The China Analyst - January 2008

THE CHINA ANALYST January 2008

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

Features: The Next Generation of Chinese Mining Companies Going Abroad

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China’s Reaction to BHP’s Bid for Rio Tinto

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Regulars: China Business News Highlights

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China Perspectives

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China Sourcing Blog Highlights

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Upcoming Events

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Table of Contents January 2008 4

The Next Generation of Chinese Resource Companies Going Abroad Once obscure provincially-owned resource companies are fast becoming global household names, as capital raised through successful IPOs are flowing into foreign projects. The original trailblazers are still making headlines for big-ticket deals, but what are the new kids on the block up to?

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China’s Reaction to BHP’s Bid for Rio Tinto: Does it Matter? News of BHP Billiton’s attempt to bring more than one third of the world’s iron ore supply under one flag quickly turned into a guessing game on the Chinese reaction. In the end, the reaction amounted to no more than a shrug, and for good reason.

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China in Statistics Breakdown of China’s trade with other BRICS countries; China import & export figures; China’s largest trade surplus destinations; actual use of foreign investment; Shanghai composite index performance and China’s largest ten companies by market share.

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Statistics in the News A drop in Chinese steel exports; rising profits for state-owned enterprises and China’s dramatic GDP revision.

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China Business News Highlights A selection of the biggest business stories coming out of China in December.

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China Perspectives A summary of high level debates and trends in the Chinese media, including coverage of the Nanjing Massacre, renminbi revaluation, and more…

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China Sourcing Blog Highlights Highlights from pages of The China Sourcing Blog, an online information portal and discussion forum on issues relevant to sourcing from China.

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Upcoming Events A list of upcoming fairs, exhibitions and conferences in China, with particular focus on sourcing from China.

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THE BEIJING AXIS News Company news for December, including the IBM Global Outlook Forum, the China-Africa Forum on Nonferrous Investment held in Beijing, and more...

THE CHINA ANALYST is published and distributed by THE BEIJING AXIS Ltd. For more information on services, please contact any of the following persons: Beijing Dirk Kotze Tel: +86 10 6440 2347 [email protected]

Shanghai Julian Hewitt Tel: +86 21 6283 0280 [email protected]

Johannesburg Jackie Li Tel: +27 11 201 2318 [email protected]

Russia and Eastern Europe Lilian Luca Tel: +86 10 6440 2106 [email protected]

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Chinese Resource Companies - The Next Generation As the world’s capital markets move more ever eastward, they are giving rise to the next generation of savvy Chinese companies that have IPO-raised funds waiting for opportunities abroad. In this club of the newly moneyed, particular Chinese resource companies are well worth watching. Large State-Owned Enterprises (SOEs) run by the central government have traditionally led China’s global resource charge. The likes of Chalco, Minmetals, CNMC and Sinosteel have seen their sheer size, political backing and financial backing gain them access to some of China’s largest foreign resource deals to date.

cent listings, subsequent IPO equity and increasing international business savvy are defining a new era in China’s resource sector. This article will take a closer look at the components that underlie this trend and profile some of these companies that are increasingly garnering press coverage for their international resource ambitions.

Lately, however, a very visible next generation of up-and-coming provincially owned SOEs have become active players on the global mining scene. These provincial SOEs have been driven more by the internal motivation to maximize profits rather than the externally imposed imperative to secure reources for the national interest, a phenomenon seen in the operation of large resource players from China and Japan. Their modest size allows them greater flexibility in venturing into new markets and often means they are often involved in smaller scale mining transactions.

Listed Metal Shares and Recent Listings The first port of call are China’s stock exchanges. At the end of October 2007, a total of 89 Mainland China metal and mining companies had listings on the stock exchanges of Shanghai, Shenzhen and Hong Kong. Almost 50% of these metal companies had IPO’ed on the Shanghai Stock Exchange. A further 30 companies or a third of the total had listed in Shenzhen, while the remaining balance of 16 Mainland China metal companies had met the more stringent requirements of the Hong Kong Stock Exchange.

One of the major trends that have supported the emergence of China’s next generation of resource companies has been their access to the buoyant Mainland China and Hong Kong stock exchanges. Re-

Further scrutiny shows that a few progressive resource companies like Angang Steel, Jiangxi Copper and Maanshan Iron & Steel had dual listings on both the Hong Kong and Shanghai Stock Exchanges.

