manufacturing sector over the next five years is its upgrading,” said Ma, Hong Kong-based chief China economist for the bank and a former researcher for China’s State Council. Investors have yet to price in the “potential outperformance” of the sector, he said.
Companies such as machinery makers Sany Heavy Industry Co. and Changsha Zoomlion Heavy Industry Science & Technology Development Co., will “emerge to be major winners not only domestically but internationally” said Diane Lin, a fund manager with Sydney-based fund Pengana Capital Ltd., which manages about $1 billion in global assets.
‘Forget Textiles’
“Forget textiles and all that, this is the future of China,” said Lin. “If you go and look back to Japan in the early 1970s it was a net importer of machinery as well, and within only three to four years it overtook the U.S. and became a net exporter.”
Shares in Zoomlion will double to HK$24 ($3.08) by July next year, according to Zhang Zharlen, an analyst with KGI Securities in Shanghai. Lin said she plans to buy shares of companies including Zoomlion once sentiment improves from the effect of government measures to cool the property market.
Twenty-two years after starting as a welding factory, Sany Heavy has four billionaires on the board, more than 68,000 workers and sells products including concrete pumps and road rollers in 120 countries.
“For ages, people believed that Chinese can only make stuff like toys, clothes and hand torches -- all cheap and of bad quality,” Sany’s Senior Vice President Zhao Xiangzhang said in an interview in Changsha, the capital city of the southern Hunan province. “Our dream is to change this bad image.”
Expanding in Germany
Sany opened an industrial park in June in Bedburg in Germany, home country of machinery makers Siemens AG (SIE) and ThyssenKrupp AG. (TKA) The company also supplied a pump that helped cool the crippled No. 4 reactor at Japan’s Fukushima nuclear plant after the March 11 earthquake and tsunami.
Chinese equipment manufacturers will be among the nation’s best performers over the next five years, according to Deutsche Bank. They have taken market share from competitors including South Korea’s Hyundai Heavy Industries Co. and Doosan Infracore Co., Japan’s Komatsu Ltd. (6301) and U.S.-based Caterpillar Inc., Pengana’s Lin said.
“We would avoid Komatsu because we think that Chinese companies will increase their competitiveness over the medium term,” Lin said. Komatsu is the world’s second-largest maker of construction and mining equipment, trailing Caterpillar.
Other potential “global losers” from Chinese competition include telecommunications companies Ericsson and Nokia Corp., industrial machinery maker Alstom SA (ALO) and General Electric Co., Deutsche Bank said in a report last year.
Lower-Cost Regions
The bank recommended buying Chinese equipment makers and avoiding “material- and labor-intensive companies” such as casual footwear maker Yue Yuen Industrial (Holdings) Ltd. and VTech Holdings Ltd., a maker of cordless telephones and electronic learning products.
Rising labor and other costs may force manufacturers to move production of some consumer goods to lower-cost regions including western China, Vietnam, Bangladesh and Indonesia to keep prices down.
“I don’t believe consumers in the United States or Europe are prepared to pay more,” Bruce Rockowitz, the chief executive officer of Hong Kong-based Li & Fung, the world’s biggest supplier of toys to retailers, said in May.
Cai Fang, a member of the Standing Committee of the National People’s Congress, said China’s leaders have not yet fully accepted that the so-called demographic dividend is declining. The economic benefit arises after a country’s birth- rate falls -- creating a few decades when there are a higher proportion of working-age citizens and less need to spend on children and education.
Xi’s Task
Cai, a director of the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences who helped draft the nation’s five-year plan through 2016, said advisers are “comforting” China’s policy makers with arguments that the dividend can last another 20 years or more.
The task of managing the transition in China’s economy may fall to Vice President Xi Jinping, who is expected to assume leadership of the Communist Party next year and succeed Hu Jintao as president in 2013. The new leaders will oversee a five-year plan that aims to boost consumer spending and “strategic emerging industries” such as biotechnology, new energy and advanced equipment manufacturing.
In the Pearl River Delta next to Hong Kong, the cradle of China’s industrial transformation, the government said this month it will set up a zone covering nine cities in Guangdong province to help companies upgrade. The statement, posted on the commerce ministry’s website on Aug. 22, proposes tax breaks and other incentives to help boost technology and research and development within three years.
