The China Analyst - October 2008

THE THE CHINA CHINA ANALYST ANALYST OctoberJuly 2008 2008

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

China Inc. Goes Global p.6

Features China Inc. Goes Global: The Long Road Ahead Taking a Step Into Latin America

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Regulars China Sourcing Strategy

14

China Facts, Figures & Forecasts

20

China Business News Highlights

30

China’s International Relations

33

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Congratulations China Congratulations Beijing

祝贺中国,祝贺北京

On the successful hosting of the Games of the 29th Olympiad

成功举办第二十九届 奥林匹克运动会

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At the Highest Level China’s economy is slowing down—the question is by how much, and for how long. The answer depends very much on the severity of the unfolding global financial crisis and the extent to which the corporate sector and the real economy will adjust in the US, Europe, Japan, and the rest of the world. Indications are not good for the short and medium term, and it is necessary to anticipate risks and develop contingencies. But it is also necessary to bear in mind that medium to long term China’s prospects remain sound. probable but the degree of global fallout could push that lower.

China stepped out in August and September and through its hosting of a spectacular Beijing 2008 Olympics and Paralympics showed the world that a ‘new’ force has arrived on the world stage. During September China also did its first ‘spacewalk’ and announced that its own domestically designed regional jet will undertake its first maiden test flight in the next 2 months. The list of accomplishments is growing and becoming more impressive. All this reminds us of China’s long term rise and its relentless trajectory of rapid social, economic, technological and capacity development. We should not lose sight of the ongoing glacial changes that this implies for international relations, global competitiveness and the re-ranking of industries, players, opportunities and risks on an international basis. But the Beijing Olympics are behind us and a new set of issues has shifted to center-stage: China’s economy is slowing and the verdict is still out on how much, for how long and with what implications. Following average GDP growth of 10.4% in the first half of 2008 (after 11.9% for full-year 2007) the economy has now dipped into single digits for the second half of 2008. Full-year 2008 growth will still be close to 10%, but for 2009 the prospects are for growth below 9%. At this stage a range of 8.5-9% looks

The outlook for a rebound in 2010 is also still unclear while global turbulence appears to be getting worse, potentially much worse. So, a key question is how the global economy will look in 3, 6 or 12 months from now. Our view is that most of the real economic adjustment in the US, Western Europe and elsewhere still lies ahead and this will hit not only Asian exporters but also the general corporate sector in the region hard. China will not be excluded from these effects. Slower corporate earnings growth, a weak property sector, a slumping stock market and weaker business sentiment mark China’s current business landscape. Meanwhile, a measurement of the macro economy shows weaker industrial production growth, modest private consumption growth and lower export and import growth. Trends in these aggregates provide a backdrop that will see headline economic statistics reported in China over the next 2 to 3 quarters contrast sharply with those of the past 5 years. In this context, for executives with a China agenda, a number of pertinent issues emerge: ● How severe will the worldwide real economic fallout from the unfolding global financial crisis be? ● How and for how long will China be affected in terms of financial sector contagion (i.e. reduced liquidity), real economic impact (i.e. via reduced exports), deteriorating business sentiment (i.e. financial asset values) and weaker consumer confidence (i.e. consumption)?

What are the likely policy responses from Beijing and what are the corresponding areas or risk that must be anticipated and mitigated? ● What are the strategic priorities for managers, and what action should be taken over the short term? ● How to ensure an adequate focus on long term strategic initiatives while shadows and short term crisis management dominate all thinking and all agendas? ● How will China’s slowdown affect international sentiment and industries (i.e. resources/raw materials or commodity prices) over the short, medium and long term? ●

The list of questions goes on, but what is certain is that we are shifting into an era of sustained financial turbulence, severe real economic adjustment and potentially a fundamentally new period for many in terms of their economic lives. Indeed, how these areas of change will unfold for those of us that are managing in China now deserve serious and urgent consideration. However, lets not forget that longer term China’s prospect remain sound and it will add many more accomplishments as it continues on its relentless trajectory. May we live in interesting times… I trust that our readers will enjoy this edition of The China Analyst—and as always we welcome all feedback.

Kobus van der Wath Group Managing Director THE BEIJING AXIS China Business Solutions [email protected]

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Table of Contents

6

China Inc. Goes Global: The Long Road Ahead While Chinese companies are making headlines with audacious foreign acquisitions, China remains a minnow in the league of foreign investors. What are the drivers of this trend, and how will it play out over the next decade?

10

Taking a Step Into Latin America

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China Sourcing Strategy

18

China Sourcing Blog Highlights

19

Macroeconomic Monitor

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October 2008

The more China increases its demand for natural resources, the more its commercial and investment relationships with Latin American countries are intensifying. We examine the current critical juncture between these two regions. Outlining strategic imperatives in identifying suppliers and managing the engagement, we explore some of the planning issues in an global environment characterised by financial and economic turmoil. Highlights from pages of The China Sourcing Blog, THE BEIJING AXIS’ online information portal and discussion forum on issues relevant to sourcing from China. In this edition we examine China’s slowdown and warn that there could be a significant impact on policy, RMB strength and resource demand.

China Facts, Figures & Forecasts A selection of data and forecasts illustrating growth, transformations and trends in Chinese commerce and industry, focusing on trade and foreign investment.

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China Trade Roundup

24

Financial Markets

25

China OFDI and M&A

26

The C in BRICS

30

China Business News Highlights

33

China’s International Relations

36

Upcoming Events

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THE BEIJING AXIS China Mining Delegation

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Careers at THE BEIJING AXIS

To illustrate the main trends in the growth and transformation of Chinese commerce and industry, the Roundup summarizes the latest available Chinese trade statistics. 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. With Chinese companies increasingly ‘Going Global’, this page summarizes the major Outbound Foreign Direct Investments and Mergers & Acquisitions involving Chinese companies since 2007. Using recent economic statistics from Brazil, Russia, India, China and South Africa, The C in BRICS is a comparative segment that evaluates and contrasts China with the other leading developing economies. A roundup of the main business stories coming out of China during the third quarter, including China’s first legal defeat at the WTO, a new high for China’s trade surplus, and the halting of all coal-to-liquid projects in China. A summary of the main stories related to China’s gradual emergence as a world power, including China’s role in trade talks at the latest Doha round and tense negotiations at the Nuclear Suppliers Group. A schedule of all the major upcoming fairs, exhibitions and conferences in China, with a focus on resources & industrial sourcing. Join a group of international senior executives that will travel to China in November to meet with carefully researched and briefed Chinese targets, and to attend China Mining 2008. Places are limited so contact us as soon as possible. THE BEIJING AXIS is currently looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and future business challenges.

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THE BEIJING AXIS News

43

Strategy & Implementation Workshop with PriceWaterhouseCoopers & THE BEIJING AXIS

Company news for the third quarter, including attendance of the Excellence in Mining and Exploration Conference in Sydney and the 2008 International Sourcing Fair in Shanghai; new hires and other developments. Topic: Managing in China and Asia—Strategic Imperatives in Times of Financial and Economic Turbulence For Companies that are Managing International Exposures (Wednesday, 26 November 2008, Johannesburg)

THE CHINA ANALYST is published and distributed by THE BEIJING AXIS Ltd. For information on services please see page 42.

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China Inc. Goes Global: The Long Road Ahead While Chinese companies are making headlines with audacious foreign acquisitions, China remains a minnow in the league of foreign investors. What are the drivers of this trend, and how will it play out over the next decade?

When Lakshmi Mittal announced his bid for Arcelor, some French parliamentarians had to be told that Mittal Steel was an Indian company, not an American one. Similarly, ten years ago one would have been hard-pressed to find anyone in the Western world that had ever heard about a car manufacturer called Tata. This would have been because Tata only produced its first car in 2000, yet today it is the owner of the Jaguar and Land Rover brands. The rise of developing country multinationals has been one of the big business stories of the past decade, and in the midst of this trend lies China. The almost doubling of China’s economy from 2003 to 2008 has spawned a generation of companies eager to venture into the unknown, yet most of these companies have existed in their current guise for no more than 10 or 15 years. This contrasts sharply with the histories of entities such as the Tata empire, Brazilian aircraft manufacturer Embraer or South Africa’s SABMiller, currently the world’s second largest brewer. These companies are really exceptions to their economic environment: First world companies that happen to hail from developing markets without representing their hosts’ economic characteristics. In the case of Chinese companies, however, the situation is quite the opposite. Companies such as Lenovo, CNOOC and Sinosteel were created in their current form because of government involvement, not despite it. And this is where the wave of Chinese companies going abroad will look dramatically different from ear-

lier expansions of developing country multinationals. Imperatives The imperative for Chinese companies expanding abroad has been different from that of other developing countries. Firstly, the path followed differed from convention. Whereas various emerging economies over the last 60 years, notably Japan and Korea, had coordinated programs to build strong national brands (Sony, Samsung, LG), China has been lacking in this regard. In fact, China never had to capture an international market by itself—the market came to China in the shape of foreign invested manufacturing enterprises. Thus, in a space of a mere 20 years, Chinese-made products became ubiquitous the world over, albeit under the flag of foreign brands and leaving Chinese manufacturers with razor-thin margins.

Secondly, technology transfers that took place during this process had a profound effect on Chinese industry, allowing for the emergence of companies that could be technologically competitive in foreign markets. Chinese companies have thus grown a technical and financial ability on home soil before setting out to conquer foreign markets. This is contrasted by smaller developing economies that saw their multinationals step piecemeal into foreign markets to gradually learn the ropes of doing business in developed economies. Chinese companies have not gone through this learning curve yet, but are launching into foreign markets as if they have. The consequences of this experience deficit will be one of the defining features of Chinese outgoing investments over the early parts of the coming decade. But the defining difference between China’s foreign forays and that of other developing economies is the

China Outgoing Foreign Direct Investment (2000 - 2007) in USD, Billions

30

20

10

0 2000 Source: UNCTAD

2001

2002

2003

2004

2005

2006

2007

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focus on resources. In the early 19th century Britain put around 20 million people through an industrial revolution drawing resources from a large colonial empire. After the American Civil War the US put 70 million people through an industrial revolution with help of its own rich endowment of resources. Now China is busy industrializing a country of 1.3 billion without colonies or significant resources. The immediate solution is to buy these resources on open markets that are much more efficient than those in the 19th century, but this has long been considered as only a shortterm solution. Strategically, China has no intention of seeing its economic growth tempered by its growing influence. The possible results of such a dependence was illustrated in 2005 and 2006 when acrimonious exchanges between iron ore producers and Chinese government bodies were followed by China having to swallow large rises in iron ore benchmark prices. And in 2008 China was powerless to avoid a doubling of the benchmark price the biggest rise ever. In the case of oil, the imperative is equally strong. In 2006 China was the world’s second largest oil consumer after the US, and the third largest oil importer, after the US and Japan. Also in 2006, China imported 145 million tons of crude oil, up 14.5% from 2005. China’s industrial expansion will see oil imports grow annually by 4.3% up to 2020 to eventually represent 70% of national oil consumption, up from today’s 40%. In order to avoid such dependence, China has no choice but to acquire and develop foreign reserves of natural resources. This process has been picking up speed since the earlier years of this decade, and but for a few exceptions, China’s outgoing foreign direct investment has been dominated by this need.

Leading the Charge: Sinosteel has successfully taken over Australia’s Midwest Corporation and have acquired up to 49.9% of Murchison Metals, also from Australia.

