The China Analyst - February 2009

THE THE CHINA CHINA ANALYST ANALYST

February 2009

A knowledge tool by THE BEIJING AXIS for executives with a China agenda

China and the financial crisis: 10-page special focus

Features Financial Crisis: China Impact

6

Financial Crisis: China’s Response

9

Financial Crisis: Beginning of the BRIC Era

12

Regulars Macroeconomic Monitor

16

China Sourcing Strategy

24

China Inc. Goes Global: OFDI/M&A

32

Retail Sales Growth, % y-o-y

China

US

40 30 20 10 0 - 10 Nov '05

Nov '06

Nov '07

Nov '08

“This is the worst financial crisis since the Great Depression….” IMF, World Bank, OECD, etc

Export Growth, % y-o-y

China

30

US

20 10 0 N ov ' 05

N ov ' 06

N ov ' 07

N ov ' 08

- 10 Main Photo: Sonyasonya / flickr. Data: US Bureau of the Census; Nat. Bureau of Statistics

4

At the Highest Level China’s sharp slowdown will catch many by surprise and wrong-footed. Indeed, over the next 2-3 quarters a painful adjustment will continue to unfold, requiring good information, solid planning skills and a strong ability to implement. Anticipating and managing risk must be the focus. But do not lose sight of China’s long-term trajectory – it will remain a prominent market and opportunity, outperforming developing and developed countries over the medium and long term. Do not get caught out twice! the country. Important though, is that we do see a rebound late in the year. Still, it is clear that the ensuing period will be a very challenging phase. During this time we identify a number of managerial imperatives for those that manage businesses in China or that have China exposures to watch. The overarching objective is to anticipate and manage risk in a few key areas: As we enter the Year of the Ox we look back on a year in which the global economy underwent profound changes. These changes include adjustments in the global banking and financial system; new trajectories in real economic growth; extreme volatility in energy, commodity, property and financial asset prices; dramatically reduced trade; layoffs on an unprecedented scale; corporate and country bankruptcies; and a scramble internationally to launch appropriate rescue packages. In delivering these rescues many nations broke some of their own sacred rules, even rules that were previously universally accepted as unbreakable. But worsening conditions progressively became more systemic and by the fourth quarter of 2008 impacted negatively on global sentiment and confidence – with most businesses now, in 2009, unsure about their prospects for the future. These unfolding global circumstances are not encouraging. Towards the end of 2008, as China celebrated 30 successful years of market-oriented reforms, it became clear that China’s economy had been fully pulled into the global financial and real economic crisis and Q4 growth of 6.8% confirmed the severity of the adjustments that are in train in China. Indeed, looking ahead there is significant concern over China’s short-term prospects. We concur that over the next 2-3 quarters China will be growing at rates that are well below those that the world has grown used to. In line with Q4’s headline GDP growth, we anticipate Q1 and Q2 2009 to see growth of well below the 7-8% range, widely viewed as the ‘minimum’ that can ensure stability in

• The landscape is changing – regions, sectors, policies and industry linkages and value chains are adjusting and reacting in different ways. Stay on top of these changes and manage information well. • Strategic review is needed – the severity of the economic impact may render existing strategies either completely irrelevant or may at least make them somewhat out of date. A comprehensive strategic review is necessary with some elements of the strategy likely to change much. • Re-discover partners – many Chinese firms and players have been affected already, some detrimentally so. Know how their strategic focus and ability to perform have changed and mitigate the associated risks. • Supplier audits and health-checks – many firms that source from China are really ‘outsiders’ to China. Now is the time to pay close attention to the health of suppliers and their ability to deliver on previously (or newly) agreed contracts and to do a rolling due diligence. So, we acknowledge the seriousness of the current and unfolding environment. We face testing times. But we must add that now, more than ever, it is necessary to maintain a balanced perspective on China’s future. We must guard against a view that is too heavily influenced by adverse shortterm trends or prevailing sentiment that is so deeply negative (and deteriorating). A balanced view would also enable planners to differentiate between short, medium and long term trends, issues and prospects. Over the medium and long-term China’s pros-

pects remain solid. We must also consider that it is natural for developing countries to face periods of turmoil. In this respect China is really now just behaving ‘normally’ and there is no merit in becoming utterly disillusioned with China. Rather, see China for what it is: a key developing market, with the associated dynamism (good and bad) that is endemic in developing countries, but that will remain prominent and even become more important over the long haul. Also, as China adjusts we can expect policies and changes that would likely bring structural changes that would in themselves represent opportunity, for example, in casting the Chinese consumer as a key pillar of future growth. We can also expect more moderate and therefore sustainable growth. Finally, we need to remind ourselves that populous China, with its roughly USD 3.5 trillion GDP, is now the world’s third-largest economy, growing – still – at a pace faster than the average for all developing nations, all developed nations and indeed the world. Even in dynamic Asia it still leads the field. Moreover, we do not see this changing. As such, over the long-term it will remain a focal point in boardrooms around the world. Ultimately, as we set out on the year of the ox, to navigate urgent short-term risks, we must not lose sight of, or be deflected from, the complex long-term maze that must simultaneously be ‘solved’ in order to capture full longterm advantage in the world’s leading developing market. I trust that our readers will enjoy this edition of The China Analyst – and as always we welcome all feedback. We wish all our readers a prosperous Year of the Ox!

Kobus van der Wath Founder & Group Managing Director THE BEIJING AXIS China Business Solutions Strategy I Sourcing I Investment [email protected]

5

Table of Contents

6

Financial Crisis: China Impact

9

Financial Crisis: China’s Response

February 2009

China’s banking system has sustained limited direct losses from the financial crisis, yet the global slowdown has seriously impacted China’s exports, and GDP growth may slip below the crucial ‘minimum range’ of 7-8% in 2009. With the Chinese government finding itself among the best positioned in the world to inject and control the spending of a massive stimulus package without major debt, inflationary or exchange rate consequences, there is much room for hope.

12

Financial Crisis: Beginning of the BRIC Era

16

Macroeconomic Monitor: China’s Slowdown

22

China Facts, Figures & Forecasts

The BRIC economies have been severely affected by the crisis. Yet they are now ready not only to deal with the current predicament, but also to rise above it by emerging from the crisis with an enhanced role in the global economy. China’s economy has been slowing down dramatically since the middle of 2008, and while the adjustment will be significant over the next several quarters, over the longer term we expect China to become more prominent, not less. We examine. China Facts, Figures & Forecasts provides a cross-section of data illustrating growth, transformations and trends in commerce and industry.

24

China Sourcing Strategy

29

China Sourcing Blog Highlights

30

China Trade Roundup

32

China Inc. Goes Global: OFDI and M&A

36

BRICS Breakdown

This section provides information and analyses to help formulate successful China Sourcing Strategies for the year ahead as international procurement managers assess the risk to China’s status as a top-tier global supplier. Highlights from The China Sourcing Blog, THE BEIJING AXIS online information portal and discussion forum on all issues relevant to sourcing from China. This section illustrates the main trends in the growth and transformation of China’s trade profile, and summarises a selection of the latest available trade statistics for China. With Chinese firms increasingly ‘Going Global’, this section analyses Chinese Outbound Foreign Direct Investments and cross-border M&A by Chinese companies. Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS Breakdown is a comparative segment that evaluates and contrasts China with the other leading developing economies.

37

Financial Markets

38

China Business News Highlights

Tracking the dynamics of China’s Shanghai and Shenzhen Composite Index indicators and benchmark interest rates, Financial Markets also illustrates recent trends and transformations in China’s exchange rate regime. A roundup of the main business headlines from China during the fourth quarter of 2008, including the latest indications of the impact of the global slowdown on China, notably in the airline and shipping industries.

40

Regional Focus: China-Africa

42

Regional Focus: China-Australia

44

Regional Focus: China-Russia

46

Upcoming Events

48

Careers at THE BEIJING AXIS

49

THE BEIJING AXIS News

While China-Africa trade is still relatively small, the region has strategic importance for China as trade focuses on resourcerich countries like Angola, DRC and South Africa. Since 2006 China has also vastly increased its FDI to Africa. China-Australia relations have become more strategic. This has allowed boom-times down-under on the back of significant growth for Australian exporters, but lower commodity prices and China’s current slowdown also show the risks. Russia and China are actively developing their trade relationship, although bilateral FDI flows are not yet very significant. This section provides an overview of the status of trade and bilateral investments between China and Russia. A schedule of all the major upcoming fairs, exhibitions and conferences in China, with a focus on events pertaining to resources and industrial sourcing. THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and future business challenges. Positions are available in multiple international offices. Company news for the fourth quarter, including attendance of China Mining 2008 in Beijing and the Global China Business Meeting in Barcelona, as well as exciting new team developments.

THE CHINA ANALYST is published & distributed quarterly by THE BEIJING AXIS. For more on our services see p. 50.

6 China and the financial crisis

Financial Crisis: China Impact China’s banking system has sustained limited direct losses from the financial crisis, and is in much better shape now than it was after the Asian financial crisis a decade ago. The global slowdown in demand is set to seriously undermine China’s export growth for 2009, yet the overall impact of the crisis is expected to be manageable, even though GDP growth may slip below 7-8% in 2009. By Barry van Wyk. Origins When restrictions on the mixing of commercial and investment banking were eliminated in the United States in the 1990s because they were seen to be restricting competition, more opportunities were created for commercial banks. Yet partly as a consequence of this, investment banks evolved complex and risky derivative securities to sustain their profitability. As part of these financial derivatives, banks in the US began packaging mortgages together and reselling them, creating more profits and allowing more households to receive loans. Yet lax oversight allowed banks to grant loans to some buyers who were not able to pay them back, and when US house prices began to fall in 2006, the value of the financial derivatives exponentially decreased in value. What made this so damaging, however, was that many banks and hedge funds had included subprime mortgage-backed securities in their portfolios. This is now history. The bursting of the US housing bubble revealed the extent of leverage used in the housing market and associated mortgage-backed securities (to be running into many trillions of dollars), and hence the devaluation of mortgage-related assets caused substantial write-downs on the balance sheets of financial institutions. Yet in September 2008, when within a few days investment bank Lehman Brothers collapsed and American International Group (AIG) was rescued by the US Federal Reserve, a crisis of confidence in the financial system itself seemed inevitable. By December, banking systems worldwide had written down sub-primerelated losses of USD 965 billion. Amid heightened alarm about asset

Where is the money going? China is implementing a USD 586 billion stimulus package in an attempt to re-engineer growth, yet is the private sector being starved of funding?

values backed by sub-prime mortgages and their derivatives, credit markets stagnated and liquidity decreased substantially. Risk-aversion pervaded financial markets, and fear and uncertainty dominated investor sentiment. This remains the case. Central banks responded to the crisis with various emergency measures, attempting to inject liquidity into financial markets, while governments implemented broader rescue packages. Due to global financial and commercial interdependence, however, adjustments in the US financial system have severely impacted US and world demand, causing commodity prices and exports from developing countries in Asia to slow amid the generalized weakening of economic growth. As an indication of the extent of the slowdown, output in advanced economies is forecast to contract on a full-year basis in 2009 - the first such fall in the post-war period. According to World Bank estimates, world trade is expected to contract by 2.5% in 2009, after an estimated expansion of 5.8% in 2008.

Contagion Asian financial institutions have sustained only 3% (or USD 30 billion) of the USD 965 billion sub-primerelated losses, and the bulk of this in Japan. Improved liquidity management since the 1997/1998 Asian financial crisis, along with low levels of lending to the corporate sector in recent years, meant that capital losses have not seriously impaired the profitability of the region’s banking systems. China’s banking system, moreover, has also profited greatly from reforms in the last few years that contributed to reducing the level of non-performing loans extended by major Chinese commercial banks from 18% in 2003 to 9% by 2005. While by no means incapacitating China’s banking system, uncertainty about the economic outlook and riskaversion have nonetheless served to put pressure on domestic liquidity. Credit tightening and rising raw material and labour costs in H1-2008 were an ordeal for small enterprises in China, compounded by large de-

7 China and the financial crisis creases in overseas orders in H22008. By Q4-2008, 80% of small enterprises in China were estimated to be under cash flow pressure. The advent of the financial crisis has also ignited debate about whether China’s entrepreneurial dynamism is being inhibited by remaining government controls in the financial sector, which could be hampering the flow of funding to smaller firms. A lot of the impetus for the slower growth outlook for China in 2009, however, predates the real impact of the financial crisis. Tightened monetary policies since 2007 have likely been the main driver for dampened demand in China’s real estate sector, and housing sales growth and housing prices have decreased throughout 2008. As a result, new real estate construction and investment have weakened accordingly. The financial crisis has impaired the flow of foreign direct investment to China, with new FDI contracts declining by 26% y-o-y in the first ten months of 2008 and actual flows dropping in Q4-2008. The rapid decline of China’s stock market, moreover, which has fallen by as much as two-thirds since October 2007 (and losing RMB21 trillion since late 2007), has been aggravated by the weakened outlook for corporate earnings and general risk-aversion associated with the crisis, yet much of the fall in China’s stocks have also been ascribed to their inflated value after 2-3 years of super-gains. Exports only? Much of the focus of the impact of the crisis on China has been directed at the export sector. As gross exports account for about 40% of China’s nominal GDP, the chain of events triggered by the financial crisis has ominous implications for sustaining high economic growth. Yet exports of higher value-added machinery, equipment and electronics continued to grow at a high pace for the duration of 2008. The bulk of the retraction in exports has fallen on light manufacturing such as toys and textiles. Hence the global slowdown has served to exacerbate the deteriorating outlook for China’s light

WB/IMF Outlook Comparing Earlier Downturns (Avg. Annual Change) 1997

1998

2000

2001

2007

2008(f)

2009(f)

World Bank Nov 08

3.8

2.5

4.2

1.7

3.7

2.6

1.0

IMF WEO Nov 08

3.8

2.5

4.2

1.7

3.7

2.6

1.1

World Bank Nov 08

3.7

1.7

4.3

1.4

4.1

3.0

1.2

IMF WEO Nov 08

3.7

1.7

4.3

1.4

4.1

2.9

1.4

World Bank Nov 08

9.7

4.8

12.2

0.3

7.4

5.8

-2.5

IMF WEO Nov 08

9.7

4.8

12.2

0.3

7.2

4.8

2.1

22.6

7.1

30.6

9.6

15.3

11.0

3.5

9.3

7.8

8.4

8.3

11.9

9.4

7.5

World GDP (market exch. rates)

China weighted world GDP

World imports

China Exports GDP

Note: In constant prices. Data weighted using China’s export weights, corrected for re-export via Hong Kong

Source: World Bank

manufacturing heartland in Guangdong, where thousands of factory closures and possibly as many as five million job losses have led to protests by laid-off workers. Yet notwithstanding the unrest engendered by factory closures and job losses, the plight of Guangdong also reflects China’s loss of a competitive edge in some low value-added products, notably toys, shoes and textiles. Export growth to the EU started to weaken in August, although exports to emerging markets - the destination of over half of China’s exports still grew 32% y-o-y in US dollar terms in Q3-2008. Prospects are for a sharp reduction in export growth in 2009, however, as the crisis deepens in the US and Europe. The Purchasing Managers’ Index (PMI), based on monthly questionnaires sent to 400 manufacturers, suggests that Chinese exports may contract further in the months ahead. Dropping to a record low of 38.8 in November before improving to 41.2 in December, the PMI registered below 50 (with 50 and above indicating expansion) for three consecutive months at the end of 2008. China’s industrial production growth in November declined to 5.4%, from 8.2% in October, and there are indications that the industrial slowdown in China may be more broad-based.

Of China’s four export powerhouses, Guangdong, Shanghai, Zhejiang and Jiangsu, only Jiangsu has maintained double digit output growth into Q4-2008. While much of the media coverage of the crisis has focused on factory closures and job losses in exportoriented sectors, the dramatic slowdown in heavy industrial sectors related to construction, automotive, steel, power and metallurgy has constituted a stronger warning of deeper systemic exposure in the Chinese economy. Considering that total industrial value-added growth for JanOct 2008 amounted to 14.4%, and that industrial producer prices increased by 8.2% in this period, many of China’s large firms could face negative real growth in 2009. Nevertheless, the crisis in China is expected to be largely manageable in 2009, although much of the responsibility for sustaining growth now falls on the government. As growth falls below 7-8% we can expect more bold stimulus. Still, China will face its share of old and new challenges in the year ahead.

