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Wednesday, November 30, 2011
China cuts bank reserves in policy shift to lift economy
(Reuters) - China's central bank cut reserve requirements for commercial lenders on Wednesday for the first time in three years, a policy shift to ease credit strains and shore up an economy running at its weakest pace since 2009.
China's policy change came just hours before coordinated action by major central banks, including the Federal Reserve and the European Central Bank, to ease credit strains in world markets buffeted by the euro zone debt crisis.
Official concern is rising that the global economy is on a slippery slope as the euro zone struggles to decisively tackle its two-year crisis. Global markets rallied on the combination of central bank news.
China's central bank said on its website it lowered the amount of cash that banks have to set aside by 50 basis points, effective Dec 5. That cut the reserve requirement ratio (RRR) for the biggest banks to 21 percent from a record high 21.5 percent, freeing up funds that could be used for lending.
"This is a big move -- this is easing," said Stephen Green, China economist at Standard Chartered Bank in Hong Kong. "It's a clear signal that China is on a loosening mode. The next move will be another RRR cut in January."
The cut releases between 350 billion yuan and 400 billion yuan ($54.8 billion to $62.7 billion) into the banking system, analysts estimated.
The People's Bank of China (PBOC) joins the central banks of Brazil, Indonesia, Thailand and the euro zone, among others, in easing monetary policy, a reflection of the alarm that the euro zone debt crisis and a sluggish U.S. economy could drag the world back into a recession.
CREDIT CRUNCH
China's unusually high reserve rate requirements have made life difficult for private-sector companies. While they account for 75 percent of urban employment, they find it far harder to secure bank loans than politically well-connected state-owned enterprises.
Worried about a destabilizing jump in unemployment, Beijing is eager to lend them a hand. In recent weeks, China has seen a spate of major strikes in its export powerhouse in the Pearl River Delta.
Ten of 19 analysts in a Reuters poll on Tuesday had predicted China would cut its bank reserves in December by 50 basis points. Eight had expected a move in the first quarter of 2012 and one not until the second quarter.
Purchasing managers' data on Thursday could confirm the pressure on China's manufacturers from the global slowdown after a flash PMI from HSBC last week suggested the sector was shrinking.
As recently as the middle of 2011, China was still tightening monetary policy to combat stubbornly high inflation, which rose in July to a three-year high of 6.5 percent.
However, as the economy felt the chill of a slowdown in global activity and inflation eased, Beijing adopted a policy of "fine tuning" that included loosening credit for cash-starved small firms.
Beyond growth concerns, capital outflows driven by the global market jitters also help explain the central bank's move, said analysts. Capital inflows have been the main source of money supply growth in China.
"I think the move is partially driven by capital outflows in November. Also, it may indicate that the economy has weakened quite bit and that the official PMI reading does not look very good," said Zhiwei Zhang, China economist at Nomura.
There are fewer maturing central bank bills due in December, which also put strains on liquidity conditions for banks.
MORE EASING AHEAD
The cut in the reserve ratio was the first since December 2008 and marks a monetary policy shift to an easing bias.
"The move sends a clear message that the central bank is ready to relax its policy stance," said Shi Chenyu, an economist with the investment banking unit of Industrial and Commercial Bank of China.
The central bank could have achieved the same loosening on credit quietly, said Mark Williams, chief economist at Capital Economics in Britain.
"The fact that it chose to act in this more public way is a signal not only that policymakers are loosening but that they want to be seen to be doing so. Accordingly, we see this as a decisive shift in policy stance," he said in a note.
Ting Lu of Bank of America/Merrill Lynch expects the central bank to cut reserves requirements three times, by a total of 150 basis points, before the end of next year.
Analysts said the China news would boost riskier assets on hopes that easing policy in China will boost the country's demand.
World stocks jumped 2.6 percent on the combined news from global central banks and China markets are expected to rally when they open for trading on Thursday.
Few analysts expect China to start cutting interest rates anytime soon though.
China's interest rates are already negative when adjusted for inflation. Policymakers worry that cutting them now would only prompt savers to pull money out of the banking system in search of better returns elsewhere, thus crimping bank lending.
China's economic growth has eased for three straight quarters due to tight credit at home and flagging demand overseas. The economy grew 9.1 percent in the third quarter from a year earlier, its weakest pace since the second quarter of 2009.
Data since has suggested a further slowdown. The red-hot property market is showing signs of cooling as sales fell in October from a year earlier for the first time in six months.
A flash purchasing managers' index from HSBC on Nov 23 showed that China's manufacturing sector shrank in November, reviving worries of a hard landing for the world's fastest growing major economy.
HSBC releases the final figures on Thursday alongside an official survey that analysts forecast will show that the factory sector stalled in November.
Such data would back a forecast this week from the Organisation for Economic Co-operation and Development forecast that China's growth will slow in 2012 to below 9 percent for the first time in a decade.
China Banks Get Higher Ratings Than U.S. Rivals as S&P Cites State Backing
Bank of China Ltd. (3988) and China Construction Bank Corp. (939) were upgraded by Standard & Poor’s after the ratings firm revised its criteria, giving the Chinese lenders higher grades than most of their largest U.S. rivals.
Bank of China and Construction Bank were raised to A from A-, and Industrial & Commercial Bank of China (601398) Ltd.’s rating was maintained at A, according to a statement issued today. The changes reflect the “very high” likelihood of China’s government providing help for the lenders in the event of financial distress, S&P wrote in separate statements.
Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) had their long-term credit ratings cut to A-, while UBS AG and Barclays Plc were downgraded to A and HSBC Holdings Plc to A+. The Chinese banks’ elevation underscores their turnaround since a decade-long overhaul of the state-run lenders that had cost the Asian nation $650 billion by 2008.
“You look at the liquidity conditions in China, they’re very good. You look at the policy impetus, the likelihood of government support, it’s very very high,” Tom Quarmby, an analyst at Barclays Capital Inc. in Hong Kong, said in a Bloomberg Television interview today. “Whilst lending might be higher risk, it’s just lending, it’s not exotic derivatives businesses or investment banking.”
Shares Slide
Shares of Construction Bank fell 2.5 percent to HK$5.17 as of the midday trading break in Hong Kong, while ICBC declined 2.3 percent and Bank of China slid 2 percent. Hong Kong’s benchmark Hang Seng Index (HSI) retreated 1.9 percent. The three lenders and Agricultural Bank of China Ltd. have declined by an average 26 percent this year on concern that loans may sour as economic growth cools.
Chinese banks’ bad debts may climb to 1.5 percent of total loans by the end of next year and 1.8 percent by December 2013, according to the median estimate of seven analysts surveyed by Bloomberg last month. That compares with 0.9 percent for the third quarter, according to data from the regulator.
China’s central bank has raised the reserve-requirement ratio for major lenders nine times since October 2010 to a record 21.5 percent. That compares with a maximum 10 percent for U.S. lenders, according to the Federal Reserve’s website.
Capital Requirements
China, which has more than $3 trillion of foreign exchange reserves, has pushed its banks to raise capital and limit off balance sheet loans this year on concern some infrastructure companies controlled by local governments and property developers may be unable to repay debt. Central Huijin Investment Ltd., which manages the government’s stakes in China’s biggest lenders, last month began buying bank shares.
The China Banking Regulatory Commission warned lenders earlier this month that some projects backed by local governments may run out of funding and loans to developers are likely to go bad as property sales slow, according to a person with knowledge of the matter.
China’s economy grew at the slowest pace in two years in the third quarter as the government raised interest rates and limited lending as part of its campaign to rein in inflation. Home prices declined in 33 of 70 cities monitored by the government in October.
Shang Fulin, appointed chairman of the banking regulator at the end of October, asked lenders to control risks associated with lending to local government financing vehicles, property development, wealth management businesses and shadow banking, the regulator said Nov. 25.
S&P, a unit of New York-based McGraw-Hill Cos. (MHP), has been changing the way it looks at debt after its grades contributed to the credit-market seizure that brought down Lehman Brothers Holdings Inc. and Bear Stearns Cos. It started to review the methodology in December 2008, months after the collapse of those two firms.
Ryanair Trumpets Planes From China
SHANGHAI—China's bid to convince airlines it can make jetliners as safe as Boeing Co. and Airbus aircraft is getting a big rhetorical boost from Ryanair Holdings PLC Chief Executive Michael O'Leary.
Mr. O'Leary, whose Dublin-based budget carrier Ryanair describes itself as Europe's biggest by passenger numbers, is staking an early negotiating position for his next aircraft purchase by trumpeting the "game changer" potential of Shanghai-based Commercial Aircraft Corporation of China Ltd., or Comac, as a third competitor.
"You could not fail to be impressed by the resources they are putting into" the program, the 50-year-old Irishman said in an interview Tuesday, shortly after a one-day visit with senior Comac management during which he toured their Shanghai facilities.
