Have You Heard...

• China plans 2012 manned space flight after docking test
• China's Hu says Europe can solve its economic woes
• China Replaces Financial Regulators in First Steps of Leadership Shuffle
•  Colonel Sanders Devouring Little Sheep in China Signals 69% Gain: Real M&A
• China to maintain its family planning policy: official

China plans 2012 manned space flight after docking test

Source: Reuters

(Reuters) - China will launch up to two manned space missions in 2012 as it hones the skills needed to secure a long-term manned presence in outer space, an official spokeswoman said on Monday, on the eve of the launch of an unmanned spacecraft.

The spokeswoman for China's space program, Wu Ping, said a rocket will lift the unmanned Shenzhou 8 spacecraft into orbit from northwest China on Tuesday at 0558 a.m. local time (5:58 p.m. EDT), preparing the way for the spacecraft to dock with the Tiangong 1, an experimental module launched on September 29.

The rendezvous and docking exercises between the two vessels are part of China's effort to develop the technological and logistical skills needed to run a full space lab that could house astronauts for long stretches.

The next step, planned for 2012, will entail similar exercises with at least one mission carrying astronauts onboard, Wu told a news conference at the launch site in the Gobi Desert, according to a transcript on an official news website (www.china.com.cn).

"Next year, we will carry out the Shenzhou 9 and 10 flight missions, and they will also carry out rendezvous and docking tests with the Tiangong 1," said Wu.

"According to the mission plans, at least one of the two flights next year will be manned," she added.

Beijing is still far from catching up with the established space superpowers: the United States and Russia. The Tiangong 1 is a trial module; not the building block of a space station.

Russia, the United States and other countries jointly operate the International Space Station, to which China does not belong. But the United States will not test a new rocket to take people into space until 2017, and Russia has said manned missions are no longer a priority for its space program, which has struggled with delays and glitches.

China's impending unmanned tests will help determine whether a modified version of the Shenzhou spacecraft "is suited to the needs of manned space travel," said Wu

Bringing together craft in the vastness of space is one of the key skills needed for an advanced aeronautic program that includes a space station. Collisions can be costly, even fatal.

"It is quite difficult and risky to join together two vehicles traveling at high speeds in orbit, with a margin of error of no more than 20 centimeters," Wu said.

China launched its second moon orbiter last year after it became only the third country to send its astronauts walking in space outside their orbiting craft in 2008.

Wu said crew members have been selected for the possible space missions next year, including two female astronauts.

Beijing also plans an unmanned moon landing and deployment of a moon rover in 2012. Scientists have talked about the possibility of sending a man to the moon after 2020.

China is also jostling with neighbors Japan and India for a bigger presence in space, but its plans have faced international wariness. Beijing says its aims are peaceful.

China's Hu says Europe can solve its economic woes

Source: Reuters By Sylvia Westall

(Reuters) - China believes Europe can overcome its economic problems, President Hu Jintao said on Monday, without mentioning whether Beijing will play any major role in helping to solve the euro zone's debt crisis.

Cash-rich China has already expressed confidence that Europe can survive its debt crisis, but has made no public offer to buy more European government debt while it awaits details on investment options for the euro zone's EFSF rescue fund.

"We are following the economic development under the current difficulties with attention," Hu told reporters through a German translator after meeting Austrian counterpart Heinz Fischer on a state visit.

"We are convinced that Europe has the wisdom and has the competence to overcome the current difficulties," added Hu, who will attend a summit of Group of 20 (G20) leading economies in France later this week.

Klaus Regling, head of the EFSF (European Financial Stability Facility), tried at the weekend to entice China into investing in the bailout fund by saying investors may be protected against initial losses and that bonds could eventually be sold in yuan if Beijing desires.

Hu said economic uncertainties were of importance to the international community, especially in big economies, and that it was vital to foster growth, stability and greater cooperation.

Fischer said he had agreed with Hu on the importance of the G20 meeting and said he had used the talks on Monday to highlight the theme of human rights. "We pointed out which duties Austria has regarding human rights because of our membership of the U.N. (human rights) commission," Fischer said.

China's trade minister Chen Deming, also in Vienna, promised Europe "active support," according to comments carried by the Austria Press Agency (APA). There were no details.

"All countries are in the same boat, we must stick together so that Europe recovers," Chen was quoted by APA as saying at an Austrian-Chinese economic forum.

STORMY SEAS

In a commentary on Monday, state-run Chinese news agency Xinhua used the same metaphor of the world as a storm-tossed ship that would leave no one unscathed if it capsized.

"The Chinese government has also said repeatedly that as a long-term investor in European sovereign debts, China will continue to support Europe and the euro," Xinhua wrote.

"This will create a win-win situation for China and Europe, as it will not only give firepower to European countries to combat the debt crisis, but diversify China's foreign exchange reserves and improve their safety."

Xinhua on Sunday had commented that Europe should not expect China to ride to the rescue as its "savior" from the debt crisis, although Beijing would do what it can to help a friend in need.

Regling has declined to comment on his meetings in Beijing but said he expected to submit a proposal on how to scale up the 440-billion-euro ($623.7 billion) EFSF fund by November.

Expanding the EFSF to 1 trillion euros is central to the euro zone's latest anti-crisis plan, put together at a summit last week. Details have yet to emerge and European leaders are under pressure to show the plan can work.

Regling was visiting China after the euro zone leaders struck the deal to boost the EFSF's firepower, recapitalize banks and reduce Greece's crippling debt burden.

Japan told Regling on Monday that it would continue to buy EFSF bonds but, like China, it did not commit itself to putting cash into a mooted special purpose vehicle to enhance the rescue fund's firepower.

China Replaces Financial Regulators in First Steps of Leadership Shuffle

Source: Bloomberg News

China moved its securities regulator Shang Fulin to head the nation’s banking watchdog, overseeing a 106 trillion-yuan ($17 trillion) industry that includes four of the world’s 10 largest lenders by market value.

Shang’s appointment as chairman of the China Banking Regulatory Commission to replace Liu Mingkang is part of the biggest reshuffle of financial officials in a decade. China Construction Bank Corp. (939) Chairman Guo Shuqing will become head of the securities watchdog and Agricultural Bank of China Ltd. (1288) Chairman Xiang Junbo will take the top job at the insurance regulator, the government said on Oct. 29.

Shang, 59, takes over at the watchdog for an industry whose assets have more than tripled over the past eight years as China’s economy became the world’s second largest. After almost nine years as the securities regulator, Shang will be in charge of curbing a potential surge in bad loans following a record $2.7 trillion two-year credit boom that propelled China’s expansion after the global financial crisis.

“The biggest challenge facing Liu’s successor is the ability to prudently regulate the banks in light of the development of China’s capital markets,” Mike Werner, a senior analyst at Sanford C. Bernstein & Co. in Hong Kong, said in an e-mail. “With a growing number of products, such as wealth management products, and number of financial entities, such as trust firms, balancing the profitable development of the banking sector with the regulation will be difficult.”

‘Musical Chairs’

Guo, 55, who resigned from Construction Bank on Oct. 28, will replace Shang at the China Securities Regulatory Commission. Xiang, 54, who quit Agricultural Bank the same day, will move to the China Insurance Regulatory Commission, replacing Wu Dingfu. The government’s announcement didn’t say whether Liu and Wu, both 65, are retiring.

“Guo’s appointment will be good for China’s capital markets as he respects rules and the rights of other people,” Chen Zhiwu, a finance professor at the New Haven, Connecticut- based Yale School of Management, said in an interview in New York.

The websites of the three regulators have been updated to reflect the changes.

Shang, who turns 60 in two weeks, was born in Jinan, the provincial capital of eastern Shandong province. He holds a doctorate degree in finance from France.

Shares Slump

He was appointed head of the CSRC in December 2002, and served as president of Agricultural Bank starting in February 2000. He was also previously assistant and deputy governor of the People’s Bank of China, according to a profile on the CBRC website.

“The next two years is going to see a huge game of musical chairs,” Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing, said before the announcement. “We’re expecting that over the course of the next two years there will be a major reshuffling and basically a new generation of leaders taking over for the next 10 years.”

Shang will regulate lenders including Industrial & Commercial Bank of China (601398) Ltd. and Construction Bank, the world’s two largest lenders by market value. Shares of China’s biggest lenders have slumped this year on concern that an economic slowdown and drop in property prices may trigger defaults by local governments, small companies and developers.

Shang is unlikely to make big changes overnight, Chen said.

“He keeps a low profile at work,” Chen said. “He’s cautious in making decisions and takes different opinions into consideration.”

Soured Debts

The outlook on China’s AA- long-term local-currency rating was lowered to “negative” from “stable” by Fitch Ratings on April 12 because of the risk the government will have to rescue its banks.

Local governments, barred from borrowing directly, have set up 6,576 financing vehicles through the end of 2010 to fund projects such as roads and airports, according to a report from the National Audit Office on June 27. They had 10.7 trillion yuan in outstanding liabilities at the end of last year, of which 8.5 trillion yuan was from bank loans, it said.