Barry van Wyk, Consultant [email protected]

8 China and the financial crisis Financial Crisis Timeline, 2007-2008 22 June 07

Bear Sterns halts redemptions for investors in High-Grade Structured Credit Strategies Enhanced Leverage Fund and High-Grade Structured Credit Fund

August 07

Discovery of sub-prime mortgage-backed securities in portfolios of banks and hedge funds around the globe sparks worldwide credit crunch

August 07

US Federal Reserve injects USD 100 billion into money supply for banks to borrow at low rates

10 Aug 07

For the first time since 11 September 2001, banks coordinate efforts to increase liquidity

18 Feb 08

Shares in Northern Rock are suspended and the UK bank is nationalised

17 March 08

JPMorgan Chase buys investment bank Bear Stearns for USD 2 per share

April - May 08

UBS, Deutsche Bank, Merrill Lynch, Citigroup, RBS, MBIA, Blackstone, HSBC and Barclays all report more sub-prime-related losses and write-downs

07 Sept 08

US government seizes mortgage lenders Fannie Mae and Freddie Mac, which account for half of all outstanding mortgages

15 Sept 08

Investment bank Lehman Brothers declares bankruptcy

15 Sept 08

Bank of America takes over Merrill Lynch for USD 50 billion

17 Sept 08

US government bails out AIG for USD 85 billion

26 Sept 08

In the largest bank failure yet in the US, Washington Mutual, the giant mortgage lender with assets valued at USD 307 billion, is closed down by regulators and sold to JPMorgan Chase

01 Oct 08

US Senate and House of Representatives approve revised bailout bill, the USD 700 billion Troubled Asset Relief Programme (TARP)

Oct 08

Britain agrees a GDP400 billion three-pronged plan to bail out British banks; Russia approves measures worth USD 86 billion to assist its banks

09 Oct 08

The US stock market suffers its largest loss since the crash of 1987 amid panic over General Motors, Morgan Stanley and several big insurance companies

13 Oct 08

EU economies unveil bailout packages totaling over USD 2 trillion

26 Oct 08

IMF offers lines of credit, including USD 16.5 billion to the Ukraine and USD 25 billion to Hungary, which had earlier also received a EUR5 billion credit line from the European Central Bank

Oct - Nov 08

The French government injects EUR10.5 billion into six of the country’s largest banks; Japan unveils fiscal stimulus of USD 51 billion, South Korea of USD 11 billion

31 Oct 08

The Bank of England says that the world’s financial firms had by now lost USD 2.8 trillion as a result of the ongoing crisis

09 Nov 08

China announces stimulus package of USD 586 billion to rebuild market confidence and spur domestic demand

15 Nov 08

G20 developed and emerging nations agree in Washington to enhance cooperation to revive economic growth and to implement financial reforms

Nov 08

IMF approves USD 7.6 billion bailout for Pakistan; IMF approves a USD 2.1 billion loan for Iceland after its banking system collapsed, the first IMF loan for a Western nation since 1976

25 Nov 08

US Fed commits another USD 800 billion to revive lending

26 Nov 08

People’s Bank of China cuts lending and deposit rates by 108 basis points

26 Nov 08

The European Commission unveils an economic recovery plan worth EUR200 billion, aiming to stimulate spending and boost consumer confidence

23 Dec 08

China cuts interest rates for the fifth time in three months as the government tries to inject money into the economy

Dec 08

Data provider Dealogic reports that companies abandoned 1,309 transactions valued at USD 911 billion in 2008, with total M&A volume reaching a total of USD 3.28 trillion for the whole year, down 29% from 2007

Sources: ADB Asia Economic Monitor Dec. 2008; Gtnews.com; Various

9 China and the financial crisis

Financial Crisis: China’s Response China has not escaped the consequences of the global financial crisis, and its economy has already taken a hit. But with the Chinese government among the best positioned in the world to inject and control the spending of a massive stimulus package into an ailing economy without major inflationary or exchange rate consequences, there is much room for hope. By Lilian Luca. It is no longer a matter of debate whether or not China has been affected by the global financial crisis. Only two to three months ago, one could still hear opinions from economists and other observers that the Chinese economy has ‘decoupled’, and that the crisis will therefore not affect China’s real sector. Moreover, some optimistic analysts saw China as the economic saviour of the rest of the world, at least in terms of sustained imports of raw materials and manufactured goods, giving other countries some room to manoeuvre. We have by now seen, however, that China’s economy is affected by the crisis, and the more pressing issues are: How badly? What will the government do? and Will that be adequate? China starts to become affected The financial crisis has hit the world in two waves: the first one, affecting mainly financial institutions, has had very little effect on China. Long criticised for tight control over its financial markets and on the flow of capital, China has gained in this situation by being relatively isolated from the liquidity crisis and losses in the derivatives markets that have impacted many other countries. The second wave, with the real economy being affected by the crisis, has only now started to hit China, with a delay of 3-4 months compared to other parts of the world. The latest economic statistics from China leave no room for doubt about the effects of the crisis. Imports are down, export growth has halted, and GDP growth for next year is constantly being revised downwards by analysts. The magic figure of 8% growth that is the Chinese government’s minimum target for the economy is not very likely to be achieved as things stand at the moment – that is, unless the government implements some more radical policies

and stimulus spending packages. In the latest World Bank forecast (Dec 2008), 7.5% GDP growth is predicted for 2009, yet the Goldman Sachs forecast is 6% and that of Asianomics, 0-4%. (Ours is 5.6%.) November has delivered a series of grave economic news flashes from around the world, including China. Chinese y-o-y imports have dropped for the first time in two decades by 17.9% (versus +25.3% last year), reflecting not only the worldwide drop in commodity prices, but also a significant decrease in the volume of Chinese imports. And China’s exports contracted in November by 2.2% (versus +22.8% last Nov) and by 2.8% in December, reflecting the slowdown of the major world economies. The growth of exports to developing countries is still strong at +32% year-on-year, accounting for about half of total Chinese exports, but that will also probably decline in the coming months. It also means that China’s exports to developed countries are shrinking fast. In terms of job losses, so far it is

only the heavily export-oriented light industries that have been significantly affected. But news abound about construction sites and processing plants being closed down, and it is only a matter of time before large layoffs in China’s industrial sector hit the headlines. Decoupled or not? Researchers (Anderson, He, Zhang) have argued that the dependence of China’s GDP on exports – often quoted at around 40% – has been overstated. They have suggested a smaller figure of about 8-10% as the contribution of net exports to China’s GDP, meaning that even if net exports will stall, GDP growth in China could still be a healthy 8-9% - if, and only if, the other components of GDP (private consumption, government spending, and investments) keep on growing. At this moment in time, it is not even a question of whether consumption and investment will slow down in China – but rather by how much, and what the government needs to do in order to positively influence consumption (via

China’s Foreign Trade Trade Balance Exports, % change y-o-y Im ports, % change y-o-y 60 50 40 30 20 10 0 Jan-05 -10

Jul-05

-20 Source: China Customs

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

10 China and the financial crisis income tax cuts, one-time transfer payments, pension increases or property transfers), encourage investments (via ensuring easier access to cheap loans for enterprises, larger tax deductions for investments, faster depreciation or government-guaranteed long-term purchasing contracts) and directly affect GDP via increased government spending. Crisis containment around the world

responses

The current financial crisis appears too serious to hope or wait for it to correct itself. We are already seeing some of its negative effects, and these are bound to intensify further during at least the first half of 2009, and perhaps even longer. A major deflationary recession is already underway around the world, with the associated loss of jobs, decreases in household income (due mainly to budget freezes and reduction of payments), and a decrease in corporate profits. With the financial markets remaining depressed, credit is and will remain tight for quite some time still, leading to a significant drop in the amount of new investments and also to capital depletion in firms around the globe. The slowdown of the world economy is already putting social and political pressure on governments worldwide, including China. Will the Chinese government resort to more ‘positive’ stimulus packages or will it enter (or be drawn into) a downward spiral of protectionism and currency devaluation? Will the government’s initiatives have a positive effect longterm, or will they haunt the country in 10-15 years if they are shortsighted? Governments around the world have announced and implemented some initial measures to combat the effects of the crisis. Some, such as Russia, Korea and Japan, have tried to inject liquidity in capital markets, and have failed to achieve any significant results after spending enormous amounts. Another approach to ‘solve’ the financial crisis, attempted by a few governments around the world, has been to buy out the ‘toxic assets’ that partially caused the col-

lapse in the first place. Countries such as South Korea have tried to devalue their currency in an attempt to stop the progressive decline of exports, only to waste all their efforts – when exports are slowing down due to a sharp decline in demand, there is little if anything one can achieve from enforcing a cheaper currency. Of course there is also still the immensely important ‘project’ of setting up a new world financial system, but this process will be excruciatingly slow and will not have much of a short and medium term effect, therefore we will not focus on it in this article. Partial consensus around the world’s governments now seems to indicate that the real economy needs a substantial jolt of support in the form of a large Keynesian-styled stimulus package, and countries should avoid descending into a negative trend of beggar-thy-neighbour policies of protectionism and currency devaluations. Questions still linger about the types of projects that need to be targeted for the best overall long-term effect and the best way to finance these stimulus packages. Will they be spent on ‘bridges to nowhere’ or will they help build the new Silicon Valleys and ‘tiger economies’ of the world? How does a government make sure that the financing of a stimulus package does not break the back of future generations? No-one has the answers yet, and we can be certain to see a number of different approaches around the world, and only time can tell which ones will succeed. Chinese thus far

government

measures

Up to this juncture, the Chinese government seems to be taking a Keynesian stimulus package approach, and we have reason to believe that it will continue in the same direction, with even bigger announcements in the pipeline of measures to support the ailing economy in Q1-2009. Let’s look at a few of Beijing’s announced measures, to understand the general trend.

A major stimulus package worth RMB4 trillion (almost USD 600 billion) was announced near the end of October, in an attempt by the Chinese government to prop up the confidence of consumers, firms and government agencies. Infrastructure build-up package. The plan so far includes major transportation system upgrades (railroads, tunnels, highways) and build-up in disaster-affected areas (earthquakehit Sichuan, areas affected by floods, etc.) Utilities and rural infrastructure projects are also part of the plan, as well as projects aimed at environmental protection and technological innovation. Large provincial-level infrastructure upgrade projects – such as the bridges that will connect Hong Kong, Macao and Zhuhai, and the Hebei “Three Year Big Changes” programme – are all part of additional provincial packages worth around RMB10 trillion. Some of these projects have been rescheduled to commence earlier than was originally planned. Consumer spending support has not directly been part of the stimulus plan so far, but economists point out that spending in social and educational areas will go a long way to increase the average Chinese citizen’s safety net and quality of life, and reduce the need to continually save for a rainy day, thus indirectly increasing consumer spending. Also indirectly affected will be consumer spending on tourism and leisure, resulting from investments in new railroads and high-speed trains, for example. Social and educational measures will take the form of projects for lowcost housing, new health care facilities, spending on new schools and educational projects - all necessary measures for the country’s long-term success. In addition, the new Labour Law in effect since January 2008 will further serve to improve the wellbeing and protection of China’s workers, indirectly affecting an increase in their consumption rate. Support to corporations to encourage investments are a small compo-

11 China and the financial crisis ment would have it, more in the value-added industries of the future, more sustainable and environmentally-friendly.

Engine of growth: The countryside has been the impetus behind China’s economic miracle for 30 years. With the government pushing land reforms and social and educational projects, the countryside is well positioned to provide a muchneeded consumer spending boost. (Photo: BriceFR / flickr)

nent of the measures announced thus far, containing a few minor tax cuts. Ongoing financial market reforms will also indirectly help alleviate the economic distress: the Chinese stock market will allow short selling and margin trading soon, which may encourage more trading activity. In an attempt to increase their financing ability, provinces will in the near future also be allowed to issue bonds. Land reform has been speeded up in the past few months, and the latest measures intended to legalise the transfer of rural land rights can possibility have the largest long-term positive impact on the Chinese economy. In effect, the government is creating additional assets out of ‘thin air’ – as land becomes property it will at some point in the future become tradable in one way or another, it will have a value attached to it, and will allow the peasants who own it to borrow against it, rent it out or sell it. The multiplier effect, across 750 million people, will be significant – increased rural incomes, a narrower income gap, and expansion of the financial system via the entrance of a whole new segment of clients into the market. This would also have positive social consequences.

Export-boosting measures, in the form of reinstated export rebates for more than 2,000 products and the return of the policy of allowing toll trade of non-ferrous commodities, have recently been announced. The renminbi also seems to have largely stabilised against the US dollar over the past two months, putting an end to a three-year trend of sustained strengthening, and this should go some way to helping the chances of Chinese exporters. We are still waiting to see the effects of all these measures, but with the worldwide demand for imported consumer and investment goods very much on hold, it is quite likely that their effect will be minimal, or at least smaller than Beijing might be hoping for. The likely overall effects of these and other possible forthcoming measures by the Chinese government will be to keep China on the path of becoming the largest world economy – and not by 2040, as forecasted only a few years ago, but much earlier, perhaps as soon as 2030. The trade imbalances that have plagued China’s relationships with the EU and the US will naturally adjust themselves, and China will become a stronger, more diversified economy, and will find its own place in the field of global specialization – perhaps, as the Chinese govern-

With regard to financing its stimulus packages, China is probably best positioned of all the large economies to do so on a large scale, without a debilitating effect on future generations. The Chinese budget deficit has been minimal in the past, and the almost two trillion-plus USD in foreign reserves mean that the stimulus plan will not negatively affect the RMB exchange rate in any significant way. Moreover, for the first time ever, the central government will allow local and provincial governments to run deficits, in effect creating even more financing resources for future additional stimulus packages on a local level. Peeking into the future Will China during this crisis engage in a worldwide shopping spree for technology, talent and markets? Will it pursue a powerful push into developing and utilising less resourceintensive green technologies? Will it invest massively in the education and healthcare of its people? Will it reduce its economy’s dependence on cheap labour and migrate it on to the next level? Or will it pursue a strategy of unnecessary and wasteful infrastructure build-up that will lead only to overcapacity and a negative environmental impact, while creating jobs only in the short-term? It will probably be a combination of these strategies that the government will pursue, some more, and some less successful. But we do not for one moment doubt the resolve of the government to steer the economy in a direction that benefits the people, and the ability of the Chinese people to work hard and look towards the future with optimism.

Lilian Luca, Director: Russia/CIS & Group Corporate Office [email protected]

12 China and the financial crisis

Financial Crisis: Beginning of the BRIC Era The BRIC economies have been severely affected by the global financial crisis. Yet in contrast to the vulnerabilities they have displayed in the past, the largest developing economies in the world are now ready not only to deal with the current predicament, but also to rise above it by emerging from the crisis with an enhanced role in the global economy. By Javier Cuñat. In 2001, Jim O’Neill, head of global economic research at Goldman Sachs, predicted in his article ‘Dreaming with BRIC’ that the combined GDP of Brazil, Russia, India and China will surpass the GDP of the G7 economies by 2050. According to O’Neill’s hypothesis, the integration of BRIC countries with the world economy will intensify in relation to the comparative advantages and endowment factors of their respective economies. China and India will become world-leading economies for the supply of goods and services, while Brazil and Russia will excel in providing raw materials. Irrespective of the occasional criticism directed at O’Neill’s hypothesis, the fact is that BRIC countries have experienced impressive economic growth in recent years. Between 2000 and 2007, China grew at an average rate of over 10%, India and Russia at 7%, and Brazil at 3.4% all exceeding the world average of 3.26% and accounting for close to 30% of global economic growth for the same period of time. Today, BRIC countries account for 14% of world GDP, increasing from the 9% of ten years ago. Yet in spite of optimistic trends in recent years, the current global economic turbulence is threatening the long-term prospects of the four emerging giants. While it is still uncertain what the full impact will be and what the end result of the implemented responses will look like, it is clear that virtually nothing will remain the same in the wake of the financial crisis. What are the implications for the BRIC nations? Impact The extent of the impact on the BRIC economies will be partially determined by the intensity and duration of the economic recession in the US and the EU. In the last quarter of

2008, the four countries have already experienced a notable economic slowdown which is expected to persist for the duration of 2009, impacting several parts of their economies to varying degrees:

•

•

As the liquidity crisis and risk adversity persists, enterprises will shift capital to their home economies and hold back on investment plans. This will naturally result in a decrease of Foreign Direct Investment (FDI) in 2009. This is pertinent to the BRIC economies, especially China and India, since the major part of incoming FDI in the past has originated from Western companies seeking lower production costs and access to local markets. FDI has also played a significant role as an engine of growth for the BRIC countries, in 2007 constituting 4.4% of GDP in China, 2.6% in Brazil, 2.5% in Russia, and 2% in India. Economic recession in the US and EU will be accompanied by an increase of unemployment and saving rates and therefore a decrease in consumer spending. This is already resulting in decreased internal demand as well as reduced external demand for imports from BRIC countries.

•

Again, this is especially relevant to export-based economies like that of China, where exports accounted for around 40% of GDP in 2007, with most of these exports going to the US and EU. Similarly, India, heavily reliant on its software and back-office services (export) sector, will suffer from the decrease of outsourcing activities from Western companies. In 2007, Indian exports constituted 52.8% of its GDP. The decrease in demand is also having a serious effect on commodity prices, especially impacting Russia and Brazil as major commodity exporters. Between June and November 2008, the price of coffee and soybeans, two of the main commodities exported by Brazil, decreased by 16% and 40%, respectively. As for Russia, the least diversified economy of the BRIC nations, the falling price of brent crude oil— decreasing from USD 147 in July to USD 39.8 in December 2008, has also had severe implications of reduced revenue for companies like Rostneft and Lukoil. As producers and exporters suffer from the adjustment of commodity prices and cessation of loans, this will contribute to lower output and economic growth in 2009.

BRIC Exports by Destination 2007, USD bn Others

BRIC

Developed Econom ies

China

India

Russia

39% of Chinese exports and more than 40% of Indian exports have the US and EU as destinations

Brazil

0

200

400

Sources: UN Comtrade; Euromonitor International

600

800

1000

1200

13 China and the financial crisis

•

Falling commodity prices and fear of larger losses have driven investors to pull their investments out of stock markets in BRIC economies. The MSCI Emerging Markets Index, (benchmark for equities in 24 developing nations) fell 53% for the whole year 2008, with Russia’s and India’s stocks, two of the worst performing, diving 72% and 65%, respectively. Brazil went down 56% and China 52% for the same period of time.

Forex Reserves, % Annual Growth, end–2008, USD bn 2000

+32.9 BRIC countries collectively hold 39% of the world’s foreign exchange reserves

1500

+8.7

1000

+16.6

500

While the impact of the crisis on the BRIC economies is clearly substantial, it is also of a more indirect nature due to knock-on effects of decreased demand and the credit crunch in the US and EU. Yet the duration and intensity of the impact will depend not only on the current outlook for these economies, but also on the BRIC’s own response capacity, the structural dimensions of their economies, and the implementation of adequate fiscal and monetary policies.

+56.8

China

Japan

Eurozone

Russia

•

sustained high GDP growth in recent years has facilitated a notable increase in the purchasing power and disposable income of BRIC consumers. According to Euromonitor International, from 2002 to 2007, the number of households in BRIC countries with an annual disposable income of USD 10,000 or more increased more than four-fold from 20.6 million to 90.1 million. This illustrates the fast-paced growth of the middle class and its emerging importance in BRIC nations. In 2007, moreover, the proportion of consumer spending in GDP in China was only 35%, 48% in Russia, 54% in India, and 61% in Brazil. This is still very low compared to developed nations. Sustained trade surpluses and FDI inflows in recent years have enabled BRIC countries to garner 39% of the world’s foreign cur-

Companies from Emerging Countries in the Fortune 500, 2000–2007

Non BRIC

BRIC

In 2007, 35 Chinese Companies were in the Fortune 500

•

50 40 30 20 10 0 2000

2001

2002

Sources: Fortune 500; The Economist

+105.9

Taiw an

India

Brazil

Source: CIA, World Factbook Source: CIA, The World Factbook

At the current juncture, the investment and external sectors have become less prominent as engines of growth. But if consumption and government investment will become more significant in the years ahead, the longer term outlook for BRIC countries is still more optimistic than that of developed nations: • Collectively, the BRIC countries make up a potential consumer market of 2.8 billion people, constituting more than 40% of the world’s population. In addition,

60

+64.4

0

Ready to respond

70

+2.7

2003

2004

2005

2006

2007

rency reserves. China, which held almost USD 2 trillion of foreign reserves at the end of 2008, accounted for a full 27% of this total. BRIC nations are currently able to implement sizeable fiscal stimulus packages in order to spur internal consumption and foster stability of their national currencies during the financial crisis. China is at present considering the possibility of increasing its current package of RMB 4 trillion (USD 586 billion) to RMB 14 trillion (USD 2047 billion), while Russia has injected USD 20 billion into its economy and cut the tax on profits last November. The Brazilian government has called for USD 3.6 billion in tax cuts and India announced last December that USD 4 billion will be added to its current fiscal package to ease credit access to the most affected sectors of the economy. In addition, low public debt in BRIC countries will provide more room for fiscal stimulus than in other emerging and developed nations. From 2000 to 2007, the amount of multinational companies from emerging economies in the Fortune 500 has increased enormously from 25 to 62. Although the bulk of these have suffered from the effects of currency depreciation and the fall of stock markets, many large BRIC firms are currently better equipped to overcome the challenges of the financial crisis. This is due not only to sustained growth in recent years, but also because state-

14 China and the financial crisis South-South Foreign Direct Investment 1985–2007, USD bn 350 300

South South FDI

Chinese Companies ‘Going Global’

FDI from Em erging Econom ies

250 200

Global Economic Slowdown

East Asian Financial Crisis

150 100 50 0 85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05E 06E 07E

Sources: World Investment Report; UNCTAD

•

owned companies are direct beneficiaries of government fiscal assistance. For example, with their balance sheets brimming with cash, and with lower interest rates and an appetite for resources, we may see a new wave of Chinese companies looking for bargains abroad in the second half of 2009 and beyond. Due to the limited operational capacity of foreign banks in BRIC countries, the larger market share of a few state-owned banks, lower levels of external debt, and the lesser degree of integration in the global financial system, BRIC banking systems have been shielded from the worst effects of the financial crisis. Furthermore, BRIC banks are able to learn from the mistakes of their Western counterparts and are already implementing better risk management strategies.

