Kane's China Investment & Trade Blog

Interview with Richard Peng on Tencent, Tech, and Talent in China

2009-12-23T23:25:00.000-08:00

Check out Daniel's latest interview for Knowledge at Wharton with Richard Peng, VP of Corporate Development at Tencent, China's largest internet company with nearly 1,000,000,000 users:

http://www.knowledgeatwharton.com.cn/index.cfm?fa=viewfeature&articleid=2153&languageid=1

与金地集团总裁张华纲谈话

2009-11-16T21:28:00.000-08:00

最近我很荣幸得有了机会给沃顿知识在线采访金地集团总裁张华纲，谈中国房地产市场的走向：

http://www.knowledgeatwharton.com.cn/index.cfm?fa=viewfeature&languageid=4&
articleid=2139

中国低碳生活向前进展

2009-10-29T07:38:00.000-07:00

低碳生活03年出现在国际平台之前，可持续发展学说早在90年代开始不断地主张人类应当跳出单纯追求经济增长，放弃生态环保传统发展模式。人类首要的责任就是发展高新技术，实行清洁生产和文明消费，也把当代和后代人的需要一体化，成正比。最后平衡起来社会，经济，和环境各方面。 (1) 2003 年英国政府发表了《能源白皮书》，题目是: 国家怎么做有效地创建低碳经济，首次介绍了“低碳经济”理念, 也同时引起了国际社会的广阔重视。英国政府为低碳经济发展设立了一个耀眼的目标: 2010 年二氧化碳排放量在1990 年标准上减少20%, 到2050 年减少60%, 到2050 年建立低碳经济社会。通过此新的发展趋势，英国不仅把目标锁定在减少温室气体排放所做努力的结果,也投入了很多财力和静了以便显示低碳经济是经济发展、能源消费以及人类生活方式的一种演变, 也将把扎根在化石燃料能耗基础之上的现代工业社会, 转向绿色，生态经济和文明。“因此, 系统探讨低碳经济的内涵和外延, 研究低碳经济对人类经济社会发展的影响, 既有理论价值, 也有现实意义。” (2) 面临着这么大的发展挑战，该怎么办呢？可持续发展，低碳经济都取决于三方面的合作：公司，政府，和所谓无形之手。

政府：

过去，沈阳市是中国污染严重的中型城市。沈阳大气层中颗粒物和二氧化硫浓度高。因为沈阳市政府，环保局对这一潜在的危害十分重视，对各种不同类型的污染，分别采取果断措施，进行综合治理。(3) 结果是问题在短短数年内被解决。通过此例子，毋庸置疑的是政府所面临的战略性挑战具备广泛的效应，而且平时政府就是经济发展模式的主动力量。拿美国政府为例 – 其实施的“旧车换现金补贴计划“不仅仅促进了消费者换淘汰耗油车购买节能新车，（通过4500美元的补贴）按照沃顿商学院管理学教授约翰-保罗-麦克杜飞（John Paul MacDuffie）所说的，政策为了纳税人也提供了不错的投资回报。但是，世上没有免费的午餐，而麦克杜飞补充说，“不过，这轮金融危机和日益增长的高校节能需求正在给市场带来巨大变化，全球汽车工业—尤其是通用与丰田两大公司—要想适应这种变化。还有很多准备工作要做。” (4)

公司：

不管是私营企业还是国营企业，营业在资本主义格局下的公司都必须即增强生产效率，又同时降低成本。按照低碳经济理论来说，资本主义的新发展模式重中之重就是消耗缩小。现代的经济之中有各种各样的低碳生活的旗舰产品，但是，最近亚马逊所上市的Kindle电子书可能是低碳生活的导火线…”沃顿商学院营销学教授埃里克-布莱特劳（Eric T. Bradlow）说。’现在，生产的边际成本为零，库存也为零。。。无论是Kindle电子书，还是文字印刷，上述案例里的新技术，大大增加了我们接触书籍内容的机会。。。对于消费者来说，购买和阅读图书的新方式—以及新的定价点—都是全新的领域。’” (5)

无形之手:

无形的手的意思就是在资本主义的经济之下提供供应和需求的平衡。可惜的是现在，在替代能源的领域下，无形的手越来越失效。拿光伏行业举例： “光伏产业的发展一直在不断变化。过去一年多来生产厂家担忧的因素也在改变：虽然在目前的经济环境下最令人担忧的是信贷紧缩，带就在一年前情况还非常不同。当时制约光伏产业发展的不只是潜在买家缺乏购买资金，而是生产商甚至买不到制造光伏组件的原材料硅。在德国和西班牙等地，由于政府提供丰厚的补贴，太阳能技术已经逐步开始推广。但据在纽约上市的天合光能董事长兼CEO高纪凡回忆称，就在两年前多晶硅的供给只能满足光伏组件制造商二三成的需求。更多的光伏组件制造商不得不争抢稀缺的原材料，导致原材料价格走高，终端产品（光伏组件）价格暴涨.” (6)

在中国，风力的市场也面临同样的挑战。据中国风能协会副理事长施鹏飞说：“风电投资不是有过热迹象，而是已经过热了。” (7) 具有说服力的数据显示中国的风力市场从2006年到2009年，整条产业链每年发展速度超过100%. (8) 可见的是，虽然替代能源丰富了老百姓的生活，但是因为市场的商业周期不断地经历着各种动荡，所以其发展势头老是跟随着不均匀的道路。世界上的人口总量日益增加，繁荣经济的受益人范围日益扩大，老百姓生活水平的大幅度上升有目共睹，可是如果政府和企业界不共同努力，不共同找出嵌新的发展模式，那么我们目前珍惜的低碳经济发展格局快要被消失。

(1) 环境保护与绿色营销，标准汉语教程（中级第四册），上海教育出版社，上海，150.
(2) 鲍健强, 苗阳, 陈锋, “低碳经济: 人类经济发展方式的新变革,” 浙江工业大学政治与公共管理学院, 浙江杭州, 2008年4月
(3) Mickel, Stanley, “Reading Chinese Newspapers: Tactics and Skills”, New Haven: Yale University Far Eastern Publications, 1995, 62.
(4) “旧车换现金计划能否让美国汽车工业重现生机”, 沃顿知识在线，9/2/2009.
(5) 技术的演变引发出版业的革命”, 沃顿知识在线，9/2/2009.
(6) 中国太阳能企业苦寻生存之道”, 沃顿知识在线，3/2/2009.
(7) World Journal, 2009.
(8) Ibid.

中国股市暴涨具历史性的意义

2009-08-08T23:33:00.000-07:00

“为缓解市场人士对政策转向的担忧，国家发改委、财政部、央行三部委高官周五集体亮相并表态：当前宏观政策取向不会改变，将继续保证资本市场稳定发展。"(1)

作为西方的业余观察者，我针对中国股市最近暴涨的动态将试一试从西方股市历史的角度来分析其历史性的突破。为什么用“突破”这个词呢，的确是十分值得注意的。因为，中国这次股市暴涨不仅仅因为在三年内猛暴了两次，也该说是因为第二次跟着第21世纪第一次萧条。全球的资本市场压倒性绝大多数的业内人士不否认世界的经济复苏很大程度上来源于中国注资政策的有效实行及其奇迹性的成功。上面发改委所宣传毫无含义，政府没有任何缓解股市的猛涨。

值得一提的是1933美国大萧条已经延续不到四年股市就达到了低谷，总值下了90%。德国的债务市场进入了地狱。去年下半年的幅度远远比50年以来的经济衰退大。中国俗语说“身在庐山中，反不知庐山真面目”，可是六个月前，股市，甚者全经济无可置疑倾向于历史性的大跌，连一年内跌60%的可能性也无可去除。现在不仅中国股市本身大大增增，世界各地也慢慢回到健康的状态。

作为西方的观察者，我也该尽量试图多从中国本国的角度来分析。中国政府在此批注资拯救市场的措施中有两点值得我们学习：一是低价买入；二是鉴于“中国人民储蓄共和国”的国际地位愈来愈举足轻重，新兴国家看机会时，都该趁热打铁。中国早在01年入WTO的时候等着同类的商机来拿出一比巨大国资来买入国际金融市场，也同时积累其国际政治影响。如果用中国国家统计局的数字作为证据表明：中国最近的A股市场投资规模远远比06年之前大。其实06年中国A股市场的总量比05年风暴了几倍，标志着中国股市成熟下一阶段的导火线（看下面的图表1）。如果我们把中国股市最近10年的走势跟同期的中国房地产的投资做出对比（看下面的图表2），不可否认的是，房地产的投资更具周期性，增长格局很稳定。到了06年，中国股市虽然没有地产市场稳定，可该承认是其走势的相当稳定性。只不过，从06年开始，中国股市总量的暴增与其不可预料的波动幅度搭配打下了经商炼金的最初基础。

果然，西方观察者都以为中国国内生产总值的3万亿美元意味着中国经济只有美国经济总规模的1/4，但是中国通过此次注资项目信心十足地表示：按购买力两国的经济规模更接近。曾任好佛大学肯尼迪政府学院院长的约瑟夫-耐在其2008年出版的有理论性的书“领导的能力”，耐教授解释他对领导能力的“软实力、硬实力”的概念。“最后”耐说“还有一种能力比软实力和硬实力还要重要，那就是见机行事的能力，能够恰到好处地处理事情，作出决定。”（2）财政部副部长丁学东公开宣布， “下一步，财政部将继续配合有关部门健全和完善市场内在稳定机制，以保证资本市场，特别是股市稳定健康发展。”（1）意思是中国政府不将停止打下资本市场的第二层面，而作为等到市场跌到最低的波谷时的最大的投资者，中国政府本身就在显着股神的行为；幸会有中国，否则全球经济毫无机会来复苏的多么快！

图表1 - 中国交换总值:沪市A股（RMB）（3）

年交换总值
1995 304264.3
1996 930387.3
1997 1355025
1998 1230423
1999 1682630
2000 3102970
2001 1987684
2002 1644171
2003 2054125
2004 2622931
2005 1906149
2006 5724509
2007 30196028
2008 17976243
2009上半 16163417

图表2 - 中国房地产总投资额（RMB)(3)

1995 315152
1996 321644
1997 317837
1998 361423
1999 410320
2000 498405
2001 634411
2002 779092
2003 1015380
2004 1315825
2005 1590925
2006 1942292
2007 2528884
2008 3057982

（1）上海证券报 in 三部委：政策不变保股市稳定 http://business.sohu.com/20090809/n265816323.shtml August 9, 2009
（2） “领导的能力” （The Powers to Lead, Oxford Press, 2008)
（3） CEIC Data

Lynch's Ideas Today 林奇的意见无可被烧毁

2009-07-08T23:27:00.000-07:00

最近我翻过几页彼得林奇所写的《战胜华尔街》本书，特别值得一提的就是下一段：

”当时（1992年1月）不少大盘股，尤其是市场上人人皆知的成长性公司，如菲利普-莫里斯，雅培，沃尔玛，百时美公司等，股价上涨幅度明显超过了公司盈利水平，从股价走势图上看，股价线远远高于收益线，这是一个十分不好的信号。》（战胜华尔街美林奇（Lynch, P.）,(美)罗瑟查尔德(Rothchild, J.）著；刘建位等译：机械工业出版社，2007.8）。

与其相比，美国股市的现状恰恰相反从股价大跌的困境不断得崛起，从而面临着股价上涨幅度明显落后于公司盈利水平。对于集中投资组合的高明投资者、选股者来讲，目前就是有史以来十分罕见的商机。

High Inflation

2009-06-30T01:05:00.000-07:00

I was discussing college loan rates with a friend yesterday. He told me that not only has our loan provider thrown a 5.5-pt swing at us from last year to this year, but what's worse - they could potentially skyrocket with inflation if we keep them variable, which would suggest assuming a fixed rate instead of the current variable.

That got me thinking about the high inflation eras of the past and instead of wondering why this might happen, or what circumstances might cause such an environment, I would like to focus on the rumblings that I have been hearing from colleagues discussing the negative impact this could have on China.

First of all, China's monetary and foreign currency authorities are much savvier than we are giving them credit for, and I think that years ago they understood the feasibility of this type of predicament. And while I do believe the the problem is very big, it is still not a devastating blow to either the economy in China or the US-China relationship.

But here is where it could get very interesting. Although pension funds have always aggressively chosen to invest in primarily fixed-income assets, I tend to think that a sovereign wealth fund like the one China has can be slightly more aggressive than other such organizations and hence be in a position to purchase AA and above-rated bonds if they were to climb to 10+%.

Oh wait, this just in - our ratings agencies have no credibility either and China surely will not trust them any time soon.

"

Wen's Signals from Davos

2009-01-29T09:07:00.001-08:00

The article in today's Wall Street Journal regarding China Premier Wen Jiabao's implicit comments of US negligence leading to the current world financial crisis is very interesting and worth reading, but there is one part of the message that I think the paper failed to report on that should have been reported, and here it is:

鼓励区域货币金融合作，稳步推进国际货币体系多元化。(1)
"Encourage regional currency financial cooperation, stably promote international currency system pluralization."

I think the tiff that is going on between the US and China regarding holdings of US treasuries is a major issue of concern, but I do not think that we are addressing the true meaning behind China's position and their words that reflect this. This pluralization (多元化) is not about switching to Euros, Yen, and Pounds. It is about a long-term strategy for the renminbi to become the world's international currency. Inevitably this will depend on China truly stimulating domestic consumption to become the world's dominant economy, but make no mistake: Wen's comments off as much about China's long-term strategy as they do about its short-term discord.

(1) http://news.sohu.com/20090129/n261968599.shtml

Sarkozy and France Need to Read Between the Lines

2008-12-04T08:29:00.000-08:00

In recent months, Sarkozy's actions regarding the Dalai Lama and also the Beijing Olympics, has created much tension between the two countries, but now the language in the Chinese press seems to be stepping up a bit in its intensity and it would be wise for the French government to appreciate the political gravity of this situation:

刘建超称，中方已经多次就欧盟轮值主席、法国领导人执意要会见达赖喇嘛一事阐述了中方的严正立场。对于中方的立场，法方应该非常清楚。(1)

For a national press that is known in recent years for its implicit hinting at initiatives and opinions, this leaves no doubt what the message is, and we can see it in three spots in this one sentence, which roughly states that China has told the EU Chairman and French leaders repeatedly that it is not in favor of their seeing the Dalai Lama and that the French should be very aware of this.

But let's look at the language used for a moment:
已经多次 = already multiple times
中方的严正立场 = China's ardent stance
对于中方的立场，法方应该非常清楚 = regarding China's stance, France should be very clear

For me, the red flags here are the use of multiple, ardent, and very clear (in particular the 'very' in very clear). I am not suggesting that we never see strong language from the Chinese press and national spokesman, Liu Jianchao, who is quoted here. But this thorn in China's paw will not go away and they augmentation of severity in tone is a blatant sign that China is determined to rid itself forthwith of this international assault on their reputation.

All disputes of such force are simply bargaining chips in international diplomacy, and one would have to applaud France for milking this for all it is worth; in contrast, it seems as though the US has begun to move beyond the issue of the Dalai Lama. Perhaps this means that France feels they and the EU have not received enough collateral in order to drop the issue.

From a young American investor's standpoint looking at China, France and the EU arguably are simply tangential issues and do not directly affect our ability to invest profitably in China's growing economy. However, I would say just the opposite. There is much that President Obama and our leaders can continue to glean from the relationships that China has with the other major international economies, and the EU and Japan are arguably as important to China as is the US. From a human rights standpoint, I am willing to accept an ongoing debate on the Tibet issue, but from a geopolitical perspective, it is time for all players to settle up and move on.

(1) 4 December 2008 http://news.sohu.com/20081204/n261025122.shtml

REITs in China - how long, how long will we sing this song?

2008-09-25T21:05:00.000-07:00

Awesome piece from Zepplin Real Estate (26 Sep 2008 http://www.real-estate-tech.com/gb2312articles/hkej486_S.htm) on the return of REITs over the long term in which he argues that REIT returns may not be as stable as otherwise believed due to fluctuations in market rents, financing, and the 90% dividend rule. Before we get in to this, understand that REITs are very new in Asia and especially Hong Kong (just 3 years old), so much background information is needed to come on market to educate prospective investors...

In late 2005, Guangzhou's city government did a sort of "backdoor" listing of several high profile real estate investments on the Hang Seng in what has been recognized as China first unofficial REIT. The launch was both engendered by and consequently triggered huge debate about the future of this industry in China. 3 years later, we still do not have a REIT industry to speak of in China and there are many reasons for this. First of all, the whole securities market is teeming with neophytes and REITs are very complex financial instruments. The ability to master their intricacies takes years. Secondly, the real estate industry as a whole was getting far to out of hand when this REIT was listed, so the government's relevant bureaus had to take considerable action in other areas of the real estate world in China. Thirdly, at about this same time, another mounumental REIT was being listed in Hong Kong. The Link REIT, as it is known, came under immense pressure from holdouts who demanded higher compensation for the land they were giving up as well as where they were moving to. Some retailers (Link is a big retail REIT) held out for a very long time and received handsome buyouts. Finally, the REIT security model ties in deeply to the general reform of the Communist Party in recent years. Since 2001 (perhaps even as early as 1998), when it became clear that China was here to stay as a market-oriented capitalistic economy, the grandeur of communism's ideals began to fade among more liberal party members and even among some staunch advocates of Maoism. So, over the last three years, especially at the 2006, 2007, and 2008 Peoples' Congresses, we have seen this debate square off in the press and we can infer that there is a polarization of the issue at the highest levels. (Personally, I think it is great because you have a new country in which the old vanguard is disgusted at the new found wealth and glory of the entrepreneur class - has all the makings for a 2-party system, but alas, I digress). In the 2007 Property Law, things really changed for the first time as the government address the issue of lease renewals for factory owners, home owners, and commercail building owners. Now what we have is a situation where you can automotically renew your lease on buidlings you own. A small negotiation with the government and proof of ownership will show the way. Inheritance is also taken into consideration. Simple fundamentals to westerners, but for the world's largest communist country, this break down has taken an exceptionally long period of time because it places individuals that to this day believe in a panacea stemming from Communism versus extremely wealthy industrialists, cadres, and more.

Summer's Gone and We're Back from China

2008-08-29T15:45:00.000-07:00

It's been an eventful summer - May in Philadelphia, June and July in Shanghai and Beijing, and just wrapped up August in Philadelphia. Wharton-Lauder has been great so far. Let's kick off the fall by getting right into it. This past week, I saw two items of language in English and Chinese that highlighted amazing uses of colloquial language by Warren Buffett and a Chinese blogger, Cheng Shi.

Last week, Buffett, in classic form of criticizing the common Wall Street dogma showed what happens to speculators when it's time to pay the pied piper...

Speaking on Friday on CNBC television, Buffett said some housing-related businesses in his Berkshire Hathaway Inc conglomerate are struggling as the economy works off past excess in making credit available. 'You always find out who's been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach,' said Buffett, who in March was called the world's richest person by Forbes magazine.(1) This English term is eerily similar to the Chinese idiom, 水落石出, one of my favorite classics, that means literaly, "Water recedes stone out." The English version, while a bit more colorful, is far less common than the Chinese version. But, what is most interesting is how they both perfectly identify the extent and shade of emotion that accompanies a financial crisis, namely, that speculators are left standing with not security at all, a plight that is ironically derived from the asset-backed securities which created the vanished wealth in the first place.

And herein lies the link to our next headline, taken from Chengshi's blog entry this week: 油价下跌：昙花一现还是趋势反转？ (2) "Oil prices fall: is it a transient flower or the reversal of a trend." 昙花一现 means fleeting, transient, or vanishing as soon as it appears. Although the author goes on to lay out his reasons for the temporary nature of oil's recent retreat, one could read into it so much more about the state of the current world credit market. Is the volatility going to settle with a decline in world oil prices, or is the damage much deeper than investors are willing to admit?