Going Abroad or Bust The urgent nature of this trend sets it apart from the globalization efforts of other developing economies. Japan and Korea meticulously nurtured national champions whose venturing into foreign markets was carefully coordinated and implemented when the time was deemed most appropriate. In a similar fashion, Brazilian, South African and Indian multinationals went abroad as soon as they considered themselves to be ready for the challenge. China, on the other hand, is venturing abroad because it is compelled to do so by circumstances. This phenomenon of multi-billion dollar foreign investments made by companies with little international

experience will in some cases certainly yield returns well below expectations. Risk is also compounded by the fact that many of these companies are state-owned enterprises that are used to playing by rules very different from conventional commercial wisdom. Whereas any culturally monogamous company would have difficulties operating in foreign climes, Chinese SOEs are also hierarchical and unable to make quick, informed decisions. Furthermore, SOEs are used to settling disputes on an administrative level, thus regarding the use of lawyers and other advisors in a remedial capacity rather than in a preventive capacity. Chinese SOEs regard public relations to be of much less importance than in the West, while community rela-

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Major Recent Foreign Resource Investments by Chinese Companies Date Announced

Target

Acquirer

Value

Jan 2006

NNPC-OML130

CNOOC

USD2.7bn

Aug 2006

OAO Udmurtneft

Sinopec

USD3.5bn

Feb 2007

Monterrico

Zijin

USD200m

Aug 2007

Peru Copper

Chinalco

USD860m

Jan 2008

North Peru Copper

Minmetals/Jiangxi Copper

USD470m

Feb 2008

Rio Tinto

Chinalco-Alcoa

USD14.1bn

Jun 2008

AED Oil

Sinopec

USD561m

July 2008

Midwest

Sinosteel

USD1.31bn

Sep 2008

Awilco

China Oilfield Services Limited

USD2.5 bn

tions are taken care of by local government and other organs of state. Tried and tested Chinese templates will almost certainly be applied to environments where they are bound to fail, yet this will not be due to intent as much as inexperience. Chinese companies have suffered from avoidable labour disruptions in Peru and Zambia among other places, a consequence of a general perception that if you have the government’s support, the project needs no more selling to anyone. In many African countries mining and construction projects are carried out with a fully imported Chinese labour force, leading to little if any transfer of skills. This formula is admittedly often ascribed to a general lack of local skills, yet it can also attributed to a lack of integration skills on the part of Chinese SOEs who have always only had to deal with Chinese employees in a Chinese environment. So what does this reality mean for the rest of the world? ●

Firstly, that the trend of Chinese companies going abroad is not likely to stop anytime soon because of difficulties. Chinese companies will merely learn to cope with difficulties since the

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globalizing of China Inc. is in large part not out of choice. Secondly, since Chinese resource players have little choice but to work in often inhospitable environments, this unique knowledge will be passed on to other parts of China Inc. As the DRC starts developing a middle class, expect people to buy fridges and washing machines manufactured at Haier plants in Africa, or Lenovo computers serviced in Lubumbashi. Furthermore, Chinese companies’ foreign acquisitions are bound to remain politically contentious for some time into the future. Concerns about environmental conduct and labour relations will be fertile political soil for alarmists, while China’s own restrictions on foreign investments in its own economy will become ever more untenable as its companies venture into First World economies eager to get a slice of the China pie. In Australia questions have already been raised on whether Australia is really getting a fair deal as China’s quarry master, while the attempted acquisition by Minmetals of Canada’s Noranda raised the question of whether a Chinese state-owned entity could actually own a Canadian ‘strategic’ asset.

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In the developing country arena Chinese interest is bound to be seen as a welcome source of investment that will erode Western influence. This is especially the case in a region like Africa that has been abandoned by Western powers after the end of the Cold War, leaving it as the last great strategic beachhead. In investing large amounts of money in Africa China is both gaining access to resources and quietly building diplomatic influence in a region where its investment may eventually spur longawaited economic growth. Chinese foreign acquisitions are bound to be made on different criteria than would be considered acceptable among Western investors. With Sudan’s political situation, most Western companies would not invest there, yet Chinese companies have moved in since they do not have the same constraints in terms of public opinion. Haier made a bid for Maytag that was aimed at its intellectual property and distribution network, not based on whether it is actually a good buy. Yet because Haier has a large home market and can offer cheaper manufactures to the American market, Maytag was

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seen as a good buy. The same goes for why Shanghai Automotive Industries Corporation (SAIC) bought Rover when no-one else wanted to touch it. This then ties into the last major characteristic of Chinese foreign investment, namely that it will be done with a long-term framework in mind, much in the same way as Japanese companies operated in the 1970’s and 1980’s. China knows that it is a latecomer to global markets and that the learning process will be long and at times expensive. Chinese investment patterns may change over time, but volumes will not be affected by disappointments.

The Equity Path Over the past several years, however, China has learned that the hard way is not the only way to learn. Instead of making investments that may fail due to a lack of operational and managerial experience, the equity route has become ever more popular. In 2006 Zijin Mining bought a 20% stake in Ridge Mining plc, a London registered company mining for platinum in

South Africa. In the financial arena a Chinese sovereign fund, the China Investment Corporation (CIC) in December 2007 took a 9.9% stake in Morgan Stanley as the latter became an early victim of the subprime crisis. Indeed, the establishment of the CIC with an initial capital allocation of USD200 billion was partially aimed at securing better returns from China’s massive foreign exchange reserves (approaching USD2 trillion), most of which is presently held in low yield US treasury bonds. This is indicative of a stronger focus on extracting more universal value from investments, i.e. ones that are valuable in a nonChinese context as well. Yet this process will not be smooth either, as CIC found with an ill-timed investment in private equity giant Blackstone - the USD3 billion investment was soon followed by a 19% plunge. Future trends

largest economy will be news. Yet in 2006 China ranked only 18th in terms of FDI outflows and was responsible for only 1.3% of the global total outward flows of FDI. Still, in the five years from 2002 to 2006 China’s outward FDI flows increased eight-fold in absolute terms, and trebled in terms of the world’s total flows. And whereas Chinese outgoing investment is still focused on resources and conducted by state-owned entities, China’s economic clout and size will really be reflected in its foreign investment flow once the nonresource private economy gets into the game. Home-grown retailers, insurers, manufacturers and a host of other sectors will soon feel that their dominance in a complex, large market has equipped them to function successfully in foreign markets, and that is when the true effect of China’s emergence will be felt in foreign boardrooms.

For the size of China’s economy, its outward foreign investment is still miniscule. The hype around China ‘Going Abroad’ has its origins in bigticket deals and the reality that any economic trend in the world’s third

Kobus van der Wath Group Managing Director [email protected]

China and Japan Foreign Direct Investment Comparison (Current USD, Billions)

70 60 50 40 30 20 10 0 -10 -20

China FDI Inflows Japan FDI Outflows

China FDI Outflows

'9 0 '9 1 '9 2 '9 3 '9 4 '9 5 '9 6 '9 7 '9 8 '9 9 '0 0 '0 1 '0 2 '0 3 '0 4 '0 5 '0 6

8

7

6

5

9 '8

'8

'8

'8

3

2

1

4

'8

'8

'8

'8

'8

'8

0

Japan FDI Inflows

This graph illustrates the marked difference between the economic rise of China during this decade and the rise of Japan in the 1980’s. Whereas Japan saw huge investment outflows and very few inflows, China experienced the opposite, welcoming extraordinary levels of foreign capital, while only recently starting to send investment beyond its own borders.

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Taking a Step Into Latin America The more China increases its demand for natural resources, the more its commercial and investment relationships with Latin American countries are intensifying. In the last few years, metals and minerals have been the strategic engine of this trend, opening a new stage of increased Chinese investment in the region. We examine the current critical juncture between these two regions.

After the visit of Chinese President Hu Jintao to Latin America in November 2004, the importance of the region’s natural resources for the future of China was assured. President Hu made use of his speech to the Brazilian Congress to announce that China would invest USD100 billion in Latin America during the next 10 years. Many analysts date the start of the ‘Long March’ to economic integration between the two economic blocks from this announcement. The phenomenal rise of Chinese imports of natural resources has brought with it a windfall of growth and economic opportunities for Latin America. Increased demand from China has triggered a rise in raw material prices, creating significant revenues for Latin American companies. For example, with only a modest increase in output, between 2002 and 2006 revenues for the Chilean copper giant Codelco increased five-fold. Bearing in mind this dynamic, while China secures its supply of raw materials in the short and medium term, Latin American companies will have more financial resources at their disposal for further exploration, mining and acquisitions, both regionally and abroad. In recent years, to increasing their bargaining power in the supply chain, Chinese companies have expanded their role from simply buying natural resources to actually owning the assets. In making the transition from trade to investment, China is steadily strengthening its strategic relationships with countries in Latin America, thereby achieving a more influential role in setting global market prices.

The best moment in history According to UN sources, bilateral trade between China and Latin America reached USD87.2 billion in 2007. In effect, Chinese imports from the region have increased by an annual average of 40% in the last eight years, contributing to countries like Brazil, Argentina, Chile, Peru and Venezuela enjoying notable trade surpluses with China. In the case of Chile, for instance, China has overtaken the United States as the largest destination of exports in 2007. At the same time, the share of Latin American exports to China has increased two-fold in the last decade and China has now become Latin America’s 3rd largest trading partner and the biggest consumer of several commodities from the region. This substantial increase in trade between the two regions has primarily been propelled by iron ore and copper ore exports to China, whose trade values have experienced spectacular growth rates of more than 1000% in the past 5 years. In 2007,

one-third of China’s total ore imports came from Latin America, mainly from Brazil, Chile and Peru. This has occurred despite the increased transportation costs and extended distance between the two regions. (The proximity factor is a comparative advantage of the main suppliers of metals and minerals to China such as Australia, India and other Asian countries.) The protagonists The trade boom between Latin America and China has coincided with a time of extraordinary liquidity for Chinese mining companies. China Minmetals Corporation, a Fortune 500 company, declared net profits of USD939 million in 2007, a two-fold increase on the previous year. Similarly, Chalco, the world's fourth largest aluminium producer, has increased its revenues by 17.5% from 2006, reaching a net profit of USD1.4 billion last year. Zijin Mining Group not only registered a net profit increase of 49.7% to USD370 million in 2007, but also

China Most Imported Goods from Latin America (USD bn, 2000-07) 18 16 14 12 10 8 6 4 2 0

Ores Oil Seeds Mineral Fuels Copper Electronic Equipment

2000

2001

2002

Source: UN Comtrade Statistics Division

2003

2004

2005

2006

2007

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IPOed A-shares of USD1.5 billion in April the same year, which the company intends to invest in assets in China as well as abroad.

in the region, while others have formed strategic relationships directly linked to the supply of metals and minerals.

With such a solid financial position, strong Chinese demand, public funding and an active ‘going global’ policy promoted by the Chinese government, companies like Zijin Mining are in good shape to further expand abroad.

The last 18 months have witnessed a substantial increase in Chinese mining acquisitions in Latin America, especially Peru. The acquisitions in Peru by Chinalco (34% of Peru Copper Inc.), China Minmetals and Jiangxi Copper (100% of Northern Per Copper), and Zijin Mining (89.9% of Monterrico Metals) will eventually amount to USD4 billion.

We have therefore reached a critical juncture for Chinese enterprises and resource-rich Latin American countries that are set to profit from China’s increasing role in the global mining industry. Some of the most important Chinese mining companies have already started to acquire assets and to develop infrastructure

In neighbouring Chile, by means of a strategic alliance with Codelco (the world’s largest copper producer), China Minmetals has ensured the supply of 836,000 tons of copper for the next 15 years and the option of

Major Chinese Mining Investments in Latin America & the Caribbean by Level of Completion (September 2008)

MEXICO

buying 25-49% of the copper mine Gaby. In addition, the two stateowned enterprises are currently considering the possibility of jointly mining uranium and copper in Chile, and of cooperating in exploration in Africa and some Asian countries. The strategic partnership is a sign of the complementarities of the Chinese and Chilean economies as the leading consumer and producer of copper respectively, which subsequently provided strategic impetus to the Free Trade Agreement signed between the two countries. In Brazil, Chalco has signed an agreement worth about USD 1 billion with the multinational Brazilian mining company (and world’s largest producer and exporter of iron ore) Vale for the construction of an aluminium refinery as well as local infrastructure in the state of Barcarena. The solid relationship between the two mining giants is founded on the growing demand for aluminium in China, as well as the rich reserves of bauxite in Brazil.

