Have You Heard...
Friday, September 30, 2011
China Pullout Deals Blow to Pakistan
A Chinese mining company pulled out of what was to be Pakistan's largest foreign-investment deal because of security concerns, complicating Islamabad's effort to position its giant neighbor as an alternative to the U.S. as its main ally.
An official at China Kingho Group, one of China's largest private coal miners, said on Thursday it had backed out in August from a $19 billion deal in southern Sindh province because of concerns for its personnel after recent bombings in Pakistan's major cities.
Zubair Motiwala, chairman of the Sindh Board of Investment, acknowledged the cancellation of plans to build a coal mine, power and chemical plants over 20 years. But he said he was hopeful Kingho would reconsider.
Pakistan began playing up its friendship with China after the U.S. killing of Osama bin Laden in Pakistan in May sent relations between Islamabad and Washington into a tailspin.
But China's response has been lukewarm so far, suggesting that Islamabad may remain dependent on billions of dollars in military and civilian aid from Washington for some time to come.
Pakistan Prime Minister Yousuf Raza Gilani used a visit this week from Meng Jianzhu, China's minister of public security, to promote the friendship, which Mr. Gilani said was "higher than mountains, deeper than oceans, stronger than steel and sweeter than honey."
Army chief Gen. Ashfaq Kayani thanked Mr. Meng, who pledged $1.2 million in aid for Pakistani law-enforcement agencies, for his country's "unwavering support."
The gushing compliments contrasted recent U.S.-Pakistani rhetoric. Islamabad warned last week that the alliance could be in jeopardy because of U.S. accusations of Pakistani support for militants.
Beijing constructed and financed Pakistan's Gwadar port, opened in 2007, as part of plans to develop a road and rail transport corridor from China's northwest to the Arabian Sea.
In many cases, though, China's support has stopped short of what Pakistan had hoped, while Islamabad, in Beijing's eyes, has failed to live up to its promises, including to ensure security for investments. A number of Chinese workers have been killed in Pakistan in the past decade, some of them in troubled Baluchistan province, where armed separatist insurgents have opposed Chinese investments.
Pakistan's army has been lobbying for a formal defense pact with China in the wake of the bin Laden raid, a Pakistani government official said. Such a pact would draw China into any conflict involving their ally and likely anger the U.S. and India, Pakistan's regional rival.
China hasn't commented on the matter. A spokesman for Pakistan's military declined to comment.
"The Chinese wouldn't go in for that. It's too much to put on their plate when they can't ensure how much they can control their own ally," says Pakistani military analyst Aisha Siddiqa.
Beijing is also keen to balance its support for Islamabad with a renewed push to improve relations with India, a growing trade partner. And China is eager to avoid tensions with the U.S. that could disrupt a first official visit to Washington early next year by Vice President Xi Jinping, who is expected to take over as Communist Party chief in 2012 and president in 2013, diplomats and analysts say.
The U.S., meanwhile, wants China to engage in a dialogue on Pakistan as Washington looks for ways to press Islamabad over its ties with militants. Secretary of State Hillary Clinton made the request directly to China's Foreign Minister Yang Jiechi in New York on Monday, according to a senior State Department official.
Han Hua, an expert on South Asia at Peking University, said China viewed Pakistan as an increasingly important strategic partner given the imminent withdrawal of U.S. troops from Afghanistan. "That doesn't mean China wants to replace the U.S. in the role it played. It's not a zero sum game," she said.
Pakistan's navy recently agreed to buy two Chinese-made Azmat-class attack boats and, in August, China launched a Pakistani telecommunications satellite.
Other Pakistani requests for China to increase funding of infrastructure projects haven't progressed.
In May, Pakistan's defense minister said China had agreed to take over operation of Gwadar, which is doing little business as a commercial port, and that Islamabad has asked China to build a base there for Pakistan's navy.
China has remained silent on the issue. Pakistani officials involved in Gwadar's operations say there is no sign China will take over. The officials say they have been frustrated by China's failure to finance and build a road network to connect the port to the rest of the country.
Some Chinese experts say Gwadar's cut-off location in Baluchistan makes it less attractive as a military base or as a transit point for China's oil imports, given the high cost and security risk of piping them across some of Pakistan's least stable regions.
Analysis: South Africa buys into "made in China" brand
(Reuters) - South Africa's rulers have never entirely trusted capitalists and markets, which explains their fixation with China's economic model.
Deputy President Kgalema Motlanthe finished a trip to China on Friday by praising how it had mobilized state-owned-enterprises (SOEs) to construct a global power. Pretoria should learn from Beijing's example, he added.
"Markets on their own cannot lead such fundamental change," said Motlanthe, regarded as a leading candidate to be the next president of Africa's biggest economy.
"The state has to play a leading role in reshaping the economy so that it is better able to meet the needs of our people, particularly the working class, as well as the urban and the rural poor."
Beijing says its SOEs generate about 90 percent of all jobs, and South Africa has tried to embrace the Chinese model by using its state firms as a motor to create employment in a country that suffers from chronic joblessness and mass poverty.
President Jacob Zuma's "New Growth Path" policy views SOEs, state spending and government direction as the best ways to create 5 million jobs over the next decade.
Economists say South Africa would be better served averting its gaze from China and instead loosening its labor laws, cutting red tape, fixing a broken education system and using targeted tax cuts to help essential industries grow.
But South African policymakers, many raised in the Labour movement and well-versed in Marx, have grown frustrated with Western economic models and do not believe the private sector is strong enough to reduce the 25 percent unemployment rate or nearly 50 percent poverty rate.
"South African government policymakers, some of whom may have an ideological mistrust of 'the market', are all too ready to embrace a new model that supposedly offers a new way, one that places the state as the driving force of growth," said Martyn Davies, CEO of Frontier Advisory and an expert on African-Chinese economic relations.
"It is risky to simplify China's experience and call it a 'model' ready for application elsewhere. China's greatest economic success has been the creation of a vibrant private sector that accounts for two-thirds of its GDP."
South Africa also cannot embrace some aspects of the Chinese model that have made it so effective, including cut-rate prices for labor, harsh conditions on factory floors and diverting capital to world-class manufacturing.
South Africa relies heavily on foreign capital to prop up its economy whereas Beijing needs far less and can therefore play by a different set of rules.
The Chinese model also has its limitations because its economy is devouring capital at an ever-growing rate, thereby capping job growth, reducing labor's share of the pie and depressing household consumption.
POLITICAL POISON PILL
China is South Africa's largest trading partner. A measure of its power is shown by Pretoria's reluctance to grant a visa to the Tibetan spiritual leader the Dalai Lama -- whom Beijing accuses of being a separatist -- despite pleas to let him in by Nobel Peace Prize laureate Desmond Tutu.
A major constraint South Africa faces in job creation is the close relationship between the ruling ANC and its governing partner, leading labor federation COSATU. Their bond was forged in the struggle to end apartheid and resulted in a raft of union-friendly laws once white-minority rule ended.
The labor laws make it costly for employers to hire. They have also driven up labor costs, with the average South African factory worker earning about six times more than their Chinese counterpart despite being far less efficient.
China ranks 13th in the world in terms of the ratio of pay to productivity of its workers while South Africa ranks near the bottom at 130th, according to the World Economic Forum's Global Competitiveness.
Cutting wages for entry-level workers to near Chinese levels could absorb the masses of jobless and increase competitiveness but it would be political suicide for the ANC, which would alienate its mighty vote-generating ally.
Providing more funds for South Africa's SOEs would be an unwise investment given their history of losses, management blunders and wasteful spending.
There is also little money available, with more than 40 percent of tax revenues already going to pay for state employees, and more hires are in the pipeline as part of the government's job plans.
"China's starting point was very different and growth coincided with liberalization of that economy. It didn't happen the other way around," said Razia Khan, head of Africa research at Standard Chartered.
Minmetals Acquires Congolese Copper Producer Anvil Mining for $1.3 Billion
Minmetals Resources Ltd. (1208), a unit of state-owned China Minmetals Group, agreed to buy Democratic Republic of Congo copper producer Anvil Mining Ltd. (AVM) for HK$10 billion ($1.3 billion) to help source supply for China, the biggest consumer.
Minmetals will pay C$8 ($7.7) a share for each of Anvil’s, the Hong Kong-based company said today in a statement. The board of Anvil, listed in both Sydney and Toronto, has recommended the offer, it said. The offer is a 39 percent premium to Anvil’s closing Canadian share price yesterday.
China is snapping up deposits in Africa, including Congo, rated the third-least desirable place to operate a mine, amid a shortage of new copper discoveries. Minmetals, which had its C$6.04 billion offer for African copper miner Equinox Minerals Ltd. trumped by Barrick Gold Corp. in April, is paying less than half the median valuation of assets for Anvil.