From the view in China, there is no major economic slowdown or recession in sight. As a result, that is going to continue to put massive pressure on world commodities and drive consumer price growth worldwide. The moment at hand is thus an incredible buying period for cheap blue-chip stocks, especially those that are currently experiencing unreasonable price hammering due to credit exposure. Identifying which of these are consumer monopolies and destined to survive with high return on equity ratios is our mantra for purchasing enormous long-term returns today.

(1) 22 August 2008 http://biz.yahoo.com/rb/080822/buffett.html

(2) 22 August 2008 http://cheng10.blog.sohu.com/

A Tale of Two Chinas

2008-05-08T22:34:00.000-07:00

On back to back nights of April 28 to 29th, I attended separate talks on China that demonstrated a remarkable contrast of outlooks different interest groups have on industry in China. The first night was the latest installment of the Beijing Olympics Series put on by the Asia Society. They had some really quality speakers including Alexandra Harney, author of The China Price: The True Cost of Chinese Competitive Advantage, Paul Midler, President of China Advantage, Daniel Rosen, Principal of China Strategic Advisory, and Alan Schoem, Global Product Risk Practice at Marsh. First of all, I found their level of knowledge to be very deep, particularly Paul and Alan who waxed eloquently all night about the real challenges in China. Let me highlight a few of the issues they raised:

China makes everything, not just cheap stuff, from toys to airline parts. It's not that suppliers themselves are corrupt or skimming, but more often what happens is that they have a large network of suppliers themselves that they cannot readily police, so we have to be conscious of the whole supply chain when trying to identify problems there.

The US Consumer Products Safety Commission has about 390 employees. The equivalent body in China, the AQSAQ has 55,000!!! They are also strapped for cash and years behind the US and the EU. Moreover, the Federal Government of the US increased the budget for the Consumer Products Safety Commission to $80mm from $63 million last year, which in government budgets amounts to a huge increase.

Eventually there will be convergence in China for export and domestic quality products and that will help improve quality dramatically across the board. And, we can even see this happening today. There is a force pulling Chinese companies up the value chain and it is not just the CCP. They want their own brands now, and in order to receive marginal value for the products under those labels, Chinese companies will have to dovetail marketing with quality. Consider Haier. 10 years ago, no one in America knew this white goods maker. Now they have a substantial chunk of US market share in air conditioners and more.

Quality problems in China amount to one of two basic problems.
1: factory didn't know better - specifications mistake
2: willful corner cutting

AQSAQ can help to solve #1, but there is really little the organization can do about #2. Maybe penalties, maybe enforcement, but really very little in general.

The overriding theme of the night was that at the heart of the problem, and where the real responsibility lies is with corporations as huge as Proctor and Gamble all the way down to my business - it is with the exporters, the importers, and the factories. It is our job to make sure that quality is tested and bad product is not released.

The will is certainly there to change certain industries. For example, Mr. Schoem talked about the fireworks industry in Hunan Province, whence comes over 60% of US imported fireworks. It turns out that a number of years ago, the US Fireworks Standards American Fireworks Safety Lab was created to pemit imports of fireworks under the agreement of enforcement of stringent safety requirements. Hunan's government worked closely with the US authorities, and today, 90% AFSL-tested fireworks from China comply with mandatory standards. That compares with rates as low as 50% for compliance of similar product from other countries.

This is a nice segue into the talk on the 29th, when James Filippatos, Assistant Administrator for International Aviation at the Fedearl Aviation Administration (FAA) gave a talk at the National Council on China-US Relations. Mr. Filippatos' talk was truly a gem. He described his experiences in China with aplomb. Moreover, he introduced to me the fact that over the last four years, Chinese aircraft have had the safest record of any country in the world. He then reminded us that 15 years ago, Chinese planes were so dangerous that the US would not let them fly here. Now there arae 23 daily flights between the US and China and that number is sure to grow rapidly. The Chinese equivalent of the FAA, the CAAC, got together with the FAA to make this all possible. They emphasized that no matter what, the Chinese market needed better pilots, airplanes, and operational know-how. According to Mr. Filippatos, this is an unprecedented success story for the FAA and CAAC. The two bodies have trained hundreds of personnel and generally instilled a desire to constantly improve. We reap the benefits of that improvement every day.

Quick fact - one of the major factors deterring the expansion of its domestic commercial flight industry is that China's military controls 80% of the skies in China. The US equivlent is may 2 - 3$%. Wow - that negotiation is going to be a very long process. D

Moreover,

Blood in the Streets

2008-04-23T11:46:00.000-07:00

I saw this in the Shanghai Daily yesterday and realized that it's official: there is now blood in the streets all over Western Europe and the US in terms of the property sector:

"Spanish builders are tempting reluctant home buyers with free cars, mortgage holidays and hard cash as they try to lift the crisis-hit housing sector. Some are also diving into the rental market. At this month's annual property fair in Madrid, the number of promoters was down by a third on the previous year, many of them victims of the deepening housing crisis. With fewer buyers milling between models of white-washed housing estates, there were scant queues to see sales representatives." [1]

The question is, why did this appear in the Shanghai Daily? The answer: propaganda. The regulators in China have continued to put enormous pressure on the property sector and as a result, they need to be able to justify their actions. One way to do that successfully is to point the finger at the alternative, which conveniently is much worse right now. In fact, this is great for the government as they take aim at developers and buyers alike in a common chorus, "Slow down."

[1] April 24, 2008 Harding, Ben and Clara Vilar, Copyright Shanghai Daily Information Network

Lobbying in China

2008-04-18T03:05:00.000-07:00

Scott Kennedy's 2005 "The Business of Lobbying in China" is interesting. It's one of those books that is extremely exciting at the beginning as he breaks down how major corporations lobby in Beijing and get together in some instances but often times point the same finger at each other. However, at one point, he is so unsuccesful in keeping the reader involved because he gets so caught up in the names, functions, and history of China's major commercial associations, such as the SELA, PEA, CTVEA, ACFIC, MOFERT, and many others. Nevertheless, there are some interesting revelations, such as the fact that ACFIC, a non-profit organization, publishes the China Business Times. Also interesting was that the roots of the current associations system emerged out of the Mao era, which seems strange given the fact that these are very commercial bodies today. Back at the very beginning of Maoist China (early 1950s), being private was acceptable, however as time passed of course it became terribly taboo. Consequently, many of the associations that were built on private businesses shut down or suspended operations until the late 1980s.

Asia Society Meeting on Carbon Trading

2008-04-08T12:00:00.000-07:00

Last night (4/7/08) at the Asia Society in New York City (70th St/Park Avenue), there was a terrific talk entitled "Carbon Trading Update: Business Opportunities for Asian Sustainable Infrastructure".

The main point of the talk was laid out early on by moderator Jon A. Anda, President, Environmental Markets Network and a trustee for the Asia Society (also a former Vice-Chair at Morgan Stanley).

Mr. Anda went through some basic background of the last several years that the carbon trading market has been around. He said that:

-Efficient CO2 mkt enables an efficient dynamic hedge of climate risk

-We don't have the tools yet to hedge the risk of BAD climate changes - the technological "tools" are simply not there yet

-We must limit quantities because you simply cannot tell people to "stop using carbon" and then just tax them more, for it will turn out like the cigarettes epidemic, where smokers just keep smoking and paying the higher taxes

If the US went to 80% reduction (70% by Senate) off its current usage ('08), the EU: 60% off it's 1990 usage (Merkel), and China 35% off its projected 2012 usage totals, then we would have an industry of hundreds of billions of dollars indeed possibly trillions.

And continued with the goals of the discussion, specifically to answer the following:

Carbon Trading: Is it a Good Idea?
Carbon Trading: Can it work?
Carbon Trading: Does it have a chance of being adopted in the US and then globally?

It was my general feeling that the panel of four that Mr. Anda moderated all answered yes to those three questions in one form or another.

First, a couple of definitions that I had no knowledge of going into the evening:

CCS - Carbon Capture and Storage - (from Wikipedia) Carbon capture and storage (CCS) is an approach to mitigate global warming by capturing carbon dioxide (CO₂) from large point sources such as fossil fuel power plants and storing it instead of releasing it into the atmosphere. Technology for large scale capture of CO₂ is already commercially available and fairly well developed. Although CO₂ has been injected into geological formations for various purposes, the long term storage of CO₂ is a relatively untried concept and as yet (2007) no large scale power plant operates with a full carbon capture and storage system.

CDM - The Clean Development Mechanism - an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex 1 countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. A crucial feature of an approved CDM carbon credit is that it has established that the planned reductions would not occur without the additional incentive provided by emission reductions credits, a concept known as "additionality". (Wikipedia)

The panel was awesome. It featured:

Paul Ezekiel, Head of Global Carbon Trading, Credit Suisse
Peter Ho, Country Director, China, EcoSecurities
Timothy Profeta, Director, Nicholas Institute for Environmental Policy Solutions (@ Duke)
V Raghuraman, Head of Energy, Envt, & Natural Resources, Confed of Indian Industry

The contrast of opinions and projections was awesome. If I could highlight one major point I took from each panel discussion member, it would be:

Ezekiel:
The CDM has 2 phases:
2005- 2007, which failed miserably because of its market design in which over-allocation of free carbon allowances killed the market, and we saw 0 impact on emissions.

2008-2012 Expecting much improvement based on a new market design and many of the "kinks" worked out.

Raghuraman:
India: A mixed outlook on CDM because they started late and as such are forced to mitigate.
Most big industrial players in India are public, however most initiatives come from the private/NGO sector, therefore we see a disconnect right now between those that want to implement and those that should implement. In fact, many of India's upcoming projects are not looking at CDM.

Profeta:
The US political outlook on the subject in terms of chances of passing this bill are:
10% chance this congress
90% chance next congress

All US presidential candidates: Clinton, Obama, and McCain are in favor of a system, most strongly backed by McCain of all candidates who got on board back in '01. This will happen next presidency (we should note that the McCain - Lieberman Carbon Reduction Senate Bill was written by Dr. Profeta, and later it transformed into the current McCain-Warren Bill) There will be a debate on Senate floor before the Memorial Day recess. The US is studying a 70% reduction in emissions by 2050 from the 2005 level.

There are currently 2 main issues:
1) CDM is under political attack
2) The US can and probably will go to another trading system and only allow for 15% of its emissions buying on Europe's carbon trading markets

There are 45 billion pounds of greenhouse gases released into the atmosphere every year
67% of the total between now and 2050 is in the US and China.
Therefore, a bilateral deal could solve 2/3 of the problem

Ho
There are profit model issues here that need to be considered.
They looked at a wind farm investment in China that had an IRRof 4-5%, but if CDM credit trading could have been included, then the IRR would jump to 9-10%.

Moreover, this credit trading system is opposite to traditional building. In housing, you get the loan first, then you build. There are no such loans for CDM structures - you only enjoy the benefit three years after the reduced emissions are realized.

Remarks about Guanxi

2008-04-06T10:44:00.000-07:00

My weekly book review this week brought me back to a fantastic publication from 1994 entitled, "Gifts, Favors, and Banquets: The Art of Social Relationships in China" by Mayfair Mei-hui Yang. This is an incredible piece that goes through the history of Guanxi and also some proven techniques that shed light on how to effectively work through getting things done in China. There is so much to be said on this topic, but I want to include a quotation from the very beginning of the book which provides a historical root for the practice in China. Before reading it, here is the lesson: giving and receiving is a fact of life, rite, etiquette, and ancient precedent (the source, The Book of Rites, is from the first centure BC) in China, and it needs to be studied cautiously as part of any due diligence or planning period in investment ventures in China.

太上贵德
其次务拖报
礼尚往来
往而不来
非礼也
来而不往
亦非礼也

Translation:
In the highest antiquity they prized (simply conferring) good;
in the time next to this, giving and repaying was the thing attended to.
And what the rules of propriety value is that reciprocity.
If I give a give and nothing comes in return,
that is contrary to propriety;
if the thing comes to me, and I give nothing in return,
that is also contrary to propriety

-Li Ji (Book of Rites) "Qu Li,"
1987:7; Legge 1885:65 [1]

[1] Yang, Mayfair Mei-hui, 1994, New York, Cornell University Press.

China, Laos, and the ASEAN sphere of influence

2008-04-04T06:40:00.000-07:00

When I saw this headline, "Laos: Laos-China trade reaches 241 mln USD" I was immediately reminded of my trip to Laos last year. [1] No, it wasn't the beautiful temples in Vientienne, or the awesome scenery throughout the hills, nor the hiker paradise around Vang Vienne, nor that amazing coffee shop (and greater commercialization in general) in Luang Pra Bang. What struck me about this was just how readily apparent China's sphere of influence has become over the last five years in ASEAN, nowhere more apparent than in Laos. We crossed the border into China by bus in February of 2007, in a very similar fashion to how I had done so 5 years earlier. The glaring difference was that 5 years ago, the Laos side of the border was a no-man's land but the it was absolutely under the total control of the Laos authorities. Even though Chinese cars were crossing through at that point, they were still dealing entirely with Laos border patrol. Last year was totally different. Instead of dealing with Laos patrol, Chinese tourists were being carted through exclusively by Chinese tourist group leaders backed by pseudo-China authority. It was incredible! They barely even acknowledged they were in another country. Moreover, you could tell who was paying whom under the table, and to my even greater shock, the Laos authorities did not pay even nominal attention to what the Chinese tourists and group leaders were doing logistically to get across the border. Well, I guess that's how it is now.

General Liu Yazhou on China, Japan, and the United States (Part II)

2008-04-03T10:33:00.000-07:00

In the second part of General Liu's interview, he continues with his smoke and mirrors by challenging the common notion that China is the major enemy of the US in the current global environment. Instead, General Liu contends that Japan has continued to be the US' top concern over the last 60+ years and that remains in effect today,

"I have always believed that the primary adversary of the United states in Asia is not China but Japan. It is quite probably that not a few knowledgeable persons in the United States share this belief. The United States defeated Japan sixty years ago. That was a difficult and hard-fought battle for the United States, and Japan left it with a deep impression indeed. Japan's stalwart national spirit, well-equipped educational system, and highly developed science and technology - all these combined drew respect from the world. In Churchill's words: "Japan's war machine is frightfully efficient." In only three months' time Japan drove the British and U.S. forces out of the Pacific and Southeast Asia. What country had done so in the past? And what country will be able to do that in the future? Toward the end of the war, when Japan was at the end of its tether, it still drew up a plan called 'break a hundred million pieces of jade [committing suicide].' Awed by this display of determination, the United States finally resolved matters by dropping the atomic bomb. What sort of understanding did the United States gain by fighting this war? It concluded that Japan was a fear-inspiring enemy. The qualities a country displays in wartime can also be displayed in times of peace, although in different domains. This is manifestly evident from Japan's post-war flying economic advances...Japan was a pile of rubble in 1945. It was more or less the same level with China in the 1960s. Then China started its 'Great Cultural Revolution' and tormented itself whereas Japan's economy began to take off. in less than twenty years, Japan left China far behind and was way ahead, catching up with the United States. However, the United States consistently kept a choke hold on the Japanese economy. Japan was highly adept at manufacturing 'small' products but could not make a single 'large' product. Then, with the advent of the science and technology revolution, Japan once again tried to push ahead. Not daring to leave matters to chance, the United States hurriedly concocted an Asian financial crisis and succeeded in curbing the impetus of Japan's spurt forward. The United States knows that China is a country that places inordinate importance on ideology, goes to extremes, is very good at waring itself out, or what might be called "self-destructing," and cannot get is act together. The Japanese are a highly cohesive people. China is like an old man; Japan is like a youngster. China is lethargic, whereas Japan brims with vitality. That is why the United States is much more wary of Japan than China."

I'll interrupt General Liu here only to say that he is sending a signal here. Everything that Japan did from 1960 to 1989, China has now duplicated in every respect other than the average standard of living for its people. Infrastructure is world class, technology has moved forward, higher education is booming, and the people feel young again. Moreover, there is a determined advance underway in China's political circles - the leaders are made by the time they are forty. Many of our closest colleagues in government are making impacting economic decisions on their locales and these leaders are usually between 35 and 45 and have extensive experience abroad. The old man argument does not fool anyone. If anything, it expresses the fact that China finds itself wiser and more capable of taking on an opponent years ahead of it.

General Liu continues,

"That is why the United States has kept Japan so rigidly under its thumb. The United States is much more wary of Japan than of China. So now we can understand why the United States formulated a peace constitution for Japan, a constitution under which Japan forever anjures warfare. The United States is very selfish. It is not doing this for China or Asia but only for itself. It has done this so that when it eventually dominates the world it will have one less opponent and one more helper. In accordance with the U.S. design, today's Japan has become an economic colossus but remains a military dwarf and a political midget. As Shintaro Ishihara put it, "The United States has cut away Japan's testicles and Japan can only serve the United States as a court eunuch." Today, Japan is literally and faithfully serving the United States as a global court eunuch."

Well, I do not want to treat General Liu's metaphor with any type of indifference, because the truth of the matter is that I could not agree more. For a nation as militant as post-Meiji Restoration Japan was, the US has certainly caused an unnatural turnaround in their sovereign mission. Perhaps General Liu then is also signaling a glaring opportunity for China's sovereign desires.

General Liu also mentions that the US has put up more defenses against China in the forms of Taiwan and North Korea...

"The United States feels that having Japan as its only military dog is not enough, so it has bred the 'Taiwan Independence' military dog. These two dogs are keeping watch for it over China...The current focus of the Asian strategy of the United States is on firmly controlling Japan and at the same time guarding against China. 'Hold on to one, and keep an eye on the other.' And if possible possible, 'Swallow' yet another. Which one? North Korea."

General Liu seems to make a good case for the US' recent policy in Asia. I believe that once again we are going to see a war fought in North Korea, but this time it will be political and economic, not militaristic. Frankly, the recent negotiations between South and North Korea about liberalization would seem to favor the United States, as South Korea is every much in the US' pocket as it is in China's. However, if you talk to entrepreneurs in China, many of them have been buying and selling across the Jilin border town of Dadong into North Korea for years now, apparently giving the Chinese the upper hand in terms of economics. Of course we know that the US has an uphill battle to fight politically, given that almost all of North Korea's anti-West rhetoric over the last 50 years has been explicitly aimed at the US. Moreover, during that time big brother China was North Korea's only true ally. Nevertheless, if the US can meander into North Korea's political circles through South Korea, then it ultimately will have the best chance at setting up another front against China.

Finally, General Liu hits on a subject that really makes one think...

"However, that is not the end of it. The Asian strategy of the United States has still another and deeper level, a core level-preventing China and Japan from joining hands...Everyone thinks that is impossible, but Americans believe it is possible. Americans are always able to look ten or more steps ahead when they formulate strategy. We are doing quite well if we manage to look one day ahead. They are able to look two days ahead, three days ahead, and even farther. The biggest difference between China and the United States is the difference in the level of strategic considerations. The United States takes the whole world into consideration, enabling it to look farther ahead. Our perspective is regional, and that is why we are a notch inferior in our calculations. The United States knows that under the present circumstances, its position in Asia cannot be shaken by the individual power of either China or Japan, and the sole possibility of anything happening is if china and Japan join hands."

True. And we also have to read between these lines and realize that even General Liu himself finds that condition impossible under the present circumstances, because he knows that the leadership in Beijing and the will of the people of Japan is nowhere near ready for this. Why? First of all, because life for Japan has been great under the direction of the US. Moreover, the economic benefits that Japan enjoys from its trade relationship with China fall far short of the total benefits it receives in return for its current relationship with the US, including: greater access to world capital markets, a steady flow of immigration to the United States, preferred status among other nations for entering and leaving the United States, preservation and growth of its own culture, the highest standard of living in the world, etc. Can China offer this? Moreover, can China get over its own animosity for Japan? That of course remains to be seen.