JAMAICA GUYANA BRAZIL

PERU BOLIVIA

Mining Operational Under Construction

CHILE

Feasibility Study Announcement / MOU Processing Operational Under Construction Feasibility Study Announcement / MOU

ARGENTINA

China Minmetals is also in the process of negotiating a joint venture with Brazil’s Companhia Siderurgica do Para (Cosipar) to develop a steel mill in Brazil. Minmetals, which is expected to invest USD2 billion, has in its favour the precedent of a previous joint venture between Baosteel and Vale to construct a similar industrial plant in Brazil. Joint investments have been a peculiar part of Chinese mining investments in Latin America. The fragmented nature of the Chinese mining industry and the inherent national interest involved have driven Chinese companies to invest in groups. This tactic has enabled them to diversify the risk, increase purchasing power and spread their corporate presence in the region. Inspired by China's appetite for

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Summary of Chinese Investments in Latin America's Mining Sector

70%

Type of Investment (Stage) Acquisition

Iron Ore Steel Steel Iron Ore Copper Copper Bauxite Copper Various Various Iron

100% >50% 60% 100% 50% 25-49% 70% 100% 100% 100% 100%

Acquisition (Bidding) JV (In discussion) JV Acquisition (Bidding) JV Acquisition (In discussion) Acquisition Acquisition Acquisition Acquisition Acquisition

Northern Peru Copper C.

Copper

100%

Acquisition

Shougang Hierro Peru SA

Iron

100%

Acquisition

Peru Copper SA Monterrico Metals

Copper Copper

34% 89.9%

Acquisition Acquisition

Chinese Investor

Country

China Metallurgical Group.

Argentina

Minera Sierra Grande S.A.

Iron

Shandong Luneng Hengyuan China Minmetals Corp. Baosteel Group Baosteel & Shougang Group China Minmetals Corp. China Minmetals Corp. Bosai Minerals Group Jinchuan Group Shaanxi Dongling Group Shaanxi Dongling Group Shanghai Spirited Int. Trading Co.

Bolivia Brazil Brazil Brazil Chile Chile Guyana Mexico Mexico Mexico Mexico

El Mutun Cosipar Vale CSN (Namisa) Codelco Codelco/Gaby Mine Cambior Inc. Bahuerachi Deposit Reyna del Cobre Andreas Los Vasitos

China Minmetals & Jiangxi Copper

Peru

Shougang Corporation

Peru

Chinalco Aluminium Corp. of China Zijin Mining & Tongling Nonferrous

Peru Peru

iron, copper and steel, Chinese enterprises have focused their investments on countries like Brazil, Chile and Peru, with stable political environments and sound regulatory structures. Yet Chinese enterprises have also shown interest in traditional ideological allies such as Cuba (nickel) and Bolivia (iron ore). Two different challenges, the same opportunity In order to profit from the investment deals in a sustainable manner, both sides will have to face severe challenges, yet of a different nature. The forming of joint ventures in Latin America has the potential of not only guaranteeing the supply of basic raw materials over the long term, but also to enhance the technological capabilities and know-how of Chinese companies. With this aim, they will have to adapt their management methodologies and quality standards, and integrate their corporate culture with joint venture partners. At the same time, however, Chinese companies will also have to consider the social and

Company/Mine

Resource

environmental impact of their investments. In many Latin American countries, most of the mines are an essential source of livelihood for local communities. Therefore, the establishment of sustainable relations with labour unions as well as the implementation of environmentallyfriendly developments are essential for improving the public image of Chinese investors in Latin America and for facilitating continuously profitable mining operations. Instead of concentrating solely on short term profits, Latin American companies will have to utilize investment flows to upgrade the endowment factors of their national economies and to increase their competitiveness in global markets. The investment in research, development and innovation seems to be a more profitable strategy than merely exporting resources. Driving part of the investment to the processing of metals and minerals in the region will assist with the development of the industrial base, especially infrastructure, enhance the productivity of the companies, and encourage the export of more value-added products.

Stake

China is an opportunity to Latin America as much as Latin America is to China. Traditionally dependent on investments from the First World, Latin America has a new offer from China as an engine for the economic growth and international expansion of its domestic companies. In the emerging economies of Latin America, Chinese companies have been better received than in developed countries, and have therefore found a more profitable destination for their investments. As a whole, and if the challenges can be overcome in a mutually beneficial manner, both sides are set to gain from a promising opportunity for further trade and investment between developing economies. China has taken a step towards Latin America and as long as China requires an increasing amount of natural resources, these two antipodes will grow closer together.

Javier Cuñat Consultant (LatAm Desk) [email protected]

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China Sourcing Strategy Strategic Imperatives in Identifying Suitable Suppliers and Managing the Engagement. With a global financial crisis unfolding, the question arises how developing countries, Asia in particular, and even more specifically China, will hold up as pre-eminent supply-bases. For procurement managers it is necessary to anticipate the risks that will envelope low cost country (LCC) sourcing and manage the global sourcing portfolio. We examine some of the associated planning issues. The unfolding financial crisis in the US, Europe, Russia and other parts of the world has redefined the financial and economic landscape. The road ahead looks set to be filled with further financial and corporate fallout and it is likely that few parts of the world will be left unscathed. But how should views on global sourcing and LCC sourcing in particular be adjusted to mitigate risk?

The key to this question lies in the extent of dislocation that will be experienced at a systemic level across the global economy, within specific industries and within specific regions and countries. But exactly how economic growth, exports, conventional financing avenues, payment systems and supply chain confidence will be affected remains uncertain. There is agreement, how-

% of Spending on LCCs

2003 Est.

ever, that the impact could be significant in some regions and industries. This implies the need for strategic thinking and a clear plan with regards to the appropriate localglobal mix in the supply chain, the relative risk in categories and a realtime running view on supplier ‘health’. But this is not easy given intermittent information flows across culture, language and long distance.

% of Asia’s Share of World Exports

2008 Est.

100

ASEAN

China

8

80

6

60 4

40 2

20

0

0 Industrial Auto Tier 1 Consumer Home Apparel Products Electronics Appliances Source: Booz-Allen Hamilton; Various; TBA Analysis

Strategic Mapping - From Global, Low Cost Country (LCC), to China: a two-tier approach Looking ahead we need to be clear about the different horizons of any impact that might occur. This calls for a two-tier approach. Firstly, there are likely to be severe fallout among certain countries, industries and companies over the immediate short term. These risks must be identified and contingencies worked out to mitigate specific risks and manage the overall risk profile. Some procurement managers have already been caught off-guard. For example, smaller suppliers around

1990

2000

2003

2005

2006

Source: WTO; OECD; World Bank; Centennial; TBA Analysis

the world and also in Asia and China with less leverage over banks are suffering already from decreased liquidity and many will simply be unable to withstand the shock. The supply risk to those that source from these firms is obvious. However, due to the myriad of interrelationships and the complexity of forecasting which markets will be hit hardest, it is very hard to fully comprehend the shape and extent of one’s risk. The question is whether suppliers will pull through, whether they will suffer temporarily or whether they will be left intact. Based on these possibilities, it is then necessary to determine the

best response — i.e. change suppliers immediately (and permanently), line up stop-gap suppliers, or continue as before. Overall it is wise not to underestimate the ripple-effect of what is happening in global markets. The speed of contamination could be severe and the reach of any real economic fallout could be wide. In fact, over the next 3-6 months we can expect a number of high profile corporate failures—with that their surrounding economic networks (i.e. 1st/2nd tier suppliers, service providers, etc.) may also collapse. Those having a supply dependency on one of these implicated firms would require a prudent short-term plan of action.

15

China Commodities Export Growth (USD bn) 1400 1200

85 bn USD

183 bn USD

CAGR 14%

326 bn USD

CAGR 10%

CAGR 25%

Machinery and electrical equipment 43.42%

Textile and textile articles

1000

Miscellaneous manufactured articles Base metals

800

Chemical products Transport equipment

600

1,218 bn USD

Others

400

i ch Ma

ry ne

d an

t Tex

ct ele

il e

m ip qu le a ric

ti tex and

200

1992

le rtic le a

1997

.2 % 27

13.62%

s

GR CA

12.

7%

35.60%

20.94% 23.65%

13.59% 28.98%

0

R AG tC n e

17.77%

2002

9.48% 5.66% 4.19% 4.51% 23.29%

2007

Source: UN Statistical Database, HS 2002 per sections

Secondly, there is the need to plan for the medium and longer term, say over a 5-year horizon. Firms that are not thrust into an unfortunate cycle of crisis management over the next weeks and months should keep an eye on the long term. We take the view that the role of LCC’s will not be negated by the unfolding crisis. We expect that over a 5-year horizon, the share of sourcing from LCC's will generally continue its rising trend. (See the chart on the previous page.) Undoubtedly, some markets will disappoint and there will probably be an ongoing re-balancing of spending within the LCC world. This still implies risk, but it suggests that to reverse long term LCC sourcing strategies now, because of the financial crisis, would be counter productive over the long term. Rather, the challenge is to better mine information and have the knowledge of which regions, countries and industries must be earmarked for LCC sourcing. Achieving this level of market knowledge and strategic insight could, in our view, equate to competitive advantage for those firms.

We also take the view that within the LCC world Asia will continue to be prominent, even dominant. There is already evidence that many of the Asian economies are experiencing some impact—slower economic growth, weaker exports, tighter liquidity, currency volatility and financial and corporate sector vulnerability. However, we expect that most South East Asian economies are structurally in better shape than in 1997 and strong enough to bounce back. Therefore, for example, we expect that South East Asia or ASEAN will continue to compete globally and increase its long term share of world exports. China too, we expect will not lose its overall ability to compete with its exports. (See chart on previous page.) Some traditional ASEAN and Chinese export winners will no doubt lose their competitiveness, but overall these economies should remain a key component of the global LCC opportunity. Once again, the challenge is to see through the short term turmoil and discern long term trends and to position supply chains for the future. This would require an information-based view

of how industries will adjust in countries like China, India, Vietnam and elsewhere in Asia. When we focus, for example, on China we notice that it has already become an exporter of more sophisticated goods. This has become a structural trait of the Chinese economy, and is unlikely to unravel. For example, machinery and electrical equipment already made up 43% of total export in 2007, compared to only 14% in 1992. In fact, for the period 1992-2007 CAGR amounts to 27%. This implies a more diversified economy and a more competitive higher-end industrial base. (See chart on left.) We can expect that some ‘sunset industries’ will lose their ability to gain or maintain global market share, but it seems certain that new higher-end ‘sun-rise’ industries are emerging that will further propel China as a future supply base to the world. As such, at the firm level it is necessary for strategic mapping be performed so as to determine the long term prospect for global sourcing. Within the categories that are earmarked for global sourcing it is necessary to look for LCC sourcing opportunities and within that Asia is likely to score high (with China in particular still getting on the shortlist for many categories). Looking ahead it is necessary to factor into the equation to what extent the unfolding crisis will alter the path of LCC, Asia and China sourcing potential. While the outcome will differ from industry to industry, category to category and from product to product, we take the overall view that LCC, Asian and Chinese sourcing potential will not be detrimentally affected over the medium to long term. So, while we acknowledge that the challenge of managing the immediate and near term risks could be a very real obstacle, we suggest that procurement professionals keep a strategic perspective on the longer term potential of

16

China in the context of LCC sourcing. But we must acknowledge that it will be harder to select suppliers.