“This acquisition is part of China’s move to have access to raw materials,” Peter Rudd, mining and resources manager at Armytage Private Ltd., said by phone from Melbourne. “They realize the importance and the significance of those materials to their future wellbeing.”
Anvil soared C$1.91, or 33 percent, to C$7.68 at 9:53 a.m. in Toronto Stock Exchange trading. Anvil rose 32 percent to A$7.65 at the close in Sydney trading. Minmetals has applied for approval from Australia’s Foreign Investment Review Board for the offer. China Minmetals is the nation’s largest metals trader.
Anvil Output
Adding Anvil will boost Minmetals’ copper output by about 60 percent and its copper reserves by 75 percent to about 1.7 million metric tons, Minmetals said in a presentation. Anvil may produce 60,000 tons of copper cathode annually from next year, it said.
Minmetals’ offer values Anvil at about 1.7 times the value of its total assets, based on data compiled by Bloomberg. That compares with the median of 4.08 times of 10 similar deals in the last five years, and with 2.5 times the value of Equinox’s assets.
The Chinese company led by Australian Andrew Michelmore, who sold WMC Resources Ltd. to BHP Billiton Ltd. for $9.2 billion in 2005, is taking advantage of the global market rout that has wiped 31 percent off the copper price since a February high in London. China has spent $17 billion this year buying mines to secure supply to feed its industrial growth.
China’s Jinchuan Group Ltd. agreed to buy African copper producer Metorex Ltd. for $1.36 billion in July and Sichuan Hanlong Group has offered to buy Sundance Resources Ltd., developing an iron ore mine in Congo, for A$1.2 billion.
Copper Takeovers
There have been $11.2 billion copper mining takeovers so far this year, compared with a total of $12.4 billion last year, data compiled by Bloomberg shows. The biggest was Barrick’s takeover of Equinox.
Minmetals is advised by BNP Paribas SA and Anvil is advised by BMO Capital Markets. Minmetals will use a loan from Album Enterprises, a unit of its largest shareholder, to fund the deal, it said.
Congo holds 4 percent of global copper reserves and is among the world’s largest producers of cobalt. The nation, recovering from more than four decades of dictatorship and war, is in the second year of a three-year, $561 million loan program backed by the International Monetary Fund to reduce poverty and spur economic growth.
Third Last
The Fraser Institute, a Canada-based research organization, ranked Congo third last in its 2010-2011 Survey of Mining Companies out of a total of 79 countries. The ranking reflects uncertainty created by the nationalization and revision of mining contracts by the Joseph Kabila-led government, the report said.
Congo shuttered the $750 million First Quantum Minerals Ltd.’s Kolwezi copper venture and revoked its license in August 2009, saying the Vancouver-based miner hadn’t fulfilled its contractual obligations, a claim the company denied. It still expects to get its license restored, it said in July.
The U.S. has a warning against travel to the country because of security concerns about elements of the Congolese military and rebel fighters, according to the Department of State. Foreigners were kidnapped by armed militia groups in two separate incidents in April 2010, it said.
Mutoshi Project
Anvil has faced allegations of enabling the Congolese army to attack rebel groups at Kilwa in the northeast part of Katanga Province. In 2004, the army took over vehicles owned by Anvil and used them to suppress the rebels, killing about 100 people. Anvil has said it had no option but to agree to the request by the army to use its vehicles, and had no knowledge of a planned military operation.
The takeover may trigger the sale of Anvil’s 70 percent stake in the Mutoshi project to Gecamines, Congo’s state-owned copper mining company, Minmetals said today. The stake may be worth $52.5 million, it said.
“Anvil’s experience and relationships would be leveraged to further grow in” southern and central Africa, an area with “enormous exploration potential,” Minmetals said in the presentation.
For Foreign Makers, China's Low-Cost Image Fades
BEIJING—Rapidly rising wages in China have reached the point at which foreign manufacturers need to give up on the notion of the country as a low-cost production base, a senior Hyundai Motor Co. executive said Thursday.
Jae-Man Noh, head of Hyundai's joint-venture operations in China, said average manufacturing-worker wages in China—about 27,000 yuan ($4,200) a year per worker in 2009—are likely to double by 2015 from current levels.
Auto makers are expected to be affected as much as other industries by the trend, if not more, Mr. Noh said, adding that wage costs for many foreign auto manufacturers already have doubled in less than a decade. He said that a rival foreign auto maker that Hyundai has researched has seen worker wages in China rise to 49,000 yuan a year per worker in 2010, up from 24,500 yuan a year in 2003.
"We need to let go of our perception that the Chinese market is a low-cost production base," Mr. Noh told a group of reporters at Hyundai's office in Beijing. He didn't offer specifics on Hyundai's wage costs in China.
Mr. Noh leads Beijing Hyundai Motors Co., a joint venture between the South Korean auto maker and Beijing Automotive Industry Holding Co.
In contrast to earlier decades, when the flow of Chinese workers from the countryside pushed factory labor costs down, China's workers now are demanding higher wages and better jobs. Manufacturing wages, in fact, have begun rising "dramatically" since last year, according to Mr. Noh, with auto makers taking the brunt of it.
The Hyundai executive pointed to a series of high-profile labor strikes that hit Japanese-run auto factories and others in China last year. Normally quick to break up organized worker walkouts, the government tolerated those strikes to a large extent last year, and minimum wages in some parts of China have been rising steadily since.
China still offers other draws, including strong economic growth, an increasingly affluent population and a quickly growing car culture.
Plus, Hyundai's average factory labor cost in China is still one-fifth of that in South Korea, Mr. Noh said. What concerns him most is the dramatic rate of increase, he said.
This trend is "inevitable" as the Chinese economy grows and society improves, Mr. Noh said.
Despite rising labor costs, China's auto exports will continue to increase in part because of excess auto-production capacity in the country, he said.
China's central government will also continue to focus on automotive exports, he said.
China Venture Is Good for GE but Is It Good for U.S.?
During a factory tour in South Carolina, Jeffrey Immelt smiles and cuts me off after I ask another question about his new venture in China:
"I'm done," says the chief executive of General Electric. "This was reviewed by the Commerce Department and the Defense Department."
If Mr. Immelt's response seems a bit edgy, it's probably because I raised a topic that has much of U.S. business on edge too: How to compete in China without giving away the store. And specific to General Electric: What's to keep GE's new avionics joint venture with China from transferring the best of U.S. technology abroad, empowering a new set of Chinese companies to challenge U.S. aircraft makers?
China watchers are anxious about this venture. Avionics— the "brains" guiding navigation, communications and other operations on an airplane—are at the pinnacle of American know-how, where the U.S. is still highly competitive. It's also technology the Chinese military covets.
GE says it has built protections into the venture, but the debate can get heated.
"To suggest that there are going to be firewalls that will stop this technology from going to the Chinese military is approaching laughable," says Rep. Randy Forbes (R., Va.), who sits on the House Armed Services Committee. "The fact that GE would say that is shocking."
You could substitute many industrial companies for GE in this equation, because over the last 30 years most have struck their own difficult bargains with China's many state-owned companies. China is the world's fastest-growing major market, and in return for access the country frequently demands technology or other know-how. China then absorbs that technology and uses it to battle global competitors, selling products that are often heavily subsidized by China.
That has happened in a range of industries, including autos, electronics and energy. Siemens now competes internationally against Chinese high-speed rail companies that sell products partly based on technology gleaned from an earlier joint venture with the German firm.
The U.S. has restrictions on the export of certain technology that could threaten U.S. security, but it appears less equipped, or less organized, to contend with this broader challenge: what to do about the threat to many business sectors posed by China's state-sponsored industrial juggernaut.
"We've been passive in deciding how to deal with China's aggressive industrial policies," says James Lewis, who worked on technology-transfer issues at the Commerce Department and is now at the Center for Strategic and International Studies.
"U.S. companies are making the right decision from a business point of view, but it might not be the right decision for the country," Mr. Lewis adds.
"It's unclear whether anyone in the U.S. government took a look at the GE deal in terms of U.S. competitiveness—the future of the aviation industry 10 or 20 years out," says an executive who advises companies working in China. He worries that a heavily subsidized Chinese jet program, enhanced with U.S. avionics, could eventually clobber Boeing. "China has an incredible ability to distort markets, and we can't be reacting after the distortion has taken place."
Clyde Prestowitz, a former U.S. trade negotiator who writes on global economics and business, says China is violating World Trade Organization rules that prohibit making technology transfer a condition of market access. "In a normal market the avionics would be done for that plane in the U.S. and we'd sell it to China," he argues.
GE says it wasn't forced to give up its technology for market access. Instead, it sees this joint venture as a valuable piece of an existing global network of joint ventures and supplier relationships between the world's big aviation companies.
"Technology is the heart and soul of our company," says Rick Kennedy, a GE spokesman. "Why would we give away our future?"