[1] Chan, Alfred L Chinese Law and Government, vol. 40, no. 2, March - April 2007, pp45-49

General Liu Yazhou on China, Japan, and the United States

2008-04-01T05:06:00.000-07:00

Last week I read one of the most astonishing and in-depth policy papers about the Chinese point of view of East Asian military strategy that I have ever seen. It was so impressive that I think it deserves a summary and comment here. I must mention the whole essay is actually excerpts from an interview between General Liu and a reporter from a 2005 article in the Beijing monthly, Dazhanlue guan. Our source is the translation found in the March - April 2007 edition of Chinese Law and Government. This article is so impressive and causes for cogitation on so many issues that I will have to devote more than just one entry to it. Finally, a brief introduction on General Liu copied verbatim from the beginning of the journal is as follows, "The son of a regular soldier in the Eighth Route Army, Liu was born in 1952, joined the People's Liberation Army (PLA) at age fifteen, rose through the ranks accruing extensive command experience, and became deputy political commissar of the PLA Air Force in 2003. Also an accomplished and prolific writer of report literature and novels since the 1980s, Liu has increasingly turned his pen to strategic thinking and military matters and is now one of China's most influential strategic thinkers." [1]

Interestingly enough, Liu starts with Europe before getting into the discussion of East Asia. He states, "In those years (post-WWII), the United States adopted a defensive stance in the face of the menacing concentrations of Soviet tank formations. But now the Soviet Union has collapsed, and the United States has gone on the offensive. However, one should not infer from this change in its offense-defense posture that the United States has shifted its strategic focus away from Europe. In fact, so long as the U.S. objective is to dominate the whole world, Europe reamins its center of gravity, its basic bearing point. It plants one foot on its own land - the United States - and the other foot on Europe. Doing so enables it to stretch out both its arms to cover the whole world. Asia does not furnish the conditions for shoring up the U.S. ambitions...When the Iraq war broke out, Europe saw through the United States' intention of controlling the center of the world as a prelude to taking control of the European continental plate, and they opposed that war with exceptional vigor - in fact, more vigorously than some of the Arab countries. But the United States fought the war anyway, and Europe was forced to swallow the bitter pills."

Fascinating. This is something that stares us smack in the face every day, but I believe we often forget about or overlook the significance of our military bases in Germany and southern Europe, or the reason the UK followed us right into Iraq with barely even batting an eye. The question is, what impact will this have on our Asian strategy?

Before he gets into talking about Japan, he spends a quick minute on a key point about the oversight that most Chinese have when studying the Taiwan issue,

"Those of us who have a world perspective can sense the heavy pressures to which others are being subjected, but those of us who merely have a Chinese perspective only sense that the United States is using the Taiwan issue to cause trouble. Actually, the pressures to which China are subjected are relatively minor compared to those offered by other countries and especially Russia. At first sight, it would seem that the exacerbation of the Taiwan issue places China in a dilemma. If China engages in an all-out arms race with the United States or, in other words, engages in an all-out arms race with Taiwan, it will ultimately be worn down by the United States, just like the Soviet Union. Yet if China maintains a policy of low military spending and devotes its financial resources to economic construction, the disparity will further increase and China will be helpless before the U.S. military blackmail."

From General Liu's perspective then it seems as though China has no way out. But much of this comment is smoke and mirrors and not a very good job of misdirection at that. What we should read between these lines is that there is no intention of China to engage in an arms race with T@iw@n (TW) when it fully believes that its colossal economic influence over TW can be converted into an equally effective political influence over time. Hence, one of General Liu's implicit suggestions of how to resist the expanding US world takeover is to be fought on the steps of the Yuan and TW's other political institutions. This goes a great way to explain why the Communist Party has been so active in inviting TW's leaders such as Lien Chan to tour the mainland and strengthen the political ties between the "two" countries.

[1] Chan, Alfred L Chinese Law and Government, vol. 40, no. 2, March - April 2007, p3

AMB Expanding China Holdings

2008-03-30T19:27:00.000-07:00

I must say that I was extremely pleased to see that AMB is growing its China portfolio. As a believer in the enormous potential value that China's real estate industry holds for experienced American developers and real estate asset managers, I trust that our country's top firms will derive enormous profits from China in the future. On Saturday, the Shanghai Daily reported that,

"AMB Property Corporation, a world leading developer and owner of industrial real estate, announced yesterday that it had acquired approximately 133,100 square meters of land in the Xiuzhou Logistics Park in Jiaxing of Zhejiang Province. The company said it planned to build a 74,612-square-meter distribution center on the site, its latest effort to expand its distribution network throughout the country...AMB announced earlier it planned to operate US$1 billion to US$1.5 billion worth of assets in China by 2010. It currently runs a portfolio of approximately 185,882 square meters of distribution spaces in Shanghai, Kunshan and Ningbo. ProLogis, a United States developer, owner and manager of distribution facilities, has also recently expanded its footprint in the city through land acquisition in the same logistics park." [1]

If you look at AMB's past, China is a natural fit for them because they tend to raise their money privately. That matches well with the value-based investing that long-term investor industrial real estate investors are looking for in China. As Moghadam says, AMB, " 'has never raised money on Wall Street beyond our IPO.' Since its initial public offering, AMB has gone in the opposite direction of most REITs by retiring more than 6 million shares of stock through buybacks." [2]

AMB raises most of its cash through private capital - institutions and other funds that look for a leading industrial real estate firm to offer predictable returns on prime industrial complexes. What's amazing about AMB because it is an industrial REIT, its fortunes are barely connected at all to those of the general residential real estate market. In fact, its 2007 earnings of $2.96 per share were nearly triple 2006 earnings and almost double 2005 earnings. [3] Hence, while the residential market was still booming in the US, AMB was going through a bit of a slump. Likewise, while the residential market began to tank, AMB's profits grew nicely.

AMB is also a company to take note of because its approach. This move into Jiaxing, along the Yangtze River Delta, should signal to investors that the company now has its feet wet in China after investing in Shanghai, Kunshan, and Ningbo. Therefore, it will feel comfortable going after properties that need greater managerial expertise to derive value out of them in order to really position its investments in China to derive significant profit margins.

[1] by Cao Qian 29 March 2008 Copyright 2008 Shanghai Daily Information Company
[2] Bergmann, Paul, Maverick Real Estate Investing, Copyright 2004 by Literary Productions
[3] Standard and Poors, March 30th, 2008

China vs Rio/BHP

2008-03-20T08:35:00.000-07:00

The standoff that is going on right now between Rio Tinto, BHP Billiton, and China is amazing. This is one of China's very first tests of macro supply chain that will determine how much China can control price hikes in iron ore for decades to come.

China has summarily refused to accept Rio Tinto and BHP's 71% price increases.

Although they seem to indicate that the reason is the increase is too high, that is a bit hard to accept given that they handled Vale's 65% price increase just two months ago. No, there is much more at stake with Rio Tinto, BHP, and China.

China wants a much bigger piece of the deal this time, and they have decided to strike while the iron is hot. If they can continue to stave off the spot market shipments for a few more months, Rio Tinto and BHP will effectively lose several billion dollars in revenue. That may cause the market to hammer their share prices and give China more leverage to buy a much larger stake of the planned merger than was originally anticipated. My guess is that China wants at least 25% of the new company with two or three board members to boot.

This battle is about the future of China's steel industry and several downstream industries that flow from there such as automotive and construction. They are betting that they can sweat it out longer than BHP and Rio Tinto's shareholders. My guess is that they are correct.

Maotai: A Consumer Monopoly?

2008-03-13T06:49:00.001-07:00

I was particularly struck by an article I read last week that mentioned Maotai liquor's net profit was up over 83% last year. [1] That's a phenomenal year by the measure of any mature growth stage company, and it is strange to see beverage companies produce such amazing results.

Given that I am a huge fan of the Oracle of Omaha, Mr. Warren Buffet, I began to wonder, would Buffet ever consider investing in this company? What I am really interested in is whether or not Buffet would consider Maotai Liquor a consumer monopoly?

I believe it is and here is why:

With rare exception, no matter what liquor shop or decent restaurant you go to in China, the vendor must provide certain brands off baijiu (sorghum wine - Chinese vodka/whisky). It is my belief that one of those two is Maotai. (The other brand in my opinion is Wuliangye).

An extension of this means that Maotai will be able to dictate to its vendors price increases, instead of the vendors putting pressure on Maotai that they will cease to carry Maotai unless they lower prices. Evidence of that came in the same article..."Kweichow Maotai has raised ex-factory prices of it s products by an average of 20% from January 11." [1] Again, the distributors and retailers are really helpless to rises in factory prices of Maotai because they have to carry the brand or they will lose patrons.

Next, how recognizable is the brand? Well, Maotai liquor is not only recognized among the Chinese domestically, but I would say that millions of foreigners from an earlier generation could even tell you that Mao Zedong's "official" drink was Maotai. Despite that bit of infamy, Maotai is definitely one of the most widely recognized brands in all of China.

Finally, can Maotai lose this positioning? Can management "screw things up?" I doubt it. Again, typical of most consumer monopolies, once you attain a certain position in the market, it is very difficult to screw things up. Even if millions of Chinese started overdosing on Maotai at local restaurants, I simply cannot see any way the Chinese government would let them go under. Remember, the vast majority of Maotai is being consumed in China. Thus, despite the international brand recognition, the baijiu is being consumed domestically, so any problems that may arise would be considered a "China" problem and not subject to outside political influences.

This means that for those fundamental investors, do your homework and research Maotai's traditional PE ratios and return on equity numbers. Then, sit back and wait for the market to hammer its share price, and then jump in and hold on for the long term.

FDI 'Slowdown' in February is Comical

2008-03-13T06:20:00.000-07:00

According to an article in the Shanghai Daily today, Foreign Direct Investment into China slowed drastically to a year on year rise of...38.3%! [1] You know times are good when slowing down to 38% growth represents a drastic reduction. Of course, when your main barometer shows inflation charging ahead at 7 - 9%, then you probably need that much growth in investment just to stay ahead.

What really struck me about this article however was the following...

"New foreign-funded firms fell 38.02 percent to 1,454, as investors focused on bigger and more capital-intensive projects, said Li Maoyu, an analyst at the Changjiang Securities." [1]

As a sign of the times, this plainly means that the central government is much more interested in encouraging larger scale projects that not only will help the macroeconomics of China, but also are more easily controlled by the central authorities. Furthermore, it is a sign of the continued changing demographics of China as urbanization continues to steamroll ahead and China's tier-2 and tier-3 cities consolidate and attract millions of migrants.

[1] Wang Yanlin, Shanghai Daily, March 13, 2008, (c) Shanghai Daily Information Company

China Transportation - Subway or Rapid Transit?

2008-03-11T05:06:00.000-07:00

Earlier this week, the following story about Wuhan's subway system expansion really struck me,

"City In Central China Plans To Spend $40B On Subway System...Wuhan, capital of Hubei province, plans to spend CNY300 billion (US$40 billion) to expand its subway system, Xinhua said. It will be extended from seven to 12 lines with 309 stations by 2015. Once the expansion is finished, 66% of the city's 8.7 million people will be able to find a subway station within 600 meters of their home, Xinhua said." [1]

Certainly for China's mega cities, of which Wuhan truly belongs in the mix, building a massive underground system is in order and will effectively reduce congestion in the years to come. But, what about China's smaller cities? Does the benefit outweigh the cost for cities such as Qingdao, Dalian, and Shenyang? Are there better and cheaper alternatives for Wuxi, Changzhou, Suzhou, and Hangzhou?

Yesterday, I was given a fantastic opportunity to put that in perspective when I visited with Professor Ralph Gakenheimer of the MIT's School of Architecture and Urban Planning. Dr. Gakenheimer specializes in urban planning and transportation planning and brought to my attention an interesting alternative to subway lines that has really caught on in Latin America, Europe, and increasingly the North America and Asia. That system is something called Rapid Bus Transit, or Rapid Transit. What happens in a system like this is that the municipality builds an extra lane exclusively for buses that will stop only at express points in a city or along a highway. To get on and off the bus, you need to have entered similar to a subway where your fare is already paid so that passengers get on and off the bus quickly. Dr. Gakenheimer says average stop times are reduced to 20 seconds and falling.

But, the real advantage to the system is the cost savings it offers a local government. Subway lines cost approximately $100 million per mile in the US (costs for China are unavailable). Rapid transit lanes, however, cost between $10 and $15 million, representing savings of between 85% and 90%. That is a tremendous savings and Professor Gakenheimer indicated that many of China's emerging 2nd and 3rd-tier cities that are dreaming of subway systems would be better suited to start preparing to build these alternative and more cost effective systems.

March 4th Asia Society Talk Notes

2008-03-06T11:35:00.000-08:00

I had the absolute pleasure earlier this week of listening to four China hands talk politics, law, economy, and much more at a meeting at New York's Asia Society on Park Avenue in New York. Moderating this four-person discussion was Howard Chao, Partner and Head of Asia Practice for O'Melveny & Myers LLP. He was joined by Nicholas Lardy, Senior Fellow, Peterson Institute for International Economics, Jonathan Woetzel, Director, McKinsey & Company, and Jimmy Hexter, Director, McKinsey & Company. Woetzel and Hexter's new book, "Operation China: From Strategy to Execution" was available after the talk for attendees. Here are some highlights from the talk:

Dr. Lardy began the talk with an overview of China's macro-economic barometers. One of th things I found most astonishing was that China's current account surplus is between 10 & 11% of GDP. By comparison, he noted, Japan's greatest account surplus in the 1980s was 4% of its GDP. That means that China seriously has a lot more cash stored up than even Japan did.

He went on to say that the jump in China's prices is not restricted to just food prices and the overall CPI, but rather the PPI, a barometer of price movements in machinery, is also up and accelerating more aggressively than the CPI.

Next, he talked about why there was so much craze for investments in stocks and real estate by showing us the following:

CPI: up 7%
Savings % offered by banks: 0.71%

So, your real savings rate is greater than negative 6%. Apparently, this is a textbook case of how you create a bubble in other asset classes. Of course, when you have 300 million people urbanizing, you are going to need huge amounts of capital investment in capital-intensive projects.

Next, Dr. Woetzel noted some interesting trends as well going forward...

Migration: From 1990 to 2007, apparently 250million urbanized, but mostly through establishing new cities and shifting boundaries. That's not going to happen because of land restrictions in the future. Effectively since that time, there have been only 100mm migrants to the major cities. Looking forward, there will probably be another 250mm migrants headed for the cities and a total urban population of 1 billion urban.

That is going to drive macro costs of health, education, and food way up. And the greatest burden will likely be on 3rd and 4th tier cities.

Jimmy Hexter then weighed in on China business strategy by explaining that the winners in China historically were those that executed bold strokes of strategy - whether through gaining advantageous licenses, exclusivity, or other sundry tools. However, as we look forward, the winners will most likely be those that deliver excellence of execution. Specifically, companies that can migrate world's best strategies and get their domestic operations to perform better at sourcing, procurement, manufacturing, sales, distribution, and development will win.

By his account, there is an enormous opportunity to improve performance in China, with increasing outputs by 30-50% via this shifting global best practices to result.

60%+ of exports are machinery and electronics

As far as the effect any rising world raw material prices will have on causing countries to shift to Vietnam and other Asian export economies, not likely to happen any time soon. Dr. Lardy cautioned us to remember that Veitnam's total exports amounted to $40billion in 2007, whereas
China's topped $1 trillion.

There was also a discussion of the transient talent pool in China. Here's why they move from one job to another:
1) Influence - want opp to drive performance
2) Promotion
3) More money

What they really want boils down to greater inclusion and recognition. Until they get it, we're likely to continue to see rates as high as 40% job turnover every year in China (in the US by comparison, it's 20%)

The final major topic that was discussed was capital flows in China. What we are seeing is huge amounts of capital being raised around the world, and a good portion of it is flowing to Asia and in particular, China and India. China has become a gigantic player in trade and finance, yet locally, allocation of capital has been poor because, as a result of the negative savings rate mentioned above, a large swathe of unsophisticated investors operating under duress are forced to enter a capital market that they do not really understand.

There was a great comment made about private equity investments in China. Apparently, right now, the players there that are doing well are small China private equity companies that are doing well investing in small companies with niche regional markets. For large caps, it is difficult right now because of high valuations, struggles for control, and disagreements over management.

This was a great talk put on by the Asia Society and we will continue to update you as more relevant talks occur.

Non-communist Officials - What a Joke

2008-03-03T21:33:00.001-08:00

Boy this type of article really pisses me off...I simply do not understand this: "China to opt for more non-Communist officials." [1]

The article begins by stating, "More eligible non-Communists are expected to become high-ranking officials in China following last year's appointments of two non-Communist ministers, said a spokesman of the forthcoming annual political advisory session. Many non-Communist personages have taken up posts at government departments and judicial bodies since China started its reform and opening up (toward the late 1970s), said Mr Wu Jianmin, spokesman for the First Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC). Mr Wan Gang, of the China Zhi Gong Dang (Party for Public Interest), was appointed minister of science and technology last April as the first non-Communist party cabinet minister since the late 1970s. Two months later, Mr Chen Zhu, non-party member, became minister of health. Their appointments represented major moves of the Communist Party of China (CPC) in enhancing socialist democracy and pushing forward multi-party cooperation and political consultation under the leadership of the CPC, Wu said at a press conference on the eve of the annual political advisory session."

Sorry folks, that is what is known as propaganda and I have a real problem with it - the same type of irk I recall when reading about the labor unions in WalMart that were headed by communist party members. Here's what bothers me so much. It's the way that the central communist party believes that things are really different in this dynasty. They're not. The power structure is still in tact - strong central monarchy backed by a unifying military and pervasive dissidents throughout the provinces with growing wealth. The only difference this time around is that Beijing has to deal with the whole outside world, and not just 'the old barbarians at the gate.'

Now we get this...two minsiters appointed from without the ranks. Can they defy the party? Can they provide some basis for checks and balances? Can they survive by taking a position of dissent? Let's ask Zhao Ziyang how that worked out for him. That's like an all-star game in basketball - you know, the type of game where everybody is really on the same team, nobody's fouling, nobody's playing defense, and the outcome is really just nominal. That's my microcosm for these appointments. The message is clear: Life is quite good in the political spheres of China these days.

China Technology Gap Narrows

2008-03-02T21:16:00.000-08:00

Interesting article yesterday in Maeil Business about the technology gap shortening between Korea and China...

With Chinese enterprises pursuing at a frightful speed by means of an industrial spy or imitating industrially advanced nations, the technology gap between chief industrial corporations of Korea and China was found to be narrowing at a fast rate. According to the Korea Institute for Industrial Economics & Trade (KIET) on Sunday, a research conducted November last year, on 608 major companies in 10 core industries such as automobile, electronics, shipbuilding and semiconductors, evaluated the overall technology gap between Korean and Chinese manufacturing industries at 3.8 years. Technology gap between Korea and China had been evaluated at 4.7 years in 2002, 4 years in 2004 and has continued to narrow down.[1]

Now, I really have no idea how you would effectively measure this; it seems so onerous and dubious, yet at the same time it does seem to me that Cherry cars are about 4-5 years behind Hyundai cars and Haier is about the same length behind Samsung in electronics. But, I am not so sure how far you can go with this. For instance, there really are no major Korean lap top manufacturers out of Korea that we see competing on a global level on a daily bases. Moreover, when was the last time you saw a Korean telecom company try and bid for a US telecom company. Moreover, Chinese companies are on spending sprees to buy technology abroad - and they currently have much deeper pockets than their rivals in Korea. For that reason and the following additional reasons, we think this convergence will accelerate in the coming months:

1) Economies of Scale - Korea cannot possibly compete with China in numbers or foreign reserves to buy companies/technologies abroad
2) FDI - China is just crushing Europe here, let alone Korea
3) Technology transfer - astute China policy necessitates this in many investment deals
4) Reputation - now this needs some qualification. I am referring specifically to biotech and an incident in which one of Korea's most famed scientists, Hwang Woo-suk, falsely advertised successful fabrication of human embryonic stem cells by cloning. You will not see many Americans going to Korea for stem cell surgery - but they're flocking to China. The technology gap here in terms of revenues per unit of technology is most likely in China's favor and if not it will be within a year or two, not four.