In Search of Valuable Partnerships in China Given the general increase in global financial and economic risk there is also a corresponding rise in the value at risk that is associated with the sourcing process. This elevates the need for valuable partnerships and supplier relationships. It also makes it more important than ever to perform appropriate due diligence in supplier selection and to have solid processes that cater for the increased risk profile. We emphasize that it is not only necessary to be prudent in qualifying new suppliers but to also do an audit on existing suppliers. Where audits are done on an irregular basis we suggest that the frequency of annual ‘health checks’ be increased. We

also suggest that relationships, especially strategic ones, be managed more closely. The playing field will start to shift in the coming months and it will be necessary to have experienced people that can make calls on the relative risk in the supplier portfolio.

identify pressure points early is even greater. Making corrections or iterating parts of the process flow simply takes longer due to language barriers, difficulty in managing information, time-zone differences, long distances, etc.

It is also necessary to revisit the overall process flow of the sourcing activity cycle and with that the supporting supply chain elements and processes. (We highlight this in very broad terms in the diagram below to reflect how we look at it from a service provider’s perspective.) It is necessary to identify where the main risks will derive from, i.e.: the upstream activities like intelligence gathering (internally or externally), during engagements with suppliers (due diligence, supplier selection or contracting), or during the downstream process stages (transaction monitoring, QA, or logistics). In a country such as China the need to

Towards a Preliminary Strategy Implementation Framework for Supplier Identification, Selection and Day-to-Day Engagement in China To try and pull together some of the earlier views, we now put forward some brief ideas on how to think about a strategy implementation framework. In essence, this is about having control over the entire Process Flow that we refer to above (and in the diagram below). Unfortunately the degree of cross-cultural management, language differences, standardization discrepancies, multiple stakeholders, etc. complicates

High-level Process Flow of THE BEIJING AXIS China Sourcing Unit (CSU)

Source: TBA Analysis

17

Critical Success Factors / Risks in Sourcing from China % of respondents, multiple answers possible Quality of sourced goods Cost of sourced goods Total cost of sourced goods (including logistics) Reliability of suppliers Suppliers' production processes quality Internal buy-in of ‘sourcing in China’ idea Reliability of logistics services suppliers Continuous cost improvement Strictly abiding relevant laws and regulations Purchasing department flexibility Intellectual property protection Suppliers' service level Quantity of Chinese suppliers Lowering the cultural barrier Supplier's R&D capabilities Quantity of sourced goods

2006 86% 86% 85% 83% 81% 78% 72% 72% 70% 68% 65% 65% 62% 56% 56% 55%

2008 91% 91% 92% 92% 86% 75% 79% 83% 74% 72% 73% 72% 67% 57% 64% 61%

Source: Bearing Point; TBA Analysis

matters and increases risk. We provide a preliminary checklist with some internal and external issues that need to be watched closely in order to ensure good strategy implementation: Internal Implementation Checklist People—Without the right people there is little chance of success. Language and culture makes this a key determinant of success. Processes—Firms without good global processes find it hard to succeed in China. China requires a disciplined approach and having a strong global process capability is crucial. Systems—Without the right systems in place the best people and good processes fall flat. Invest early in setting up the technology infrastructure if you are serious about China sourcing.

External Implementation Checklist Financing activities—Having a policy and relationships for vendor financing is key.

Chinese RMB and other Asian currencies to become more uncertain.

Service providers and consultants— The nature of sourcing and supply chain work in China often necessitates the use of various service providers and consultants. Many of these firms are going to be tested in the near future and selecting the right partners is key. Complacency will not pay off.

Surveys show that there are many critical success factors in achieving good outcomes during implementation. For example, the chart above shows important areas where risk arises when sourcing from China. Finally, in order to manage these risks we identify a few implementation principles for China sourcing ventures: ● Develop only ‘implementable’ strategies ● Strategies must be researchbased, grounded in reality ● Invest in good project managers ● Adopt a holistic risk management philosophy ● Manage strategic relationships well

Currency risk—There is already a significant increase in volatility in global markets. Looking ahead we can expect the trajectory of the Chi-

Kobus van der Wath Group Managing Director [email protected]

The relationship with HQ, regional financing centres (i.e. HK, Singapore) and local banks in China must be managed well. The next 6-12 months could see a turbulent time in this area.

18

China Sourcing Blog Highlights The China Sourcing Blog has been investigating sourcing trends influenced by rising transportation and labour costs in China. Yet, although sourcing trends are changing, China remains the sourcing destination of choice.

Sponsored by THE BEIJING AXIS, the China Sourcing Blog takes on a multi-faceted, dynamic subject and carefully scans everything from the mainstream media to distant corners of the Internet to get to the bottom of all the best bits and pieces on China sourcing. The following are some of the most popular postings over the last four months: Posted: 29 August 2008 Mexico has emerged as a potential competitor to China in the field of low cost country sourcing. In a posting titled “In-Sourcing and China Plus One: Who’s Going to Mexico?”, CSB showed that, far from US supply chains preparing to retreat en masse back to Mexico, Chinese auto manufacturers are instead poised to advance into Mexico to gain a foothold in the American market. And instead of leaving China, most companies are opting to diversify their supply chains to other Asian countries in order to offset increased costs in China - the so-called China Plus One phenomenon. Posted: 10 August 2008 As the impact of rising transportation costs continue to be felt in global supply chains, CSB looked at whether China sourcing is in any immediate danger as oil prices drive up transportation costs. Yet while some Western companies are trying to move production closer to their customers, China is set to remain the sourcing destination of choice for the foreseeable future. Posted: 22 July 2008 Negotiation is a crucial yet complicated element in any sourcing deal

Harder to get there: Logistics costs have caused some to seek sourcing opportunities in Mexico or elsewhere in Asia, but China remains the best choice.

in China. In a posting titled “Its all about the Supplier: Negotiation in China”, we analyzed the dynamic negotiation process in a Chinese context. Being the best prepared negotiator is ultimately subservient to one overarching reality: negotiation in China can only be done in one way - the Chinese way. Posted: 21 July 2008 As Wal-Mart signed a landmark labour agreement with its Chinese employees, CSB examined China’s move up the production ladder from the perspective of recent changes in labour organization and regulation. With a trend towards collective bargaining, recent labour regulations have encapsulated the government’s resolve to develop higher-value industries by making it harder for companies to flout labour regulations and by forcing them to invest in employee training.

Posted: 18 July 2008 As electronics manufacturer Foxconn left Shenzhen for western China aiming to save 60% in labour costs, many simply believe that China is no longer cheap. Yet China’s climb out of low-cost production is also defined by the rise of its high-tech companies and their improving ability to meet global quality and design requirements - signs that China is moving from low-cost to high-tech. And finally... In the latest posting on the state of quality control (QC) in China, we find that quality control has a lot to do with size: the bigger, the better… Yet for small companies the best option remains to utilize an outside service provider. [email protected] www.chinasourcingblog.org

19

Macroeconomic Monitor Time for a China Slowdown? Yes—but uncertainty remains over how much and for how long. China’s post-Olympics economy is showing signs of a slowdown. This is partially due to local softness i.e. in industrial output, consumer demand and investment levels, but we can also expect global growth to dent China’s performance via weaker exports and the knock-on effect of tighter global liquidity. Meanwhile, the weak stock market and a vulnerable property sector will also weigh on sentiment. The full extent of slowdown is still unclear but we can expect growth falling below 10% - and there are implications for global resource demand, local fiscal and monetary policy and slower RMB appreciation. As such, manage risks now, but keep in mind that longer term, once global confidence returns, China’s prospects remain sound. We expect China’s GDP growth to slow from the 11.9% level in 2007 to close to 10% in 2008 and 8.5-9.0% in 2009. However, the second half of 2008 and the first half of 2009 will be particularly soft with quarterly year-on-year growth of below 8.5% and potentially even below 8.0% for some quarters during the period.

slowdown that is showing up in statistics are the temporary Olympicseffect (a widespread but largely expected reduction in economic activity); a slowdown in investment spending; a slowdown in industrial production; moderate consumer demand and of course less buoyant exports.

small exporters, property firms and utilities, etc.) and there are signs of inventory build-up across many industries (i.e. primary production sectors such as steel, etc).

In 2010 we expect growth to rebound to 9% (largely as the slump falls out of the index.) Overall though, we have entered a period of slowdown in China and key questions are: ● How much of the slowdown can be explained by the domestic Chinese business cycle? ● How much is external—i.e. what will the impact of the global financial/economic crisis be on China? ● How severe and protracted will the slowdown be? ● What are the key risks to manage right now—and how? The main causes for the current

The next few months will likely see further reductions in export growth and consumer sentiment will likely also take a hit in the context of the global financial crisis. Property values and stock prices are key factors in this regard—neither of which are providing a positive impetus to confidence. (Property values in China are down between 5-35% depending on the area, and the Shanghai stock index is down around 60% this year.

Looking ahead it is necessary to carefully monitor the extent of further slowdown (by region, sector and sub-sector) and to anticipate the likely policy responses. Beijing may respond with fiscal and monetary stimulus in the wake of a global and local slowdown. In the meantime one can also expect a moderation in the rate of RMB appreciation (or at least that perceived risk) and in the consumption/price levels of resources and raw materials. But the main challenge will be to maintain a balanced view between short term risk and long term potential.

The slowdown that is in process in China has already translated into slower earnings growth in the corporate sector (i.e. airlines, refiners,

Kobus van der Wath Group Managing Director [email protected]

China GDP Growth (% change y-o-y, 1978-2010F) 16

Likely period of slowdown: in 2008 to ~10%, in 2009 to below 9% and in 2010 to around 9%

Most recent overheating period Past periods of overheating

14 7-10% GDP growth ‘band’

12

8% GDP growth ‘floor’

10 8 6 4 2 0 78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

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

94

95

96

97

98

99

00

01

02

03

04

05

06

0 7 0 8 F 0 9 F 10 F

20

China Facts, Figures & Forecasts The following is a selection of recently released data and forecasts that illustrate the main trends in the growth and transformation of Chinese commerce and industry, with an emphasis on trade and foreign investment.