Listing Preference of Mainland Metal and Mining Companies (No. of Listings) 48%

50 34%

25

18%

0 Hong Kong

Shenzhen

Shanghai

From a sectoral perspective, the vast majority of these metal and mining companies – more than a third - were in the steel sector. A smattering of aluminium, copper and gold companies represented other key mineral interests. What becomes informative is to analyze recent listing patterns of Chinese resource companies. Since 2007, 11 resource companies listed on the Shanghai and Shenzhen Stock Exchanges. Of these, seven were metal companies that raised a combined USD9 bn. A further four were coal companies that included the listing of Shenhua, one of China’s largest SOEs. Shenhua alone generated over USD60 billion from its IPO and currently has a massive market capitalization of USD140 bn. Since 2006, the Hong Kong Stock Exchange received four new resource company listings that created approximately USD80 bn in IPO equity. As is the case with the listing of many Mainland China companies, the percentage of shares in public circulation is often very low, making true market capitalizing valuations problematic. In the case of Shenhua, less than 10% of the shares are in public hands with the vast majority still remaining under state control. For most resource companies, this figure is closer to 30%. Hybrid Resource Companies While China’s National SOEs have dominated international resource activities, a new category of companies is emerging that combines the advantageous elements of both SOEs and private sector companies. The companies that typify these hybrid characteristics are

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successfully combining three main elements. They hail from provincial SOE backgrounds, are responsible to public shareholders and have strong global growth plans in place. The unique background of these companies brings with it a unique set of characteristics. These companies are driven more by market opportunities and less by national mandates. Their smaller size and slightly flatter decision making structures make then more nimble foreign investors. They rely less on state-backed credit lines and more on the generation of IPO funding to support their aggressive global ambitions. Importantly, hailing from provincial state owned environments, these companies still carry with them the political impetus and ‘guanxi’ that purely private companies do not. A Case in Point There are five companies that show strong commonalities with China’s new generation of hybrid resource companies and make for interesting further assessment. Zijin Mining Zijin Mining originally hails from Fujian, a province on the southern China coast. Since its establishment 20 years ago, it has grown to become one of China’s largest gold miners and has international interests in nickel, platinum, copper, gold, lead and zinc. It was one of the first metal companies to list in Hong Kong and is planning a Shanghai one for the earlier part of 2008. Zijin Mining is one of the most successful of China’s provincial SOE resource companies and has already expanded its international activities to include interests in eight countries outside of China that include Peru, Burma, South Africa, Russia, Mongolia, Vietnam. Tajikistan and Afghanistan.

IPO Value Generated by Mainland Resource Companies Since 2006 (USD bn) 15

4 listings 4 listings

10 5 8 listings

0 Shenzhen

Shanghai

Hong Kong

Hunan Nonferrous Metals Hunan Nonferrous is a Hong Kong listed company. It is active in Pakistan and Australia and is pursuing further interests in Australia and Vietnam. Hunan Nonferrous also has controlling interests in three Chinese resource companies. The company focuses on copper, zinc, tungsten, molybdenum, silver, bismuth and tin. It plans to spend over USD250 billion to further develop these resources over the next five years.

Yunnan Copper Yunnan Copper is China’s third largest copper smelter. The company is listed on the Shenzhen Stock Exchange and has a subsidiary - China Yunnan Copper Australia Ltd – that is listed in Australia. Yunnan Copper has to date invested in Australia, Zambia, Laos, Vietnam and Myanmar in addition to a large off-take agreement in Peru. It aims to boost production capacity to one million tons within the next five years.

Jiangxi Copper Jiangxi Copper is a Shanghai and Hong Kong listed copper smelter. The company has interests in Canada and Afghanistan as well as cooperation with a large Japanese conglomerate. Half of its copper concentrates are imported. Jiangxi Copper’s net profit for 2006 was USD600 mn – an increase of 150% from 2005.

Future Leanings China’s hybrid resource companies are becoming more assertive on the global mining front, and they make for the perfect vehicle to gradually shift China’s current mining acquisition policy of purchasing strategic interests to that of obtaining greater overall managerial control. As if to make the point even clearer, Jinchuan recently made its first acquisition of a foreign mining company in the form of Canada’s Tyler Resources. With provincial SOEs representing 73% of Chinese resource listings in 2007, the young and ambitious are about to liven up the world of Chinese outgoing investment, and so too the global mining landscape. Watch this space.

Gansu Jinchuan Group Jinchuan is China’s largest nickel producer and is currently pursuing a listing on the Shanghai Stock Exchange. It is active in Australia, Kenya, Zambia and Papua New Guinea. The company is expected to generate sales revenues of almost USD7 bn for 2007. Jinchuan has two joint ventures with foreign mining companies in Africa. This includes an equity and off-take interest in Zambia and Kenya.