In its China project, GE will develop a new generation of its avionics operating system with state-owned Aviation Industry Corp. of China, which supplies China's commercial and military aircraft industries. The business will be based in Shanghai and owned 50-50 by the two firms.
GE says its half of the work load will chiefly be handled out of GE facilities in Florida, Michigan and Britain. And it expects that capturing new business through the joint venture will both boost exports from its U.S. operations and add jobs.
The venture's first big customer: Commercial Aircraft Corp. of China, which is developing the C919 passenger jet to compete with Airbus and Boeing. The joint venture will also sell its avionics to aircraft makers globally. GE's current operating system is already on the Boeing 787.
As for the Chinese military, GE says it has spent nearly three years developing a compliance program that it believes won't let the military near its technology. GE will run the compliance office and will vet all hiring. AVIC is forbidden from sharing information with its military business. And people who leave the venture must wait two years before they can take any Chinese military-related assignment.
Still, China is an authoritarian country with a weak legal system. It is difficult to imagine that any technology deemed worthwhile in the GE/AVIC venture wouldn't somehow find its way onto the next-generation Chinese jet fighter. GE says that its system is specific to commercial use, not military. And if there were evidence that information had gotten to the Chinese generals, the joint venture would be shut down.
Kathleen Palma, who handles trade compliance for GE Aviation, says GE determined that U.S. export licenses weren't required for the technology involved, but the company nonetheless briefed the Commerce Department and the Defense Technology Security Administration several times. She says the U.S. government appeared satisfied. A spokeswoman for DTSA said GE said it was "complying with all applicable laws." A spokesman for the Commerce Department referred questions back to GE.
GE has manufacturing operations elsewhere in China, and it isn't alone in giving a lift to China's commercial jet program. Other U.S. companies have a piece of the action, including Honeywell, Hamilton Sundstrand, Rockwell Collins, Eaton and Parker Aerospace. Airbus has manufacturing operations in China.
What is uncertain is whether these companies will remain part of China's aviation calculus once they are done being useful, and whether Chinese companies will supplant them. That transition has happened in other industries and is a mainstay of China's "indigenous innovation" industrial strategy, which is explicit about "metabolizing" foreign technology and making it China's own.
GE says that if it hadn't linked with AVIC in a joint venture a competitor would have, which is very likely. Mr. Immelt, the CEO, says he'll take responsibility if the venture goes wrong. "It's on me," he says. "It's on me."
But the reality is more complicated. When it comes to China and its ability to shake global industries, the ramifications of GE's decisions—and the decisions of many other American companies—are on everyone.
Thursday, September 29, 2011
Have You Heard...
- China’s Space Lab Launch Closes Gap With U.S. Dependent on Russian Rockets
- Solar-Panel Imports From China Said to Face U.S. Trade Complaint
- China’s Delays on Regional Jet Weaken Threat to Boeing, Airbus Duopoly
- Hang Lung, CapitaMalls Plan Chinese Malls to Tap Luxury Market
- Traders Test Yuan's Limit for Second Straight Day
China’s Space Lab Launch Closes Gap With U.S. Dependent on Russian Rockets
China launched its first space laboratory module yesterday in a step toward a manned station orbiting Earth, two months after the final shuttle mission halted the U.S.’s ability to put people into orbit.
The Tiangong-1 blasted off 9:16 p.m. local time, according the official Xinhua News Agency. President Hu Jintao watched from the control center in Beijing and Premier Wen Jiabao was at the launch site in Jiuquan, Gansu province. The liftoff is part of a program that aims to put a man on the moon by 2020 and, together with high-speed trains, the Beijing Olympics and the world’s biggest nuclear-power expansion, serves as a marker for the nation’s emergence as a global power.
“China sees space as one of the things that will confirm ‘we’re now on a par with Western countries, we’ve entered the club,’” said James Lewis, a senior fellow at the Center for International and Strategic Studies in Washington who specializes in technology and security. “It’s prestige, it’s catching up with the West and it’s exploring ways to overcome the U.S. information advantage.”
Yesterday’s launch helps cement China’s lead over emerging nations such as India, Iran and South Korea that are pumping money into matching rocket and docking technology pioneered by the Soviet Union and U.S. five decades ago. As China expands, the U.S. is scaling back on routine manned missions: President Barack Obama last year scrapped plans to return to the moon, setting a goal instead of making a “leap into the future” of deep-space travel.
The U.S. move away from “chokingly expensive” manned flight is a more sustainable model, said Joan Johnson-Freese, a professor at the U.S. Naval War College in Newport, Rhode Island. Still, with the shuttle grounded, the U.S. is reliant on Russia to fly astronauts to the International Space Station until commercial operators can fill the gap.
Lost Leadership
“It would not be good for China to move forward in the 2020s with a manned lunar program and eventually be ferrying individuals to and from the lunar surface with the U.S. program grounded,” she said in a e-mailed response to questions. “Ceding human spaceflight to the Chinese over the long term would have significant strategic leadership implications.”
China, which made its first successful manned flight in 2003 aboard the Shenzhou spacecraft, plans to put a capsule on the moon in 2013 and have the technology for a manned mission in 2020, Xu Shijie, a member of the Chinese People’s Political Consultative Conference said on March 3 in Beijing. The country plans to launch its own orbital station in about 2020.
The module launched yesterday will be used to practice docking techniques needed before moving to the next phase of building a station, according to the website of China Manned Space Engineering, the country’s space agency.
Military Shadow
While China’s achievements are lauded at home, a lack of transparency over budgets and possible military applications of space technology have raised concerns overseas. CMSE is led by Chang Wanguan, a member of China’s top military body, the Central Military Commission.
“There’s no separation between their ostensibly civilian program and their military program,” said Dean Cheng, a research fellow on Chinese security at the Heritage Foundation, a Washington think tank that describes its mission as designing and promoting conservative public policies.
The Chinese government is “convinced this is the next phase of major competition,” said Huang Jing, a professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. China believes “whoever dominates in outer space will dominate in military warfare.”
Benefit for All
The government’s intentions are entirely peaceful, Foreign Ministry spokesman Hong Lei told reporters in Beijing yesterday. China aims “to contribute to peaceful utilization of space for the benefit of all human kind,” he said.
The more that can be done to increase the civilian component of China’s space program the better, Mark Stokes, executive director of the Arlington, Virginia-based Project 2049 Institute, said by telephone. The U.S. should find ways to cooperate without aiding the military side and is capable of parsing the two, he said.
Space “is a metric of national power,” said Stokes, whose organization focuses on policies promoting security in Asia, according to its website. “If this would make China feel better about itself, if it gives it more confidence, gives it more security, gives it more pride, it’s better than some other ways of doing that.”
The U.S. government aims to encourage responsible behavior in space, Gregory Schulte, deputy assistant secretary of defense for space policy, told lawmakers in May. “Space is ‘‘increasingly congested, contested and competitive,’’ he said, according to a transcript of the hearing. ‘‘A more cooperative, predictable environment enhances our national security and discourages destabling behavior.’’
Space Shower
China in 2007 blew up one of its own satellites in a test of its ability to disrupt global communications networks. The explosion spread thousands of pieces of debris in what the European Space Agency described as ‘‘by far the worst break-up event in space history.’’ The impact of a 10-centimeter fragment of debris on a spacecraft or station ‘‘will most likely entail a catastrophic disintegration of the target,’’ according to the agency’s website.
The U.S. Navy in 2008 used a Raytheon Co. SM-3 missile to destroy a malfunctioning spy satellite that was headed for earth loaded with toxic chemicals. The strike was timed to ensure debris burned up on re-entry.
The challenge for the U.S. isn’t just getting China to agree to rules. Dozens of countries claim space programs, though some -- like North Korea and Iran -- use that as a cover for missile development, Lewis said.
‘‘Governments need to begin discussing space security more directly,” James Clay Moltz, who teaches at the Naval Postgraduate School in Monterey and is author of the forthcoming book “Asia’s Space Race,” wrote in an e-mailed response to questions. “A shooting war in space is in no one’s interest. We need to start talking about conflict prevention, keep-out zones, and stronger norms against destructive activities.”
Solar-Panel Imports From China Said to Face U.S. Trade Complaint
Solar manufacturers including a unit of SolarWorld AG (SWV) are preparing a U.S. trade complaint against China, as they seek to counter low-cost, subsidized imports, according to people familiar with the matter.
The case, which would be filed at the Department of Commerce and the U.S. International Trade Commission in Washington, would be one of the largest targeting China, with political implications as both nations race to develop clean- energy technologies.
The companies say that China’s subsidies to solar companies violate global trade rules and provide those manufacturers with an unfair advantage, according to the people, who spoke yesterday on condition of anonymity because no complaint has yet been filed.
“We are actively conversing with our federal contacts in seeking help on how to prevent China from decimating another U.S. industry,” Ben Santarris, a spokesman for SolarWorld Industries America Inc. in Hillsboro, Oregon, said in an interview. He declined to discuss a possible filing.