The Effects of Steel Prices Rsing

2008-02-28T21:19:00.000-08:00

Rio Tinto, BHP Billiton, and Vale are major corporations and they're going to get theirs too, there's just no two ways about it. After Rio Tinto and BHP Billiton merge in two years, that neew mammoth $400 billion company will probably set its sites on Vale, assuming of course Vale has not ammassed its pile of smaller acquisitions to compete. We shall see.

On Tuesday, Xinhua gave a pretty nice summary of the recent iron ore price hikes, their inevitability, and their effects on steel prices in the coming year. Let's break this article down into those three sectoins:

1) Price hikes...

"After Brazilian mining conglomerate Vale hammered out 2008 benchmark prices for iron ore fines with Japanese and Republic of Korea (ROK) steel makers last week, Baosteel Group, China's largest steel maker, agreed on the price for fiscal 2008, accepting the Brazilian miner's price hikes that ranged from 65 percent to 71 percent compared with 2007."

71%!! I'm confused now because the rule of 72 is only supposed to be for compounded returns - so what happens if you get there in one year? Does 72% = 100% if it's one year? No, of course not, but if it did that probably would require me to immediately find a finance professor.

What's more, the article says that an almost identical hike occurred two years ago...

"Since China joined the international pricing negotiations in 2004, the price has risen every year. Price negotiations for 2004 ended with an 18.62 percent increase, followed by a 71.5 percent rise in 2005 and a 19 percent increase in 2006."

Now we can use compounding equations, and by such numbers, it would appear that steel prices have risen 2.5x over the last four years. What is this doing on a practical level? Let me give you a quick insight into our world. Two of my clients in the last week have said that their products are now more competitive if made in the North America - one in the US and one in Mexico. I am certainly not suggesting that this will be the case for years to come, and perhaps this is because their current China suppliers are in East China (as opposed to the cheaper western and central regions), but nevertheless, I do think this is a sign that things are moderately changing across various industries.

2) Inevitably. Basically, according to the article, this hike was going to hit China whether they liked it or not, whether they negotiated hard or not, and whether they neotiated early or not - it was all numbers...

"Baosteel, the partly state-owned representative of China's steel makers in the pricing negotiations, faced a challenge. The miners were holding out for higher prices, while other major Chinese steel producers wanted a favorable pact. Given the huge share of the market that China represents, Baosteel may have believed it had more bargaining power than it did. CISA estimated the 2008 price rise at only 20 percent.

So Baosteel waited -- but others negotiated.

'Even if Baosteel had concluded negotiations first, the price hike would not be lower,' said Hu (Kai, a senior analyst with the Chinese Umetal.com website.)"

There was no way around this. Especially given the fact that Chinese steel makers have enjoyed fat profits over the last two years as China's stock market has boomed.

3) Pricing effects

Well, we alluded to it above, but they make it quite clear in the article what the price increases are likely to be on steel tonnage...

"

The China Securities Journal reported on Monday that 57 domestic steel mills had raised their prices after the benchmark price was settled. And on Tuesday, the newspaper reported that Baosteel had raised steel prices for the second quarter of 2008. Its prices for major cold- and hot-rolled products will rise 800 yuan (111 U.S. dollars) per ton in the second quarter, compared with the first quarter, Tuesday's China Securities Journal quoted an announcement by Baosteel as saying.

Considering that Baosteel has a heavier reliance on imported iron ore than other domestic competitors, a 65-percent iron ore price rise could translate into cost mark-up of 258 yuan for Baosteel, as against 116 yuan for other domestic steel makers, according to statistics from Chemease, a business information provider on Chinese chemical commodity markets.

But a price hike of up to 800 yuan would offset its cost mark-up and also provide ample profit margins, said Chemease analysts."

So, why not just buy steel from Benxi I&S, or Ma'an I&S? It's just not that simple for two major reasons:

1) Logistics
2) Quality

Baosteel is one of the world's best steel plants and there are grades and qualities of steel that you need for certain applications that are available at perhaps two or three more factories in China. Secondly, the country is so large that regionalism plays a huge role in determining which steel ends up in which factory.

At the end of the day, the iron ore price hikes, in addition to oil, are the largest drivers of industrial price inflation. If we use this though as a basis for comparison, then what is the industrial subsidy equivalent for China's large subsidies on refined oil/gasoline? I would say that this question gets answered every day by those that find the real deals in China and those that just cannot seem to be profitable in China.

China's Credit Market Keeps Humming Aon

2008-02-21T22:16:00.000-08:00

Great article in today's Asian Wall Street Journal by Professor Victor Shih of Northwestern. Professor Shih writes that although credit and broad money supply has tightened in the West, the opposite is true in China.

"Despite a cascade of State Council decrees restricting bank lending this year and a high-profile Politburo meeting in November that focused on the risk of inflation, bank lending last month grew by over 800 billion renminbi ($112 billion) -- equivalent to 22% of the total loan quota that Beijing's technocrats meted out to state-owned banks for 2008." (-Victor Shih, "China's Credit Boom", Asian Wall Street Journal, February 21, 2008)

That sounds like mixed signal calling to me. Shih goes on to describe in the article that indeed, although Hu Jintao backed Wen Jiabao's call for increased tightening of credit, the fact is that this did not happen which means that the Politburo is quite split on the matter. (Perhaps it's that Shanghai faction led by Xi Jinping and his people that had already begun to exert their influence even before he officially was selected into the Politburo).

Shih adeptly identifies this standoff as,

"an unusual game of chicken. China's major banks, all of which are majority state-owned and run by managers appointed by the Communist Party, are simply ignoring decrees issued by the highest authorities. In a state-dominated banking system, this is as unexpected as mid-level managers blatantly acting against the wishes of both the CEO and the board of directors. Formally the technocrats have the full backing of the ruling Communist Party and can dismiss any banker at any time. However, senior state bankers do not behave as if they take the threat of removal seriously. They've stared down such threats before, anyway -- in China, elite political discord has often compelled banks to disobey formal decrees."

I would add that this is a quintessential power struggle in China and one that will plague the Communist Party for as long as it continues to build wealth. I would also say that this is the modern version of a classic battle between the wealthy and the King in China. If this were the 1680s, we could clearly see similar factional divides between Emperor Kang Xi and the feudal princes Wu San-kuei, Shang Chih-hsin, and Keng Ching-chung (from "Emperor of China: Self Portrait of K'an-hsi" by Jonathan D. Spence, Vintage Books, 1988). The same nobility versus the king proxy struggles happened throughout European history and, let's face it, the history of the entire world ever since one person wanted something another had. But, the contemporary version of Chinese history, which is where we find ourselves today (and let's not kid ourselves, that's how the Chinese see it - they're just passing through China in the current dynasty), has an added element to it. This time the stakes are higher. 3000 - 1000 years ago, the rest of the world meant nothing to China. 800 years ago, it was the Chinese who got annihilated by the Mongols, (when David and Goliath were one in the same and no one could stop them). 150 years ago it was the Europeans who destroyed China. Now, with momentum, size, a growing military, and everybody's factories, the pie is a lot bigger and, most importantly to the Chinese, the face they stand to gain, both on an individual level and a national level, is far greater than ever before in history.

So, if you're watching the economy hum along at 9, 10, 11, and even 12% growth, and you have connections, the only mandate from heaven is to keep the wheels turning and the money flowing. That's why, as Shih astutely points out, today's biggest enemy is inflation...

"The Chinese government needs to continue monetary tightening by raising interest rates and the bank's reserve requirements. Furthermore, Messrs. Hu and Wen need to overcome internal opposition and make it clear to bankers that flouting central decrees begets serious consequences, including dismissal. Otherwise, they risk allowing inflation to spiral toward dangerous levels. In the opaque Chinese political system, strong signals, in addition to decrees and laws, continue to be necessary ingredients of credible policies."

The key policy is all of this is pricing. The biggest winners politically are going to be those that can continue to stem inflation. Given that, maybe the motivations and intentions of the bankers is in fact to prime inflation to fly through the roof and purposely sabotage the current administration in some sort of Pyrrhic Victory. (Or maybe I need to ease up on the conspiracy theories).

Report 4 on Four of China's Tier-3 Cities: Changzhou

2008-02-20T11:47:00.000-08:00

Changzhou is really beginning to stake its place among the major tier-3 cities in the Yangtze River Delta (YRD) such as Wuxi, Cixi, Taizhou, and several others. In fact, at its current growth rate and projections for the future, it could conceivably rank as a tier-2 city within the next 10 years, assuming a sustained dose of foreign direct investment (FDI) and port/road infrastructure construction. The main reasons are that much like Suzhou and Wuxi before it, Changzhou is close to Shanghai and the labor force is skilled. Moreover, at 3.4 million, it is in a population growth spurt that could easily see the total population balloon to over five million over that same 10-year period. This is definitely a city to watch over the mid-term.

Changzhou (Chinese: 常州; pinyin: Chángzhōu; formerly known in English as Chang-chou, Changchow) is a prefecture-level city in southern Jiangsu province, People's Republic of China. It was also known as Yanling, Lanling, Jinling, and Wujin previously. Located on the southern bank of the Yangtze River, Changzhou borders the provincial capital of Nanjing to the west, Zhenjiang to the northwest, Wuxi to the east, and the province of Zhejiang to the south.

Located in the East China, the most prosperous Yangtze River Delta, Changzhou lies in-between the two metropolitan cities of Shanghai and Nanjing. It is about 100 miles from Shanghai and 70 miles from Nanjing. With a cultural history of over 2500 years, Changzhou is also a rising modern industrial city. It covers a total area of 180,000 acres, and 11,000 acres are urban areas. The total population in Changzhou is 3.415 million, including 840,000 urban residents.

Changzhou has a solid industrial foundation. There are over 20,000 various manufacturing companies, forming a complete industrial structure including mechanical, metallurgy, electronics, textile, garments, chemicals, pharmaceuticals, plastics, building materials and foodstuff. The six main industries in Changzhou are power industry, engineering machinery, automobile, motorcycle and their parts, power transmission equipment, electronics, new-style textile and garments. It has formed numerous brand products such as the diesel engines, loaders, power transformers, city buses, special and micro motors, DVD and indigo blue denim, etc. By now, the percentage of new and Hi-Tech enterprises accounts for 50% of the economy.

Administration

The prefecture-level city of Changzhou administers 7 county-level divisions, including 5 districts and 2 county-level cities.

Zhonglou District (钟楼区)
Tianning District (天宁区)
Qishuyan District (戚墅堰区)
Xinbei District (新北区)
Wujin District (武进区)
Jintan City (金坛市)
Liyang City (溧阳市)

Infrastructure and Transportation

-Located just south of Chang Jiang (Yangtze River), Changzhou is situated on the main Shanghai-Beijing rail line and is one of the main stops on the busy Shanghai-Nanjing route. Changzhou also has its own airport approximately 15km from the city centre. There are flights to Beijing, Guangzhou, Shenzhen, Shenyang, Kunming, Harbin and Dalian.

- Changzhou Airport's seat occupation rate has remained above 65% for several years and actually hit 70.8% in September 2007, according to the latest news released by the airport. The passenger throughput experienced a year-on-year increase of 12.95% in the first nine months of 2007, and increased by nearly 100,000 person-times when compared with the volume in the whole of 2005. The passenger throughput continued to set new monthly records in July and August. Thanks to the increase in transportation capacity, Changzhou Airport's cargo and mail throughput has experienced rapid growth. The cargo and mail throughput increased by 11.89% year-on-year in the first three quarters, and set a new monthly record in September.(China Industry Daily News, 11/6/07)

-By the end of June 2007, the downtown area of Changzhou City had 21 concrete producers and a total of 30 production bases (mixing stations) with more than 60 concrete production lines and 498 registered agitating trucks, with the annual designed concrete production capacity and the transfer pump capacity standing at 18 million cbm and 12 million cbm respectively, according to the latest information from the Secretary Office of the Changzhou Municipal Concrete Association. Based on preliminary statistics, the concrete producers in the downtown areas produced and supplied 4.6 million cbm of concrete to the market in the first half of 2007. (9/10/07, China Financials Daily News)

-Changzhou City plans to complete an investment of RMB1.058bn in the construction of trunk roads in 2007, and actually completed RMB705M in the first eight months, accounting for 66.6% of the annual target, according to the latest information released by the Changzhou Municipal Government of Jiangsu Province. (9/20/07 China Industrial Daily News)

-Jiangsu Province's Changzhou City invested RMB4.948bn in transportation projects in the first three quarters of 2007, according to the latest news released by Changzhou City's Transportation Department. Of the total, the investment in expressway construction reached RMB3.8bn, increasing by 13.4% year-on-year, and accounting for 76.8% of the total. Investment in expressways and national and provincial trunk route highways hit RMB2.137bn and RMB930M respectively, up 8.1% and 3.74% year-on-year, while the investment in rural expressways experienced a year-on-year increase of 41.79% to RMB660M.(China Industry Daily News, 10/16/07)

-Changzhou plans to invest RMB5.07 billion in traffic construction this year to build a 102 -kilometer long highway, two high-quality passenger-transportation lines, add 300 taxis to the roads and begin a number of other projects. The national highways 104 and 312 both pass by the city, and it is additionally linked to the surrounding cities in Jiangsu province as well as those in Zhejiang, Shandong and Hubei by long distance bus routes. Changzhou is situated on the main Shanghai-Beijing railway line and there is an urban rail project currently underway and due to be completed in 2015. The city also has a regional airport located 15 kilometers from the city center. Changzhou has a Category A cargo transport port located on the southern bank of the Yangtze river. There is also a passenger ferry in Changzhou, and the Beijing to Hangzhou Grand Canal which passes through the city is being expanded to include eleven 1,000MT-class berths and thirty-one 500MT-class berths as well as affiliated loading and unloading equipment. (China News Digest, 1/14/08)

Human Resources

-Changzhou is an educational hub and is home to several universities (including Ho Hai University, Changzhou Campus and Jiangsu University of Science and Technology) and middle schools (including Changzhou Middle School and Changzhou International School).

-The resumption of MG car production by Nanjing Automobile Corporation has helped to cement the relationship between a Birmingham university and a counterpart in China. The Technology Innovation Centre at the University of Central England has long been working with universities in China. Senior officials from Changzhou University Town have been among those visiting Longbridge to view NAC-MG's resumption of new MGTF production. (Birmingham Post, 6/20/07)

Economy

NANJING, March 20, SinoCast -- Changzhou, a city in China's eastern Jiangsu Province, has a thriving capital market, which supports a lot of companies to go public. The city now has 13 listed companies with 14 stocks, raising CNY 5.041 billion. Seven China-listed companies such as Changchai Company Limited, Changlin Co., Ltd., Far East Industrial Stock Co., Ltd., Jiangsu Xincheng Real Estate Co., Ltd. raised CNY 2.611 billion by issuing eight stocks. The rest six companies went public on oversea stock markets, raising CNY 2.43 billion. Three of the companies were listed on oversea stock markets last year like Changzhou Galaxy Electrical Appliance Co., Ltd. and Changzhou Trina Solar Energy Co., Ltd., raising nearly CNY 1 billion. The city plans to list five companies on oversea stock markets, and to encourage two listed companies to refinance and one company to issue bonds, to raise at least CNY 2 billion this year. As more companies in the city are listed, big investment organizations march into the capital market. Nine securities companies have set up 13 operational bodies with total transactions of CNY 106.273 billion last year. (9/27/07 Sinocast)

Companies

Trina Solar Limited ("Trina Solar" or the "Company"), a leading integrated manufacturer of solar photovoltaic products from the production of ingots, wafers and cells to the assembly of PV modules, founded in 1997, announced today the following updates relating to its previously stated capacity, operational, and technology roadmap targets that were achieved in the quarter ended December 31, 2007:

-- 150MW integrated capacity achieved for ingot, wafer, cell and module

production

-- Successful ramp up of new cell production lines No. 3-6

-- Increased in-house cell processing to over 75% for the Q4 2007

production

-- Realized in-house cell efficiency rates of up to 17.0%

(monocrystalline) and 15.6% (multicrystalline)

-- Commenced commercial production of 220-watt multicrystalline-based

modules

-Changzhou Dongfeng Agricultural Machinery Group realized an export value of RMB190.66M in 2006, up 34% year-on-year, and the company continued to maintain significant growth in exports in 2007, announced sources at the group on July 2nd. The group exported RMB94.2M of agricultural machines in the first five months of 2007, up 52% year-on-year. (7/3/2007)

- Swedish garden equipment maker, Husqvarna, has announced plans to build a new plant in Changzhou in China. The plant, which will cost around SEK 70mn (US$ 10.91mn EUR 7.64mn), replaces an existing plant and will increase the group's annual production by approximately 1 million units. Husqvarna plans in addition to invest SEK 20mn to increase production in the Zenoah facility in Kawagoe in Japan as well as expand its R&D operation. (Esmerk Swedish News, 11/6/07)

- Changzhou Pharmaceutical Factory Co. Ltd. in eastern China's Jiangsu Province announced yesterday that the company aims to develop a formulation department in the European Union after it received EU Good Manufacturing Practice (GMP) certification last week. The company is one of only a few Chinese drug makers so far to be awarded the EU GMP certificate for finished drug production, along with Zhejiang Huahai Pharmaceutical Co. Ltd., Zhejiang Hisun Pharmaceutical Co. Ltd., Wuxi Kaifu Pharmaceutical Co. Ltd., and Zhejiang Conba Pharmaceutical Co. Ltd. Industry insiders agree that more and more Chinese pharmaceutical companies are eyeing the European Union or the United States as potential markets for their generic drugs. (11/14/07 China Business Newswire)

- CHANGZHOU, China, Dec. 11 /Xinhua-PRNewswire/ -- US-based Biomet Inc., one of three largest medical devices manufacturers in the world, on the 11th signed an agreement with the Changzhou National Hi-Tech District, eastern China's Jiangsu province, Biomet has decided to make an investment of US$15 million in the Changzhou Export Processing Zone mainly for production of orthopaedic implants and medical devices…Han Jiuyun, Vice Mayor of Changzhou municipal government, noted in his speech that development of the medical industry was given priority in Changzhou's ''Eleventh Five-Year Plan,'' and Changzhou would continue to improve its excellent platform for receiving transferred international industrial capital so as to provide Chinese and foreign businessmen with even better, faster and more effective services. (PR Newswire, 12/11/07)

-S3 Investment Company, Inc. (SIVC) announced that its Redwood Capital, Inc. subsidiary has signed Changzhou HaiJai Metallurgical Machinery Manufacturing Co. Ltd. (CMMC), a provider of metal fabrication, as a new client for its reverse merger services. Redwood Capital will assist Changzhou HaiJai Metallurgical Machinery Manufacturing Co. with efforts to access the U.S. capital markets through a reverse merger into a U.S. public company. (Knobias, 5/15/07)

-China's Do How Chemical restarted September 23 its styrene monomer plant at Changzhou following a three-day shutdown, a company source said Monday. The 210,000 mt/year plant was shut September 20 as the Changzhou State Power Company, which supplies it with power, was undergoing a turnaround. The SM plant was running at 50% nameplate capacity as of Monday, a source said. The company expects to ramp up operating rates to 100% by Tuesday night, he added. Loss from the shutdown was estimated at 2,000 mt, leaving Do How with no spot supplies for September. In October, however, the company would have around 4,000 mt of SM for the spot market, the source said. In May, US private investment firm Ewing Management Group acquired an 80% controlling stake in Do How Chemical, the remaining 20% being held by Chinese investors. (Platts Commodity News, 9/24/07)

- CHANGZHOU, China, June 25 /Xinhua-PRNewswire/ -- Changzhou National Hi- Tech District announced today that on June 24 it was promoted to be one of the first international service outsourcing base cities at the provincial level in Jiangsu. The two special parks in Changzhou National High-Tech District, namely Changzhou Software Park and the Changzhou National Animation Base, have become the important carriers of the industry, and the district was selected as one of the top five "International Service Outsourcing Demonstration Zones in Jiangsu." Six enterprises in the district, including OKI Software Technology Co., Ltd. and Changzhou CIC-Futong Technologies Co., Ltd., were recognized as the first "Key Enterprises Undertaking International Service Outsourcing in Jiangsu Province." Changzhou began developing its fledgling animation industry in 2000. So far, 31 deals have been signed worth 520 million yuan. (9/27/07, China Daily; 6/25/07 PR Newswire)