As much as 30 percent of outstanding debts held by local authorities’ financing vehicles may sour, and is likely to be the biggest source of nonperforming assets for the banks, according to Standard & Poor’s.

Liu was appointed as the first head of the watchdog after serving as chairman and president of Bank of China, where he cut staff and branches, introduced lending controls and took the bank’s Hong Kong unit public.

During his time at the CBRC, the nation’s four largest lenders raised a total $74 billion in first-time sales on the Shanghai and Hong Kong stock exchanges from 2005 to 2010. Agricultural Bank’s $22.1 billion share sale last year was the world’s largest initial public offering at that time. He also presided over capital injections and purchases of bad assets that brought the total value of bailouts over a decade-long overhaul of the state-run banks to $650 billion.

Tightened Oversight

“The regulator’s biggest achievement has been the listing of the Chinese banks in the H- and A-share markets,” Werner wrote. “More importantly than the listings has been improvement in the banks’ corporate governance, risk management, disclosures, transparency and internal control measures that were required before their listings.”

The CBRC has this year drafted higher capital requirements, tightened oversight on banks’ asset management businesses and ordered faster collections from local governments on loans to curb risks. Lenders were also told to slow loan growth and pace lending more evenly throughout the year after the credit expansion in the past two years helped fuel inflation and an asset bubble.

Chinese banks’ risk level and ability to withstand shocks reached the “best in history” last year, the regulator said in its 2010 annual report released on March 29. Commercial lenders’ overall non-performing loan ratio fell 5 percentage points from the end of 2007 to 1.1 percent at Dec. 31, 2010, while their capital adequacy ratio rose to 12 percent last year.

Bad-Loan Provisions

The banks’ combined profits surged more than 14 times to 899.1 billion yuan last year from 61.6 billion yuan in 2002, enabling commercial lenders to boost their bad-loan provisions to almost 250 percent of their outstanding soured debts as of June 30, according to CBRC data.

Wu, the outgoing head of the CIRC, was appointed to the position in November 2002 after stints at the National Audit Office and the Communist Party’s Central Discipline Inspection Committee. The nation’s insurance market more than quadrupled during his tenure.

His successor, Xiang, is a former state auditor and deputy central bank governor. He joined Agricultural Bank in 2007 to lead its restructuring. He has a master’s degree in economics from Tianjin-based Nankai University and a Ph.D. from Beijing University.

New Provincial Chiefs

Guo was appointed chairman of Construction Bank in March 2005 after heading the country’s foreign-exchange regulator. He is also a former deputy central bank governor and was vice governor of Guizhou province from 1998 to 2001. A graduate of Nankai University, Guo is “outspoken, insightful and an advocate of systemic reform,” the Xinhua News Agency said.

China also appointed new Communist Party chiefs for the provinces of Henan, Jiangxi, and Anhui, Xinhua said on Oct. 30.

Lu Zhangong was named secretary of the Henan Provincial Committee of the Communist Party of China, Xinhua reported. Su Rong was named head of the Jiangxi committee and Zhang Baoshun was appointed head of the Anhui committee, according to Xinhua.

Colonel Sanders Devouring Little Sheep in China Signals 69% Gain: Real M&A

Source: Bloomberg News

Anti-monopoly regulators are turning Yum! Brands Inc.’s acquisition of a chain of Mongolian hot-pot restaurants into the most profitable bet in China.

Little Sheep Group Ltd. (968) has tumbled after saying last week that China’s Ministry of Commerce extended a review of Yum’s HK$4.4 billion ($573 million) takeover by two months. Little Sheep, which rose to within 25 cents of Louisville, Kentucky- based Yum’s HK$6.50-a-share bid, last week slumped 18 percent below that price, according to data compiled by Bloomberg.

Yum, the owner of the KFC fried chicken chain founded by Colonel Harland Sanders, is facing increased scrutiny from regulators as it attempts its biggest acquisition. While Little Sheep would extend Yum’s lead among restaurant chains in China, independently owned eateries would still control more than 90 percent of sales. That means the Ministry of Commerce, which has blocked only one of the more than 250 takeovers it has reviewed since China’s anti-monopoly law began three years ago, is unlikely to reject Yum’s bid, DBS Vickers Hong Kong Ltd. said.

“People are just too nervous,” Alick Wong, an analyst at Louis Capital Markets in Hong Kong, said in a telephone interview. “If an American company wants to buy in China, it makes investors cautious. Any bad news will move the stock.”

Wong expects the deal to close by March, which implies an annualized 69 percent return based on last week’s closing price of HK$5.30 a share, data compiled by Bloomberg show.

Jonathan Blum, a spokesman at Yum, didn’t immediately respond to telephone or e-mail messages requesting comment on whether it expects the transaction to gain approval.

Mongolian Hot Pot

Zhang Zhanhai, chief operating officer at Baotou, Inner Mongolia-based Little Sheep, declined to comment. The Ministry of Commerce, known as Mofcom, didn’t respond to a faxed request for comment on Yum’s bid for Little Sheep.

Founded in 1999, Little Sheep has more than 400 Mongolian hot-pot restaurants, where diners cook a variety of thinly sliced meats such as pork, mutton and beef in a simmering broth. The restaurant operator, whose Chinese name translates to Little Fat Sheep, agreed in May to an all-cash deal that would give Yum 93 percent of the company, data compiled by Bloomberg show.

The acquisition would strengthen Yum’s presence in China, where it generates more sales than in the U.S., by enabling the fast-food chain operator to offer a local specialty in the world’s most populous nation.

Little Sheep has posted annual sales growth of more than 20 percent since 2006 and analysts project the company will extend that streak through at least 2013, according to data compiled by Bloomberg. Yum’s sales haven’t increased by more than 10 percent since 2002, the data show.

Local Specialty

“They want to be a leading brand in all the major markets,” Sara Senatore, an analyst at Sanford C. Bernstein & Co. in New York, said in a telephone interview. “Little Sheep is how they’re going to do that.”

Right now, Yum doesn’t “have an Asian or Chinese full- service, and Chinese food is still many, many times bigger as a market than the market for Western food,” she said.

Little Sheep, which had climbed as high as HK$6.26 after the announcement, plunged by the most in three years on Oct. 26 after Yum notified the hot-pot chain of the 60-day extension by the Ministry of Commerce. The decision came four months after it first acknowledged the application. The regulator now has until December to decide on Yum’s acquisition.

With the gap to the deal offer widening to HK$1.20 based on last week’s price, buying shares of Little Sheep would translate into a 23 percent gain if the deal closes -- without accounting for how long it will take to complete the transaction, data compiled by Bloomberg show.

Spooked

That’s a bigger potential windfall than any other takeover target based in China, data compiled by Bloomberg show.

While investors dumped shares of Little Sheep because of the possibility the deal will be blocked by antitrust regulators, the concern is unwarranted because China is dominated by independently owned eateries, said Titus Wu, a Hong Kong-based analyst at DBS Vickers.

Under China’s anti-monopoly law, an acquisition that allows the companies involved to reach certain market share and sales levels needs the approval of the commerce ministry.

The ministry has reviewed 267 mergers under the anti- monopoly law and rejected only one -- Coca-Cola Co. (KO)’s $2.3 billion bid for China Huiyuan Juice Group Ltd. (1886) in 2009, said Marc Waha, Hong Kong-based partner at law firm Norton Rose LLP.

The deal would have combined China’s largest and third- largest juicemakers and given Coca-Cola a 17.5 percent share of the market that year, according to Euromonitor International.

‘Finger Lickin’ Good’

In China’s restaurant industry, independent operators garnered 92 percent of sales last year, while restaurant chains including Yum controlled just 8 percent, Euromonitor said.

Yum, which opened its first KFC outlet in China in 1987 and has more than 3,300 fried chicken outlets across the country, still accounted for less than a fifth of the sales within the smaller chain market. Little Sheep had a 2.1 percent share.

“This case is more likely to be approved because it’s hard to standardize Chinese food,” said Mei Xinyu, a researcher at the Ministry of Commerce’s Chinese Academy of International Trade and Economic Cooperation. “There are many local restaurants which have the capability to compete.”

Nevertheless, political objections to non-Chinese companies acquiring local businesses can’t be ruled out, according to James McGregor, senior counselor in China for APCO Worldwide, a public-affairs consulting firm.

Overreacting

“On a pure business level, there’s no reason to reject it,” said McGregor, who wrote the book ‘One Billion Customers: Lessons from the Front Lines of Doing Business in China.’ Still, “the government is worried about getting criticized for allowing foreigners to buy into Chinese brands. We never know what the politics are behind this.”

Traders may still have more to gain from buying shares of Little Sheep now -- even if the deal ultimately unravels, according to DBS Vickers’ Wu.

Before Yum made its takeover announcement in May, analysts covering Little Sheep had an average share-price estimate of HK$6.09, according to data compiled by Bloomberg. That’s 15 percent higher than its closing price last week.

“The market may have overreacted,” said Christina Lie, an analyst at First Shanghai Securities in Hong Kong.

