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The China Analyst - May 2009


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

May-July 2009

Charting China’s crisis exit strategy – The road ahead in 2009

Features Re-engineering Growth: China’s Crisis Exit Strategy China’s Stimulus Package: How Green? China’s Africa Engagement: New Issues, Salient Trends 6 9 12

Regulars Macroeconomic Monitor China Sourcing Strategy China Inc. Goes Global: OFDI/M&A 15 22 30

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GDP 2008 (USD tn) GDP 2008 (USD tn) EU US Japan China Germany Britain France Canada Brazil Poland

Budget Balance GDP (%)
18.4 14.3

Current Account Balance / GDP (%) US -4.6 Japan China Germany Britain -1.8 France Canada -1.4 Brazil Poland -5.6
-2.2 3.5 10.2 6.6

4.9 4.4 3.7 2.9 2.7 1.6 1.5 0.5

US Japan China Germany Britain France Canada Brazil Poland

-3.2 -5.4 -0.1 0.2 -5.3 -3.2 0.3 -0.7

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-1.8

Worldwide Stimulus Packages (USD bn)

Hungary 6.5 Canada 30 USA 787 Netherlands 7.5 Britain 30 Spain 113 EU 255 Mexico 54 Saudi Arabia 17.3 India 4 Brazil 283 Singapore 13.6 Poland 31 Russia 42 Japan 650

Germany 109 Kazakhstan 25 France 33 Italy 6.3

S. Korea 10.8 China 586 Philippines 6.1

Chile 4

Argentina 13.2

South Africa 3.7

Australia 27 New Zealand 5

Breakdown of Selected Stimulus Packages
US
5% 7% 1% 7% 10% 14%

China
4% 1% 7% 3%

Japan

Germany

38%

9% 43% 9%

30%
46%
24%

54%

70%
18%
Infrastructure Disaster Reconstruction Rural Construction Environmental Protection Social Welfare Technological Innovation Value-added Tax Cuts Education and Health Care

Tax Relief State and Local Fiscal Relief Infrastructure and Science Protecting the Vulnerable Health Care Education and Training Energy Other

First package Second package
USD 111 billion for tax cuts, more than half of total for capital injections for lenders and financial institutions

First package Second package
1st: Infrastructure; Tax relief & Support for SMEs; Education 2nd: Aid to auto industry; Tax relief for households
Sources: IMF; Various Press; TBA Analysis

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At the Highest Level
China has been able to weather the global economic storm better than most. China’s dramatic slowdown halted during March-April 2009, and further consolidation looks likely in the near future. But risks remain and unrealistic expectations should be avoided. At the very least, we must look out for regional, sectoral and value chain variability in the economy. Simply put, navigating in the Chinese landscape has just become even harder. But the long term prize is still unparalleled: China, the world’s third-largest market, is set to maintain its solid lead on developed and developing economies.
Expect changes in the relative and absolute attractiveness of certain areas based on their share of exports in GDP, share of FDI, the cost of doing business, government incentives, infrastructure, etc. These regional discrepancies will be felt in the urban-rural divide, between eastern and western China, and between provinces in the east, i.e. those that form a contiguous belt on the coast. Location studies now become more important and it is necessary to think about the opportunity in second tier, third tier and fourth tier cities and areas ? Sectoral disparities are also emerging. Gone are the days when almost all sub-sectors exhibit super-fast growth. It will become far more difficult to identify sectors and sub-sectors that will be the sustained drivers of overall growth ? Not all areas of the value chain within a particular industry will enjoy the same prospects. It is now more essential to identify which industries will see differences between the upstream and downstream segments. This has widespread implications, i.e. for regulatory changes, for input and gate price changes and for fluctuating inter-dependencies between various industries ? The past 6-9 months have shown that economic reform in China is as unpredictable as ever and policy levers can be used aggressively in order to stimulate or constrain target areas, sectors and sub-sectors The list goes on, but it is clear that a more uncertain environment spells a new strategic landscape where strategies will have to be more finely calibrated. The ability (or inability) to manage information and more sophisticated, forward-looking planning processes will determine the winners and losers in China. Yet this more complicated planning environment does not mean that the overall risks outweigh the rewards. On the contrary, China’s Q1 2009 performance clearly showed its continued dominance as the world’s most robust large market. It leads global growth and continues to outperform developing and developed markets alike. And nothing suggests that this is about to change. As such, while it is necessary to carefully navigate the immediate challenges in a changing landscape, we must not lose sight of, or be deflected from, the opportunity to capture full long-term advantage in the world’s third-largest economy. I trust that our readers will enjoy this edition of The China Analyst – and as always we welcome all feedback.
Kobus van der Wath
Founder & Group Managing Director THE BEIJING AXIS China Business Solutions Strategy I Sourcing I Investment

uring the latter part of Q1 2009, China’s economy emerged from a period of rapid slowdown that had ensued in Q3 2008. With 6.1% y-o-y GDP growth in Q1 2009, and with many indicators pointing to a mild recovery in activity, the scene is now set for China to hover near 67% growth over the next few months before entering into a somewhat higher pace of growth towards the end of 2009 and into 2010. With a consolidating global environment— albeit only a tentative consolidation based on a reduction in negative news, somewhat stabilized financial markets, the edge coming off the credit crunch and a more unified G20 voice — there is scope for optimism. Confidence in the global economy is a key requirement for an eventual broad-based recovery. Indeed, in recent months some Chinese economic sectors (such as auto, selected property segments and credit growth, etc) have recorded a markedly ‘better’ performance compared with the period of spontaneous destruction between August 2008 and February 2009. But some sectors remain weak and are unlikely to return to their previous lofty levels. Herein lies the management challenge. It is now both more difficult and more important than ever to analyse the multitude of volatile indicators and divergent trends that characterize the Chinese landscape. In short, the one-way-bet scenario of recent years, when most indicators trended higher, have come to an end and managers with a China agenda must now manage in a more complex environment. China has become a country where some sectors (perhaps most) far outpace global averages, but others are now below the waterline. This new environment is in fact only an inevitable shift towards normalcy and is likely to be with us over the long term. In order to mitigate risks that arise in this new era it is necessary to manage information well. That implies having the right people, processes, methodologies and systems in place. Below we identify a number of focus areas for those who manage China ventures: ? Regional disparities are likely to become more distinct.

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Table of Contents

May-July 2009

6 9 12 15 19 20 22 26 27 28 30 34 36 40 43 46 50 52 53

Re-engineering Growth: China’s Crisis Exit Strategy
The financial crisis and the adherent global economic stasis have severely impacted China’s exporting growth engine, yet can China be the first nation to recover by reconfiguring its economy?

China’s Stimulus Package: How Green?
One of China’s greatest concerns is the rising environmental damage that the past 30 years of breakneck economic development has created. Will the country continue its efforts in the areas of efficiency and environmental regulation?

China’s Africa Engagement: New Issues, Salient Trends
As more Chinese companies feel the need to enter new markets and gain more resources, Africa will see increased Chinese business and investment activity in more sectors on the continent.

Macroeconomic Monitor: China’s Tentative Consolidation
While the world remains firmly in recession, Q1 2009 has delivered tentative signs of a recovery in China. We expect China’s economy to recover gradually in 2009, and then more rapidly in 2010 as demand eventually rebounds.

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.

China Facts & Figures
China Facts & Figures provides a cross-section of data illustrating growth, transformations and trends in China’s commerce and industry.

China Sourcing Strategy
China’s economy is exhibiting some positive signs, but how has the China sourcing risk profile changed for international procurement managers—and what can they do to formulate appropriate China Sourcing Strategies in 2009?

China Sourcing Blog Highlights
Highlights from The China Sourcing Blog, THE BEIJING AXIS online information portal and discussion forum on all issues relevant to sourcing from China.

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

China Trade Roundup
This section illustrates the main trends in the growth and transformation of China’s trade profile, and summarises a selection of the latest available trade statistics for China.

China Inc. Goes Global: OFDI and M&A
While the current investment climate continues to provide new opportunities for Chinese investors, Chinese firms may yet face more hurdles in their plans for making foreign acquisitions.

China Business News Highlights
A roundup of the main business headlines from China during the first quarter of 2009, including positive signals of China’s economy slowly emerging from the crisis, as well as the latest on China’s headline deals in the natural resources sector.

Regional Focus: China-Africa
China recently announced that trade between Africa and China exceeded its USD 100 bn goal, that was set to be achieved only in 2011. With the China-Africa Summit set for late 2009, trade and investment are expected to expand further.

Regional Focus: China-Australia
At such a critical juncture of the global economy, China-Australia relations are being tested and fashioned anew. Beijing and Canberra are scrambling to forge a mutually-beneficial arrangement that will enable them to emerge stronger from the crisis.

Regional Focus: China-Latin America
China’s influence in commodity prices and the likely rebound of its economy by the fourth quarter of 2009 are key for the growth prospects of Latin America’s resource-intensive economies. We analyze the drivers, enablers and constrains.

Regional Focus: China-Russia
China and Russia bilateral trade values steadily declined in the first quarter of 2009. However, within this period a number of long-awaited agreements to promote strategic cooperation were signed between the two countries .

Upcoming Events
A schedule of all the major upcoming fairs, exhibitions and conferences in China, with a focus on events pertaining to resources and industrial sourcing.

Careers at THE BEIJING AXIS
THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and future business challenges. Positions are available in multiple international offices.

THE BEIJING AXIS News
TBA news for the first quarter, including speaking at Mining Indaba in Cape Town, PDAC in Toronto, AMEC in Perth, a series of TBA presentations delivered at Beijing’s Capital Club, as well as exciting new team developments.

THE CHINA ANALYST is published & distributed quarterly by THE BEIJING AXIS. For more on our services, see p. 54.

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Re-engineering Growth: China’s Crisis Exit Strategy
The financial crisis and the adherent global economic stasis have severely impacted China’s exporting growth engine, and tens of millions of jobless makes anything less than the fabled 8% growth feel like a recession. Yet can China be the first nation to escape the recession by reconfiguring its economy? By Barry van Wyk.
n one highly symbolic picture of the line-up at the recent G20 Summit in London, the fact that Chinese President Hu Jintao appeared in the preeminent position on the right of host Gordon Brown in the front row, seemed a clear indication of China’s importance in this gathering, the highest international forum dealing with the crisis. In line with appearances, both China’s leaders have recently voiced their optimism at China’s resilience in the face of the financial crisis. US President Obama, however, languishing in the back row in the picture, can still see nothing more than glimmers of hope when referring to the US economy. According to Chinese premier Wen Jiabao, however, China may have seen the worst of it.

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increasing speculation on whether and when China’s economy may be reaching the bottom of its downturn. The economist Nouriel Roubini has pointed out that if China measured its GDP on a quarter-to-quarter annualized basis, the figure for Q4 2008 would actually have been close to zero, or even negative. In the wake of the slowdown in developed economies from Q4 2008, a number of indicators reflected that China’s economy had followed suit: slowing GDP growth, industrial production and PMI; lower production of electricity; weak auto sales; a fall in home sales; and falling imports and exports. Most problematic of all, perhaps, is that the 6.1% GDP growth registered in Q1 2009 is the slowest pace of growth in nearly a decade.