These are reason enough to believe that BRIC economies will gradually recover from the current challenges that they face. In some respects they may even pull up before the US and Europe are able to rebound on a cyclical basis. But more pertinent, adequate structural reforms and macroeconomic policies in the past decade have enabled the BRIC economies to (still) enjoy sounder medium to long term economic prospects than the developed world. The steps to be taken now, however, will determine that future.

potential scope of economic and political cooperation among the four BRIC countries, the circumstances of the current environment are impelling these nations to plan and implement common actions. The G20 Summit that took place in Washington on 15 November illustrated the enhanced role that the BRIC countries will play in the decision-making processes that will shape the post-crisis environment. The four countries assumed a common position at the Summit, proposing reform of the Bretton Woods system, including the restructuring of the WTO and IMF, considered incapable of preventing and resolving the current financial crisis, as well as the enlargement of the G7 to incorporate the world’s leading emerging economies in a format more closely resembling the G20. In addition, reform of the regulatory framework of global financial supervision was also proposed, including the admission of the BRIC countries to the Financial Stability Forum (FSF). Developing nations were able to point to the inherent contradiction of continuing to utilise the traditional leadership structures of the G7 while the crisis emanated from the developed world itself.

Stronger together

The G20 meeting of November 2008 also witnessed the first announcement that the BRIC leaders would convene the first official BRIC meeting in Russia in 2009 to further take common actions in terms of cooperation in trade and investment.

While the Goldman Sachs prediction did not include an indication of the

Russia, China and India are already experimenting with rouble settle-

ments in bilateral trade, especially in the energy sector. Considering the high fluctuation of the dollar and euro exchange rates, the switch to national currencies is especially important and will enhance BRIC countries’ cooperation in the face of the global financial crisis. The current period also forms a critical juncture with the highest ever level of FDI between emerging countries. The last five years have witnessed a dramatic increase in the flow of FDI both from and to emerging nations, increasing from USD 36 billion in 2002 to close to USD 300 billion in 2007. Chinese companies have been especially prominent in this process, which has changed from an intra-regional (China in Asia, Brazil in LatAm etc.) to a global phenomenon, characterised by Chinese investments in East Asia, Africa and Latin America, for instance. The IMF has actively sought the assistance of the BRIC countries to find a workable solution out of the current predicament. It is apparent that due to the current economic recession in the developed world, emerging economies will be the only viable engines of growth for the global economy in 2009. Longer term tectonic plates are shifting: the structure of the world economy is changing and the global financial crisis is enhancing this shift. This new world will see the BRIC nations claiming a prime position.

Javier Cuñat, Manager: China Strategy Group & LatAm Desk [email protected]

16

Macroeconomic Monitor: China’s Slowdown China’s economy has been slowing down dramatically since the middle of 2008. This slowdown is currently intensifying and economic statistics for late 2008 and the first half of 2009 will disappoint those who have become used to GDP growth rates of over 7-8%. Expect growth of below that magical range in the next few quarters. However, do not be caught out twice. While China’s slowdown and adjustment will be significant over the next several quarters, we still expect China to outperform other Asian economies, developing economies (from other regions), and developed economies. In short, do not expect a V-shaped correction over the short-term, but count on China to remain a significant growth driver in the global sphere over the medium-term. Long-term we see China becoming more prominent, not less. By Kobus van der Wath. Over the coming six months we expect a dramatic economic slowdown in China after the already slower y-oy GDP growth of 9.0% in Q3 and 6.8% in Q4 of 2008. (We expected 6.5% for Q4.) Indeed, full year 2008 GDP growth of 9.0% is in sharp contrast with 13% in 2007 (revised up from 11.9%) and well below the average annual rate of over 11% sustained for the past 4 years. But the point here is that next several quarters will test Beijing’s resolve even more as it tries to buoy the economy in order to maintain at least 7-8%.

China Annualised Quarterly GDP Growth, % y-o-y, 2007–2010F 14

Q3 and Q4 2008 GDP growth of 9.0% and 6.8% showed the initial slowdown

12 10

Q1 and Q2 of 2009 will see a continuation of the slowdown but at a sharper rate

Q3 and Q4 of 2009 will show a mild rebound that will extend into 2010

8 6 4 2 0 Q1 2007

Q2

Q3

Q4

Q1 2008

Q2

Q3

Q4

Q1F 2009

Q2F

Q3F

Q4F

Sources: China Monthly Economic Indicators; TBA Analysis

The deeper slowdown that we expect in the first and second quarter of 2009 is a continuation of a trend that emerged in the first half of 2008 and that became more pronounced in Q3-2008 as the global picture changed, but that trend especially intensified in Q4-2008. Exports, industrial production and many other indicators in October, November and December already showed this intensification clearly. (See charts on next 2 pages.) To illustrate, y-o-y GDP growth for the four quarters of 2008 slowed from 10.6% in Q1 to 10.1% in Q2, 9% in Q3, and 6.8% in

Q4-2008 - while for 2009 we are expecting growth rates of below or around 5% for both of the first two quarters, before a mild rebound later in the year. Much of that rebound will be a statistical phenomenon but it will nevertheless buoy sentiment. Our full year 2009 forecast is 5.6%.

ures are all in ranges that have not been seen recently (or even at all, over the past 30 years). As this new reality materialises - and settles in with the media, analysts and other commentators - many businesses will question what this means over the long-term. China just celebrated 30 years of pro-market reforms, but will the current set of economic challenges invite an appropriate response and what will it mean for the next decade of policy-making and reform? Our view is that China’s reform process is irreversible, and pol-

But whether our forecast is 100% accurate is not the issue. What is certain is that China’s slowdown is serious and analysts around the world are revising their global and China forecasts down and these fig-

China Annual GDP Growth, % y-o-y, 1978–2010F

14

Past periods of overheating

7-10% GDP growth ‘band’

12

Temporary slowdown below 7-8% ’minimum range’ in 2009

Overheating concerns

16 7-8% GDP growth ‘band’

10 8 6 4 2 0 78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

Sources: World Bank; China Statistical Abstract 2006; OECD Report; TBA Analysis

94

95

96

97

98

99

00

01

02

03

04

05

06

07

0 8 0 9 F 10 F

17 Monthly Imports, % y-o-y, USD bn Im ports (lhs)

140

Grow th Rate (rhs)

40% 30%

120

20%

100

10%

80

0% 60

-10%

40

-20%

20 0 06-Jan

-30% 06-Jun

06-Nov

07-Apr

07-Sep

08-Feb

08-Jul

-40% 08-Dec

last few months are: coal production grew 5.2% in November against 9.2% in October; electricity production declined 9% in November versus a decline of 4% in October; and the Purchasing Managers Index reached its lowest level in November 2008 since its introduction in 2005. (See China Sourcing Strategy for more on PMI, p. 25.) Overall, industrial output in 2008 was up by 12.9% in 2008, much below the 17.9% increase in 2007. For 2009, we are looking for industrial output growth of below 10% at around 8-9%.

Source: China Monthly Economic Indicators

icy-making and implementation are core competencies of the CCP. Our view is also that China is on a much better footing now than say in 1997 during the Asian crisis, and although a deep, painful adjustment is occurring in some sectors and regions, the medium to longer term prospects for China remain sound. In short, over the next few quarters, but also over say a five year horizon, China is still likely to outperform Asian, developing country, developed country and world average rates of growth as it has done before. But over the short-term China’s slowdown will be severe and for many businesses and strategies the fallout will be serious. Below we elaborate key trends that are underway. Losing an engine in mid-flight: Export growth disappears, stellar growth ends? During the past few months, China’s export growth has been on a downward trend and in November and December exports actually recorded year-on-year declines of 2.2% and 2.8%. This poor performance will be repeated for several months and we do not expect to see a revival in the near term; in fact, we do not see much of a rebound before the latter part of 2009 and then only a mild one. This view is shared widely and Beijing also realises that recent export trends have not been a temporary blip. For the full year 2009 we actually see exports contracting. This presents a problem for several reasons. Firstly, China has become more reliant on exports over the past 5-10 years. In 2001 China’s exports amounted to around 23% of GDP,

while in 2007 the ratio came to about 40%. In fact, in 1997 - at the time of the Asian crisis - this ratio was below 19%. Secondly, and importantly, many other drivers of growth also depend on the export performance, for example employment, household income, manufacturing output, investment demand and so forth. The fact that imports are also slowing down means that net exports as a direct contributor to GDP remains roughly intact (China is actually still enlarging its trade surplus), but the indirect effect of lower industrial production (see chart on the next page), capacity utilisation, layoffs and reduced taxes all contribute to an uncomfortable ripple-effect. Industrial production, for instance, grew 5.4% year-on-year in November after an already slow 8.2% in October, and December (despite a marginal increase 5.7%) was also weak. (Industrial production related to exports meanwhile grew by only 5.2% and 6.8% in October 2008 and November 2008, respectively.) Other examples of weaker activity over the

Thirdly, the world regions that China export to (70% of China’s exports go to the US, Western Europe and Asia) are all likely to be affected for a considerable period. Some countries’ economies and imports will likely not recover for 2-3 years or more. This is a stark reminder that ideas about decoupling, expounded by many during the previous fat years, was mostly unrealistic. Fourthly, many small and mediumsized (and some large) exporters have suffered a slow deterioration in viability and financial health (due to rising costs, a firmer RMB, etc) for quite a while. For many, notably in the Pearl River Delta (PRD), 2007 and 2008 were already tough and the latest fall-off in exports was (or will be) the end of the game. Many have shut down and the resultant job losses and/or layoffs present a huge challenge for Beijing. Social stability remains paramount, and there is an urgent need to create jobs and revive ailing sectors and regions. Here it is notable that concerns over inflationary pressures,

Monthly Exports, % y-o-y, USD bn Exports (lhs)

140

Grow th Rate (rhs)

60%

120

50%

100

40%

80

30%

60

20%

40

10%

20

0%

0 06-Jan

06-Jun

06-Nov

Source: China Monthly Economic Indicators

07-Apr

07-Sep

08-Feb

08-Jul

-10% 08-Dec

18 Growth Rate of Industrial Added Value, % y-o-y 30 Grow th Rate of Industrial Added Value 25 20 15 10 5 0

2001

2002

2003

2004

2005

2006

2007

2008

Source: National Statistics Database

that were rife from the middle of 2007 to the middle of 2008, have now made room for concern over an extended deflationary cycle. CPI peaked early in 2008, while PPI also peaked around mid-year. Lower energy, commodity and import prices along with reduced food prices increasingly synchronises with much weaker demand growth for a low inflation environment, creating clear risks of deflation into 2009. The upshot is that China must quickly create new drivers of growth. At the very least it must find ways to avoid a hard landing. But it is not easy to quickly stimulate domestic demand in order to serve as a replacement for external demand. However, at least in China there is a long history of pump-priming, infrastructure projects and other demand stimulus experience to draw on. Many other economies will move too slowly either in planning a stimulus response, or in implementing the plan. The US and Western Europe are examples of long decision cycle systems where political deadlock is

common. China, we expect, will not make either of these two mistakes. (Re)starting the backup engine: Government stimulus to avoid a hard landing? As the global financial crisis unfolded in H2-2008, and as the real economic reality became evident around the world (and in China), China’s policy makers and planners became convinced that the impact on the local economy would likely be severe. Moving seamlessly from a five-year phase of trying to slow economic activity, there was a swift change to an expansionary policy stance. Monetary measures were taken (reserve requirements were cut, interest rates were cut and money supply growth targets were loosened while banks were encouraged to keep lending growth up); and fiscal policy was quickly identified for significant stimulus. The four trillion yuan stimulus package announced by Beijing in late October formed part of this policy

about-turn (from restraining the economy to providing strong impetus for faster growth). We cover China’s response elsewhere in this publication (see China Response, p9), but suffice to say that so far there has already been a strong response that is likely to be augmented by additional measures in the period after Chinese New Year and over the course of 2009. So far other measures have included: lower property sector transaction taxes, subsidies to low income earners and the agricultural sector and reduced export taxes for many industries. There has also been a slowdown (or even a reversal) in the reduction of export subsidies. Expect more. As mentioned above, our 2009 GDP forecast projects a very weak H12009, a consolidation in Q3-2009 and a mild recovery in Q4-2009. This recovery can be ascribed to a somewhat less vulnerable global picture at that time, a statistical windfall in terms of measuring yearon-year growth against a weak Q42008, and (our anticipation of) Beijing’s success in delivering a stimulus package. Our Q4-2009 forecast is 7.5%, which would again bring growth back into the usual ‘expected’ range. Moving forward into 2010 we expect a continuation of that momentum until statistics again work against us in H2-2010, but we nevertheless look for a full year GDP growth rate of 7.5% in 2010. Flying again: Unlocking China’s domestic consumer potential? Exports have contracted for the past several months, yet to write off

Monthly Retail Sales, % y-o-y, USD bn Retail Sales

160

Grow th Rate 26%

140 120

22%

100 80

18%

60 40

14%

20 10%

0 07-Jan Source: National Statistics Database

07-Jun

07-Nov

08-Apr

08-Sep

19 Annual per Capita Rural and Urban Disposable Incomes, % y-o-y, USD Per Capita Annual Disposable Incom e of Urban Households Per Capita Annual Net Incom e of Rural Households Grow th Rate(Urban) Grow th Rate(Rural)

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

25% 20% 15% 10% 5% 0%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: National Statistics Database

China’s ability to compete in export markets over the longer term would be a mistake. But it is also true that easy export gains, on the back of low labour costs, are no longer possible or viewed as the model for pulling China ahead over the next 30 years. That, for example, is why the export-intensive PRD is now reinventing itself to move to higher value-added industries, higher technology sectors and a services-based segment. This is also why there is so much debate about how China could unlock the potential of its vast population as a credible and sustainable consumer market. After all, private consumption in China constitutes only 30% of GDP as opposed to 70% in the US (and over 50-60% in the UK, Germany and Japan), so there is scope to expand that share. Recent events and reduced external demand have now forced Beijing to stimulate household consumption. Exports may remain important but it can no longer be perceived as the reliable engine of growth that it used to be. At the very least we can expect China’s planners to think more about their export composition, exposure and policies. The long-term future will no doubt see much more emphasis on domestic demand, specifically on the private consumer. There is already a huge market of new rich and an upand-coming middle class to tap into and grow. But it probably also suits Beijing to put more emphasis on the grassroots and in particular secure the incomes and prospects of the rural poor (especially in central, western and north-eastern China). Pulling these households into the Eastern China success story has

always been a key element of CCP planning. The problem of course is that this was supposed to be something that would be addressed over multiple 5year plans. Suddenly, the need for accelerated rural development, job creation and social security is far more urgent. While exports have practically fallen off a cliff over a matter of 3-4 months, it will take many quarters to kick-start the stimulus programme, spend the money, implement projects and see results at the grass-roots level (let alone in quarterly GDP growth statistics). This is a key challenge for Beijing and commentators are sure to highlight the risks to social stability. But Beijing is aware of the risks too, and will do everything possible to expedite implementation of its measures over the course of the next few quarters. In effect, as the global economic situation deteriorates further and as the impact on China becomes worse, the Chinese government will select a number of longer term capital projects that were previously delayed or cancelled due to overheating concerns over the past few years, and re-launch them in a super-package over the coming two to three years. Future 5-year plans will likely also be reviewed in line with the notion of making the Chinese consumer a top priority. The fundamental fact remains that China has an underdeveloped consumer base that can be developed, a national spending capability (higher savings and lower indebtedness compared to most other coun-

tries affected by the crisis) and an implementation apparatus that could see the Chinese consumer reshaped as a key pillar of the Chinese economy. These factors are central to our continued optimism over China’s medium to long term prospects.

Exchange rate outlook: No longer a one-way bet The gradual appreciation of the RMB over the past three years, both against a basket of currencies and against the USD, may be on hold. (Since the de-pegging in 2005 the RMB has appreciated by 20% against the USD.) It will be difficult for Beijing to engineer a sudden return to a weaker bias for the RMB, and a significantly weaker RMB would be politically unacceptable. However, a simple continuation of the appreciation trend of the past three years is unlikely too. At the very least the current circumstances will inject a good degree of two-way risk into the business of forecasting the USD/ RMB. (Forward rates in the NDF market has already illustrated this clearly.) It will also fuel friction between Beijing and the new administration in Washington. Our view is that the RMB will be range-bound over the next six months. The extent of the slowdown globally, and in China, will then determine what we can expect for the next stage of RMB adjustment. For the time being our forecast anticipates a further but slight appreciation in the RMB during the second half of 2009.