- Changzhou XD Transformer Co., Ltd. completed the installation and testing of six ZHSFPTB-112000kVA/220kV three-phase on-load tap-changing autotransformers according to the requirements of a Kazakhstan-based electrolytic aluminum plant, and has put the equipment into operation 100 days ahead of schedule. With a total value of RMB140M, this is one of the cooperation projects between the Chinese and Kazakh Governments, contracted by China Nonferrous Metal Industry's Foreign Engineering and Construction Co., Ltd. The transformers are 12m long and 8.5m wide, weigh a total of 400t and consist of a main transformer and a voltage regulation transformer. (China Industry Daily News, 10/11/07)

-Changzhou Wujin Natsteel, now wholly owned by Taiwan's Walsin Lihuwa, is investigating a possible expansion into stainless melting and rolling in the future. Walsin Lihuwa, one of Taiwan's major stainless producers, recently purchased NSL China Investments - Changzhou Wujin Natsteel's parent company. Walsin Lihuwa is now keen to produce stainless at the newly acquired Changzhou plant, according to sources. (3/19/07, Steel Business Briefing)

- Walsin Lihwa Corp (1605.TW), the world's third-largest supplier of copper wire, said it will proceed with its expansion in China as planned, regardless of new mainland labor regulations that will increase costs for manufacturers starting next year. "Our expansion is moving forward in accordance with our previously set road map," Walsin spokesman Lin Wang-tsai said. "The increase in labor costs is not seen as significant enough to put us off track," he added. Under the new Chinese labor rules that take effect Jan 1, companies must sign their employees to labor contracts. Short-duration contracts will be more closely controlled: after two consecutive short-term contracts the worker's next contract will have to be open-ended. (Xinhua Asia, 12/20/07)

-Peoria Tube Forming Corp., an Illinois firm that makes metal tubes and pipes for the likes of Volvo and Caterpillar, has 60 employees in Changzhou -- almost as many as the 70 workers it employs in its home factory, according to the company's president, Rodger Butler. All but two of the firm's Changzhou employees are Chinese, and all of them were recruited at the city's large and recurring job fair, Butler said. Peoria Tube's wholly owned Chinese subsidiary, Pacific Changzhou Tubing Co., accounts for $3 million of annual revenue, Butler said, compared with $12 million in annual revenue from the U.S. operation. Although the Peoria shop still leads in producing revenue, Butler said the company sees its greatest growth potential in Changzhou, where labor costs are much lower than in the United States and only 25 to 30 percent of the labor costs in more famous Shanghai. (New York Times, 3/21/06)

Real Estate

- Kardan NV says its real estate subsidiary GTC Real Estate will purchase an additional land plot in Changzhou, China, located next to the land plot that was acquired earlier this year. The group adds an additional 90,035 square metres of land and approximately 252,000 square metres of building rights to the project announced mid January, when Kardan said it would develop its sixth real estate project in China after winning a tender to acquire 104,000 square metres of land for 18.4 mln eur. With this acquisition, the original land plot (of 104,000 square metres with building rights up to approximately 290,000 square metres) will be increased to a total of 194,035 square metres with building rights up to approximately 542,000 square metres. (AFX International, 2/1/08)

-Howard Johnson Hotel, a five-star hotel brand under the USA-based Wyndham Group, signed a cooperation agreement on the Kaina Business Plaza project on April 9th with Changzhou Rojana Real Estate Development Co Ltd, a subsidiary of Rojana Industrial Park Public Co Ltd in Thailand. Howard Johnson will join the Kaina Business Plaza project, the tallest project in Changzhou City. They will provide hotel management services to the project and property management services to the project's hotel apartments. Their cooperation marks the development in Changzhou City of a new type of residential accommodation, the hotel apartment. (4/11/07, China Industry Daily News)

- In recent months, Changzhou City's vacant apartment area saw a rapidly increasing trend. By the end of 2007, the City's vacant apartment area covered 658,000sq.m, with the vacant area of residential apartments and business operations apartments accounting for 263,000sq.m and 300,000sq.m respectively, surging by 28.5%, 47.8% and 9.7% year-on-year. However, the vacant office space in the City dropped by 50.1% when compared to the end of 2006 to 14,000sq.m last year. (China Industry Daily News, 1/22/08)

-Investment in Changzhou City's real estate development reached RMB22.5bn in 2007, surging by 31.6% year-on-year. In terms of apartment types, completed investment in the development of residential apartments, office buildings and business operations apartments was RMB15.92bn, RMB670M and RMB3.38bn respectively, surging by 29%, 32.8% and 29.1% year-on-year, with other investment soaring by 54.3% to RMB2.53bn. The completed apartment area in Changzhou City exceeded 6 million sq.m in 2007, with the year-on-year growth rate exceeding 50%. More specifically, the completed residential apartment area covered more than 4.7 million sq.m, soaring by nearly 60%. (China Industry Daily News, 1/22/08)

-Harbour Centre Development (51) said it succeeded in bidding a piece of land located in Changzhou, the PRC with a site area of4.43 million sqft and a total GFA of about 8.68 million sqft at Rmb1.47 billion through its wholly-owned Cheer Sky Investment. The group said it will develop the Changzhou land into residential and hotel properties. (12/30/07, ET Net News)

Report 3 on Four of China's Tier-3 Cities: Wuhu

2008-02-15T10:35:00.000-08:00

Wuhu is home to Chery Automotive Company. As one of China's rising automotive powerhouses
, Chery has an ambitious goal of selling 1,000,000 automobiles annually within the next five years. Preliminary plans to enter the US market were derailed when their partnership with Malcolm Bricklin fell apart. They'll be back - probably hitting the US by 2012.

Many other companies and investments have started to grow around Chery's remarkable story and home base. Here's Wuhu's summary:

Wuhu is located in southeastern Anhui. Historically known for its agriculture and trade, during the Qing Dynasty it had one of China’s biggest rice markets. Wuhu Port is an important deep water port on the Yangtze River. Today the city’s backbone industries include autos and auto parts, new construction materials, and electronic appliances. The city, with a population of 2.3 million, posted a GDP of approximately 48 billion yuan (USD6.3 billion) in 2006, an increase of 15.4 percent year-on-year.

In his 2007 best-selling book, China Shakes the World, former Financial Times Bureau Chief of Beijing and author James Kynge writes of Wuhu, “The city of Wuhu, a river port on the Yangtze’s middle course, was a backwater as recently as 1998. When I first went there at that time, it took me six hours along a bone-jangling, potholed road to reach it from Hefei, the provincial capital. When I did the journey again in 2002, it took an hour and a half, and Wuhu had been transformed. In just four years, four expressways, a road-and-rail bridge over the Yangtze, and a river port had been built. It was not possible, the vice mayor told me, to reach 250 million people within eight hours of the city center. ‘That is the population of America,’ he said with a smile.” (p31)

Wuhu 2004 GDP: 34.5 billion RMB; expected 2007 GDP: 64 billion RMB

Wuhu 2004 per capita GDP: 15,366;

Logistics

Wuhu Export Processing Zone

Wuhu Export Processing Zone (EPZ) is one of two major industrial bases in Wuhu. It was approved and set up by State Council in 2002, with a planned area of 2.95 km², the first phase consisting of 1.1 km². Since April of 2003, Wuhu EPZ has been operating service sectors including Customs Commodity Inspection, Banking, Logistics, Storage, etc. that cooperate for one-stop export services.

Wuhu EPZ enjoys the following advantages:
Geographic Situation: Wuhu is a transportation hub for East China, connecting 3 highways and 5 railways. The Wuhu Yangtze River Bridge is the largest dual-duty bridge of railway and highway. Wuhu port is currently the last deepwater port upstream in the Yangtze River which can provide major logistics support to export-oriented enterprises along the Yangtze. The largest dual-use (railway and highway) bridge over the Yangtze River is in Wuhu,

Pillar Industries: The Wuhu EPZ lies within Wuhu Economic & Technological Development Area (WEDA), which is the most important industrial production base in East China and now has more than 150 enterprises in production, forming 3 pillar industries: automobile and automotive parts, electrical appliance, and building materials.

Human Resources: Wuhu has two universities, six colleges, and more than twenty technical schools offering over 60,000 students available for corporate recruitment of all majors and at different entry levels.

Investment: Wuhu PZ is located between the new urban area and the old industrial area, hence its infrastructure and water supply are stable after long-term construction with plentiful utility supply, including power, natural gas, and water. Land use rights are cheaper than in the rest of WEDA.

Wuhu Economic and Technological Development Zone

Wuhu Economic and Technological Development Zone (WEDZ) was approved as a state-level development zone in April 1993. The zone has a developed area of 10 square kilometers and is situated in northern Wuhu.

Transportation and Infrastructure
The main traffic routes in the zone are part of the municipal transportation network and are directly joined with three expressways leading to Shanghai, Hangzhou, and Hefei. as the 3 expressways and 5 railways mentioned above all converge here. Wuhu Harbor is also the last deep-water port at the upper stream of the Yangtze River joining all important ports around the globe. Water carriage routes were opened to such designations as Hong Kong, Japan and Southeast Asia. WEDZ is one hour's ride to Luokou International Airport of Nanjing, and Luogang Airport of Hefei, both of which have flights to major domestic and foreign destinations.

-2 of China’s 4 eastern trunk railways of Beijing to Nanjing, Shanghai to Nanjing, Nanjing to Wuhu and Wuhu to Yingtan (Jiangxi) meet in Wuhu, connecting with major trunk railways and large and medium sized cities all over China. So Wuhu is an essential railway hub to connect with Central, East, and North China.

Manufacturing Industries
Three pillar industrial groups have come into shape in WEDZ, including automobiles and parts, electronics and electrical appliances and new building materials.

In view of its industrial structure and current stage of development, WEDZ encourages investment in the following sectors:

Automobile and parts:
Development and manufacturing of

Car bodywork and accessories
Car engines, gear-boxes, and other key components
Car moulds
Electronics
Precision founding of major car components, black founding, and colored casting semi-finished production
Light materials
Key car parts and components
Car discharge emission systems
Car accreditation and inspection systems

Electronics and electrical appliances:

Intelligent household appliances
Electronic components
Photo-electronic products
Integrated Circuits

New materials:

New building materials
New energy-saving materials
Micro-electronic and photo-electronic materials
Surface coatings and films
High-quality structure materials
Environmentally friendly materials

Bio-medical and bio-pharmaceutical products:

Bio-medicines and drugs
New traditional Chinese medicines
Synthetic and chemical medicines
Medical equipment and electronic apparatus
Refined chemicals.

Software products:

Software platforms and intermediaries for all types of business applications
Application systems in broad-band networks
Critical software for corporate informatization and information security systems
Management software for E-commerce

Administration Committee
Tel: 86-553-5841768
Fax: 86-553-5841876
Email: wuetdz@mail.ahwhptt.net.cn
Wetsite: http://www.weda.gov.cn/eindex.html

http://knows.jongo.com/res/article/7131

Human Resources

-Anhui Normal University is located in Wuhu. Founded in 1928, it is the oldest institution of higher education in Anhui Province and also one of the national comprehensive universities established at a very early stage. The university is a major scientific research institution. In addition to Anhui Normal, Wuhu’s other major institutes of higher learning include: Anhui University of Technology and Science, Wannan Medical College, Wuhu Radio and Television University, and Wuhu Vocational Institute of Technology

Principal: Jiang Yumin
Zip code: 241000
Address: NO.1 Beijing Road(E), Wuhu, Anhui
Tel: (0553)3869234
Email: ymjiang@mail.ahnu.edu.cn
Website: http://www.ahnu.edu.cn/nic/

-Some factories in Wuhu (and surrounding regions) pay workers the equivalent of $0.30 an hour.

Companies

-Yinghua Wire sold controlling interest of a wire harness plant in Wuhu to the Michigan company KenSa,

-Wuhu’s Conch International Hotel is consistently filled with guests from Germany, Australia, Japan and the United States.

-There are 104 factories owned or partly owned by foreign companies, up from 55 just five years ago.

-Germany-based Siemens AG builds automotive gauges in Wuhu.

-Tower Automotive, based in Troy, builds suspension components.

-Wuhu is one of dozens of industrial centers in China, which has become “a Candyland for Rust Belt manufacturers hungry for cheap labor.”

Report 2 on Four of China's Tier-3 Cities: Foshan

2008-02-12T04:37:00.000-08:00

The second in our series of tier-3 cities, Foshan is on the rise. It recently broke the 300 billion RMB GDP mark (for FY2007), and along with 5 tier-2 cities for 2007. Hence, it is probably fair to call Foshan a tier-2 city at this point, but because it flies so low on the radar, we will keep it in the tier-3 grouping for now. Once again, if not otherwise noted, the information comes from Wikipedia.

Foshan (Chinese: 佛山; pinyin: Fóshān) is a prefecture-level city in central Guangdong province, People's Republic of China. The city has jurisdiction over an area of about 3,840 km² and a population of 5.4 million of which 1.1 million reside in the city proper (2000 census figures).

Total GDP ¥292.67 billion; Per Capita GDP ¥50,207 (2006)

Administration

The prefecture-level city of Foshan administers 5 county-level divisions, all of which are districts.

Chancheng District (禅城区)
Nanhai District (南海区)
Sanshui District (三水区)
Gaoming District (高明区)
Shunde District (顺德区)

These are further divided into 64 township-level divisions, including 37 towns and 27 subdistricts.

Transportation and Infrastructure

External links

-Foshan Airport was once a regional airport with mixed usage (both military and domestic transport) since January 22, 1987, as it became a base of China United Airlines (CUA) in Guangdong Province. When CUA ceased domestic flights in November 1, 2002, Foshan Airport remained military service only. The airport resumed its regional airport status in 2005 when the regrouped CUA, which was partly purchased by Shanghai Airlines, resumed domestic flight service. It is expected domestic flight linkages between Foshan and at least 10 Chinese cities including Beijing, Nanjing, Hangzhou, Yinchuan will begin in the near future.

-Foshan is close to Guangzhou and considers its link with Guangzhou very important. A Guangzhou-Foshan metropolitan region is being formed as well as the 37-km Guangfo subway line linking the two cities.

-Foshan is a main interchange for railway routes linking Guangzhou, Hong Kong, western Guangdong Province and Guangxi Province. It is connected with Hong Kong via the KCRC Guangdong Through Train service from Foshan railway station. The inter-city through train service was extended from Guangzhous to Foshan in the late 90s.

- China's Ministry of Communications and the Communications Administration of Guangdong Province have jointly approved the planning of constructing Foshan Port in Guangdong in mid-July 2007. The Foshan Port under planning will have a cargo flow of 110 million tonnes by 2010 and 150 million tonnes by 2020. The Foshan authority plans to bring Hong Kong's logistics industry to the port. (NewsTrak D-(Jan. 16, 2008)- Construction on the second phase project of Foshan Aomei Aluminum Co., Ltd., the Southeast Asia's largest aluminum material enterprise, has been completed, bringing the company's annual production capacity to 200,000t. According to a source, Aomei Aluminum is the largest aluminum processing enterprise and largest production base funded and established by Qili Industry Group, it is headquatered in Malaysia's Kuala Lumpur and has large production or sales bases in Great Britain, Australia, Hong Kong and Dubai.( www.chinainfoworld.com )

-The first phase of the first specialized logistics distribution base in Foshan City's Sanshui District formally began operations on December 12th, according to the latest news released by Foshan Automobile Transportation Group. The base occupies an area of more than 6.67ha (100mu) and was funded by Foshan Automobile Transportation Group with RMB40M. The base will provide modern logistics services such as storage, distribution, freight forwarding, third party logistics and value-added services of the supply chain, with the designed monthly cargo transportation volume at 60,000t and the truck handling volume exceeding 3,000 units. (China Industry Daily News, 12/14/07)

Economy

Agriculture

There are Agricultural Model Districts (AMD) around the prefecture, such as Shunde Chencun AMD, and AMDs in Daili Town, Shatou Town and Locun Town in Nanhai, with a total area of about 9.4 km². The AMDs aims at providing an all-round environment for modern agriculture. Agricultural process is upgraded through technology, and sale service is incorporated with a new style tourism, that attracts target clients. The modern integrated practice mode resulted in the reputation of the largest base for wholesale, food production, storage and logistics of agricultural products in Guangdong Province.

Manufacturing industries

Following Shenzhen and Guangzhou, Foshan is the third largest manufacturing base in the Pearl River Delta. Once home to a strong State-Owned Enterprises sector, its current economic strength lies in private firms and Township and Village Enterprises in Shunde and Nanhai. In 2002, private firms contributed 56.12% of the industrial output and firms from Hong Kong, Macau, and Taiwan contributed 63.44% in exports.

Key industries in Foshan include:

household electrical appliance and tool manufacturing
furniture
non-metal ore and manufacturing
ceramics
garments
chemicals
electronic information
medicine
food and beverages
building materials
automobile parts
high technologies
electronics and communications
stainless steel products
Plastic products

Towns in Foshan specializing in pillar industries are as follows:

Beijiao Town, Shunde (顺德北滘) - household electrical appliances
Chencun Town, Shunde (顺德陈村) - flowers and horticulture
Dali Town, Nanhai (南海大沥) - aluminium products
Lecong Town, Shunde (顺德乐从) - furniture production and distribution
Nanzhuang Town, Nanhai (南海南庄) - building materials
Xiqiao Town, Nanhai (南海西樵) - tourism and textiles
Yanbu Town, Nanhai (南海盐步) - underclothes

Several well-known brands to come out of these pillar industries include Midea, Kelon (before its 2005 bankrupcy), Jianlibao, and Galanz Group (Galanz Group and Midea Group jointly hold more than 80% of China's microwave oven market, according to a report by China Market Monitor Co., Ltd.). Foshan's furniture and lighting industry is known as the world's largest, including the world’s largest furniture wholesale market and the world's largest lighting wholesale market.

Development strategy

Foshan aims to become a manufacturing giant and the third largest city in Guangdong. To do this, it has pledged to make large-scale investments in the construction of transportation and energy infrastructure. Urban development will focus on the Central Urban Group and Shunde Urban Group, each with more than one million inhabitants.

-China Development Bank, a policy bank in the country, has granted more than CNY 2 billion loan to Nanhai district, Foshan city, China's southern Guangdong province. The local government used the capital to finish the preliminary construction of Qiandeng Lake and planned to set up a financial business zone there. Guangdong, a developed province in China, wants to build Qiandeng Lake to be a financial high-tech development zone, which covers an area of some 4.5 square kilometers. Chen Yunxian, mayor of Foshan, said that Qiandeng Lake was positioned as a financial logistics base for the province, containing data processing center, call center, disaster recovery center, training center as well as innovation and R&D center.

Companies

- Chi Mei Optoelectronics Corp. (CMO), the No. 2 manufacturer of thin film transistor-liquid crystal display (TFT-LCD) panels, plans to set up a LCD module (LCM) production plant in northern Vietnam in 2008 and form a panel-industry cluster in the region, according to company president Ho Chao-yang. Ho said CMO's two LCM plants in mainland China have effectively solved the labor-shortage problem at his company's facilities in Taiwan and cut costs.

- Shanghai. October 16. INTERFAX-CHINA - The Guangdong provincial government announced yesterday that the province's largest LCD module manufacturing line, established by Taiwan-based Chi MeiOptoelectronics in the city of Foshan, has started operation and is expected to produce more than 200,000 units of LCD modules by the end of this year. The line was established with an investment of $480 million and is expected to produce more than 10 million units of LCD modules next year, according to the Guangdong government. Guangdong Province plans to build Foshan into a TFT-LCD TV center by establishing a sound supply chain for the TFT LCD TV industry, including the supply of LCD modules, displays and TV components. Chinese TV giant Hisense also started construction of a flat panel TV manufacturing center in Foshan at the end of September, planning to produce 1 million units of flat panel TVs after completion.