China’s impeccable economic growth 20,000 hopefuls: Job fair in Beijing, trajectory of the last 30 years has to a February 2009. China’s phenomenal economic large extent relied on investment from growth in the last 30 years (averaging and exports to the developed world. While household con- 10% annual GDP growth) has largely been investment-led, sumption accounted for around 50% of China’s GDP in the supported by massive domestic savings and large inflows 1970s, economic reform since then has been accompa- of Foreign Direct Investment (FDI). This development stratnied by a decline in the contribution of household con- egy has very effectively boosted growth, yet has been sumption to GDP, reaching a low of 35% in 2006 characterized by weak domestic consumption and an over(compared to about 70% in the United States), and a con- reliance on exports, which has made the Chinese econcomitant increase in household saving rates from 15% in omy vulnerable to the international economic slowdown. 1995 to 25% in 2007 (compared to less than 5% in Japan While China’s GDP expanded by 260% between 2000 and and Korea). Rapid growth has transformed China in the 2008, China’s net exports increased eleven-fold in the last three decades, yet the global financial crisis has driven same period. As the crisis intensified in Q4 2008, however, a temporary wedge in China’s economic relationship with China’s exports began to shrink, declining sharply in Nothe rest of the world, and in mitigating the impact of the vember and falling a further 21% y-o-y in the first two crisis, China’s government have one place to turn: Inward. months of 2009. Exports in February were a full 26% less than a year earlier, and declined for a fifth consecutive The slowdown has seriously impacted China’s export sec- month in March, yet at a slower rate of 17.1%. tor and caused a large number of job losses, yet in the same instance it has also provided a massive incentive – a The marginally improved trade figures for March has incompulsion even – to further wean China’s economy off spired talk of China ‘bottoming-out,’ complemented by a its traditional growth engines of exports and investment rebound in March of industrial output growth of 8.3% (from towards exports, and to focus more on spurring consump- a record low of 3.8% in the first two months of 2009), and tion in the domestic market. In fact, by means of its USD by the CFLP measure of the Purchasing Managers’ Index 586 billion stimulus package, China is not only attempting (PMI) rising for three months to finally break through the to keep its economy growing by offsetting the slack global 50-level mark (indicating expansion) in March. China’s demand for Chinese manufactures, but also to reconfigure stock market rallied in Q1, and retail sales and urban fixed the set of structural economic factors that has underpinned investment have remained robust if not growing particularly the Chinese success story of the last 30 years. fast. There is also some evidence of a recovery in the housing sector with an increase in sales volume, although home prices remain low due to excess inventories of unLooking for the bottom sold homes. March has nonetheless delivered a slight Following Wen Jiabao’s optimism, there has recently been growth trend in the real estate market in China’s major cit-

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ies, with the trade volume of residential units in Beijing reaching 2,124, up 23.6% compared to February. Media reports have also hailed the rising sales volume of passenger vehicles in March, increasing 10% y-o-y and 27% from February. While profits at China’s SOEs declined by 43.7% y-o-y in the first two months of 2009 (which the Ministry of Finance described as the first decline in many years), March brought indications of the impact of the stimulus package. The chairman of the State-owned Assets Supervision and Administration Commission (SASAC) stated in April that 170 SOEs had increased their profits in March by 26% y-o-y. The various economic indicators above clearly show signs of economic recovery, and forecasts are for accelerated growth in Q2-Q4 2009. Reaching the other China Employment policies Striving to get near the self-imposed 8% growth benchmark is by their own admission not the Chinese government’s primary objective in their response to the current crisis. Commerce Minister Chen Deming earlier this year said that he was not really worried about GDP growth; China’s biggest challenge, he claimed, was unemployment. China’s Academy of Social Sciences has reported that 670,000 small and medium enterprises in places like Guangzhou, Dungun and Shenzhen have closed down, with job losses of up to 2.7 million. Various media reports have indicated, moreover, that more than 20 million migrant workers may have lost their jobs due to the crisis – yet these are not recorded in official statistics. With a further 6 million university graduates expected to join the work force this year, the Asian Development Bank has concluded that China’s RMB 4 trillion fiscal stimulus will not be able to create enough new jobs to absorb the labor surplus. Increased rural unemployment and a downturn in farm product prices are severely inhibiting the government’s stated goal this year of boosting rural incomes and narrowing the gap between the rich and poor. While over 600 million people have been lifted out of extreme poverty in China since 1981, the World Bank still groups China among lower-middle income countries, with USD 936–3,705 in annual per capita income in 2007, on a par with countries such as Bolivia, India, Morocco and Syria. Real per capita income in rural households increased almost fivefold between 1980 and 2007, yet disparities with urban areas in terms of income and the provision of public services have developed. In addition, while the permanent urban population (apart from migrants) is covered by medical insurance, the majority of the rural population remains subject to expensive medical treatment and tertiary education. Before the advent of China’s economic reform programme, a state-funded social security net was in operation. Reform of the system in the 1980s, however, aimed at reducing the costs of SOEs by commercialising social security services and allowing the state, employers and individuals to share the costs. Yet medical services came to be unequally distributed between urban and rural arTeacher salaries Funding for SMEs
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China Major Growth Targets for 2009 ? ? ? ? ? ? 8% GDP growth 9 million new jobs in urban areas Urban registered unemployment rate under 4.6% Steady growth in urban and rural incomes CPI increase of about 4% Improvement of balance of payments

2009 China Government Spending Plan (RMB bn) Social safety net Science & Technology Sichuan reconstruction Agriculture subsidies 42 12 10
100 200 300

293 146 130 123

Source:Key figures in gov. work report by Chinese Premier, Xinhua (05/03/09).

eas, and did not adequately cater to China’s large migrant populations. Unsurprisingly, Chinese household savings amounted to 24.7% of their disposable income in 2006 (compared to only 0.7% in the US). The absence of a substantial social security net, increasing joblessness and falling rural incomes have continued to inspire high precautionary saving rates among households in China, and this structural barrier remains a clear impediment to the government’s hopes of creating growth this year by increasing consumption in the domestic market. Bricks, people and confidence According to Wen Jiabao, confidence is more important than money or gold. Hence to inspire more confidence in China’s population, and given the obvious latent potential of China’s under-spending, over-saving population, investment in ‘people’ by means of initiatives designed to boost domestic consumer spending, health care and social security are among the key drivers of the stimulus package announced late last year. Yet the largest share (RMB 1.5 trillion, or 38%) of the stimulus spending is devoted to ‘bricks’: public infrastructure, with projects lined up including railways, irrigation, roads, and airport construction. RMB 1 trillion is to be spent on funding reconstruction work in the quakeaffected Sichuan province. RMB 400 billion has been earmarked for civil works, including low-income housing and renovation, while RMB 370 billion will be spent on rural infrastructure, including improvements to the power grid, roads and substandard housing. In the revised outline of the stimulus spending announced in March this year, RMB 370 billion was devoted to technology initiatives, and RMB 210 billion to energy-saving projects, while RMB 150 billion was allocated to educational, cultural and family planning purposes. Following the release of

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China’s GDP data for Q1 2009, 8 additional measures to spur the economy were announced, laying out a range of broad objectives including the boosting of fixed-asset investment, consumption and exports. Intended both to encourage employment and expand China’s social security net, the stimulus package endeavours to address the structural reasons why Chinese private and household savings are high and the consumption share of GDP is relatively low. The share of household income in GDP is very low in China (about 40%) yet the share of corporate savings in GDP is relatively high as most of the corporate sector’s profits in China are held by firms in the form of retained earnings and not distributed to shareholders as dividends. In a world where the US consumer can no longer be the consumer of first and last resort, government spending and investment in China must over time be compensated by private consumption. China’s infrastructure-dominated fiscal stimulus, however, while attempting to better develop China’s consumer market, is still a capital-intensive growth strategy consistent with China’s investment-led path of development and is unlikely to raise a significant amount of confidence over the short term among Chinese consumers to dispense with more of their savings. China GDP Expenditure Approach Breakdown, RMB bn
30,000 25,000 20,000 15,000 10,000 5,000 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: China Statistical Yearbook 2008

light industry; electronics and information; logistics; automobile; shipbuilding; machinery; steel; nonferrous metals and petrochemicals. Yet analysts have pointed to the potential risk that these ten stimulus plans will not adequately address the concern of clearing out excess capacity, instead creating more inventory and an illusion of increased demand. The government has limited its deficit to 3%, but has placed no obvious limit on bank lending. In fact, China’s banks are expected to fund much of the stimulus. The government has been encouraging banks since November to extend more credit, and in March Chinese banks accordingly lent a record amount of RMB 1.9 trillion, an increase of more than six-fold compared to a year earlier and the third straight month that bank lending has exceeded RMB 1 trillion. This lending surge has raised fears of the emergence of a new credit bubble. According to the Bank of China, first quarter 2009 lending amounted to RMB 4.6 trillion, already more than 90% of the full-year target of RMB 5 trillion and fast approaching the full amount for the whole of 2008 (RMB 4.9 trillion). Growth in M2, the broadest measure of money supply, hit a record 25.5% in March, 8.5 percentage points higher than the government’s targeted annual rate. In light of the vastly increased bank lending during Q1 2009, the chairman of the China Banking Regulatory Commission has warned China’s banks to be cautious about loan assessment and management. Excessive discounted bill financing, however, which made up 40% of lending in January and 45.5% of loans in February, have prompted a government investigation into where the capital went, with speculation that the funds may have been diverted to the stock exchange. In April, the French insurance firm Coface reported a rapid deterioration in the ability of Chinese companies to honour payments to their suppliers which, it concluded, has significantly increased the risk of doing business in China. The head of the firm’s underwriting and claims business in China noted that the cost of insuring against customers defaulting on payments in domestic trade has risen by 30% since the advent of the crisis. The change in the risk environment, moreover, seems to be more acute for China’s SMEs (particularly in the export-oriented sectors) who have been faced with a liquidity crisis as China’s banks are traditionally more accustomed to extend credit to large state-owned enterprises. Riding out the storm China has embarked on a massive stimulus package to get its economy back on track. As such, the spending-led intervention is not a significant break with trusted growth models. Yet inherent in the vigorous response is a more long-term trend tied to China’s balanced growth as a nation. China’s future path lies in the development of its citizens as consumers and contributors to the economy, and if China’s population can be given incentives to play a greater role in China’s economy, the financial crisis may just go from being a temporary jolt to a stepping stone. Barry van Wyk, Consultant barryvanwyk@thebeijingaxis.com

Government Consumption Expenditures Household Consumption Expenditures Gross Capital Formation Net Exports of Goods and Services

Plans for the two-year stimulus spending requires the central government to contribute RMB 1.2 trillion, divided into RMB 104 billion in Q4 2008, 488 billion in 2009, and the rest in 2010. The first two installments, implemented this year, makes up about 1.8% of China’s expected GDP for 2009, and combined with RMB 300 billion which the Ministry of Finance has earmarked for tax and fee cuts (0.9% of GDP) and the additional 0.3% of GDP for increased social spending, the stimulus is expected to amount to about 3% of China’s GDP for 2009. Local governments will supplement this amount, and much of this financing will be undertaken by banks, who have been asked to issue long-term loans to local government entities. Side effects While the basic structure of the stimulus package can be divided into infrastructure projects and spending to improve people’s livelihoods, revitalisation plans have also been announced for ten manufacturing industries: textile;

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China’s Stimulus Package: How Green?
One of China’s greatest concerns is the rising environmental damage that the past 30 years of breakneck economic development has created. Will the country continue its efforts in the areas of efficiency and environmental regulation for sustainable development, or will it sacrifice these issues in order to avoid the rise of unemployment and lower growth rates during this crisis? By Lilian Luca.
“China is fully aware of the consequences on energy demand, energy imports, and security of supply of its impressive economic growth. Already China is using regulation to channel development into more energy-efficient forms. [...] not just in the automobile industry — by clearly stated national policy it applies to all areas of industrial activity.” — Amory Lovins, Chairman, Rocky Mountain Institute. it seems that China is well under way to exceed these targets—the energy intensity of GDP has fallen by 4.2% in 2008 after an earlier decline of 3.7% in 2007. China’s environmental protection agency has been given additional powers and the rank of a ministry in 2008, but on the other hand, the project of “Green GDP”, a statistic measure championed by the agency’s energetic and vocal Mr. Pan Yue, originally designed to align the interests of economic development and sustainability, was scrapped in March 2009. In the area of renewable and clean energy, China has been very supportive of wind and solar generation, and has for many years pursued hydro power. The country is a world leader in terms of the proportion of hydro power resources it utilises, and home to the International Centre for Small Hydro Power, a UN-sponsored organization. In addition, quite a few Chinese companies aggressively pursue energy-efficient equipment and technologies—for example, China is one of the largest markets for GE’s most sophisticated and expensive diesel locomotives, partly due to their fuel-efficiency. Crisis response and environmental concerns A major concern voiced in the recent few months worldwide and in China is the fear that the economic priorities of the present downturn—job creation, support to industry and boosts to consumption—will push energy and resource efficiency and environmental issues in general to the back burner. The Keynesian approach to an economic stimulus plan, adopted by quite a few governments around the world, including China, stresses the importance of infrastructure projects to stimulate investment. The cement and steel industries would be major beneficiaries of infrastructure stimulus plans, and these industries are not generally too environmentally-friendly. Investment plans may be selected for their ‘shovel-readiness’, rather
Comparative Energy Intensity of GDP, Selected Countries
BTU per USD of GDP, 2005 Russia China 35,766 India 24,799 Poland 18,425 S.Korea 14,539 Brazil 13,917 Mexico 10,809 US 9,113 Sw eden 8,662 Germany 7,396 UK 6,145 Japan 4,519 Source: HSBC 86,686

Recent environmental pressure build-up in China

“P

ollution” is often the number one problem cited by first-time visitors to China. The gray air of Beijing or Shanghai, or any other large Chinese city for that matter, takes a little getting used to. According to a 2007 World Bank report, 20 of the world’s top 30 most-polluted cities are Chinese. The energy intensity of the economy, measured in BTU per USD of GDP, is still about five times that of Germany and eight times that of Japan (2005 data). The numbers have improved somewhat for the past 3 years, but there is still significant room for efficiency.