In Ningbo, Dejin Textile’s Lin is preparing for his own upgrade: a new line of women’s clothes to be sold online and in two local stores, a “huge risk” that he says keeps him awake at night.
“In five years we may have a very big retail business,” he says. “Or we may be closed.”
China Takes Aim at Rural Influx
BEIJING — Xie Zhenqing spent 12 years transforming a collection of ramshackle houses into Red Star, a privately run, low-cost school for 1,400 children of migrants from poor rural areas. It took just a few hours this month for a government-dispatched demolition crew to turn the place into a jagged pile of bricks.
“What the government did to us is unconscionable,” Ms. Xie, Red Star’s principal, said angrily as parents of her students scrambled to find other arrangements before the start of the new school year on Thursday. “I’ll never work for a migrant school again.”
Red Star is one of 30 technically illegal private schools in Beijing that have been torn down or closed in recent weeks in an official campaign billed as a war against unsafe and unhygienic school buildings. In all, more than 30,000 students have lost their classrooms this summer. Advocates for the migrants warn that many of the capital’s 130 other unlicensed schools could be next.
Some observers see other motives behind the campaign, including the municipal government’s unceasing pursuit of land sales to fill its coffers. The site where Red Star once stood is already surrounded by a crop of expensive high-rise apartment towers and a new subway station.
But school administrators, parents and many Beijingers view the bulldozing as nothing more than a roughshod exercise in population control. According to the Beijing Bureau of Statistics, more than one-third of the capital’s 19.6 million residents are migrants from China’s rural hinterland, a figure that has grown by about 6 million just since 2000.
Numbers like these worry the governing Communist Party, which has a particular aversion to the specter of urban slums and their potential as cauldrons for social instability.
Though the quality of education they offer may be questionable, private schools like Red Star are often the only option for the children of low-skilled migrant laborers, who for the most part are ineligible for the free public education available to legal Beijing residents. Known derisively as “waidi ren,” or outsiders, the migrants are the cut-rate muscle that makes it eminently affordable for better-off Chinese to dine out, hire full-time nannies and ride new subway lines in places like Shanghai, Guangzhou and Shenzhen.
“The middle class hates to see that kind of poverty, but they can’t live without their cheap labor,” said Kam Wing Chan, a professor at the University of Washington who studies China’s rural-migrant policies.
To manage the huge population flows — and its own fears — the government relies on an internal passport and registration system dating from the Mao years that ties access to education, health care and pensions to the birthplace of a person’s parent. The hukou system, as it is called, has created a two-tiered population in many Chinese cities: those with legal residency and those without.
Though urbanization is a central tenet of the party’s latest five-year economic plan for the country, Mr. Chan says, the 250 million rural migrants who are expected to move to cities in the next 15 years could become a source of social unrest unless the hukou system is reformed. “Having that many second-class citizens in Chinese cities is dangerous,” he said.
Obtaining an urban residence permit, called a hukou, is possible only for those with deep pockets or top-notch connections, so struggling migrants live in a gray zone of pay-as-you-go medical care, dingy rented rooms and unregistered schools where the education is middling at best. Byzantine property ownership and bank-loan rules mean that most rural hukou holders are frozen out of the housing market even if they can afford a down payment on an apartment.
The challenges become even more heart-rending after middle school, when the children of migrants must either return to their parents’ hometown for high school — and thus live separated from their parents — or drop out. “It’s a cruel, unfair system that stops people from pursuing their dreams,” said Song Yingquan, a researcher at the Rural Education Action Project, an advocacy group.
Policy makers have been discussing hukou reform for two decades, but beyond limited experiments in Shanghai, Chongqing, Chengdu and a smattering of second-tier cities, the National People’s Congress, China’s lawmaking body, has declined to act.
Resistance comes from factory owners who want migrant laborers to remain insecure and cheap to exploit, and from urban elites who fear an even greater deluge of migrants from the countryside if it becomes easier to live in the city. But the most formidable opposition may be that of local governments, which worry about paying for the health care, education and other benefits that migrants and their children would qualify for as legal residents.