Julian Hewitt Manager, Shanghai Office [email protected]

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BHP’s Bid for Rio: China the Morning After Much has been written about China’s perceived or real attempts to block BHP Billiton’s proposed takeover of Rio Tinto, with the possibility of a linkup generally portrayed as a strategic defeat for China. So what will happen in Beijing the morning after if the deal goes through? Three days after the announcement of a bid by mining giant BHP Billiton for Rio Tinto, a meeting of highlevel Chinese officials and business persons was held at Beijing’s Great Hall of the People. Hosted by the Bank of China, the Chinese Ministry of Land and Resources and the China Mining Association, the gathering sought to strategise a Chinese reaction to BHP’s attempt to create a company that would control around 36% of global iron ore production. Since the world’s largest iron ore producer, Companhia Vale do Rio Doce (CVRD) already accounted for 38% of global output in 2006, China has to face the spectre of a duopoly in an industry that has already produced raw emotions over the past few years. Probably no other commodity so vividly illustrates the paradox of China’s economic growth eroding its economic leverage. The early years of this decade saw the start of a commodity boom that saw cop-

per rise to USD8,000 per ton, and a doubling of iron ore prices. Nowhere have these rises caused more pain than in China, the very country that caused the commodity boom. 2006 marked the 10 year anniversary of China overtaking Japan as the world’s largest steel producer, when China produced 100 million tons in 1996 to pip Japan by two million tons for the year. That position has since been put beyond the reach of any challengers - in 2007 China produced four times as much crude steel as Japan (still the world’s second largest producer), reaching 480 million tons to Japan’s 120 million tons. Yet, until 2005, the annual negotiation of a global benchmark price for iron ore, the

World Iron Ore Imports by Destination (million tons, 1990-2006) 350 China

primary raw material in steelmaking, was a decidedly Japanese affair, with Nippon Steel squaring off to Brazilian giant CVRD. But the 71.5% benchmark rise agreed to by Nippon Steel in 2005 spurred the Chinese to demand a more representative role in price negotiations. In 2006 a consortium of steel mills, fronted by Baosteel, took a leading role in this annual ritual. Still, a seat at the table failed to stop a further 19% rise in 2006, and so it became ever more clear that China would have to accept the fate of being a price taker instead of a price setter. Even more worrisome for China, however, is its position as an iron ore taker - in 2006 more than 50% of China’s steel production was from imported ore. Local deposits are of low quality, mined by primitive methods and see a disturbing high prevalence of “rich-grading”, a practice where ore is extracted in a way that renders a large part of the remaining reserve beyond extraction. The scope of developing new deposits or expanding existing mines are limited, and are in most cases already in progress. In terms of leverage China is limited.

300 250 200 150

Europe Japan

100 50

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Other

This has led to China fundamentally reassessing its relationship with the big three producers. Whereas the iron ore negotiations of 2006 were filled with emotional and often irrational behaviour (“we’ll forbid steel mills to accept price rises”), the gathering at the Great Hall accepted that China has two options: one is to establish a presence inside whatever entity or entities emerge, and the other would be to acquire related resources. In addition, the Chinese

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authorities avoided the shrill statements that were the hallmark of iron ore politics two years ago: reports of impending Chinese attempts to buy stakes in Rio Tinto were met with silence, although Rio said that it had received approaches from Chinese investors. All this probably points to a realization on the Chinese side that it cannot influence the eventual outcome. In order to play this game smart, it would have to play it long term. In this light, the BHP-Rio match-up, if it happens before the 6 February deadline, may merely spur the Chinese to act faster in acquiring foreign iron ore assets in particular, and resource assets in general. This impetus, however amplified by BHP’s bid, is not new, and Chinese companies have been involving themselves in foreign mining activities for some time. Whereas the story of China’s resource hunt is most often told in the context of its engagements with Africa, Chinese mining investment is increasingly focused on first world mining destinations. From Zijin Mining’s 2006 purchase of a

21% stake in Canada’s Pinnacle Mines to Minmetals’ investment in Chile’s Codelco, the world’s largest copper producer, Chinese stateowned enterprises have engaged in investments ranging from equity acquisitions to greenfield developments. Even the mining majors have been in on the action; in 2007 the China Development Bank acquired a 1% stake in Anglo American, a move that was preceded in 2006 by the acquisition of 1.13% by Chinese tycoon Larry Yung for some USD800 mn. Hiccups there have been: the attempt by state-owned Minmetals to acquire Canadian miner Noranda in 2004 ran into controversy when doubts were raised over whether a foreign government-owned company should own a “strategic” Canadian asset. Nevertheless, Chinese miners have on average been more successful than most other industries in skirting both controversy and failure in engaging foreign mining companies and governments. Nowhere has this trend been more in evidence than in Australia. Although there are currently only three Chinese invested opera-