20 CHINA MACRO STRATEGY: Risk & Reward Coexist, Business Planning is Crucial Key elements of our global outlook for 2009, 2010 and beyond

range over the medium and longer term of very close to but hopefully above the 7% level. This will be a departure from previous years when high (above 9%) but unsustainable growth became the norm.

losses have been sustained in 2008 and how many are likely to occur in 2009? This is an obvious area of concern but very little information is available on the exact scale. Strategic opportunities

By 30 June 2009 we would have seen the low for most financial asset and commodity prices globally. After 30 June 2009 the chances of good news increase in probability, i.e. expect an end to a period of ‘one-way-bias’ in news. After 30 June psychology in global markets will turn steadily from ‘gloom’ to ‘cautiously optimistic’ as intermittent signs of recovery become discernible over the mediumterm. In the second half of 2009, in Q3 and especially Q4, a statistical and activity rebound will occur. This will buoy the prevailing mood and cause a consolidation phase for 2010 to potentially look much different. The first half of 2010 will be measured against very poor numbers in the first half of 2009. This will help anchor confidence and turn the page on 2008/9 in a positive fashion. This will hold true for the world but also for China. There is scope for supply bottlenecks and capacity shortages across products as we enter deeper into 2010. This will lay the foundation for price escalation, fixed asset investment and a welcome seachange in investor sentiment. Key elements of our China outlook China’s first half of 2009 will be weak, but the second half will be better, followed by a stronger first half of 2010 as the stimulus starts to kick in. Confidence, prices and expectations will all ‘track’ this macro cycle for direction. A V-shaped correction looks very unlikely but we do not see a permanent reduction of China’s growth beneath the 7% level (that is so crucial for social stability in China). Rather we expect a new average

We view the upper end of a 6-8% GDP growth range as acceptable (in order to meet Beijing’s social challenges, avoid structural distortion and/or overheating), and it will also be a more sustainable growth rate over the long-term. We expect changes in the long-term composition of GDP: regional, sectoral and internal/external demand. Reasons for optimism Policy makers—Beijing’s resolve and the realisation that in the short to medium term domestic demand needs to cushion the blow from reduced exports. The stimulus measures announced so far are likely only the beginning of an ongoing effort that will unfold in coming months. Implementation—A key strength of the Chinese system is the ability to deliver on plans and there are many shovel-ready projects. Structural issues—China’s economy is structurally different from say the US or Asian countries in 1997 with lower indebtedness, higher savings and stronger bank balance sheets. Causes for concern Duration—Exports are unlikely to come back anytime soon but just how long before this happens? Marginal projects—There is a risk that marginal projects are taken on in the stimulus programme that may not ripple through far/wide enough. Consumer and general sentiment— Property and stock markets have seen significant value-erosion. This is sure to weigh on consumer demand just as we need more reliance on domestic demand. (From late 2007 to the end of 2008 the stock market lost 21 trillion yuan, or roughly 100% of GDP in value.) Unemployment—Just how many job

Despite a short-term disappointment in growth we believe that the world will maintain the view that China is a significant developing country that will continue to industrialise, urbanise and modernise. As this history unfolds we expect to see opportunities over the short, medium and long term. A few preliminary ideas: • As Beijing continues to support domestic demand (in particular the ‘grass-roots’) we can expect more centers of growth and market opportunities in third-tier, fourth-tier and fifth-tier cities and regions. It is time for go-to-market strategies in rural and Western China • A shift away from ‘more-is-better’, to quality and sustainability will make global suppliers of key technologies and solutions attractive. Efficiency and safety now become priorities and foreign firms will benefit if they develop the right channels-to-market in this phase • The next stage of growth will coincide with a renewed environmental consciousness which will make foreign technologies, services and solutions in this sector more attractive. This is a long-term trend that must be captured • The Chinese consumer is about to become far more powerful and renowned. Firms that have well developed Chinese consumer knowledge and plans will excel • Players in infrastructure must sell know-how and technology into large-scale projects during the stimulus period • China Procurement will remain a big opportunity for firms that can manage international projects and risk. The end of a runaway world economy provides an environment where long-term supply relationships can be forged and developed in a sober and rational manner Kobus van der Wath Founder/Group Managing Director [email protected]

21 Selected Quarterly TBA Forecasts for China (% y-o-y) 2007

2008

2009F

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Real GDP

11.7

12.2

12.2

11.9

10.6

10.1

9.0

6.8

4.3

4.5

5.8

7.5

Retail Sales Capital Formation Industrial Output Exports

19.2

20.9

23.1

26.0

n/a

24.0

22.2

19.8

17.0

16.0

15.5

18.0

-

-

-

24.8

-

-

-

25.5

-

-

-

29.0

15.1

18.3

18.7

17.5

16.6

15.9

13.0

6.8

6.0

8.2

9.5

10.5

27.9

27.4

26.2

22.2

21.3

22.3

23.1

14.6

-3.0

-4.0

1.0

5.0

Imports

18.2

18.2

20.7

25.4

28.7

32.4

25.7

-10.1

-10.0

-8.0

2.0

3

CPI

102.7

103.6

106.1

106.3

108.0

107.8

105.3

103.2

102.0

101.0

100

100

USD/RMB

7.76

7.68

7.56

7.43

7.16

6.96

6.84

6.83

6.8

6.8

6.7

6.65

China Consensus: China GDP Growth Forecasts for 2009 by Selected Analysts (% y-o-y) Highest to Lowest

Latest forecast for 2009 (by December 2008, January 2009)

Previous forecast for 2009 (by beginning of Q4-2008)

CASS

9.3 (started to signal downside risk)

9.7

UOB

8.3

n/a

Asian Development Bank

8.2

9.5

Merrill Lynch

8

8.6

Wing Hang Bank

8

n/a

HSBC

8

n/a

EMIS 21 Source Consensus (30 Dec 2008)

7.76

>9

World Bank

7.5 (Reference to sub-6% growth)

9.2

UBS

7.5

9.5

Deutsche Bank

7.0

7.6

BMI

6-7

8.8

Global Insight

6.9

n/a

AT Kearney

6.0

n/a

EIU

6.0

7.5

Goldman Sachs

6.0

n/a

THE BEIJING AXIS

5.6

8.5

RBS

5.0

8.0

Asianomics

0-4 (see 30% risk of negative growth)

n/a

Sources: Press; Various; TBA

China Chart Pack China Outlook 2009—Selected Economic & Other Indicators

THE BEIJING AXIS China Strategy Group has again prepared a start-of-the-year ‘China Outlook’ chart pack for the Chinese economy in 2009. The chart pack outlines historical and recent trends, along with forecasts for selected economic statistics and other indicators, covering China’s national accounts, prices, consumption, investment, public finances, external trade, financial indicators, demographics and comparative international statistics. The chart pack can be downloaded from the ‘Knowledge’ section on our website at: www.thebeijingaxis.com

22

China Facts, Figures & Forecasts The following is a brief selection of data and forecasts that illustrate the main trends in the growth and transformation of China’s commerce and industry. We also include a forecast of developing and developed country growth, along with world average growth. China Selected Economic Indicators Nominal GDP ($bn)

2003 1,641

2004 1,932

2005 2,244

2006 2,645

2007 3,242

GDP per capita ($)

1,270

1,486

1,716

2,012

2,454

Real GDP growth (%)

10

10.1

10.4

11.1

13.0

Growth in private consumption (%)

9.2

10.5

12.1

12.7

14.9

Growth in real fixed asset investment (%)

26.7

25.8

25.7

24

24.8

Fixed investment (% of GDP)

39.4

40.7

42

42.8

44.1

CPI inflation (% change in average index for the year)

1.2

3.9

1.8

1.5

4.8

Exchange rate (RMB per USD, end-year)

8.28

8.28

8.07

7.8

7.09

Nominal wage growth (% change year-on-year, average)

13

14.1

14.6

14.4

16.5

3-month inter-bank rate (%, end-year)

3

3.6

3.6

2.8

4.4

Broad money supply (M2,% of GDP)

162.9

158.9

160.7

163.9

163.6

Broad money supply (M2,% change year-on-year)

19.6

14.6

17.6

16.9

16.7

Current account balance ($bn)

45.9

68.7

160.8

249.9

333.7

Net FDI ($bn)

47.2

53.1

67.8

60.3

67.7

Foreign debt ($bn, end-year)

193.6

247.5

281

323

373

Foreign debt (% of GDP, end-year)

11.8

12.8

12.5

12.2

11.5

Central bank gross FX reserves ($bn)

403

610

819

1,066

1,500

Source: Credit Suisse Capital Markets Report

World GDP growth, % y-o-y, 1990–2010F 14

China Emerging and Developing Economies World Advanced Economies

13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1

97

98

-2 Sources: IMF; TBA Analysis

99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

23 FDI Statistics by Province

China’s Utilized Foreign Direct Investment

Heilongjiang

Jilin

Beijing

Xinjiang

Liaoning

Inner Mongolia

Gansu

Ningxia Tianjin

Hebei Qinghai

Shandong

Shanxi Shaanxi

Tibet

Henan

Jiangsu

Sichuan Hubei

Chongqing

China’s FDI

Flow Stock (USD bn) (USD bn)

2003

53.50

228.37

2004

60.63

245.47

2005

72.41

272.09

2006

72.72

292.56

2007

83.52

327.09

2008F

92.40

Guizhou

Jiangxi

Hunan

Shanghai

Anhui Zhejiang

Fujian

Yunnan Taiwan

Guangxi

Guangdong

Provinces in red made up 75% of China’s Actual Utilized FDI in 2007

Hainan

419.49

FDI Actual Utilized (USD bn)

% of Total

OFDI From Chinese Side (USD bn)

% of Total

Anhui

3.0

2.5

0.02

0.2

Latvia

Beijing

5.1

4.2

0.37

5.1

Chongqing

1.0

0.8

0.44

Fujian

4.1

3.3

Gansu

0.1

Guangdong

FDI Actual Utilized (USD bn)

% of Total

OFDI From Chinese Side (USD bn)

% of Total

Jiangsu

21.6

17.8

0.47

6.5

Chile

Slovakia

Jiangxi

3.1

2.5

0.02

0.2

Latvia

6.1

Iran

Jilin

0.9

0.7

0.24

3.3

Venezuela

0.31

4.3

Philippines

Liaoning

9.1

7.5

0.22

3.1

Vietnam

0.1

0

0

Sierra Leone

Ningxia

0.1

0.1

0

0

Haiti

17.1

14.0

1.47

20.5

Nigeria

Qinghai

0.3

0.3

0

0

Netherlands

Guangxi

0.7

0.6

0.07

0.9

Botswana

Shaanxi

1.2

1.0

0.04

0.5

Uruguay

Guizhou

0.1

0.1

0.00

0.0

PNG

Shandong

11.0

9.0

0.40

5.6

Malaysia

Hainan

1.1

0.9

0.03

0.5

Honduras

Shanghai

7.9

6.5

0.63

8.7

Argentina

Hebei

2.4

2.0

0.06

0.8

Bahrain

Shanxi

2.5

2.0

0.12

1.7

Panama

Heilongjiang

0.5

0.4

0.03

0.4

Antigua

Sichuan

1.5

1.2

0.79

11.0

Bahamas

Henan

3.1

2.5

0.14

2.0

Latvia

Tianjin

5.3

4.3

0.10

1.4

Serbia

Hubei

2.8

2.3

0.01

0.2

Bosnia

0

0

0

0

Hunan

3.3

2.7

0.29

4.1

Oman

Xinjiang

0.1

0.1

0.25

3.5

Yunnan

0.4

0.3

0

0

In. Mongolia

2.1

1.8

0.07

1.0

El Salvador

Zhejiang

10.4

8.5

0.61

8.4

Sources: UNCTAD Database; China Commercial Yearbook 2008

Comparable FDI inflow

Tibet

Comparable FDI inflow

Vanuatu PNG Afghanistan Indonesia

24

China Sourcing Strategy Affected by the financial crisis, China’s foreign trade slumped in Q4-2008, and the Chinese government has taken a series of measures to stimulate exports and domestic consumption. This section provides information and analysis to help formulate China Sourcing Strategies in 2009. By the CSU team. Highlights

China Exports as Share of GDP, % 1978–2007

• In November 2008 China’s exports suffered the first monthly y-o-y decline in seven years • China’s manufacturing Purchasing Manager Index (PMI) in November fell to 38.8%, the lowest point since the PMI survey was initiated in China in 2005 • The Chinese government adjusted export tax rebates four times in H2-2008 • China’s Customs estimated the y-o-y growth rate of the total value of imports and exports in 2008 to be 18%, and this will fall to below 5% in 2009 • The RMB posted a record one-day decline against the US dollar on 1 December 2008, falling from 6.8349 to 6.8505 • China removed 1,757 items from its lists of product categories that had been either restricted or banned from foreign investment in processing trade. These products, ranging from textiles to plastic goods, account for 77% of the products designated as restricted and may involve USD 30 bn in foreign trade • China adjusted the rate and application scope for some provisional and special taxes from 1 December 2008. The export duty was scrapped on 102 items • Supplier audits have now become even more crucial

45

30

15

0 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: World Bank

China Exports by Category, USD bn 1,400 1,200 1,000 800 600 400 200 0

Others Sundry M achinery Equipment Products Classif ied by mat erial Chemicals and Relat ed Products M ineral Items Foodstuff s

2001

2002

2003

2004

2005

2006

2007

Source: MOFCOM China

Jan Oct 2008

Export Slowdown: Implications for Procurement Managers that Target China China’s November exports fell by 2.2%, the first monthly decline in seven years. The number for December was –2.8%. There were early signs of decreasing exports, such as at the Canton Fair where orders decreased by 17%. Also, the PMI fell to its lowest point since China introduced the survey system, and exports of some main export commodities declined in Q1, Q2 and Q3 of 2008, including texMonthly Export Growth, % y-o-y 35

2 0 0 8 mo nt hly g r o w t h ( y - o - y )

30 25 20 15 10

tiles, parts of automatic data processing machines, televisions/radios, garments, footwear and toys. The main reason for the severity of export declines is shrinking overseas demand, as a result of the crisis. China’s government is seeking new economic growth angles, while some measures have been taken to buoy struggling exporters, i.e.: • assisting exporters to transform by stimulating domestic demand • encouraging M&A and to help with industry consolidation, and • guiding exporters to better anticipate RMB volatility by 1) better managing FX risk, 2) improving resilience despite a stronger RMB

ties; the RMB’s appreciation has slowed; and China’s energy and raw material prices are going down. All of these are drivers for better pricing. Buyers in emerging markets and developing countries, such as south Asia, the Middle East, Latin America, Africa and Eastern Europe, could benefit from the Chinese government’s policy of encouraging exporters to actively develop these markets in 2009 as developed country imports weaken. Annual Export Growth, % y-o-y 50 40 30 20 10

5 0 -5 Jan

M ar

M ay

Source: China Customs

J ul

Sep

Nov

Procurement managers that target China may notice a series of favourable trends: more export rebates are (again) provided; fewer export du-

0 - 10 19 78

19 8 8

Source: China Customs

19 9 8

2008

25 Regulatory Watch

Purchasing Managers Index, Jan 2007–Dec 2008

China raised export tax rebates four times in the second half of 2008

60

PMI in Manufacturing Industry

1st time (effective 1 August 2008): China lifted export tax rebates on a range of textiles and garments to 13%, some bamboo products to 11%.

50

2nd time (effective 1 November 2008): This adjustment involved 3,486 items of products, which is about 25.8% of total products. Rebates were increased on textiles, garments and toys to 14%, and furniture from 11% to 13%. In addition, rebates on exports of selected ceramic, plastics, mechanical, electrical and medicinal products were lifted by 1% to 2%.

This adjustment raised rebates on 3,770 items of export goods, about 27.9% of the total products, including laborintensive, mechanical and electrical products. The adjustment reduced or eliminated export duties on certain types of steel, chemical and some fertilizer products. 4th time (effective 1 January 2009): The last adjustment in 2008 increased rebates on 533 items of high-tech and machinery products. It raised rebates on industrial robots and airplane navigation systems to 17%, motorcycles and sewing machines to 14%. The RMB posted a record one-day fall to the USD On July 21 2005, after more than a decade of strictly pegging the RMB to the USD at an exchange rate of 8.28, the People's Bank of China announced a revaluation of the currency and reform of the exchange rate regime (pegged against a basket of currencies). Since then the RMB started to appreciate. By the end of July 2008, the RMB had appreciated by about 18%, but then experienced a 20-day range-trade. Although it subsequently resumed its appreciation once more, the speed of appreciation was much slower and characterised by short reversals. On 1 December, when the RMB median rate to the US dollar dropped 156 basis points from 6.8349 to 6.8505, it started off another round of depreciation and rangetrading. This was considered a signal that China will resist further RMB strength (and international pressure) to assist domestic manufacturers and maintain the current account surplus, which came to over 7% of GDP in 2007. China’s Long-term Exchange Rate Trend Average USD/RMB exchange rate

4 6 8 10

1988

Source: MOFCOM China

1994

40

30 Jan-07

Jun-07

Nov-07

Apr-08

Sep-08

Source: China Federation of Logistics & Purchasing (CFLP)

3rd time (effective 1 December 2008):

2

The index has been lower than 50% for three consecutive months

2005

2008

• The FLP manufacturing PMI in November 2008 fell to 38.8%, which was the index's lowest point since the PMI survey was initiated in China in 2005 • It climbed again to 41.2% in December. The new order index rose by 5.0% and the purchasing price index rose by 6.1%, while the new export order index was 30.7%, the lowest among all the composite elements of the manufacturing PMI • Among the 20 industries surveyed, the PMI of manufacturing of beverages and manufacturing of medicines was over 50%; while the PMI of 10 industries of a total of 20 was lower than 40% About the PMI The Purchasing Managers Index (PMI) is a commonly used international macro-economic monitoring indicator, but it is relatively new to China. It focuses on the areas of production and distribution, manufacturing and nonmanufacturing. The PMI is a composite index of five sub-indicators which are allocated the following weights: Production level (25%) New orders (30%) Supplier deliveries (15%) Inventories (10%) Employment level (20%) The magic number for the PMI is 50. A reading of 50 or higher generally indicates that the industry is expanding. There are over 20 countries and regions, such as the US, UK, Japan and Singapore that have established a PMI survey. The PMI system and its methodology is unified, and therefore are comparable internationally. The establishment of the PMI survey in China has significance in the areas of macroeconomic and industrial economic adjustment, control and forecasting, and in the planning of enterprises’ operations. The National Bureau of Statistics of China (NBS) and China Federation of Logistics & Purchasing (CFLP) released the first Purchasing Managers Index on Manufacturing (PMI) on July 6 2005 in Beijing.