China — Selected Economic Indicators

General Statistics Population (mn) Nominal GDP (US$bn) GDP per capita (US$) Real GDP growth (%) Growth in real retail sales (%) Growth in real fixed asset investment (%) Fixed investment (% of GDP) Prices, Interest Rates and Exchange Rates CPI inflation (% December over December) CPI inflation (% change in average index for the year) Exchange rate (RMB per US$, end-year) Exchange rate (RMB per US$, average) Nominal wage growth (% year-on-year change, average) 3-month interbank rate (%, end-year) Fiscal Data General government fiscal balance (% of GDP) General government primary fiscal balance (% of GDP) General government expenditure (% of GDP) Gross general government debt (% of GDP, end-year) Money Supply and Credit Broad money supply (M2, % of GDP) Broad money supply (M2, % year-on-year change) Domestic credit (% of GDP) Domestic credit (% year-on-year change)

2005 1,308 2,244 1,716 10.4 12.1 25.7 42 2005 1.6 1.8 8.07 8.19 14.6 3.6 2005 -1.2 -0.3 18.5 23 2005 160.7 17.6 105.9 9.3

2006 1,314 2,645 2,012 11.1 12.7 24 42.8 2006 2.8 1.5 7.8 7.97 14.4 2.8 2006 -0.8 0.1 19.2 20.9 2006 163.9 16.9 106.9 15.7

2007 1,321 3,242 2,454 11.9 13 24.8 44.1 2007 6.5 4.8 7.09 7.61 16.5 4.4 2007 -0.5 0.3 19.9 18.3 2007 163.6 16.7 106.1 16.1

2008E 1,329 4,214 3,171 9.8 13.6 20.2 43.2 2008E 7.5 7 6.6 6.95 20.3 5.2 2008E -0.6 0.1 20.4 15.9 2008E 161.9 17.5 104.1 16.5

2009E 1,336 5,592 4,186 9.0 13.7 19 41.8 2009E 6.2 7.2 5.9 6.25 25 5.8 2009E -0.6 0.1 21 13.8 2009E 156 15 99.4 14

Balance of Payments Exports (goods and non-factor services, % of GDP) Imports (goods and non-factor services, % of GDP) Exports (goods and non-factor services, % increase in $value) Imports (goods and non-factor services, % increase in $value) Current account balance ($bn) Current account (% of GDP) Net FDI ($bn) Scheduled external debt amortization ($bn) Foreign Debt and Reserves Foreign debt ($bn, year end) Public ($bn) Private ($bn) Foreign debt (% of GDP, end-year) Foreign debt (% of exports of goods and services) Central bank gross FX reserves ($bn) Central bank gross non-gold FX reserves ($bn)

2005 37.3 31.7 27.6 17.4 160.8 7.2 67.8 18.1 2005 281 98.7 182.4 12.5 33.6 819 815

2006 40.1 32.2 26.9 19.8 249.9 9.4 60.3 20.9 2006 323 108.2 214.8 12.2 30.4 1,066 1,062

2007 41 32.2 25.2 22.2 333.7 10.3 67.7 24.1 2007 373 118.7 254.2 11.5 28.1 1,528 1,524

2008E 34.3 31.8 8.9 28.5 150 3.6 32 27.3 2008E 423 130.3 292.7 10 29.2 1,773 1,768

2009E 28.6 28 10.7 16.9 73.1 1.3 25 30.5 2009E 473 142.9 330.1 8.5 29.5 1,918 1,914

Source: World Bank, Asian Development Bank, TBA Analysis

21

Trade Statistics by Province—Total Imports and Exports (2007)

2007 China Total Trade Volumes: Imports:

956 USDbn

Exports:

1218 USDbn Heilongjiang

Jilin

Beijing

Xinjiang

Liaoning

Inner Mongolia

Gansu

Ningxia Tianjin

Hebei Qinghai

Shandong

Shanxi Shaanxi

Tibet

Henan

Jiangsu

Sichuan Hubei

Chongqing

Highlighted Provinces make up 90% of China’s Total Trade Volume (Imports plus Exports):

Guizhou

Hunan

Shanghai

Anhui Jiangxi

Zhejiang

Fujian

Yunnan Taiwan

Guangxi

Guangdong

Top 75% Next 15%

Hainan

Anhui Beijing Chongqing Fujian Gansu Guangdong Guangxi Guizhou Hainan Hebei Heilongjiang Henan Hubei Hunan Inner Mongolia

Exports (USDbn) 9 49 5 50 2 369 5 1 1 17 12 8 8 7 3

% of Total 0.7 4.0 0.4 4.1 0.1 30.3 0.4 0.1 0.1 1.4 1.0 0.7 0.7 0.5 0.2

Imports % of (USDbn) Total 7 0.7 144 15.1 3 0.3 25 2.6 4 0.4 265 27.7 4 0.4 1 0.1 2 0.2 9 0.9 5 0.5 4 0.5 7 0.7 3 0.3 5 0.5

Comparable Foreign Trade*

Lebanon Hungary Tanzania Iraq Albania Spain Congo Guinea Afghanistan Bahrain Sudan El Salvador Ivory Coast Botswana Papua New Guinea

Jiangsu Jiangxi Jilin Liaoning Ningxia Qinghai Shaanxi Shandong Shanghai Shanxi Sichuan Tianjin Tibet Xinjiang Yunnan Zhejiang

Exports (USDbn) 204 5 4 35 1 0 5 75 144 7 9 38 0 12 5 128

% of Total 16.7 0.4 0.3 2.9 0.1 0.0 0.4 6.2 11.8 0.5 0.7 3.1 0.0 0.9 0.4 10.5

Source: China Monthly Economic Indicators Vol. 95, 2008.2; UN Comtrade Database; TBA Analysis

Imports (USDbn) 146 4 6 24 1 0 2 47 139 5 6 33 0 2 4 49

% of Total 15.3 0.4 0.7 2.5 0.1 0.0 0.2 5.0 14.5 0.5 0.6 3.5 0.0 0.2 0.4 5.1

Comparable Foreign Trade*

Switzerland Botswana Uruguay Qatar Niger Liberia Ethiopia Slovak Rep. Turkey Iceland Ivory Coast Iraq Grenada Cuba Myanmar Finland

*Imports plus Exports

22

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 Trade (Jul 07-Jul 08, USD bn)

Exports

Total China Imports (CIF) & Exports (FOB) 2000–1H 2008)

Imports

12,500

Imports

120 10,000

100

Exports

7,500

80

5,000

40

2,500

20

0

0 J

A

S

O

N

D

J

F

M

A

M

J

J

Trade level at the end of 1H 2008

20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

60

Source: National Bureau of Statistics

Source: National Bureau of Statistics

% of Total Imports by Main Commodities (2007)

% of Total Exports by Main Commodities (2007)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: UN Comtrade

Iron and Steel 2% Copper 3% Organic Material 4% Plastic and articles of 5% Ores, Slag 6% Technical , apparatus 7% Mineral fuels, oils etc 11% Nuclear Reactors, Machinery 13%

Others 22%

Electronic Equipment 27%

100% 90% 80% 70%

Plastic and articles of 2% Toys, games, sport equipment 2% Vehicles 3% Furniture, lighting, signs, etc 3% Technical , apparatus 3% Iron and Steel 6%

60% 50% 40% 30% 20% 10% 0%

Nuclear Reactors, Machinery 19%

Articles of Apparel, Accessories 9%

Electronic Equipment 25%

Others 28%

Source: UN Comtrade

China’s Importance to the World: Trade with China as a Percentage of Country or Territory GDP (2007) Key*: 30% China

15%

0% No Data Available Source: TBA Analysis *For reasons of presentation the colour scheme used on this map only varies between 0 and 30%, with all countries representing percentages larger than 30% shown in black. These countries are: Benin (32%), Equatorial Guinea (30%), Liberia (84%), Mongolia (59%), Rep. of Congo (41%), Singapore (31%) and Togo (33%).

23 China Imports and Exports y-o-y Growth Rate 2001—2008

40 30 20 10 0

Exports

2001

2002

2003

2004

2005

Imports

2006

2007

H1-2008

Source: National Bureau of Statistics

Total Trade (Imports & Exports) by Major Partners (2007)

China’s 10 Largest Trade Surpluses (2007)

USA Japan Hong Kong Rep. of Korea Taiwan Province Germany Russia Malaysia Netherlands Australia

USA Netherlands United Kingdom United Arab Emirates Italy India Turkey Russian Federation Viet Nam Mexico

Exports Im ports

0

50

100 150 200 250 300 350

Source: World Bank

0

50

100

150

Source: World Bank

Total Value of Imports into China of Top 10 Sources of Imports 2000 (USD133bn)

2007 (USD410bn) Hong Kong 7%

Thailand 3% Australia 4%

Hong Kong 3%

Thailand 5% Australia 5% Russia 4% Singapore 4%

Russia 4% Singapore 4% Malaysia 4%

Japan 31%

Japan 28%

Malaysia 6%

Germany 8% USA 17%

S. Korea 17%

Germany 9% S. Korea 22%

USA 14%

Source: Asian Development Bank: Key Indicators 2007

Total Value of Exports from China to Top 10 Destinations 2007 (USD774bn)

2000 (USD184bn)

Hong Kong 24% Italy 2% UK 3% Russia 1% Singapore 4% Netherlands 4%

Japan 23% S. Korea 6% USA Germany 5% 28%

Source: Asian Development Bank: Key Indicators 2007

Hong Kong 24%

Japan 13% S. Korea 7%

Italy 3% UK 4% Russia 4%

USA 30%

Singapore Netherlands 5%

Germany 6%

24

Financial Markets 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. Shanghai Shenzhen Composite (3(Jan-Dec Month) 07) Share of & BRI(C)S Total Trade withIndex China

RMB Exchange Rates (12 Month Trailing, Indexed)

Index: 2 June 2008 = 100%

RMB/Foreign Currency

115

120 Shanghai

Shenzhen

USD

ZAR

AUD

RUB

110

100

105

80

100

60

95

40

90

20

85

0

80 June

July

11 September 2008

12 September 2007

August

Source: Shanghai Stock Exchange; Shenzhen Stock Exchange

Source: Oanda Corporation

Benchmark Interest Rates (as on 10 September 2008)

USD/RMB Exchange Rate (since peg loosened in 2005)

15%

4

12%

13%

9%

10%

7%

7%

2%

7

1%

Brazil

South Africa

India

China

Australia

UK

EU

US

0% Japan

17.4% appreciation up to 30 September 2008

6

5%

4%

5%

19 July 2005: RMB ‘unpegged’ from US Dollar

5

.5% CAGR 4

8 9 2005

2006

2007

2008

Source: PRC Ministry of Commerce

Source: Central Banks

10 Largest Chinese Listed Companies (USD bn) by Market Capitalization in mid-September (A-shares) P e t ro C hina

265

IC B C

Petrochemicals Financial

166

S ino pe c

92 92

B a nk o f C hina C hina Lif e

73 59

S he nhua C o a l C hina M ins he ng B a nk ing

36 30

P ing A n Ins ura nc e

26

B a nk o f C o m m unic a t io ns D a qin R a ilwa y

20

0 Source: Shanghai Stock Exchange

Petrochemicals Financial Insurance

Utilities

Financial Insurance Financial Infrastructure

50

100

150

200

250

300

25

China Outbound FDI and M&A With Chinese companies increasingly ‘Going Global’, this page summarizes the major Outbound Foreign Direct Investments (OFDI) and Mergers and Acquisitions (M&A) involving Chinese companies since 2007. Also see our feature article on page 6 for more on this subject. Chinese Major Outbound Mergers and Acquisitions 2007- 2008 Amount USD

Country

Stake

May 07 China State Investment Agency

Month

Acquirer Blackstone

Target

3 bn

USA

9%

May 07 China Mobile

Paktel Ltd.

460 mn

Pakistan

100%

Jun 07 China Development Bank

Barclays

3.1 bn

UK

3%

Oct 07 ICBC

Standard Bank

5.5 bn

South Africa

20%

Oct 07 China Mingsheng Banking Corp.

UCBH Holding

317 mn

USA

10%

Nov 07 Ping An

Fortis Belgian/Dutch Banking

2.3 bn

Belgium

4%

Nov 07 Shandong Nanshan Industrial

Gulf Alumina

4.5 mn

Australia

20%

Dec 07 China State Investment Agency

Morgan Stanley

5 bn

USA

10%

Jan

Minmetals/Jiangxi Copper

North Peru Copper

470 mn

Peru

100%

Jan

Wuxi Pharma Tech

AppTec Lab Services

151 mn

USA

100%

Jan

Jinchuan Group

Tyler Resources

210 mn

Canada

100%

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%

Feb

State Administration of FOREX

BP

2 bn

USA

1%

Mar

Huaneng Power

Tuas Power

3 bn

Singapore

100%

Mar

China State Investment Agency

Visa

100 mn

USA

<1%

Apr

State Administration of FOREX

Total

2.9 bn

France

2%

May

China Merchants Bank

CIGNA & CMC Life Insurance

20.33 mn

USA

50%

Jun

Changsha Zoomlion

Co Italiana Forme Acciaio

253.22 mn

Italy

60%

Jun

Western Mining

FerrAus

20 mn

Australia

10%

Jun

Sinochem International Corporation

GMG Global Ltd.