Principal Sources of China’s Iron Ore Imports (million tons, 1992-2006)

350 Others

300

South Africa

250

Brazil

200 India

150 100

Australia

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tions in Australia, at least half a dozen are under development, and most of these are in iron ore. The success of China in entering the Australian mining industry lies in mainly two drivers: the fact that the Chinese have ample funds available, and the fact that Australia still has many iron ore deposits that lie undeveloped. This abundance of resources is partly thanks to the fact that capacity expansion was neglected during the 1990’s, with the soaring prices of the last few years making possible the development of previously unviable resources. Many such new developments are based on off-take arrangements where the Chinese party funds a development in return for a share of the future production, but as China steps up its attempts to gain access to foreign resources, more direct involvement in mining and processing activities are likely to become the norm. The Aluminium Corporation of China’s (Chalco) winning of a USD3 bn bid to develop a bauxite deposit at Aurukun in Northern Queensland is one such example. Much newsprint has been spent on the expected Chinese reaction to a possible BHP-Rio Tinto merger, yet the deal is bound to have little effect on the reality of China’s dependence on foreign iron ore. China has seen the writing on the wall of the resources marketplace, and the only viable reaction is for Chinese resource companies, small and large, to make foreign resource investments. This has been a growing trend for the whole life of the commodity boom, and is set for a boom of its own.

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0 Dirk Kotze China General Manager [email protected]

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China in Statistics The China in Statistics page contains recently released data that best illustrate the main trends in the growth and transformation of Chinese commerce and industry, with an emphasis on trade, foreign investment and companies. Share of BRICS Total Trade with China (Jan-Sep 07)

120

South Africa 11%

Brazil 22%

China Total Trade (12 month historical data, USD bn)

Imports

Exports

100 80 60 40

Russia 38%

India 29%

20

No v De c Ja n Fe b M ar Ap r M ay Ju n Ju l Au g Se p O ct

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Source: PRC Ministry of Commerce

Source: PRC Ministry of Commerce

10 Largest Trade Deficits with China (Jan-Oct 07)

Actual Use of Foreign Investment (FDI, 2007, USD bn)

USD 138bn

Hong Kong USA

USD 134bn

8

USD 6.6 bn

Netherlands UK

5

UAE Spain Singapore

3

Italy India Turkey

0 0

50

100

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

150

Source: PRC Ministry of Commerce

Source: PRC Ministry of Commerce

Shanghai Composite Index (12 month historical avg.)

7,500

Largest Companies by Market Cap (Nov 07, USD bn) Petro China

16 Oct 07

ICBC China Life

5,000

Bank of China China Shenhua Ping An Insurance Communication Bank

2,500

China Industrial Bank CITIC Bank COSCO

0 Nov 06

0 Jan

Source: Shanghai Stock Exchange

May

Aug

Oct 07

250

500

750

1000

Source: Shanghai Stock Exchange, Shenzhen Stock Exchange, Hong Kong Stock Exchange

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Statistics in the News China’s rise is best described in numbers, whether population, economic growth or the fact that in 2007 its crude steel output was the same as the total for the entire three decades after the 1949 revolution. Statistics in the News is a selection of the most interesting statistics released this month. Chinese Steel Exports See a Dramatic Fall Following Reduction of Export Rebates

During 2007 the Chinese government further reduced export tax rebates of 76 steel products from 8%-11% to 5%, and removed tax rebates on another 83 categories. Consequently, steel exports began to slow in May 2007. On 1 July 2007, the government reduced the rebates on 161 steel products from 11%-13% to 0-5% and on 1 Jan 2008 the government raised the export tax on steel billets from 20% to 25% and long products from 10% to 15%. These measures are aimed at reducing overinvestment in capacity and possible political fallout from a flood of Chinese steel onto world markets.

Steel Product Exports (Jan-Nov 2007) 7,500,000 7,000,000 6,500,000 6,000,000 5,500,000 5,000,000 4,500,000 4,000,000 J

F

M

A

M

J

J

A

S

O

N

Profits Growth at Central Government Controlled State Owned Enterprises Continue to Rise in 2007

China’s often ridiculed state-owned enterprises have slowly been getting better at what they’re famous for not being good at: making a profit. The total profit of the 151 centrally controlled state-owned enterprises is expected to reach RMB 980 bn (USD130 bn) in 2007. This is the fifth year of sustained profit increases. However, the seemingly healthy nature of these enterprises are only on average - certain enterprises in statecontrolled industries can’t help but make money in an 11% growth economy, while many other enterprises are either underperforming or losing money, prompting calls for the government to “spin-off” certain companies.