China to maintain its family planning policy: official

Source: Xinhua

BEIJING, Oct. 30 (Xinhua) -- China will adhere to its family planning policy so as to maintain a low reproduction rate, said the country's family planning chief on Sunday, expected to be the eve of the world's population reaching seven billion.

"Over-population remains one of the major challenges to social and economic development," said Li Bin, director of the State Population and Family Planning Commission in an exclusive interview with Xinhua, adding that the population of China will hit 1.45 billion in 2020.

Li said maintaining and improving the existing family planning policy and keeping a low reproduction rate, along with addressing the issues of gender imbalance and an aging population, will be the major tasks in the future.

Li's words came just one day before Oct. 31, the day on which the United Nations estimates the world's population will reach seven billion.

Zhai Zhenwu, a leading Chinese demographer, said earlier in the past week that China's family planning policy had postponed this day for at least five years, as it prevented 400 million people from being added to the country's population, which is 1.34 billion at present.

"The population of China would have hit 1.7 billion had it not been for the family planning policy, and it would have created more difficulties for society," said Li.

The most populous nation in the world, China introduced its family planning policy, often referred to as the "one-child policy", in the late 1970s to curb pressure on the environment and resources.

Li said the policy has made a favorable environment for the country's economic development and social stability by alleviating demand for fundamentals including education, employment and housing.

Thanks to the policy, China's average education term has reached nine years and its population's life expectancy 73.5 years. In addition, maternal mortality rates and infant mortality rates are among the lowest in all developing countries.

China is focusing more on the all-round development and the livelihood of the people. It is a model of poverty relief efforts for developing countries, said Li.

"The Chinese government seriously fulfills the World Population Plan of Action and the Millennium Development Goals set by the United Nations, making positive contributions to the world's population development," said Li.

However, Li said that besides overpopulation, China is still facing other population-related challenges, including gender imbalance and an aging population.

For every 100 girls born in 2010, 118 boys were born. And 13.26 percent of China's population are aged 60 or above. It is expected the ratio will hit one third, or 440 million, by 2050. One fifth of the population will be 80 years of age or older in 2050, according to Li.

Although the average education term has been extended, the rate of higher educated people in the main labor force stands only 12 percent, which still lags far behind the average level in developed countries.

In the meantime, the rate of infant defects in recent years has stood at four percent to six percent, and people with disabilities account for 6.34 percent of the aggregate population, said Li.

"We must stick to the existing policy, raise the quality of the population and optimize its structure, so as to reach the sustainable development of population, society, environment and economy," Li said.

Have You Heard...

• China names new financial chiefs
• China Defines Acts of Terrorism, Allows Funds, Assets to Be Frozen
• China Has Homemade Supercomputer Gain
• Chinese Town Cancels Tax That Sparked Riots

China names new financial chiefs

Source: Reuters By Jacqueline Wong

(Reuters) - China named new heads to three top financial regulatory posts on Saturday, the official Xinhua news agency said, the first big step in a comprehensive leadership change that will culminate when its top political leaders retire.

The personnel changes are the highest-profile yet in a broad transition of top officials that will run through the next 17 months at a time when the global economy is grappling with a debt crisis and looking to the world's second-largest economy for financial support.

China's President Hu Jintao and Premier Wen Jiabao are due to retire their Communist Party posts at the 18th Congress next fall, and their presidency and premiership positions at a parliament session in March 2013.

The Xinhua announcement on Saturday marks a handing over of power to a younger generation and confirms a Reuters report citing three independent sources that a shake-up would be announced as early as this week.

A broad number of officials will retire from Communist Party, state, military and regulatory jobs in the coming months, forced out as they hit the official retirement age.

"There is going to be a major reshuffling of leadership positions in the next two years. We're going to see a big game of musical chairs as some officials retire and others move into empty slots and advance along their careers," said Patrick Chovanec, associate professor at Tsinghua University's School of Economics and Management in Beijing.

HELMING REFORM

Securities regulator Shang Fulin, 54, was named chairman of the China Banking Regulatory Commission (CBRC), replacing Liu Mingkang. He has proven adept at navigating choppy financial waters, managing to introduce a raft of much-needed reforms to stock and futures markets despite investor jitters over their potential impact.

As head of the China Securities Regulatory Commission (CSRC), Shang oversaw a series of innovations, including the launch of a Nasdaq-style second board, index futures and margin trading, as well as the unloading of a large overhang of previously untradable shares in state companies.

Former China Construction Bank chairman Guo Shuqing, 55, will take up the post of chairman of the China Securities Regulatory Commission. Late on Friday, the bank said Guo resigned due to the need to attend to state financial work.

Xiang Junbo, 54, former chairman of Agricultural Bank of China, will take up the post of chairman of the China Insurance Regulatory Commission (CIRC). AgBank also said on Friday that Xiang, a war hero-turned-banker, resigned "due to the need of state financial work."

Xiang will oversee an industry that includes the world's two biggest life insurers -- China Life and Ping An -- and is currently facing headwinds from weak investment returns.

"State financial work" will entail keeping China on its ambitious path of reform as it continues to ease controls over key sectors and prices, open up to foreign companies and promotes a fledgling offshore market for the yuan in Hong Kong.

Age limits will force out older leaders from throughout the Communist Party, local governments, military, and cabinet ministries, making way for younger leaders to move up.

Liu who headed the CBRC and Wu Dingfu, chairman of the CIRC, have both reached the compulsory retirement age of 65 for officials who hold a rank equivalent to a cabinet minister.

"It's not at all unusual for people to move from a posting with a state-owned bank to a posting with a regulatory agency or a ministry," said Tsinghua University's Chovanec.

"These are not two separate worlds in China; this is a single system where the (Communist) Party decides postings for members inside ministries and bureaucracies."

China Defines Acts of Terrorism, Allows Funds, Assets to Be Frozen

Source: Bloomberg News

China today passed legislation that defines acts of terrorism and empowers the nation to freeze the funds and assets of people and organizations identified on a government list.

The legislative resolution, approved today by the standing committee of the National People’s Congress, “provides a clearer definition of what constitutes a terrorist activity and will help differentiate between terrorist crimes and other crimes,” Li Shouwei, a deputy director of the criminal law office of the NPC, said at a briefing in Beijing. There is no international consensus on the definition of terrorism, he said.

China started a crackdown on terrorists in the northwestern region of Xinjiang in August after a spate of attacks which the government said seriously destabilized development. Local authorities blamed some of the assaults on people trained in overseas terrorist camps, the official Xinhua news agency said in an Aug. 1 report.

China has been “plagued” by terrorist activities for years, mostly originating from the East Turkistan Islamic Movement and other international terror groups outside the country, Public Security Minister Meng Jianzhu was quoted as saying by the official Xinhua news agency on Sept. 21. The government says these groups are seeking independence for Xinjiang.

In December 2003, the ministry published a list of terrorists and terrorist organizations, identifying illegal groups including the East Turkistan Islamic Movement, the East Turkistan Liberation Organization, the East Turkistan Information Center and the “World Uygur Youth Congress as terrorist organizations, Xinhua said in a Sept. 9 report.

Disturbing Social Order

China will now define terrorist acts as “those intended to induce public fear, to harm public security or to coerce state organs or international organizations by means of violence, damage, threats or other tactics that cause or aim to cause severe harm to society by causing casualties, bringing about major economic losses, damaging public facilities or disturbing social order,” according to a copy of the legislation issued by the National People’s Congress in Beijing today.

Instigating or funding such activities or assisting them through other means are also considered terrorist acts, according to the statement.

The definitions on terrorism are “murky” and “broad”, according to Willy Lam, an adjunct professor of history at Chinese University of Hong Kong. “Without due process and an independent judiciary, this will give the police too much power to lock up so-called anti-state elements who are actually not terrorists by international standards,” he said in a phone interview today.

Investigating Terrorists

Phelim Kine, a senior Asia researcher with New York-based Human Rights Watch said the organization is concerned about how China applies measures to investigate terrorists and bring them to justice.

“There is a consistent tendency by the Chinese government to conflate legitimate expressions of ethnic identity and traditions with ‘separatist’ and ‘terrorist’ activities,” he said today.

China’s legislature today also passed an amendment requiring citizens to have their fingerprints included on their identity cards when they apply for or renew the cards. The amendment, which takes effect on Jan. 1 next year, increases punishments for those found guilty of leaking citizens’ personal information.

China Has Homemade Supercomputer Gain

Source: New York Times By John Markoff

China has made its first supercomputer based on Chinese microprocessor chips, an advance that surprised high-performance computing specialists in the United States.

The announcement was made this week at a technical meeting held in Jinan, China, organized by industry and government organizations. The new machine, the Sunway BlueLight MPP, was installed in September at the National Supercomputer Center in Jinan, the capital of Shandong Province in eastern China.

The Sunway system, which can perform about 1,000 trillion calculations per second — a petaflop — will probably rank among the 20 fastest computers in the world. More significantly, it is composed of 8,700 ShenWei SW1600 microprocessors, designed at a Chinese computer institute and manufactured in Shanghai.