The government-run Comac program represents a technological ambition for China, which in recent years has become the biggest maker and market for increasingly sophisticated products such as cars and bullet trains.
China's emergence as a competitive producer of commercial aircraft could disrupt one of the largest export-oriented industries for both the U.S. and European Union.
First, Comac needs to overcome skepticism about airworthiness.
Comac's featured plane is the C919, a single-aisle aircraft expected to begin test flights in 2014, with the first deliveries two years later.
The C919 is pitted against Boeing's 737 and the Airbus A320. Aircraft Value News recently forecast the C919's price tag around $32 million, which editor Paul Leighton said is a "speculative" figure based on the U.S. trade publication's calculation that the A320neo will list for $46 million in 2016.
Boeing and Airbus, a unit of European Aeronautic Defence & Space Co., didn't respond to requests to comment.
Comac, which also didn't respond to a request to comment, has said almost 200 C919 jets have been ordered, primarily from domestic airlines and financing firms. Last November, General Electric Co., which has deals to supply the C919 program with avionics and engines, placed an order through its aviation-leasing business for as many as 10 of the planes.
Industry executives say the C919 faces significant safety-certification hurdles before it will fly internationally. As the C919 program moves ahead there are early efforts to coordinate regulation, such as aircraft flight trials, between the U.S. Federal Aviation Administration and Civil Aviation Administration of China, whose directors have hosted each other in meetings this year.
Few international airline executives have been as publicly enthusiastic about the Chinese company's plans as Mr. O'Leary. "It will have plenty of credibility," he said.
Since early this year he has been in talks with Comac about production of a so-called stretch version of the C919 with 199 seats instead of the basic 174-seat configuration. He said he saw design studios Tuesday where engineers were working on the concept. The Chinese plane would likely cost 10% less than Boeing and Airbus jets, and could provide a further 5% savings with the added seats, Mr. O'Leary added.
There is only so much Comac can do to compete on price, Mr. O'Leary said, because key components such as avionics and engines are Western-designed.
"They haven't got that much local input," he said, describing the C919 as an assembly of existing technology and a "glorified" A320.
"This is not advanced technology. We are not building rockets to get to the moon," he said.
Ryanair, Mr. O'Leary says, intends to place its next order—perhaps 200 to 300 jetliners—as soon as late 2014 for possible delivery in 2018. It is awaiting the last deliveries of its 300-strong fleet of Boeing 737-800s, expected before the end of 2013.
The question is whether Mr. O'Leary's support goes beyond talk. His business strategy features heavy doses of eye-catching marketing, including often-irreverent advertisements that poke fun at competitors. And Mr. O'Leary makes no secret of his plans to play Comac, as well as Russian maker Irkut Corp., off Boeing and Airbus for the best deal on his next orders.
He said Tuesday's visit, his first to China, gave him "much more confidence" in Comac.
When Ryanair in June agreed to share its "experience and expertise" to assist Comac in development of the C919, Mr. O'Leary said his aim was to promote more competition among aircraft manufacturers, "which can only be good for promoting competition between airlines and lowering the cost of air travel for consumers all across Europe toward the end of the decade."
Comac said in June that the Ryanair memorandum of understanding was an indication of "new progress in cooperation with well-known airlines."
In a recently published 20-year industry forecast, Comac predicted 30,900 world-wide aircraft deliveries valued at nearly $3.7 trillion, pushing the global fleet toward 36,000 planes after aircraft retirements—about double the current fleet of 17,600. Comac predicted most of the new planes will be single-aisle jets—like the C919. It said about 4,700 of the new aircraft valued at about $500 billion are likely to be delivered to Chinese carriers, which are expected to fly 15% of the world's total compared with 9% today.
In its own recent forecast, Boeing was more optimistic about spending by Chinese carriers, saying it expected them to buy 5,000 new commercial aircraft for $600 billion from Boeing, Airbus and other manufacturers, a 25% increase by value and 15% rise in aircraft numbers from an estimate in 2010.
Shipbuilders to ride wave
BEIJING / SHANGHAI - Pressed by the difficult market conditions, China plans to enhance the competitiveness of its shipbuilding industry by developing a handful of major players, said Guo Yanyan, a senior official at the Ministry of Industry and Information Technology (MIIT).
The government will further consolidate the sector by encouraging mergers and acquisitions and reorganization among Chinese shipbuilders, said Guo, at the Senior Maritime Forum of the 2011 International Maritime Conference in Shanghai on Tuesday.
"We will strive to foster more than five Chinese shipbuilders so they will be among the world's top 10 (in terms of production capacity) by the end of 2015," he said. According to the plan, industrial consolidation will see China's 10 biggest shipbuilders account for more than 70 percent of the country's domestic shipbuilding production. Small and medium-sized companies will be encouraged to develop specialized shipbuilding techniques, Guo added.
The weak recovery of the global economy has resulted in a depressed market for shipbuilders this year. The number of orders for new vessels at Chinese shipyards - particularly for tankers and bulk-carriers - has been much lower than in 2010, said Zhang Shengkun, the president of the Shanghai Society of Naval Architects and Marine Engineers.
In 2010, China replaced South Korea as the world's top shipbuilder and the volume of completed shipbuilding orders accounted for 43 percent of the global total. Meanwhile, orders for new ships accounted for 5 percent and orders in hand were 41 percent.
So far this year, orders for new ships made in South Korea have outstripped China by 17 percent, Zhang said.
"With their technological advantages, South Korean shipbuilders can manufacture vessels with more added-value. Chinese shipbuilders have not paid enough attention to their product structure and are facing a serious problem of overcapacity in the market," said Zhang at the forum.
Guo said Chinese shipbuilders should strive to develop their technology to meet demand in the international market.
"Most Chinese shipbuilders produce bulk-cargo ships as their major product. To tap into the global market, it is time to develop the technologies to make vessels with more added-value, such as container vessels, liquefied-natural-gas carriers and drilling ships," said Guo.
Another emerging market for Chinese shipbuilders is the oceanographic engineering equipment industry, said Guo, citing the government's 12th Five-Year Plan (2011-2015).
"China's sales revenue from oceanographic engineering equipment is expected to exceed 200 billion yuan ($31 billion) this year, and the country's market share for equipment used in the detection of oceanic oil and gas is targeted to reach 20 percent in five year's time," said Guo.
In 2010, China's accomplished shipbuilding output exceeded a total deadweight tonnage of 60 million tons for the first time, a fivefold increase from 2005. By the end of the third quarter of this year, the accomplished shipbuilding output exceeded a total deadweight tonnage of 51 million tons.
China takes a tough line on poverty
New threshold helps the poor gain access to more assistance
BEIJING - With the stroke of a pen, nearly 100 million more people in China were deemed poor as the country modified its definition of poverty to bring it more in line with international standards.
The move will also put more people in rural areas under the government's poverty aid network.
A rural resident with a yearly net income of less than 2,300 yuan ($361) will now be considered living in poverty. The threshold, lifted from 1,196 yuan in 2009, translates into slightly less than $1 a day.
The revision will boost the number of people deemed poor to 128 million from 26.88 million last year, said Hong Tianyun, a spokesman for the Leading Group Office of Poverty Alleviation and Development under the State Council.
"The previous poverty line underestimated the number of poor people in rural China," said Wang Sangui, a professor at the School of Agricultural Economics and Rural Development of Renmin University of China.
"Only 2.8 percent of the rural population was officially considered poor, which was lower than many developed countries such as the United States, which has a poverty rate of about 15 percent."
The new poverty threshold better reflects the situation in China and brings more resources to poverty-stricken regions, Wang said.
The poverty line applies only to rural areas.
After China's revision of the poverty line, more people will be covered by the government's poverty reduction fund, which will amount to 27 billion yuan this year, a 21-percent annual increase.
Yang Maobao, 52, from a village in Shuicheng county, Southwest China's Guizhou province, is one of those expected to benefit from the new policy.
She raises three grandsons with her husband and relies on a yearly income of 4,000 yuan earned from selling crops and vegetables.
Life became more difficult for Yang after her son went missing two years ago and her daughter-in-law left three children without saying goodbye.
Potatoes and green vegetables make up the family's daily diet, and they only get the chance to taste some smoked meat during major festivals such as Chinese New Year.
"We only go to the market to buy salt and soy sauce, and the television my son bought several years ago broke but we can't afford to repair it," Yang said, adding the rice cooker is the only electric device in her family.
Ardo Hansson, World Bank lead economist for China, said the higher poverty line will help focus policy attention on the right target group given China's current level of development.
Hansson said the enhanced poverty line will enable more rural households who were previously considered "low income" (but not poor) to gain access to benefits and programs for poor households.
"A more realistic poverty line can also help guide future changes in fiscal reallocation and equalization," Hansson told China Daily in an e-mail.