In a rare act of coordinated defiance, more than a dozen newspapers across the country jointly published an editorial last year calling on the government to take on the nettlesome process of reform. “We believe in people born to be free and people possessing the right to migrate freely,” the editorial declared. Within hours, however, the editorial was pulled from the papers’ Web sites and several editors were punished.
Since then, some Chinese scholars have been reluctant to speak out on the issue — indeed, a half-dozen experts on the subject each declined to comment for this article. Others, who were willing to discuss the matter, warned that the status quo was producing the very situation China’s leaders want to avoid.
As income gaps widen and inflation takes its toll on the paltry incomes of big-city migrants, many workers are becoming increasingly bitter. “The system as it stands now is only feeding instability,” said Jia Xijin, a public policy expert at Tsinghua University. “Rural and urban residents contribute to our nation, and they both pay taxes. But they don’t equally benefit. The injustice is glaring.”
Although education bureaucrats insist that the closings of the migrant schools in Beijing are a matter of safety, many parents raised questions about the timing and the lack of alternatives. Some parents, especially those whose children have been displaced more than once, admitted defeat and said they would either return to their hometowns or send their children back to be raised by relatives.
“If officials don’t want our kids to be educated in the capital, then we should all go back to the places where we truly belong,” said a recyclables collector who sent his two school-age children back to Henan Province this month. “I don’t see why we should live here without dignity.”
More of the families, however, vowed to stick it out in Beijing. Two weeks ago, as devastated parents and their children gathered at the rubble of their former schools, local newspapers eagerly captured their despair. Compounding popular ire were news media reports about a government-affiliated charity that is spending more than $300 million to construct 1,000 schools in Africa.
The public backlash was immediate, prompting education officials in several districts to relax restrictions that bar nonresident students from enrolling in Beijing’s public schools. Still, many parents complained that the remedies were inadequate or elusive, and said that similar promises after a spate of school demolitions in 2006 proved to be hollow.
Li Haixin, 32, a math teacher at Red Star who sent her 6-year-old son to the school, said the boy was still shaken from seeing the desks, chairs and student art projects buried under a mound of broken masonry. Although she is now unemployed, Ms. Li said she would try to send him to a more expensive but legally registered private school, borrowing the money to pay the fees, rather than enroll him in a slapdash building that the authorities said would open as a replacement school for some of the students.
“This is a ruse,” she said of the campaign against illegal schools. “Let’s face it, they just want to elbow us out of the city.”
Chinese films explore ways to compete with Hollywood
For Hollywood, the Chinese film market presented a splendid box-office report this summer.
And among the top five box-office hits of all time in China, three are from Hollywood: "Avatar" with 182 million U.S. dollars, "Transformers: Dark of the Moon" with 145.5 million dollars and "Kung Fu Panda 2" with 91.5 million dollars.
However, "Legend of a Rabbit," a 3D animated movie produced completely by a Chinese team and aimed at competing with the best of the West, grossed only 16.2 million yuan (2.5 million dollars) in the Chinese market last month after its release on July 11.
The 18.8-million-dollar 3D production, which took more than 500 animators three years, on Sunday shared the Best Animation Award of Huabiao, China's highest government honor in the film industry, along with three other animations.
The different performances of China's "Rabbit" and the United States' "Panda" in the world's fastest growing movie market, whose box office gross increased by 64 percent last year to 1.5 billion dollars, also mirrored the wide gap between the box-office receipts of the two countries' films in each other's market.
In the last few years, China has become a key destination for big Hollywood films. "Avatar," "Transformers: Dark of the Moon," "Inception" and "2012" all grossed more ticket numbers in China than they did anywhere else outside the United States.
However, Chinese films, even the blockbusters at home such as the earthquake drama "Aftershock," could not make a success on the U.S. market.
SUCCESSES RARE FOR CHINESE FILMS IN U.S. MARKET
Chinese-made films were first launched in North America in the 1980s.
However, successes had been rare until December 2000, when "Crouching Tiger, Hidden Dragon," a kungfu drama directed by Ang Lee, hit the screen.
As the most profitable Chinese film, the movie, released by Sony Pictures Classics, grossed a total of 128 million dollars in roughly 2,000 theaters in the United States.
Almost four years later, "Hero," a smash directed by Zhang Yimou and distributed by Miramax, made another wave by garnering 53.7 million dollars in ticket sales, making it the second most profitable Chinese film in the U.S. market and a No. 1 movie at the U.S. box office for two weeks in a row.