Profit of Central-Owned Enterprises (RMB Billion) China GDP Growth (%) 1200 1000 800 600 400 200 0

12% 8% 4% 0% '03

'04

'05

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China’s GDP 40% Lower Than Previously Thought?

According to highly controversial figures released by the World Bank, China's GDP (at purchasing-power parity) is 40% less than was previously thought - this thanks to new calculation methods for international comparisons that include China for the first time. Previous estimates of China's PPP were largely guesswork. Now the World Bank has produced new calculations based on a survey of prices of over 1,000 goods and services in 146 countries, including the Chinese economy for the first time.

Previous Estimate (USD Billion) Current Estimate (USD Billion)

12,000 10,000 8,000 6,000 4,000 2,000

On this basis, China's GDP in 2005 was USD5.3 trillion, compared with USD2.2 trillion using market exchange rates and USD8.9 trillion using previous PPP estimates.

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China Business News Highlights China business news in December was dominated by M&A events, with the proposed merger between BHP and Rio Tinto taking centre stage. Sinochem’s giant bid for Australia’s Nufarm caved in, while Chinese resource companies made their third investment in Peru for 2007. It was reported in early December that China’s auto exports to developing countries soared by 64% year-on-year in the first ten months of 2007. However, the majority of the 400,000 vehicles went to neighboring markets Russia, Kazakhstan and Iran, indicating that Chinese-made vehicles have yet to make a mark in much of the developing world. The carnage in Chinese coal mines continued when an explosion at a coal mine in Shanxi Province claimed the lives of 105 miners on 5 December 2007. The accident was only reported six hours after it happened, infuriating rescuers and the community, and prompting the government to indict 19 persons, including the owner and manager. In 2006, the last year for which full figures are available, China saw a 20% drop in coal mine fatalities despite an 8% rise in output. This still amounted to around 4,746 deaths for the year. An artist’s impression of the new Beijing Airport, set to open before the Olympic Games in August 2008.

It was announced in early December that residential property prices in Guangzhou saw a spectacular drop of 9.9% from October to November. Shanghai prices have been stagnant, but prices in Beijing have been rising steadily. Sinosteel and Baosteel announced on 5 December 2007 the signing of a strategic cooperation agreement in the areas of iron ore, chrome, ferroalloy and mining equipment supplies. The two companies also undertook to cooperate in developing local and foreign resources, technologies and services in an industry that is being pressured to consolidate. The Olympic Games in August 2008 are already having an impact on China’s advertising expenditure, with 2007’s third quarter recording a 14% year-on-year increase, topping USD15 bn amongst print, radio and TV media. No figures were released for the internet.

In early December 2007, Beijing International Airport announced that it was expecting some 53 million passengers in 2007, making it the world’s eighth busiest airport, and the second busiest in Asia, after Tokyo’s expected 65 million travellers. Amidst feverish speculation on China’s reaction to BHP Billiton’s bid for Rio Tinto, China’s largest steel producer denied rumours that it was considering a stake in Rio Tinto. Baosteel Group’s chairman stated that the company lacked the necessary financial resources. Around the same time similar rumours were denied by China’s newly created sovereign fund, the China Investment Corporation Ltd. (CIC), as well as the CIC invested private equity giant Blackstone. It was announced on 10 December 2007 that China Minmetals Nonferrous Metals and Jiangxi Copper concluded a deal to take over Northern Peru Copper Corporation (NPC) for RMB3.3 bn. NPC has been looking for a buyer to develop its Galeno project which will have an average production capacity of 144,000 tons of copper concentrate per annum over an estimated 20 year mine life. This was the third acquisition of a Peruvian asset by a Chinese Mining Company in 2007. Walmart announced it would open it 100th store in China on December 10th 2007. In 2007 alone the retailing giant opened 23 stores in China, with total investment reaching RMB1.7 bn since opening its first store in Shenzhen in 1996. The retailer buys around RMB18

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bn of goods from China annually.

Chinese retail investors, most of them investment novices, queue up outside a stock broker amidst the stock exchange surge in 2007.

China National Chemical Corp ended talks to purchase Nufarm, Australia’s largest supplier of farm chemicals. The cancellation of the USD2.6 bn deal resulted in the company’s largest share price drop in 11 years. ArcelorMittal announced on 13 December 2007 that it had closed a deal to enlarge its shareholding in steel producer China Oriental Group from around 28% to 73%. If approved by the Ministry of Commerce (not certain by any means), this deal would be the first time that a foreign investor gains control of a major Chinese steel producer. A consortium including China’s largest power distributor, State Grid Corporation, outbid a rival by offering USD3.95 bn for a 25 year contract to operate and expand the Philippine’s power grid. Despite government attempts to curb excessive spending, it was announced on 14 December 2007 that China’s investments in factories, real estate and other urban assets surged 26.8% in the first 11 months of 2007, totalling USD1.4 trillion. According to survey results released by the American Chamber of Commerce in Shanghai on 14 December 2007, its members are experiencing rising costs of doing business in China. Many members have resorted to moving their factories and offices inland to smaller cities to take advantage of lower costs, while most of those surveyed said that finding and retaining good employees remained their greatest challenge, followed by IPR infringements. Nevertheless, most companies said that they were profitable in 2007.