26 WHY Source in China: Logistics is Relatively Mature compared with other Middle Income Countries/LCCs On the Ground Situation • Delivery times depend on many factors – a quoted lead time is only an estimate • In China, speed is not always dependent on the factors that you are used to • Regard speed within the context of the time it takes to get one order delivered in perfect order, not the time it takes to deliver the first order • China has an overburdened rail system • Port capacity is large, expanding, but still at times inadequate for existing needs • Container space from China is very limited; this creates the potential, though not the certainty, of transportation delays. The current slowdown alleviates this but do not get caught out as exports revive • Factories may oversell their capacity in order to later cherry pick the ‘right’ client-portfolio • Input materials are not supplied with the same certainty as in Western economies; this is typically not a high priority for Chinese manufacturers, but domestic firm SCM is improving • In many cases after sales service consists of sending free parts with the next shipment, for the party on the other side to fix the machinery; a comprehensive maintenance and service mindset is still developing • Uncertainty about the supply of input materials may not always prevent suppliers from making a deal anyway • Delays are often caused by different interpretations of the responsibilities in terms of documentation China’s Relative Logistics Performance Country

LPI

Customs

Infrastructure

International shipments

Logistics competence

Tracking & tracing

Domestic logistics costs

Timeline

Singapore

4.19

3.90

4.27

4.04

4.21

4.25

2.70

4.53

Japan

4.02

3.79

4.11

3.77

4.12

4.08

2.02

4.34 3.68

China

3.32

2.99

3.20

3.31

3.40

3.37

2.97

Thailand

3.31

3.03

3.16

3.24

3.31

3.25

3.21

3.91

India

3.07

2.69

2.90

3.08

3.27

3.03

3.08

3.47

Vietnam

2.89

2.89

2.50

3.00

2.80

2.90

3.30

3.22

Brazil

2.75

2.39

2.75

2.61

2.94

2.77

2.58

3.10

Russia Federation

2.37

1.94

2.23

2.48

2.46

2.17

2.40

2.94

Source: World Bank LPI 2007

WHAT to Source in China: China’s Exports are led by Machinery and Mechanical Appliances China’s Export Mix, % 2007 Machinery and mechanical appliances; electrical equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles Textiles and textile articles Base metals and articles of base metal Miscellaneous manufactured articles Vehicles, aircraft, vessels and associated transport equipment Products of the chemical or allied industries Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; clocks and watches; musical instruments or parts and accessories thereof Plastics and articles thereof; rubber and articles thereof Footwear, headgear, umbrellas, sun umbrellas, walking-sticks, seatsticks, whips, riding-crops and parts thereof; prepared feathers and articles made therewith; artificial flowers; articles of human hair Others

10.24% 2.51%

Machinery and mechanical appliances: 43.42%

3.00% 3.34% 4.19% 4.51% 5.67%

Base metals: 9.49% Source: China Customs

Textiles and textile articles: 13.62%

Composition of China’s Exports of Machinery and Mechanical Appliances 2007, USD bn 528.82

112.24 46.79

Machinery

Automatic data processing machines (computers)

Source: China Customs

Radio and TV transmitters, television cameras

42.66

Electric apparatus for line telephony, telegraphy

32.74

Parts, accessories, except covers, for office machines

24.68

Electronic integrated circuits and micro assemblies

18.73

Printing and ancillary machinery

17.88

Television receivers, video monitors and projectors

14.22

Electric transformers, static converters and rectifiers

10.80

Parts for radio, TV transmission, receive equipment

207.80

Others

27 HOW to Source in China

China Sourcing in 2009: Procurement Risk Management Imperatives in Turbulent Times As the global financial and real economic crisis deepens and China becomes more affected, firms are engaging in supplier audits. Some firms are scaling back on China sourcing plans in the wake of the crisis but firms that are taking a long-term view remain active and are still viewing China as having an important share of supply. Looking at the general picture of sourcing in China in 2009, risk management is more critical than ever. Here we abstract 5 imperatives, all basic and practical measures, that procurement managers must adopt in turbulent times: Strategic review & supplier health check (audits and due diligence)

Measure exact China exposure (review current and planned future contribution of your China procurement) in overall supply chain; and do a rigorous once-off supplier health check and audit to gauge fallout of the financial crisis in your supply base. Constantly review suppliers contract execution and focus on risk.

2

Review clauses in existing supply contracts

Review and confirm if existing contracts are subject to premises in terms of RMB exchange rates, export duty policy, energy and raw material prices, etc.

3

Renew supplier evaluation process

Renew evaluation process for new suppliers by integrating current reality market research (are there better choices emerging?) given changed conditions.

4

Reassess 3rd party service providers

Reassess all service providers, including logistics companies, law firms and consulting companies. Many are being squeezed by the current market presenting risk as they shed teams, close offices, cut costs, cut corners, etc.

5

Strengthen business relationships with suppliers

Get closer to suppliers than ever and develop strategic relationships, such as becoming an exclusive agency, signing long-term cooperation contracts, etc.

1

Process Flow of THE BEIJING AXIS China Sourcing Unit (CSU) - Needs Analysis This section introduces the process flow of THE BEIJING AXIS China Sourcing Unit, i.e. how we operate from the point of receiving enquiries from clients, the services included in this solution-process and the benefits provided to our clients, and lessons learnt. In this edition we touch on the initial stage of strategic sourcing: Needs Analysis. A thorough needs analysis will focus China efforts and increase effectiveness/efficiency. It will also help introduce a risk management orientation form the outset. CSU collaborates with clients in conducting the needs analysis by employing TBA’s research capacity, knowledge management system, on-the-ground reach & by utilising established networks. We are especially active in the testing stage as outlined below. 2

1

Needs Analysis

Preliminary Categories and ‘WishList’ for China

Test for China Relevance and Feasibility

Final Categories and ‘Target Lists’ for China

Systematic Industry Search & Supplier Identification

Issues to consider: • Develop initial categories list; test for China relevance and feasibility; then formulate final ‘China target lists’ • Formulate high-level strategic objectives and business priorities for sourcing from China, then focus on detail • Start with categories/commodities that are: low risk; easy to keep stock in; are known to see large exports from China; specs and standards have been internationalised; for which current suppliers don’t have many competitors

• Select products with low/stable trade barriers (duties) • Develop high-level SC cost model early and determine if China’s delivery cycle can match SC limits • Determine own resources and capacity, i.e.: language, travel, risk management capability - and scale China ambitions to these constraints (do not be unrealistic) • Determine costs to mitigate risks’, i.e.: travel, consultants, 3rd party inspectors

29

China Sourcing Blog Highlights The global financial crisis has overshadowed the economic landscape in 2008, and CSB has gauged the China impact and considered the economic landscape that could follow the crisis. Yet we have also continued our China sourcing analysis with an in-depth guide on how to make good enquiries, some tips on successful e-commerce, and a few reflections on the Canton Fair. The China Sourcing Blog (CSB) is THE BEIJING AXIS online media platform to keep track of all the latest trends on sourcing and the Chinese economy. Taking on a multi-faceted, dynamic subject and carefully scanning everything from the mainstream media to the distant corners of the Internet, CSB strives to get to the bottom of all the best bits and pieces on China sourcing. The following are a selection of CSB postings that appeared over the last three months: Posted: 30 November and 5, 16 and 19 December 2008 In a series of four postings providing practical insights on the sourcing process, CSB illustrated the ins and outs of How to Make a Good Enquiry. Based on the experience gained from years of conducting successful China sourcing operations, CSB was able to provide a concise assessment of not only what exactly a good enquiry should consist of and how it should be put together, but also of the soft skills required to make an enquiry suitable and comprehensible for Chinese suppliers, enabling buyers to obtain the quotation they are looking for. Posted: 12 December As the financial crisis continues unabated, Brazil, Russia, India and China (the so-called BRIC nations) are poised not merely to weather the current crisis but to go from strength to strength as a sense of normalcy gradually returns in the year ahead. CSB analysed the current outlook for the BRIC nations and the measures adopted in these countries to deal with the crisis, and by all indications it appears that the aftermath of the financial crisis will see the BRICs in better shape than ever. Posted: 28 November China’s steel industry has felt the

Gloomy in Dongguan: The financial crisis and the resultant drop in foreign export orders has severely impacted the Pearl River Delta, causing factory closures and job losses (Photo: Mariehavens / flickr).

brunt of the financial crisis as the global slowdown in the demand for commodities has caused prices to plummet. With first-hand knowledge of the consequences being experienced in the industry, CSB analysed the current state and future prospects for China’s steel suppliers. Posted: 20 November and 31 October 2008 The crisis that emanated with such force from the US financial centers in 2008 inevitably impacted China’s economy, and in an extensive twopart series, CSB assessed both the systemic impact of the crisis on China as well as the new opportunities presented by the situation. With the decline in foreign export orders, the impact on China’s real economy has been reflected most prominently in the spate of factory closures in China’s Pearl River Delta export manufacturing base. Yet the crisis has also presented China with a novel opportunity to promote modernisation in its export sector and to shift the balance of its economy from FDI and exports to domestic consumption, services and innovation.

Posted: 7 November In a posting entitled What can you get from Alibaba?, CSB offered some tips for users of the online Chinese trading platform Alibaba. While it has become an indispensable tool for innumerable buyers and sellers of Chinese products, Alibaba does not necessarily by itself guarantee a successful China sourcing operation, and the experiences of buyers using the platform can often vary from finding many good suppliers to not finding any quality suppliers at all. We provide some hints on what to look out for when going online. Posted: 3 November And finally, as the most prestigious event in the China trading calendar, the Canton Fair is integral to many foreign buyers’ China sourcing plans. After attending the 2008 Spring session of the Canton Fair, CSB reported back with some reflections on the event and found that the best booths do not always equate to the best quality products... [email protected] www.chinasourcingblog.org

30

China Trade Roundup To illustrate the main trends in the growth and transformation of Chinese commerce and industry with an emphasis on trade and foreign investment, the China Trade Roundup summarizes the latest available China trade statistics. China Total Imports & Exports 2000–2008, USD bn

China Total Trade Dec 07–Dec 08, USD bn Exports

1,500

Im ports (CIF)

Im ports

120

Exports (FOB)

1,250

100 1,000

80

750

60

500

40

250

20 0

0

D

2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: National Bureau of Statistics

1- Electronic Appliances 1% 2- Motor Vehicles 1% 3- Copper Products 2% 4- Soya Beans 2%

5- Steel Products 2% 6- Data Processing 4% 7- Refined Petroleum Products 3% 8- Plastic in Primary Form 3%

2008.11 2007.11 % (USD bn) (USD bn) Change

9- Electronic Components 10% 10- Crude Oil 12%

11- Others 60%

China Total Imports

1060

2007.10 (USD bn) 865

2000

F

M

A

M

J

J

A

S

O

N

2008.11

1

8

7

8.8

2

14

10

45.2

3

18

18

-0.3

4

20

10

103.9

5

22

19

16.0

6

37

35

5.3

7

29

14

98.3

8

32

30

8.3

9

121

117

3.8

10

123

71

73.6

11

635

533

19.1

Total Exports by Main Commodities, % Jan–Nov 08 1- Toys 1% 2- Electronic Appliances 1% 3- Travel Goods and Handbags 1%

4- Plastic Articles 1% 5- Furniture 2% 6- Footwear 2% 7- Mobile Phones Articles 3% 8- Textiles and Makeup Articles 5%

2008.11 2007.11 % (USD bn) (USD bn) Change

9- Garments and Clothing Articles 8%

1

8

8

3

2

12

9

24

3

12

10

27

4

14

13

6

5

24

20

22

6

27

23

16

7

36

32

12

China Total Exports

8

60

51

18

2008.10 (USD bn)

9

109

105

3

10

155

141

10

11

861

691

25

10- Data Processing 11%

11- Others 65%

1317

2007.10 (USD bn) 1103

2008.11

Source: National Bureau of Statistics

2008.11

Source: National Bureau of Statistics

China Import and Export Monthly y-o-y Growth Rate, % 2008 50 Exports

Im ports

40 30

20

10

Nov 0

Jan

Feb

-10

-20 Source: National Bureau of Statistics

D

Source: National Bureau of Statistics

Total Imports by Main Commodities, % Jan–Nov 2008

2008.10 (USD bn)

J

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Dec

31 Total China Exports by Country/Region 2008, USD bn 300

EU

300 Others US

250

250 Other Hong Kong

200

Total China Imports by Country/Region 2008, USD bn

200

150

150

Japan

Japan ASEAN

100

S. Korea Germany Netherlands UK Russia

50 0

100

EU ASEAN S.Korea Taiwan US

50

Germany Australia Malaysia Brazil

0

Source: National Bureau of Statistics

Source: National Bureau of Statistics

Total China Exports and Imports by Country/Region, % Jan–Nov 2008

Imports

Exports Netherlands 3%

UK 3% Russia 2%

Malaysia 3% Australia 3% Brazil 3%

Germany 4%

Germany 5% EU 21%

Korea 5%

Others 25%

US 7% ASEAN 8% Taiwan 9% Japan 8% US 18%

Japan 13%

Korea 10%

Hong Kong 13% ASEAN 10% Source: National Bureau of Statistics

EU 12%

Others 15%

World Trade Map: Imports and Exports of Goods for Selected Countries Jan–Aug 2008 Imports USD trillion 1.5

Country

US

1.4 1.3

Total World Trade of Goods Jan-Aug 2008 USD trillions

1.2

Exports of Goods

10.563

1.1

Imports of Goods

9.973

DEFICIT SURPLUS

1.0 0.9

Germany China

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0

France Japan UK S.Korea Italy Netherlands Spain Belgium Canada HK Russia Turkey Mexico Singapore Australia Brazil 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 Exports USD trillion

Source: IMF

Germany China US Japan Netherlands France Italy Belgium Russia United Kingdom Canada S. Korea HK Singapore Mexico Spain Brazil Australia Turkey

% of Total World Exports

% of Total World Imports

9.85% 8.88% 8.46% 5.14% 4.27% 4.11% 3.64% 3.17% 3.14% 3.05% 3.00% 2.84% 2.26% 2.26% 1.93% 1.85% 1.22% 1.17% 0.91%

8.45% 7.87% 14.70% 5.13% 4.07% 5.04% 3.97% 3.37% 2.10% 4.49% 2.81% 3.08% 2.59% 2.24% 2.13% 3.01% 1.20% 1.35% 1.50%

32

China Inc. Goes Global: OFDI and M&A China has attracted attention not only with its GDP growth but also with its increasingly active overseas investments. 2008 saw China’s OFDI diversify into more sectors. Although Chinese outbound investors are currently more cautious, due to the crisis and volatility, from H2-2009 we will see more deals. Do not expect a wave, expect surgical, focused banner transactions. By Edward Wang. Highlights: China Outward FDI and M&A in 2008 • While global Mergers & Acquisitions (M&A) decreased by 29% in transaction value in 2008, China’s M&A transaction value grew by 25% as one of only two countries in the world with M&A growth in 2008 • In terms of OFDI, Chinese companies seemed more active in 2008 than the previous year, with some strategically important deals concluded by Chinese companies. China’s OFDI flow for 2008 is expected to be over USD 40 billion • After a few years of doing overseas deals, Chinese companies are now more familiar with cross-border M&A standards and processes and more Chinese companies are currently considering cross-border expansion. All surveys show the appetite is there • There is at present a popular view that Chinese companies should take advantage of the ongoing global financial crisis to more actively acquire overseas assets, especially such targets as resources companies which are ‘less complicated’ than banks. Expecting a wave is, however, unrealistic; expect focused and surgical transactions by leading firms • Although Chinese companies are generally not short of capital, they are now more cautious and conservative in their approach to cross-border deals • It is estimated that China’s OFDI activities will start to recover in the second half of 2009

China Outward FDI Flow 2003-2008, USD bn Estimate for 2008: Over USD 40 bn Asia

Latin America

Africa

North America

Europe

Oceania

26.51

21.16 12.27

5.5 2.85 2004

2003

2005

2007

2006

2008

Source: MOFCOM China

Structure of China’s OFDI Flow 2006–2007 2006 Total: USD 21.16 bn

2007 Total: USD 26.51 bn

30%

24%

33%

45% 31%

37%

Eq uit y invest ment

Eq uit y i nvest ment

Pr o f i t s r einvest ment

Pr o f i t s r ei nvest ment

U nclassi f ied invest ment

U nclassif i ed invest ment

Source: MOFCOM China

Major Recent Cross-border Deals 1

Wuhan Iron & Steel

2

Shougang

3

Shenzhen Nonfemet

4

Anshan Iron & Steel

5

Sinopec

1

December 2008: Wuhan Iron & Steel Co (WISCO) is set to pay up to AUD 180 million (USD 127 million) for a 50% stake in five iron ore mining projects owned by Australian miner Centrex Metals Ltd. WISCO, one of China's largest steelmakers, will also pay an additional AUD 9.7 million (USD 6.4 million) for a 15% stake in Centrex itself. The deal is still subject to Chinese and Australian government approval.

2

December 2008: Mount Gibson Iron Ltd shareholders have approved a AUD 162.5 million (USD 107.2 million) package that could see the mine being more than 40% owned by Shougang Concord International Enterprises and APAC Resources Ltd.

3

December 2008: China’s nonferrous metals producer Shenzhen Zhongjin Lingnan Nonfemet has received government approval to take a 50.1% stake in cashstrapped Australian lead and zinc miner Perilya Ltd for AUD 45.5 million (USD 30 million). The remaining conditions are approval by Perilya shareholders and by Australia's Foreign Investment Review Board.

4

November 2008: China stateowned Anshan Iron & Steel Group agreed to raise its stake to 36.28% by acquiring a further 23.68% stake in Gindalbie Metals Ltd, an Australian iron ore and gold mining company, for a total of AUD 162.06 million (USD 106.91 million) in a privately negotiated transaction.

5

December 2008: Sinopec has completed the acquisition of the Canada-based Tanganyika Oil Company after receiving approval from the Chinese government. Sinopec offered RMB 13 billion to buy out the Canadian oil company in October 2008, the company's largest overseas acquisition in recent years.