In the first seven months of this year, China shipped $1.4 billion of solar panels to the U.S., more than the $1.2 billion of panels it sent in all of 2010, according to U.S. International Trade Commission data. Imports from South Korea, the Philippines and India also jumped.
The collapse this month of Solyndra LLC, a California maker of solar panels that had $535 million in U.S. loan guarantees, has renewed demands from U.S. lawmakers and union leaders that the Obama administration pursue unfair-trade complaints against China for out-sized subsidies to its clean-energy companies.
China’s Position
“The environment-friendly green-technology policies introduced by the Chinese government are for the purpose of energy protection and ensuring sustainable development,” Wang Baodong, the spokesman for the Chinese Embassy in Washington, said in October.
The volume of imports from China sped up as prices fell. China sent more solar panels to the U.S. in July of this year than in all of 2010, according to U.S. Department of Commerce data supplied by SolarWorld.
“The American solar industry is facing unparalleled challenges, and without the leadership of your administration this industry may disappear,” Senator Ron Wyden, an Oregon Democrat, said in a Sept. 8 letter urging President Barack Obama to initiate a countervailing duty case against imports from China or to file a case at the World Trade Organization.
Credit Provided
China provided $30 billion in credit to its biggest solar manufacturers last year, about 20 times the U.S. effort, Jonathan Silver, executive director of the Energy Department’s loan program, told a congressional panel Sept. 14.
SolarWorld Industries America, which is lobbying lawmakers such as Wyden to help protect its 1,000 jobs in Oregon, is owned by SolarWorld AG of Bonn, the biggest German maker of solar modules. The company said Sept. 2 that it was cutting almost 200 jobs at its facility in Camarillo, California.
“There is no cost advantage in China,” Santarris said. “But it is difficult for a Western company to compete with a centrally planned economy in China.”
China’s Delays on Regional Jet Weaken Threat to Boeing, Airbus Duopoly
China’s bid to break Airbus SAS and Boeing Co. (BA)’s stranglehold on the global aircraft market is being hindered by a four-year delay in delivering the nation’s first passenger jet.
The 90-seat ARJ21 won’t enter service this year as it is still going through safety tests needed to win certification from China’s aviation regulator, Tian Min, chief financial officer of state-controlled Commercial Aircraft Corp. of China Ltd., said last week. The plane was due to begin commercial flights service as early as 2007.
The ARJ21’s failure to win regulatory approval almost four years after the first aircraft was assembled may hamper Comac sales as customers can’t be sure when they will get planes, said Ken Zhang, a Beijing-based analyst with Founder Securities Co. The delay may also disrupt development of the larger 168-seat C919, which will compete with revamped Boeing and Airbus aircraft in a domestic market that may more than triple by 2030.
“It’s only logical for customers to slow orders when they don’t know when delays will be resolved,” Zhang said. “The problems just show that challenging experienced players is always easier said than done, especially in aerospace.”
Comac has 206 orders for the ARJ21, predominately from state-controlled companies in China. Of that tally, only 35 have been won since 2008, when the aircraft made its maiden flight. The plane, which competes with Bombardier Inc. (BBD/B) and Embraer SA (EMBR3) aircraft, has General Electric Co. (GE) engines and a maximum range of 2,225 kilometers (1,382 miles) for the standard model, according to Shanghai-based Comac’s website.
Unknown Schedule
Chengdu Airlines Co., which is part-owned by Comac, is due to be the first operator of the regional jet. The carrier doesn’t know when it will begin to receive planes, said a spokeswoman, who declined to give her name. Deliveries are unlikely to start before the second half of next year, said David Wei, an analyst with Shanghai Securities Co.
“The delays for the ARJ21 highlight the difficulties in getting certification,” he said. “The C919 delivery schedule may also be too tight.”
Comac isn’t alone in suffering delays in developing new planes. Boeing this week delivered its first 787 to All Nippon Airways Co. three years late. Airbus postponed the handover of its A380 superjumbo by almost two years. Singapore Airlines Ltd. (SIA) received the first in 2007.
Comac expects the C919 to make its first flight in 2014 and to enter commercial service two years later. The planemaker has won as many as 100 orders for the aircraft and it will announce “substantial” new deals this year, Chen Jin, its general manager for sales and marketing, said last week.
Regulatory Delays
Approval for the ARJ21 may be taking longer than expected because it is the first time that Comac has built a jet plane and the first time that the Civil Aviation Administration of China, or CAAC, has had to certify one, said Wei and Feng Fuzhang, a Beijing-based China Securities Co. analyst.
A high-speed train accident in July, which killed 40 people, and a Chinese-made propeller-aircraft crash in May in Indonesia that killed 25 people may also have made the regulator more cautious, said Founder’s Zhang.
“The recent train crash is a setback for China’s hi-tech manufacturing,” he said. “The CAAC may be even stricter with the new plane now.” Two phone calls to the aviation regulator yesterday went unanswered.
The process of winning approval for ARJ21 from the Chinese regulator and the Federal Aviation Administration in the U.S. are running “smoothly,” said Comac’s Tian. “It’s normal for there to be some technical issues, but so far there haven’t been any disruptive problems,” he said. He declined to elaborate.
C919 Certification
The experience Comac and the regulator gain from certifying the ARJ21 may mean that they can more quickly process the C919, said China Securities’ Feng. Comac may also now be more focused on the C919 than the ARJ21 as it’s a more important product for the company, he said
The ARJ21 has so far undertaken tests in cross winds, high temperatures and high humidity, said Comac’s Tian. He declined to say how many other stages the plane needs to complete. At least four planes have been used for tests, according to Comac’s website. Stall tests began late last year, according to People’s Daily.
The delays for the ARJ21 may disrupt Comac’s plans to win overseas approval for the C919 as the FAA is refusing to work on assessing the larger plane until the first one wins certification, aerospace magazine Aviation Week & Space Technology reported earlier this month, without saying where it got the information from. If the C919 advances much further without the regulator’s involvement, the FAA may decide it can never become involved, the report said.
FAA Approval
The FAA is working with the Chinese regulator on the ARJ21, said Les Dorr, a spokesman for the Washington-based regulator. He declined to comment on the C919 saying that the agency doesn’t discuss certification efforts in detail.
Overseas suppliers for Chinese aircraft are also helping in the regulatory process. For instance, Honeywell International Inc., which will make parts for the ARJ21 and the C919 through local ventures, has worked with partners on approval processes, said Mark Howes, its Asia-Pacific aerospace president.
“There’s always great interest from the perspective of our partners to learn more about certification with the FAA,” he said.
Boeing, Airbus
Boeing and Airbus are working on new versions of their single-aisle aircraft that will compete against the C919. Toulouse, France-based Airbus will introduce the A320neo in 2015, while Boeing plans to begin deliveries of the 737 MAX two years later. Both planes will feature new engines that will help cut fuel usage.
Boeing expects China to take delivery of 5,000 new planes, worth $600 billion, through 2030. The nation’s airline fleet will total 5,930 planes that year, with about 70 percent of the planes being single-aisle models, according to its forecast.
“I think the market is big enough for everybody to play,” said Ihssane Mounir, Boeing’s senior vice president for sales & marketing in Greater China and Korea. “People want to move around, people want to get together, so there will be plenty of business for everybody.”
Comac’s ability to grab a significant share of the domestic and overseas market may depend upon whether it can stick to its delivery plans and how quickly it can get its aircraft into service.
“The ARJ21 will eventually get the certification,” said China Securities’ Feng. “But, it’s clearly true that Comac was far too optimistic in setting schedule.”
Hang Lung, CapitaMalls Plan Chinese Malls to Tap Luxury Market
Hang Lung Properties Ltd. (101) and CapitaMalls Asia Ltd. (CMA) have announced plans to build new shopping malls in China, underscoring their confidence in the country’s growing luxury consumer market.
Hang Lung, the Hong Kong developer that’s building high-end shopping centers in other parts of China, and its parent bought two sites in Kunming in the southwest for 3.5 billion yuan ($547 million), it said in a filing to the stock exchange yesterday. Singapore-based CapitaMalls will form a venture to invest 6.7 billion yuan in a mall and office development in Suzhou, a city west of Shanghai, the company said in a separate statement.
Luxury-products makers such as Prada SpA and LVMH Moe Hennessy Louis Vuitton SA are expanding in China, where the number of millionaire households jumped 31 percent to 1.11 million in 2010 from a year earlier, according to a Boston Consulting Group survey. Demand for retail space helped drive a 42 percent surge in commercial real estate investments in the country last year, according to Cushman & Wakefield Inc.
“There are a lot of opportunities in retail property in China,” said Sherman Yeung, Beijing-based director of retail services for North China at Colliers International. “The population is big and the country needs domestic consumption to boost the economy.”