Currently, the Chinese are about three generations behind the state-of-art chip making technologies used by world leaders such as the United States, South Korea, Japan and Taiwan.

“This is a bit of a surprise,” said Jack Dongarra, a computer scientist at the University of Tennessee and a leader of the Top500 project, a list of the world’s fastest computers.

Last fall, another Chinese-based supercomputer, the Tianhe-1A, created an international sensation when it was briefly ranked as the world’s fastest, before it was displaced in the spring by a rival Japanese machine, the K Computer, designed by Fujitsu. But the Tianhe was built from processor chips made by American companies, Intel and Nvidia, though its internal switching system was designed by Chinese engineers. Similarly, the K computer was based on Sparc chips, originally designed at Sun Microsystems in Silicon Valley.

Dr. Dongarra said the Sunway’s theoretical peak performance was about 74 percent as fast as the fastest United States computer — the Jaguar supercomputer at the Department of Energy facility at Oak Ridge National Laboratory, made by Cray Inc. That machine is currently the third fastest on the list.

The Energy Department is planning three supercomputers that would run at 10 to 20 petaflops. And the United States is embarking on an effort to reach an exaflop, or one million trillion mathematical operations in a second, sometime before the end of the decade, though most computer scientists say the necessary technologies do not yet exist.

To build such a computer from existing components would require immense amounts of electricity — roughly the amount produced by a medium-size nuclear power plant. In contrast, Dr. Dongarra said it was intriguing that the power requirements of the new Chinese supercomputer were relatively modest — about one megawatt, according to reports from the technical conference. The Tianhe supercomputer consumes about four megawatts and the Jaguar about seven.

The ShenWei microprocessor appears to be based on some of the same design principles that are favored by Intel’s most advanced microprocessors, according to several supercomputer experts in the United States.

But there is disagreement over whether the machine’s cooling technology is appropriate for designs that will be required by the exaflop-class supercomputers of the future.

Photos of the new Sunway supercomputer reveal an elaborate water-cooling system that may be a significant advance in the design of the very fastest machines. “Getting this cooling technology correct is very, very difficult,” said Steven Wallach, chief scientist at Convey Computer, a Richardson, Tex., supercomputer firm. “This tells me that this is a serious design. This cooling technology could scale to exaflop. They are in the hunt to win.”

Chinese Town Cancels Tax That Sparked Riots

Source: Wall Street Journal By James T. Areddy

SHANGHAI—The government of an eastern Chinese town that specializes in making children's wear said Friday it will retract a tax that sparked riots this week, an effort to quell local discontent that had prompted authorities to fill the town's streets with police.

A dispute over levies that mostly affected migrant workers at small workshops sparked violence this week in the Zhejiang province township of Zhili, 80 miles west of Shanghai in the city of Huzhou. For a second straight night Friday, officials were telling residents to stay home, as teams of riot police and paramilitary personnel patrolled the streets in order to keep the peace.

Domestic media reported 28 people were detained after Wednesday's mayhem, in which more than 30 cars were damaged, some of them burned. A handful of people were injured. No deaths were reported.

"A small group of people caused trouble intentionally and seriously disrupted normal social order," the Zhili government said in a statement Friday.

In its brief statement, the government said a tax on children's wear processors had been suspended but offered no details. It said a tax-bureau official, who it identified only as Xu Rongquan, was suspended and under investigation.

Calls to various government offices Friday were unsuccessful.

According to people interviewed by telephone in Zhili, the disturbance followed aggressive collection of new charges for the use of machines used to make children's wear, the town's mainstay product. The tax was targeted at small, independent workshops that often aren't licensed and are manned mostly by migrant laborers who earn money per piece produced.

They said workshop managers were being charged between 300 yuan (about $48) and 600 yuan for each machine used, in what Chinese discussing the matter online called the "sewing-machine tax." It amounts to about twice as much as was collected in the past. An unidentified man who apparently objected to the payment rallied others to join this week's protest, locals said.

Demonstrations are illegal in China but increasingly common over livelihood issues like inflation, pollution and real estate in urban areas.

On Saturday, a group of Shanghai homeowners said it plans a peaceful march to draw attention to allegedly deceitful advertisements by a property developer that caused them to pay too much. Earlier this month in Shanghai, buyers of apartments in a different development destroyed a real-estate sales office.

China's economy is slowing and the Zhili government's pullback on tax levies reflects a strategy Beijing is increasingly likely to take to soften pain of the deceleration, according to analysts. This week, the central government said it would reduce double-taxation of certain transportation in China, a move expected to encourage some business activity and amounts to a philosophical change, according to analysts.

This tax reform is part of the structural tax reduction, and thus can be viewed as a signal of expansionary fiscal policy," Minggao Shen, a Citigroup economist said in a research note Friday.The influence on China of a weak global economy is clearly being seen in Zhejiang province, home to nearly 50 million people and by some measures the country's wealthiest region. Nearly 12% of China's total exports came from the province in August. But Zhejiang factory owners say their already-thin margins are disappearing.

Zhejiang industry long depended on cheap labor from the interior, but now face rising demand for wage increases. China's currency has increased 30% versus the dollar since mid-2005, an increase factory owners have trouble passing on to buyers. Regulators are also policing the environment better—including along the environmentally damaged southern rim of the giant lake Taihu, where the children's-wear cluster Zhili sits—which means increased costs for factories.

In a 2008 study, three Zhejiang University professors estimated that 40% of the Zhili economy depended directly on the children's-wear industry and that activity among its around 10,000 small enterprises accounted for just over one-fifth of Chinese production in the sector. It concluded the factory owners couldn't easily relocate to cheaper regions.

"Although Zhili's children's-wear industry as a whole is large, there are few big enterprises, and most of [the] enterprises are home-based workshops," the report said.

Have You Heard...

• China Plays Down Expectations on Europe Bailout
• Analysis: Europe's bailout an unexpected bargain for China
• Insight: China premier-in-waiting schooled in era of dissent
• Wal-Mart's China woes began with phone call, then snowballed
• China's New Protectionism

China Plays Down Expectations on Europe Bailout

Source: Wall Street Journal By Dinny McMahon and Aaron Back

BEIJING—Chinese and European officials sought to play down expectations about when and how China may deploy its vast financial resources to help bail out indebted countries in Europe.

A Chinese Vice Finance Minister said China must first see the details of a new European bailout fund before making any commitments. "We of course must wait until its structure is extremely clear," Zhu Guangyao told a press briefing. "And moreover, this investment must be decided on after serious, technical discussions."

Klaus Regling, the chief executive of the European Financial Stability Facility, flew into Beijing on Friday on the first stop of a tour around Asia to drum up support for Europe. He told reporters he doesn't expect "any precise outcome" from his visit to China and said "it's too early to say what kind of amounts might be envisioned."

Mr. Regling said his trip to Asia was about consulting with investors over the best way to structure the bailout.

European leaders on Thursday agreed to leverage the EFSF and increase its firepower through two mechanisms: a special fund and an insurance scheme for sovereign bonds. Details on the new fund are scant, but European leaders are looking to partly fund the expansion with investments from cash-rich emerging economies such as China.

Mr. Zhu also said that more details are also needed on the insurance scheme. "How much is this insurance? That's still not clear," he said.

Beijing has previously expressed a willingness to help Europe, albeit through the International Monetary Fund. With China's massive foreign-exchange reserves of $3.2 trillion, few other countries have the financial firepower to make a significant contribution.

Analysts say that any new support for Europe by China will be conditional. It will expect European economies to push ahead with tough domestic reforms and to be more sympathetic to Chinese interests. There is also public debate in China about whether bailing out Europe is the proper use for China's reserves.

Mr. Regling dismissed suggestions that European leaders will be forced to offer concessions to China in return for investment. "I am not here to discuss concessions," he said, noting that China already buys EFSF bonds and gets no special considerations.

Jin Liqun, chairman of sovereign wealth fund China Investment Corp., made clear in London last month that CIC wouldn't offer handouts. "The $3 trillion in reserves are the fruits of the hard work of the Chinese people," he said. "We're willing to work with those European countries in distress for a better solution. But…we have to be accountable to the people."

CIC felt the wrath of public opinion after it stepped in to shore up Morgan Stanley and U.S. financial firm Blackstone Group LP during the global financial crisis, losing heavily as shares in both companies continued to sink.

"CIC came in and bailed out the U.S. banks in 2007 and got burnt," said Ashby Monk, co-director of the Oxford SWF Project, which tracks and researches sovereign wealth funds. "China has a domestic constituency to worry about and can't be seen to be wasting money."

Still, if China decides to contribute to a bailout it's likely to be the State Administration of Foreign Exchange and not Mr. Jin's fund providing the cash. Although CIC has more than $400 billion in assets under management, its funds are almost fully invested and it has been waiting for a capital injection for almost two years.

"European leaders should turn policy commitments into real action," said Mr. Zhu. EU leaders should "take serious action to solve questions the market needs".

Mr. Zhu didn't go into details. But last month CIC's Mr. Jin said "there are some things governments have to do to deserve the sincere support of the rest of the world," listing reining in spending, dismantling the welfare state, and reforming "sloth inducing" labor laws.