33 China Total Outward FDI Capital Stock by Region 2007: USD 117.9 bn

North America USD 3.2 billion (2.7% of total)

Europe USD 4.5 billion (3.8% of total)

Asia USD 79.2 billion (67.2% of total)

China Africa USD 4.5 billion (3.8% of total)

Oceania USD 1.8 billion (1.6% of total)

Latin America USD 24.7 billion (20.9% of total)

Note: FDI Stock is a cumulative concept (vs. Flow)

Source: MOFCOM China

China’s Total Outward FDI Stock by Sector 2007 Leasing & business services Wholesale and retailing Finance Mining Transport, warehouse & postal services Manufacturing Real estate IT Construction Science research, service & geo-survey Residential & catering trades Agriculture, forestry, husbandry, fishery Water, environment & public facility mgmt. Power and other utilities Other industries

China OFDI Stock in Africa, Top 10 Countries 2007 30.5

20.2 16.7 15.0 12.1 9.5 4.5 1.9 1.6 1.5 1.3 1.2 0.9 0.6 0.2

Algeria USD 394 mn

Egypt USD 132 mn

Niger USD 135 mn

Sudan USD 575 mn

Nigeria USD 630 mn

Ethiopia USD 109 mn

Zambia USD 429 mn

Tanzania USD 111 mn

South Africa USD 702 mn

Mauritius USD 116 mn

Source: MOFCOM China

Source: MOFCOM China

Features and Trends of China’s OFDI

China’s Investment in Africa

• China’s OFDI grew at a low stable pace before 2004. Since 2004, however, China’s OFDI has been growing at a faster pace, with total OFDI flow increasing from USD 5.5 billion in 2004 to an estimated USD 40 billion-plus in 2008. It is widely believed that with China’s increasing integration into the global economy, this trend will continue in the near future • The sectors into which more of China’s OFDI has been invested in the last several years are business services, wholesale and retail, finance, mining, transport, warehousing and postal services and manufacturing. By the end of 2007, more than 88% of China’s OFDI has been invested in these sectors across the world • In terms of investment destinations, 67% of China’s OFDI has been invested in Asia by 2007. (Bear in mind HK effect!) However, in recent years, because of China’s growing thirst for natural resources, a greater share of China’s OFDI has been invested in resource-rich areas such as Australia and Africa. In 2007, investment in Oceania, mainly Australia, was USD 770 million, an increase of 509% on 2006

• Chinese investment in Africa has been growing very fast in the last few years. OFDI flow into the continent stood at only USD 74.8 million in 2003, yet this had increased to USD 1574.3 million by 2007 • By 2007, South Africa had attracted USD 702 million in capital from China, the most among all African countries. The major Chinese investors in South Africa are Sinosteel, Zijin Mining (via a London-listed entity), and Gansu Jiuquan Iron and Steel. Nigeria and Sudan have also had more investment from China than most other African countries, with capital stock from China reaching USD 630 million and USD 575 million by 2007, respectively. China’s investments in Nigeria and Sudan are heavily slanted towards the oil industry • Some major investment developments by Chinese companies in Africa in 2007 and 2008 are ICBC’s acquisition of a 20% stake in Standard Bank for USD 5.5 billion (2007/10); Sinosteel increasing its investment in South Africa by USD 440 million (2008/02); and CREC announcing plans to invest a total of USD 3.1 billion in mining in the DRC (2008/09)

34 China Cross–border Investment Deal-sheet: Major Deals in 2008

Dec

Wuhan Iron & Steel (WISCO)

Centrex

Amount USD 6.84 mn

Dec

Wuhan Iron & Steel (WISCO)

Centrex's 5 iron ore projects

127 mn

Australia

50%

Dec

Shougang Group

Mount Gibson Iron Ltd.

110 mn

Australia

n/a

Dec

Shenzhen Nonfemet

Perilya Limited

30 mn

Australia

50.1%

Nov

Anshan Iron & Steel

Gindalbie Metals

143 mn

Australia

36%

Oct

Anshan Iron & Steel

VIGANO

n/a

Italy

60%

Oct

China Merchants Bank

Wing Lung Bank

n/a

Hong Kong

97.82%

Sep

Sinopec

Tanganyika Oil

2 bn

Canada

100%

Sep

China Oilfield Services

Awilco Offshore ASA

2.49 bn

Norway

100%

Sep

ICBC

RosEvroBank

800 mn

Russia

100%

Sep

People's Bank of China

Drax Group

32.2 mn

UK

<1%

Aug

Sinopec & CNPC

Petro-Tech Peruana

2 bn

USA

n/a

Aug

Zhuzhou CSR

Dynex Power

15.7 mn

UK

75%

Aug

Hunan Valin

Golden West Resources

23.27 mn

Australia

11.39%

Aug

People's Bank of China

Prudential

234.71 mn

UK

1%

Aug

FUQI International Inc.

Temix

19.3 mn

Italy

100%

Aug

Suntech Power

Nitol Solar

100 mn

Russia

n/a

Jul

China Metallurgical Group Corp.

Ramu nickel project

1.37 bn

PNG

n/a

Jul

Sinosteel

Midwest Corp.

1.32 mn

Australia

100%

Jul

China Healthcare Acquisition Corp.

Europe Asia Huadu

60.375 mn

Singapore

100%

Jun

Sinopec

AED Oil

561 mn

Australia

n/a

Jun

China Metallurgical Group Corp.

Cape Lambert‘ iron ore project

367 mn

Australia

n/a

Jun

Changsha Zoomlion

CIFA S.p.A.

253.22 mn

Italy

60%

Jun

Western Mining

FerrAus

20 mn

Australia

10%

Jun

Sinochem International Corporation

GMG Global Ltd.

198 mn

Singapore

51%

May

China Merchants Bank

Wing Lung Bank

2.48 bn

Hong Kong

53.12%

May

China Merchants Bank

CIGNA & CMC Life Insurance

20.33 mn

USA

50%

Apr

China Minmetals Non-ferrous Metals

HPTec

n/a

Germany

100%

Apr

China National Gold

Jinshan Gold Mines Inc.

218 mn

Canada

41.99%

Apr

State Administration of FOREX

Total

2.9 bn

France

2%

Apr

China International Marine Containers Goodpack Ltd.

16 mn

Singapore

1.5%

Mar

China Investment Corp.

Visa

100 mn

USA

<1%

Mar

Huaneng Power

Tuas Power

3 bn

Singapore

100%

Feb

Chinalco - Alcoa

Rio Tinto

14.1 bn

Australia

12%

Feb

State Administration of FOREX

BP

2 bn

USA

1%

Jan

State Administration of FOREX

ANZ Bank

176 mn

Australia

<1%

Jan

State Administration of FOREX

Commonwealth Bank of Australia

176 mn

Australia

<1%

Jan

State Administration of FOREX

National Bank of Australia

176 mn

Australia

<1%

Jan

Jinchuan Group

Tyler Resources

210 mn

Canada

100%

Jan

Wuxi Pharma Tech

AppTec Lab Services

151 mn

USA

100%

Jan

Minmetals / Jiangxi Copper

North Peru Copper

470 mn

Peru

100%

Jan

Jinchuan Group

Fox Resources

15.7 mn

Australia

11%

Month

Acquirer

Sources: Multiple sources; Press; TBA Analysis

Target

Country

Stake

Australia

15%

35 China Outward FDI Flow by Sector 2007, USD mn 26506

4063

4063

In August 2007, Chinalco acquired a 91% stake in Peru Copper Inc. for USD 860 million

860

55

4065 2127

In June 2007, Zijin Mining paid USD 55 mn to purchase a subsidiary of Avocet Mining, whose main assets are gold and exploration rights in Tajikistan

7979

Mining Manufacturing

Source: MOFCOM China

Many Chinese companies’ expansion increased their demand for resources

6604

1668

Total

3148

WR

TWP

Finance

Mining

Others

Chinalco

Zijin

Others

TWP = Transport, warehousing & postal service; WR = Wholesale & retail

Strategic Rationale: Chinese Outbound Deals by Strategic Rationale 1995–2007 (n=214) 1

Primary rationale

Total deal value, USD mn

Number of deals

Security, access to natural resources

15055

43 4026

31

Access to capabilities Gaining scale

1448

10

Access to financing Government influences

Export of capabilities

15753

48

Access to new markets

Sources: Dealogic; McKinsey Analysis.

27083

68

Financial investment/diversification

CEO’s personal ambition

5

184

5

448 577

3 1

14

1) All deals with value > USD 10 million; 2) USD 1 = RMB 7

China FDI Stock: Top 10 Countries/Regions 2007

Top 30 Chinese Companies by OFDI Stock 2007

1.07

Pakistan Korea

1.21 1.25

Canada

1

China National Petroleum Corporation

2

China Petrochemical Corporation

3

China National Offshore Oil Corporation

4

China Ocean Shipping (Group) Company

5

China Resources (Holdings) Co., Ltd.

6

CITIC Group

Russia

1.42

Singapore

1.44

7

China National Cereals, Oils & Foodstuffs Corp.

Australia

1.44

8

China Mobile Communications Corporation

9

Sinochem Corporation

10

China Merchants Group

11

Shum Yip Holdings Company Limited

12

China Shipping (Group) Company

13

China National Aviation Holding Corporation

14

China National Chemical Corporation

15

China State Construction Engineering Corporation

16

SinoSteel Corporation

17

China Network Communications Group Corporation

18

Aluminum Corporation of China

19

GDH Limited

20

China Minmetals Corporation

21

CITS Group Corporation

22

Shanghai Automotive Industry Corporation

23

Legend Holdings Ltd.

24

China Power Investment Corporation

25

Haier Group

26

China Metallurgical Group Corp.

27

Guangzhou Yuexiu Holdings Limited

28

China National Foreign Trade Transportation (Group) Corp.

29

Shanghai Baosteel Group Corporation

30

ZTE Corporation

USA

1.88

Virgin Island

6.63

Cayman Islands

16.81

HK, China

68.78

Source: MOFCOM China. In USD bn.

Top 10 Provinces/Cities by OFDI Stock 2007, USD bn 7.24

ZJ = Zhejiang FJ = Fujian HLJ = Heilongjiang LN = Liaoning SC = Sichuan

GD = Guangdong SH = Shanghai SD = Shandong BJ = Beijing JS = Jiangsu

3.03 1.61

GD

2

SH

SD

Source: MOFCOM China

1.59

BJ

1.17

JS

1.16

ZJ

0.92

FJ

0.71 HLJ

0.44 LN

0.44 SC

Source: MOFCOM China

36

BRICS Breakdown Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS Breakdown is a comparative segment that compares and contrasts China with the other leading developing economies. GDP, Current USD bn

Inflation, Average Consumer Price Index Index: 2000 = 100

4,500

300

4,000

275

3,500

China

3,000

Russia

250 225

2,500

200

2,000

Russia Brazil India

1,500 1,000 500

South Africa

0 Source: IMF

2005

2006

2007

2008E

Current Account Balance 2005–2008E, USD bn 450

2005

2006

2007

150

Brazil S. Africa India

125

China

175

100 2005

2007

2008E

Current Account Balance, % of GDP, 2005–2008E 15%

2008

400 350

2006

Source: IMF

2005

2006

2007

2008

10%

300 250

5%

200 150

0%

100 50 0 -50

-5% China

Russia

Source: IMF

Brazil

India

South Africa

-10% Source: IMF

China

Russia

Brazil

India

South Africa

BRIC World Rankings–Selected Indicators 2007

World Ranking Total Area Population GDP Nominal Exports Imports FDI (received) Foreign Exch. Res. Electricity Consumption Mobile Phones Internet Users

Source: The Economist

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

37

Financial Markets Tracking the dynamics of China’s Shanghai and Shenzhen stock markets and Benchmark Interest Rates, Financial Markets also illustrates recent trends and transformations in China’s exchange rate regime. Shanghai & Shenzhen Composite Index, Monthly

RMB Exchange Rates, 12 Month Trailing, Indexed

Index: December 2002 = 100%

Index: November 31 2007 = 100%

USD

500 450 400 350 300 250 200 150 100 50 0

Shanghai

ZAR

AUD

RUB

110

Shenzhen

100 90 80 70 60 50 2006

2005

2004

2003

2007

2008

1 December 07

1 December 08

Sources: Shanghai Stock Exchange; Shenzhen Stock Exchange

Source: Oanda Corporation

Benchmark Interest Rates, as on 2 January 2009

10 Largest Chinese Listed Companies, USD bn 13.8%

15%

Petro China

11.5%

I ICBC CBC

Bank of China

10%

Si no p ec Sinopec

5.6% 5.5%

China Life

4.3%

5%

Shenhua o al ShenhuaCCoal

2.5% 2.0%

China Merchant Bank

0.1% 0.3%

Pi ng an Ping An Insurance

Source: Central banks

Brazil

South Africa

India

China

Australia

UK

EU

US

Japan

0%

Changjiang Power B ank o f Bank of Comm. C o mmuni cat io ns

0

50

100

150

200

250

Source: Shanghai Stock Exchange

Dow Jones Global Titans, YTD % change as on 31 December 2008 - 67 . 2

Russia - 62 . 4

China 88

- 62 . 1

Turkey

- 58 . 7

Egypt - 55 . 3

Netherlands

- 53 . 2

Sweden

- 52 . 9

Italy - 49 . 3

Japan

- 48 . 9

UK

- 47 . 6

Germany

- 47 . 0

France

- 46 . 9

Hong Kong

- 46 . 5

The Dow Jones Country Titans Indexes span major markets from across the globe Sources: Dow Jones Indexes; WSJ

South Africa - 42 . 8

Spain

- 4 1. 1

Switzerland

- 40 . 9

Australia - 1. 7

Sri Lanka

Cyprus 7 .7

38

China Business News Highlights The fourth quarter of 2008 has delivered a series of negative business headlines for China, with sharp falls in export growth and industrial production illustrating China’s vulnerability to the global economic slowdown. A drop in inflation, however, has allowed the government a freer hand to attempt to re-ignite economic growth, including significant new investments in infrastructure. General China will increase investment in rail infrastructure to USD 730 billion by 2020, as an extension of existing plans to spend USD 102 billion on rail in the next year, which forms part of the original USD 586 billion stimulus package. As a result China’s rail network is expected to increase by as much as 41,000 kilometers by 2020, and construction is estimated to create 6 million new jobs. Inflation in November declined to the lowest level in two years as food and energy costs eased. The consumer price index in November increased by 2.4% y-o-y, compared to a 4% rise in October. China’s monthly export growth fell by 2.2% in November from the same period last year, the first decline in exports since June 2001. In November, China’s imports also registered a 22% decrease y-o-y. Foreign Direct Investment in China fell by 36.52% in November to USD 5.32 billion, pushing foreign investment growth down to 26% for the first 11 months of 2008, down from 35.06% y-o-y growth for the first ten months of 2008. Merger and acquisition (M&A) activity from July to November 2008 slowed 47% compared to the same period last year, the South China Morning Post reported, citing accounting firm PricewaterhouseCoopers. 543 deals were announced in the five-month period, the lowest level since 2006, as investors remained cautious during the ongoing financial crisis. Nevertheless, according to a report issued by Thomson Reuters, China’s M&A activity was the best in the region for the whole year 2008, growing by 44% to USD 159.6 billion. In contrast, global M&A volume dropped to USD 2.89

trillion, a third of the amount of 2007 and the lowest rate since 2005. Property prices in 70 major Chinese cities increased by 0.2% y-o-y in November, the lowest growth rate since publication of the data began more than three years ago. Price growth fell consistently over the course of the year since reaching 11.3% in January 2008. Chinese aviation conglomerate HNA Group, of which US billionaire George Soros is a shareholder, in December became the first privately-owned airline to receive a government bailout of USD 72.3 million. Earlier in the month, China Eastern Airlines and China Southern Airlines each received capital injections of USD 437 million. In total, China’s airlines lost USD 1.03 billion in the first 11 months of 2008, with Air China reporting a USD 280 million loss in the third quarter alone. About 192 billion people traveled by air in China during 2008, a 3.3% increase y-o-y, yet the growth rate has

decreased by 13% since 2006. In December, Premier Wen Jiabao declared that creating employment opportunities for university students would be Beijing’s top priority in 2009. China’s premier expressed concern about official government figures indicating that 10 million migrant workers had lost their jobs in the first 11 months of 2008, while 4.85 million had returned to their homes. Natural Resources As of December 19, the price of gasoline was reduced by 14% to USD 816 per metric ton, the first price cut since January 2007. The price of diesel was reduced by 18% to USD 727 per metric ton, and that of jet fuel by 32% to USD 739 per metric ton. China’s top fuel refiners in early December prepared to cut production to the lowest level in 20 months due to excess inventory and weak

Catching Up: China’s rail infrastructure is to get a massive boost in the next few years as part of the government stimulus package. (Photo: Enzojz / flickr)

39 demand. Twelve of China’s largest plants reduced production by 5% in December, continuing the decline in production that commenced in November. Industry sources have also suggested that refiners are cautious before the expected implementation of a fuel tax and other pricing reforms in January. Plans were announced in early December to stockpile 1 million metric tons of base metals - including aluminum, tin, copper, lead and zinc - to support domestic metal producers. Taking advantage of the low crude oil prices to increase its reserves, China has also been increasing its imports of oil, and some analysts estimate reserves to have grown by 25 million barrels since August. China’s reserve capacity is currently 102 million barrels of crude oil, and this is expected to increase to 170 million with completion of the current phase of construction on oil reserve bases. Industry Industrial production in China grew by 5.4% in November, the slowest growth level for a nonholiday month since records commenced in 1994. The drop in industrial production has hit China’s steel makers particularly hard, with Chinese crude steel output down 18 percentage points from October’s figure. As a clear indication of how China’s Pearl River Delta has borne the brunt of the global slowdown brought on by the financial crisis, provincial GDP growth for Guangdong which produces nearly a third of China’s exports - slowed to 10.1% in 2008, down from 14.7% a year earlier, while export growth slowed to 5.6% in 2008 from 22.3% in 2007. China’s shipbuilders have experienced a more rapid decline in new orders compared to their foreign competitors. According to a report by Clarkson Research Studies, Chinese shipyards have reported a decline of 44% in new orders, compared to the global average of 37%. The International Monetary Fund has predicted an ever gloomier outlook for 2009, forecasting new orders to decrease

Running on empty: China’s airlines lost a total of USD 1.03 billion in the first 11 months of 2008, and the growth rate of people traveling by air has decreased by 13% since 2006. (Photo: mag3737 / flickr)

by 40% from the level of 2008. Retail China’s total retail sales for 2008 are expected to reach RMB10.8 trillion, an increase of about 21% y-o-y. The National Bureau of Statistics reported that China’s retail sales rose 21.9% to RMB9.78 trillion in the first eleven months of 2008. ICT In early January China issued third generation (3G) mobile technology licenses to three state-owned telecom operators. China Mobile received a license for TD-SCDMA, the domestically-developed 3G standard, while China Unicom will use CDMA2000 from the US and China Telecom will use the WCDMA standard developed in Europe. All three standards will facilitate faster data downloads, video phone calls and other advanced features. Chinese internet and communications company 263 Network Communications announced in December that it will acquire a 50% stake in US telecom service provider iTalk Global Communications. The transaction will be the first expansion of a private Chinese telecom service provider into a foreign market. Finance In November, China’s central bank

cut interest rates by 108 basis points, the largest cut in over 10 years, in a further attempt to bolster China’s slowing economy. In a further effort to strengthen cross-strait financial relations, Industrial and Commercial Bank of China, Bank of China and China Development Bank have offered USD 19 billion in loans to Taiwanese companies operating on the mainland. In addition, Beijing will also purchase USD 2 billion worth of flat-panel displays from Taiwanese manufacturers, and lawyers from Taiwan will henceforth be allowed to work on the mainland. Regular scheduled shipping between the mainland and Taiwan was also launched earlier in December. China’s State Council announced in December that it will increase the money supply in China by 17% in 2009 as part of efforts to spur consumer spending and bolster the economy. China Construction Bank (CCB) in December received a USD 10 billion quota from the State Administration of Foreign Exchange (SAFE) to provide financial guarantees to Chinese companies engaged in cross-border investments. Intended to support mainland companies that trade overseas, the quota is the largest among China’s banks. CCB also plans to US72.6 billion available for loans.