Chinese consumers will be the world’s largest luxury spenders by next year, according to an HSBC Holdings Plc report last month. The nation’s retail sales climbed 17 percent in August from a year earlier, after increasing 17.2 percent the previous month, the statistics bureau said earlier this month.
‘Short of Capital’
Foreign developers may have an advantage in acquiring commercial projects over local rivals, who are “short of capital,” Yeung said.
Chinese developers are facing an “increasingly severe” credit outlook that may force them to cut prices and borrow on higher interest rates, Standard & Poor’s said in a Sept. 27 report. Fewer than half of the 70 cities monitored by the government in August posted month-on-month gains in home prices for the first time, according to Samsung Securities Co.
Hang Lung, Hong Kong’s third-largest builder by value, is investing as much as HK$50 billion ($6.4 billion) building shopping malls in cities including Shenyang, Wuxi, Tianjin and Dalian that are scheduled for completion over the next four years. Chairman Ronnie Chan said in August the company is “financially capable” of doubling that investment to tap the country’s growing luxury spending.
Best Team
The builder won the bid for the Kunming land, which has a maximum floor area of 401,383 square meters (4.3 million square feet) and will be used for “commercial and financial development,” the company said. They are the first sites Hang Lung has bought in the nation since May 2009.
“If you have to be exposed to the market at this point, Hang Lung would still make a good choice,” said Kevin Gin, a Hong Kong-based analyst at Yuanta Securities Co. “They have one of the best, if not the best, property management team in North Asia with a strong track record.”
The developer, which had about HK$27 billion in cash at the end of June, hasn’t bought any land in Hong Kong in at least 10 years. The company in August opened a 3.5 billion yuan shopping mall in the eastern Chinese city of Jinan, its fourth outside of Hong Kong.
Hang Lung’s rental income from China will “almost certainly” overtake that of Hong Kong next year, Chan said in August. The company is targeting Chinese cities with per-capita income of about 40,000 yuan for future projects, he said. Kunming is the capital and largest city of Yunnan province.
Hang Lung shares fell 33 percent this year compared with a 22 drop in the benchmark Hang Seng Index. They lost 2.8 percent on Sept. 28 to HK$24.40. Hong Kong’s financial markets were shut yesterday as Typhoon Nesat swept through the city.
Suzhou Project
CapitaMalls, a unit of CapitaLand Ltd. (CAPL), Southeast Asia’s biggest developer, will include a retail mall and two office towers in its Suzhou project, which will be jointly owned by Suzhou Industrial Park Jinji Lake Urban Development, the master developer of the city’s business district.
China makes up 44 percent of CapitaMalls’ S$6.19 billion ($4.8 billion) of assets. CapitaMalls shares fell 0.4 percent to S$1.20 at the close yesterday.
CapitaMalls said it picked Suzhou for its prospects as China’s fifth-largest city by gross domestic product and proximity to Shanghai via a 30-minute train ride. CapitaMalls, which developed ION Orchard in Singapore, has 55 shopping retail properties in China, including the Raffles City developments in Beijing and Shanghai.
Traders Test Yuan's Limit for Second Straight Day
SHANGHAI–Currency traders on Thursday tested China's government-set trading limit on the value of the yuan for the second straight day, putting a spotlight on one of the ways Beijing keeps the currency stable amid turbulent markets.
China's central bank sets a daily rate, called the parity rate, around which the yuan trades in over-the-counter mainland markets. It then prohibits the yuan from rising or falling against the U.S. dollar more than 0.5% from that value.
On Thursday, the dollar strengthened to 6.3983 yuan, putting the Chinese currency at its weakest permitted level for the day against the U.S. dollar, off 0.5% from the central parity rate of 6.3665 set earlier in the day by the People's Bank of China. Traders also tested the lower limit Wednesday.
Traders rarely take the yuan to its limit. Before this week, the yuan had hit its daily trading limit only three times since June 2010, when China essentially unpegged its currency from the U.S. dollar. A push at the limit is seen as a signal that investors believe the PBOC has set the daily rate too weak or too strong.
While Thursday's trading-limit test would typically suggest investors think the yuan should weaken, currency watchers said the moves are more likely the result of the global pursuit of assets perceived as safe, spurring demand for U.S. dollars. That has led to investors selling a broad swath of investments, even those seen as likely to rise over the longer term, such as the yuan. Traders also said demand for dollars has risen among China's importers because of their need to settle contracts in the currency at the end of the month.
The moves come as an increasing number of economists and analysts question whether Beijing should widen the trading range.
"If conditions permit, there may be no harm in allowing the yuan to fluctuate around 1% above or below the central parity from October, and to widen that to around 2% after 2015," Wang Yong, a professor at the central bank's training institute in Zhengzhou, Henan province, wrote last month in the Economic Information Daily, a magazine backed by the official Xinhua news agency.
PBOC officials couldn't immediately be reached for comment.
A shift in the trading band would be unlikely to affect China's long-term trend of letting the yuan gradually appreciate against the U.S. dollar. Rather, it could add volatility to the growing market for the yuan, potentially drawing more interest from currency traders and marking another step toward Beijing's plan to give the yuan a greater international presence.
While it's unclear whether Beijing is considering a change in the trading limit, analysts said a shift in the near term is unlikely because of China's coming National Day holiday, which will close offices and businesses in China next week. "I don't think China will announce such big policy changes during the National Day holiday amid the global market turmoil," said ING Asia economist Tim Condon.
He said the recent launch of the "Operation Twist" monetary easing program by the U.S. Federal Reserve, which came amid mounting concerns about a global economic slowdown, has triggered an outflow of hot money—or speculative capital—from Asia, including China. Under the program, the Fed will sell $400 billion of its short-term debt holdings and buy longer-term bonds in an effort to drive down long-term interest rates.
China has gradually strengthened the yuan's parity rate since last week, even as investors have tested the mainland trading limits and sent the currency down sharply in the nascent market for yuan trading in Hong Kong, where investors are allowed to buy and sell with fewer restrictions. Last week, in the market for yuan-tied derivatives called nondeliverable forwards, investors pushed down the value of the yuan forwards, signaling expectations for a weaker yuan, though the market has since reversed much of that trend.
"The yuan is still undervalued and the central bank will let it rise," said Zhao Qingming, a senior analyst at China Construction Bank Corp., citing the parity-rate moves.
The yuan is still seen as likely to strengthen over the long term as China continues to attract capital from around the world. But the recent volatility has raised questions about whether Beijing might let the currency—also known as the renminbi—weaken in the meantime.
Barclays Capital's chief economist for emerging Asia, Huang Yiping, said Thursday that he sees recent evidence that policy makers are paying closer to attention to the value of the yuan against a basket of currencies, rather than the dollar alone. Though the bank still expects the yuan to strengthen, the currency could weaken under that scenario if a global recession hits, he said.
Wednesday, September 28, 2011
Have You Heard...
- China says US-Taiwan arms deal to impact exchanges
- China Train Crash Spurs Safety Fears
- China’s Hong Kong Succession Plan Takes Shape as Tang Quits to Prepare Run
- Beijing Considers Allowing Some Local Bonds
- Esprit’s 68% Sales Discount Signals World’s Cheapest Apparel LBO: Real M&A
- Citic, Sinohydro, Great Wall show China's IPO struggle
China says US-Taiwan arms deal to impact exchanges
BEIJING — Beijing said on Wednesday Washington's decision to upgrade Taiwan's F-16 fighters would damage military ties between the United States and China, impacting military exchanges and high-level visits.
China has repeatedly condemned the $5.85 billion US deal to upgrade Taiwan's fleet of F-16 fighter jets, summoning the US ambassador and warning the move would undermine warming military relations if it was not revoked.
On Wednesday, the defence ministry warned that military relations would suffer direct consequences from the deal, without specifying what action it would take.
"In light of the serious damage resulting from the US arms sale to Taiwan, planned China-US military exchanges, including high-level visits and joint exercises, will definitely be impacted," said ministry spokesman Geng Yansheng.
Geng also urged Washington to "stop arms sales to Taiwan" to avoid "serious damage" to US-China military ties.
Beijing still considers Taiwan part of its territory awaiting reunification -- by force if necessary -- even though the island has ruled itself since 1949 at the end of a civil war.
Washington recognises Beijing rather than Taipei, but remains a leading arms supplier to the island of 23 million inhabitants, providing a source of continued US-China tension.
Under the deal announced last week, Taiwan will get a retrofit of 145 F-16 A/B fighter jets, which will be equipped with modern weapons and radar capable of detecting China's new stealth aircraft.
Taiwan and US officials have said the upgrade would improve the island's defences as it faces a rising China, which has ramped up military spending and widened its strategic edge over the self-governing territory.
The move fell short of Taiwan's request for 66 new and more powerful F-16 C/D fighters.