Increasing health problems for the population and a growing burden for the nation’s healthcare system have not been the only problems associated with pollution and environmental degradation. China has become the world’s largest CO2 emitter in 2007, due to its heavy reliance on coal-generated power to fuel the economy. Environmental damage and resource overuse have also been associated with floods, insufficient freshwater access in some areas of China, an increase in the number of endangered species and a general perceived lack of quality scenic spots for tourism. Moreover, a recent phenomenon brings together accusations of a lack of environmental protection and regulations and anti-dumping investigations. For example, US steelmakers announced in March a large-scale investigation of China’s environmental policies and enforcement mechanisms as a way to prove unfair advantage for Chinese steelmakers and push the US Congress to pass legislation for punitive tariffs on Chinese steel products. Similar studies and lobbying efforts are also contemplated by US industry associations against Chinese rubber, glass and cement producers. To address the environmental pains of its growing economy, the Chinese government has in the past launched a number of initiatives, some more successful than others. For example, the country’s development plans foresee a 20% increase in energy efficiency from 2006 to 2010, and

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than economic and environmental efficiency. An additional concern not directly related to the stimulus package’s environmental impact has more to do with the price for oil and gas. China, among other countries, has supported the renewable energy industry for many reasons, the chief ones being the reduction of its dependence on imported oil. These projects were economically viable when energy prices were high, but it is uncertain whether the Chinese government will keep its commitment to the diversification of energy sources in an era of low oil prices. China’s stimulus plan: USD221 bn devoted to ‘green’ The government has detailed its economic stimulus plan in March, and now we can be fairly certain that many of the environmentalists’ concerns are indeed being addressed in the plan. As researchers from HSBC have pointed out in a recent report, China is devoting a larger amount than any other country to ‘green’ causes. The main uses of these funds are for railway transportation, upgrades to the electric grid and waste and water management. The railway investments are a big part of the plan— overall, China plans to spend over 5 trillion RMB (USD 730 bn) on constructing over 16,000 km of rail lines, mainly for passenger transportation, and on railway stock. Railway transportation emits less CO2 and is generally more efficient and environmentally friendly than truck and bus transportation that are so popular in China, so this part of the plan is expected to have a major positive environmental impact. In upgrading the electric grid, especially the transmission infrastructure, China is targeting efficiency (loss reduction) and flexibility in the utilisation of multiple, competing energy sources, including renewable, in an interconnected, smart system. Over RMB 1.1 trillion (USD 146 bn) has been earmarked by the stimulus plan to the electric grid upgrades. ‘Direct’ environmental projects, such as improving the waste treatment and water management infrastructure, as well as conservation and other environmental protection areas, are also part of the stimulus plan, and an Green Stimulus Spending, USD bn
China US South Korea EU Germany Japan France Canada Australia UK 0 Source: HSBC 20 40 60 80 100 120 140 160 180 200 220 240

amount of RMB 230 bn (USD 34 bn) has been devoted to such projects. In addition to the main stimulus plan, a separate plan supporting the car industry’s development of electric cars—including rebates and sales tax reduction—was announced in January 2009. Industry experts hope that this measure will help China leapfrog into the electric car leadership. Indeed, China is among the countries best positioned to benefit from a shift of auto transportation to plug-in or hybrid electric cars. The commutes tend to be shorter than in other countries, and most of them are city commutes (electric cars tend to be more efficient in a city, ‘stop-go’ environment). In addition, China does not have a major technological and investment stock ’legacy’ in traditional auto technologies—it can make the leap to electric easier than countries such as the US or Germany. There are also other ways in which China’s central government’s actions and plans are having, directly or indirectly, an overall positive environmental effect. A major restructuring, driven by M&A activity and the closing down of smaller, less efficient plants and mines, is expected in the metals & mining industry. A few deals in the steel sector have already been announced, including the one that created the largest listed Chinese steel company—a three-way merger of Tangshan, Handan and Chengde Xinxin. In the electricity generation sector, the National Energy Bureau announced at the end of March that outdated, polluting coal-fired generation plants with a total capacity of 200,000 kW will be closed down by the end of this year. The housing part of the stimulus plan, that which earmarks 20% of the stimulus package to affordable housing projects, while not directly a ‘green’ package, also has the potential for positive environmental impact. China has adopted its own ‘green’ building standards in 2007, and may apply these selectively to the affordable housing projects to achieve higher short– and long-term cost efficiency and resource utilisation efficiency for the new buildings. The so-called ‘circular economy’ law adopted in 2007 (it came into force at the beginning of 2009) has the potential to make a very significant impact, especially for new projects in metals and mining, petrochemical and construction industries. It includes stricter controls of emissions and waste, promotes recycling of water and energy efficiency, and forbids the use of oil-fired fuel generators and boilers in favour of natural gas and alternative fuels generators. Special economic incentives are reserved for the re-utilisation of mining and agricultural waste and byproducts. Implications for Chinese firms Companies in China stand to mostly benefit from the ‘green’ measures of the Chinese government in the stimulus package. Railway equipment companies, steelmakers, construction industry players—all will benefit from a surge in investments in railroads and railway

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World Green Stimulus Spending Timing, USD bn*
Low Carbon Energy Efficiency 143 Wate/Waste Management

integrate some of the more sophisticated components of the ‘smart grid’. Opportunities for foreign companies This leads us to another interesting issue—to what extent and how exactly can foreign companies benefit from the Chinese stimulus package? Even though the government has tried hard to avoid protectionist language in the stimulus package legislation, one may expect that on a project-by-project basis, both local authorities and the central government will prefer the funds to benefit domestic firms, and thus trickle further down the economic chain. This is especially true for traditional, established industries and projects where foreign companies do not have a significant advantage over domestic firms. We therefore are inclined to recommend our clients, in their quest to benefit from the resilience of the Chinese economy, to focus more on technologies, knowledge and products which China still lacks. A few examples of such technologies come from our inhouse research of the needs of Chinese mining firms. One area of interest for them is bio-leaching and other advanced methods of efficient extraction of minerals from poor ores and tailings. Deep-level underground mining technologies and modern use of IT in mining are also important areas for foreign suppliers to the mining industry to watch and pursue. Environmentally-friendly mining and metallurgical technologies, such as low-waste, advanced water treatment and circulation technologies are also interesting for Chinese metals and mining firms. Sure, Chinese companies will face more stringent environmental controls and will feel compelled to utilise environmentally-friendly technologies and methods in their work. But some will be more readily acceptable than others—especially the technologies that combine environmental damage limitation and cost reduction.

88

40 12 21 22 14

48 15 4

10

4

2009
Source: HSBC.

2010

2011

2012

*For countries that have announced plans by 04/09.

stock. As noted by the Economist publication (April 16, 2009), railway investment has already tripled in China on a year-on-year basis. In a similar fashion, construction and steel industry will benefit from the increased government spending on affordable housing. The Chinese government’s push for consolidation, coupled with more stringent environmental and labour compliance supervision in the heavy industries (such as steelmaking and mining), will probably damage the interests of the shareholders in the smallest, least efficient (and most polluting) players. But it will no doubt benefit the modern, large-scale players, many of which are state-owned— through increased market share, a more level playing field for all companies and less pressure from cut-throat cost competition. Further cost reductions from economies of scale and quality improvement as a result of industry consolidation and increased investment levels should follow suit. In addition, the measures may prove extremely beneficial to these industries in the long run, by bringing them closer to international standards in terms of environmental and labour compliance, which in turn may lift some worldwide barriers to Chinese exports. This should raise the image of Chinese producers abroad, and lower the instances of anti-dumping measures often initiated in other countries on the grounds of unfair advantage that Chinese companies have due to their minimal compliance costs, when compared to their Western counterparts. The upgrade of the national electric grid, even though it is another substantial part of the stimulus package, is not strictly a new idea. The Chinese government has in the past few years pushed hard for new ’smart grid’ technologies that offer better monitoring of user activity and pricing / charging, minimising the losses of electricity in the system and allowing for better load balancing. With the stimulus now in place, the innovation and investments in these areas only stand to accelerate on the same trajectory. We expect this part of the stimulus to benefit domestic firms to a large extent, but at least some of the benefits will accrue to foreign firms. Areas to watch are the ones in which Chinese firms do not yet possess the technologies and knowledge to produce, and especially to

Lilian Luca, Director: Russia/CIS & Group Corporate Office luca@thebeijingaxis.com

12

China’s Africa Engagement: New Issues, Salient Trends
There are a number of African elements that are critically important to China’s global strategy: The African continent’s geopolitical importance, big untapped market, and rich natural resources. As more Chinese companies feel the need to enter new markets and gain more resources, Africa will see increased Chinese business and investment activity. By Edward Wang.
frica has presented an untapped source of natural resources and a big potential market for Chinese investors with different mindsets and ways of doing business compared to their western counterparts. China’s growing demand for aluminium, copper, nickel, iron ore and oil has compelled the Chinese government to establish mining interests in a range of African countries. China Inc. has invested billions in Africa; it is harvesting, yet it is also feeling backlash from some host governments and criticism from Western countries. Trade between China and Africa reached a record USD 106.84 billion in 2008, up 45.1% yo-y. The number of African countries with which China had more than USD 1 billion in trade increased to 20 in 2008 from 14 in 2007. China’s emerging political and economic power in the world is set to lead to more Chinese political influence and investment activities in Africa, which is changing and reshaping the business landscape of the continent.

A

For almost half a century before the 1990’s, however, China’s relations with Africa were of a more political rather than economic nature. Before 1978 when China adopted an opening-up policy, as part of its Third World strategy, China had delivered many infrastructure projects in support of African countries’ social and economic development. The Tanzania-Zambia Railway is a famous part of the legacy of China’s tangible assistance during this period. Medical teams were also sent to many African countries by China to treat African people with various illnesses, which has greatly helped relations between China and Africa at grass-root levels. For almost two decades after 1978, China’s relations with Africa entered into a kind of dormant phase. This is mainly because China had to deal with many new and difficult challenges derived from the strategic and fundamental transformation of its economic system and development mode. As China came to be more economically developed in the late 1990’s, the increasing demand for resources to sustain the high-speed economic growth required it to acquire oil, gas and minerals outside China. As China’s good relations with Africa had previously helped China with its corporate investments on the continent, the African continent naturally had much attraction for China. There are a few African elements that are critically important to China when it comes to China’s global strategy: Africa’s geopolitical importance, its big untapped market, and its rich natural resources. China knows Africa is distinctively different from the West in many ways: views on domestic issues, goals of economic development, values and cultural norms. From the perspective of its global strat-

Historical antecedents China sees its relations with Africa as firmly embedded in history. Ever since the 1950’s, China has viewed Africa as a potential strategically important partner on the world political arena and has put a great deal of effort into developing stronger China-Africa relations in order to play a significant role in gaining geopolitical weight for the Third World, of which China saw itself as the leader at that time. China’s development of relations with Africa can be classified into three phases: ? ? ? The Political Phase (1950’s to late 1970’s) The Dormant Phase (late 1970’s to late 1990’s) The Commercial Phase (late 1990’s up to now)

China has gone through three Phases in its Engagement with Africa Political Phase Dormant Phase Commercial Phase

? ?