But still, many Chinese films have met with failures in terms of box office record after brief showings in a small number of U.S. theaters.
"Aftershock," which grossed over 100 million dollars in China, earned only 60,954 dollars in 25 U.S. theaters. John Woo's 80-million-dollar "Red Cliff" netted merely 627,047 dollars in 42 U.S. theaters in 2009.
China Lion Film Distribution, a Los Angels-based company that distributes Chinese-language films via an exclusive deal with AMC, North America's No. 2 theater chain, for the U.S. and Toronto markets, has distributed several Chinese-language films in the United States over the last year, including "Aftershock," "The Warring States," "A Beautiful Life" and "If You Are the One II."
"If You Are the One II," a romantic comedy directed by Feng Xiaogang, earned 427,000 dollars, with more than 90 percent of the viewers being Chinese or Chinese Americans.
Such earnings, humble even by Chinese standards, are already much better than other Chinese films released in the United States. Most of the Chinese-language films were just screened in around 20 U.S. theaters. Over the decade, although Chinese films have increased their presence in U.S. theaters, most U.S. moviegoers still tend to patronize Chinese martial arts films rather than straight dramas or comedies.
Those Chinese films that are not kungfu movies are usually screened in "art house" cinemas in major cities -- the main location for foreign-language films from around the world.
"Chinese films in the United States are subject to market forces," said Richard L. Anderson, an Oscar winner in sound effect. "The U.S. distribution companies are audience-driven. They buy what they think they can sell here."
STORY-TELLING IS THE BIGGEST ISSUE
Then, what are the reasons that make the "audience-driven" U.S. distribution companies think Chinese films are not marketable?
Foreign-language films rarely find more than a niche audience in the United States. Their tastes and cultural preferences obviously are barring them from watching Chinese-language films.
"Red Cliff" ended in a fiasco with only 627,047 dollars on the U.S. market. But in Japan, the film quickly became a phenomenon when it opened in 2008 and was one of the hottest movies that year.
Besides hot actors in the movie, Japanese viewers' knowledge of the Chinese novel "Romance of the Three Kingdoms," which the movie was adapted in part from, served well.
It was the same case in France for "Detective Dee and the Mystery of the Phantom Flame." The kungfu movie, directed by Tsui Hark, did fairly well when it opened in the European country in April. It ranked the ninth in the French box office back then, an excellent performance for a foreign film.
Experts say that the success of the movie was due to the French people's familiarity with the main character, Detective Dee, who had been made famous in Western countries by late Dutch diplomat and writer Robert Van Gulik.
Van Gulik translated "Dee Goong An (Stories of Detective Dee)," an 18th-century Chinese detective novel, into English and used it as the basis for his own series of detective novels about Judge Dee.
Besides the preference of the U.S. audience to local films, Chinese films have their own problems.
Technology has always been an integral part of filmmaking. But lack of professionals in filmmaking has plagued the Chinese industry for years.
Feng, director of "Aftershock," said that when he shot the earthquake drama, numerous disaster scenes had to be processed abroad.
Although there was an imported apparatus with more than 5,000 functions of audio and visual effects, the machine could not play its due role "because technicians can only use perhaps 500 of them," Feng said.
Meanwhile, although there are a small group of actors, directors and producers at the top of the movie industry who are extraordinarily successful, talent among screenwriters and directors has not been actively cultivated.
"Money is not the problem. The film industry is desperate for creative talent," said Wang Zhongjun, chairman of Huayi Brothers Media Group, China's first listed private film company.
Three years ago, when "Kung Fu Panda" broke the Chinese box office record for highest-grossing animated features with 180 million yuan (26 million dollars), many questioned why the DreamWorks film had not been made by a Chinese company, as it borrowed heavily from Chinese culture.
For years, local moviegoers have been complaining why Chinese animations could not be as funny and palatable as their Hollywood counterparts.
"Dinosaur Baby," a local animation screened in April and May, lost out to Fox's "Rio." When "Legend of a Rabbit" was released last month, many questioned the originality of the movie, saying it was just an imitation of "Kung Fu Panda" and even the posters were alike.