Analysts have said the US offer was a piece of diplomatic craftsmanship which showed commitment to the defence of democratic Taiwan, while averting a furious Chinese reaction to a sale.
China froze military exchanges with the United States in 2010 over an earlier arms package, but relations have improved over the past year.
In July, Mike Mullen became the first chairman of the US Joint Chiefs of Staff since 2007 to visit China.
A top US officer on Tuesday played down the potential effect of the latest US arms sale to Taiwan, saying he did not expect Beijing to cut off all military relations.
Admiral Robert Willard, head of the US Pacific Command, said China might delay or cancel some meetings, but would not sever all contacts with the US military.
"I think that regardless of the effects of this particular round of Taiwan arms sales and disagreement between our two governments on that issue, China will be very likely to retain the highest-level visitation that will enable us to continue those strategic level discussions," Willard told reporters in Washington.
China Train Crash Spurs Safety Fears
SHANGHAI—Chinese authorities blamed a signal breakdown for a subway collision in Shanghai that injured about 260 people and fueled new fears about safety amid a boom in railway construction, following a deadly high-speed rail crash around two months ago.
The Shanghai government said about 20 people were seriously injured in Tuesday's accident, which occurred when one subway train ran into the back of another at a low speed near a downtown tourist district. No fatalities were immediately reported.
The government-owned operator of the relatively new line, Shanghai Shentong Metro Group Co., said signals had malfunctioned less than an hour before the accident, and that trains were running on a slower timetable because drivers had to rely on visual cues and telephones to plot their course on the tracks.
The subway accident prompted a flurry of online messages that compared it with the far worse collision on July 23 of two high-speed trains on an above-ground, intercity line. In that accident, one train rammed the back of another near the city of Wenzhou, sending carriages plunging off a viaduct, killing 40 people and injuring more than 190 others.
The incidents involved different types of railway built with equipment from a variety of suppliers. But, according to company statements, they had one component supplier in common: Casco Signal Ltd., a Shanghai joint venture of France's Alstom SA and Beijing-based China Railway Signal & Communication Corp., or CRSC.
A Casco spokeswoman said in an email Tuesday that initial signs pointed to a wider power outage rather than a signal failure as the cause of Shanghai's incident, but said investigations continue. Alstom and Casco in separate statements Tuesday rejected association with the Wenzhou accident, reiterating their equipment was "not the root cause" of the July crash. A CRSC subsidiary unrelated to Alstom had earlier said it would accept its responsibility in the Wenzhou crash. Alstom referred questions about Tuesday's crash to Casco.
The Wenzhou accident severely dented the image China's leadership has sought to project of its high-speed rail system as technologically superior to others in the world. Investigators initially cited faults with signaling in the Wenzhou accident, saying a full report would be issued this month. Last week, the state-run Xinhua news agency said the team investigating the accident had postponed indefinitely the release of the report, citing the complexity of the issue.
Since January, when Beijing celebrated a record-breaking speed of 487.3 kilometers per hour (302.1 miles per hour) for one of its bullet trains, its railway sector has faced numerous setbacks: a scandal that toppled senior leadership of the Ministry of Railways and glitches such as electrical outages on the ballyhooed Beijing-Shanghai line. For many analysts, the Wenzhou accident suggested Beijing compromised safety in the quick expansion of its high-speed railway system, now the world's biggest.
China has been no less ambitious expanding its rail system underground.
Since Shanghai's first subway opened in 1995, it has built one of the world's largest underground systems, with 11 lines, 273 stations and 425 kilometers of rail that carry more than five million people daily.
Line 10, where Tuesday's accident occurred, began service last year, just weeks before Shanghai started a six-month World's Fair. The line features sleek trains with televisions and purple interiors, but was built so quickly that even today one transfer involves going above ground and crossing a street.
Tuesday's apparent signal breakdown was at least the second on Line 10 in the two months since the Wenzhou accident. On July 28, a Line 10 train moved to an incorrect branch of track and went a short distance the wrong direction, the government says. Authorities haven't provided an explanation for that incident.
The Alstom website says Casco supplied signaling equipment for Line 10, noting that it was designed to be China's largest driverless subway line. Casco was blamed directly by Shanghai's government for a 2009 accident on another subway line, where trains collided at 60 kilometers an hour. Alstom and Casco have declined to comment on the government's accusation in that incident.
Tuesday's accident happened about 2:50 p.m. in a tunnel between stations near the city's touristy Yu Gardens area. Around 40 minutes earlier, according to a Shanghai Metro statement, equipment failed in a nearby station that required trains passing through the next three stations toward the riverfront Bund to switch to manual operations and run at slower speeds. The statement said drivers had to communicate by phone.
After the crash, sirens were heard throughout the city as ambulances raced to the scene. Television footage showed bloodied, bruised and dazed passengers being treated by firemen and rescuers. Rail equipment was shown bent and broken, with a cab of one of the cars pressed into a sharp bend. Local reports said at least 20 people were seriously injured.
Shanghai Communist Party Secretary Yu Zhengsheng, whose government has faced a barrage of local criticism for a high-rise fire last year that killed 58 people, was shown on television Tuesday evening crowded into a briefing room and whispering in the ear of an injured man in a hospital bed.
China’s Hong Kong Succession Plan Takes Shape as Tang Quits to Prepare Run
Hong Kong Chief Secretary Henry Tang resigned to consider running for the city’s top government job in a long-awaited succession plan that may be muddied by public anger at a widening wealth gap.
Tang, 59, is expected to run in elections when Chief Executive Donald Tsang’s five-year term ends next June. He faces competition from Leung Chun-ying, who yesterday said he will stand down from Tsang’s advisory body to compete in polls that are skewed in favor of candidates backed by China.
Preparations to replace Tsang take place against the backdrop of an economy contracting at the same time as surging prices of have stoked anger at a government seen as favoring business. While Tang’s path from finance secretary to chief secretary followed Tsang’s and fueled speculation he was being groomed to take over, China has raised concerns over social tension in the city.
“China can wait for a bit to make the final decision, as both Tang and Leung are acceptable,” said Willy Lam, an adjunct professor of history at Chinese University of Hong Kong. “Hong Kong people see Tang as a representative of the business community, which may disadvantage him. On the other hand, civil servants clearly would favor Tang over Leung, and Beijing will no doubt take that into consideration.”
China’s Unease
In a sign of unease at Hong Kong’s leadership, Chinese Premier Wen Jiabao said in March that Tsang and Tang’s administration should resolve “deep-rooted conflicts” as social unrest is growing. Tens of thousands of demonstrators marched to protest surging home prices and inequality on July 1, the 14th anniversary of Hong Kong’s return to Chinese rule.
Hong Kong was handed back in 1997 under an agreement with the U.K. that included guarantees of civil liberties, an independent judiciary and autonomy laid out in the city’s constitution, or basic law. That status helped cement its role as Asia’s biggest international financial center, with a $2 trillion stock market that hosts China’s biggest companies by market value, including Industrial & Commercial Bank of China (601398) Ltd. and PetroChina Co.
The success also created the widest rich-poor gap in Asia, according to a report by the United Nations in 2008. Inflation, excluding distortions from government subsidies, accelerated to 6.3 percent in August, the highest since the global financial crisis. The city can’t set interest rates to damp demand because its currency is pegged to the U.S. dollar.
Shrinking Economy
Rising consumer prices coincide with a slowdown in export growth that caused the economy to contract 0.5 percent in the three month ended June 30 from the previous quarter. Gross domestic product will shrink again this quarter, according to economists at Morgan Stanley and Daiwa Capital Markets.
Tang said he was stepping down to consider "how to improve our livelihood, and ensure that all sectors, particularly the underprivileged, would be able to truly share the fruits of our economic success." In a televised resignation speech he called the prospect of running for office "a great challenge for me."
The 1,200-member committee to be formed in December that will decide the next chief executive is elected from several sectors that represent “narrow business interests” and won’t confront Beijing, said Joseph Cheng, a political science professor at City University in Hong Kong. Some of the biggest groupings in the committee include delegates to the National People’s Congress, China’s parliament, and the Communist Party’s own advisory committee.
‘Cultivated’
China hasn’t always got its way with Hong Kong’s 7 million people. Tsang’s predecessor, Tung Chee-hwa, stepped down early in 2005 citing ill health after unpopular decisions fueled demonstrations that included a march of 500,000 to protest a China-backed anti-subversion law.
“In a climate where people are suspicious of collusion between the government and business, if Tang becomes chief executive there may be a backlash,” Lew Mon Hung, a Hong Kong member of the National Committee of the Chinese People’s Political Consultative Conference, told reporters in Beijing today in comments broadcast by Cable Television. “C.Y. Leung, who comes from a poor family, can avoid such doubts,” he said, adding that he would back Tang’s rival.
Leung, 57, is Asia Pacific chairman at DTZ Holdings Plc (DTZ), a real estate advisory company. He will leave his job “within days” on the Executive Council, the top advisory body to the city government, Leung told reporters yesterday.