With China’s inflation benchmark rising to 6.9% in November, the highest rise since 1996, the country’s central bank, the People’s Bank of China, raised interest rates for the sixth time in 2007 on 17 December. Its deposit rate reached 4.14% while the lending rate rose to 7.47%. Commenting publicly for the first time since it lost a highly publicised intellectual property theft lawsuit, Schneider Electric president Guy Dufraisse stated that the ruling by the Wenzhou Intermediate People’s Court was “totally unfair”. Sued by Wenzhou-based Chint, the ruling made headlines since the RMB330 mn award was extraordinary in a legal system where IP lawsuits (usually by foreign companies) normally result in symbolic awards of a few thousand dollars. One commentator described the ruling as “protectionism of the ugliest kind”. It was announced on 31 December 2007 that China’s newly created sovereign fund, China Investment Corporation (CIC), will invest USD20 bn in the China Develop-

ment Bank, in line with its strategy to invest two thirds of its USD200 bn allocation of China’s foreign reserves domestically. The China Aviation Industry Corporation inaugurated its first fully home grown commercial aircraft, the ARJ-21 just before Christmas. The 85 seat passenger jet is to make its maiden flight in March 2008 while mass production is to begin in 2009. The jet is to compete with other makers of smaller passenger jets, such as Bombardier Inc. and Embraer SA, while laying the groundwork for the development of a Chinese jumbo jet. The Shanghai Composite Index finished the year at almost double where it started. The 97 percent growth made it the world's bestperforming major benchmark index, and was one of the biggest business stories coming out of China during 2007. Shanghai ranked second in the world in attracting IPOs, raising some USD48.62 billion for Chinese companies, after the NYSE’s total of USD52.06 billion.

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China Perspective Taking a look at the issues discussed in the Chinese media, China Perspectives aims to track the opinions and criticisms of the very people that are driving and living China’s breakneck transformation. commentators at the time also suggested that economic stresses, notably the acceptance by Nippon Steel of dramatically higher global benchmark iron ore prices, pushed relations into the deep freeze. In December 2007, the Chinese media for the first time engaged in serious debate on the issue the revaluation of the Chinese renminbi. The widely read and reputable Economic Observer remarked in an editorial: The Chinese media was conspicuously quiet on the 70th anniversary of the Nanjing Massacre, better known in the west as The Rape of Nanking. Over a six week period from December 1937 to February 1938 Japanese occupation forces in the Yangtze River port of Nanjing engaged in some of the most sadistic war crimes of the Japanese occupation. 300,000 Chinese civilians were systematically slaughtered and many more maimed, injured or raped. Yet, with China-Japan relations on the mend, the sometimes shrill editorials of the state media were quiet on the issue, with coverage limited to regular reporting and several photographs. Some publications even showed Japanese Shinto priests blessing the spirits of the victims at the Massacre Memorial in Nanjing, a news angle that would have seemed unimaginable two years ago when China’s major city centres saw large (and some say government coordinated) antiJapanese protests. The animosity flowed primarily from then Japanese Prime Minister Junichiro Koizumi’s visit to Tokyo’s controversial Yasukuni shrine, where 14 class-A war criminals are entombed. Some

“We believe it is time for China to revalue the RMB because the country’s competitiveness is under threat. However, it needs to be made clear that the competitiveness of a country is not determined by the exchange rate. We believe that true Chinese competitiveness should be presented as the reduction of transaction cost and the development of high technology.” Up to fairly recently the official government line was reflected in the media, with near unanimity on the virtues of a weak exchange rate that favours exports. However, the overheating economy and rising inflation have turned the spotlight on the under-valued renminbi, which is suddenly being blamed for economic ills ranging from rapidly rising foreign reserves (by far the largest in the world at USD 1.4 trillion in December 07 to high property prices, and excessive fixed asset investments. The renminbi can float within a limited range against a basket of currencies, and the US and EU trade authorities continuously lobby for a free floating regime.