The new threshold is another step to catch up with the international standard, which the World Bank revised to $1.25 a day in 2008.
Senior Chinese leaders convened on Tuesday to map out efforts to alleviate poverty in the country's rural areas over the next decade as the government tries to narrow a widening wealth gap.
The two-day working conference will study the implementation of an outline from 2011 to 2020. The outline is expected to be unveiled after the conference.
The government strives for providing adequate food and clothing for poverty-stricken people while ensuring their access to compulsory education, basic medical services and housing by 2020, said President Hu Jintao, who delivered a keynote speech at the meeting.
China should pay more attention to integrating environmental sustainability into poverty reduction in the future, an official from the United Nations Development Programme China office, who declined to be named, told China Daily.
Given the huge flow of people from rural to urban areas, it's important for China to ensure migrants and their families have equal access to the urban social welfare system, she said.
Tuesday, November 29, 2011
China Pushes to Buck Up Yuan Market
BEIJING—China is taking steps to nurture growth of the fledgling market for its currency outside its borders, in an apparent effort to restore its momentum amid a slowdown in world trade.
Under China's guidance, Hong Kong's market for yuan has surged from nowhere over the past year to become the fastest-growing currency market in the world. But what is known as the offshore yuan market faces new constraints, including slower growth of yuan deposits as a result of weakening cross-border trade and a belief that the currency is no longer a sure-fire bet to rise in value.
"It will be a lower growth environment until there is more confidence in global markets," said Gordon French, head of global markets in the Asian-Pacific region for HSBC Holdings PLC.
Currency watchers say the nascent market still has plenty of room to grow. But mindful of the slowdown, Beijing has taken more steps to keep the market growing and has vowed to make further efforts.
On Monday, China's state-run Xinhua news agency said officials will accelerate implementation of a previously announced program that will allow foreign firms to invest yuan they have accumulated overseas in mainland China's securities market. It also kicked off trading of the yuan versus the Australian dollar and Canadian dollar in the mainland market. In recent weeks, Chinese officials have started to allow more mainland Chinese companies to sell yuan-denominated bonds offshore and doubled the size of a currency-swap deal with Hong Kong so that foreign banks could supply more yuan to their customers.
Officials have also indicated their intention to make it easier for capital to flow in and out the mainland. "To boost the use of yuan offshore, we'll continue accelerating the opening up of the domestic bond market by allowing more overseas entities to invest in it and expanding the volume of domestic entities' bond issuance offshore," Xie Duo, director general of financial markets at the People's Bank of China, said at a global debt forum on Wednesday.
The moves have come after Beijing officials informally surveyed banks about the reasons behind the slowdown, according to people familiar with the matter. Officials from China's central bank met with senior Hong Kong banking executives earlier this month while in the Chinese city to attend a ceremony cementing Bank of China Ltd.'s status as its sole yuan-clearing bank, they said.
"They were trying to understand why growth in renminbi deposits in Hong Kong has slowed," one of those people said. "They expressed concerns."
The yuan faces big obstacles before it becomes a more relevant international currency and a store of value on par with the dollar, euro and yen. Chief among them, the currency would have to be fully convertible. That, however, would require China to allow capital to move freely across its borders—something it has been reluctant to do for fear of losing control of its developing financial system and an economy heavily dependent on exports.
The most significant measure China has taken so far is allowing cross-border trade to be invoiced and paid in its currency. Yuan-settled trade now accounts for about 10% of China's total trade, compared with less than 1% a year ago.
But deposit growth has slowed as the flow of trade has weakened due to the uncertain state of the global economy. As trade has slowed, companies doing business across the border have tended to pile up fewer yuan as payments.
Yuan-based trade saw its first quarterly decline in the third quarter, slipping to 583 billion yuan ($91.7 billion) from 597 billion yuan in the second quarter, according to the PBOC. Meanhile, yuan deposits in Hong Kong increased 2.2% in September from a month earlier to total 622 billion yuan, down from 6.4% growth in August, according to the Hong Kong Monetary Authority, the city's de facto central bank. Many analysts are now expecting even slower growth in October; investors no longer view the currency as a one-way bet, so they may cut their holdings.
"To some extent the market is at a crossroads," says Patrick Perret-Green, Singapore-based head of Asian currency and rates strategy at Citigroup Inc. "But it is still so small that it can grow a lot more before it runs into any real difficulties."
HKMA Chief Executive Norman Chan said on Wednesday that Hong Kong saw a net outflow of 19.5 billion yuan via cross-border trade in September, as yuan payments into China exceeded those into the territory.
In the near term, Beijing's new push for wider use of yuan abroad could help the offshore market continue to grow, the result of increased trade and investment flows and bond sales.
The market for yuan bonds, known as dim sum bonds, has tripled in size this year, to about 210 billion yuan of debt outstanding, according to HSBC. But growth in new bond sales is likely to slow next year as investors dial down their expectations for yuan appreciation, said Michael Lam, director of Asia debt capital markets at Deutsche Bank AG. "Earlier this year, people were expecting yuan deposits to reach one trillion yuan by the end of this year," he said, "Now this is obviously looking like a very tough target."
Baosteel Group Corp., a state-owned steelmaker based in Shanghai, on Thursday became the first mainland Chinese company outside the financial sector to sell dim sum bonds. The company sold 3.6 billion yuan of the bonds for yields ranging from 3.125% to 4.375%.
China also is moving to lessen the red tape that issuers of dim sum bonds, especially foreign companies, face in bringing money back to the mainland.
"Multinational corporations would likely find it more predictable now than before whether they can send the proceeds back," said Augusto King, co-head of debt capital markets in Asia for Royal Bank of Scotland.
Analysis: After 10 years, China's WTO ride could get bumpier
(Reuters) - Rising trade protectionism and frustration over its domestic subsidies spell trouble for China and could lead to more friction within the World Trade Organization than Beijing has grown accustomed to over the past decade.
On the eve of China accession to the WTO 10 years ago this December, naysayers warned that the country could falter under the demands of opening up its economy. Now there is little debate that it has been a boon in making China the world's largest exporter and the second largest trading nation.
But China's next decade in the trade group could be tougher. That's partly because while the country has opened many of its markets as required under the WTO rules, it still heavily subsidizes key industries.
State spending on clean technologies, which has already drawn ire from China's trading partners, could continue rising after last week's confirmation by Beijing of a massive investment plan for "strategic industries."
That can only lead to increased friction as the global economy slows and countries scramble to boost exports.
"Some aspects of China's economic system are fundamentally inconsistent with the market economy-based principles of the WTO," said Wang Jiangyu, a law professor and WTO expert at the National University of Singapore. "In the first few years, they (WTO members) could tolerate this, but as China's trade grows you will see more and more cases against China."
Experts say a recent WTO ruling that cheap state-supported financing and land give an unfair advantage may lead countries to increasingly resort to anti-subsidy cases against China -- a trade weapon that aims at the heart of China's state-backed economic model.
FIRING AT THE CHINESE "MOTHERSHIP"
To date, WTO members have used anti-dumping cases to target China's trade policies.
That's relatively easy to do, since China is still considered a "non-market" economy under the terms it negotiated in 2001. To build a case, another country can substitute China's prices with those of another, often pricier market economy.
That clause -- which Beijing sees as unfair -- expires in 2016.
But a recent WTO decision said state involvement must be accounted for in bank financing, land prices and production input prices.
That means the possible use of a similar tactic in anti-subsidy cases: using higher third country market rates and prices to show subsidized pricing.
In essence, China must still answer for its non-market economy subsidies past 2016.
Chin Leng Lim, a law professor at the University of Hong Kong, said challenging China on cheap land and financing -- when the government owns all the land and banks -- is more intrusive than going after unfairly underpriced goods. It is firing at the "Chinese mothership."
"It's about saying to China: we don't like the way you regulate and control your banks. We don't like the way you regulate land. We don't like the support you give to your state-owned enterprises. So change all of that," Lim said.
Anti-subsidy retaliation is already happening, and green technology is a likely battlefield.
In early November, the U.S. government launched an investigation into imports of Chinese made solar panels after U.S. solar companies called for anti-dumping and anti-subsidy duties. In return, China's commerce ministry said on Friday it was looking into U.S. renewable energy subsidies.
"That's what a trade war looks like, when it is tit-for-tat," Lim said. "And it is all happening in and around anti-subsidy law."
CHANGING GOALS
The man who negotiated China's entrance into the WTO is worried about his country's pledges to liberalize the economy.
"Essentially, after 10 years, it seems China is getting farther from the WTO," Long Yongtu said at a conference on the WTO anniversary in October.
WTO clashes are bound to rise, say trade experts, not only because trade rules are being used differently, but also because -- as the shift away from the WTO shows -- China's goals have changed.
Scott Kennedy, director of Indiana University's Research Center for Chinese Politics and Business, said now the priority of China's leaders is not liberalizing the market but boosting competitiveness by moving up the industrial value chain.