40 Regional Focus

CHINA-AFRICA While China-Africa trade is still relatively small, the region has strategic importance for China as its trade with Africa focuses on resource-rich countries like Angola, the DRC and South Africa. Since 2006, China has vastly increased its investment in Africa. This section summarises the current trade and investment landscape, and analyses China’s current business footprint on the continent. China-Africa Highlights •

•

•

• •

Beijing sends naval deployment to patrol Somali waters: In China’s first such deployment outside its own waters, at the end of December three warships were despatched to the Gulf of Aden to patrol for Somali pirates. Earlier in December, a Chinese merchant ship was rescued by a multinational force from Somali pirates Beijing asks for postponement of Bashir indictment: In early January China called for the war crimes indictment against the Sudanese president Omar al-Bashir to be postponed, stating that such an indictment would have ‘disastrous’ effects Angola seeks China’s help: Angolan president Jose Eduardo dos Santos visited China in December, seeking new loans as tumbling world oil prices started to threaten the country’s plans for big infrastructure spending in 2009 China offers help to Zimbabwe: In December China offered humanitarian aid to cholera-stricken Zimbabwe, while urging the formation of a national unity government Chinese company to build power plant in Nigeria: Shenzhen Energy Group plans to build a 3,000 megawatts power plant in a joint venture with Nigeria’s First Bank at an estimated cost of USD 2.4 billion. When finished, the plant should significantly improve Nigeria’s power generation capacity

China-Africa Trade China is an increasingly important trade partner for Africa. Exports to China have great potential for further expansion and is growing at a rapid pace. Although China only obtains 3.8% of its total imports from Africa, its trade with Africa is focused on resource-rich counties such as Angola, the Democratic Republic of Congo and South Africa. During the first half of 2008, exports to China increased substantially (to USD 30 bn), indicating sustained strong growth for full year 2008, but lower commodity prices will now impact this. (Full year China-Africa total trade in 2007 came to USD 73 bn and is expected to have exceeded USD 100 bn in 2008.) Fuels and mining products have always been Africa’s major export products and fuels and mining products represented up to 82% of the continent’s overall exports of USD 325 bn in 2007. Imports are more diversified, but to a great degree focused on processed products such as chemicals, clothing, textiles, iron & steel. The differences (surplus) between import and exports can be ascribed to high energy and commodity prices in 2007 and the start of 2008.

Africa’s Exports to China, 2007 USD 36 bn

USD 996 bn

Angola 35.4% Asia 64.9% Others 33.2% N. America 8.4% Others 8.3% Europe 14.6% Africa 3.8% World Exports to China Sources: WTO; China Statistic Bureau; TBA Analysis

DR Congo 7.8% Eq. Guinea 4.7% South Africa 18.2% Africa Exports to China* *Excludes Egypt: 0.7%

Africa Imports and Exports, 2007 Agricultural Products Chem icals Iron & Steel

3%

3%3%

Fuels & Mining Products Clothing Textiles

1% 8%

8%

6% 29%

35% 82% Africa’s Exports to the World Total USD 325 bn Sources: WTO; TBA Analysis

2%

20%

Africa’s Imports from the World Total USD 141 bn

41 Regional Focus

CHINA-AFRICA

China-Africa Investment In 2007, FDI from China accounted for only 3% of the total FDI inflow to Africa. Yet China is the biggest investor in Africa among the BRIC nations of China and Brazil, Russia and India. In 2006 and 2007, China almost tripled its FDI to Africa from USD 518 mn to USD 1,574 bn. Attracted to oil in West Africa and raw materials in Southern Africa, this trend reflects China’s strategic focus on Africa. Over the next 5-10 years a significant further ramp-up in Chinese investment can be expected.

China OFDI to Africa, 2003–2007, USD mn North Africa 2007

West Africa

2006

Cental Africa

2005

East Africa

2004

Southern Africa

2003 0

400

800

1200

1600

Sources: FDI information; TBA Analysis

China’s Business Footprint in Africa China’s cumulative investments in Africa has grown from USD 49 million in 1990 to USD 500 million in 2000, to over USD 13.0 billion in 2007. China’s investment in African infrastructure projects rose from less than USD 1 billion in 2001 to at least USD 7 billion in 2007. While over 30 countries in Africa have benefited from Chinese finance in some form, 70% of China’s infrastructure funding on the continent goes to only four countries: Nigeria, Angola, Sudan and Ethiopia. The two largest sectors are power (mainly hydropower) and transport (mainly railroads). Chinese contractors in Africa are often served by Chinese service providers, i.e.: • For loans, guarantees and bonds: Bank of China, China Exim Bank, China Construction Bank, and others • For miscellaneous credit: China Exim Bank, Bank of China, China Construction Bank, and others • And for insurance: Sinosure, PICC, PingAn Insurance, and others

Major Chinese Investments and Infrastructure Developments in Africa China has oil rights

China has mineral rights

Ghana Nearly USD 800 mn in hydro and CCGT power plants

China has both oil and mineral rights

Nigeria USD 5.4 bn in roads, railways, coal power and hydro power

Mauritania 430km railway project

Gabon Deep water harbour, hydro power, railway

Sudan 4 power plants, 2 hydro projects, 1,506km oil pipeline, oil terminals. Total investment in Sudan of USD 15 billion

Guinea USD 1 bn hydro project

Ethiopia USD 500 million telecom network

DRC 3,500km highway and 3,200km railway. China Railway Group invested USD 2.9 bn in copper and cobalt mining project. Norinco has cobalt interests

Angola-Zambia USD 500 million in repairs to the 1400km Benguela railway

Zimbabwe Sinosteel acquired 67% stake in the country’s largest ferrochrome producer Angola Total Chinese infrastructure funding of USD 3.2 billion, including roads, rail, power, water and telecoms. Sinopec has invested USD 2.4 bn to explore 3 offshore oilfields Sources: Various; Chinavest; TBA Analysis

Zambia-Tanzania Famous 1900km Tanzam railway, completed in 1975 South Africa ICBC bought 20% of Standard Bank for USD 5.6 billion. Sinosteel has two chromium mining JVs, JISCO has one, and also did COVEC Vresap water pipeline

Zambia CNMC invested USD 150 million in a copper mine

42 Regional Focus

CHINA-AUSTRALIA China-Australia relations have become more strategic, their economies inter-twined. This has allowed boom-times down-under on the back of significant growth for Australian exporters, but lower commodity prices and China’s current slowdown has shown the risks. But even so, their bilateral relationship will become only more pivotal to both sides. China-Australia Highlights • China remains one of Australia’s most important trading partners, illustrated by the increasing volume of both imports from and exports to China • Australia and China are still negotiating a Free Trade Agreement. The 13th round was held in Beijing in December. The next one is planned for Q4-2009 • Ores, slag and ash remain the top Australian exports to China • Due to the global financial crisis, China is keen to establish tighter controls over iron ore imports (Australia’s second-largest export commodity to China) to help drive down prices for steel-making inputs. Also, China’s first batch of coking coal imports for 2009 are nearly half the levels they were a year ago (9.62 mn tonnes) • Australian firm RepuTex has released its list of the Top 10 most sustainable Chinese companies from the CSI 100 Index. Inner Mongolia Yili Industrial Group, the Shanghai Pudong Development Bank and Baoshan Iron & Steel Company topped the list with an overall sustainable rating of ‘A’ Sources: Multiple sources; Press; TBA Analysis

Australia-China Trade 1998–2008 (Jan-Sep), USD mn 30,000

Exports to China

Im ports from China

25,000 20,000 15,000 10,000 5,000 0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007 2008*

Sources: UN Comtrade; Australian Bureau of Statistics. 2008 figure is based on Jan-September data only.

Major Australian Imports from and Exports to China 2008, USD mn 100% 80% 60% 40%

Furniture, Lighting, Signs, etc 1,278

Nuclear reactors, Machinery 4,594

20%

Articles of Apparel, Accessories 2,683 Electronic Equipment 5,111

100%

Raw hides, Leather 363

80% 60%

Mineral fuels, Oils, etc 796

Nickel 493 Wool, Yarn, Fabrics 1,432 Others 7,006

40%

Others 10,388

20%

Ores, Slag, Ash 9,456

0%

0% Im ported Com m odities

Exported Com m odities

Source: UN Comtrade

State Trade Watch–How Important is China? Victoria dise trade in 2007. Exports include centrates, coal and copper ores China is Victoria’s largest trading part- copper ores, wool and coal South Australia ner. Two-way merchandise trade was • China is South Australia’s secondNorthern Territory worth AUD 11.1 bn in 2007. Exports China is Northern Territory’s secondlargest trading partner with two-way include wool, raw hides and skins, largest trading partner with AUD 979 merchandise trade worth AUD 1.7 and internal piston combustion enmn two-way merchandise trade in bn in 2007. Exports include iron ore, gines 2007. Exports include manganese/ copper and wool zinc ores and concentrates, iron ore Tasmania Australian Capital Territory China is ACT’s seventh-largest trad- and stone • China is Tasmania’s fourth-largest ing partner. Two-way merchandise Queensland trading partner and total two-way trade was worth AUD396,000 in 2007 China is Queensland’s second-largest merchandise trade was worth AUD 387 mn in 2007. Exports include trading partner with two-way merchanNew South Wales lead/zinc ores and concentrates, iron China is NSW’s largest trading partner dise trade of AUD 5.8 bn in 2007. Exore and zinc with AUD 16.4 bn two-way merchan- ports include lead/zinc ores and con-

43 Regional Focus

CHINA-AUSTRALIA

Australia Export Sector Potential to Attract Investment, USD mn World Export Growth since 2002

China-Australia Investment • Chinese foreign direct investment in Australia have increased rapidly since 2004, while Australian direct investment in China haven experienced a relative decline in the same period of time • Australia’s mining and quarrying industry is continuing to attract significant amounts of FDI while the Petroleum and Metal industries are playing catch-up • Australia’s cross-border deals continue to outweigh China’s relatively new M&A activities

35 P e t r o l e um, 8 ,8 3 3 .2 6

30

M e t al a nd me t a l p r o d uc t s, 2 2 , 5 18 . 5 9

25

C hemi c a l s & c he mi c a l p r o d uc t s , 4 ,8 8 9 .3 2 T r a ns p o r t a t i o n se r vi c e s, 6 ,3 2 0 .8 5 A g r i cul t ur e a nd hunt i ng , 7 , 8 5 4 . 4 3

20 15

M otor v e hi cl e s a nd o t he r 10 t r a ns p o r t eq ui p ment , 5 4 , 3 0 7. 2 0

0

Growth of world trade, all products: 16%

5

10

15

20

25

World market share, all products: 1.05% Sources: Investment Map; TBA Analysis

Cross–border M&A Deals in Australia & in China

Australia–China Investment Trends, USD

Australian Deals (seller) Australian Deals (purchaser) Chinese Deals (seller) Chinese Deals (purchaser)

Australia FDI Outflow s China FDI Outflow s Australia Foreign Investm ent to China China Foreign Investm ent to Australia 30.00

2000

600

20.00 10.00

1500 1000

500

0.00 -10.00

500 0

300

-20.00 -30.00

-500 -1000

100

-40.00

-1500

400 200

2001 2002 2003 2004 2005 2006 2007 Sources: UNCTAD; Australian Bureau of Statistics

0 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 *

Thousands

M i ni ng a nd q uar r y i ng , 3 6 ,2 6 4 .3 0

World Market Share of Australia (%)

0 -5

R e f e r e nce B ub b l e , 7, 0 0 0 . 0 0

Source: UNCTAD

*First half of 2008

Latest Developments in China-Australia Foreign Investment H2–2008 Month

Acquirer

Target

Jun

Shougang Group Corp

Sims Steel

Jun

Sinopec

AED Oil– Expl. Permits (3)

Jul

Sinosteel

Midwest Corp.

Aug

Chinalco

Rio Tinto

Aug

China Metallurgical Construction

Cape Lambert Iron Ore– Project

Sep

Sinosteel

Murchison Metals

Oct

China Stem Cells Holding Ltd.

Cordlife

Nov

China Shenhua Energy Co. Ltd.

Dec Dec

Amount USD

Stake

Status

n.p.

100%

Complete

555.96 mn

60%

Complete

1.32 bn

100%

Complete

14.3 bn

11%

Complete

373.44 mn

100%

Complete

205.672 mn

49.9%

Complete

5.735 mn

18.9% (12.65%)

Complete

New South Wales– Coal Expl.

260.88 mn

100%

Complete

Wuhan Iron & Steel Group

Centrex Metals Ltd.

6.681 mn

14.9%

Ongoing

Shougang Corp. (w/APAC)

Mt. Gibson Iron

400 mn

20%

Complete

Sources: Multiple sources; Press; TBA Analysis

44 Regional Focus

CHINA-RUSSIA Russia and China are actively developing their trade relationship, although their bilateral FDI flows are not yet very significant. This section is an overview of the structure of trade and bilateral investment between the two countries. Russia-China Highlights •

•

RUSAL will continue to invest in China in spite of the current economic crisis. In February 2008, RUSAL and China Power Investment Corporation signed a strategic business partner agreement on bauxite ore, alumina oxide and aluminum production, including plans to build a 500,000 ton aluminium smelting plant in China’s Qinghai province Evraz Group has entered into a Share Purchase Agreement with Best Decade to acquire a 51% stake of Delong Holdings Ltd. However,

•

this deal is taking longer than originally expected, and Evraz is still waiting for Beijing’s approval for its planned USD 1.5 bn takeover of Delong. Evraz has agreed with Best Decade to extend the option exercise period from Aug 18 2008 until Feb 18, 2009 In July Evraz signed a cooperation agreement on setting up a JV with China Metallurgical Group (MCC) to develop Australia’s Cape Lambert Iron Ore project. In the new built JV, Evraz holds 75%, while MCC con-

•

•

trols 25% China will likely invest USD 6.4 bn in construction projects in Russia via ASR (Russian Builders’ Association) and its Chinese counterpart. The president of ASR, Nikolai Koshman, said, “There are 30 selected projects ready for construction so far, and related procedures have been completed” Donghua Investment Corporation (Russia) acquired Mudanjiang Cement Group Company Ltd. for USD 40 mn

Sources: Multiple sources; Press; TBA Analysis

China-Russia Trade • China is Russia’s fifth-largest trading partner (and second-largest if EU countries are regarded as a block) • Light industry products are China’s largest export commodities to Russia, yet these are increasingly being displaced by machinery • Russia was China’s seventhlargest trading partner in 2007 and ninth-largest in 2008. In 2007, Russia became the largest supplier of logs and wood to China. Russian log exports account for 68.5% of China’s total log import volume • Mechanic appliances, footwear, electrical machinery, vehicles and parts, and textile products are the top Chinese exports to Russia, while mineral fuels, mineral oils, fertilizers and wood are the top Russian exports to China • Around 230 representative offices or firms invested by Russian companies have been registered in China. Many Russian companies are planning to open sourcing offices in China. Severstal, for example, opened a purchasing office in Beijing in November 2008 Sources: Multiple sources; Press; TBA Analysis

Russia-China Trade, 1997–Sep 2008, USD mn Exports to China Im ports from China

30,000 25,000 20,000 15,000 10,000 5,000 0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: MOFCOM China

by Sep 2008

Russia Imports from and Exports to China, Q1–Q3 2008, USD mn 100%

Footwear, Textiles 1,703

Vehicles and parts 1,278

80%

80% 60%

100%

Electrical machinery, equipment and parts 5,914

40%

Machinery and mechanical appliances 5,939

Others 10,574

20% 0%

Wood and articles of wood, Pulp, Wood charcoal 1,928

Source: MOFCOM China

Others 4,300

60% Mineral fuels, Mineral Oils 7,919

40% 20% 0%

Im ported Goods

Fertilizers 1,002

Exported Goods

45 Regional Focus

CHINA-RUSSIA

Russia-China Investment • Russia’s and China’s FDI to each other are 1% or less of their total respective outward FDI. In 2007, China’s total outward FDI was USD 22.5 bn, and China’s FDI to Russia was USD 0.4 bn. Russia’s outward FDI was USD 45.7 bn, and FDI to China was USD 0.05 bn • Chinese investments in Russia focus on forestry, mining, construction, textiles and electrical appliances. Russian investments in China concentrate on transportation and construction Sources: Multiple sources; TBA Analysis

Russia-China Bilateral FDI, 2004–2007, USD mn Russia FDI to China 500 400 300 200 100 0 2004

2006

2007

Sources: Press; TBA Analysis

Russia Industrial Production and Investment, % y-o-y Growth Rate Investm ent Grow th Rate

Industrial Production Grow th Rate 40 20 0 -20 -40 Oct-08

Jul-08

Apr-08

Jan-08

Oct-07

Jul-07

Apr-07

Jan-07

Oct-06

Jul-06

Apr-06

Jan-06

Oct-05

Jul-05

Apr-05

-60 Jan-05

Russia-China Investment In 2007, FDI into Russia amounted to USD 52 bn, yet this amount is expected to increase to USD 55-58 bn in 2008 • Russian industrial production growth dropped from 16.7% in Nov. 2007 to -56.7% in Nov. 2008. The investment growth rate declined from 17.1% to -2.1% • The most attractive industry remains real estate, followed by transport, communications, construction & mineral production

Sources: Russian Publishing Company ‘Expert Group’; TBA Analysis

Investment into Russia by Sector, USD bn

Investment in Russia by Countries, USD bn 2005

140

Real estate operations

120

Wholesale, retail (transport vehicles excluded)

37.7%

60

Transport and communications

3.7% 7.0% 21.5%

Others

2007 To a large extent, returning Russian capital

USA Germ any

Metallurgical production Construction

2006

Brit. Virgin lslands

Transport facility production

80

40

2005

Source: UNCTAD

•

100

China FDI to Russia

36.5%

12.3%

Ireland Sw itzerland France Luxem burg Netherlands Cyprus

20

33.7%

0

34.5%

27.1%

36.3%

30.2%

2003

2005

2006

2007

Source: GKS (Federal State Statistics Service of Russia)

United Kingdom 0

10

20

30

Source: GKS (Federal State Statistics Service of Russia)

40

50

46

Upcoming Events THE BEIJING AXIS can assist delegates who wish to attend fairs, exhibitions and conferences in China. Services include research, interpretation, negotiation and travel logistics. For more information, please send an email to [email protected], or for more contact details please see page 50. Date

Event

Location

Hong Kong Toys & Games Fair

Hong Kong

13 - 16 Jan 09

35th International Fur Fair

Beijing

14 - 16 Jan 09

10th China International Trade Show for Exhibition and Conference Industry

Beijing

19 - 20 Jan 09

Asian Financial Forum 2009

Hong Kong

16 - 18 Feb 09

2009 China International Automotive Aftermarket Industry Fair

Beijing

5 - 8 Jan 09

17 - 20 Feb 09 17 - 20 Feb 09

10th International Exhibition of Machinery and Accessories for Furniture Production, Upholstery and Furnishings International Exhibition of Machinery Components and Supplies for Timber Construction