-HSBC opened its thirteenth Global Service Centre in Foshan, Guangdong province on December 3. Vincent Cheng, chairman of HSBC Asia-Pacific, says Foshan is the perfect location to set up a global logistics centre thanks to its outstanding investment environment and urban planning. The new centre is situated at the National High-tech Development Zone in Foshan and is equipped with the most advanced communication and information technology facilities. (NewsTrak Daily, 12/4/07)

- In Guangdong, the home province for Belle International, Foshan-based Saturday Shoe Co., Ltd. has also secured VC investments from Lenovo Capital and is preparing to go public in 2008. "From 2006 on, the prices of raw materials like leather have been on the rise, but our shoe products have to remain where they are now, otherwise we'll lose our competitiveness," explains Wu. Saturday, along with other Chinese shoe brands such as Aokang, Kangnai and Fuguiniao, are also grappling with rising prices for raw materials. "The current net profit margin of the leather shoe industry is about 8%," claims Wu. Despite the rise of raw materials and labor costs, Saturday still has a bigger net profit margin than the industrial average with its higher brand value… Saturday shares the idea of Belle International: maintenance of the department store channel is a part of the brand management, because it gives an opportunity to contact the consumers and to deliver the brand value. Saturday now has over 1,000 sales outlets, 70% of which are self-operated stores and 30% franchised stores. (11/8/07 China Business Feature)

- Zhang Shuhong, a 52-year-old businessman, had apparently committed suicide, just days after Mattel blamed his company, Lee Der Industrial, in Foshan, in southern China, for the recall of one million toys coated in toxic lead paint. In a summer of high-profile recalls of Chinese exports -- pet food, shellfish, tires -- Mr. Zhang's suicide read like the latest twist in a morality play. Each week, it seemed, brought news of another faulty Chinese product; and with it, growing concerns about unscrupulous Chinese businessmen: cutting corners; pouring cheap, sometimes lethal, ingredients into their products; endangering consumers around the world, even children, to make a bigger profit. But at the Lee Der factory in Foshan, an industrial city 140 miles northwest of Hong Kong, Mr. Zhang's colleagues and workers tell a less familiar narrative. They say that Mr. Zhang was a victim, too -- of his own duplicitous suppliers, of China's faulty supply chains, and of the pressures of its loosely regulated brand of capitalism, where Chinese entrepreneurs feel squeezed between Western companies' appetite for cheap goods and the fierce local competition to satisfy it. (8/23/07 New York Times)

- The Sanshui District Bureau of Economy and Trade revealed that Tsingtao Beer Sanshui Company will improve its production capacity in 2007 and Budweiser Beer will begin operations in this district at the end of 2008, thus the District's beverage industrial output value is expected to soar in the next one to two years.(China Industry Daily News, 1/14/08)

- Beiqi Foton Motor Co., Ltd. an SOE holding company mainly involved in car manufacturing in China, plans to increase the production capacity of its factory in Nanhai District, Foshan in southern Chinese province of Guangdong. Construction of the new factory is planned to start from May or June 2008. The phase I project is expected to be finished in 2009 and the whole project will be finished in 2015. By then, the new factory, which mainly produces SUVs, pickups, small MPVs and the like, will be four times larger than the old one. It aims to seek sales of more than CNY 5 billion by 2010. (Sinocast, 1/10/08)

- Guangdong Foshan Glanz Co., Ltd., a leading home appliances manufacturer in China, planned to sell 6 million air-conditioners in 2008, with 70% of them sold at home. The company intends to export 30% of output in 2008, higher than 20% in 2007. A report by Boston Consulting Group tells that more and more Chinese people are interested in high-end and expensive products and five times more consumers tends to increase spending than those to reduce. (Sinocast, 1/9/08)

Labor

- More workers in Guangdong Province will be able to negotiate with their employers and fight for higher wages, according to the provincial labor and social security department. The wage negotiation system was first launched in Guangzhou in 2001, and has covered 44,000 enterprises and benefited 2.4 million workers up to June this year. Workers have signed more than 14,000 collective wage agreements with various employers… Workers can nominate representatives or the labor union of their factories to negotiate on their behalf with employers. They can even hire professionals, such as lawyers or consultants, as long as they are familiar with the labor law. (8/15/07, China Daily)

-Guangdong is on the verge of finalizing details of a labor law that will place about 20 million factory workers under better welfare protection but add to the burden of manufacturers already reeling from rising production costs. As a nationwide policy to be promulgated on January 1, the law will set welfare standards and responsibilities of employers and employees by binding the two parties to a labor contract. Welfare protection such as work hours, extra shift compensation, commission and wages, holidays, arrangement for parting and other benefits are expected to be key conditions on a contract, according to some manufacturers in Guangdong. The Guangdong Labor and Social Security Bureau was studying the feasibility of regulating wages such as distribution of wages and setting up a mechanism to lift salaries by engaging about 10 enterprises in Foshan, Guangzhou media reported. (11/19/07 South China Morning Post)

Tax

-(Jan. 14, 2008)- The tax payments by Sanshui District's beverage industry surged by nearly 30% in 2007 and accounted for 12% of the District's total, revealed Foshan City's Sanshui District Office of the State Administration of Taxation. In 2007, Tsingtao Beer Sanshui Company paid more than RMB103M in tax, the highest among Sanshui's tax payers, while the tax payments generated from Jianlibao drink products increased over 2006 and exceeded RMB56M last year. (1/14/08 China Industry Daily News)

GDP

- Calculating based on the data for the third quarter of 2007, Foshan, Ningbo, Nanjing, Chengdu, Dongguan, Wuhan and Dalian have joined the "300-billion-yuan GDP Club" for Chinese cities in 2007. 300 billion yuan is equivalent to US$41 billion. From 2006 to the first three quarters of 2007, annual economic growth in Foshan was 19.2 per cent, 19.3 per cent and 19.2 per cent. (1/2/08, Asia Pulse)

Real Estate

- Shui On Land Limited (" Shui On Land", Stock Code: 0272) today has successfully acquired by auction the development right and land use rights of the land in Zumiao Donghua Lane, Foshan City, Guangdong Province. Shui On Land will capitalise on the huge potential and rapid growth of Foshan to develop an integrated project, aiming to facilitate the transformation of the city into a major economic and cultural hub in Southern China. The site has a planned net developable area of approximately 517,471 square metres with a gross floor area of approximately 1.5 million square metres. The new integrated project will include residential and office buildings, as well as retail, restaurant, entertainment, tourism and cultural facilities. (11/30/07 irasia.com)

Report 1 on Four China Tier-3 Cities: Shijiazhuang

2008-02-10T19:13:00.000-08:00

Today is the first of four posts on tier-3 cities. We will feature Shijiazhuang, Changzhou, Wuhu, and Foshan (which at this point is actually a tier 2 city, but we'll still group it with these other Tier 3 cities). The common theme among them is lots of money, not a lot of recognition among us in the west. They are all hot spots for investment among the Chinese themselves and other Asian investors. There is no set paradigm for the reports and they are really a collection of articles from various media sources over the last year to highlight major industries, infrastructure, real estate, and the economy at large in each city. Please think of this as a clipboard of media on each city that should shed some light on what is going on in each area for those looking for a general overview of what is going on beyond the borders of China's international cities. Each report is infused with a little bit of background from Wikipedia to set the stage. So, without further ado, we give you Shijiazhuang:

Shijiazhuang (simplified Chinese: 石家庄; traditional Chinese: 石家莊; pinyin: Shíjiāzhuāng, literally, "The Stones' Village") is a prefecture-level city about 320 kilometers south of Beijing and the capital of Hebei province. Shijiazhuang was established in the Second Sino-Japanese War as a communication outpost. Shijiazhuang is China's first big city that allows immigration population settles in it without paying any fees. (Wikipedia on Shijiazhuang)

Administration

-Shijiazhuang has direct jurisdiction over 23 districts, counties, and cities.

Sister cities

Infrastructure and Transportation

-Shijiazhuang is a transportation hub: it is at the intersection point of the Beijing-Guangzhou, Taiyuan-Dezhou, and Shuozhou-Huanghua railroads and many expressways, including the Beijing-Shenzhen and Taiyuan-Cangzhou Expressways. The Shijiazhuang Daguocun International Airport has flight connections to major cities in China.

-The Industrial and Commercial Union of Shijiazhuang city in Hebei province of China set up a logistics association in the middle of December 2007. The association will perform as a communication platform between enterprises and the government. It encourages local logistics enterprises to unite and to share resources. The logistics industry is a major growth momentum of the local economy. It covers cargo transportation, loading and unloading, storage and distribution related to construction, electronics and clothing businesses. (NewsTrak Daily, 1/3/08)

-Shijiazhuang High and New Technology Industrial Development Zone was established in March, 1991. It is among the state band high-tech zones approved by State Council. At the beginning, the zone is located at the west wing of the present one. For meeting the needs of development, the CPC Committee and People's Government of Shijiazhuang City decided to join Shijiazhuang Economic & Technical Development Zone and Liangcun Economic & Technical Development Zone with Shijiazhuang New and High-tech. Development zone from the year 1991, which has formed the frame of "One zone and three Gardens." The zone has the designed area of 18sq.km., with 40,000 staff. (http://www.21sjzg.com/)

-Taihang Mountain Tunnel, the key project of Shijiazhuang ¨C Taiyuan Railway, was completed on December 22nd. The passenger railway is a key project in the Eleventh Five-Year Plan period (2006-2010), and is China's first passenger railway project, on which construction began, totaling 189.93km in length. Construction on the railway project began on June 11th, 2005, and is expected to be completed at the end of 2008. The 27.8km-long double-hole Taihang Mountain Tunnel has established one entrance, one exit, nine slope mines and eleven construction routes. (12/27/07, China Industry Daily News)

- The construction of an express passenger railway which links Beijing with Shijiazhuang, capital of north China's Hebei province, will begin in June and finish in four years. The National Development and Reform Commission has approved the project, and a ground breaking will be done on June 1, said a source with the city government of Shijiazhuang, adding a special company will be set up to take charge of the construction. The new line is planned to alleviate transport pressure on the northern end of Beijing-Guangzhou railway, a north-south trunk route, and boost the development of areas around Beijing. The projected route will stretch 281 km starting from Beijing West Railway Station and ending at Shijiazhuang South Railway Station. Trains can run at a speed of 350 km per hour. Speed in the initial stage can be 300 km per hour, cutting the transit time to just over an hour. The investment of 43.87 billion yuan (about 6.01 billion U.S. dollars), will be shared by the Ministry of Railways and the governments of Beijing Municipality and Hebei Province. (Xinhua, 1/12/08)

-Shijiazhuang Public Transportation Company increased the number of natural gas buses in 2007 on the basis of environmental protection principles, according to the latest news released by Shijiazhuang City's Public Transportation Department. The City purchased 371 buses in 2007, with natural gas buses accounting for 150 units, thus bringing the total number of its natural gas buses to 748. Shijiazhuang City presently has 2,210 public buses, with natural gas buses accounting for 33.8% of the total. (1/29/08 China Industrial Daily News)

- The main route of Shijiazhuang City's Loop Highway (Shihuan Highway) was opened to traffic on a trial basis on November 11th. Construction on the Shihuan Highway began on September 30th, 2005. The first phase of the project, involving a total investment of RMB4.77bn, is 79.9km long, with the length of the first-grade bi-directional six-lane highway accounting for 46.1km. A total of 62 bridges and culverts have been established. The main body of the 74.2km-long main route of the Shihuan Highway has been completed, while the other projects are under construction.(11/13/07 China Industrial Daily News)

- Shijiazhuang Customs and Qingdao Customs formally signed a cooperation MOU on customs reform on May 22nd. This is the second cooperation agreement on customs reform between inland areas and coastal areas, following the agreement between Shanxi and Tianjin Customs.

The new regional customs-passing system will provide companies in Hebei Province, especially in central and southern areas, a more convenient way of passing customs. (5/24/07, Xinhua)

- Shanghai Juneyao Airlines opened two air routes on July 10th, namely Shanghai (Hongqiao) ¨C Shijiazhuang and Shanghai (Pudong) ¨C Baotou. Round-trip flights will operate on the Shanghai ¨C Shijiazhuang route on Tuesdays, Wednesdays, Fridays and Sundays, and a weekly round-trip flight will operate on the Shanghai ¨C Baotou route. (7/11/07 Xinhua)

-Relevant sources from Shijiazhuang Government revealed on May 29th that the first phase of the Runfeng Logistics Center project opened on May 27th. The first phase of the center projected is located at the intersection of the city's South Second Ring Road and Jianshe Street. Construction of the logistics center was divided into two phases, with a total area of 13.33ha (200mu) and an investment of RMB20M. 180 logistics enterprises are now settled in the center, including eight of China's top ten logistics companies, such as Guangda Logistics and Chengxin Logistics. Once the center goes fully into operation, it will transport and distribute over 10,000 tons of cargo daily. (5/30/07 Xinhua)

- Tianjin Port is confident about achieving its target of handling 300 million tons of cargo by 2010. With its seamless cargo transport operation, Tianjin Port has brought in efficiency to its port economy. To reduce transport cost and time, it has formed a literally "waterless port" or seamless operation with Zhengzhou and Shijiazhuang. The waterless port arranges effective logistics from the source of cargo, to custom clearance, ship order booking, storage, and to packaging all in one effective sequence. (8/20/07 NewsTrak Daily)

-Hebei Province in Central China aims to see its ports be capable of handling 592 million tons of cargo, including 1.2 million containers (TEU), in 2010. (1/8/08 Sinocast)

- SHIJIAZHUANG - Several petrochemical projects will be launched at Shijiazhuang Petrochemical Base in Hebei province, the nearest province to Chinese capital Beijing. (8/24/07 Asia Pulse)

-Shijiazhuang Section of the South-to-North Water Diversion project will be completed at the end of 2007, and after the trial period, it will be able to transmit water before April 2008, according to the news released by the Beijing Water Affairs Bureau on November 5th. Hebei Province will transmit 300 million cbm of water to Beijing annually. (11/6/07 Xinhua)

Human Resources

-Shijiazhuang Railway Institute is a prestigious university of applied engineering science as well as the specialties for Arts Science, Economy, Management and Law. It has formed a closed educational system, including graduate students, undergraduates, specialty students and the adult education. More than 40,000 students, famous academies and experts in engineering technology and advanced management have been cultivated. The institute has been enrolling students from the whole country. Now the institute has established 12 schools and 6 departments including 45 majors with more than 16,000 full-time students. We have 13 specialized approved accredited master degree programs such as the Civil Engineering, Construction Engineering, Bridge and Tunnel Engineering, Mechanical Design and Theory, Transport Tools Application Engineering, Managing Science and Engineering. Road and Railway Engineering, Materials, Electric Power Electronics and Electronic Conveying, Computer Application, Solid Mechanics, Disaster Prevention and Reduction Engineering and so on. At the same time, it was authorized to enroll doctor degree students, award master degree to those who have reached the required level. The institute possesses a faculty of 1,500, in which 700 people specialize in educational science, 270 professors, associate professors or senior engineers, 74 teachers have got the doctor degree. 46 young experts have made outstanding contributions to Hebei province even to the nation. Meanwhile, academician from academy of science, academy of engineering or famous professors were appointed as our part-time professors. (http://knows.jongo.com/res/article/3344)

-Hebei Medical University is located in Shijiazhuang, Hebei Province, North China Plain. It consists of the original Hebei Medical College, Hebei Provincial College of Traditional Medicine and Shijiazhuang Medical College, which were combined in 1995. Of them the original Hebei Medical College was established the earliest and grew out of the Hebei Medical School which was set up in 1915. Hebei Medical University has become a comprehensive medical university composed of western medicine, traditional medicine, pharmacy and other subjects. It has 14 colleges, and 15 specialities. The university has Basic Medicine, Clinical Medicine and Integrated Traditional and Western Medicine Postdoctoral Research Institutions. It has been authorized in conferring Ph.D. degree in 14 and master degree in 47 specialities. There are 9781 full-time students in school, 6728 adult students, and nearly 50 foreign students from South Korea and Japan and so on. Now it has been qualified to enroll students from Taiwan, Hongkong and Macao. (http://knows.jongo.com/res/article/3270)

-Hebei University of Economics and Business is a multi-subject and Comprehensive university offering a wide range of courses in Economics, Administration, Laws, Literature, Engineering and Science, with emphasis on the study of Economics. HUEB is privileged to confer Master's and Bachelor's degrees on qualified students. At present the university has 13 master degree programs and 39 bachelor degree programs. The students of the university come from 16 Provinces, cities and self-governing municipality. The student population is more than 18000. Besides the full time students, the College of Continuing Education of the university has more than 13000 part-time students. (Website:http://www.heuet.edu.cn/)

-The Institute of Genetics and Developmental Biology (IGDB) of the Chinese Academy of Sciences (CAS) was founded in 2001 by merging of three former Institutes of CAS, the Institute of Genetics, the Institute of Developmental Biology and the Shijiazhuang Agricultural Mordernization lnstitute. The Institute has a strong and young scientific community. Among 614 employees, 469 persons are directly involved in research activities. Scientists in the Institute work with plant and animal models to address fundamental questions in life sciences, such as genetic control of growth and development, gene expression, signal transduction, structural and functional genomics, and bioinformatics. (Website: http://www.genetics.ac.cn)

-Shijiazhuang City in Hebei province held the 5th Overseas Chinese Professionals Economy and Technology Discussion Fair on 26 June, 2007. The theme of the fair was to increase communication and cooperation with overseas Chinese businessmen. The fair is organized by Shijiazhuang City Government with support from the State Council. Over 100 overseas Chinese from the US, Canada, Singapore, Australia, France, Japan and other countries attended and participated in the fair. Among the participants, there were professionals in medicine, new material, electronic information and financial investment services. Successful entrepreneurs and businessmen were also invited to the fair that aimed to promote innovative power. (7/18/07, News Trak Daily)

Economy

- Shijiazhuang's history tied to medical sector In 1953, the Ministry of Chemical Industry and the Ministry of Light Industry decided to construct a large-scale pharmaceutical base in Shijiazhuang, one of 156 prioritized projects of China's first-ever Five-Year Plan. In the early 21st century, the National Development and Reform Commission approved Shijiazhuang as the first national biological medicine production base. In 2004, Hebei's provincial government said it would build a biological medicine industry belt beginning in Shijiazhuang and covering neighboring cities. Shijiazhuang's government said it plans to transform the city into China's "medicine capital" in the next five to 10 years. (6/19/07 China Daily)

-Shijiazhuang City's prices for packaged chicken, aquatic products, eggs and sugar dropped in December 2007, while the prices for meat, vegetables, fruits and edible oil increased, according to the monitoring data of daily necessities released by the Municipal Bureau of Industry and Commerce. (1/8/08 China Industry Daily News)

- Shijiazhuang is also quickly becoming a consumer market that pursued by both domestic and foreign enterprises. In 2006, the city's per capita disposable income reached RMB11,250 (US$1,486), up 12% from 2005. ;On Zhongshan Road, the major business street in Shijiazhuang, you'll spot "2,999" emblazoned on passing buses. A closer look will reveal the numbers are an advertisement for RMB2,999 HP computers. The computer maker rarely launches advertising campaigns of this size in larger cities. "The changes started in the second half of 2006," says Xing Kai, a local HP distributor. "People here had a vague idea about HP, but now, it has dropped its airs, and released a spectrum of medium to low-end products. We're delighted with it. You know, the supply of the RMB2,999 (US$396) model can hardly meet demands." (8/6/07 CEO CIO China)

-The total foreign trade value of Shijiazhuang City in Hebei Province exceeded US$ 5bn and hit US$ 5.13bn in 2007, up by 22.62% year-on-year, with exports accounting for US$ 4.149bn, rising by 21.98% year-on-year. More specifically, Shijiazhuang's exports of steel products soared in 2007, while exports of fur and leather garments dropped sharply. In addition, exports of hi-tech and electromechanical products increased rapidly, while antibiotics exports surged.(China Industry Daily News, 1/23/08)

- In the first seven months of 2007, the traditional Chinese medicine export value was US$ 3,265,777 in Shijiazhuang City of Hebei Province, down 3.73% year-on-year, according to the latest statistics released by the China Chamber of Commerce for Import and Export of Medicines and Health Products on September 17th. Of the total, the export value of traditional

Chinese medicinal materials and medicines in ready-to-use form reached US$ 2,332,197, down 7.06% year-on-year, the export value of traditional Chinese medicinal extracts was US$ 226,588, down 1.37% year-on-year, the health product export value was US$ 3,748, down 91.28% year-on-year, and the export value of Chinese patented medicines was US$ 703,244, up 15.19% year-on-year. (9/21/07 Xinhua)

- A total of 14.35 million overseas and domestic tourists visited Hebei Province's Shijiazhuang City in the first eight months of 2007, with the tourism income reaching RMB7.2bn, rising 9% and 16% year-on-year respectively, according to the latest statistics released by Shijiazhuang City's Bureau of Tourism. (9/21/07 Xinhua)

-Shijiazhuang - Nearly 7,000 hectares of biodiesel forest will take shape in the north China province of Hebei this year, part of a national campaign to fuel the fast growing economy in a green way. In no more than five years, the Pistacia chinensis Bunge, whose seeds have an oil content of up to 40 per cent, will yield five tons of fruit and contribute about two tons of high-quality biological diesel oil, according to the provincial forestry administration. (1/17/08 Asia in Focus) Hebei is among seven regions designated by the State Forestry Administration (SFA) in 2006 to develop biofuel demonstration forests.