198 mn

Singapore

51%

Jun

Sinopec

AED Oil

561 mn

Australia

n/a

Jul

China Healthcare Acquisition Corp.

Europe Asia Huadu

60.375 mn

Singapore

100%

Jul

Sinosteel

Midwest Corp.

1.32 mn

Australia

100%

Aug

Suntech Power

Nitol Solar

100 mn

Russia

n/a

Aug

FUQI International Inc.

Temix

19.3 mn

Italy

100%

Aug

China Oilfield Services

Awilco Offshore ASA

2.49 bn

Norway

100%

Aug

People's Bank of China

Prudential

234.71 mn

UK

1%

Aug

Cheung Kong Infrastructure Holdings

Taharoa Iron Sands

179.526 mn

New Zealand

100%

Aug

Chinalco

Rio Tinto

14.3 bn

Australia

12%

Sep

ICBC

Rosevrobank

800 mn

Russia

100%

Sep

People's Bank of China

Drax Group

32.2 mn

UK

<1%

Source: Multiple sources, Press, TBA Analysis

26

The C in BRICS Using recent economic statistics from Brazil, Russia, India, China and South Africa, The C in BRICS is a comparative segment that evaluates and contrasts China with the other leading developing economies. Total Imports (% of GDP)

Total Exports (% of GDP)

Brazil

Brazil

Russia

Russia

India

India

China

China

2005 2006 2007

South Africa

0

10

20

30

2005 2006 2007

South Africa

40

0

10

Source: UN Comtrade

Source: UN Comtrade

USD Exchange Rate (Index)

GDP (Current USD billion)

115 110 105 100 95 90 85 80 75 70 65 60

South Africa

20

30

3,500

China

3,000 2,500

India China Russia

2,000 1,500

Brazil Russia India

1,000 500 Brazil 2004

2005

2006

40

2005

2007

Source: World Bank

South Africa

0 2006

2007

Source: World Bank

BRICS World Rankings—Selected Statistics (2007) 1 2

3

Total Area Population GDP Nominal Exports as % of GDP Imports as % of GDP FDI (received) as % of GDP For. Exch. Res. as % of GDP Electricity Use per capita Mobile Phones per capita Internet Use per capita Sources: The Economist; CIA World Factbook

4

5

6

7

8 9 10 11 12 15 20 25 30 35 40 45 50 60 70 80 90 100 120 140 160 180

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China Business News Highlights While China suffered its first legal defeat at the WTO, China’s trade surplus reached a new high of USD28.7 billion in August and inflation decreased to 4.9%. Almost all coal-to-liquid projects have been halted in China, yet foreign investments by Chinese companies more than tripled in 1H 2008.

General On July 18 China suffered its first legal defeat since joining the World Trade Organization (WTO) seven years ago. The global trade body ruled against Beijing’s import tariffs for car parts when a WTO dispute panel upheld complaints by the US, the European Union and Canada that China violated fair trade rules by discriminating against imported cars. China has decided to appeal the ruling, which postpones any definitive decision until later this year. China still has three other cases outstanding: The US has challenged China’s enforcement of intellectual property rules and has alleged discrimination against US films, music and books, and during July Canada joined the US and the EU in a complaint over Chinese restrictions applied to foreign financial news agencies. Furthermore, in a letter posted on the WTO website and dated 13 August, the US has also challenged China to justify the legality of its tax, subsidy and export rules for farm products such as pork and wheat.

7.6% in the first half of the year, has continued rising since October last year, although the prices of consumer goods in July rose only 4.6% y-o-y. The rise in PPI has been ascribed mainly to the fuel price hike in June. China posted a record trade surplus of about USD28.7 billion in August. According to customs statistics, exports in August were USD134.87 billion, up 21.1% y-o-y, while imports amounted to USD106.18 billion, up 23.1% y-o-y. Yet in light of the 33.7% growth in imports in July, the spike in China’s trade surplus during August has been attributed to a sharp slowdown in imports rather than any significant jump in exports. In July, exports rose by 26.9% y-o-y, and China’s trade surplus was USD25.3 billion. A less encouraging employment outlook for China for the second

half of 2008 has been forecast by Manpower Inc. A poll of 4,014 employees in nine major cities showed that China’s net employment outlook - the difference between firms adding jobs and those cutting them was a positive 12% for the 4th quarter, yet this figure is down 3% from the third quarter and 1% y-o-y.

Natural Resources China imported 120 million tons of crude oil in the first eight months of 2008, an increase of 8.7% y-o-y. Imports of oil products during the January to August period totalled 28.72 million tons, up 18.3% y-o-y. Exports of crude oil, however, was down to 3.34 million tons, a decrease of 18.3% y-o-y. Russian steel maker Evraz Group has joined forces with China Metallurgical Construction Group Corporation (MCC) to gain access

In what has been interpreted as a positive sign of the effectiveness of the Chinese government’s measures to ease inflation, China’s Consumer Price Index (CPI) increased by only 4.9% in August, compared with 6.3% in July and 7.1% in June. Rising energy prices, however, have contributed to the Producer Price Index (PPI) increasing 10.1% in August, the highest level since 1996 when data was first recorded. The PPI, which rose by

Go West: China will construct the largest ore carriers ever built for the Brazilian company Vale, the world’s largest producer and exporter of iron ore.

31

to Australia's vast iron ore reserves to supply Chinese steel mills hungry for the key raw material. Evraz, partly-owned by Russian billionaire Roman Abramovich, said in late July it would own 75 percent of a joint venture to develop the Cape Lambert Iron Ore project in Western Australia. China Shenhua Energy, the mainland’s biggest coal producer, has agreed to pay USD261 million for a license to explore for coal in New South Wales in Australia. In winning the license, Shenhua beat out a number of competitors, including Anglo American’s Coal Unit and Griffin Coal Mining. Plans have been announced for a new USD30 billion, 30 million tons per annum steel plant that will be built in China’s southwestern Guangxi Province. The plant is expected to be the world’s largest steel plant upon entering production in 2010. In September China’s National Development and Reform Commission (NDRC) ordered all coal-to-liquid (CTL) projects in China to be halted, with the exception of a project under construction by Shenhua Group and the Ningdong indirect CTL project jointly planned by Shenhua Ningxia Coal Group and the South Africa-based Sasol Ltd. In the context of excess investment in the sector and tight coal supplies in China, the NDRC suspended the granting of approvals for new projects with the intention of slowing development in the sector until its technology and business processes become more mature. Shenhua’s CTL project would be the first in the world to put direct liquefaction technology into commercial production. In early September it was reported that China’s National Plan for

Under new management: In September Midwest Corporation of Australia became the first company in a First World Country to be subject to a hostile takeover by a Chinese company.

Mineral Resources was pending for approval by the State Council, China’s Cabinet. The plan, formulated by the Ministry of Land and Resources, proposes enhancing macro-regulation on the exploration and utilization of mineral resources, and specifies areas to be restricted and encouraged for prospecting and utilization. The plan also discusses setting up strategic reserves for mineral resources such as petroleum, coal and major nonferrous metals. Chinese steel trading company Sinosteel has completed its takeover of Australian miner Midwest Corporation. The Wall Street Journal reported in mid-September that Sinosteel had increased its stake in Midwest to more than 90%, enabling it to force the sale of all outstanding shares. According to insiders, Sinosteel crossed the 90% threshold after New York investment group Harbinger Capital Partners agreed to sell its holding of

around 15%. Sinosteel’s takeover of Midwest it is the first successful aggressive takeover by a Chinese firm.

Industry Manufacturing in the Pearl River Delta has shown signs of slowing down in the first five months of 2008. According to the latest data released by the National Development and Reform Commission, China’s eastern areas grew by 16% from January to May, 3% lower than a year earlier and the lowest growth rate compared to the western, north-eastern and the middle regions of the mainland. Export-oriented firms in China’s coastal cities have suffered from the appreciation of the yuan and economists have pointed to clear indications that the advantages of low labour and raw material costs are slowly receding in China’s eastern areas.

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In late July the first aircraft section for the new Airbus A320 arrived in Tianjin at the Final Assembly Line (FAL) site. The assembly process for the first aircraft, which will be for Sichuan Airlines, started in August 2008 and delivery is anticipated for mid 2009. By 2011, it is expected to deliver four aircraft per month. A deal to build 12 super-tonnage carriers was signed on August 4th between Brazil’s Companhia Vale do Rio Doce, the world’s largest producer and exporter of iron ore, and Jiangsu Rongsheng Heavy Industries Corporation. The 12 ore carriers, each with a capacity of 400,000 deadweight tons, are the largest ore carriers to be built in the world, and the USD1.6 billion deal is the largest shipbuilding order in the world to date. These carriers will also be the largest ships built by China in terms of tonnage. Construction of all the vessels are expected to be completed by 2012. Vehicle sales in China declined in August for the first time in 3½ years, marking a setback for global auto manufacturers that have viewed China as a bright spot in the global market. According to the China Association of Automobile Manufacturers, vehicle sales fell 6.3% y-o-y to 629,000 units, the first decline since February 2005 when sales dropped 26.3% y-o-y to 318,000 units.

ICT China now has more people getting online than any other country. As of June this year, 253 million Chinese were using the Internet, according to the latest report by the China Internet Network Information Centre, a government organization. The US had to make do with second place, with around 223 million online users, according to Nielsen, an internet-ratings company. The growth in China's Internet users has been rapid: 91 million people have come online in the past year alone. For its planned start of 3G services by the third quarter of 2009, China Unicom announced in late August it expected to be granted a license to use the European-developed WCDMA third-generation (3G) standard for its high-speed wireless network on the mainland. This would give the company an edge against its larger competitor China Mobile, which is using the still immature Chinese-developed TD-SCDMA standard. In late August, however, China Mobile announced it will be launching 3G mobile services in 38 cities across the mainland by June 2009.

Finance

Retail

Actual foreign direct investment (FDI) in China in the first eight months of 2008 totalled USD67.73 billion, up 41.6% y-o-y. In August, FDI was up 20.38% y-o-y, reaching USD7.01 billion.

China's retail sales rose 23.3% year-on-year to USD126 billion in July, the fastest one-month pace in nine years. The sales growth edged ahead of June's 23% year-on-year growth. Household electronics sales rose 18.8%, almost twice June's pace, as television sales spiked ahead of the Olympics.

Investment overseas by Chinese companies more than tripled to USD25.7 billion in the first half of 2008 compared to a year earlier, the Ministry of Commerce revealed on July 24. Wang Chao, China’s Assistant Minister of Commerce, told a press conference in Beijing that “The government is vigorously pro-

moting domestic companies going abroad.” In September British newspaper the Sunday Telegraph reported that China’s central bank has built up stakes worth up to USD16 billion in leading British companies, including household names like Unilever and Tesco. The People’s Bank of China and the State Administration of Foreign Exchange (SAFE) have bought stakes in at least half of the companies that constitute the FTSE 100. Also in September, the Financial Times reported that SAFE bought USD150 million worth of Costa Rican government bonds in January this year as part of an agreement in which Costa Rica would sever its 63-year-long diplomatic ties with Taiwan. China’s tax revenue rose 30.5% yo-y in the first six months of 2008, to 3.2 trillion yuan, the tax administration said in 22 July. China’s tax intake for all of 2007 rose 31.4% to 4.94 trillion yuan. The Industrial and Commercial Bank of China (ICBC) has been given permission by the US Federal Reserve to open its first branch in the US, a move widely seen as a sign of the easing of restrictions after claims from China that Chinese banks had been denied access to the US market. In September China moved to tighten controls on how foreign companies spend the foreign currency they bring into the country, in a further effort to curb speculative inflows. New rules require the State Administration of Foreign Exchange to carry out checks on the use of foreign currency by firms, and disallows them from exchanging foreign currency into yuan in order to buy real estate for speculative purposes or for investing in equity.