Home Base
Leung has been vocal about housing policy, urging the government to resume a program to build subsidized homes that was halted in 2002. Home prices surged more than 70 percent since 2009 on low mortgage rates and an influx of mainland Chinese buyers, according to an index by Centaline Property Agency, the city’s biggest closely held real estate broker.
Tang’s best-known policy success was to abolish duties on wine in 2008, helping the city overtake London and New York as the world’s biggest wine auction market. Imports of the beverage surged to $858 million last year, from $185 million in 2007.
The son of a manufacturer, Tang has faced criticism over his response to public protests, including security measures during a speech by Chinese Vice Premier Li Keqiang at Hong Kong University last month. Tang described criticism that police violated demonstrators’ civil rights as “completely rubbish.”
Tang in May said young people shouldn’t blame the rich for dominating Hong Kong and should instead focus on how to become the “next Li Ka-shing,” the South China Morning Post reported. Li is known as “Superman” in Hong Kong, after parlaying a business making plastic flowers into a multibillion-dollar ports, telecoms and property empire.
Tang’s support fell to 46.6 out of 100 in the latest survey ended this month, from 65.4 when he succeeded Tsang as chief secretary in July 2007, according to the University of Hong Kong’s Public Opinion Programme.
“Chinese officials have cultivated Henry Tang and he has been groomed for the chief executive position for 10 years,” City University’s Cheng said. “Because he appears so weak, that’s why C.Y. Leung believes that he has a chance to win.”
Beijing Considers Allowing Some Local Bonds
China is moving toward a trial program allowing some local governments to issue bonds directly, said a person briefed on the effort, as Beijing considers restructuring a system that has contributed to worries about the threat that local-government debt poses for the nation's economy.
The provincial governments of Zhejiang and Guangdong and the municipalities of Shanghai and Shenzhen would participate in the trial, said the person, selling a total of around 20 billion yuan ($3.13 billion) in bonds in the fourth quarter, the person said.
It's unclear whether the trial program has gained final approval from Beijing authorities. Neither the Ministry of Finance nor the four local governments were available for comment.
The program could mark the beginning of a shift in how local-government projects in China are funded. China's Budget Law doesn't allow local governments to issue bonds directly, but under a program introduced in 2009 the Ministry of Finance has been issuing bonds on their behalf. It pays the principal and interest to investors after the bonds mature, and the local governments then repay the ministry.
The trial program will allow local governments to raise funds for infrastructure projects more easily and flexibly, analysts said. "Such a program is credit-positive as it will enhance local administrations' discipline and transparency in managing their debt, and more importantly, will expand their sources of funding," Moody's Investors Service wrote in a report earlier this month.
Local authorities borrowed heavily to help fund China's four-trillion yuan stimulus following the global financial crisis of 2008, but concerns that lax discipline may result in bad loans have led the central government to clamp down on further borrowing by local authorities, including borrowing via companies or local government financing vehicles.
The national audit office estimated the total debt of local governments at the end of last year at 10.7 trillion yuan, equal to 27% of China's 2010 gross domestic product.
Esprit’s 68% Sales Discount Signals World’s Cheapest Apparel LBO: Real M&A
No apparel retailer in the world is offering potential buyers a bigger discount on a billion-dollar deal than Esprit Holdings Ltd. (330)
Once a $20 billion company, Esprit has plummeted more than 90 percent in the past four years as Hennes & Mauritz AB (HMB) and Inditex SA (ITX)’s Zara lured away customers and prompted the retailer to say its brand “lost its soul.” Shares of Esprit, valued at just $1.4 billion yesterday, sell for 32 cents per dollar of revenue, cheaper than any apparel company after falling to its lowest valuation this week, according to data compiled by Bloomberg.
While Esprit is mired in its worst ever earnings slump, the brand alone may still be worth twice as much as the company itself, according to WPP Plc’s Millward Brown Optimor. With Hong Kong-based Esprit betting on China to boost flagging demand and its equity valued at a record discount to both cash flows and net assets, the clothing retailer may now attract private equity buyers seeking to turn it around, according to Jyske Bank A/S.
“It is still a very well-known brand,” said Gabriel Chan, an analyst at Credit Suisse Group AG in Hong Kong. Private equity could “take over the company and restructure the company in a more sensible way. It is still worth something. It’s a matter of how they rejuvenate the brand,” he said.
Patrick Lau, a spokesman for Esprit, declined to comment on whether it is considering a sale or has been approached about an acquisition.
‘Lost Its Soul’
After reporting a record HK$6.45 billion ($827 million) in net income for its year ended June 2008, earnings have slumped in the each of the past three years as competition from H&M and Zara intensified.
“The brand has gradually lost its soul over the past few years,” Esprit’s Chief Executive Officer Ronald Van der Vis said in the company’s earnings statement on Sept. 15.
At the time, Esprit said full-year net income plunged 98 percent, hampered by costs to close stores and sell its North American operations. Sales also stalled as consumers in Europe, its biggest market, cut back on spending in the face of an economic slowdown in the region, Esprit said.
H&M and Zara, which also rely on Europe for most of their revenue, have fared better. While Esprit’s sales have stagnated in the past three years, analysts estimate that Stockholm-based H&M will increase 25 percent this year versus 2008.
Zara’s parent, Arteixo, Spain-based Inditex, has increased revenue by a third in its three-year span, helping the stock more than double to a record this week.
H&M, Zara
“They totally lost their way after H&M and Zara came up and took over a big part of their market,” said Tan Yew Boon, a Hong Kong-based money manager at KGI Group, which oversees about $5.9 billion in assets. “Esprit was the brand to aspire for because it was like H&M.”
Esprit had plummeted 93 percent from its high in October 2007, leaving it valued at HK$8.50 a share yesterday. The stock rose more than 12 percent today, its biggest gain in almost three years, to HK$9.55.
In the past year, Esprit has declined more than any other company in the MSCI World (MXWO) Index except Tokyo Electric Power Co., which owned the nuclear plant in Fukushima, Japan, that caused the worst atomic disaster since Chernobyl.
Esprit is “small enough for a debt-backed bid,” said Anne Critchlow, an analyst at Societe Generale SA in London. “It would be a financially feasible deal, but a highly risky one.”
At yesterday’s close, Esprit is valued at 0.32 times its sales, versus the median 1.33 times for 50 apparel retailers with at least $1 billion in market value, data compiled by Bloomberg show. H&M and Inditex both trade at more than 3 times revenue.
Relative Value
Compared with cash flows, Esprit’s stock slumped this week the lowest level since at least the end of 2002, while the company also traded at the biggest discount to its assets minus liabilities in at least 16 years, the data show.
Robert Jakobsen, an analyst at Jyske Bank in Silkeborg, Denmark, estimates that Esprit has a so-called fair value of HK$24 a share, or about $4 billion for the entire company, based on his discounted cash flow analysis. That’s almost three times its current market capitalization.
“It’s so cheap that it might have buyers stepping up,” said Alvaro Shiraishi, a Denver-based vice president of Cambiar Investors LLC, which oversees about $8 billion. “The adjustments they need to make are probably better done when you are not under scrutiny of a public company.”
To turn the company around, Esprit’s Van der Vis plans to more than double sales in China, the world’s most populous nation, in four years. In the year ended June, it had HK$2.68 billion in revenue from China, Esprit’s fastest-growing market.
Cost Benefit
Esprit also intends to spend HK$6.8 billion on branding over the next four years, focusing its efforts on China and parts of Europe, according to a company presentation. Almost one-third of its marketing will be directed to China.
“We have to be realistic -- China is our future, not North America,” Van der Vis said in an interview this month.
While the cost to rebuild Esprit and expand in China may limit profitability and deter potential buyers, the value of the brand itself may make it worth the risk, according to Credit Suisse’s Chan.
Esprit’s brand is valued at $3.4 billion, equal to Polo Ralph Lauren Corp. (RL)’s Ralph Lauren and more than twice as much as Esprit’s equity value, according to an annual report released in May from Millward Brown Optimor, a unit of WPP, the world’s largest advertising company.
“Despite all the problems Esprit has just now, the stock has become so cheap that it wouldn’t surprise me to see a private equity firm or another buyer looking at it,” said Jim Nelson, who helps manage $500 million, including Esprit shares, at Euro Pacific Asset Management in Newport Beach, California. “Future success will hinge on the company’s ability to turn the brand around and successfully grow the Asian business.”
Citic, Sinohydro, Great Wall show China's IPO struggle
(Reuters) - Weak pricing for share sales by Citic Securities (600030.SS) and Sinohydro Group, along with a soft market debut for Great Wall Motor (601633.SS), showed greater China's IPO markets, while still open, are buckling in the face of economic uncertainty and hefty supply.