Relations primarily of a political nature Economic aid for infrastructure and medical teams Effort to gain support for the Third World

?

China’s priority shifted towards establishing a more market-based economic model while integrating itself with the world’s leading economic powers Less effort towards gaining political influence

?

Followed the rise of China as an economic power with surging demand for raw materials FOCAC 2006 drew Chinese businesses’ attention to Africa Increasing Chinese investment in more sectors

?

?

?

?
Source: TBA Analysis

13
Number and Size Distribution of Chinese-Financed Infrastructure Projects in Sub-Saharan Africa, 2001-2007 Estimated Number of New Projects
50 40 30 Chinese Sources Total Press Reports

Project Size Distribution (USD mn)
40

30

20
20 10 0 2001 2002 2003 2004 2005 2006 2007

10

0 <50 50-100 100-250 250-500 5001,000 1,000+

Source: World Bank–PPIAF Chinese Projects Database

Source: World Bank–PPIAF Chinese Projects Database

egy and domestic economic development, China regards it as in its strategic interests to deal with Africa in a fashion different from the West. Though China’s strategy of engagement with Africa is reviewed, designed and implemented from a wider angle than economic or commercial considerations, China tries to separate political issues from commercial issues. Politically and diplomatically, China has dealt with sensitive issues of African countries in a manner which is considered by many African countries as non-interference in their internal affairs, though the West has quite a different view on China’s ways. Yet China’s diplomacy has rewarded it with more of Africa’s trust and cooperativeness. China also took actions to counter the West’s criticism that China’s goal is only to grab African resources. In February this year, President Hu Jintao visited four African countries, and it is clear that one important goal of this trip was to show the world that China's commitment to the continent reaches beyond business and resources, as the four African countries (Mali, Senegal, Tanzania and Mauritius) he visited are not renowned for possessing natural resources. China’s different political attitudes and measures, combined with a long period of Chinese economic aid to Africa, have helped China develop a close relationship with many African countries, which has created favourable conditions for Chinese investment in Africa. Chinese investment in Africa grew very fast in the last few years. OFDI flow into the continent stood at only USD 74.8 million in 2003, yet this had increased to USD 1574.3 million by 2007. From oil contracts in Sudan to a substantive stake in a leading South African bank, China’s investment activities are sprawling across the African continent. At the high official level, the Chinese government already realized the strategic economic implication of China-Africa relations right after China’s opening-up policy was adopted in late 1970’s. Back in 1982, the then Chinese prime minister visited 11 African countries with 4 principles for the development of economic and technological cooperation with Africa. At the business level, however, only after the late

1990’s, when China’s economy was more developed and its growing economy required more markets and resources, did Chinese companies start to look at overseas investment. Africa then became an attractive region for market development and resources investment for some Chinese companies. Especially after the staging of the Forum for China-Africa Cooperation (FOCAC) in Beijing in 2006, more of Chinese companies’ attention was drawn to the African continent and more Chinese companies started to consider and plan for doing business in Africa. Since then it can be seen that Chinese investment in Africa has been growing more rapidly in various sectors and in value. Salient features From our observations and engagement with Chinese companies, we can observe some features of Chinese investment in Africa. Firstly, Chinese investment is heavily slanted towards resources, i.e. China’s investments in Nigeria and Sudan are in the oil industry; China’s investments in the DRC and Zambia are in the copper mining industry. However, a diversified investment trend is also clearly visible in the last few years, i.e. ICBC acquired 20% of Standard Bank for USD 5.6 billion in October 2007; in 2004, a Wenzhou shoe company set up a shoe-making plant with annual production of 6 million pairs of shoes in Nigeria, and its total investment was more than USD13 million by 2007; a large Chinese private cement producer invested in cement production in Madagascar; a Zhejiang company invested USD 51.8 million in setting up the China-Botswana Economic & Trade Cooperation Zone which includes a manufacturing base, a logistics centre and a free trade zone. Over the last number of years, Chinese investors have learnt many lessons from their engagements in Africa. Many Chinese companies have now realized that to research and do due diligence on various aspects of investment opportunities and targets are critically important. They are now more accustomed to using advisory services before and during the process. More than 80% of Chinese investors in Africa are private companies. One model or pattern of the investments of these private companies is that these companies normally start their engagement in

14
Africa by trading. For example, a Shanghai-based private company started its mining business in Africa by collecting and trading copper ores in the DRC and Zambia. Now this company has set up four other companies in the DRC and they are all engaged in mining exploration. It is estimated that the company has invested about USD 100 million in the DRC. The ‘trading’ of infrastructure projects for raw material contracts is one strategy China has used to establish itself on the continent. For example, in September 2007, China signed a deal to lend the DRC a total of USD 5 billion to develop infrastructure and mining. In exchange, China will get rights to the DRC’s extensive natural resources, including timber, cobalt and copper. A similar earlier soft loan deal with Angola has resulted in that country now being the leading supplier of oil to China. Supporting investment in Africa The Chinese government and government-owned companies have made much effort in the following five aspects to promote and support China’s investment in Africa: ? ? ? ? ? High-level visits by Chinese top officials Policies and measures preferential to Africa Economic aid to Africa Financial support Cultural influence Financially, China has cancelled the debts of 33 African countries as a gesture of goodwill. China has also cut import tariffs on hundreds of items from 32 least-developed African countries to promote business development between China and Africa. To support Chinese investors, China set up China-Africa Development Fund to provide a source of finance. Going global is a relatively new task for Chinese companies. Where more international standards and processes are required, Chinese companies will have more problems and issues in terms of communication with foreign partners, sufficient managers with good skills, business system standards etc. In addition to the above-mentioned issues and problems, Chinese companies have encountered labour issues in Africa in particular. Chinese companies prefer importing their own workforce, especially on big construction projects. Their unwillingness to employ local workers has created discontent in some African countries. In Angola in June last year, the Angolan government cancelled a deal with Sinopec to build an oil refinery in Lobito, a USD 3 billion project, because of the Chinese company’s tendency to import labour rather than use locals. In some African countries where locals are employed, Chinese companies have found it difficult to handle labour issues. Looking ahead China and Africa will continue to work together to cope with the economic difficulties brought about by the unfolding global downturn, especially in the following six key areas: ? Strengthen solidarity and mutual assistance to jointly meet the challenge of the global financial crisis ? Enhance mutual trust and cement the political foundation for traditional friendship ? Raise the level of practical economic cooperation and trade on the basis of reciprocity and mutual benefit ? Expand people-to-people exchanges and deepen cultural cooperation ? Work closely together and strengthen coordination in international affairs ? Enhance coordination and jointly promote the further development of the Forum on China-Africa Cooperation With the Chinese government working to improve strategic cooperation between China and Africa in the areas mentioned above, the business space between China and Africa will be further broadened and deepened. As more Chinese companies feel pressured for new markets and resources, Africa will see more Chinese business and investment activities, and in more sectors.

At the highest level, China has been actively engaging Africa, which has helped create a more favourable setting for Chinese investors. China’s president, prime minister and foreign minister have all visited the continent on a regular basis. From early 2004 to most recently, President Hu Jintao has made four visits to Africa. The four visits have taken him to 18 African countries, including Egypt, Gabon, Algeria, Morocco, Nigeria, Kenya, Cameroon, Liberia, Sudan, Zambia, Namibia, South Africa, Mozambique, Seychelles, Mali, Senegal, Tanzania, and Mauritius. On his recent visit to four African countries, President Hu repeatedly pledged that China will continue to increase its aid to Africa, reduce tariffs and expand trade with and investment in African countries, within China's capabilities. China has adopted a range of policies with the intention of encouraging investment in African countries. In terms of investment, the Chinese government not only encourages and supports Chinese enterprises' investment and business in Africa, but also provides preferential loans and buyer credits to this end. The Chinese government is also continuing to negotiate and implement the Agreement on Bilateral Facilitation and Protection of Investment and the Agreement on Avoidance of Double Taxation with African Countries. In China’s African Policy, published in January 2006, China promised that, in light of its own financial capacity and economic situation, it will do its best to provide and gradually increase assistance to African nations with no political strings attached. Though not on the same scale as three decades ago, China is still continuing its economic aid to Africa as part of its strategy.

Edward Wang, Director: China Capital Advisors edwardwang@thebeijingaxis.com

15

Macroeconomic Monitor: China’s Tentative Consolidation
While the world remains firmly in recession, Q1 2009 has delivered tentative signs of a recovery in China. We expect China’s economy to recover gradually in 2009, and then more rapidly in 2010 as demand from overseas markets eventually rebound. Over the longer term, however, the need to address structural issues in China’s economy remains. By Barry van Wyk and Javier Cu?at.

W

e were somewhat surprised by the Q1 y-o-y GDP growth rate of 6.1%. Looking at the macroeconomic picture in the developed world and the link to Chinese exports, we had expected a more dramatic economic slowdown in China after the already slower y-o-y GDP growth of 9.0% in Q3 and 6.8% in Q4 of 2008. As such, the stronger number suggests that China’s slowdown has been more modest and that a recovery is perhaps underway. We therefore revise our 2009 GDP forecast up by around 1% to 6.8%. This still represents a slowdown against full year 2008 GDP growth of 9.0% and 13% in 2007 (revised up from 11.9%) - and well below the average annual rate of over 11% sustained for the past 4 years - but it is nonetheless a relatively strong performance in the context of recent global events. The next few quarters will be critical to gauge China’s ability to maintain strong growth, but for now there is relief that the nation can potentially at least maintain a 6-8% range over 2009-10. China’s Q1 GDP growth rate of 6.1% could be the lowest since the government began publishing quarterly figures in 1992, yet this stands in stark contrast to the negative 6.1% annual GDP growth recorded in the US for Q1. Despite the fact that

China’s Quarterly GDP Growth, % y-o-y, 2007–2010F
14 12 10 8 6 4 2 0 Q1 2007 Q2 Q3 Q4 Q1 2008 Q2 Q3 Q4 Q1 2009 Q2F Q3F Q4F
Q3 and Q4 2008 GDP growth of 9.0% and 6.8% showed the initial slowdown Q1 2009 surprised with a firmer than expected 6.1% Q3 and Q4 of 2009 will likely see a mild recovery from Q1 and Q2 levels

Sources: China Monthly Economic Indicators; TBA Analysis

weak overseas demand will limit China’s export performance throughout 2009, China’s investment-led economy, self-dependence on financing and a stronger state-owned banking system provides the fundamentals for a more substantial rebound of China’s economy in Q4 2009. China’s immediate fiscal policy response to the worldwide recession— the implementation of a RMB 4 trillion (USD 586 billion) stimulus package as well as the RMB 4.85 trillion (USD 670 billion) of new loans issued by Chinese banks in the first three months of the year—will gradually boost domestic demand and domestic consumption, providing a renewed impetus for advancing

reform and rebalancing the structural composition of China’s economic growth. Yet over the short term, the heavy reliance on exports for growth will keep China from returning to the 10% plus growth band—at least until recovery has fully set in in the developed world. But 10% plus growth was never healthy nor sustainable. Hence, we expect China’s economy to begin a more sustained recovery in Q3-Q4 2009, albeit at lower levels, as the impact of the aggressive government intervention intensifies in the real economy. As reflected in the table on page 18, in response to positive signs emanating from China’s Q1 data, several

China Annual GDP Growth, % y-o-y, 1978–2010F
16 14 12 10 8 6 4 2 0 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
Sources: World Bank; China Statistical Abstract 2006; OECD Report; TBA Analysis 7-10% GDP growth ‘band’ Past periods of overheating 7-8% GDP growth ‘band’ Overheating concerns Temporary slowdown below 7-8% ’minimum range’ in 2009

16
Monthly Imports, % y-o-y, USD bn
140 120 100 80 60 40 20 Imports (lhs) Grow th Rate (rhs) 40% 30% 20% 10% 0% -10% -20% -30%

Monthly Exports, % y-o-y, USD bn
140 120 100 80 60 40 20 Exports (lhs) Grow th Rate (rhs) 60% 50% 40% 30% 20% 10% 0% -10% -20%

0 -40% 06-Jan 06-Jul 07-Jan 07-Jul 08-Jan 08-Jul 09-Jan
Source: China Monthly Economic Indicators

-30% 0 06-Jan 06-Jul 07-Jan 07-Jul 08-Jan 08-Jul 09-Jan
Source: China Monthly Economic Indicators

institutions have recently revised upwards their forecasts for full-year growth in 2009. At the present juncture, however, China’s recovery still remains at a preliminary stage. The government stimulus plan is a public spending mechanism to engineer growth over the short term, yet over the medium to long term it remains to be seen not only how successful China will be to engineer growth by raising consumption levels in the domestic market, but also how fast Chinese exports will recover. Positive signals By the end of Q1 2009, a few clear positive signals were apparent in China’s economic statistics:

?