"That is a different mission than what Long Yongtu and his team were pushing for when they were pushing for liberalization to improve the Chinese economy," Kennedy told Reuters in Beijing, where he is also visiting professor at the University of International Business and Economics.
During trade talks in Chengdu, China confirmed to U.S. officials that Beijing plans to pour $1.7 trillion into a number of strategic sectors over the coming five years.
While officials promised foreign firms would not be overlooked in the massive spending spree, foreign governments may see much of the investment as unfair subsidies for home-grown champions -- many in cleaner and hi-tech sectors.
After a decade, the debate has come full-circle, and more of China's exasperated trade partners are likely to head to the WTO dispute resolution system looking for answers.
Lim, the University of Hong Kong law professor, said it is much like the debate before 2001, when they were deciding whether to allow a country that is not a free-market economy into the WTO.
"The counter argument to that was, how can you call it a world trade organization if China is not in it? So do we need to change China's rules, or do we need to change global rules to accommodate China?" he said.
Factbox: China's decade in the WTO
(Reuters) - China marks its 10th anniversary since joining the World Trade Organization on December 11. The following is a look at how China has lived up to its WTO promises in different industries.
BANKING
WHAT CHINA PROMISED: Foreign banks will be allowed to conduct domestic yuan currency business with Chinese firms two years after WTO accession and with Chinese individuals after five years. Geographic restrictions will disappear after five years.
WHERE IT STANDS NOW: China on December 11, 2006 introduced rules allowing foreign banks that set up locally incorporated units to do yuan retail business -- exactly five years after its WTO accession. The first batch of foreign banks actually started setting up such units in 2007.
There are now about 40 China-incorporated units of foreign banks though only a handful, including HSBC Holdings Plc, Citigroup Inc and Standard Chartered Plc, have retail banking operations.
Foreign banks only have an estimated 2 percent market share as they struggle to compete with local players that have far-reaching networks and stronger branding. Foreign bankers say in private that slow approvals of new branches have hindered them from expanding as quickly as they would like.
SECURITIES
WHAT CHINA PROMISED: China will let minority foreign-owned joint ventures into fund management on the same terms as Chinese firms. Three years after accession, foreign firms will be allowed 49 percent stakes in joint ventures.
WHERE IT STANDS NOW: There are 11 Sino-foreign securities ventures. Global investment banks including Goldman Sachs, Morgan Stanley and UBS have all established a foothold in China.
The underwriting business has been dominated by domestic brokerages, although the JVs of foreign banks such as UBS and Deutsche Bank have pushed into initial public offering deals.
In the fund management space, 38 foreign firms including Morgan Stanley, BNP Paribas and JPMorgan have set up joint ventures in China, a market crowded with 67 players. The JVs, where foreigners are allowed to have a maximum 49 percent holding, have just under half of China's 2.3 trillion yuan mutual fund market.
INSURANCE
WHAT CHINA PROMISED: China will allow "effective management control" in life insurance joint ventures, although it will limit foreign stakes to 50 percent. Foreign firms can choose their China joint venture partners freely.
China will phase out geographical restrictions in three years, allow foreign insurers into group, health and pensions over five years and permit wholly owned non-life subsidiaries in two years. Foreign insurers were largely restricted to Shanghai and Guangzhou.
WHERE IT STANDS NOW: The 25 Sino-foreign life insurance ventures control less than 6 percent of total market share. In contrast, China's top four life insurers, including China Life, Ping An, New China Life Insurance Co and China Pacific Insurance (Group) Co, control 65 percent of the market.
Foreign life insurers are not subject to geographical restrictions in China, but the pace of expansion into new provinces is tightly controlled by the China Insurance Regulatory Commission, the industry watchdog.
Their Chinese rivals have much bigger sales forces and enjoy better relations with commercial banks -- an important sales channel for insurance products in China. Foreign life insurers also face challenges from Chinese banks, who have been rushing into the insurance industry in recent years.
In property and casualty, 20 foreign insurance companies own a combined 1 percent market share. The top Chinese player, PICC Property and Casualty Co, owns 38 percent. Foreign property and casualty firms are still barred from conducting third-party liability auto insurance in China, though they have been granted access to the commercial auto insurance market.
ENERGY/OIL
WHAT CHINA PROMISED: China agreed to open the crude and refined oil sectors to private traders gradually and cut its state monopoly on oil trading by giving up four million tonnes of oil products and 10 percent of crude imports to the private sector.
China also will open retail oil distribution three years after accession and allow foreign firms up to 30 wholly owned service stations each. More can be built through joint ventures with Chinese oil majors, industry sources said. China will open its wholesale market five years after accession.
That implied the state will give up its virtual monopoly in the oil sector, allowing private traders to import oil products and foreign firms to set up service stations.
WHERE IT STANDS NOW: China increased the amount of crude oil and fuel oil that non-state traders can import by 15 percent every year for 10 years until 2011.
In 2011, the non-state crude oil import quota reached 29.1 million tonnes, which is about 12.2 percent of China's total crude imports that year, and the fuel oil import quota for non-state traders was 16.2 million tonnes for 2011.
But these non-state traders have to sell back the crude they import to the oil duopoly Sinopec and PetroChina. Imports of other refined fuels like gasoline and diesel have not been open to private traders. In any case, most "non-state traders" are affiliated to the top two oil majors CNPC and Sinopec Group.
As for the oil retail sector, foreign majors Royal Dutch/Shell Group, BP Plc. and ExxonMobil Corp were each allowed to build or acquire, jointly with the Chinese firms, 500 gas stations on the booming east coast. The concession came as a reward for their support in Chinese state oil firms' share offerings in 2000 and 2001. Exxonmobil and BP each now run an estimated 1,000 joint venture gas stations, followed by Shell.
AGRICULTURE
WHAT CHINA PROMISED: China agreed to cap its future spending on farm subsidies at 8.5 percent of the value of domestic farm production. Duties on agricultural products were to fall from 22 percent to 17 percent and on U.S. priority products from an average 31 percent to 14 percent by January 2004. China agreed to cut import tariffs on agricultural products such as rape oil, butter, mandarins and wine to a range of nine to 18 percent from the previous 25 to 85 percent.
WHERE IT STANDS NOW: China reduced average farm products duties to 15.2 percent in 2010 and declared it has more than fulfilled its commitment as a member. (Its farm tax level is only one fourth of the world's average of 62 percent.) It has scrapped farm export subsidies and removed import quotas on edible oil imports. A low-tariff-rate quota system (TRQ) was implemented on imports of wheat, corn, rice, sugar and cotton.
Despite early progress, some technical barriers remain in farm trade, including restrictions on canola imports from Canada and live swine imports from the United States. Washington also worries about regulations governing imports of genetically modified organisms (GMO) products, which could potentially disrupt U.S. corn exports.
AUTOS
WHAT CHINA PROMISED: China agreed to cut import tariffs on automobiles to 25 percent by mid-2006 from the 80-100 percent prevailing before the U.S. agreement was clinched. The EU deal requires China to lift all restrictions on category, type and model of vehicles produced in Sino-EU joint-ventures within two years.
WHERE IT STANDS NOW: China did cut import tariffs on automobiles to 25 percent on June 1 2006, and abolished import quotas on automobiles on Jan 1, 2005.
The move had a limited impact overall for foreign car makers, who were already producing most of their models domestically. It did help them in the luxury car segment, though, since high-end models are still mostly imported.
China's vehicle market has exploded in the past several years, surpassing the United States as the world's largest in 2009.
The car market is now dominated by foreign brands built in China, but the foreign companies are forced to team up with local partners and may own a maximum of half of such joint ventures.
TELECOMS
WHAT CHINA PROMISED: China agreed to allow foreign operators to take a 25-percent share in mobile telecommunications firms, 35 percent after one year and 49 percent after three years.
In Internet, paging and other value-added services, foreign firms could immediately take 30-percent stakes in Chinese companies in Beijing, Shanghai and Guangzhou, rising to 50 percent in two years, without any geographical constraints.
Tariffs on many high-tech products like telecoms equipment were to be phased out by 2005. China agreed to liberalize fixed-line and long distance service but slowly, with 25-percent stakes allowed after three years and 49 percent after six years.
WHERE IT STANDS NOW: Foreign investment in the telecom market has been raised to 49 percent for basic services and 50 percent for value-added services. But foreign investors complain of continuing restrictions on joint ventures: foreign telecom service providers are only allowed to form JVs with existing state-owned telecom providers.
There have been a few deals in the sector since the WTO entry, including the purchase by Vodafone Group Plc of a minority stake in China Mobile, which it sold last year. SK Telecom of South Korea acquired a stake in China Unicom and later sold it as well. Spain's Telefonica this year increased its stake in China Unicom to 9.7 percent.