China clearly has an interest in supporting the economy of its biggest trading partner. But with Europe coming cap in hand, analysts say that Beijing may feel it's entitled to more than just a slightly higher return on its capital.

Both SAFE and CIC have gone to great lengths to avoid alarming Western governments by presenting themselves as purely financial investors with no political agenda.

"The West sort of imposed [rules] on countries with sovereign wealth, like China, to force them to invest along commercial and not political lines," said Mr. Monk. "It's ironic then that Europe may now be side-stepping that principle," he said.

Beijing has a long list of gripes with Europe including the EU's unwillingness to lift an embargo on selling arms to China, its refusal to treat China the same way as other major economies in trade disputes, the difficulties Chinese firms often encounter when trying to invest in Europe, and EU pressure to get China to appreciate the yuan more rapidly.

Analysts say that given the complexity of decision-making in the EU, China might struggle to get explicit concessions on any of these points if it decides to provide Europe with the cash it needs in a timely manner. Mr. Regling said there had been no discussion of concessions.

Many analysts say China is unlikely to be a white knight for Europe. A parade of politicians from struggling European economies have gone to China over the past several years looking for support. Beijing's response has typically been to say that it will continue buying European bonds, but it hasn't done so on any significant scale.

"We could see China investing, but it won't be a game changer for Europe," said Rachel Ziemba, a senior analyst at Roubini Global Economics. "Though some capital might come from China, most will need to come from within Europe."

Analysis: Europe's bailout an unexpected bargain for China

Source: Reuters By Nick Edwards

(Reuters) - China might just be about to strike the deal of the decade.

For a fraction of the trillion euros needed to clean up Europe's debt mess, Beijing could score huge diplomatic kudos for helping end the crisis while satisfying a domestic agenda of reducing dollar dominance in world trade and further loosening its currency straitjacket.

Any contribution to the rescue of the euro zone is fraught with risks -- and no sum has yet been declared -- but for many analysts the upside for China far outweighs the danger of failure.

Among multiple motivations China has for contributing to a euro zone bailout -- such as supporting recovery in its single biggest export market and protecting the value of the 600 billion euros of sovereign debt in the bloc it already owns -- being hailed as the banker to the world is a strong one.

Beijing already enjoys that status in Asia, largely because no country in the region has any desire to ask the IMF for help again after the bruising experiences of the 1997-98 financial crisis, while they would be more than willing to seek assistance from their principal trading partner.

"If you step that up a notch, China in an IMF-type role, then this is simply a soft-power projection on the global economic stage," says Tim Condon, head of Asian economic research at ING in Singapore.

"It's the world's second-largest economy helping avoid another Lehman-like panic."

A SMALLER PILE OF CASH

China has reveled in the role of savior before, earning plaudits during the Asian financial crisis for not devaluing the yuan as the currencies of regional competitors crumbled, and again at the height of the 2008 global downturn when it unveiled a 4 trillion yuan domestic stimulus package that many observers say kept the world economy moving.

China's contribution to any rescue this time around would likely be far smaller.

That's because while China officially has a pile of $3.2 trillion of foreign exchange reserves, there isn't nearly so much money on hand.

Excess reserves -- the amount of foreign currency above and beyond that needed to cover short-term trade and sovereign debt purposes -- are calculated closer to $1.5 trillion.

Some of that has already been channeled to China's sovereign wealth fund and much of the rest could easily be spent if Beijing chose to clean up a pile of bad debt accumulated by its local governments, meaning free reserves might be as low as $500 billion.

That doesn't leave a huge amount of money to divert toward the euro zone rescue, which could easily explain official Chinese reticence on the size and scale of any commitment.

Beijing also would be reluctant to make a massive bet having watched for two years as Europe has limped from crisis summit to crisis summit, with each successive meeting hailed beforehand as the breakthrough event, only to disappoint.

And there are domestic risks for China's leaders, who face constituencies pessimistic about Europe and wary of buying its debt, something many Chinese see as a bad investment.

"China won't want to be seen as part of a failed effort, but as part of a success and that's probably why there's been so much to-ing and fro-ing," ING's Condon said.

SOMETHING TO GAIN

Chinese officials were customarily cautious on Friday.

Vice Finance Minister Zhu Guangyao told a Beijing news conference that while Europe clearly saw China as an important investor, China wanted more detail about plans to boost the euro zone rescue fund before deciding whether to commit more capital.

Li Daokui, an academic member of the monetary policy committee of China's central bank summed up the quandry.

"It is in China's long-term and intrinsic interest to help Europe because they are our biggest trading partner, but the chief concern of the Chinese government is how to explain this decision to our own people," Li told the Financial Times.

"The last thing China wants is to throw away the country's wealth and be seen as just a source of dumb money."

A big Chinese investment bolstering the existing 440 billion euro European Financial Stability Facility -- even one far more modest than China's 2008 intervention -- would be a clear signal of closure for the crisis that Europe's leaders are desperate to send.

It also would advance several of China's own goals.

First, an investment fits China's need to diversify its foreign exchange holdings in euro-denominated assets. Investing via the proposed special purpose investment vehicle could be a much more favorable way of increasing Chinese holdings of euros rather than buying debt direct.

"Every major reserve currency has its own problems, so for China it comes down to choosing the right balance," said Song Xinning, a professor of European studies at Renmin University in Beijing.

Second, it might also help China deliver on its ambition to internationalize the yuan to unseat the dollar as the world's main unit of cross-border trade settlement.

"It allows China to hold fewer dollars in reserve while preventing a European meltdown that would also have affected their U.S. market," says MES Advisers President Paul Markowski, a long-time external adviser to China's monetary policy makers on international financial markets.

"The debt is cheap and, since the Chinese had already bought some Greek debt, preserves their position and more on an average cost basis," Markowski added.

With so many details still absent for how China might contribute to the funding of a leveraged EFSF, it's conceivable that part of the funding comes with strings attached to accelerate yuan trade settlement efforts, or outright issuance of yuan bonds to national central banks in the euro zone, analysts say.

Finally, it will inevitably grant China some political leverage over its biggest trade partner.

China often grumbles about its lack of access to Europe's markets and about the EU's long-standing arms sales ban on China. It has also been pushing Europe to recognize it as a market economy, something that would shield it from certain trade actions.

Some Chinese intellectuals argue that now is the time to negotiate hard, securing access to, control over, or even ownership of some of Europe's best brand names, companies and intellectual property.

A tilt in the balance of economic power is a price Europe may find it has to pay, however reluctantly.

"Do we really think that China would come to the rescue of the euro zone without getting something in return?" said French Socialist Party challenger François Hollande, who leads Sarkozy in polls for the 2012 election, on Thursday.

"Do we think that by putting ourselves, even if only partially, in the hands of these nations with which we also have to negotiate on monetary and trade issues, we will be able to get positive results for Europe?"

Insight: China premier-in-waiting schooled in era of dissent

Source: Reuters By Chris Buckley

(Reuters) - Li Keqiang, China's likely next premier, once huddled beside Yang Baikui in a Beijing university dorm, translating a book by an English judge, little separating the future Communist Party leader from his classmate who would be jailed as a subversive.

Over three decades ago, Vice Premier Li and Yang entered prestigious Peking University, both members of the storied "class of '77" who passed the first higher education entrance exams held after Mao Zedong's convulsive Cultural Revolution.

More than any other Chinese party leader until now, Li was immersed in the intellectual and political ferment of the following decade of reform under Deng Xiaoping, which ended in the 1989 Tiananmen Square protests that were crushed by troops.

As a law student at Peking University, Li befriended ardent pro-democracy advocates, some of whom later became outright challengers to party control. His friends included activists who went into exile after the June 1989 crackdown.

Now Li, 56, is preparing to take the reins of government, and Yang and other sometime friends wonder how those heady times will shape his role running a one-party state that has increasingly bristled at calls for political relaxation.

"When we were working on translating the book and exchanging ideas, I thought his views were very liberal," Yang recalled of Li, who as an English speaker is a rarity among senior Chinese leaders.

"His leanings were clearly pro-Western ideas. He certainly wasn't conservative," said Yang, now a bald 61-year-old translator in Beijing, in a recent interview. "When he opened his mouth, it wasn't Mao slogans."

"I personally think his past certainly left an impact, but he's also been an official for over two decades, and so that's also a factor," said Yang, who was jailed for nearly a year on "counter-revolutionary" charges after helping write petitions and offer advice in the 1989 demonstrations.

Li has visited North and South Korea this week in Beijing's latest effort to lift his profile. The secretive Communist Party will wait until a congress in late 2012 to confirm who will succeed President Hu Jintao and Premier Wen Jiabao, and the new premier will then be formally anointed by parliament in early 2013.

The Chinese translation that Li, Yang and a fellow student, Liu Yongan, labored over -- "The Due Process Law" by Lord Alfred Denning -- was recently reissued, a perhaps inadvertent reminder of the past of the man likely to succeed Premier Wen.