Initial public offerings globally have ground to a halt because of volatile markets and sovereign debt concerns, shutting off a key supply of funding for companies and revenue for banks.
In Hong Kong, the world's biggest IPO market for the last two years, some $4.5 billion worth of deals were pulled just last week by companies including Sany Heavy Industry (600031.SS) and rival XCMG Construction Machinery Co Ltd (000425.SZ).
"The situation is pretty poor right now," said Jasper Chan, corporate finance officer at Phillip Securities Ltd in Hong Kong. "The investment banks are hungry for any business, so they pushed these IPOs to the market. It's not a recovery," he added. "Demand is not there, absolutely."
Demand is likely to be tested further with some $35 billion in share sales expected in Hong Kong and Shanghai in coming months from financial services companies alone.
Underscoring the continued flood of new equity, China Communications Construction Co Ltd (1800.HK), the country's largest builder of ports, won approval for a 20 billion yuan ($3.1 billion) IPO in Shanghai which could become the biggest offering on the mainland so far this year.
FURTHER TESTS
Citic Securities Co Ltd, China's largest publicly traded brokerage, priced its Hong Kong share sale at the bottom of a revised range, four sources with direct knowledge of the matter told Reuters on Wednesday. The company will now raise about $1.7 billion from the offering.
Elsewhere Sinohydro, China's largest dam builder, is raising 13.5 billion yuan ($2.1 billion) from an IPO in Shanghai, a fifth less than it originally sought, after setting the price at the bottom of an indicative range. It will sell 3 billion shares at 4.50 yuan each, it said in a statement.
Shares of automaker Great Wall Motor, meanwhile, fell as much as 9.2 percent on their Shanghai debut, with an uninspiring outlook for the industry adding to the weak sentiment.
Among other offerings slated before the end of the year are share sales from Haitong Securities, insurer New China Life and China Guangfa Bank.
The fact that Chinese companies are still considering public offerings in such uncertain times reflects their need to raise cash, China's relatively strong economic growth outlook and the country's time-consuming and opaque listing approval process.
Companies seeking to list in mainland China often wait years for approval, then must proceed within six months.
But in many cases, companies are cutting the size of their offerings to generate interest. Earlier this week for example, Sinohydro cut the size of its Shanghai IPO by about 14 percent.
Companies have so far raised $32.3 billion from first-time share sales, down 42 percent from a year earlier, Thomson Reuters data showed.
"The capital market is under immense pressure. There is not enough demand," Sinohydro Chairman Fan Jixiang told investors on an online roadshow on Monday. "We must take into consideration liquidity conditions in the market as well as the actual value of the company, so we proactively cut the size of the issue."
BIG DEAL
Even with the lower pricing, Citic Securities' deal will be the biggest stock offering in Hong Kong since the $2.5 billion IPO by luxury goods maker Prada (1913.HK) in June.
Citic Securities had enough commitments from cornerstone and anchor investors including Temasek Holdings Pte Ltd TEM.UL, U.S. asset manager Waddell & Reed (WDR.N) and hedge fund Och-Ziff Capital Management (OZM.N) to fully cover its deal, sources said previously, easing concerns it could be derailed because of growing market volatility.
Hong Kong's benchmark Hang Seng index .HSI has plunged about 13 percent in September alone and fell to a 26-month low on Monday, making it harder for companies to tap risk-averse investors and demand top valuations when selling stock.
Great Wall, China's top manufacturer of sport utility vehicles and pick-up trucks, raised 3.96 billion yuan ($619 million) from its Shanghai offering. Its shares closed down 8.9 percent while the benchmark Shanghai Composite Index .SSEC ended down 1 percent at its lowest close in almost 15 months.
"Many new listings had traded below their IPO prices recently. There will be more to come as this has become a norm now," said Zhang Yanbing, an analyst at Zheshang Securities in Shanghai. "Companies need to adjust their plans to reflect market realities or they will have a hard time selling their shares."
($1=7.796 HK dollars)
Tuesday, September 27, 2011
Pakistan pushes back against U.S., woos China
(Reuters) - Pakistan warned the United States on Tuesday to stop accusing it of playing a double game with Islamist militants and heaped praise on "all-weather friend" China.
Prime Minister Yusuf Raza Gilani, speaking exclusively to Reuters, said any unilateral military action by the United States to hunt down militants of the Haqqani network inside Pakistan would be a violation of his country's sovereignty.
However, he side-stepped questions on the tense relations with the United States and offered no indications of any steps Pakistan might take to soothe the fury in Washington.
The outgoing chairman of the joint chiefs of staff, Admiral Mike Mullen, last week described the Haqqani network, the most violent faction among Taliban militants in Afghanistan, as a "veritable arm" of Pakistan's ISI spy agency and accused Islamabad of providing support for the group's September 13 attack on the U.S. embassy in Kabul.
"The negative messaging, naturally that is disturbing my people," Gilani said in the interview from his office in Islamabad. "If there is messaging that is not appropriate to our friendship, then naturally it is extremely difficult to convince my public. Therefore they should be sending positive messages."
Since Mullen's comments, Pakistan has launched a diplomatic counter-attack and attempted to drum up support from its strongest ally in the region, China.
Pakistani officials have been heaping praise on China since its public security minister arrived here on Monday for high-level talks.
"We are true friends and we count on each other," Gilani said in separate comments broadcast on television networks after talks with Meng Jianzhu on Tuesday.
The military, Pakistan's most powerful institution, also said it appreciated its giant Asian neighbor's support. Army chief General Ashfaq Kayani thanked Meng for China's "unwavering support".
China and Pakistan call each other "all-weather friends" and their close ties have been underpinned by long-standing wariness of their common neighbor, India, and a desire to hedge against U.S. influence across the region.
"They (the Pakistanis) are trying to use their diplomatic options as much as possible to defuse pressure on them. They hope China will help them in this crisis," said security analyst Hasan Askari Rizvi.
SLIM ACHIEVEMENTS
Asked why the United States had suddenly ratcheted up its criticism of Pakistan, Gilani implied that it reflected Washington's frustration with the war in Afghanistan ahead of a withdrawal of U.S. troops from the country in 2014.
"Certainly they expected more results from Afghanistan, which they have not been able to achieve as yet," he said. "They have not achieved what they visualized."
Rejecting allegations that Islamabad was behind any violence across its border, he said: "It is in the interest of Pakistan to have a stable Afghanistan".
The United States has been pressing Pakistan to attack the Haqqani network, which it believes is based in North Waziristan near the Afghan border. Sirajuddin Haqqani, the head of the group, says it is no longer based in Pakistan and feels safe operating in Afghanistan.
Analysts say Pakistan sees the Haqqanis as a counterweight to the growing influence of rival India in Afghanistan and is highly unlikely to go after the group.
The United States seems frustrated at its inability to influence Pakistani policy on militants.
In a meeting with her Chinese counterpart, Yang Jiechi, at the United Nations on Monday, Secretary of State Hillary Clinton urged Beijing to open a dialogue with Washington on Pakistan.
"We have stated this before, but there's clearly an urgency given recent developments and also given the close relationship that exists between Pakistan and China," a State Department official said in a briefing to reporters.
CHINA MORE POPULAR
China is vastly more popular in Pakistan than the United States, which is seen as fickle and favoring India.
Much of the Pakistani public believes that since the end of the Cold War, the United States has tilted toward India, which has fought three wars with Pakistan since the violent partition of the subcontinent in 1947.
In a demonstration of that distrust, hundreds turned out on Tuesday for anti-American rallies in Pakistani cities.
In Hyderabad, they burned pictures of U.S. President Barack Obama and Mullen, while in Karachi they protested in front of the U.S. consulate and the headquarters of the Pakistan People's Party. In Landikotal in the Khyber agency near the Afghan border, about 1,000 people turned out for a rally organized by the religious party Jamaat-e-Islami.
Also on Tuesday, a suspected U.S. drone strike on a house in Azam Warsak village in South Waziristan's tribal region on the Afghan border killed at least three alleged militants, local intelligence officials said.
Gilani pointed out that Washington did not help itself when it struck a deal on civilian nuclear cooperation with New Delhi but not Islamabad.
"There is an acute shortage of electricity in Pakistan. And there are riots. And the opposition is playing to the gallery because there is a shortage of electricity," he said.
"But they (the United States) are doing the civilian nuclear deal not with Pakistan, but with India. Now how can I convince my public that they are your (Pakistan's) friends and not the friends of India? ... the perception matters."
In a tit-for-tat deal in May, Pakistan inaugurated its second Chinese-made nuclear power reactor. China is building two more reactors at the same site, despite international misgivings about risks to nuclear safety and the integrity of non-proliferation rules.
China has also helped build the deep-sea Gwadar port on Pakistan's Arabian Sea coast, partly with a view to opening up an energy and trade corridor from the Gulf to western China, and has been a major supplier of military hardware to Pakistan.
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