?

?

?

?

China’s leaders have hailed the slightly improved trade figures for March. The decline in China’s exports decelerated in this month, falling 17% y-o-y (compared to the -25.7% in February, see chart above) Industrial production growth rose to 8.3% in March and 5.1% for Q1 y-o-y, after maintaining an average of 3.8% during the first

?

?

two months of the year The Purchasing Managers Index (PMI) of China’s manufacturing sector rose to 52.4 in March, rebounding above 50 for the first time since July last year As a more direct signal that China’s USD 586 bn stimulus package is taking effect, fixed investment soared by 30% in March. In conjunction with the government’s stimulus plan, fixed-asset investment is forecast to maintain rapid growth in Q2 of around 27% y-o-y Tentative signs of improvement have also been apparent in the real-estate market in the form of a rebound in property transaction volumes and the first rise in month-on-month prices since July 2008. Prices in March still fell 1.3% y-o-y, however China’s oil demand in March declined by 0.3% y-o-y, but stood at its highest level since September 2008 Power generation fell by 0.7% in March, yet declined at a slower rate compared to February. Nevertheless, China’s Electricity
Retail Sales

Council announced that China’s industrial use of electricity actually fell by 8.38% in the first quarter. In essence, while the export outlook is still uncertain, China’s economy seems to be showing hints of stabilising and/or approaching the end of the worst part of the financial and economic crisis. Warning signs Government-driven economic intervention is proving to be effective in the short term, but the effectiveness of this is still uncertain in the medium to long term if market conditions and financial flows do not improve in the economies of China’s trading partners. Weaker labour demand is generating notable pressure for job creation with the added risks of social instability. China retains a serious unemployment problem, while given the capital-intensity of the stimulus package and the weaknesses of labourintensive SMEs in the export sector, the outlook for China’s labour mar-

Monthly Retail Sales, % y-o-y, USD bn
160 140 120 100 80 60 40 20 0 07-Jan
Source: National Statistics Database

Grow th Rate 26% 22% 18% 14% 10%

07-Jun

07-Nov

08-Apr

08-Sep

9-Feb

17
kets in 2009 remains weak. Lower external demand is also generating the problem of overcapacity, which at the same time may intensify unemployment and put downward pressure on prices. While growth in domestic consumption in China has not slowed down as yet, the ability of China to increase domestic demand to compensate for slowing net exports remains limited. Government spending and investment can in the short term fill up some of the slack, but over time China faces a serious structural challenge to fundamentally increase domestic consumption. The lending surge may currently also be the main driver of positive signs in the property sector. The eventual need to contain credit growth renders this a temporary respite, and once that reality hits home, continued property price decreases could precipitate a further downturn in real-estate investment. This would also harm local governments, who will be expected to fund much of the government’s stimulus while relying on land sales and taxes for about half of their fiscal income. On the other hand, the surge in lending may be able to bolster domestic demand until global demand picks up again. China’s drive to attain 8% GDP growth in 2009-10 will be a contest between falling private investment and shrinking exports on one hand, and rising public investment on the other, with private consumption forming an additional, critical variable. Growth of retail sales in China has held up well in Q1 2009, with record vehicle sales of 1.11 million units in March (during which brands such as Audi and GM registered their best sales ever in China). Consumption growth seems to have been especially fast in China’s lessprosperous central and western regions. Thanks in part to government subsidies in rural areas, companies like GM and Nissan have spoken of an auto boom in rural China. Structural concerns Since the global recession registered its most severe impact during Q4 2008, the Chinese government has undertaken a range of aggressive monetary and fiscal policy actions in order to re-engineer economic growth. As a result of monetary and credit easing, China has experienced a credit boom in Q1, while USD 586 bn of government spending, tax cuts, provision of a social safety net and subsidies to poor and unemployed is being implemented to improve people’s livelihoods and take up some of the slack of sagging demand from overseas. Ultimately, however, China’s recovery remains in large part based on the state of the global economy. It is likely, however, that growth in the US, EU and Japan will remain negative for the duration of 2009, while 2010 could see no more than subdued growth. China’s stimulus spending may be effective in the short term, but the rebalancing of China’s economy away from investment- and export-led growth and more towards private consumption as a growth driver will require determined action to address income inequality and to provide a better safety net and higher incomes.

The China Compass—May 2009
A country in figures
By THE BEIJING AXIS China Strategy Group

Contents
History Country Profile China Economic Indicators International Comparison Conclusion About THE BEIJING AXIS

The China Compass—May 2009 is a publication by THE BEIJING AXIS China Strategy Group. It is a navigational instrument for determining China’s direction relative to the world’s economic poles. Combining basic country data with more detailed analysis of a wide range of macroeconomic and social data, The China Compass—May 2009 presents a comprehensive picture of the ever-changing and evolving Chinese landscape. The China Compass, published in presentation form, is full of up to date statistics, topical themes and insights. It is easy to read and presents a rich, useful desk-reference for executives with a China agenda.
The China Compass can be downloaded from the Knowledge section of THE BEIJING AXIS website at www.thebeijingaxis.com Alternatively, to request a copy of The China Compass, please send an email to barryvanwyk@thebeijingaxis.com

18
Selected Quarterly TBA Forecasts for China (% y-o-y)
2007 Q1 Real GDP Retail Sales Capital Formation Industrial Output Exports Imports CPI USD/RMB 11.7 19.2 15.1 27.9 18.2 102.7 7.76 Q2 12.2 20.9 18.3 27.4 18.2 103.6 7.68 Q3 12.2 23.1 18.7 26.2 20.7 106.1 7.56 Q4 11.9 26.0 24.8 17.5 22.2 25.4 106.3 7.43 Q1 10.6 n/a 16.6 21.3 28.7 108.0 7.16 Q2 10.1 24.0 15.9 22.3 32.4 107.8 6.96 2008 Q3 9.0 22.2 13.0 23.1 25.7 105.3 6.84 Q4 6.8 19.8 25.5 6.8 14.6 -10.1 103.2 6.83 Q1 6.1 17.0 6.0 -15.0 -18.0 102.0 6.8 2009 Q2F 6.5 16.0 8.2 -4.0 -8.0 101.0 6.8 Q3F 7.0 15.5 9.5 1.0 2.0 100 6.7 Q4F 7.5 18.0 29.0 10.5 5.0 3 100 6.65

China Consensus: China GDP Growth Forecasts for 2009 by Selected Analysts (% y-o-y)
Highest to Lowest Latest forecast (April 2009) Previous forecast for 2009 (by December 2008, January 2009) 9.3 (started to signal downside risk) 6.0 8 8 8 8.2 7.0 5.0 5.6 6-7 8.3 7.76 7.5 (Reference to sub-6% growth) 7.5 6.0 6.0 6.9 0-4 (saw 30% risk of negative growth) Previous forecast for 2009 (by beginning of Q4-2008)

CASS Goldman Sachs Wing Hang Bank Merrill Lynch HSBC Asian Development Bank Deutsche Bank RBS THE BEIJING AXIS BMI UOB EMIS 21 Source Consensus (30 Dec 2008) World Bank UBS AT Kearney EIU Global Insight Asianomics

8.3 8.3 8 8 7.8 7.0 7.0 7.0 6.8 6-7 6.5 n/a

9.7 n/a n/a 8.6 n/a 9.5 7.6 8.0 8.5 8.8 n/a >9

6.5 6.5 6.0 6 5.9 n/a

9.2 9.5 n/a 7.5 n/a n/a

Sources: Press; Various; TBA

19

Financial Markets
Tracking the dynamics of China’s Shanghai and Shenzhen stock markets and Benchmark Interest Rates, Financial Markets also illustrates recent trends and transformations in China’s exchange rate regime.
Shanghai & Shenzhen Composite Index, Monthly
Index: December 2002 = 100% 500 Shanghai 450 400 350 300 250 200 150 100 50 0 2005 2004 2003

RMB Exchange Rates, 12 Month Trailing, Indexed
Index: April 30 2008 = 100% USD ZAR 110

AUD

RUB

Shenzhen

100 90 80 70 60 50
2006 2007 2008 Q1-09 30 April 08
Source: Oanda Corporation

30 April 09

Sources: Shanghai Stock Exchange; Shenzhen Stock Exchange

Benchmark Interest Rates, as on 30 April 2009
15% 10.25% 10% 4.75% 5.31% 5% 0.10% 0.25% 0.50% 0% US Japan UK EU China India Australia South Africa Brazil 1.25% 3% 8.50%

10 Largest Chinese Listed Companies, USD bn
PetroChina ICBC Sinopec Bank of China China Life Shenhua Coal Ping An Insurance China Merchant Bank Bank of Comm. CITIC Securities 282.85

154.21 103.42 92.61 74.46 64.39 28.67 28.00 26.40 24.60 50 100 150 200 250

0

Source: Central banks

Source: Shanghai Stock Exchange, as on May 5 2009

Dow Jones Global Titans, YTD % change as on 1 May 2009 % y-o-y
38.3 34.1 17.0 13.2 6.7 4.9 3.5 3.1 -0.3 -1.0 -2.4 -4.1 -5.9 -6.2 -6.4 -7.3 -8.3
Sources: Dow Jones Indexes; Google Finance

-34.4 -57.9 -42.1 -37.9 -29.1 -58.4 -37.7 -29.9

The Dow Jones Country Titans Indexes span major markets from across the globe

-46.5 -53.0 -42.4 -37.6 -42.4 -48.7 -37.1 -44.8 -44.3

China Russia Sw eden Turkey South Africa Egypt HK Australia UK Netherlands Japan Sw itzerland Germany Italy US France Spain

20

China Facts & Figures
China Facts & Figures provides a cross-section of data illustrating growth, transformations and trends in China’s commerce and industry.