In an interview with China Entrepreneur Magazine, the CEO of Lenovo said that Chinese companies going abroad need to employ foreign CEOs. The statement has caused some controversy in a country that still smarts from a shortage of middle aged managers, a phenomenon caused by the educational interruptions of the cultural revolution that ended in 1976. The 21st Century International Business Herald fired a salvo in the growing debate around income distribution in China. Quoting an economics professor from Xi’an Petroleum University, it stated that between 2001 and 2006 individual income as a share of GDP dropped from 51.5% to 40.6%. This while government income as a share of GDP remained stable, and company income rose handsomely. Although this situation may in fact be little different from other countries - individual income rarely rise in lockstep with company incomes it does indicate a growing journalistic market for all matters related to the distribution of wealth. Income as a Share of GDP 60%

2001

50%

2006

40% 30% 20% 10% 0% Individual Company Government Earnings Earnings Earnings

Compiled by Haiwei Huang and Edward Wang

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China Sourcing Blog Highlights First going online in November 2007, the China Sourcing Blog has had a busy time living its name. Recording, digesting and posting all pieces of the debate, CSB found that despite safety concerns, the phenomenon of companies sourcing from China is healthy, growing, and here to stay.

For the past two months, the China Sourcing Blog has tirelessly nosed around everything from mainstream financial media to the odder corners of the Internet, following its mission of finding the best bits and pieces on the issue of sourcing from China. Sponsored by THE BEIJING AXIS, the site seeks to act as both a source of information, as well as a forum for discussing and debating the topic of China sourcing. Following is a summary of the most popular posts over the last month: Posted: 20 December 2007 One of the biggest stories to come out of China this year was about sourcing, with particular reference to the unsafe kind. The toy recall scandals during the summer jolted China’s state media into defensive overdrive as doubts were raised about the credibility of all goods made in China. By December it seemed as if the world had shrugged off the hyperbole, and had continued sourcing. Was the crisis over? Not so fast. The US has a presidential campaign going, and according to Barack Obama, in these challenging times the only thing to fear is….Chinese toys. Posted: 28 November 2007 A post was dedicated to The Boston Consulting Group’s July 2007 report titled Sourcing from China Lessons from the Leaders. It summarizes, in simple terms, a list of ten best practice principles usually followed by successful sourcing operations in China, without raising any of these to the essential pedestal so often seen in literature discussing sourcing in China.

Come have your say...

Posted: 12 December 2007 China’s recent ascension to the World Trade Organisation was a major step in breaking down Chinese trade barriers. At the same time another emerging economy, that of South Africa, also enjoyed a fruitful period of economic and political progress after many years of international isolation. CSB posted an article by Julian Hewitt of The Beijing Axis discussing the development of this relationship. Posted: 18 November 2007 China’s State Intellectual Property Office (SIPO) launched its first ever “Patent Week” in December. As part of the drive, trade fairs, exhibitions and lectures took place in Beijing and 20 other provinces and municipalities including Tianjin, Shanghai and Jilin. In 2006 SIPO accepted 573,000 patent applications, a 20.3 per cent year-on-year increase, of which 210,000 were patent applications for new inventions.

Posted: 3 December 2007 The continuous tussle between China and the US over policies regarding currency and trade liberalization has become staple for the financial media in the Middle Kingdom and abroad. Several commentators, including Michael Pettis of the popular China Financial Markets blog were included in a post on some of the truths and myths swirling around this debate. And finally... One of the most popular posts so far has been the quick and easy China Sourcing 2007 Review. No more than a 5 minute read, the review looks at the main issues affecting China Sourcing in 2007, including rising costs, labour issues and, of course, all those toys. Please feel free to leave comments and suggestions on the website, or to contact the webmaster Barry van Wyk at [email protected]

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Upcoming Events THE BEIJING AXIS can assist delegates that wish to attend events such as fairs, exhibitions and conferences in China. Services include research, interpretation, negotiation and travel logistics. For more information: [email protected], or contact one of our offices. Date