33

China’s International & Cross-Strait Relations China’s gradual emergence as a world power continued on the global stage, where China’s increasing importance has created both challenges and opportunities for brinksmanship in the midst of a changing world order.

During the Doha round of multilateral World Trade Organization (WTO) trade talks held at Geneva during late July, China emerged as a central player as it fought for last-minute concessions, including the right to shield important farm products from competition and to delay for a number of years cutting some of its tariffs. China came under heavy criticism from the US and other nations for its tactics, yet the discussions at Geneva confirmed that the balance of power in global trade has shifted irrevocably with the rise of China. Traditionally a defender of free trade policies since joining the WTO in 2001, China allied itself with Indian negotiators in insisting that developing countries be allowed to impose prohibitively high tariffs on food imports from affluent countries to halt increases in imports that might put farmers in poorer countries out of business. China and Russia have settled the last of numerous border disputes after decades of negotiations (and one war). Russia agreed to return all of Yinlong and half of Heixiazi, two riverine islands captured during a 1929 skirmish. The islands are situated at the confluence of the Heilongjiang and Wusulijiang rivers that serve as a natural frontier between the two countries. In August Iraq announced a USD3 billion 20-year deal with Chinese oil giant Petrochina. It is the first major contract between post-war Iraq and a foreign oil firm. A court in Tokyo in August started hearing a case brought by two Chinese school boys injured

Facing off: After a tense round of talks at the Nuclear Suppliers Group in August, where India was seeking a waiver to obtain uranium, China and India prepared to re-open long-running border negotiations in September.

by abandoned Japanese chemical weapons. The incident took place in 2004 in China’s northeast, an area occupied by Japan from 1933 to 1945 and known as Manchuria at the time. The Chinese foreign ministry issued a statement asking Japan to speed up its efforts to clear the area of weapons. One of US President George W. Bush positive legacies, the sixparty agreement to dismantle North Korea’s nuclear programme, ran into trouble in late August. North Korea announced that it will be reassembling certain installations in reaction to Washington’s failure to remove it from the

US list of state sponsors of terror. The US replied that it will do so once North Korea has fulfilled commitments on verification. China has opened a new consulate in Sudan's autonomous south, determined to tap greater economic potential from the undeveloped region, its new consul, Zhang Qingyang, told reporters in August. China has close ties with the Sudanese central government in Khartoum and is the chief buyer of the African nation's oil and a key investor in its economy. Beijing has come under fire from human rights groups and countries in the West that have urged the Chinese gov-

34

ernment to do more to end five years of war in the western Sudanese Darfur region. Yet China had earlier expressed serious concern with the International Criminal Court’s attempts in July to prosecute Sudanese President Omar alBashir for alleged war crimes and crimes against humanity in the Sudanese province of Darfur. At a summit of the Shanghai Cooperation Organization, a forum of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, China endorsed Russia’s role in South Ossetia and Abkhazia, yet prior to the summit China expressed concern about Russia’s recognition of the breakaway republics. This was a slight but significant break from China’s usual approach of not expressing opinions on foreign conflicts.

In September an agreement was reached that will enable China to open a new shipping route across the 3km-wide strip of Russian territory that denies maritime access to China’s north-eastern province of Jilin. For the time being, the new route will only extend to the Japanese port of Niigata, passing en route through the South Korean port of Sokcho. China and Singapore have successfully concluded negotiations for a free trade agreement, the first such an agreement between China and an Asian country. China has submitted a report to the United Nations on its defence expenditure for 2007, endeavouring to display more transparency regarding its military spending. The report is China’s second report to

Panda Diplomacy: Lien Chan, Honorary Chairman of the Taiwanese KMT party, and his wife during a previous visit to the mainland. In August Taiwan officially accepted a controversial gift of two pandas from the mainland.

the UN since China joined the world body’s military budget transparency mechanism. This year’s budget has risen by 17.6% to USD57.2 billion. Yet according to Chinese officials, the increase is moderate compared to the US, the world’s top military spender, which last year had a defence budget of about USD700 billion. Chinese online trading site Alibaba has announced plans to expand to Europe and will open a new office in London to encourage more Chinese companies to invest in the next Olympic host city. The new office will be the fifth Alibaba office outside of mainland China. In addition, in July and August Alibaba signed agreements to start Japanese and Korean-language services, and in May the company teamed up with Mumbai-based Infomedia India with the intention of attracting new business from small and medium-sized Indian companies. Three years after mainland China offered them as a token of friendship, in mid-August Taipei Zoo finally obtained approval to receive a panda couple. The election of the nationalist Kuomintang candidate Ma Ying-jeou as Taiwanese president in March has facilitated a dramatic improvement in relations with mainland China, and in September Taiwan’s deputy president Vincent Siew made Taiwan’s position clear when called for a diplomatic truce with the mainland. Yet it is not certain when Tuan Tuan and Yuan Yuan - whose names taken together mean Reunion - will head for the island and whether they will retain their controversial names once they arrive. Nevertheless, Taiwan zoo already has a state-of-theart panda home, with its own doctors and staff, in anticipation of the pandas’ arrival.

35

At a meeting of the 45-country Nuclear Suppliers Group (NSG) in Vienna where India was seeking a waiver to obtain uranium, Chinese officials drew bitter complaints from India by trying yet ultimately failing to block the waiver using what Indian officials described as ‘backroom tactics’. Because India has not signed the Nuclear Nonproliferation Treaty, which it considers discriminatory, it needs approval from the 45-country NSG to obtain uranium. While Chinese officials subsequently stated that China wholeheartedly supported India’s nuclear ambitions, Beijing has also expressed concern that the NSG waiver for India might lead to an arms race with Pakistan and also impact ongoing border negotiations between India and China. India claims China currently occupies 38,000 square kilometres of its territory in the Himalayas, while China claims the 90,000 square kilometre north-eastern Indian state of Arunachal Pradesh.

SUGGESTED READING

A new line in the sand: Yunlong and a part of Heixiazi, two sandy islands in the Songhua River, were handed back to China by Russia. On the picture above the yellow line shows the old border, while the red line shows the area gained by China. This agreement settles the last of the two countries’ border disputes.

China: Practical Advice on Entry Strategy & Engagement China: Practical Advice on Entry Strategy and Engagement is very different from the multitude of books by Western commentators that have flooded the market in recent years. The principal author and editor, Jonathan Reuvid, has been actively engaged in joint venture development in China since 1984, both as a consultant and an investor. The book deals with the regulatory detail of investment and trade in China with a series of commentaries on actual experiences by leading practitioners of doing business in China, supported by case studies of British companies that have engaged China with mixed fortunes. The book offers insight to Western companies seeking to engage in China in terms of practical issues and the business environment they will encounter. Yet the book is also of interest to Chinese readers because it illustrates the perceptions British entrepreneurs have of China and their attitudes towards Chinese companies. Both sets of readers will find illuminating the chapters on developing and managing joint ventures, as well as personal accounts of managing a business in China, airport construction and the MG Rover takeover. There are also some 15 case studies of actual business projects, most of which have matured into successful ventures and some of which have failed to achieve their objectives.

36

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: [email protected], or contact one of our offices. Date

Event

Location

9th Suzhou Building Materials and Home Decoration Exhibition

Suzhou

9 - 11 Oct 08

International Trade Fair for Toys, Hobbies and Baby Articles

Shanghai

9 - 13 Oct 08

9th China International Machine Tools Exhibition

Beijing

10 - 12 Oct 08

5th China (Shanghai) International Non-Metallic Minerals Industry Expo

Shanghai

13 - 16 Oct 08

Hong Kong Electronics Fair 2008 - Autumn Edition

Hong Kong

15 - 17 Oct 08

2nd China International Exhibition for Titanium Industry

Shanghai

15 - 17 Oct 08

China International Copper Industry Exhibition

Shanghai

15 - 17 Oct 08

2nd Annual Retail Banking Asia 2008

Shanghai

15 - 17 Oct 08

Shanghai International Parking Equipment & Intelligent System Expo 2008

Shanghai

15 - 30 Oct 08

China Import and Export Fair Guangzhou

Guangzhou

16 - 18 Oct 08

2008 China (Qingdao) International Aluminium Industry Exhibition

Qingdao

16 - 18 Oct 08

2008 China (Qingdao) International Copper Industry Exhibition

Qingdao

16 - 18 Oct 08

China International Pipeline Exhibition

Langfang

17 - 20 Oct 08

International Computer, Communication & Consumer Products Expo

Dongguan

20 - 21 Oct 08

2nd China - Latin America Business Submit

Harbin

20 - 22 Oct 08

17th International Symposium on Mine Planning and Equipment Selection 2008 (MPES2008)

Beijing

22 - 24 Oct 08

Scan China 2008

Shanghai

22 - 24 Oct 08

10th China International Exhibition on Industrial Gases Industry Association - IG China 2008

Shanghai

22 - 25 Oct 08

5th China - ASEAN Expo

Nanning

25 - 26 Oct 08

Summit on Sustainable Development and Investment of China Mining

Beijing

26 - 28 Oct 08

2008 China International Copper Conference

Nanchang

27 - 30 Oct 08

CeMAT Asia 2008

Shanghai

28 - 31 Oct 08

Hong Kong International Furniture Fair

Hong Kong

28 - 31 Oct 08

3rd China International Architectural Expo

Beijing

29 - 31 Oct 08

5th China Copper and Asia Lead Zinc Conference

Shanghai

3 - 5 Nov 08

World Scrap Metal Congress 2008

Shanghai

4 - 7 Nov 08

2008 China International Coal Expo

Beijing

4 - 8 Nov 08

China International Industry Fair

Shanghai

5 - 6 Nov 08

4th China International Hi-tech Symposium on Coal Chemical Industry and Coal Conversion

Beijing

1 - 4 Oct 08

37

Date

Event

Location

6 - 8 Nov 08

2008 China International Silver Conference

Haikou

7 - 9 Nov 08

China Shenzhen International Logistics Fair 2008

Shenzhen

10 - 12 Nov 08

Bohai Electronics Week 2008

Tianjin

11 - 13 Nov 08

China Mining Congress & Expo

Beijing

11 - 15 Nov 08

Asia Pacific CEO Summit 2008

Macau

12 - 14 Nov 08

12th International Exhibition on Electric Power Equipment and Technology

Beijing

12 - 14 Nov 08

5th International Exhibition on Electrical Engineering, Electrical Equipment & Contractor's Supplies

Beijing

12 - 15 Nov 08

72nd China Electronics Fair

Shanghai

18 - 20 Nov 08

Coal Tech Asia 2008

Beijing

25 - 27 Nov 08

3rd China (Beijing) International Wind Power Generation Technology and Equipment Exhibition 2008

Beijing

25 - 27 Nov 08

2nd Nuclear Power Industry Exhibition 2008

Beijing

2 - 4 Dec 08

2008 China Aluminium Forum

Sanya

2 - 4 Dec 08

2008 China (Shanghai) International Mining Conference

Shanghai

3 - 5 Dec 08

9th China International Industrial Automation & Instruments Expo

Beijing

AmCham China's Ninth Annual Appreciation Dinner

Beijing

China Complex Project Management Excellence Conference

Beijing

5 Dec 08 9 - 10 Dec 08

THE CHINA ANALYST—Highlights of Previous Editions in 2008

January 2008

April 2008

The Next Generation of Chinese Resource Companies Going Abroad The original trailblazers are still making headlines for big-ticket deals, but what are the new kids on the block up to?

Putting China’s Urban Billion into Perspective To the business community, China’s big population offers an opportunity, yet to the government this is serious challenge.

China’s Reaction to BHP’s Bid for Rio Tinto: Does it Matter? News of BHP Billiton’s bid quickly turned into a guessing game on the Chinese reaction, yet in the end this amounted to no more than a shrug, and for good reason.