China Selected Economic Indicators

General Statistics Population (mn) Nominal GDP ($bn) GDP per capita ($) Real GDP growth (%) Prices, interest rates and exchange rates CPI inflation (%, December over December) CPI inflation (% change in average index for the year) Exchange rate (RMB per USD, average) Fiscal data General government fiscal balance (% of GDP) General government expenditure (% of GDP) General Government revenue (% of GDP) Money supply and credit Broad money supply (M2,% of GDP) Broad money supply (M2,% year-on-year change) Balance of payments Exports (total value, % of GDP) Imports (total value, % 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) FDI ($bn) External debt outstanding ($bn) Central bank gross FX reserves ($bn)
Sources: China Monthly Indicators; TBA Analysis

2004 1,300 1,932 1,486 10.1 2.4 3.9 8.28 -1.3 17.8 16.5 158.9 14.6 34 31.4 35.2 35.1 68.7 3.6 60.6 247.6 610

2005 1,308 2,244 1,716 10.4 1.6 1.8 8.19 -1.2 18.5 17.3 160.7 17.6 37.3 31.7 27.6 17.4 160.8 7.2 72.4 283.8 819

2006 1,314 2,645 2,012 11.1 2.8 1.5 7.97 -0.8 19.2 18.3 163.9 16.9 40.1 32.2 26.9 19.8 249.9 9.4 72.7 325 1,066

2007 1,321 3,242 2,454 11.4 6.5 4.8 7.61 -0.6 19.9 19.9 163.6 16.7 41 32.2 25.2 22.2 372 11 83.5 373.6 1,528

2008 1,330 4,445 3,342 9.0 1.2 5.9 6.9 -0.04 20.8 20.4 158.0 17.8 32.1 25.5 17.3 19.4 440 10.1 92.3 420 1,980

World GDP growth, % y-o-y, 1997-2010
China

14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5

Emerging and Developing Economies World Advanced Economies

98

99

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Sources: IMF; TBA Analysis

21
2008 Fixed Asset Investment in Urban Areas by Province

Provinces in red made up 70% of Total Fixed Asset Investment in Urban Areas in 2008
Heilongjiang

Xinjiang Gansu Inner Mongolia

Beijing Liaoning

Jilin

Hebei Qinghai Ningxia Shanxi Tibet Sichuan Hubei Chongqing Hunan Anhui Shaanxi Henan

Tianjin

Shandong

Jiangsu Shanghai

Zhejiang Guizhou Jiangxi Fujian Guangxi Taiwan Guangdong

Regional Distribution, % of total Fixed Asset Projects Investment under Completed Construction Eastern Area 50% 38% Central Area 27% 33% Western Area 23% 29%
Fixed Asset % of Projects under % of Investment Regional construction Completed total GDP (units) (USD bn) Anhui Beijing Chongqing Fujian Gansu Guangdong Guangxi Guizhou Hainan Hebei Heilongjiang Henan Hubei Hunan In. Mongolia 87.8 52.1 54.9 67.8 22.1 127.2 49.1 23.7 9.9 110.4 49.8 128.6 75.9 71.3 78.7 69% 34% 75% 44% 48% 25% 48% 49% 47% 47% 42% 49% 47% 44% 70% 20,937 2,930 7,743 11,627 7,822 17,346 17,185 9,100 1,235 21,000 7,715 29,559 14,316 18,611 9,612 6% 1% 2% 3% 2% 5% 5% 3% 0% 6% 2% 8% 4% 5% 3%

Yunnan

Hainan

Comparable Gross Fixed Capital Investment Indonesia Southern Africa Southern Africa Austria Egypt Netherlands Southern Africa Israel Slovenia Northern Africa Southern Africa Netherlands Greece Greece Belgium Jiangsu Jiangxi Jilin Liaoning Ningxia Qinghai Shaanxi Shandong Shanghai Shanxi Sichuan Tianjin Tibet Xinjiang Yunnan Zhejiang

Fixed Asset % of Projects under Comparable Investment Regional construction % of total Gross Fixed Completed Capital Investment GDP (units) (USD bn) 168.1 63.8 69.3 131.3 10.9 7.6 185.2 64.6 63.2 47.2 93.7 46.9 3.9 29.2 45.9 96.4 39% 68% 75% 68% 69% 55% 41% 33% 63% 47% 52% 51% 69% 48% 56% 31% 15,843 10,308 9,181 14,733 1,501 2,522 27,614 5,237 6,778 6,778 17,267 3,204 2,551 6,068 13,360 15,161 4% 3% 3% 4% 0% 1% 8% 1% 2% 2% 5% 1% 1% 2% 4% 4% Mexico Poland Sweden Netherlands Belarus Luxembourg Central America Norway Poland Poland Northern Africa Southern Africa Uruguay Algeria Southern Africa Northern Africa

Sources: China Monthly Indicators; UNCTAD

22

China Sourcing Strategy
Stimulated by a series of measures, China’s economy is exhibiting some positive signs such as a growing PMI and indications of stabilising exports. But how has the China sourcing risk profile changed for international procurement managers—and what can they do to formulate appropriate China Sourcing Strategies in 2009? By THE BEIJING AXIS China Sourcing Unit team.
Major Recent Developments ? Total trade (imports and exports) in March totalled USD 162.02 billion, down 20.9% y-o-y. Exports totalled USD 90.29 billion and imports USD 71.73 billion, decreasing 17.1% and 25.1% y-o-y, respectively ? Total trade in March grew by 29.7% over the previous month, with exports up 39.1% and imports up 19.5% ? China’s manufacturing Purchasing Manager Index (PMI) reached 52.4% in March 2009, the first time during the past 6 months that the index exceeded 50%. The index has, however, indicated continuous growth since December ? In April 2009 the PMI rose again, to 53.5%, indicating further consolidation in economic conditions ? China announced industry-specific stimulus plans during January and February 2009: Auto, steel, shipbuilding, textile, machinery-manufacturing, electronics and information, light industry, petrochemicals, nonferrous metals and logistics ? China adjusted the export tax rebate rates for 3,802 items from 1 April 2009. This is the sixth increase since last August when the government decided to raise export tax refunds to stimulate exports Share of Net Exports in GDP Growth, y-o-y
60% 40% 20% 0% -20% -40% -60% -80% 2008E 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Sources: China Statistical Yearbook 2008; Chinese Academy of Social Sciences

China Monthly Exports, USD bn & Growth Rate, y-o-y
150 120 90 60 30 0 Export Grow th Rate (y-o-y) 40% 30% 20% 10% 0% -10% -20% -30% Jan-08 Mar-08 May-08 Jul-08 Sep-08Nov-08 Jan-09 Mar-09

Source: China Customs

In the Midst of a Crisis: Enhancing Supply Chain Risk Management in China with Good Access to Information Globalization has accelerated the growth of organizations, but also somehow shaped the supply chain by increasing global inter-dependencies and the need for more overall stability. The current economic crisis is perfect proof of this—as trade slumped and companies failed, the supply chains of many organisations have been inhibited or put under severe stress. Therefore, it is more crucial than ever to manage supply chain risk well. China is no different. There is an elevated need to effectively manage the internal organization, customers, suppliers, the business environment and the web of links in-between all of these. But implementation of this can potentially be much more difficult in China due to the obstacles of language, business culture, differences in the economic system, etc. Presently, potentially pertinent risks in the China supply may include the following: ? Do your suppliers have adequate access to finance/credit? ? What is the typical ‘demographic’ of your Chinese suppliers? Many small and medium sized exporters will not survive or will suffer severe dislocation so how to mine information about supplier health? ? How does the regulatory framework look for your categories? Are there prospects for changes in taxes/subsidies? ? What about foreign exchange rate risk now that the RMB appreciation has halted? The best way to manage risk is to preempt and anticipate. From a macro perspective the entire landscape in China has changed: market growth, industry dynamics, profitability, confidence, etc. To manage in this environment requires extensive knowledge, timely market information and accurate analysis of how supply chains are affected. But this is a challenge for international firms with timezone, language and cultural obstacles to overcome. For example, China announced a series of stimulus plans for 10 industries, which included a host of export encouragement regulations and new policy trends. Without indepth analysis of the right information the risk profile goes up exponentially. Similarly, from the micro side, an organisation must review its cooperation with its Chinese suppliers and service providers as well as audit their current situations via interviews, visits, surveys, and 3rd party due diligence. In short, not to be closely tapped into the state and condition of your suppliers in the current environment simply injects unacceptable risk.

23
Regulation Watch China raised export tax rebates twice during Jan - Apr 2009: 1st time (effective 1 February 2009): China increased the tax rebate rate for textiles and garments from 14% to 15% from 1 February 2009, which was announced along with the national plan to invigorate China's textile industry, as announced by China’s State Council. The textile sector is China’s traditional pillar industry. This is the 3rd time that the Chinese government adjusted tax rebates for textiles since August 2008. The previous increase in November took the rate from 13% to 14%. 2nd time (effective 1 April 2009): China lifted the export rebate on 3,802 items from 1 April 2009 in order to boost falling exports. The adjustment covers the export rebate for textiles and garments, iron and steel, non-ferrous metals as well as petrochemical items. New export tax rebates for CRT colour TVs are 17%, 16% for textiles and garments, and 13% for non-ferrous metals and furniture. It was the sixth increase since last August when the government decided to raise refunds in an attempt to deal with the problem of slumping exports amid the global financial crisis. WHY Source in China: Export Credit During China’s development over the past 30 years, export credit became an important financial facility for the Chinese government to encourage exports and the Chinese ‘Going Global’ strategy. The two main export credit players in China are China Export & Credit Insurance Corporation (Sinosure) and The Export-Import Bank of China (China Exim Bank). Sinosure is the only officially-supported insurance company specialising in credit and investment insurance in China, playing the role of export credit agency for the state. Sinosure is one of 51 members of Berne Union, the leading international organisation of public and private sector providers of export credit and investment insurance. China Exim Bank is a government policy bank under the direct leadership of the State Council. The bank approved an aggregate of RMB 402.4 billion loans in 2008, with actual disbursement of RMB 296.1 billion, up by 53% and 51% respectively over 2007. These loans supported USD 102.8 billion-worth of exports of mechanical and electronic products, high- and new-tech products and agriculture products as well as overseas investment projects and contracted construction work. As China is increasing fiscal input to stimulate exports, export credit will be supportive and helpful for financing of Chinese exporters and overseas buyers. Export Buyer’s Credit Working Procedure
Exporter 1. Commercial Contract 5. Down Payment 6. Delivery of goods/services 2.Loan Agreement 7. Disbursement 4. Export Credit Insurance China Export & Credit
Source: China Exim Bank

Purchasing Managers Index, Jan 2007–Apr 2009
PMI in Manufacturing Industry
60

50

40

The index has been growing for five consecutive months

30 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09

Source: China Federation of Logistics & Purchasing (CFLP)

? The CFLP manufacturing PMI in March 2009 grew to 52.4, which was the first time the index returned to above 50 during the past 6 months ? In April this trend continued with a small rise to 53.5 ? By March 2009, 3 sub-indexes of the manufacturing PMI were over 50, including output, new orders and quantity of purchasers. The other sub-indexes have also been growing, albeit at a slower rate ? Among the 20 industries surveyed in March 2009, the PMI of manufacturing in 15 industries (including electric equipment and machinery, transportation equipment, general equipment and tobacco) registered 50 or higher

Importer (Borrower)

8. Repayment China Exim Bank

3. Repayment Guarantee Guarantor

China Exim Bank Export Credit 2003-2008E, USD bn
30 Seller's credit 20 Buyer's credit

10

0 2003 2004 2005 2006 2007 2008E
Source: China Exim Bank

24
WHAT to Source in China: Implications of the Stimulus Package During Jan—Feb 2009, China unveiled stimulus packages for 10 industrial sectors: Auto, steel, shipbuilding, textiles, machinery-manufacturing, electronics and information, light industry, petrochemical, nonferrous metals and logistics. As one of the most important measures the Chinese government has taken to keep the economy growing in 2009, these packages also include adjustment plans to stimulate exports, from which overseas buyers will also benefit. Here we select 8 sectors to explain favourable trends for overseas buyers. Auto (announced on 14 Jan 2009) ? Encourage large auto companies as well as major auto-part makers to expand through mergers and acquisitions so as to optimise resources and improve their competitiveness on the international market ? Encourage auto exports; export 10% of China’s locally-manufactured autos ? Earmark RMB 10 billion as a special fund to support auto companies to upgrade technology and develop new engines that use alternative energies in the next 3 years Machinery (announced on 4 Feb 2009) ? Encourage major equipment manufacturers to expand by M&A and develop large enterprises with comprehensive capacity for turnkey project implementation, system integration, international trade and financing ? Encourage machinery exports by increasing export credit ? Encourage introduction of overseas advanced technology and re-innovation; eliminate import duties and value-added duties for the key parts and materials which need to be imported Shipbuilding (announced on 11 Feb 2009) ? Make effort to develop the international market; expand international market share of high-tech and high value-added ship and marine project equipment ? Encourage financing organisations to increase export buyer’s credit for shipbuilding exports ? Support shipbuilding enterprises’ R&D to develop marine engineering equipment; encourage the development of marine engineering and power transmission and other critical systems and ancillary equipment; actively develop ship repair and modification abilities Light industry (announced on 19 Feb 2009) ? Further raise export rebates of some light industrial products, and extend fiscal and credit support to small and medium-sized firms ? Lift processing trade restrictions on some labourintensive, technology-intensive, energy-efficient, and environmentally-friendly products ? Speed up technological upgrades in the fields of paper making, home appliance and plastic sectors ? Increase supply of light industrial products in the domestic market, and improve foreign trade services and maintain export volumes Steel (announced on 14 Jan 2009) ? Adopt a more flexible tax rebate policy to retain international market share ? Allocate special funds from the central budget to promote technological advancement of the sector, readjustment of product mix and improvements of product quality ? Transforming ‘big’ industry competitors into ‘strong’ international players; eliminate outdated technology ? From 1 April, the Chinese government increased ex port VAT rebates of some more value added steel products Textile (announced on 4 Feb 2009) ? Develop new domestic and international markets; maintain global market share by expanding new overseas markets ? Strengthen technical innovation and establish local brands; support the localisation of manufacturing and textile machinery ? Expand financial support: Increase the export VAT rebate for textiles and garments to 15%; provide subsidies for small and medium sized companies who are suffering from worsening business conditions and cash-flow problems Electronics & information (announced 18 Feb 2009) ? Promote outsourcing and encourage electronics and information enterprises to go overseas and build research and development centres, production bases and marketing networks ? Increase financial input, including increasing the export VAT rebate of key electronic products to 17% ? Include 6 key projects under the stimulus plan: Integrated circuit industry, plate-panel and colour TV, TDSCDMA, digital TV networks, computer and nextgeneration internet and software and information services Non-ferrous (announced on 25 Feb 2009) ? Adjust the product to meet the demand of power, transportation, construction, mechanics and light industries; encourage exports of high-tech and high value-added products ? Adjust export VAT rebate rates ? Promote company restructuring and offer subsidised loans to support technical innovations ? Eliminate technically undeveloped producers and avoid an increase of excessive output capacity ? Establish a national reserve system; make full use of both domestic and foreign resources