Event

Location

Feb 18

International Insurance and Finance Congress

Hong Kong

Feb 29 - Mar 3

15th China International Decorations & Building Materials Exposition

Beijing

Mar 1 - 3

2008 China International Machinery Mode Exhibition

Zhengzhou

Mar 1 - 6

The 18th East China Fair

Shanghai

Mar 3 - 5

China Bus Industry Expo

Suzhou

Mar 4 - 7

12th China International Factory Automation & Instrument Exhibition

Guangzhou

Mar 4 - 7

7th International Pump, Valve & Pipe Trade Show

Guangzhou

Mar 4 - 7

10th China International Power Transmission & Control Exhibition

Guangzhou

Mar 4 - 7

9th International Water, Wastewater & Water Treatment Trade Show

Guangzhou

Mar 4 - 7

Sino-Pack 2008

Guangzhou

Mar 5 - 7

Pipe China Shanghai 2008

Shanghai

Mar 6 - 7

13th Annual International Integrated Circuit China Conference & Exhibition

Beijing

Mar 6 - 8

2nd China Pipeline Exhibition

Beijing

Mar 6 - 8

2008 China Chongqing Construction and Building Materials and Energy-Saving Technology Exhibition

Chongqing

Mar 11 - 13

The 6th Suzhou International Industry Expo

Suzhou

Mar 11 - 13

The 6th International Machine Tool & Mould Manufacturing Equipment Fair

Suzhou

Mar 11 - 13

The 10th International Plastics & Rubber Industry Fair

Suzhou

Mar 11 - 13

Modern Factories & Automation Technical Process Equipment Expo

Suzhou

Mar 12

China Maritime 2008

Hong Kong

Mar 13

Auto Maintexpo China 2008

Beijing

May 14 - 16

13th World Aluminium Conference

Chongqing

Mar 14 - 16

2008 China International Exhibition of Special Purpose Vehicle, Refitting Vehicle and Commercial Vehicle

Guangzhou

Mar 18 - 20

Electronica & Productronica China 2008

Shanghai

Mar 18 - 20

7th Munich & Shanghai Electronic Expo

Shanghai

Mar 19 - 21

International Exhibition on Catalytic Technology, Product and Equipment

Shanghai

Mar 26 - 29

Building Materials, System, Construction Machinery & Architecture Expo

Beijing

Mar 31

Asia Pacific Leather Fair - Materials Manufacturing & Technology

Hong Kong

Mar 31 - Apr 2

2008 China Hydrogen Energy & Fuel Cell Trade Exhibition

Shanghai

Mar 31 - Apr 2

2008 China Wind Energy Corollary Equipment Trade Fair

Shanghai

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THE BEIJING AXIS News Dirk Kotze, The Beijing Axis (TBA) General Manager for China, delivered a presentation on ‘Strategies for Entering Southern Africa’ at the China Nickel & Cobalt Forum, held in Ningbo on 12 November 2007. This was the second such event hosted by Antaike, a Beijingbased commodities research house, and the Chinese Ministry of Land & Resources. Kobus van der Wath, TBA Managing Director, was invited to chair the CPA Australia China Conference 2007 that was held in Sydney and Melbourne on 13 and 21 November respectively. Edward Wang, TBA Executive Director, delivered a keynote speech at the Invest in China Seminar

held in Singapore on the 24th of November 2007. The seminar, hosted by Singapore’s prestigious media group Lianhe Zaobao, offered large SME’s and MNC’s insight into conducting business in China through the eyes of experienced business persons. Julian Hewitt, TBA Shanghai Office Manager, represented China-Africa business perspectives at IBM’s Global Innovation Outlook Africa Forum held in New York on the 4th of December 2007. The international event brought together 300 business, political and policy leaders to attend panel discussions and analysis sessions that looked into IBM Global Innovation Outlook’s year-long exploration of emerging African business trends.

Managing Director Kobus van der Wath and Lilian Luca, Director for Russia & Eastern Europe, hosted a well-attended workshop on ’Doing Business in China’ to the Moscow City Chamber of Commerce and the Moscow Regional Chamber of Commerce in Moscow on 5 and 6 December respectively. Dirk Kotze and Edward Wang delivered presentations at the inaugural China South Africa Steel & NonFerrous Metal Investment Forum. Held in Beijing on 8 and 9 December, the forum had the renowned China Academy of Social Sciences as its primary sponsor, and was attended by some 150 persons representing the mining-related public and private sectors of both countries.

About THE BEIJING AXIS THE BEIJING AXIS serves as a dedicated business bridge to China. Our focus is on two-way China strategy, sourcing and investment. By leveraging sound analytical processes, hands-on experience and strong networks, the firm is positioned to support clients’ divergent needs. Our solutions go beyond market research and we emphasize ‘actions and transactions’. In addition, our cross border experience enables us to bridge information gaps as well as cultural and language barriers in a manner that adds value and mitigates associated risk. We have assisted several international blue chip companies in setting their China ventures on the right strategic course and implementing related initiatives. Similarly, we serve many of China’s most ambitious and prominent companies in realising their ambitions of ‘going abroad’. For more information, please visit our English, Chinese or Russian websites at www.thebeijingaxis.com.

Why THE BEIJING AXIS? Clients turn to us for strategic, operational and transaction support. We offer insight, impact, trust and confidence on the basis of a strong team and:

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Operational (on-the-ground) presence in China

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Extensive local knowledge and experience

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Strategic relationships and networks

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Proven track record