Africa and China: How Long will the Honeymoon Last? With Chinese involvement in Africa growing, questions are being asked about the sustainability of the relationship. Yet is there reason to be concerned?

China Perspectives A summary of high level debates in the media.

China in Statistics A breakdown of China trade and investment figures.

July 2008

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 approaching and the winners will the firms that successfully navigate the pitfalls and peculiarities. Macroeconomic Monitor Is China’s Olympian economy slowing down at last? A slowing world economy has given the Chinese authorities much more to think about in their balancing act.

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

38

Alert: Mining Delegation to China

(Dates: 9-15 November 2008)

THE BEIJING AXIS will facilitate a high-impact mining sector fact-finding and business development visit for clients to China during November 2008 around the time of China Mining. Places are limited. Interested parties from mining and related companies should respond as soon as possible. Raise your China Mining Knowledge and Profile

Select from 3 Focused SubStreams

China Mining Sector Unpacked

1. China Domestic Mining Environment (Intelligence & Networks)

Global Implications of China’s Rise China Mining Procurement

2. China Goes Global (Intelligence, Partnering & Networks)

Targeted 1-on-1 Meetings

3. China Procurement (Intelligence, Supplier search, Supplier visits, Direct engagement, Reference Attend China Mining 2008 (11-13 Nov) sites) Senior Level Engagement

The Concept ●

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●

●

●

●

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A China trip that is sector-specific with focused sub-streams to allow a deep-dive and assure relevance A well organized itinerary to optimise use of time: structured elements (the whole group); targeted breakouts (for individual firms to maintain relevance); and free time (own appointments, and/or leisure) Timing coincides with China Mining 2008 Conference & Exhibition in Beijing (11-13 Nov 08) — Asia’s most prominent mining event Programme designed to fit around the proceedings of China Mining and will allow delegates to add days (before and/or after the event) for side-trips to relevant areas for meetings & site visits Carefully targeted pre-arranged meetings will be tailored to the specific and focused needs of each individual firm/delegate based on research and screening Experienced multi-lingual business consultants will accompany and support each delegate throughout Flexible travel arrangements (make your own or let us assist)

Programme Elements Programme is currently being finalised under construction; preliminary items include: ●

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Orientation in Johannesburg —2024 Oct 08 (Individual firms) Workshop/Roundtables in Beijing on arrival in China (All/Substreams) Opportunity to attend China Mining 2008 (All) One-on-one meetings with appropriate targeted firms. [THE BEIJING AXIS will scope individual needs, do research/engage appropriate targets.] (Individual firms)

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Supplier/site visits (Individual firms)

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Mine site visit (Indiv./optional), etc.

Who would find the trip valuable? We target those executives with a serious China agenda that want to extract more than the usual value from an expensive, time-consuming trip to China. We aim to achieve specific business objectives as opposed to just having a general China exposure. We work closely with individual delegates in the leadup to November to ensure highimpact interactions. We target mining companies but selected service providers and the investment community may also benefit: ●

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Executives from mining companies that are selling into China Executives from investing or fundraising mining companies Executives from service companies that are looking at entering China or sourcing from China Mining and engineering sector procurement managers Sector analysts, strategists and fund managers

Please note that the aim is to keep all interactions at a senior level.

CHINA MINING 2008 Conference & Exhibition Overview

Contact in Beijing Barry van Wyk Tel: +86 10 6440 2106 [email protected]

China Mining is Asia’s premier mining and exhibition event, hosted by China’s Ministry of Land and Resources. It will be held in Beijing from 11-13 November 2008.

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

The event is well attended and worthwhile. For more information please visit: www.china-mining.com

Note: The trip has an Africa-China focus but delegates from other regions are welcome to contact us.

39

Careers at THE BEIJING AXIS We are currently looking for dynamic, creative, 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 that international relocation is possible. LEAD CONSULTANT (CHINA STRATEGY GROUP) Based in Beijing: 1 position Role ● Lead multiple strategy consulting assignments in the Strategy 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 ● Manage a team of consultants and analysts ● Manage and mitigate associated project risks ● Be a thought leader and promote the development of learning processes and platforms ● Improve process efficiencies; optimise workflow; control costs ● Customer relationship management ● Ensure alignment of Strategy Division’s objective with Group ● Manage aspects of Strategy Division budgeting ● Multi-sector assignments with emphasis on resources, mining and industry ● Significant (international) travel Requirements ● Superior analytical and problem solving ability ● 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 preferred with more than 8 years experience in consulting and/or management ● Native English written and verbal communication skills essential

Let your career take off: 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 (CHINA STRATEGY GROUP)

SOURCING ENGINEER (CHINA SOURCING UNIT)

Based: Beijing, Perth & JHB: 3 positions

Based: Beijing: 1 position ●

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Employed in the Strategy Division of THE BEIJING AXIS Sound analytical and problem solving skills A degree in a business or technical discipline with a postgraduate qualification Minimum of 3 years work experience in an appropriate or related field Strong experience in the formulating and execution of research methodologies and analysis is preferred Excellent communication skills Mandarin not essential, but regarded as an advantage Willing to travel

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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 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 Willing to travel

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THE BEIJING AXIS News Community THE BEIJING AXIS commends China and all organisers and athletes of the 2008 Beijing Olympic Games for a phenomenal spectacle and an event that will be remembered for its awesome opening ceremony, impressive recordbreaking achievements and allround embrace of sports. We further extend our wholehearted support and praise to all 2008 Paralympic athletes for the most competitive Paralympic Games to date and a successful event in its own right.

Learning & Getting Around On 12-14 August, Kobus van der Wath, Group MD, attended the Perth Mining Exhibition and Conference 2008. He also delivered a presentation on China’s role as a low-cost country sourcing base in a global environment characterised by supply chain bottlenecks. Kobus van der Wath was invited to present at the CIPS Australia Strategic Procurement Forum in Perth on 21 August. Kobus’ presentation was entitled: ‘The Role of Low-cost Countries in the Global Sourcing Equation - with Specific Reference to China’s Sourcing Advantages & Challenges’. On 4-5 September, Kobus van der Wath attended the Africa Downunder Conference in Perth. Jackie Li and Danielle Olivier from the Johannesburg office attended the Mining in Africa 2008 Conference in Johannesburg on 8-12 September. Kobus van der Wath was invited to Chair a session at the Excellence in Mining & Exploration Conference in Sydney on 14-16 Septem-

ber. He also delivered a presentation on Chinese mining investment in Australia. On 23-25 Sep, Cheryl Tang, Director, attended 2008 China International Sourcing Fair Shanghai. Kobus van der Wath, Chaired the CPA Australia 2008 China Business Insights Conference on 18 September in Sydney. Jackie Li, Johannesburg Office Business Development Manager, delivered a presentation on Low-cost Country Sourcing from China at the Global Sourcing Conference in Pretoria, SA, on 7-8 October. Kobus van der Wath and Jackie Li was invited to host a practical halfday workshop entitled ‘Doing Business with China & Asia’ at the Johannesburg Chamber of Commerce and Industry on 23 October. THE BEIJING AXIS will further be represented at events in Australia, China and Singapore in October and November: ● South Africa Expo in Hong Kong (2-3 Oct.), Beijing (8-9 Oct.) and Shanghai (13-14 Oct.) ● CIPS Australia Annual Conference in Melbourne (14-15 Oct.) where Kobus van der Wath will present on China Sourcing ● the Mining 2008 Resources Convention in Brisbane (12-14 Oct.) ● the Canton Fair in Guangzhou (15-19 and 23-28 Oct.) ● the INSEAD Leadership Summit Asia 2008 in Singapore (7 Nov.) ● the Australia Mining Congress 2008 in Sydney (18-20 Nov.) ● China Mining 2008 where Kobus van der Wath have been asked to present on the Drivers, Enablers, Constraints and Future Trends of China’s Outbound Investment in the Global Mining Sector

Team Developments at THE BEIJING AXIS Barbie Co joined the Beijing office in September as an intern. She holds a degree in International Relations from the Ateneo de Manila University in the Philippines. During September she was offered a permanent position as an Analyst in THE BEIJING AXIS China Strategy Group. During August and September, Ajara Chekirova joined the Beijing office as an intern. Ajara is from Kyrgyzstan and currently studies Law at Beijing University. THE BEIJING AXIS welcomes Mitch Cosani, Corporate Office Manager (based in Johannesburg), to Beijing for 3 months as part of his China learning and corporate office development programme. Dirk Kotze, Manager in our Beijing office, left THE BEIJING AXIS at the end of September to pursue other opportunities. Dirk has been with the company for more than 4 years and has seen it grow from strength to strength. The entire team wishes Dirk every success in the future and thanks him for the commitment and professionalism that he brought to the company. THE BEIJING AXIS wishes Helen Tang, Finance & Admin Manager, and family everything of the best for her imminent maternity leave. Sincerest best wishes and affection from us all. THE BEIJING AXIS also wishes Haiwei Huang (Business Development Manager) and proud father to-be and his wife everything of the best for the birth of their child. Our best wishes to the entire Huang family.

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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 emphasize 'actions and transactions’. THE BEIJING AXIS is organised along 3 synergistic cross-border China businesses: the China Strategy Group, 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, focused on strategy formulation and implementation:

THE BEIJING AXIS China Sourcing Unit supports sourcing / procurement initiatives to/from China based on a systematic & analytical approach:

THE BEIJING AXIS China Capital Advisors provides cross-border advisory services. The focus falls on 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, due diligence and selection

ƒ Advising Chinese strategic capital as Chinese outbound FDI/M&A seek overseas assets, equity or projects

ƒ Negotiation ƒ Commercial and contract man-

ƒ Advising foreign capital that is seeking Chinese assets, equity and projects

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

agement 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 manage-

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

ment

Contact Information For more visit our English, Chinese, Russian or Spanish websites at www.thebeijingaxis.com, or contact an office: Beijing

Johannesburg

Russia, CIS

Latin America

Australia

Cheryl Tang

Jackie Li

Lilian Luca

Javier Cunat

Kobus van der Wath

[email protected]

[email protected]

[email protected] [email protected]

[email protected]

43 International Business Workshop

MANAGING IN CHINA AND ASIA Strategic Imperatives in Times of Financial and Economic Turbulence Organised by PriceWaterhouseCoopers and THE BEIJING AXIS for South African Companies that are Managing International Exposures Wednesday, 26 November 2008 Johannesburg (Location details to be confirmed) Agenda 08:00

Registration

08:45

Introduction: PWC

09:00

PART 1: A New Strategic Landscape - Perspectives on Asia & China a. The Global Context b. Asia c. China Kobus van der Wath, Group Managing Director, THE BEIJING AXIS & Vice-President, Asia Pacific South Africa Chamber of Commerce

10:00

PART 2: Strategy and Implementation in China & Asia - Constraints & Enablers a. Strategies to Support Export Development b. Strategic Sourcing for Cost Advantage c. Attracting Strategic Capital from China, or investing in China d. Selected Topics and Issues 1. Dealing with Culture and Language 2. Managing Risk Effectively 3. Research, Due Diligence and Other Key Processes 4. Exchange Rates, Regulations, Approvals, etc.

10:55

PART 3: Practical Issues During Implementation - A Perspective from China Jackie Li, Manager, THE BEIJING AXIS

11:15

Coffee Break

11:30

Final Word, Conclusions & Integration: PWC / THE BEIJING AXIS

11:45

Interactive Discussion

12:30

Close/Lunch

For more details please contact: Alan Witherden, PWC Tel: +27 (0)11 797 5590 Jackie Li or Danielle Olivier, TBA Tel: +27 (0)11 201 2550 Fee: No charge

[email protected] [email protected]