Companies

-Shijiazhuang Listed Companies:

1	Changjiang Securities Co Ltd	China	Listed	000783.SZ	Petrochemicals
2	Huda Technology & Education Development Co Ltd	China	Listed	600892.SS	Wires/Cables
3	Jointo Energy Investment Co., Ltd. Hebei.	China	Listed	000600.SZ	Real Estate Transactions
4	Shijiazhuang Baoshi Electronic Glass Co Ltd	China	Listed	000413.SZ	Components for Electronic Goods
5	Shijiazhuang Changshan Textile Company Ltd	China	Listed	000158.SZ	Textiles
6	Shijiazhuang Dongfang Thermoelectric Co Ltd	China	Listed	000958.SZ	Electricity/Gas Utilities
7	Shijiazhuang Aircraft Industry Co.,ltd	China	Unlisted		Aerospace Products/Parts
8	SHIJIAZHUANG BAOSHI GLASS	China	Unlisted

-Shijiazhuang Pharmaceutical Group Ltd., one of China's largest antibiotic producers, is planning to launch an antibiotic production technology development project in the near future, a company official said today. "The feasibility of the project, Key Technology Innovation for Mass Producing Antibiotics, has recently passed expert appraisal," said Zhang Heming, vice director of the general affairs office of the company, adding that the project will receive government investment, though he declined to specify the amount. The project will focus on creating technology capable of producing antibiotics on top of developing fermentation technology and equipment, as well as separation engineering technology and equipment… Shijiazhuang Pharmaceutical Group Co. Ltd., Harbin Pharmaceutical Group Co. Ltd., North China Pharmaceutical Group Co. Ltd., Shandong Lukang Pharmaceutical Group Co. Ltd. are the four largest antibiotic manufactures in China. (10/17/07 China Pharmaceuticals and Health Technologies Newswire)

-Legend Holding, the parent company of Lenovo Group (HK:0992, LNVGY.PK) has finally concluded its buyout negotiation with Shijiazhuang Municipal State-owned Assets Supervision and Administration Commission, the owner of Shijiazhuang Pharmaceutical Group Co., Ltd. The two sides on June 16 formally signed an agreement to transfer the 100 percent stake in the drug maker to Legend Holding for 870 million yuan, 30 million yuan higher than the bottom price originally set for auction. (6/18/07 Xinhua)

-Shijiazhuang - North China Pharmaceutical Group Corporation (NCPC), one of the largest pharmaceutical manufacturers in China, has entered into a strategic contact with the Institute of Microbiology, Chinese Academy of Sciences (IMCAS) to march into the field of biomass as well as the bio-based chemicals, said local media at the 1st China Bioindustry Convention. Butylalcohol, the biofuel NCPC and the IMCAS focused on, is expected to tart production in August. In September, the biofuel will receive an automobile-oriented testing in the UK, revealed a senior executive of the pharmaceutical giant. Presently, the company has gained several thousand tons orders. The btylalcohol product can be distributed soon provided that the result of concerned testing is satisfactory by then. (6/21/07 Sinocast)

-Guodian Power Development Co (GPDC), a publicly listed company, said it will buy a 20 percent stake in Shijiazhuang City Commercial Bank. GPDC, a subsidiary of China Guodian Corporation (CGC), one of the country's top three power generating firms, will acquire the bank's 313 million shares for 1.2 yuan apiece. GPDC will become the bank's largest shareholder with the 375 million yuan capital investment, it said yesterday. The cash injection from the issue of new shares will lift the bank's capital adequacy ratio to above 10 percent, paving the way for the bank to hold an initial public offering (IPO) on the mainland A-share market in the future. (11/22/07 China Daily)

-Chang An Bus, a subsidiary of Chang An Auto Group, reported heartening performances for the first nine months of the year. In Jan-Sept, the company, based in Dingzhou, Hebei province in north China, produced 94,320 vehicles and sold 84,830 of them. Established in end-2002, Chang An Bus is the sole base of Chang An Auto Group to produce mall passenger and export-oriented vehicles. Over the nine months, the company gained overseas orders totaling 6,000 vehicles while its products were marketed to more than a dozen of countries and regions, with both export-oriented production and sales reaching respective historical highs. By end-September, the company realized sales revenue of 2.61 billion yuan and contributed 106 million yuan of tax to the state coffer. (10/29/07, Xinhua)

-Hebei Huadan Complete Biodegradation Plastics Company Limited (HHCBP) signed an agreement with Hong Kong Tianhao (Chinese phonetic alphabet) Development Company Ltd. on June 17th, on jointly constructing a new bio-degradation plastics particles project in Yuhua Biology Industry Zone, Shijiazhuang, Hebei province. The facility will produce 150 000 tons of bio-degradation plastics particles per year for shopping bags, one-off dinner bucket, one-off water cups, one-off medical goods and rubbish bags, with a total investment of approximately RMB400 million. Its first phase is scheduled for startup at the end of 2007, with a capacity of 20 000 t/a. (China Chemical Reporter, 7/6/07)

-TTCM China, Inc. (TTCH) announced the acquisition of ShiJiaZhuang HuaTeng Technology Company who is engaged in the design and manufacturing of IC-based smart card water-meters as a strategic acquisition related to the water supply industry. The Company is expected to complete the audit and evaluation of the IC-based smart card water-meter company within this month. The acquired company has the annual production capacity of 300,000 units of such high-technology water-meters. (Knobias, 1/22/08)

-Shijiazhuang Sanlu Group plans to let its subsidiary, Shijiazhuang Sanlu Group Co., Ltd., offer Chinese yuan-denominated A shares in 2008, the Chinese milk powder maker announced on October 10, 2007. The subsidiary is a joint venture founded by Sanlu Group and New Zealand-based Fonterra Cooperative Group Ltd. in June 2006 and was designed to get listed since its foundation. Fonterra Cooperative Group, the world's biggest dairy exporter, became the second largest shareholder of the Sanlu Group by acquiring a 43% stake in it with CNY 864 million in June 2006. Situated in the north Chinese province of Hebei, Sanlu Group is devoted to providing dairy products in China. It targets a CNY 10 billion revenue for 2007 and a CNY 30 billion by 2010, and the number was CNY 8.6 billion in 2006, said its chairman Tian Wenhua. (10/16/07, SinoCast)

Real Estate

-The Shijiazhuang Municipal Government recently announced the housing construction and guarantee plan for the period 2008-2010. In the next three years, the City will provide 2,530 low-rent apartments to low-income families with housing problems, and will also construct 123,700 apartments of different types, with 103,600 units of 90sq.m-and-below apartments, accounting for 77% of the total residential floor area. Furthermore, the City will design and construct 33,900 units of affordable housing with floor area of 2.05 million sq.m. (12/13/07, China Industry Daily News)

- Hong Kong contractor Chun Wo Holdings will become a mainland property developer with a two billion yuan investment in Shijiazhuang, the capital of Hebei province. The company, founded in 1968, will be renamed Chun Wo Development Holdings as part of the change. "The mainland will become the company's major profit contributor over the next few years, especially from the project in Shijiazhuang," said Dominic Pang Yat-ting, managing director of Chun Wo's mainland unit, Chun Wo (China). The company is the sole non-mainland property developer in the city. Its residential and retail project, known as Arc De Royal, covers a total gross floor area of 400,000 square metres and accounts for 85 per cent of the company's land bank. (9/28/07 South China Morning Post)

China, Oil, and Africa's Role

2008-02-06T19:29:00.001-08:00

Two articles over the past two days have really caught my attention and wonder unlike many in a long time. The first one comes from Canada's Global Mail in which journalist Geoggrey York describes the situation of China securing Alberta's tar sands oil reserves as follows:"Iris Evans was in an upbeat mood when she walked into the Canadian embassy in Beijing last fall to pitch the Alberta oil sands to a high-powered group of Chinese investors. Ms. Evans, the Alberta Minister of Employment, Immigration and Industry, was expecting a smooth ride. But she was quickly ambushed by a hostile question from a Chinese journalist...'You say Chinese investment is welcome, but we feel a negative attitude from the Canadian government,' the reporter told her at a news conference. 'The Canadian media makes a big story about Chinese spies in Canada, and it seems the Canadian government does not trust Chinese people much.' Ms. Evans said she knew nothing about the spy issue. But the skeptical question was one example of China's doubts about Canada as an oil supplier. Beijing wants a relationship of trust with its oil suppliers - and that means it usually prefers to buy from authoritarian regimes in Africa, Latin America or the former Soviet Union, where there are no complications about democracy or minority rights."

The next article came from the Macau Daily Times, where the journalist, Christopher Cottrell, described a small block in Guangzhou known as "Little Africa." Here's an excerpt:
"Barbecued chicken smoke and Senegalese pop music fills one hallway. On another floor, mosquito coil incense and the odour of new leather bean-bags bound for Angola commingle. Welcome to the Tianxiu building, the home of China’s largest African enclave and a microcosm for the billion dollar trade boom taking place between African nations and China.Located along the bustling Xiao Bei Road in downtown Guangzhou, tens of thousands of Africans flock to Tianxiu to purchase everything from school erasers for Darfur to hair-weaves for Kinshasa’s beauty parlours. Whilst at least 2,000 make it their own, thousands more are just here for export shopping runs.“It is hard to get hair like this in the Congo,” comments Alice Clarisse as she peruses a Tianxiu shop specialising in hair extensions. “I come here about twice a year to Guangzhou for a week, the prices are very good.” Clarisse, whose home-town is Kinshasa, adds, “This city of markets is becoming famous all over Africa.” Indeed, since China opened in 1979, African students and merchants have been flocking to both Beijing and Guangzhou in droves. However, whilst Africans number into the thousands in Beijing, there are no areas that are considered to be wholly African in the capital. Not so in Guangzhou. The Tianxiu building began seeing hundreds of Africans move into the apartments above the lower shopping mall in the late 1990s. As more Africans moved in, more Chinese moved out to rent to them. By 2001, when China entered the WTO and the Beijing 2008 Olympics were announced, the building was considered Guangzhou’s answer to Chungking Mansions in Hong Kong."
What should the impression of a young voter in the United States of America be to the combination of these two articles?
Number 1 is that China is making moves in international energy strategy that clearly demonstrates its desire to get the job done, no matter how it needs to. Secondly, that there is a power circle growing around China that is in direct conflict with the United States on the status of almost every major conflict country in Africa and the Middle East.
I find it terribly ironic that China does not want to secure oil from CANADA because of political concerns that could lead to supply issues in the future. Yet the so-called 'rogue states', deemed so because of their political bent, are in China's eyes, in fact the more stable supplier economy. This is a huge gamble by Beijing, but it is paying off in more ways than even they had imagined. According to the evidence of so many African traders taking up at least periodic residence in Guangzhou, China is springing economic growth in Africa on a scale and in a paradigm that the Europeans never would have fathomed. Why? Because the 19th century European 'traders' in Africa were more 'raiders' than anything else. China is not only taking natural resources out of the continent, but also giving back in the form of cheap goods, political favor, and international markets beyond China.
The latter is what I find most interesting. I posted a trade lead recently on a well-known edible oil site for sunflower oil. Sure enough, half of the responses came from Africa. And a couple of those responses were Chinese names. Now, I had no interest in buying from Africa, but if I were so inclined, I would absolutely have negotiated with the Chinese broker above the other brokers, because I would feel comfortable negotiating with the Chinese anywhere in the world. This may be the exception today, but do not be surprised if in 10 years it is the rule that the Chinese communities of Africa take dominant positions in Africa's burgeoning international trade.

One Reason REITs are Slow to Develop in China

2008-01-27T20:21:00.000-08:00

One headline this morning that is sure to keep the CSRC from accelerating any plans to put out any legislation on REIT formation on the mainland comes to us from Hong Kong. Apparently former Link Chairman Paul Cheng-Ming-fun affirmed what many believed was the reason he left China's most famous REIT, the Link REIT. He said that indeed, the motion by Link's largest shareholder, The Children's Investment Management (TCI) to accelerate rent increases on smaller shareholders went against Mr. Cheng's ethical standards of conduct and he refused. So, the REIT ousted him and the Chief Executive officer Victor So in favor or two westerners.

Mr. Cheng's reasoning was that the majority of the rents would affect smaller retailers. Indeed, Hong Kong's democratic-style government did not disrupt these retailers when they protested the steep rental increases.

A year later, the protest seems meaningless in monetary terms as the rents are going up steeply as Hong Kong's commercial real estate vacancy rates dipped to a five-year low at under 3% (and the boom has also prompted a five-year high of over 400,000 square meters of planned commercial office space to come on market in 2008 (CBRE)).
There is no doubt that the regulators in Beijing understand that REITs are a very sophisticated type of fund. Sam Zell's goal when he created REITs in the 1960s, other than to make colossal returns, was to "enable to average investor to enjoy returns from the country's most prime office buildings." That's fair. The only problem is that this is land - not factories, not energy, not widgets, not commodities, not foreign exchange. How can the government possibly enact legislature for packagin 10 buildings together when it still has not figured out how ownership for even one building plus the land underneath is to be clearly defined? Furthermore, there is such tremendous pressure on the central government to keep speculators from buying up and building on more land, that the very last thing they need to worry about is greedy fund managers cornering 10 buildings in Lujiazui and then unilaterally forcing up rents and wrestling away what little control the government still has over rental rates. They already have the protests to worry about all over the countryside. Center-urban protests would just add insult to injury.

Volatile Stock Markets and China Still Rocking

2008-01-24T12:34:00.000-08:00

Let's take a quick look at the daily headlines regarding China's stock market over the last four days:

Asian stocks rise on hopes worst is over (January 24, Agence France Presse)
Asian Markets Rebound After Fed Cut(January 23, AP)
Chinese shares follow world markets down, sink 4 pct at middday(January 22, Xinhua)
Asian Stocks Plunge In Global Selloff On US Recession Fears(January 21, Market News International)

In an article from two days ago, Kevin Rudd, a journalist for Australia's popular "The Advertiser" wrote the following, "It may be the Chinese and Indian economies and their demand for Australian minerals, meat and grain, which determine the direction of the world economy, not Wall Street."

China's Statistics Bureau today released figures for 2007 National GDP growth - not surpisingly it was a whopping 11.4%! The breakdown by level of industry was primary (agriculture) 3.7%, secondary (manufacturing) 13.5%, and tertiary (service) 11.2%. However, the real growth in manufacturing is closer to 18.5% (stats.gov.cn). The latter represents what is known as the "Total Value-added Industrial Growth" (全年规模以上工业增加值比上年增长18.5%)

So, despite all the rhetoric that China (and India) are the new centers of the global economy, the outright economic shift to Asia has still not taken full effect. However, the effects of the recession we are headed for are bound to influence the shift and in my mind it will only expedite it.
There are three major factors that contribute to this convergence:

1) Lowered interest rates in the US
2) Higher commodity prices
3) Appreciating RMB
4) Higher bank reserve ratio in China

1) Lowering the interest rates in the US is traditionally done for one reason: increase consumer spending. The problem with this logic in January of 2008 is that 2) Higher commodity prices have forced consumers into high levels of debt and spending based on increasingly higher cost goods. Since the last time the Fed cut rates in the early part of this decade, gas is up from an average of $1.40 (some points as low as $1.20) to $3.09 in December of 2007. 500 Kilowatt Hours (KWH) of Electricity cost you $48 in 2001. It's now up to $60 as of December 2007. Even the cost of 1 dozen eggs has jumped from $1 to $2 in that time period. (data.bls.gov) While many other commodities, such as fruits and bread have grown in step with inflation, the energy shocks are enough to wreak havoc on our economy.

3) The steadily appreciating RMB is causing China to make leaps and bounds in two related ways: A) Slowly the Chinese are able to buy more heavy equipment from Europe, the US, Taiwan, and Japan. Simultaneously, they are quickly building new roads, infrastructure, and factories in the hinterland to keep their economy relatively competitive with poorer development manufacturing countries in south Asia (India, Pakistan, Bangladesh), Mexico, Africa, and South America. This will offset many of the price pressures that they are facing. Here's an example. We know of a factory in the western part of Shandong where they are paying workers $0.40 an hour to do the same labor that was being done 10 years ago in Shanghai or Guangzhou for an even higher hourly wage. How can this be? It is because that region is so poor, that the workers can accept that low wage and still live comfortably. Meanwhile, the central and local governments have dramatically increased the port and road infrastructure at Rizhao Port and Lianyungang Port, a mere 3 hours drive from the factory.

4) China raised the central reserve ratio for its banks to 14% last week. That's high, but not high enough. According to experts, the prediction is that they will continue to raise it until it reaches 19% later this year. What this does is reduce the amount of money that banks can loan out to their customers. This in turn reduces the amount of money to start new businesses, buy homes, and get credit cards. It makes the economy much tighter and more secure. They are doing this to prevent a meltdown in their banking system. Given the amount of cash they have in the central bank, it is going to be possible that they will not need banks to lend to continue building roads and creating factories. The central government will effectively "fill in" as projects are short on cash.

All of this has led to not only predictions of a stronger China, but as you will see in the following quotation from George Soros' speech to the World Economic Forum in Davos, Switzerland, the dollar's day as king has passed us by...

“ 'The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,' Mr. Soros said in a debate today at the World Economic Forum in Davos, Switzerland. 'Now the rest of the world is increasingly unwilling to accumulate dollars.' The dollar's share of global foreign-exchange reserves fell to a record low of 63.8 percent in the third quarter as demand for U.S. assets waned after the collapse of the U.S. housing market, according to International Monetary Fund data. The greenback accounted for 65 percent three months earlier. The euro's share rose to 26.4 percent from 25.5 percent. IMF quarterly figures go back to 1999, the year the euro was introduced..." (Bloomberg)

Update on China Real Estate Investment

2008-01-20T19:48:00.000-08:00

Before I get into a succint analysis of the latest data on China's real estate market, let me first begin by saying that it is astonishing how quickly Dubai has stolen Shanghai's (and all of China's for that matter) thunder. I recently received an email from my brother that was entitled "This is what $100 Oil Can Do: Why Steel and Construction are Correlated to Oil." Lest you be scared off by that pretentious and academic-sounding title, this was no economics paper abstract. Rather, the email blasted off 25 pictures of Dubai then, now, and in the future. They included renderings of the Burj Al Ajam, a 480-meter hotel, the Burj Dubai, expected to be over 800 meters and 140 stories upon completion, the Al Burj, expected to be over 1200 meters and approach 200 stories upon completion, the Palm, the World, Trump International Hotel and Tower, Dubailand, and (in my opinion the coolest of them all), Hydropolis - the world's first underwater hotel. How they emergency exits in that are going to work is far beyond me, but hopefully the civil engineers have consulted with...I don't know - who would you consult on that? The old deep water submarine engineers?