Li himself has been nearly silent about his university years. But his experiences could mark him out as more politically pragmatic than present leaders, including his patron, President Hu, said classmates and acquaintances of Li.

"Hu Jintao and Wen Jiabao were members of a red generation that had no opportunity to learn English or immerse themselves in new ideas or Western thought," said Chen Ziming, back then a student-activist at another school who campaigned with Li's classmates and got to know him.

"But the generation of Li Keqiang is different, and because of his law specialty and the length of his education, he was much more exposed to the new influences than, say, Xi Jinping," said Chen, referring to President Hu's likely successor.

"We don't know for sure what this difference means, but it's there, waiting to manifest itself in the future, if the opportunity arises," said Chen, who was jailed after the 1989 crackdown and lives in Beijing, writing on politics.

Xi spent years in countryside during the Cultural Revolution, but got into university earlier than Li. Despite that, Xi too has attracted talk that he could be more pragmatic.

ENGLISH

The man nearly certain to be China's next premier once spent hours every day muttering the unfamiliar English words that promised to unlock a world of previously forbidden knowledge.

Li was among the 273,000 examinees to win university and college places in the intensely competitive entrance test of 1977, when reformers began to revive conventional schooling upended by Mao's upheavals.

Li arrived at Peking University in early 1978 from Anhui province in eastern China, dirt-poor farming country where his father was an official. He chose law, a discipline silenced for years as a reactionary pursuit and in the late 1970s still steeped in Soviet-inspired doctrines.

"Keqiang was tireless in studying English to the point that young people nowadays would find hard to imagine," He Qinhua, one of Li's 82 law classmates in the same year wrote in a memoir. "He recited it while walking, while queued up at the canteen, while on the bus and waiting for the bus."

Li's thirst for foreign ideas brought him close to Gong Xiangrui, one of the few Chinese law professors schooled in the West to survive Mao's purges. Gong studied at the London School of Economics and Political Science in the 1930s, and was a living bridge to long-dormant liberal ideas that spread through student circles in the early 1980s.

The old professor took a shining to the skinny, earnest Li, who become one of several disciples who helped prepare a textbook and translate books, including Lord Denning's, according to mentions in Gong's recently published posthumous memoirs and in his 1985 textbook on Western constitutional law.

In a brief memoir of his time at Peking University, Li paid tribute to Gong and recalled the heady atmosphere of the time.

"I was a student at Peking University for close to a decade, while a so-called 'knowledge explosion' was rapidly expanding," Li wrote in an essay published in a 2008 book.

"I was searching for not just knowledge, but also to mold a temperament, to cultivate a scholarly outlook."

At the time, Deng Xiaoping was shepherding China toward market reforms, but many students and a few officials hankered for bolder political changes that alarmed party conservatives.

The ideas about rights, rule of law and popular representation that Li's cohort encountered in books, lectures and study groups percolated into those broader debates.

"Gong Xiangrui advocated a separation of powers and a multi-party system, and some of his ideas remain taboo even today," said Jiang Ming'an, a classmate of Li's, in a report published by China's Southern Weekend newspaper in 2007.

"Constitutional government is the road to rule of law, and rule of law is the first step toward democracy," Gong said in a lecture in San Francisco in 1996, shortly before his death.

"The Chinese people should fully achieve constitutional democracy in the coming century," he said.

Some of Li's classmates remember that he too was also carried along by that idealism of the time.

"The Li Keqiang that I knew in the past was quite bold. He was high-minded, bold and idealistic," said Wang Juntao, who has been in exile since 1994 and is now co-chairman of the China Democratic Party, which campaigns for change in his homeland.

Wang was a physics student at Peking University who ran a study group with Li. He was jailed as a "black hand" for his prominence in supporting the 1989 student protests.

"Among all the younger leaders, Li Keqiang is the only one who's lived and debated alongside these liberals," Wang said by telephone from New Jersey.

"He understands us, he's argued with us."

ELECTION TIME

In late 1980, those debates spilled out of crowded classrooms and dormitory rooms, when officials allowed students at Peking University and other schools to compete in competitive elections for places on local assemblies.

Months earlier Deng Xiaoping had signaled he might tolerate experiments in political reform. Peking University drew national attention as it tested how far those experiments might go.

More than two dozen students put themselves forward, including Wang Juntao, Yang Baikui and other friends of Li, promoting bold calls for democratic reform at meetings attracting hundreds of students, witnesses have said in memoirs.

Back then, the distinction between political "insiders" and "outsiders" -- those who acted under party patronage and those who acted on their own accord -- was more fluid and blurred.

Wang Juntao nominated Li to seek election as head of a student committee to oversee the larger student council, a position he won, Wang recalled.

But Li was away studying off-campus during the 1980 elections or kept aloof from them, according to varied memories of his friends. Yang Baikui -- the fellow translator -- and the student-activist Chen Ziming both said Li backed a more moderate candidate, Zhang Wei, who said economic reform was the priority.

"Their view wasn't against political reform, but it was that economic reform was more urgent," said Chen. "Li Keqiang was a bit more conservative in that way, but he also wanted reform."

Alarmed by the passions of the student elections, Deng drew back from political relaxation. As the 1980s progressed, Deng curbed demands for dramatic political reform, bringing the more ardent members of Li's cohort into growing conflict with party conservatives, a confrontation that culminated in 1989.

But while classmates headed off to policy research, independent activism and even outright dissent, Li struck a more cautious course, abandoning ideas of study abroad and climbing the ladder of the Communist Party's Youth League, then a reformist-tinged ladder to higher office.

He rose in the Youth League while completing a master's degree in law at Peking University and then an economics doctorate there under Professor Li Yining, a well-known advocate of market reforms.

In 1998, he was sent to Henan province, a poor and restless belt of rural central China, rising to become Party secretary for two years. In late 2004, he was made party chief of Liaoning, a rustbelt province striving to attract investment and reinvent itself as a modern industrial heartland.

Rumors have occasionally spread that Li's past contacts with now-exiled dissidents, including Wang Juntao, derailed his prospects for becoming China's president and party chief, a more powerful post than premier, said Wang.

But Li's prospects of becoming next premier appear increasingly assured, a point bolstered by recent high-profile trips abroad and major policy speeches. His diplomatic forays also show he has kept his English.

"The fact that Li Keqiang has been able to constantly rise in the official ranks, and to win the liking of key people, shows that he's undergone big changes," said Wang.

Li's patron, President Hu, began his tenure as leader with promises of respecting the law and constitution. But latterly his government has overseen a crackdown on dissent that resorted to widespread extra-judicial detentions.

Yang, the former classmate, said he had not had any contact with Li since the 1980s, and could only speculate at how deep a mark Li's university years had left.

"I think it could make him more open and inclusive, more democratic, if the conditions allow. His ideas of rule of law might go deeper," said Yang. "But he couldn't show any of that now. That would be too dangerous."

Wal-Mart's China woes began with phone call, then snowballed

Source: Bloomberg News By Terril Yue Jones

(Reuters) - Wal-Mart's PR nightmare over sales of mislabeled pork in China began with a phone call two months ago from an irate housewife.

By the time the dust had settled, officials in Chongqing in central China had raided and shut the U.S. firm's 13 stores here for violating food standards by selling regular pork as more expensive organic meat.

After an apology and a pledge to set things straight through staff training and more contact with shoppers, Wal-Mart's stores reopened Tuesday after a two-week closure in this vast municipality of 28 million.

The punishment was the toughest ever imposed on a foreign retailer in China, a country that offers rich prospects for store owners but also holds numerous pitfalls, from regulators' determination to improve lax food standards to increased scrutiny of foreign-owned businesses.

The troubles for Wal-Mart, the world's largest retailer, started with a phone call to a consumer hotline on August 24.

A housewife in her 30s complained that the organic pork she bought was the same as ordinary pork, said Zhao Jia, spokesman for the Administration for Industry and Commerce, or AIC.

The Chongqing administration had already cited Wal-Mart stores 20 times in the past five years for violations ranging from food sold past expiration dates to selling products that were deemed "substandard," including washing machines, television sets and women's clothing.

The administration jumped on the housewife's complaint, Zhao said, recalling how the case unfolded in a conversation in his Chongqing office.

Within 24 hours, the agency sent out investigators who discovered three Walmart stores were selling ordinary pork labeled as organic pork. The meat was priced about 43 percent higher than it should be.

Deciding it had a case, the AIC called in the police and expanded the probe. Authorities found that 12 of Wal-Mart's 13 stores in Chongqing were selling mislabeled organic pork.

To the AIC, that was the last straw.

"Many times we sent our opinions and sent them notices," Zhao said. "They never explained anything to us clearly."

AIC investigators then delved into Wal-Mart's inventory books.

"As the No.1 retailer, their management has been perfected," Zhao said. "They can track anything."

Investigators traced the organic pork to a local meat supplier called Gaojin. Interviewing employees at Gaojin, the numbers didn't add up.

Investigators worked out that of more than 78,500 kilograms of pork sold in Walmart stores since January 2010 as organic, only 15,000 kg, or 19 percent, was organic meat.