The U.S. audience's preference to domestically produced movies and China's lag in filmmaking technology are certainly obstacles, but insiders say that story-telling seems to be the biggest problem that fails Chinese films in both domestic and foreign markets.
Mark Osborne, one of the directors of "Kung Fu Panda," once said that if Chinese animation filmmakers want to learn something from Hollywood, they should learn "how to tell an interesting story."
Hollywood's story-telling methods are not unique to the United States but are universal ways to attract human souls, he said.
Yin Hong, a professor of film and television studies with Beijing-based Tsinghua University, said that Chinese films have not yet found a cultural and artistic strategy for telling a Chinese story with a global perspective and for expressing universal cultural values through film language.
"The American society is such a multi-racial, multi-cultural culture that they have been able to make movies for the lowest common denominator," said Chris D. Nebe, an acclaimed Hollywood writer, producer and director. "That's why everybody understands them and likes them."
CO-PRODUCTION A WAY OUT
China has been endeavoring to let its films go global in ways including participation in various film markets and renowned international film festivals.
But among the efforts, experts say creative partnerships between Chinese and foreign companies are one of the most important and effective ways.
Co-production can help not only to grow China's own industry but also to export Chinese movies. Introducing Chinese movies to the world is part of China's cultural strategy that helps to build up its soft power.
"To increase our share in the international film market, we must spend much more efforts on film promotion and marketing," said Yang Buting, board chairman of China Film Promotion International.
"Hollywood's successful global distribution system will benefit Chinese films through co-production. To cooperate with foreign companies, it will be their job to distribute the film in their countries. This is much more effective than selling the film by ourselves," said Yang.
Actually, partnerships between Chinese and Hollywood moviemakers have been proliferating. Oscar-winning actor Christian Bale played the leading role in Zhang Yimou's "The 13 Women of Nanjing."
Meanwhile, Mike Medavoy, producer of "Black Swan," who was born in Shanghai, is working with Beijing-based film promoters to help Chinese films go global. Hugh Jackman starred in "Snow Flower and the Secret Fan," Wendi Murdoch's first co-produced movie.
In addition, Oscar winner Branko Lustig, producer of "Schindler's List," has announced his plan to produce "The Melanie Violin," a movie about Jewish refugees in Shanghai during the Second World War.
In one of the latest big moves, Huayi Brothers Media, China's largest independent film studio, and Los Angeles-based production company Legendary Entertainment, maker of such global box-office hits as "Inception" and "The Dark Knight," formed in June a new China-U.S. venture called Legendary East.
Earlier this month, the newly-formed, Hong Kong-based and Chinese-managed entertainment company announced its first project: "The Great Wall," which is designed to be a "globally-appealing" adventure movie and will be directed by Edward Zwick, director of "The Last Samurai."
In China, the project will be distributed by Legendary East's co-production partner, Huayi Brothers. Warner Bros. is expected to handle other territories.
As China is advancing fast, especially in film financing and distribution, some have warned that what is more important is the real quality of movies.
"I know some films were done in only a month. No one talked thoroughly of the screenplay. It is not this case in Hollywood. A good screenplay needs to be worked on time and time again," said Gong Li, one of the best known Chinese actresses in Hollywood.
Since 2005, the Chinese government has invested heavily in infrastructure projects, including new theaters in China's major cities. There are now more than 6,000 screens across the country, and many of them are digital. In 2010, more than four screens were set up every day.
But with the high speed of hardware development, the artistry of Chinese films is yet to improve. According to Yin, the Tsinghua University professor, only about 100 of the 500-plus movies produced in China last year met acceptable art standards.
"It is easy to buy buildings, for example, and see the cash flow. It is harder to go into the software business of making films. It has to be done methodically and in a way that makes both economic and strategic sense," said Medavoy, producer of "Black Swan."
Meanwhile, Dan Mintz, CEO of DMG Entertainment, pointed out that identifying the target audience group is the key to success for co-produced works. It is either an international film with Chinese elements or a Chinese film with global faces.
For a Chinese filmmaker to win over the U.S. viewers, the most important thing is that he has to incorporate the Chinese elements with Western ones in terms of story-telling and film techniques, said Nebe.
The Hollywood writer was involved in producing with Chinese filmmakers "Mysterious China," an award-winning series of documentaries exploring China and its 5,000-year-old culture.