25
HOW to Source in China Common Modes for Establishing a Sourcing Hub in China: Representative Offices and Trading Companies As a part of globalised sourcing strategy, many multinational companies are starting to establish their own sourcing hubs in China to better manage their Chinese suppliers. Apart from using 3rd party sourcing facilities, these companies commonly have two options: A representative office or a WOFE (wholly owned foreign enterprise) trading company. Here we list the main features of these two types that procurement managers must know before decision-making: Type Attribute Operation Features Cannot sign contracts Cannot open LC Cannot apply for import/export license Cannot employ staff Can perform all duties including signing contracts, applying for import/export licenses, employing staff independently, issuing invoices Benefits Better understanding of suppliers Better control of quality Better assurance of delivery Better understanding of suppliers Better control of quality More assured of delivery Can do domestic trade Can get export VAT rebate Can utilize China banking Setup cost is higher than Rep office Operation cost is higher than Rep office Cost Setup cost is low Operational cost is low

Representative Has no qualification of a legal entity, with incomOffice plete economic functions to engage in commercial activities with common significance WOFE Trading With complete functions of a company Company

Process Flow of TBA China Sourcing Unit (CSU) - Systematic Industry Search & Supplier Identification This section introduces the process flow of THE BEIJING AXIS China Sourcing Unit, i.e. from the point of receiving enquiries from clients, the services included in the solution process and the benefits provided to our clients, as well as lessons learnt. In this edition we discuss the stage after Needs Analysis: Industry search and supplier identification. Which supplier(s) to deal with is always a crucial decision, which directly impacts TCO, quality and lead time you can attain and the overall risk of the sourcing strategy that you are formulating. CSU identifies an initial universe list of suppliers by conducting a comprehensive and systematic industry search and employing on-theground reach & established networks to ensure that all the possible suppliers are included for evaluation.
3

2

Systematic Industry Search & Supplier Identification

Methodology Determine appropriate approach, methodology to ensure full universe list (UL)

Sources Identify information nodes and all potential sources that encompass full UL

Research Populate exhaustive UL based on methodology and sources and iterate

Supplier Evaluation, Application of Highlevel Filters

Guidelines for Systematic Industry Search and Supplier Identification The key is to arrive at a comprehensive all-inclusive universe list (UL) that includes ALL potential candidate suppliers. Different industries, categories and product clusters would require a different approach in order to construct a UL. For example, high regional-concentration cluster industries often occur in the same region (i.e. most digital scanners are manufactured in Guangdong in the Pearl River Delta, but trailers or auto components are manufactured across China. Rank, classify possible suppliers from early on, based on industry ranking, technology, quality and specifications, commercial standing, export history, references, price point perception, etc. All this information must enter the project database. A good database would inform the specific sourcing strategy for this specific case, i.e. what tier of suppliers to approach in terms of supplier size, price position, product range, service level, etc. Also, how to approach them, i.e. by email, RFI, RFP, RFQ, by direct visit, via an introduction from guanxi, etc.

26

China Sourcing Blog Highlights
Amid an unfavourable economic environment, global trade and China sourcing are going on. CSB recently investigated measures China’s Ministry of Commerce has taken to reverse the situation with falling exports, and analyzed the role of e-commerce in global sourcing. We also offered practical tips on enhancing the efficiency of plant tours and on making optimal use of sourcing exhibitions.
The China Sourcing Blog (CSB) is THE BEIJING AXIS online media platform to track the latest trends on sourcing and the Chinese economy. Taking on a multi-faceted, dynamic subject and carefully scanning everything from the mainstream media to the distant corners of the Internet, CSB strives to get to the bottom of all the best bits and pieces on China sourcing. The following is a selection of CSB postings that appeared over the last three months: Posted: 3 February China's economy has sustained dire effects from the global economic slowdown, and the spillover has impacted e-commerce as a trading platform. However, in these difficult times, online business has shown itself to have many advantages in comparison with traditional trading methods. CSB analyzed the current role of ecommerce for global sourcing and presented several factors which can facilitate further growth of this type of business. Posted: 18 February Surveys conducted by China's Ministry of Commerce (MOC) indicated that the export growth of mechanical and electrical products will slow considerably in the first half of 2009, due to dwindling demand from overseas markets. CSB investigated in more detail the measures that China’s MOC plans to take to maintain steady export growth for mechanical, electrical and high-tech products. Posted: 2 March It is said that a trip to the Canton Fair can save one from undertaking a sourcing trip to China. While this is not necessarily true, the Canton fair is China’s premier sourcing event and anyone sourcing from China or planning to source from China has to be aware of this event and what it offers.

Make your presence felt: Are you making the most of China’s sourcing fairs? In a series of postings The China Sourcing Blog outlined how to choose the right fair and how to optimize your experience of the fair.

Hence CSB collected everything you need to know about the fair into one posting, including exhibition dates, composition of exhibitors and ways to register. Posted: 4, 11 & 18 March All international purchasing managers try to minimize import risk, and in order to achieve this goal in China we always recommend you to undertake plant visits before you place an order. In a series of three postings, CSB provided its readers with tips for organizing a plant tour in China, including advice on making preparations before coming over and necessary actions after arrival. We also provided a thorough explanation of the advantages of such plant visits. Posted: 6 March For many years, China has been criticized for lacking innovative and creative ideas in the course of its economic development, a shortcoming in large part ascribed to the technological gap between China and developed countries. By means of a brief overview of IPR in China in 2008, CSB demonstrated that China has

kept making efforts towards improving the situation with an innovative approach to economic development. Posted: 17 March In recent years, a significant number of alarming incidents concerning food safety have taken place in China. CSB listed all the recent food scandals that occurred in China and analyzed possible reasons and current problems standing behind the issue of food security. Posted: 30 March, 14, 16, 24 & 30 April Exhibitions are considered an important step for buyers to meet suppliers. However, many people experience limited outcomes from attending exhibitions in China. Based on TBA experts’ experience, CSB offered its readers some advice on achieving good results from sourcing exhibitions. Recommendations are divided into three main parts: Choosing the right exhibition, doing sufficient preparation, and following up afterwards. CSB@chinasourcingblog.org www.chinasourcingblog.org

27

BRICS Breakdown
Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS Breakdown is a comparative segment that compares and contrasts China with the other leading developing economies.
Real GDP Growth for BRICS Countries, %
2008 9.0 6.0 5.6 5.1 3.1

2009 F 6.5 4.0 1.0 0.5 -4.5

Russia

China

Brazil

India

South Africa

South Africa

Russia

China

Brazil

Since the publication of the February edition of The China Analyst, economic observers and analysts from leading world institutions have revised downward their 2009 forecasts for the leading world economic activity indicators. The BRICS countries are no exception. The World Bank, for example, has revised the real GDP growth forecast in its March 30 update by 1-2 percentage points downwards on average for these countries compared to its November 2008 publication. China and India are forecast to still have significant GDP growth of 6.5% and 4%, respectively, but the economies of South Africa and Brazil are feared to have almost no growth this year or even decline slightly. The IMF, for example, forecast a 0.3% GDP decline for South Africa and 1.3% decline for Brazil’s 2009 GDP. As for Russia, Q1 2009 real GDP fell by a staggering 9.5% compared to Q1 2008, as announced on April 23 by the Ministry of Economic Development. No one doubts that the Russian economy will shrink this year—analysts only argue by what amount. World Bank forecasts a 4.5% decline, IMF is more pessimistic with a 6.0% decline forecast (as of April 2009). Other BRICS trends to watch for over the next few months are the rising current account deficits for resource-rich countries, such as South Africa, Brazil and Russia; and the double-edged sword of unemployment and inflation that is bound to hit the populations of the most vulnerable economies around the globe. Again, China stands out as the only BRICS economy where both effects will be mild though still significant. The most troubling scenarios will be haunting Russia, where both unemployment and inflation are forecast at high levels in 2009, and Brazil and South Africa, where inflation will be moderate, but unemployment will be a major cause of concern throughout 2009 and perhaps continuing into 2010 and 2011.

Source: World Bank, forecast as of 30 March 2009

Unemployment and Inflation in BRICS Countries, 2009F,%
China India Russia Brazil South Africa Inflation 2009F

-1%
-0.2

India

5%
Inverted scale 4.2 7.2

4.4 5.9 8.3

10% 15% 20% 25%

6.0 8.4 13.5 Unemployment rate 21.9

Source: Economist Intelligence Unit

Current Account Surplus/Deficit as % of GDP
12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% 2005 2006 2007 2008
Russia Brazil India South Africa China

2009F

Source: IMF World Outlook

28

China Trade Roundup
China Trade Roundup illustrates the main trends in the growth and transformation of China’s trade profile, and summarises a selection of the latest available trade statistics for China.

China Total Imports & Exports 2000–Q109, USD bn
1,250 1,000 750 500 250 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q109
Source: National Bureau of Statistics

China Total Trade Mar 08 – Mar 09, USD bn
Exports 120 100 80 60 40 20 0 Mar Apr Mar Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Source: National Bureau of Statistics

Imports (CIF) Exports (FOB)

Imports

Total Imports by Main Commodities, USD bn
100% 183.20 80% 60% 40% 20% 0% 22.51 12.40 6.60
Copper Products Refined Petroleum Others

Total Exports by Main Commodities, USD bn
100% 245.54 80% 60% 40% 20% 0%
Furniture Plastic Articles Travel Good, 28.80 Handbags, etc 15.40 11.90 Others 7.40 6.20 5.70 2.95 2.57 Footwear Mobiles Phones Textile, Fabrics Garments & Clothing China Total Exports Jan—Mar 2009 Data Processing USD 245.54 bn

6.00 4.10 3.90 3.47 2.91 Soya Beans Steel Products Plastic 121.30 Data Processing
China Total Imports Jan—Mar 2009 USD 183.2 bn

164.62

Crude Oil Electronic Appliances

Source: National Bureau of Statistics

Source: National Bureau of Statistics

China Import and Export Monthly y-o-y Growth Rate, % 2008—Q1 2009
Exports 45 35 25 15 5 -5 -15 -25
Source: National Bureau of Statistics

Imports

Nov Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Dec

Jan

Feb

Mar

29
Total China Imports by Country/Region, USD bn
40 35 Japan 30 25 US 20 15 10 5 0
Source: National Bureau of Statistics

Total China Exports by Country/Region, USD bn
70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 EU US HK 2008 Jan-Mar 2009 Jan-Mar

2008 Jan-Mar EU ASEAN S. Korean

2009 Jan-Mar

Taiw an

Japan ASEAN S. Korea India Russia Taiw an Australia

Australia India Russia

HK

Source: National Bureau of Statistics

Total China Imports and Exports by Country/Region, % Jan–Mar 2009 Imports
Russia 2% India 2% Australia 4% Taiwan 8% Other 28%