"They sold more than 600,000 yuan ($95,240) worth of false organic pork," Zhao said. "That's consumer fraud."

Asked if he thought Wal-Mart tripped up in the pursuit of profit in China's cut-throat retail industry, where a competitor's hypermarket may be only a stone's throw away, Zhao said he didn't think the stores intentionally sought to deceive customers.

"One employee told us they were instructed to keep the special display shelf for organic pork stocked with meat," Zhao said. "They didn't want to show empty shelves."

Walmart Asia spokesman Anthony Rose declined Friday to comment about the pork, noting that Chongqing authorities are continuing their investigation.

But he said the company is pleased with the stores' reopenings.

"We are glad that after working with the AIC and implementing corrective actions, we have reopened all of our stores in Chongqing and customers have responded very positively," he said. "Walmart will continue to make the very best efforts to exceed our customers' expectations."

Unlike Walmart stores in the United States, which are often accessible mainly by car and cater largely to discount shoppers, Walmarts in China are in densely populated areas, often in basements or the lower floors of skyscrapers, serving as a one-stop shopping center for groceries and household goods.

Indeed, when the Walmart stores in Chongqing reopened, they were overrun by shoppers who said they were drawn by price, selection and the ability to walk to the store from home or take the retailer's free shuttle van.

BIAS AGAINST FOREIGN FIRMS?

The administration's sanction against Wal-Mart was tough: closure of all its stores in the municipality for 15 days.

The AIC also slapped a 2.7 million yuan ($423,000) fine on Wal-Mart and arrested the manager and deputy manager of one store, Zhao said. Authorities are investigating 25 others for possible criminal charges.

Some executives have raised the question of bias against foreign firms in China.

Both the American Chamber of Commerce and the European Chamber of Commerce in China have published reports in the past year saying foreign firms are sometimes unfairly singled out for sanctions.

Not here, said Zhao.

There were many more complaints about Wal-Mart stores in Chongqing than outlets run by France's Carrefour SA, Germany's Metro AG, or domestic competitors such as Yonghui, Shinshiji and Chongqing Baihuo, he said.

And consumer monitors are not just concerned with big players in Chongqing, a sprawling metropolitan region the size of Austria.

A small-scale entrepreneur in Chongqing was caught adding food coloring to make his steamed "mantou" buns appear fresher. The AIC fined him 40,000 yuan and banned him from working in the food industry for life, Zhao said.

Wal-Mart has not said how much it spent on improvements or staff training during the shutdown, but "it is significant and in keeping with the positive response we want to see from our customers," spokesman Rose said.

Analysts also don't expect the issue to affect Wal-Mart over the long term in China.

Visiting a number of Walmarts in Chongqing Tuesday, the day stores reopened, shoppers were raucously cheerful as they jammed aisles and loaded up on cooking oil, soy sauce, peanuts and fruit, some even taking their turn at gutting rabbits.

Wang Dingbao, 66, brought his wife and a camera to the Jiulongpo Walmart to snare some bargains as well as some snapshots of the hustle and bustle.

"I like the selection and the prices," said Wang, who lives within walking distance and also shops at Yonghui and Shinshiji.

He said he likes Walmart the best, and trusts the retailer. "They said they would fix things, and they did."

China's New Protectionism

Source: Bloomberg Businessweek  By Dexter Roberts

It’s been a rough year for foreign businesses in China. In April, Anglo-Dutch consumer goods giant Unilever was fined $308,000 for publicly announcing it was considering price hikes, allegedly sparking hoarding. In July fast-food giant KFC (YUM) was pilloried in the state media for its use of powdered soybean milk, instead of the fresh variety, in outlets in Shanghai and Guangzhou. Italian luxury brand Gucci was accused of abusing employees in a Shenzhen boutique in October. All the companies apologized for the incidents, and Gucci replaced two store managers.

The real drubbing, however, has been reserved for Wal-Mart Stores (WMT) and France’s Carrefour. In January the retailers were fined for misleading pricing in 19 stores and duly apologized. Both paid fines for selling expired products in the city of Changsha earlier this month. Then regulators in Chongqing accused Wal-Mart of selling regular pork mislabeled as organic. The world’s biggest retailer was forced to temporarily shutter 13 stores, paid a $573,000 fine, and saw 37 employees detained. Two of its top China executives resigned. Again, there was a public apology.

To a growing number of business observers, the recurring humbling of Western businesses is symptomatic of a new protectionism, often emanating from local officials, aimed squarely at foreign investors across China. They say it is spurred in part by a slowing economy and cutthroat competition, which is hurting Chinese brands and prompting officials to lash out at foreign rivals in industries where mainland players have lagged. “Supermarkets are one area where the foreigners have been blowing the Chinese out of the water,” says Paul French, co-founder and director at consultancy Access Asia. “The attitude is: Why go to the effort of getting your own guys to raise their game when you can tear down a foreign guy instead?”

Tang Chuan, director of law enforcement in the Chongqing Bureau of Inspection and Enforcement, disagrees. “We are not targeting Wal-Mart,” says Tang, noting that since 2006 the U.S. retailing giant has been cited for 21 cases of selling expired or substandard food, as well as false advertising in Chongqing. “We wish to warn other retailers and purify the industry. Anyone who breaks the law, no matter foreign or domestic, big or small, will be punished.” Both Wal-Mart and Carrefour declined to be interviewed. Other foreign retailers in China, including France’s Auchan Group, Britain’s Tesco, and Germany’s Metro Group, have not been punished in cases made public.

The new protectionism stems from a broader change in Chinese attitudes: Where once localities vied for the prestige and money a big foreign investor brought, today multinationals are taken for granted. In a 2011 survey by the American Chamber of Commerce in the People’s Republic of China, almost a quarter of American companies cited “increased Chinese protectionism” as their greatest risk. “It is going to get harder to get permits, and these foreign companies won’t be as welcomed coming into important neighborhoods,” says Shaun Rein, managing director of China Market Research Group. “That’s because their capital isn’t as needed as it once was.”

Before China entered the World Trade Organization in 2001, foreign retailers as well as banks and insurance companies were banned from doing business in most cities in China. Today, such obvious restrictions are no longer an option. That’s brought about a more subtle protectionism, where state-controlled Chinese media can be counted on to make a national incident out of what otherwise might be a small infraction. While accusing retailers of violating quality rules is one common tactic, another is to fine them for “price fraud,” or not clearly marking the price of products. That’s what Wal-Mart and Carrefour were charged with by China’s National Development and Reform Commission earlier this year. “Fraudulent conducts, such as fabricating original prices and misleading customers with confused marked prices, have seriously infringed customers’ interests,” the website for state-owned China Radio International reported. Another Access Asia co-founder and director, Matthew Crabbe, says domestic companies do similar things but authorities often look away: “They have been coming down really hard on the foreign retailers. The idea that there was ever an even playing field is increasingly not true.”

One reason retailing has become ground zero for the new protectionism is that China’s $70 billion-a-year market for large grocery stores is still up for grabs. The industry, expected to double in size by 2015, is far more fragmented and regional than that in Europe or the U.S. There are more than 30 operators of hypermarkets (large food and beverage outlets that dwarf traditional Chinese stores), but few have a national presence. Wal-Mart, with 353 stores, has an 11.2 percent share, second only to the 12 percent held by France’s Auchan. The biggest local player, China Resources Enterprise, has a 9.8 percent share.

Wal-Mart didn’t help itself by selling mislabeled pork. Crises over melamine-tainted milk, exploding watermelons, and hormone-injected meats have pushed food quality concerns into the national spotlight—and into the crosshairs of politicians eager to show they’re serious about safety. “By cracking down on a high-profile foreign retailer, their message is being sent throughout the country to consumers and supply chains,” says China Market Research’s Rein. “They realize they can get the same traction by detaining a few dozen Wal-Mart people as with a national crackdown.”

The bottom line: Foreign businesses such as Wal-Mart, which was forced to temporarily close 13 stores in Chongqing, increasingly draw scrutiny in China.

Have You Heard...

• Chinese Military Suspected in Hacker Attacks on U.S. Satellites
• Exclusive: China eyes creation of ASEAN Bank
• Cosco Sees Annual Loss on ‘Severe’ Bulk Market; Wei Leaves Executive Role
• China Reins In Entertainment and Blogging
• Traditional, ancient accents at China Fashion Week

Chinese Military Suspected in Hacker Attacks on U.S. Satellites

Source: Bloomberg News By Tony Capaccio and Jeff Bliss  | Photo: Getty Images

Computer hackers, possibly from the Chinese military, interfered with two U.S. government satellites four times in 2007 and 2008 through a ground station in Norway, according to a congressional commission.

The intrusions on the satellites, used for earth climate and terrain observation, underscore the potential danger posed by hackers, according to excerpts from the final draft of the annual report by the U.S.-China Economic and Security Review Commission. The report is scheduled to be released next month.

“Such interference poses numerous potential threats, particularly if achieved against satellites with more sensitive functions,” according to the draft. “Access to a satellite‘s controls could allow an attacker to damage or destroy the satellite. An attacker could also deny or degrade as well as forge or otherwise manipulate the satellite’s transmission.”