The sheer size of Chinese telecoms is a barrier to taking larger shares in them, a 10 percent stake in China Mobile, China's largest mobile carrier, would cost nearly $20 billion.
DISTRIBUTION/RETAIL
WHAT CHINA PROMISED: China agreed to phase out restrictions on distribution services for most products within three years. It agreed to lift joint venture restrictions on large department stores and virtually all chain stores. It also would scrap space restrictions on foreign-owned stores.
The change meant allowing foreign firms a controlling stake of up to 65 percent in retail stores. Foreign firms previously had to distribute products made in China through domestic companies.
WHERE IT STANDS NOW: China has made significant progress in opening the Chinese retail sectors, including opening up the Internet retail market to foreign-invested retailers. It has phased out distribution restrictions on distribution services for most products and lifted JV restrictions in most areas. Today, foreign enterprises can form joint ventures for most wholesale operations, and can apply for national wholesale licenses.
However, retailers -- other than those owned by Hong Kong and Macao investors -- operating more than 30 stores in China that sell pharmaceuticals, grains, vegetable oil, sugar, cotton, agricultural pesticide, chemical fertilizer and certain other commodities may not be more than 49 percent foreign-owned.
China prepares for big entry into vaccine market
Beijing (AP) — The world should get ready for a new Made in China product — vaccines.
China's vaccine makers are gearing up over the next few years to push exports in a move that should lower costs of lifesaving immunizations for the world's poor and provide major new competition for the big Western pharmaceutical companies.
However, it may take some time before some parts of the world are ready to embrace Chinese products when safety is as sensitive an issue as it is with vaccines — especially given the food, drug and other scandals the country has seen.
Still, China's entry into this market will be a "game changer," said Nina Schwalbe, head of policy at the GAVI Alliance, which buys vaccines for 50 million children a year worldwide.
"We are really enthusiastic about the potential entry of Chinese vaccine manufacturers," she said.
China's vaccine-making prowess captured world attention in 2009 when one of its companies developed the first effective vaccine against swine flu — in just 87 days — as the new virus swept the globe. In the past, new vaccine developments had usually been won by the U.S. and Europe.
Then, this past March the World Health Organization announced that China's drug safety authority meets international standards for vaccine regulation. It opened the doors for Chinese vaccines to be submitted for WHO approval so they can be bought by U.N. agencies and the GAVI Alliance.
"China is a vaccine-producing power" with more than 30 companies that have an annual production capacity of nearly 1 billion doses — the largest in the world, the country's State Food and Drug Administration told The Associated Press.
But more needs to be done to build confidence in Chinese vaccines overseas, said Helen Yang of Sinovac, the NASDAQ-listed Chinese biotech firm that rapidly developed the H1N1 swine flu vaccine. "We think the main obstacle is that we have the name of 'made in China' still. That is an issue."
China's food and drug safety record in recent years hardly inspires confidence: in 2007, Chinese cough syrup killed 93 people in Central America; one year later, contaminated blood thinner led to dozens of deaths in the United States while tainted milk powder poisoned hundreds of thousands of Chinese babies and killed six.
The government has since imposed more regulations, stricter inspections and heavier punishments for violators. Perhaps because of that, regulators routinely crack down on counterfeit and substandard drugmaking.
While welcoming WHO's approval of China's drug safety authority, one expert said it takes more than a regulatory agency to keep drugmakers from cutting corners or producing fakes.
"In the U.S., we have supporting institutions such as the market economy, democracy, media monitoring, civil society, as well as a well-developed business ethics code, but these are all still pretty much absent in China," said Yanzhong Huang, a China health expert at the Council on Foreign Relations. "For China, the challenge is much greater in building a strong, robust regulative capacity."
Last year, a Chinese newspaper report linked improperly stored vaccines to four children's deaths in northern Shanxi province, raising nationwide concern. The Health Ministry said the vaccines did not cause the deaths, but some remained skeptical.
Meanwhile, Chinese researchers reported in the New England Journal of Medicine earlier this year that a pandemic flu vaccine given to 90 million people in 2009 was safe.
WHO's medical officer for immunization, Dr. Yvan Hutin, said WHO's approval of the Chinese drug regulatory agency is not "a blank check." Each vaccine will be evaluated rigorously, with WHO and Chinese inspectors given access to vaccine plants on top of other safety checks, he said.
Vaccines have historically been a touchy subject in the Western world, rife with safety concerns and conspiracy theories. Worries about vaccine safety resurfaced in the late 1990s triggered by debate over a claimed association between the vaccine for measles, mumps and rubella and autism. The claim was later discredited.
For China, the next few years will be crucial, as biotech companies upgrade their facilities and improve procedures to meet the safety and quality standards — a process that is expected to be costly and challenging. Then they will submit vaccines to the U.N. health agency for approval, which could take a couple of years.
First up is likely to be a homegrown vaccine for Japanese encephalitis, a mosquito-borne disease that can cause seizures, paralysis and death. The vaccine has been used for two decades in China with fewer side effects than other versions. Its manufacturer expects WHO approval for it in about a year. Also in the works are vaccines for polio and diseases that are the top two killers of children — pneumonia and rotavirus, which causes diarrhea.
Vaccines also are a significant part of a $300 million partnership with the Bill & Melinda Gates Foundation for the development of new health and farming products for poor countries.
China's entry into this field is important because one child dies every 20 seconds from vaccine-preventable diseases each year. UNICEF, the children's agency and the world's biggest buyer of vaccines, has been in talks with Chinese companies, said its supply director Shanelle Hall. The fund provides vaccines to nearly 60 percent of the world's children, and last year spent about $757 million.
Worldwide, vaccine sales last year grew 14 percent to $25.3 billion, according to healthcare market research firm Kalorama Information, as drugmakers which face intensifying competition from generic drugs now see vaccines as key areas of growth, particularly in Latin America, China and India.
China's vaccine makers, some of whom already export in small amounts, are confident they will soon become big players in the field.
"I personally predict that in the next five to 10 years, China will become a very important vaccine manufacture base in the world," said Wu Yonglin, vice president of the state-owned China National Biotec Group, the country's largest biological products maker that has been producing China's encephalitis vaccine since 1989.
CNBG will invest more than 10 billion yuan ($1.5 billion) between now and 2015 to improve its facilities and systems to meet WHO requirements, Wu said. The company also intends to submit vaccines to fight rotavirus, which kills half a million kids annually, and polio for WHO approval.
Smaller, private companies are also positioning themselves for the global market.
Sinovac is now testing a new vaccine for enterovirus 71, which causes severe hand, foot and mouth disease among children in China and other Asian countries. It is also preparing for clinical trials on a pneumococcal vaccine Yang says could rival Pfizer's Prevnar, which was the top-selling vaccine worldwide last year with sales of about $3.7 billion.
Pneumococcal disease causes meningitis, pneumonia and ear infection.
"In the short term, everyone sees the exporting opportunities, because outside of China the entire vaccine market still seems to be monopolized by a few Big Pharma (companies)," Yang said.
The entry of Chinese companies is expected to further pressure Western pharmaceutical companies to lower prices. Earlier this year, UNICEF's move to publicize what drugmakers charge it for vaccines showed that Western drugmakers often charged the agency double what companies in India and Indonesia do.
The aid group Doctors Without Borders criticized the vaccine body GAVI for spending hundreds of millions of dollars on anti-pneumonia vaccines from Western companies, saying it could put its buying power to even better use by fostering competition from emerging manufacturers like those in China.
GAVI's Schwalbe said the vaccine body has to buy what is available and negotiates hard for steep discounts. "We need to buy vaccines now to save children's lives now. We can't wait."
Monday, November 28, 2011
Have You Heard...
- China pushes Myanmar military ties ahead of Clinton visit
- China eyes European assets as debt crisis bites: minister
- Seldom Heard on China: 'Sell'
- Hong Kong Leadership Contest Starts as Leung Challenges Tang in March Poll
- China Bans Ads in TV Dramas
- Chow Tai Fook Seeks $2.8 Billion in Hong Kong Initial Offering, Terms Say
- Yao Ming Courts China's Wine Boom
China pushes Myanmar military ties ahead of Clinton visit
(Reuters) - Chinese Vice President Xi Jinping offered to boost military ties with Myanmar on Monday, days ahead of U.S. Secretary of State Hillary Clinton's historic visit to China's isolated southern neighbor that has begun showing signs of political reform.
The calls by Xi, heir apparent to the Chinese leadership, to deepen military cooperation with Myanmar come after U.S. efforts to ramp up military engagement in Asia made Beijing jittery.
He told the visiting commander of Myanmar's armed forces, General Min Aung Hlaing, that the two countries' friendship had "endured the test of time through sudden international changes."