Anyways, the bottom line is that now that much of the international real estate world's rapt attention has been taken away from Shanghai and shifted toward the Middle East, it is time for China's major markets to mature and pave the way for the second and third-tier markets to really take off.

With that, a quick comment on the first 2008 report by a major real estate broker and consultancy, none other than Colliers International (www.colliers.com/Markets/China). For those of you reading this that are not familiar with the landscape in China, almost all of the major international consultancies are there. CBRichard Ellis, Jones Lang Lasalle, Cushman & Wakefield, Colliers, Savills, and Knight Frank Petty are the six majors that really dominate the foreign corporate world. There are hundreds of local brokers as is to be expected in such a major market, but the international companies really rely on this six brokerages unless they are going in with their independent real estate advisors, who no doubt will have relationships with one of these companies at least.

Now, let's tackle some of the more interesting stats that appeared in this report.

1) Beijing's office rental vacancy rate is 14.63%! That seems quite high in the buildup to the Olympics and on top of this, over 1,000,000 square feet were added in the fourth quarter alone! Maybe all of that action going on next door in Tianjin is keeping vacancy rates higher than they should be. What's more, there is another 1,200,000 square feet to come on market next year and that should lift the vacancy rate to a near 20%! By comparison, Shanghai's office vacancy rate is peaked at 7.5% in 2004 hit a nadir of below 3% in 2006, and is on the rise again and scheduled to hit 6% for 2008.

2) New residential supply in Shanghai in 2007 was estimated at a shade over 2000 units, well below 2005 and 2006 totals. However, 2008 is poised to see that total jump to nearly 4,000 units. Vacancy will remain steady around 20%.

3) Guangzhou office supply in nearly quadrupled from approximately 180,000 square meters in 2006 to over 650,000 in 2007. Although vacancy rates followed suit and approached 20% from 10% in 2006, the experts at Colliers predict a return to 12% vacancy in 2008. It only occurs in developmental years of a young economy that such gross fluctuations in capacity can be absorbed so quickly from one year to the next. That where the tremendous opportunity is.

4) The Shenzhen migration from Hong Kong continues. Shenzhen OFFICE supply is continuing to surge. In 2006, nearly 350,000 square meters of new supply can on line nearly double 2005. In 2007, supply was up another 33% to 460,000 square meters. 2008 growth should cool, but the prediction is for still another 520,000 square meters. Shenzhen RESIDENTIAL capital values also continued their surge that started in 2006. Midway through 2006, the average per square meter value of housing in Shenzhen was $1500. By the end of 2007, it was nearly $4000! Unbelievable! Colliers predicts it will level off in 2008.

5) Chengdu residential supply and demand were about even in 2006 and it looks like the same occurred in 2007 at 900 new units in each. The vacancy rate there remains quite low at 3% and should not rise above 4.5% in 2008. Average prices there are still quite modest at 13,570 per square meter.

6) Finally, it looks like Hong Kong is in for a huge increase in office supply in 2008 after a very modest 120,000 square meter increase in 2007. This year, nearly 450,000 square meters are due to come online, almost quadruple the total for 2007. Consequently, the vacancy rate is expected to more than double to 7%.

So, where would I suggest putting your money (even though my opinion for you is totally irrelevant given the clamp on foreign investment into the real estate market in China)? Of the majors mentioned here, no doubt Chengdu is the best market to be in for long-term appreciation. As for cap rates, well, most cap rates across China are quite low, averaging in the 1 - 6%, but there are great deals to be had in the Lianyungang and Rizhao Port facilities for industrial space as well as the Nanhui area of Shanghai. Finally, Tianjin is going to boom for years to come so whether you invest in one of the old houses there, new office space, or industrial, you'll do well.

Finally, I think the rush to the third tier cities is on and I have stated before that Nantong, Wuhu (Anhui Province), and Qingdao are all places you want to be looking. Finally, it is still so early to invest in Sanya, which is incredible given how nicely they've built out Yalong Bay and other parts of the city. However, the key factors there are population and employment. There are not even 1,000,000 full time residents in Sanya. In 1950, the population in Florida was 2.77 million (Floridians for Sustainable Population). Today, there are over 17 million. By 2030, there are expected to be 30 million (Census Bureau). In 1940, there were 7 million people in California. Today, there are over 35 million. And in Arizona, in 1950 the population was 750,000. Today, it's nearly 5.5 million. What those numbers show are a minimum population increase of five times over a fifty year period in warm weather climates in the United States. Now, what do you think it would take much for the population to reach 2 million in Sanya? How about 5 million? 10 million? But this is a much longer debate for a different post.

Make it a great week!

5)

Thompson on China's Military

2008-01-18T11:39:00.000-08:00

I have to admit that I have begun morphing into my father by spending entirely too much time watching C-SPAN. However, in my defense, it is an election year and the banter is neither stoic nor meaningless. Watching Fred Thompson is a pleasure because he has a really deep voice and I always get this sensation that I'm watching a combination of him as District Attorney Arthur Branch on "Law & Order" and White House Chief of Staff Harry Sargent in Clint Eastwood's 1993 thriller, "In the Line of Fire."

What struck me today was that in discussing the freedoms of the US and our constant battle with Islamic fundamentalists, presidential candidate Thompson quickly turned his attention to China and asked the question, "Why are they building up their military so strongly right now?" He then made an astute allusion to Sunzi's "The Art of War" by saying that the Chinese have known for millenia that in order to build a strong military you must first build a strong economy. Indeed, in the second chapter, called "Waging War" (作战), Sunzi starts of by saying "Generally, a war operation requires one thousand light chariots, as many heavy chariots and a hundred thousand armored soldiers with provisions enough to carry them a thousand li. What with the expenses at home and in the field, stipends for the entertainment of state guests and diplomatic envoys, the cost of materials such as glue and lacquer and sums spent for the maintenance of chariots and armour, the total expenditure will amount to one thousand pieces of gold a day. Only after this money is in hand can an army of one hundred thousand men be raised." (Sunzi: The Art of War, Foreign Language Press Beijing, China 2001, Edited and translated into modern Chinese by Wu Rusong and Wu Xianlin, translated into English by Lin Wusun - for the original Chinese, see the end of this posting).

Now, over the last eight years, Donald Rumsfeld repeatedly stated that the Chinese were spending much more than in military armaments than they officially reported, including his visit in late 2005. During that visit, Rumsfeld stated, "'We also approach our relationship realistically...Many countries, for example, have questions about the pace and scope of China's military expansion...A growth in China's power projection understandably leads other nations to question intentions and to adjust their behavior in some fashion." (Associated Press, October 18, 2005)

He is right. There is a lot of money going around China right now and we really have no idea how much of it is being pumped into arms factories. We do know about the military equipment purchases from Russia, we know about their nuclear weapons pointed at Taiwan, however we have very little idea about much else. Moreover, we do see the Shanghai Cooperation Organization;s yearly conference that gathers heads of state from around Central Asia, including Russian President Vladimir Putin, and it is clear that China's influence in that region is growing. Furthermore, China is leading the way in Southeast Asia as well.

So, when Admiral Keating, who just returned from China, said that "We must be more open about its rapid military buildup and should expand military collaboration with the United States to develop greater trust and thereby prevent misunderstandings and confrontation," he means business. The response by his counterpart, General Chen Bingde, chief of general staff of the People's Liberation Army was, ''We don't have the ability to make you afraid of us.'' (January 18th, 2008, by Jim Yardley, The New York Times) Keating's visit came on the heels of a dispute between the US and China around Thanksgiving of last year, when Beijing summarily refused to allow the aircraft carrier Kitty Hawk its scheduled call to Hong Kong. A few days prior to that, China also refused two American minesweepers from Hong Kong due to inclement weather. Most commentators attribute this to the official state welcome by President Bush of the Dalai Lama. Nevertheless, tension is growing.

So, when the real life presidential candidate Fred Thompson takes on international defense and security issues by mentioning China, I actually was somewhat relieved. The bottom line is that the war on terror is a minor conflict and a blip on the map of the balance of power shift. The nation of Islam is 1.5 billion strong, but it's spread over dozens of countries, all with competing national interests. That means that the nation-state of Islam simply does not exist. However, China's nation state is immense, bigger than anything we have seen before and building an infrastructure and industrial complex that will surpass that of the US one day. Let's just hope they continue to prefer our friendship and commercial markets over their own inherent ambitions.

Translation:
作战
孙子曰：凡用宾之法，驰车千驷，各车千乘，带甲十万，千里馈粮；则内外之费，宾客之用，胶漆之材，车甲之奉，日费千金，然后十万之师举矣。

Citigroup, China Development Bank, and the Saudis

2008-01-16T21:16:00.000-08:00

Well, it sure does look like the recession everybody is humming about is upon us in the US. Let's look at several factors that caught my eye all in the last two days:

1) The unmployment rate went up to 5% at the end of 2007, a benchmark rate that has got to worry even the most optimistic prognosticators.
2) Tonight on C-Span, six democratic members of the House of Representatives, including Minnesota congressman Tim Walz and Keith Ellison, took the podium for an hour to discuss an economic stimulus package for middle income Americans that would pump $100 billion into the economy and target subsidies for health insurance, small businesses, employment, housing cruch victims, and more. Several of the congressmen mentioned that although Americans continue to increase productivity, wage increases have not moved forward
3) A report came in that Citigroup, one of America's pillar financial institutions and a major player in the global banking industry (with a major presence in China I might add - not the least of which is their shining 40-story Shanghai headquarters overlooking the Pudong side of the bund) is in need of $10 billion and that the China Development Bank is one of two major plausible investors - Saudi Prince Alwaleel bin Taleed being the other. City reportedly has a market cap of some $140 billion
4) Bank of America purchases Countrywide Loans for $4.1 billion
5) The value of Asian-Pacific outbound M&A deals in 2007 hit a record US$433.07 billion in 2007, more than double the $187.1 billion in 2006, according to Thomson Financial. The value of U.S. deals rose 13.9%. (WSJ.com, January 10th)

Citigroup is hard at work in China expanding their business, and now it occurs to me that they are looking not only for the retail, but more importantly for the well of funds that will pour into global markets over the next 10 years.

Looking back to the US now and our next ten years, there is every reason to believe that we can remain competitive, yet only if the legislation and policy supports that hard work. If Citigroup is going to solicit and receive billions of dollars from their "client" in China, meaning our good friend the CCP, and the honorable prince of Saudi Arabia, then it is not just that corporation that should benefit. When you sell a major chunk of a domestic asset, as you'll recall the US government blocked from happening in the case of Unocal, then there should be some trickle-down benefits. My question is, what will Citi do with that infuse of cash? Will they buy more assets, lay off workers, or create more loans for midwest entrepreneurs? If I were China or the good prince, I think I might wait it out 8 months, when that trillion-dollar sub-prime fallout really hits the fan because Citi's assets will look even less liquid and no doubt a stock price drop will reflect that vulnerability.

Then again, at that point, some upset Congressmen from the midwest might step in at that point and block that one too. $430 billion is an obscene amount of capital coming from the East. I just hope that some of that makes it way to the entrepreneur's pursuit, and does not get stuck along the way.

China Growth not Unprecedented

2008-01-15T08:48:00.000-08:00

Tuesday, January 15th, 2008

Our inaugural post will be an academic paper written by Shoshannah Zirkin. Ms. Zirkin is a graduate student at New York University working towards Masters Degrees in Chinese History and Library Sciences. Daniel Turgel contributed to the research for this paper.

This paper tries to compare China's rise to economic might with its own economic history, as well as compare it to that of the United States from 1820 to 1870, exactly the time when China began to crumble economically thanks to western imperialism and invasion.

China’s Second Rise as an Economic Power
by Shoshannah Zirkin
For over a decade the media has painted China as a dragon waking from a generation of hibernation. Exotic and unpredictable, newspapers claim her vast frontier is uncharted territory, a blank map on which courageous foreign investors can draw their own lines and mark new paths to infinite profits. Those who brave the heat of her fire have unprecedented opportunities. As the government slowly disassembles the fortified bastion of communism, windows of opportunity are opening, and those hungry for wealth and opportunity are running free. “Everybody wants a slice of the Chinese miracle that is powering the world economy,” explains Australian journalist Christopher Russell.[1] Miracle, he claims, and he is not alone. China’s success is lauded by the public throughout the world, as if the country has never before obtained economic achievement. People exclaim that growth of such nature has never been seen before. More startling than a stirring dragon is the young yet forgotten history of China in 1820, when her share led the world GDP at 32.9%, a figure unmatched by a single country anywhere on the globe in the last two centuries.[2]

As the world watches China move ahead, it becomes increasingly beneficial to take a look at China’s past. From 618-907CE China was united under the rule of the Tang Dynesty. This was a period of development and stability, often regarded as China’s Golden Age. The capital city, present day Xi’an, was at the time the most populous city in the world, and new cosmopolitan centers sprouted along the recently built Grand Canal. Strict civil service exams brought reverence and sustained authority to government positions, and veneration for the arts brought forth tremendous talent in the form of both poetry and painting.[3] Europe did not see such high levels of cultural achievement until the Renaissance, centuries later.

In the early thirteenth century the “Chinese were still richer on average than Europeans, and their economy was also larger than that of Western Europe.”[4] International trade prospered along the Silk Road and via maritime trade with Southeast Asia. The Portuguese first anchored on China’s coast in the sixteenth century, and the British followed shortly thereafter. The Europeans were frustrated by the limited access implemented by the Qing Dynasty, who restricted foreign trade to the single port of Canton in the South East of China. While interested in selling products of their own, such as tea, silk, and porcelain, the Chinese found European goods inferior. They agreed to trade, but only in exchange for silver. This arrangement created a tremendous trade deficit. In response the Europeans began to trade opium for goods. An addictive currency, the Chinese became hooked on opium, and the balance of trade soon turned. This exchange resulted in the infamous Opium Wars and humiliating Treaty of Nanking, signed by China in 1842. The Chinese were no match for the British, who fought with technology recently developed during the industrial revolution, a transformation that China was yet to encounter.[5] The Chinese lost territorial integrity and authority over international trade. It is therefore no surprise that China’s staggering 32.9% share of world GDP in 1820 dropped to 17.2% by 1870. In contrast, the share of world GDP of Western Europe rose from 23.6% in 1820 to 33.6% in 1870.[6]

The Qing Dynasty fell in 1911, ending dynastic rule in China. Chaos followed. Thirty years of Civil War accompanied by the Japanese Invasion and World War II. In 1949, Chiang Kaishek and the Nationalist Party were defeated by Mao Zedong and the Chinese Communist Party. The latter gained control over Mainland China, unifying China for the first time in decades. This victory was the start of many years of seclusion for China and the Chinese people. For thirty years, trade with China was virtually non-existent. This changed with the death of Mao Zedong and other original Communist Party leaders such as Zhou Enlai. Reforms implemented by Deng Xiaoping opened China’s boarders, and resulted in the rapid economic development that we still see today.

In his book, China Shakes the World, James Kygne argues that China’s current growth is new to world history. He explains, “China’s emergence is different and unprecedented… the sheer scale and speed of the renaissance puts it in a class of its own.”[7] While Kygne has a point concerning scale in terms of population, his statement that the dramatic speed of China’s growth is unprecedented is historically inaccurate.

From 1820 to 1870, the US population increased by 25 million people, a mere 8% of world population growth.[8] At the beginning of the nineteenth century, the United States was first establishing the ideals of an independent democratic nation. Jacksonian America, defined by the frontier and represented by the cowboy, was not primarily concerned with international politics. Statistics reflect this claim, as in 1820, US share of world GDP measured only 1.8%. Industrialization coupled with population growth resulted in a fivefold increase in America’s share of the world GDP by 1870, as America’s piece of the world GDP pie increased from 1.8% to 8.9% in fifty years.[9]
This tremendous spurt in economic growth in America signaled the dawning of a new era in the world’s development. The new world had begun to establish itself as a tour de force in all aspects of global commerce. Its markets became a source for imports from Europe and Asia, its factories led the world in production of cotton textiles, and scientific discoveries such as Charles Goodyear’s vulcanization of rubber established a country which would go on to change, create, and recreate global commerce over the next century and a half.

By contrast, China’s renaissance has largely been exclusively in terms of population and economic growth, not technological breakthrough nor political reform. From 1973 to 2006, China’s population increased by approximately 350 million people, nearly 18% of the world’s population growth. During that time, China’s share of world GDP increased from 4.6%[10] to 15%.[11] Over a thirty-five year period, China’s increase in share of world GDP has increased 3.5 times. This puts China on pace only to match and not to exceed the fivefold increase already obtained by the US in the nineteenth century. Such growth is therefore not an unprecedented accomplishment. Moreover, the lack of technological innovation in China that was present in the US during its explosive stint in the nineteenth century deems China’s feats all the more arbitrary. This is because the science behind laying miles of butadiene highway, constructing dozens of modern port facilities, and planting vast stretches of fiber optic has come from the pioneering work of scientists and engineers outside China. America, on the other hand, was built largely on the ingenuity and scientific breakthroughs of its own innovative entrepreneurs and inventors whose work that has shaped this modern life is now so take for granted.

Still, well educated politicians, journalists, and citizens throughout the world continue to laud China’s “unmatched” economic boom. Helmut Schmidt, the first German Chancellor ever to travel to China remarked in a hyperbole that, “It’s a miracle, really. There has never been such a phenomenon in the world’s history.”[12] Why must something be record-breaking to be grand? Although this is not the first time in history that China has been successful, and although China is not the only country in history to experience such growth, her present success nevertheless is still phenomenal.

“Napoleon, it is said, once remarked, ‘Let China sleep, for when she wakes, she will shake the world.’”[13] While the dragon that we know to be China began to stir in the late 1970s and early 1980s, this was not the first time she awoke from a nap! Thirty years in hibernation was preceded by a rich history and tremendous economic success. A height of fortune that today’s China has still not matched. In looking at China’s past and in comparing China to the US, we can readily predict that China will continue to lead the world in economic growth and will have ever-increasing influence and power. To deny China of her unprecedented past is to deprive the dragon of a lifetime of history. Those who shine a light into her dark cave richly reveal a China that led the world’s economy before and elevate her image beside a China that is likely to accomplish the same feat again. But, sadly, many commentators miss the fact that the most important aspect of this historic rise – the speed and momentum of growth - has in fact been done before, right here at home. Thus, given the way that America has challenged and changed the traditional functioning of human civilization, perhaps then the true miracle of China is not in what we have seen already, but rather what contributions to human progress she is yet to offer.
[1] Christopher Russell, “Hong Kong Gateway; Miracle market beckons SA first to the rapidly growing markets of Mainland China,” The Advertiser (Australia), 7 November 2006, 48.
[2] Angus Maddison, The World Economy – A Millennial Perspective.
[3] Valerie Hansen, The Open Empire: A History of China to 1600 (New York: W. W. Norton & Company, 2000), 191-197.
[4] James Kynge, China Shakes the World: A Titan’s Rise and Troubled Future (New York: Houghton Mifflin Company, 2006), 38.
[5] June Grasso, Jay Corrin, and Michael Kort, Modernization and Revolution in China (New York: M. E. Sharpe Inc., 1997), 31.
[6] Angus Maddison, The World Economy – A Millennial Perspective.
[7] Ibid., 27.
[8] FIND SOURCE!
[9] Angus Maddison, The World Economy – A Millennial Perspective.
[10] Ibid.
[11] The International Monetary Fund “World Economic Outlook Database,” available from http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP); accessed 11 November 2007.
[12] No Author. “China to Overtakeermany in a Few Years,” Xinhua General News Service, 14 September 2006.
[13] James Kynge, China Shakes the World, xiv.

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