A Landsat-7 earth observation satellite system experienced 12 or more minutes of interference in October 2007 and July 2008, according to the report.

Hackers interfered with a Terra AM-1 earth observation satellite twice, for two minutes in June 2008 and nine minutes in October that year, the draft says, citing a closed-door U.S. Air Force briefing.

The draft report doesn’t elaborate on the nature of the hackers’ interference with the satellites.

Chinese Military Writings

U.S. military and intelligence agencies use satellites to communicate, collect intelligence and conduct reconnaissance. The draft doesn’t accuse the Chinese government of conducting or sponsoring the four attacks. It says the breaches are consistent with Chinese military writings that advocate disabling an enemy’s space systems, and particularly “ground-based infrastructure, such as satellite control facilities.”

U.S. authorities for years have accused the Chinese government of orchestrating cyber attacks against adversaries and hacking into foreign computer networks to steal military and commercial secrets. Assigning definitive blame is difficult, the draft says, because the perpetrators obscure their involvement.

The commission’s 2009 report said that “individuals participating in ongoing penetrations of U.S. networks have Chinese language skills and have well established ties with the Chinese underground hacker community,” although it acknowledges that “these relationships do not prove any government affiliation.”

Chinese Denials

China this year “conducted and supported a range of malicious cyber activities,” this year’s draft reports. It says that evidence emerging this year tied the Chinese military to a decade-old cyber attack on a U.S.-based website of the Falun Gong spiritual group.

Chinese officials long have denied any role in computer attacks.

The commission has “been collecting unproved stories to serve its purpose of vilifying China’s international image over the years,” said Wang Baodong, a spokesman for the Chinese Embassy in Washington, in a statement. China “never does anything that endangers other countries’ security interests.”

The Chinese government is working with other countries to clamp down on cyber crime, Wang said.

Defense Department reports of malicious cyber activity, including incidents in which the Chinese weren’t the main suspect, rose to a high of 71,661 in 2009 from 3,651 in 2001, according to the draft. This year, attacks are expected to reach 55,110, compared with 55,812 in 2010.

Relying on the Internet

In the October 2008 incident with the Terra AM-1, which is managed by the National Aeronautics and Space Administration, “the responsible party achieved all steps required to command the satellite,” although the hackers never exercised that control, according to the draft.

The U.S. discovered the 2007 cyber attack on the Landsat-7, which is jointly managed by NASA and the U.S. Geological Survey, only after tracking the 2008 breach.

The Landsat-7 and Terra AM-1 satellites utilize the commercially operated Svalbard Satellite Station in Spitsbergen, Norway that “routinely relies on the Internet for data access and file transfers,” says the commission, quoting a NASA report.

The hackers may have used that Internet connection to get into the ground station’s information systems, according to the draft.

While the perpetrators of the satellite breaches aren’t known for sure, other evidence uncovered this year showed the Chinese government’s involvement in another cyber attack, according to the draft.

TV Report

A brief July segment on China Central Television 7, the government’s military and agricultural channel, indicated that China’s People’s Liberation Army engineered an attack on the Falun Gong website, the draft said.

The website, which was hosted on a University of Alabama at Birmingham computer network, was attacked in 2001 or earlier, the draft says.

The CCTV-7 segment said the People’s Liberation Army’s Electrical Engineering University wrote the software to carry out the attack against the Falun Gong website, according to the draft. The Falun Gong movement is banned by the Chinese government, which considers it a cult.

After initially posting the segment on its website, CCTV-7 removed the footage after media from other countries began to report the story, the congressional draft says.

Military Disruption

The Chinese military also has been focused on its U.S. counterpart, which it considers too reliant on computers. In a conflict, the Chinese would try to “compromise, disrupt, deny, degrade, deceive or destroy” U.S. space and computer systems, the draft says.

“This could critically disrupt the U.S. military’s ability to deploy and operate during a military contingency,” according to the draft.

Other cyber intrusions with possible Chinese involvement included the so-called Night Dragon attacks on energy and petrochemical companies and an effort to compromise the Gmail accounts of U.S. government officials, journalists and Chinese political activists, according to the draft.

Often the attacks are found to have come from Chinese Internet-protocol, or IP, addresses.

Businesses based in other countries and operating in China think that computer network intrusions are among the “most serious threats to their intellectual property,” the draft says.

The threat extends to companies not located in China. On March 22, U.S. Internet traffic was “improperly” redirected through a network controlled by Beijing-based China Telecom Corp. Ltd., the state-owned largest provider of broadband Internet connections in the country, the draft said.

In its draft of last year’s report, the commission highlighted China’s ability to direct Internet traffic and exploit “hijacked” data.

Exclusive: China eyes creation of ASEAN Bank

Source: Reuters By Benjamin Kang Lim

(Reuters) - China is considering a proposal to set up a regional bank to help its small and medium enterprises (SMEs) invest in Southeast Asian neighbors, fund infrastructure projects and promote development in southwestern China, two independent sources said.

After approval by the State Council, or cabinet, China would formally invite members of the Association of Southeast Asian Nations (ASEAN), Japan and South Korea to each take a stake in the ASEAN Bank, said the sources, who have direct knowledge of the proposal.

China, the world's second biggest economy, is likely to be the bank's biggest single shareholder with an initial investment of up to 30 billion yuan ($4.7 billion), the sources said, requesting anonymity because they are not authorized to speak to reporters. The other countries' stakes still must be negotiated.

"ASEAN Bank will be a commercial bank and at the same time a policy bank," the first source told Reuters. "It will be a mini Asian Development Bank (ADB)."

The ADB was founded in 1966 to help fight poverty in Asia. The Manila-headquartered bank is owned and financed by its 67 member countries. Its president is traditionally from Japan, the lender's biggest donor along with the United States.

China hopes the ASEAN Bank will buy it some goodwill in Southeast Asia, providing low interest loans to infrastructure projects and Chinese SMEs investing there, the sources said.

The bank will also settle China-ASEAN trade in yuan, a step in China's long campaign to make the yuan, also known as renminbi or people's currency, a regional currency.

China's cabinet and the central bank declined immediate comment.

Vietnam's central bank said it had not received any information or an invitation to join. The Philippine central bank refused to comment. Central banks of Indonesia, Malaysia, Singapore and Thailand could not be reached for comment.

CHINA-ASEAN TRADE SOARS

Trade between China and ASEAN members has soared since a bilateral Free Trade Agreement took effect in 2010.

The ASEAN bloc overtook Japan to become China's third-largest trading partner this year after the European Union and the United States. China-ASEAN trade accounted for 10 percent of China's total trade in the first nine months of 2011.

China is ASEAN's biggest trading partner. Two-way trade rose 26.4 percent to $267 billion in the first nine months, an $18.9 billion surplus in favor of ASEAN, Chinese customs data show.

China wants the bank in the southern Guangxi region, where it hopes it can help transform the area into southwest China's financial center.

"Southwest China needs a financial center to balance east-west development," the second source said, referring to China's wealthy coastal provinces and impoverished hinterland.

"Guangxi and (neighboring) Yunnan (province) will play a key role in regionalization of the yuan," the source added.

Reuters reported last week that China plans to sign a framework agreement with ASEAN to settle trade in yuan, formalizing a pilot program put in place in 2009.

State news agency Xinhua confirmed that report on Saturday, quoting Jin Qi, an assistant to the central bank governor.

But Gavin Bowring, a Hong Kong-based analyst with research firm GaveKal Dragonomics, said Nanning -- Guangxi's regional capital -- would find it difficult to compete against nearby Chengdu and Chongqing as the epicenter of western China.

"Though Nanning is a suitable geographical location to spur ties with ASEAN countries, it is mainly a convenient spot only for neighboring Vietnam and Laos, and to a lesser extent Thailand and Myanmar," Bowring said.

"Having said that, it appears Malaysian companies are investing in infrastructure, real estate and other projects in Nanning so there is some credence to the plan," he added.

HELP FOR CHINESE ENTERPRISES

The new bank will facilitate new business opportunities for Chinese SMEs -- a pillar of the economy but which have been squeezed by a Beijing-led credit clampdown, a firmer yuan, falling export orders and rising land and labor costs.

"It will resuscitate SMEs abroad rather than (let them) die at home," the first source said.

Many cash-strapped SMEs are drowning after turning to loan sharks who charge exorbitant interest rates. Scores of SME bosses have gone into hiding or fled abroad.

China plans to create a vice-ministerial level agency to facilitate lending to SMEs.

The 10-member ASEAN, ranging from resource-rich Indonesia to financial center Singapore, is planning a union by 2015 to become a single market and production base to compete with rising Asian powerhouses China and India.

Despite friction with several ASEAN members over overlapping territorial claims in the South China Sea, China is keen to boost ties with its economies, which it relies on for commodities and energy supplies, such as natural gas and crude palm oil, to keep the Chinese economic engine humming.

The region, home to 600 million people and a combined GDP of $2 trillion, is also angling for foreign investment.

($1 = 6.353 Chinese Yuan)