"I hope the militaries of the two countries, hereon, can continue to strengthen exchanges, deepen cooperation and play an active role in pushing forward the development of comprehensive relations," Xi said, according to a statement posted on the Foreign Ministry's website(www.fmprc.gov.cn).
Earlier this month, U.S. President Barack Obama told Asia-Pacific leaders that the United States was "here to stay." He also announced plans to set up a de facto military base in northern Australia and chided China for refusing to discuss its South China Sea disputes at regional forums.
Chinese military commentators have suggested Washington's recent diplomatic push into the Asia-Pacific region is an obvious ploy to encircle China.
Clinton's three-day Myanmar visit from Wednesday is the first such trip by a U.S. secretary of state since a 1962 military coup ushered in 50 years of unbroken military rule.
That rule ended in March when a nominally civilian parliament was established.
Many of Myanmar's top leaders are former generals but they have adopted breathtakingly fast reforms by Myanmar's standards, reaching out to armed ethnic groups to end decades of violence, releasing political prisoners, and initiating talks with democracy leader Aung San Suu Kyi.
Obama dubbed those moves "flickers of progress," opening the door for Clinton's visit to the secretive state, which is under wide-reaching sanctions by Western countries for human rights issues.
China's ties with Myanmar, formerly known as Burma, were jolted in September when the new civilian government suspended plans for a controversial, Chinese-backed dam.
For Myanmar, China is its most important diplomatic and economic ally, and both governments voiced a desire to find an "appropriate solution" to the dam issue.
China eyes European assets as debt crisis bites: minister
(Reuters) - China is preparing to buy up plum assets in Europe, the commerce minister said on Monday, as the escalating debt crisis leaves countries in the region increasingly vulnerable to the deep pockets of Chinese firms.
The fastest-growing major economy in the world is keen to invest in infrastructure in Western Europe, particularly in Britain, Lou Jiwei, the head of $400 billion China Investment Corp (CIC), wrote in the Financial Times at the weekend.
Indeed, Commerce Minister Chen Deming said China will send a trade and investment delegation to Europe next year, where potential investments will be on the agenda.
"Some European countries are facing a debt crisis and hope to convert their assets to cash and would like foreign capital to acquire their enterprises," he told a gathering of Chinese firms with overseas investments.
"We will be closely watching and pushing ahead with this effort."
China has given a cautious response to euro zone plans to raise funds from countries with big foreign exchange reserves, such as China or Japan, to boost the financial firepower of its rescue fund.
China already has some 600 billion euros ($798 billion) in euro-zone debt, a sizeable portion of its $3.2 trillion in foreign exchange reserves, the world's biggest stockpile of cash.
Instead, China may be more interested in investing in solid assets, such as companies or infrastructure. Some Chinese intellectuals argue that now is the time for Beijing to negotiate hard, securing access to, control over, or even ownership of some of Europe's best brand names, companies and intellectual property.
"It is a good opportunity for domestic firms to make equity investment in some European firms that may need cash badly right now because of the debt crisis," He Fan, a researcher at the Chinese Academy of Social Sciences, a top government think tank, said.
"The Chinese government has been nudging domestic firms to venture abroad and by encouraging capital outflows, it could also help the country to improve its international balance of payments."
Chen warned, however, that China may fight back if other countries use trade protectionism to block purchases. Chinese officials repeatedly emphasize that overseas deals have fallen through because of political opposition; although far more Chinese purchases have gone through without difficulty.
Last week, the Icelandic government rejected a plan by Chinese multimillionaire developer Huang Nubo to buy 300 sq km (186 sq miles), saying the plan did not meet legal requirements on foreign ownership.
Huang said the response revealed Western "hypocrisy and deep prejudice." Foreigners wrongly assume Chinese companies have ties to China's military, he said.
China's largest state-owned shipping firm COSCO (1919.HK) has already made a major investment in Greece's historic Piraeus port (OLPr.AT) as part of divestment plans.
"We are willing to import more products and encourage outbound investment, since the dollar is relatively weak for a long period of time," said Chen, who earlier this year urged Chinese firms to buy global brands.
MONEY TO BURN
Overseas investment by Chinese state-owned enterprises has mostly focused on resources given China's need to fuel annual economic growth of 9 percent to 10 percent.
Despite the enticing opportunities that Europe may offer, Chinese firms will move carefully for risk of being criticized for hasty moves that do not pay off, said Wang Jun, an economist at top government think-tank CCIEE in Beijing.
CIC, for example, was criticized for some of its early equity stakes in Western financial institutions during the global financial crisis because they subsequently fell in value.
In any case, there was no need for Chinese companies to rush to make investments in Europe, Wang said.
"At this point, I think it's too early to discuss," Wang said. "The euro zone crisis has not entirely played out and asset prices are very volatile. They haven't found their floor," he said.
"Overall, Europe is not a resources play, but its manufacturers are what would most interest us, with their market, their technology, and their strong experience."
Plans by the British government to make London a trading center for the Chinese yuan could attract property investment from China, which has tended to lag Southeast Asian countries for making large deals, said Nick Braybrook, a partner at property consultant Knight Frank.
"Most investor lists include Chinese money, but we haven't seen big organizations like China Investment Corporation being very active yet," he said.
The CIC's main focus would be on infrastructure projects where governments could offer lower taxes or discounted bank loans in return for investment, Lou suggested in the Financial Times.
However, CIC has indicated some caution about investing in Spain, whose borrowing costs have surged over fears of European debt contagion.
A visiting Spanish minister was met with polite disinterest earlier this month when he tried to interest CIC in upcoming divestments of state holdings in so-called cajas savings banks, in the national lottery company, airports and other infrastructure, sources said.
Chen indicated that China also faces its own investment constraints, noting expectations for a slowdown in China's economic growth next year.
Annual inflation in 2011 is likely to be about 5.5 percent -- overshooting a government target of 4 percent -- and inflationary pressures will continue next year, he said.
Another constraint, analysts say, is that China may not be a deep pocketed as it seems. They estimated that out of a foreign exchange arsenal of $3.2 trillion, only $100 billion may be spare per year to spend.
Seldom Heard on China: 'Sell'
HONG KONG—Investors have soured on many Chinese companies on fears of a slowing economy and worries about accounting fraud and corporate governance. But for analysts at investment firms, the stocks remain a hot ticket.
In bullishness reminiscent of the technology bubble of the 1990s, analysts who work for investment banks based around the world rate nearly every Chinese stock they cover as a "buy." While these analysts generally are a bullish lot, they are far more positive on Chinese banks, tech companies, retailers and the like than they are on companies based elsewhere.
According to data compiled by independent research firm Forensic Asia Ltd., analysts have 19.2 "buy" recommendations on Chinese stocks for every one "sell" recommendation. For stocks of companies based in the U.S., the ratio is 10.5, and for the rest of the Asian-Pacific region it is 7.3.
"At sell-side firms, there is overwhelming pressure to believe in the 'China cannot fail' story," said Gillem Tulloch, Forensic Asia's founder and managing director and a former analyst at brokerage firm CLSA. Current and former sell-side analysts said other reasons for bullishness include obtaining better access to companies and their executives and a desire to get investment-banking and trading business from companies. Forensic Asia, which doesn't do any corporate-finance business or investing, issues slightly more "sell" than "buy" ratings in general, Mr. Tulloch said.
Investors who followed analysts' bullish recommendations haven't fared well this year. The Shanghai Composite Index has dropped 15%, and in Hong Kong, where Chinese companies account for two-thirds of the trading volume, the Hang Seng Index has fallen 23%.The selloff in Chinese shares has come amid questions from some ratings firms, hedge funds and short sellers about corporate governance and accounting at some companies.
Questions also have swirled around Sino-Forest Corp. This month, a special board committee said it found no fraud at the company in response to a Muddy Waters report this year that said the forestry firm misrepresented the value of its timber holdings.
An analyst who covers Asian stocks for a major bank said that, in his experience, when analysts suspect wrongdoing at a company they will drop coverage rather than issue a negative report.
"The best you can do is to suggest certain dealings are 'questionable.' Readers of our reports understand these subtleties," the analyst said.
Overly bullish analysts and conflicts of interest have been a problem in the securities industry. In the wake of the tech-stock bubble in the U.S. early last decade, Wall Street's largest securities firms agreed to pay $1.4 billion to settle government charges they issued overly optimistic investment research to curry favor with corporate clients and win investment-banking business. The settlement also included a provision that securities firms erect a firewall separating analysts from investment-banking operations. At the height, analysts' buy ratings outnumbered sell ratings by 100 to 1.
In an interview on his last day in office as Hong Kong's securities regulator this year, Martin Wheatley warned about the craze for shares of Chinese companies, calling China "the new dot-com" of the investment world.
As with the tech bubble, the rationale behind the bullishness is growth.
"For years there has been a 'who cares' attitude toward Asian company fundamentals due to high growth rates in the region," said Richard Leggett, a former Goldman Sachs Group executive who has run two independent research firms.