"Since we want 'lao wai' (foreigners) to understand China, we have to give them information in the 'lao wai' fashion," he said.
Monday, August 29, 2011
Have You Heard...
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- China Widens Base of Reserve Ratio to Control Liquidity, Limit Inflation
- Bank of America Sells Stake in China Construction Bank
- Gome Electrical Net Profit Rises 30%
- GM Keeps Top China Overseas Sales Rank
- China's Food Chain Lures Private Equity
- Sino-Forest saga another reversal of fortune for HK founder
Aquino Walks a Fine Line With China
BANGKOK—Philippine President Benigno Aquino III faces a delicate task in China this week: taking up his country's claim to the troubled waters of the South China Sea without undermining the increasingly important economic relationship between the two countries.
China is now the Philippines' third-largest trading partner, with bilateral trade up 35% to $27.7 billion in 2010, and Manila views its gigantic northern neighbor as a potentially valuable source of investment and tourism. Philippine officials have said they expect Mr. Aquino to sign commitments on this trip, which runs from Tuesday to Saturday, that could generate $50 billion in two-way trade by 2016.
But relations between the two countries have grown distinctly frosty this year over their claims to the South China Sea. Mr. Aquino is urging China to join his call to have the United Nations International Tribunal for the Law of the Sea settle a patchwork quilt of competing claims to the potentially oil-rich Spratly Islands, though Beijing earlier rejected the Philippines' proposal.
"China's not to going to throw the dice at a tribunal which could undermine their claim to the entire region," said Carl Thayer, a professor at the Australian Defence Force Academy at the University of New South Wales and a long-time observer of the South China Sea dispute. "There's too much at stake and China is in a much stronger position."
After meeting with President Hu Jintao and Premier Wen Jiabao, Mr. Aquino plans to visits Xiamen, where his late mother, democracy icon Corazon Aquino, planted a tree on a visit nearly two decades ago. Like many Filipinos of Chinese ancestry, she traced her roots to Fujian province. Mr. Aquino also plans to bring at least 200 Filipino businesspeople to help step up trade and encourage Chinese investment in mining and infrastructure projects that he hopes will ramp up economic growth at home.
Analysts say Mr. Aquino will be wary of doing anything that could trip up his economic mission. Last week he told Chinese media in Manila that the countries' relationship was like a marriage and that both sides have a role in making it work. But Mr. Aquino is also facing pressure to stand up to China.
"He'll get criticized if he doesn't raise the South China Sea," said Ian Storey at the Institute of Southeast Asian Studies in Singapore.
The Philippines has pressed its claims to the South China Sea harder in recent months. Under previous President Gloria Macapagal Arroyo and during the early months of Mr. Aquino's presidency, the Philippines went out of its way to curry favor with China.
Last December it chose not to send a representative to the Nobel Peace Prize ceremony in Norway honoring Chinese dissident Liu Xiaobo, a gesture aimed at saving the lives of three Filipinos sentenced to death by China after being convicted of smuggling drugs into the country. But when the three were executed in March despite the Philippines' appeals for clemency, Mr. Aquino began taking a harder approach to Beijing.
Philippine officials have accused Chinese vessels of hindering oil and gas exploration in a portion of the waters known as Reed Bank, and the Philippines has vowed to step up its military capabilities to defend the country's economic interests. The U.S. has said it will assist the Philippines, a treaty partner, in the event hostilities break out in the South China Sea, which in addition to having oil and gas potential is a rich fishery
Vietnam, too, has complained loudly of China's increasingly assertive claims to the South China Sea.
Hanoi claims parts of the Paracel and Spratly island chains, while the Philippines claims the Spratlys. Brunei, Malaysia and Taiwan also maintain claims to parts of the sea, crossed by some of the world's busiest shipping lanes. The long-running dispute has triggered intermittent and sometimes lethal clashes.
In June, Vietnam accused a Chinese fishing boat, backed up by two military vessels, of snapping the cables on an oil-exploration craft. That incident followed a similar one in May and triggered a sharp exchange of words between Hanoi and Beijing. Vietnam later held a series of live-fire exercises in its waters.