Shanghai Shanghai

17 - 20 Feb 09

10th International Forestry and Woodworking Machinery and Suppliers Exhibition

Shanghai

20 - 22 Feb 09

International Conference on Computer Modelling and Simulation (ICCMS 2009)

Macau

20 - 23 Feb 09

8th China International Auto Accessories Commercial Expo

Beijing

23 - 25 Feb 09

2009 China International Catalyst Industry Technique and Application Exposition

Beijing

23 - 25 Feb 09

7th China (Guangzhou) International Auto Parts Expo 2009

Guangzhou

24 - 27 Feb 09

10th China International Machinery Industry Exhibition

Ningbo

24 - 28 Feb 09

China International Concrete Technology and Equipment Expo

Beijing

25 - 27 Feb 09

Infrastructure Project Finance

Shanghai

25 - 28 Feb 09

China International Trade Fair for Auto Maintenance Technology and Equipment, Auto Parts and Accessories

Beijing

26 - 27 Feb 09

14th Annual International IC-China Conference & Exhibition

Shenzhen

26 - 28 Feb 09

First Chinese Forum on Intelligent Finance

Beijing

27 - 28 Feb 09

2009 International Conference on Communication Software and Networks

Macau

3 - 4 Mar 09

6th CTLtec ASIA: Coal Gasification, Liquefaction, Coal-Chemicals Projects & Technologies

Beijing

4 - 6 Mar 09

Pump, Valve & Pipe China Exhibition

Guangzhou

4 - 7 Mar 09

China International Factory Automation & Instrument Exhibition

Guangzhou

6 - 8 Mar 09

5th International Brand Forklift and Accessory Exhibition Guangzhou

Guangzhou

12 - 13 Mar 09

2nd Annual China Petrochemical Summit 2009

Beijing

17 - 20 Mar 09

Asia Eco Green Building Congress 2009

Shanghai

18 - 19 Mar 09

16th Asia-Pacific CFO Roundtable

Shanghai

18 - 21 Mar 09

China International Furniture Fair

Guangzhou

25 - 27 Mar 09

2009 Flow Expo Guangzhou

Guangzhou

27 - 30 Mar 09

China International Woodworking Machinery & Furniture Raw Materials Fair

Guangzhou

Sign Expo

Beijing

4 - 11 Apr 09

47 Date

Event

Location

12 - 15 Apr 09

China Sourcing Fair - Electronics & Components

Hong Kong

19 - 22 Apr 09

8th International Exhibition on Nuclear Power Industry 2009

Shanghai

20 - 23 Apr 09

China Sourcing Fair - Baby & Children's Products

Hong Kong

21 - 23 Apr 09

Export Controls and Trade Compliance Asia Summit

Beijing

22 - 28 Apr 09

13th Shanghai International Automobile Industry Exhibition

Shanghai

6 - 8 May 09

SNEC 3rd (2009) International Photovoltaic Power Generation Expo

Shanghai

7 - 8 May 09

2nd Energy Efficiency Asia 2009

Beijing

3 - 5 Jun 09

Mines and Money Asia 2009

Hong Kong

8th China International Consumer Goods Fair

Ningbo

15th Shanghai Metallurgy Expo / 2nd China (Shanghai) International Steel Trade Expo

Shanghai

China Structured Products Forum 2009

Beijing

17 - 18 Jun 09

Asia Mining Tunnelling Summit 2009

Beijing

18 - 20 Jun 09

9th China International Steel Construction Fair

Beijing

18 - 20 Jun 09

14th China International Exhibition for Building Material, Building System, Construction Machinery & Architecture

Beijing

18 - 20 Jun 09

2009 China Inner Mongolia International Coal & Energy Industry Expo

Inner Mongolia

23 - 26 Jun 09

4th China International Metals Industry Fair 2009

Guangzhou

23 - 26 Jun 09

The 10th China (Guangzhou) International Metal & Metallurgy Exhibition

Guangzhou

28 - 30 Jun 09

5th China International Coal Equipment and Mine Technical Equipment Exhibition 2009

Beijing

2009 International Conference on Information Engineering

Shanxi

8 - 12 Jun 09 11 - 13 Jun 09 16 Jun 09

10 - 11 Jul 09

SUGGESTED READING

China Entrepreneur (Fernandez & Underwood, 2009) China Entrepreneur: Voices of Experience from 40 International Business Pioneers gives China-bound entrepreneurs and small business owners the opportunity to learn from experienced China hands before bringing their businesses to the world’s largest and most dynamic consumer market. China Entrepreneurs delivers street-tested advice on launching, growing, and operating your own business in China. Authors Juan Antonio Fernandez, professor of Management at the China Europe International Business School (CEIBS), and Laurie Underwood, journalist and Director of External Communication at CEIBS, use their combined 26 years of China experience to interview 40 successful international entrepreneurs who have built businesses in China. These entrepreneurs share their first-hand advice, anecdotes and best practices in tackling the challenges of succeeding in China, from negotiating with government agencies and gaining necessary start-up approvals, to hiring and keeping the right staff, to collecting payments and safeguarding intellectual property. Yet China Entrepreneur also balances the practical business advice with insights from experienced China consultants who have risen to prominence in the Chinese business environment. China Entrepreneur features THE BEIJING AXIS Founder & Group Managing Director, Kobus van der Wath, as one of the 40 foreign China entrepreneurs included in the book.

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Careers at THE BEIJING AXIS THE BEIJING AXIS is constantly looking for dynamic, performance-driven individuals to assist us in meeting our present and future business challenges. Applications will be treated confidentially. If you believe that you can make a positive contribution, please send your detailed CV with a letter of motivation and references to our Group MD, Kobus van der Wath: [email protected]. Note: international relocation is possible. LEAD CONSULTANT (CHINA CAPITAL ADVISORS) Beijing: 1 position Role • Lead multiple advisory assignments in the Investment Advisory Division of THE BEIJING AXIS • Project manage assignments and ensure quality and time objectives are met - and ensure professional ‘best practice’ standards across assigned projects • Valuation, modelling, participate in overall investment process • Manage 1-2 deal-team consultants and analysts • Be a thought leader and promote the development of learning processes and platforms • Improve process efficiencies, optimise workflow and control costs • Client relationship management • Ensure alignment of Division’s objectives with those of the Group • Multi-sector assignments with emphasis on resources, mining and industry • Significant (international) travel Requirements • Superior analytical and problemsolving ability: valuation, deal structuring • Ability to work with diverse cultures and backgrounds • Interest in and knowledge of China’s cross-border business engagement • Sound judgement, maturity and a systematic mind • Conceptual thinking and attention to detail • MBA/CFA/CA or legal background preferred with more than 3 years experience in finance/ consulting • Native English written and verbal communication skills essential • Mandarin not essential but regarded as an advantage • Willingness to travel

Going Places: THE BEIJING AXIS is an entrepreneurial firm and welcomes applications from persons with a well-grounded knowledge of their professional fields in a China context. We offer a rewarding experience, international exposure and highly competitive remuneration. CONSULTANT / ANALYSTS (CHINA STRATEGY GROUP)

SOURCING ENGINEER (CHINA SOURCING UNIT)

Beijing: 1 Consultant position Beijing, Singapore, Perth, Johannesburg: 4 Analyst positions

Beijing: 1 position

• Employed in the Strategy Division of THE BEIJING AXIS • Sound analytical and problemsolving skills • Ability to work in teams with colleagues from diverse cultures and backgrounds • Strong experience in the formulation and execution of research methodologies and analysis • A business and/or technical degree with a post-graduate qualification • Minimum 3 years experience in an appropriate or related field • Excellent communication skills, including both spoken and written English ability • Mandarin not essential, but regarded as an advantage • Willingness to travel

• Employed in the China Sourcing Unit of THE BEIJING AXIS • Strong sourcing (or manufacturing) project management skills • Focus: Project manage sourcing schedules (i.e. ensure that specialised capital equipment is manufactured to required standards and delivered on time); technical QA/QC knowledge; expediting experience and strong supplier management skills • Provide support and technical advice and expertise to China Sourcing Unit colleagues and department • A degree in engineering, preferably mechanical/mining-related with a minimum of 10-years work experience in appropriate field • Excellent English and Mandarin written and spoken ability • Willingness to travel

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THE BEIJING AXIS News Community THE BEIJING AXIS would like to extend warm wishes to all its valued clients, stakeholders and readers of The China Analyst for a healthy, happy, successful and prosperous 2009, and Year of the Ox!

Learning & Getting Around THE BEIJING AXIS Founder & Group Managing Director, Kobus van der Wath, has been included in a new book, China Entrepreneur: Voices of Experience from 40 International Business Pioneers, as one of the 40 entrepreneurs. The book, by Fernandez & Underwood, was published in early 2009. Jackie Li, Business Development Manager for South Africa, delivered a presentation on Low-cost Country Sourcing from China at a Global Sourcing Conference in Pretoria, SA, on 7-8 October 2008. Kobus van der Wath, Group MD, and Mitch Cosani, Corporate Office Manager, attended a DTI-organised SA Expo in HK on 2/3 Oct, Beijing on 8/9 Oct, and Shanghai on 14 Oct. On 15 October 2008, Kobus van der Wath delivered a presentation entitled ‘Working with China B2B’ at the CIPSA Annual Procurement Conference in Melbourne. China Business Development Manager Haiwei Huang and Senior Strategy Consultants Javier Cuñat and William Dey Chao participated in the Second China-Latin America Business Summit in Harbin, Heilongjiang, on 20-21 October 2008. On 11-13 November a number of TBA staff from both the Beijing and Johannesburg offices attended China Mining 2008 in Beijing. Kobus van der Wath was actively involved in both delivering a presentation entitled: ‘China Inc. Goes Global’ as well as co-chairing an Outbound Mining Investment Forum. TBA staff attended Mining Investment Seminars held by the Canadian, South African and Australian governments on 11 & 12 Nov 2008 in Beijing.

Kobus van der Wath attended the Global China Business Meeting in Barcelona, Spain from 17-19 November 2008. The event is the foremost annual gathering of Chinese business leaders and their global counterparts in Europe and is attended by CEOs and business leaders from leading organisations.

• Asia Mining Congress 2009 in Singapore (23-27 Mar 2009) • The International Mining Equipment Fair in Handan, China (2729 Mar 2009) • The 4th China International Metals Industry Fair 2009 in Guangzhou (31 Mar 2009)

On 18-19 November 2008, Jackie Li attended the Africa Investment Forum at Gallagher Estate, SA.

Team Developments

PricewaterhouseCoopers, in association with TBA, hosted a workshop on 26 Nov 2008 in Bryanston, SA. The workshop was entitled Strategic Imperatives in Times of Financial and Economic Turbulence and Kobus van der Wath and Jackie Li delivered presentations on how SA companies can improve their strategies and implementation success when operating in China. In January 2009 Kobus van der W a t h h o s t e d ‘C h in a i n 2 0 0 9 ’ Roundtables in Vietnam, Thailand and Singapore. TBA will be further represented at a number of events in China, South Africa, Australia and Canada in January, February and March 2009; some of these include: • Mining Indaba 2009 in Cape Town, SA, where Kobus van der Wath has been invited to deliver a presentation on China’s role in the resource sector (9-12 Feb 09) • Macquarie China-Day Seminar in CT (6 Feb 09) • China Business Roundtable in Singapore by Kobus van der Wath on 20 Feb 09 • China Business Roundtable in Perth by Kobus van der Wath on 24 Feb 09 • Business Seminar at The Capital Club in Beijing: ‘China Inc Goes Global—Africa’s Important in China’s International Engagement’ (26 Feb 2009) • PDAC 2009 in Toronto, Canada, (1-4 Mar 09) where Kobus van der Wath has been invited to deliver a keynote presentation • Minerals Processing 2009 in Perth, Australia (24-25 Mar 2009)

Cheryl Tang, Director and previously Head of Operations in the Beijing office, was appointed as the Beijing General Manager in October 2008. In this position Cheryl is responsible for managing all aspects of the day-to-day running of the Beijing office. Lilian Luca, previously solely responsible for Russia and CIS, has been asked to take on additional responsibility as Director of the Group Corporate Office from the beginning of 2009. Javier Cuñat, previously working as a Senior Consultant in the Beijing office, has been appointed as Manager of the China Strategy Group, effective from the start of Feb 2009. Mitch Cosani, currently at the end of a 6-month secondment to the Beijing office, returns to Johannesburg where he will assume responsibility as Manager of the office. Elena Zhou joined the Beijing office in October as Senior Consultant in the Finance & Admin Dept. Elena is a CPA from the Chinese Institute of Certified Public Accountants. TBA welcomed Christine Kirk to the Beijing office in Nov last year as an Executive Assistant in the Group Corporate Office. Christine previously worked for a number of leading international companies and also lived in Germany and SA. Jason Gao joined in Dec in Beijing as an intern. Jason is currently completing post-graduate studies in International Relations at the China Univ. of Political Science and Law. We welcome them, congratulate them and wish them all the very best and continued success in the next stage of their careers with TBA.

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About THE BEIJING AXIS THE BEIJING AXIS is a cross-border business bridge to/from China in three principal areas: Strategy, Sourcing and Investment. Since our establishment in 2002, we have successfully worked with many international and Chinese MNC clients across various sectors and industries, but our core focus is on the Chinese mining and resources sector, and on China’s burgeoning industrial and engineering sector. Our work is always cross-border — supporting international firms as they act in unfamiliar territory in China, or supporting Chinese firms as they venture out and ‘go global’. We are committed to safety and sustainability; and our solutions emphasise 'actions and transactions’. THE BEIJING AXIS is organised along 3 synergistic cross-border China businesses: the China Strategy Group, the China Sourcing Unit and China Capital Advisors.

China Strategy Group

China Sourcing Group

China Capital Advisors

THE BEIJING AXIS China Strategy Group provides professional business solutions, with a clear focus on strategy formulation and implementation:

THE BEIJING AXIS China Sourcing Unit supports sourcing and procurement initiatives to/from China with a systematic and analytical approach:

THE BEIJING AXIS China Capital Advisors provides cross-border advisory services. The focus falls on corporate finance origination activities:

Strategy Formulation

Strategic Sourcing

Corporate Finance Origination

ƒ Market intelligence ƒ Market and industry research ƒ Market entry strategy ƒ Partnering strategy ƒ Business planning

ƒ Supply needs analysis ƒ Supplier identification, filtering,

ƒ Advising Chinese MNCs as they

Strategy Implementation

Supply Chain Management & Support

ƒ Market entry support ƒ Business development ƒ Operational support ƒ Negotiation ƒ Agency services ƒ Relationship management ƒ Delegations

due diligence and selection ƒ Negotiation ƒ Commercial and contract management support

ƒ Comprehensive project management

ƒ Transaction monitoring ƒ QA/QC, expediting, managing 3rd parties (QA inspectors, lawyers, etc.) ƒ Logistics ƒ Holistic risk management ƒ Strategic relationship management

seek overseas assets, equity, projects or foreign co-investors ƒ Advising foreign MNCs that are seeking Chinese assets, equity, projects or Chinese co-investment partners

Financial Advisory

ƒ Buy side & sell side M&A advisory ƒ Acquisition target identification, filtering and selection ƒ Project and target due diligence ƒ Fundraising support ƒ Valuations ƒ Opinions

For more information, please visit our English, Chinese, Russian or Spanish websites at www.thebeijingaxis.com

Contact Information Beijing, China Cheryl Tang Director & GM: China [email protected] +86 (0)10 6440 2106 +86 (0)10 6440 2672

China Strategy Group

China Sourcing Unit

China Capital Advisors

Javier Cuñat Manager [email protected]

Diana Wang Manager [email protected]

Edward Wang Director & GM [email protected]

Johannesburg, South Africa

Moscow, Russia/CIS

Perth, Australia

Latin America Desk

Michele (Mitch) Cosani Manager: Johannesburg Office [email protected]

Lilian Luca Director: Russia/CIS & Group Corporate Office [email protected]

Jim Hu Senior Consultant [email protected]

Javier Cuñat (in Beijing) Manager [email protected]

Jackie Li Manager: Business Development [email protected] +27 (0)11 201 2550 +27 (0)11 201 2508

51 THE CHINA ANALYST Previous Editions

October 2008

July 2008 Regulars China Sourcing Strategy Macroeconomic Monitor China Sourcing Blog Highlights China Facts, Figures & Forecasts China Trade Roundup Financial Markets China OFDI and M&A The C in BRICS China Business Highlights

Regulars China Sourcing Strategy Macroeconomic Monitor China Sourcing Blog Highlights China Facts, Figures & Forecasts China Trade Roundup Financial Markets China OFDI and M&A The C in BRICS China Business Highlights

Features China Inc. Goes Global: The Long Road Ahead China companies are making headlines with foreign acquisitions, yet what are the drivers of this trend? Taking a Step Into Latin America China is intensifying its relationship with LatAm. We examine the current critical juncture between these regions.

Features The Scramble for Australia We take a look as China’s Australian mining moves from trade to investment. Sourcing High-Value Industrial Products from China The era of Chinese high-value industrial exports is fast approaching, yet pitfalls and peculiarities remain.

April 2008

January 2008 Regulars China in Statistics Statistics in the News China Business News China Perspectives China Sourcing Blog Highlights Upcoming Events

Features Putting China’s Urban Billion into Perspective To the business community China’s population is an opportunity, yet to the government it is serious challenge. Africa & China: How Long will the Honeymoon Last? As Chinese involvement in Africa grows, is there reason to be concerned about the sustainability of the relationship?

Regulars China in Statistics Statistics in the News China Business News China Perspectives China Sourcing Blog Highlights Upcoming Events

Features The Next Generation of Chinese Resource Companies The original trailblazers are still making headlines for bigticket deals, but what are the new kids on the block up to? China’s Reaction to BHP’s Bid for Rio Tinto BHP’s bid turned into a guessing game, yet the Chinese reaction was no more than a shrug, and for good reason.

To view or download a copy of current or previous editions of The China Analyst, visit our website at www.thebeijingaxis.com.

DISCLAIMER This document is issued by THE BEIJING AXIS Ltd. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information contained here has been compiled from sources believed to be reliable. While every effort has been made ensure that the information is correct and that the views are accurate, THE BEIJING AXIS cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. THE BEIJING AXIS, and/or a connected company may have a position in any of the investments mentioned in this document. All readers are advised to make their own independent judgements with respect to any matter contained in this document. Copyright Notice: Copyright of all materials, text, articles and information contained herein resides in, and may only be reproduced with permission of, an authorised signatory of THE BEIJING AXIS. Copyright in materials created by third parties and the rights under copyright of such parties is hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests in and shall remain copyright of THE BEIJING AXIS and should not be reproduced or used except for business purposes on behalf of THE BEIJING AXIS or save with the express prior written consent of an authorised signatory of THE BEIJING AXIS. All rights reserved. © THE BEIJING AXIS 2009.