China's big state-controlled banks were among the largest initial public offerings in the world when they listed in recent years, but their recent stock performance has been weak, as investors worry that they are carrying bad debts on their books. On average, the big-four Chinese banks are down 29% this year in Hong Kong trading, yet analysts have remained steadfastly bullish.
Industrial & Commercial Bank of China Ltd., the world's largest lender by market value, has 24 buy ratings and only one sell, according to FactSet Research Systems Inc. In September 2007, as banking stocks were approaching peaks, there also was only one sell rating on the lender. China Construction Bank Corp. has 25 buy ratings and one sell, according to FactSet. In 2007, there were 17 buy ratings and no sell ratings.
South Korea, where the ratio of buy to sell ratings is 22.7, is the only market where analysts are as bullish as they are in China, according to Forensic Asia. Several analysts said some Korean companies put pressure on analysts to produce positive ratings.
James Antos, a banking analyst for Mizuho Securities Co., is one of the few bears on Chinese banks, with sell ratings on six of the nine Chinese lenders he covers and no buy ratings. Mr. Antos, a former Ernst & Young auditor who has been following banks since the 1980s, blamed the bullishness on the inexperience of many analysts in Asia.
"In Europe, some guys have been covering banks for 20 years. There's a depth of understanding among Europeans and to some extent U.S. analysts that's just not here in Asia," he said. "It wouldn't be a bad thing to have at least lived through one economic cycle before you start telling people to buy bank stocks in a bear market."
Hong Kong Leadership Contest Starts as Leung Challenges Tang in March Poll
The race for Hong Kong’s top job started as former government adviser Leung Chun-ying said he’ll run against former Chief Secretary Henry Tang in the March 2012 election, as the city faces a widening wealth gap and slowing economy.
“There are rising voices from the community seeking for change,” Leung, 57, said at a press briefing yesterday. “I aim to make Hong Kong a more prosperous, righteous and improved society.” The outgoing Asia Pacific chairman of London-listed property broker DTZ Holdings Plc will challenge Tang, 59, who announced on Nov. 26 his candidacy for the chief executive post.
Hong Kong’s economy barely grew in the third quarter, and surging home prices and inflation have spurred protests and led to a record-low approval rating for the government. Leung and Tang need to win votes from a 1,200-member election committee, some picked by China, that will select the replacement for outgoing Chief Executive Donald Tsang.
“Leung definitely has used his grassroots upbringing to good advantage to build a populist image,” said Willy Wo-Lap Lam, an adjunct professor of history at the Chinese University of Hong Kong. “Tang has never been able to shake off his image as the product of privilege, but he enjoys the support of Hong Kong’s tycoons. Beijing will go along with the candidate who wins the business community’s confidence.”
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 has the widest wealth gap in Asia, according to a report by the United Nations in 2008.
Tsang, who will step down in June after running the city for seven years, said last month the jump in housing prices, up 70 percent since the start of 2009, has been the biggest source of public anger. Tsang was the only candidate in the 2005 election after predecessor Tung Chee-hwa stepped down following protests by more than 500,000 people in 2003.
‘Plastic Flowers’
Leung, the son of a policeman, worked part-time at local food shops when studying in the U.K and said his parents earned their living making accessories at home, a popular light- manufacturing activity in the 1960s in Hong Kong.
“My mother assembled plastic flowers to help fund the family, and I helped her to bring those heavy materials back home as a primary student,” he said.
As a 34-year-old in 1988, Leung became the head of the committee responsible for drafting the Basic Law, the city’s de facto constitution adopted after the former British colony was returned to China. Leung was one of the non-official members in the Executive Council, which advises the government on major policy issues.
Among his backers are Vincent Lo, chairman of Shanghai- based developer Shui On Land Ltd. (272), and Hang Lung Properties Ltd. Chairman Ronnie Chan.
‘Tong Tong’
Tang was financial secretary before becoming Hong Kong’s second-highest ranked official, a career path that mirrored Chief Executive Tsang. His father is Tang Hsiang Chien, who was ranked the 40th-richest person in Hong Kong in 2010 by Forbes Magazine. The younger Tang was the managing director at the textile manufacturer founded by his father before he joined the government in 2002.
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. As financial secretary in 2007, he handed out income tax rebates and property-rate waivers, earning him the nickname of “tong tong,” a term for sweets, from the local press.
“The chaos in Europe and U.S. economies could hit Hong Kong hard, we need an experienced and capable helmsman to lead us,” Joseph Yam, who steered the city through the 1997-1998 Asian financial crisis as then-head of the Hong Kong Monetary Authority, said on Nov. 24 in declaring for Tang. Yam’s backing echoed that from Peter Wong, chief executive officer for Asia Pacific at HSBC Holdings Plc.
About 200 supporters attended Leung’s press conference at the exhibition center yesterday. In contrast, Tang announced his candidacy at the exit of Admiralty subway station, after he took a 15-minute ride from Sham Shui Po, a district of working class and low-income families in Kowloon. He met demonstrators there and was forced to dash to the subway, according to the South China Morning Post’s report.
Relationship Scandal
In the latest opinion poll, Leung had the support of 35 percent, while Tang was backed by 10 percent, according to the University of Hong Kong’s Public Opinion Programme, which cited a survey of more than 500 residents conducted last month.
Eastweek magazine published an interview with Tang and his wife Kwok Yu-chin on Oct. 4, in which they were questioned about speculation that he had an affair. He later said he “deeply regrets” his failings, declining to give details.
“I believe the inappropriate relationship scandal has struck my popularity,” Tang told reporters on Nov. 17. “I went through struggles and came forth with my wife to talk about the relationship failing in public. She forgives and accepts me, I also hope to get the public understanding on this.”
‘Deep-Rooted’ Conflicts
Leung has been vocal about housing policy, urging the government to resume a program to build subsidized homes that was halted in 2002. Tang said that residents should only buy property within their means.
Chinese Premier Wen Jiabao said in March that the city needs to resolve “deep-rooted conflicts,” underscoring concerns over social tension. The administration of Tsang and Tang has posted low support ratings, close to “governance crisis,” according to the Poll Director Robert Chung at the University of Hong Kong.
“Only a capable chief could unite a capable team,” Tang said during his district tour, in response to criticisms he was part of the government with low popularity.
The committee to be formed in December that will decide the next chief executive is elected from several sectors that represent business and political interests, skewed in favor to the candidate backed by Beijing, said Joseph Cheng, professor of politics at the City University of Hong Kong.
Home prices have surged on low mortgage rates and an influx of mainland Chinese buyers. Inflation, excluding government subsidies, was 6.4 percent in October, the highest level since records started being kept in 2007. The city’s economy narrowly skirted a recession, with a 0.1 percent gain in the third quarter from the previous three-month period, after a contraction in April through June.
China Bans Ads in TV Dramas
BEIJING—China's regulators will ban advertising during television dramas, dealing a blow to marketers who have ramped up ad spending to reach the nation's growing consumer class.
The State Administration of Radio, Film, and Television on Monday issued new rules restricting commercials from interrupting TV dramas, allowing them to air only back-to-back between programs. It said the new restrictions, which will go into effect at the beginning of next year, are intended to spur broadcasters to show more cultural programming, helping them to uphold a "public service."
While the ban could cheer couch potatoes, experts say pushing commercials to the end of dramas will ultimately hurt marketers. Earlier this month, both foreign and domestic companies paid a record 14.26 billion yuan, or about $2.25 billion, for the rights to advertise next year on the country's largest network, China Central Television. Volkswagen AG, for example, pledged $45.6 million in the auction, according to Chinese advertising agency Charm Communications.
"The efficacy of TV advertisement during these shows will be lost," said Zhou Wei, chief financial officer of Charm Communications, adding that lumping commercials together will train consumers to anticipate a block of time that they can tune out or turn off the TV before the next program starts.
The Chinese regulatory agency, known as Sarft, didn't respond to requests for comment. Broadcast TV is a mouthpiece for the Communist Party and "has a duty to provide a cultural service to the public," Sarft said in its statement.
The ban marks the latest restriction on China's media by central government officials, who have tightened control over television and the nation's voluble Internet culture in recent months amid a broad cultural clean-up campaign. Last month, regulators reduced the number of entertainment programs to nine per night, down from 17, across 34 channels nationwide in an effort to stamp out "excessive entertainment and a trend toward low taste."
China isn't alone in its pursuit against ads. In 2008, French president Nicolas Sarkozy proposed a similar initiative to ban ads on public network France Télévisions, following the model of Britain's British Broadcasting Company. But in 2010, Mr. Sarkozy, facing resistance from businesses, dropped the effort.
South Korean dramas run uninterrupted on broadcast stations.