China, which dismisses the complaints of both Vietnam and the Philippines, has said repeatedly that it would prefer to negotiate rights to the South China Sea with other claimants individually—according to analysts, out of concern that in a multilateral setting its substantial military and economic power might be diluted. The U.S. angered China last year by lending its support to proposals for multiparty talks.
Tensions have escalated since China launched its first aircraft carrier earlier this month, enabling Beijing to project its military power much farther than previously. Vietnam and the Philippines, though they lag far behind China, also are working to upgrade their naval power. Vietnam expects to take delivery of six Russian-made submarines in three years, while the Philippines last week took delivery of its newest warship, a former U.S. Coast Guard cutter.
China Widens Base of Reserve Ratio to Control Liquidity, Limit Inflation
China broadened the base of reserves it requires commercial lenders to deposit with the central bank to control liquidity and limit inflation, economists said.
Reserve requirements are being extended to customers’ margin deposits, a move that may drain 900 billion yuan ($140 billion) from the banking system over six months, Bank of America Merrill Lynch economist Lu Ting said in an e-mailed note on Aug. 26. Mizuho Securities Asia Ltd. cited similar information. A central bank press official declined to comment.
China has already raised reserve ratios to a record 21.5 percent for the biggest banks to counter the fastest inflation since 2008. London-based Capital Economics Ltd. said that the reported move may mean no further increases this year, after previously anticipating another 1 percentage point gain by the end of December.
“It’s not surprising to see such a move from the Chinese government, as it is facing a big trade surplus and inflation pressure,” said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking group Ltd. “The move will further tighten liquidity,’” he said.
Industrial Profits
Premier Wen Jiabao aims to sustain the nation’s expansion while containing the risks from record credit growth. A 28 percent increase in industrial companies’ profits in the first seven months of the year, reported Aug. 27, suggests that businesses are weathering monetary tightening.
The central bank is clarifying the need to set aside reserves on margin deposits, Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia, said on Aug. 27. While some banks already do so, the requirement hadn’t been clearly stated, he said.
The six largest Chinese banks need to start setting aside cash equal to as much as 21.5 percent of their margin deposits from Sept. 5, and complete reserves within three months, said Shen, citing information obtained from his investor contacts. Smaller banks will be given a requirement of 19.5 percent starting Sept. 15, with a five-month grace period, he said.
Spokesmen for China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China, who declined to be named because of company rules, said they weren’t aware of the matter. Calls to a spokesman at Bank of China during the weekend weren’t answered.
Top Priority
Reserve requirements force commercial banks to park a proportion of their deposits with the central bank, reducing the amount of money available for lending.
Fighting inflation will remain the top priority in the second half of this year and monetary policy will remain “prudent,” the central bank said in its quarterly monetary policy report on Aug. 12. July’s 6.5 percent increase in consumer prices was the biggest since 2008.
Forcing lenders to set aside more cash may put “some upward pressure on interbank rates,” Bank of America’s Lu said. At the same time, the central bank can “neutralize” that effect by altering its program of bill sales, another tool for locking up cash, he said.
Lu calculated that the latest move may have an effect equivalent to a 130 basis-point increase in reserve requirements. Capital Economics’ estimate was “roughly 125 basis points.” One basis point is 0.01 percentage point.
The central bank has increased its reserve requirement ratio nine times since the second half of 2010, and raised interest rates five times during the period. The PBOC has held off for two months in boosting the ratio, the longest pause since the latest series of increases began in November.
Margin Deposits
Reuters reported Aug. 26 that reserve requirements will now cover margin deposits paid by banks’ clients to secure issuance of bankers’ acceptance, letters of guarantee and letters of credit. Such deposits were 4.4 trillion yuan ($689 billion) at the end of July, according to the report.
The net effect of the reported rule change “if everything else was unchanged,” would be to tighten monetary policy, Capital Economics said. “But in fact, we think any such move would be designed as an alternative to further reserve- requirement increases over the rest of the year.”
Policy makers are also monitoring the risks from the surge in lending that fueled the nation’s rebound from the global financial crisis. One focus is the credit that has been extended to local-government financing vehicles.
China’s five biggest banks posted first-half profits that surpassed the total of their 14 largest U.S. and European rivals, with Industrial & Commercial Bank of China (601398) Ltd. reporting last week that net income rose 29 percent to a record $17 billion.
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