Dramas are among the most popular shows on Chinese television and, airing during prime time, attract some of the highest advertising revenue. Because broadcasters are leery of violating government restrictions on hot-button political issues, China's dramas typically steer away from subjects like crime and social tensions and often focus on love stories or period sagas.
Shifting the ads away from a TV show's runtime reduces the value of that time, and many marketers will look to pull out or renegotiate with networks, media experts say. Much of the $2.25 billion advertisers spent on the CCTV auction, for example, includes drama programming, media experts say. CCTV doesn't disclose the exact amount of advertising dedicated to dramas.
Pulling ads out of them may send many advertisers to look for alternative placements, such as the Web, for their ads, said Mr. Zhou. While the Internet is popular with Chinese consumers, television remains the single most effective way for companies to reach the broadest number of eyes, according to WPP PLC's ad-buying unit GroupM.
Media experts say that the government is aiming to tighten its political control of ideology through TV and that decreasing profitability will hurt popular satellite networks that have attracted wide audiences with hit shows, such as reality-dating show "If You Are the One." Such broadcasters have given CCTV, the government's main TV broadcaster, increasing competition as well.
Chow Tai Fook Seeks $2.8 Billion in Hong Kong Initial Offering, Terms Say
Chow Tai Fook Jewellery Group Ltd. may raise as much as HK$22 billion ($2.8 billion) in what could be Hong Kong’s biggest initial public offering this year as luxury-goods companies tap growing affluence in China.
The jewelry chain, whose revenue is higher than rival Tiffany & Co. (TIF)’s, is offering 1.05 billion new shares at HK$15 to HK$21 each, according to a term sheet sent to investors. Chow Tai Fook plans to start trading Dec. 15, according to the terms.
The offering by the Hong Kong-based jeweler with more than 1,400 outlets in China will test investors’ appetite after Prada SpA, which raised $2.5 billion in Hong Kong’s biggest IPO this year, has declined since its June debut. Sales of luxury items in China will more than double to about 180 billion yuan ($28 billion) in 2015 from last year, McKinsey & Co. estimates.
“At such a pricing range, it is more expensive than its peers, but Chow Tai Fook is much bigger,” said Patrick Yiu, managing director at Cash Asset Management. “The price range still looks reasonable.”
Chow Tai Fook, controlled by real-estate billionaire Cheng Yu-tung, forecasts net income of more than HK$6.3 billion in the year ending March 31, 2012, according to a statement from the company to Hong Kong’s stock exchange today. Earnings per share on a pro forma basis will be at least 63 Hong Kong cents, it said.
Fortune, Prosperity
Founded in 1929 in the southern Chinese city of Guangzhou, the company was named after founder Chow Chi Yuen and “Tai Fook” means fortune, prosperity and luck in Chinese.
Retail sales in China have grown an average of 17 percent in the first ten months of this year, according to data compiled by Bloomberg. In Hong Kong, Chinese visitors splurging on high- end shoes, watches and jewelry have driven monthly retail sales to record highs.
Graff Diamonds Ltd., the jewelry retailer whose founder twice set records buying gems at auction, is preparing to raise $1 billion in a Hong Kong IPO next year, according to a person familiar with the matter.
Baoxin Auto Group Ltd., a dealer of BMW and Jaguar cars in China, seeks as much as $526 million in a Hong Kong share sale, according to a term sheet. The company, based in Shanghai, plans to start trading on Dec. 14, according to the terms.
Use of Proceeds
The Chow Tai Fook shares being offered will account for 10.5 percent of the company after the sale, according to the term sheet. The company’s stockholders have the option to sell 210 million shares under an upsize option, as well as the equivalent of 15 percent of the final deal size under an overallotment option, according to the document.
Half of the funds raised by the company will be used on raw materials and inventory, with 36.5 percent for repayment of loans and 5 percent on buying properties and renovating stores, according to the term sheet. The remainder will be used to buy production as well as research and development equipment, to build an office building in Shenzhen, and on working capital.
The IPO will be the biggest in Hong Kong this year, exceeding Prada’s if priced at the top of the range.
Companies have raised more than $15 billion from initial public offerings so far this year, compared with $46.3 billion for the same period last year, data compiled by Bloomberg show.
Prada rose 6.3 percent, the most since Oct. 27, to HK$34.40 at the close of trading in Hong Kong. The stock has dropped 13 percent from the offer price since it started trading in June.
Annual Sales
Chow Tai Fook posted revenue of HK$35 billion in the 12 months ended March, it said in a filing. Tiffany had annual sales of $3.09 billion.
The Hong Kong-based jeweler has 12.6 percent of China’s jewelry market, with a 20 percent share in Hong Kong and Macau, the company said in its filing, citing a Frost and Sullivan report. It sources rough diamonds from companies such as Rio Tinto and Diamond Trading Co., the distribution arm of De Beers.
Retail sales in China are predicted to more than double to 40.5 trillion yuan ($6.36 trillion) in 2015, up from 15.4 trillion yuan in 2010, according to a KPMG report released in April.
Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc and JPMorgan Chase & Co. are managing the IPO for Chow Tai Fook as global coordinators.
Yao Ming Courts China's Wine Boom
While Yao Ming was growing up in Shanghai, wine was served with ice cubes. It wasn't until the 7-foot-6-inch Chinese basketball star spent time with National Basketball Association teammate Dikembe Mutombo, a 7-foot-2-inch Congolese player, that he began to appreciate wine.
"I always watched him at our dinners and I'd sometimes ask him 'Why are you doing that?'" said Mr. Yao, swirling an imaginary glass. "I was just trying to copy him."
Now retired and living in his native Shanghai, Mr. Yao is an unlikely connoisseur and a trailblazer on the Chinese wine scene. The 31-year-old is launching his own Californian winery geared exclusively for the Chinese market this week called Yao Family Wines.
Distributed by French beverage giant Pernod Ricard SA, bottles in the first 5,000-case run will be labeled simply Yao Ming and aimed at the top end of the market.
The wine, made from cabernet sauvignon grapes harvested in 2009 from California's Napa Valley, is priced at 1,775 yuan (US$289) a bottle. (The price includes a 27% import duty and a 17% sales tax.) A second wine, called Yao Family Reserve, will be released later this year, and its small 500-case production will be even pricier.
"I really like Napa Valley," said the former center. "California represents vacation, casual [living], sunshine—everything related to a good quality of life."
Yao Family Wines currently doesn't own any vineyards in California, but is aiming to acquire land in the next few years.
California couldn't have a better pitchman in China than Mr. Yao. He is one of the country's biggest stars and is credited with boosting China's interest in the NBA. During his nine seasons with the Houston Rockets, his games were broadcast on national television in China, and he was selected to carry China's flag during the opening ceremonies at the 2008 Olympics in Beijing. He has endorsed everything from Apple Inc. products to his father's Chinese restaurant in Houston.
Mr. Yao's appreciation for wine grew in parallel with its acceptance in his home country—wine consumption in China doubled from 2005 to 2009. But wine imported into China came predominantly from France, and he spotted a market opportunity for Californian wines.
Mr. Yao asked BDA Sports International, the agency that represents him, to explore the idea of starting his own Napa Valley winery. In 2009, with BDA's assistance, he found a team of wine experts to help him realize his vision, including winemaker Tom Hinde, who had made wines for Flowers Vineyard and Winery and Kendall-Jackson Wine Estates. "We tasted a lot of wine together and got to know him in a way so I could express his personality in the wine," said Mr. Hinde. "He's physically imposing, but he's also very personable and gentle. We wanted to capture that in the wine."
Mr. Hinde insists Yao Family Wines isn't a short-lived bid to capitalize on China's wine boom and the star's celebrity before either of them wane. He said the business plan is based on a 10-year timeline.
While most of the wine sold in China is from domestic sources, the imported market has grown dramatically. Bottled-wine imports—as opposed to cheap bulk wine that is imported in large tanks for bottling in China—grew 240% from 2008 to 2010, according to data from China Customs.
China has a heavy bias toward French wines. Last year, France led bottled-wine imports with a 47% market share. Australia ranked a distant second with 16% of the market. The U.S. came in sixth, trailing Italy, Spain and Chile, with a 6.4% share.
Chinese collectors have bid top dollar for the world's most sought-after bottles of Bordeaux and Burgundy at auctions in Hong Kong, putting the city ahead of London and New York in sales.
In September, an anonymous Chinese bidder spent $539,280 on a single lot of 300 bottles of Château Lafite-Rothschild wine at a Sotheby's wine auction in Hong Kong.
Mr. Yao's new winery isn't his only business venture. He is the owner of his first professional basketball team, the Shanghai Sharks, and an investor in a digital-music site called Top100.cn.
Mr. Yao is also attending classes at Shanghai Jiaotong University. He is going to miss a day of school this week for one of the many launch events scheduled for the new winery.
"I'll need an extra bottle for my history professor so he can give me a good grade and let me skip his class," Mr. Yao said.
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