Exports
Australia 2% Taiwan 2% India 2% S. Korea 5% EU 20% ASEAN 8%

US 9%

Japan 9% ASEAN 10%

EU 14% S. Korea 10% Japan 13% HK 12% US 19%

Others 21%

Source: National Bureau of Statistics

2007 China Trade Balance Map, USD bn (Top 5 Trade Surplus & Top 5 Trade Deficit Partners)

UK Netherlands USA

South Korea

Japan China’s Top 5 Trade Surpluses and Deficits Surplus
HK, SAR US Netherlands UK UAE
- 11. 0 1 - 11. 6 6 - 15 . 6 2 - 3 1. 9 3 - 47.65 36 .49 23 .88 14 . 0 1

UAE Hong Kong Malaysia Philippines

Deficit
171. 6 3 16 3 . 57

Angola

Malaysia Angola Philippines Japan S. Korea

Source: UN Comtrade

30

China Inc. Goes Global: OFDI and M&A
The popular view that Chinese companies should take advantage of the ongoing global financial crisis to more actively acquire overseas assets continues to spread in China. Yet while the current climate provides new opportunities for Chinese investors, Chinese firms may yet face more hurdles in their plans for making foreign acquisitions. By Edward Wang.
Highlights: China Outward FDI and M&A in 2008 ? China’s outward FDI in 2008 was rather unexpectedly up 96.7% over 2007 to stand at USD52.2 billion, of which 78% were non-financial investments. Chinese companies seemed more active in 2008 than the previous year, with some strategically important deals being concluded ? Since 2000 when the Chinese government more openly encouraged Chinese companies to go global, Chinese companies have been integrating international cross-border investment and M&A standards and processes into their planning. In 2009, more Chinese companies from more sectors are clearly considering and pursuing cross-border expansion ? A steep fall in the price of key resources, triggered by the global economic downturn, has provided opportunities for Chinese companies to make overseas investments. More Chinese companies have developed an appetite for overseas business development as they see new opportunities with ‘distressed’ players looking for capital / investors ? But some high-profile Chinese acquisitions (e.g. Chinalco's investment in Rio Tinto) have roused significant public as well as government concern in the destination countries. It is expected that Chinese firms may yet face more hurdles in their OFDI activities, such as national security issues and communication problems Major Cross-border Deals, Q1 2009
1 2 3 4 5

China Outward FDI Flow 2003-2008, USD bn
OFDI 60 Grow th Rate 52.2 150%

40 21.2 20 2.9 0 2003 2004 2005 2006 2007 2008
Source: MOFCOM China

100% 26.5 50%

12.3 5.5

0%

Structure of China’s OFDI Flow 2003-2008, USD bn
Non-Financial 2008 2007 2006 2005 2004 6.9 5.5 24.8 17.6 5.4 3.5 40.7 1.7 Financial 11.5

2003 2.9 0 10 20 30 40 50 60

Source: MOFCOM China

China Minmetals Wuhan Iron & Steel CNPC Hunan Valin Iron & Steel Chinalco

Thompson Iron Mines Ltd, in return for a 19.9% stake of 29.7 million common shares in the company. February 2009: China National Petroleum Corp (CNPC) will buy Verenex Energy, a Canadian company that holds oil assets in Libya, for USD 402 million. CNPC's offer is subject to conditions, including the approval of the Libyan National Oil Corp. Verenex's most valuable asset is a 50% stake in the Area 47 property in northwest Libya.
3 4 February 2009: Hunan Valin Iron & Steel has bought a 16.5% stake in Australia's third-largest iron ore producer Fortescue Metals for USD 771 million. Valin purchased 225 million new Fortescue shares at USD 1.61 per share, and 275 million shares

from two Harbinger Capital funds for a combined 16.5% stake in Fortescue. Valin also has a ‘standstill agreement’ that prevents it from raising its stake in Fortescue above 17.5%. The deal has been approved by the Australian government.
5 February 2009: Chinalco has agreed to inject USD 19.5 billion into Rio Tinto Ltd/Plc. This will bring Chinalco's stake in Rio to 18%. Chinalco will invest USD 12.3 billion in three partnerships with Rio's copper, aluminum and iron ore divisions, taking minority stakes in nine assets. Chinalco will also receive a seat on Rio's board and the right to appoint another at a later date. The cash injection is pending regulatory approval in countries affected by the deal, including Australia and Chile.

April 2009: China Minmetals has signed a USD 1.21 billion takeover deal with Australian miner OZ Minerals which will leave it with USD 366 million in cash. The revised bid is well below Minmetals' original USD 1.7 billion offer, and excludes the Prominent Hill mine and other "sensitive assets".
1 2 March 2009: Chinese steel maker Wuhan Iron & Steel will invest USD 240 million in the Canadian m i n i n g c om p a n y C o n s o l i d a t e d

31
China Total Outward FDI Capital Flow by Continent 2003-2007, USD mn*
2003 2004 2005 2006 2007

Europe
1126 58 126 321258 145 157 1540 395 598

16593

Asia

North America
8569 6466 4902 1763 1038 392 75 315 1574 520

China

7663 4484 3014 1505

Africa
203 126 34 120 770

Latin America

Oceania

Source: MOFCOM China *Note: The data illustrated here refers to investments from mainland China, and does not include investments from Hong Kong. This potentially significantly reduces the flows as it might exclude investments by Chinese companies in cases where they draw funds from IPO receipts in HK.

China OFDI Flow to Africa 2003 & 2007, USD mn
2003 Total: USD 74.81 m n 12%

2007 Total: USD 1,574.31 m n 8% 2% 3% 28% 3% 4% 4%

Top 10 Destinations 2007 South Africa

42% 33%

6%

3%
Source: MOFCOM China

8%
7% 3%

9%

25%

Nigeria Algeria Zambia Niger Sudan Congo DR Libya Angola Egypt The rest Africa

CAGR 2003-2007 119.8% 74.1% 126.1% 84.8% 294.4% 235.1% 193.2% 64.1% 33.6%

Features and Trends of China’s OFDI ? The view that Chinese companies should take advantage of the ongoing global financial crisis to more actively acquire overseas assets continues to spread in China. Resources companies are particularly attractive to Chinese investors The trading of infrastructure projects for raw material contracts is one strategy China has utilized to establish itself in some foreign countries. In 2007, China signed a deal to extend USD 5 billion of soft loans to the DRC to develop infrastructure and mining. In exchange, China received rights to DRC’s extensive natural resources. Subsequently China has also used the strategy in other countries China’s recent high-profile acquisitions in Australia, Peru and elsewhere has provided valuable insight for Chinese companies to better utilize PR strategies in their overseas expansions, and a steadily more sophisticated approach can be expected. It is clear that in most cases Chinese SOEs are encountering more resistance in overseas M&A than private companies, i.e. a sovereign state (company) buying into another’s resources does not sit well with most recipient countries

China Investment in Africa ? Chinese investment in Africa is heavily slanted towards resources, i.e. China’s investments in Nigeria and Sudan are in the oil industry; China’s investments in the DRC and Zambia are in the copper/ cobalt mining industry However, a degree of diversification is also evident in the last several years, i.e. ICBC acquired 20% of Standard Bank for USD 5.5 billion; a Wenzhou shoe company set up a shoe-making plant with annual production of 6 million pairs of shoes in Nigeria; a large Chinese private cement producer invested in cement production in Madagascar; a Zhejiang company in vested USD 51.8 million in setting up the China–Botswana Economic & Trade Cooperation Zone More than 80% of Chinese investors in Africa are private companies. One model or pattern of the investments of these private companies is that they normally start their engagement in Africa by trading. After they have learnt more about the environment, they start to venture into investment FOCAC 2009, to be held in Q4 2009, will further underpin China’s investment in Africa

?

?

?

?

?

32
China Cross–border Investment Deal-sheet: Major Deals in 2009 and the Second Half of 2008
Date Apr-09 Acquirer / Investor Minmetals Target / New Company OZ Minerals Delphi Corporation Consolidated Thompson Drivetrain Systems Int’l Furl (LookSmart) Murchison Metals Ltd. Fortescue Metals Group Verenex Energy Moteurs Baudouin Arafura Resources Ltd. China Mobile Pakistan Corp. Rio Tinto Gindalbie Metals Switchbox Labs Vizirama LCM GROUP Schnadig Refining factory at Bong iron mines Centrex Centrex's 5 iron ore projects Sky Profit iTalk Global Communications Anju Coal Mining Association Mount Gibson Iron Ltd. Perilya Limited Dynex Power Alam Group Vigano Wing Lung Bank Tanganyika Oil Awilco Offshore ASA GMG Global Ltd. RosEvroBank Drax Group Petro-Tech Peruana Taharoa Iron Sands Business Tiomin Golden West Resources Prudential Legal & General Old Mutual Plc Heritage Fund Management Ramu nickel project Midwest AED Oil Ltd Cape Lambert‘ iron ore project Tinggi Value (USD) 1.2 bn 100 mn 240 mn 46 mn 40 mn n/a undisclosed 438 mn 402 mn 380 mn 5.4 mn 0.5 bn 19.5 bn 108.35 mn undisclosed n/a 2 mn 8.94 mn 2.6 bn 6.84 mn 127 mn 8 mn n/a n/a 110 mn 28.9 mn 14.53 mn 0.85 mn n/a n/a 2 bn 2.5 bn 197 mn 800-850 mn 32.2 mn 2 bn 174.275 mn 25 mn 23.27 mn 250 mn n/a n/a 8.7 mn 1.37 bn 906 mn 561mn 367 mn 5 mn Country Australia USA Canada Australia Australia USA Australia Australia Canada France Australia Pakistan Australia Australia USA South Africa USA USA Liberia Australia Australia UK USA Korea Australia Australia Canada USA Italy Hong Kong Canada Norway Singapore Russia UK USA New Zealand Canada Australia UK UK UK Switzerland Papua New Guinea Australia Australia Australia Singapore Stake 100% n/a 19.9% 12.29% 100% n/a 5.85% 17.6% 100% 100% 25.0% 100% 18% 36% 100% 70% n/a n/a n/a 15% 50% 30% 50% n/a 28.6%-40.5% 50.1% 75% 51% 60% up to 98% 100% 100% 51% 100% 0.7% n/a 100% 70% 11% 1% n/a n/a 30% n/a 51% n/a n/a 60%

Mar-09 Beijing Jingxi Heavy Industry Co. Mar-09 Wuhan Iron & Steel Co. (WISCO) Mar-09 Mar-09 Mar-09 Feb-09 Geely Automobile Diigo Sinosteel Hunan Valin Steel Co.,Ltd.

Mar-09 China Nonferrous Metals Mining Corp. Terramin Australia Ltd.

Feb-09 China National Petroleum Corp. Feb-09 Weichai Power Feb-09 Jiangsu Huadong Nonferrous Metals Feb-09 China Mobile Feb-09 Chinalco Feb-09 Anshan Iron & Steel Co.,Ltd. Jan-09 Lenovo Jan-09 Minmetals Jan-09 LiveChain Jan-09 Markor Dec-08 China Union Ltd. Dec-08 Wuhan Iron & Steel Co. (WISCO) Dec-08 Wuhan Iron & Steel Co. (WISCO) Dec-08 Kingsoft Dec-08 263 Dec-08 Henan Yima Coal Mining Group Dec-08 Shougang Dec-08 Shenzhen Nonfemet Nov-08 Zhuzhou CSR Time Elctric Co.,Ltd. Oct-08 Oct-08 Oct-08 China Everbright Anshan Iron & Steel Co.,Ltd. China Merchants Bank

Sep-08 Sinopec Sep-08 CNOOC Sep-08 Sinochem International Corp. Sep-08 ICBC Sep-08 People's Bank of China Aug-08 Sinopec & CNPC Aug-08 Cheung Kong Infrastructure Holdings Aug-08 Jinchuan Group Aug-08 Hunan Valin Steel Co. Ltd. Aug-08 People's Bank of China Aug-08 People's Bank of China Aug-08 People's Bank of China Jul-08 Jul-08 Jul-08 Bank of China China Metallurgical Group Corp. Sinosteel

Jun-08 Sinopec Jun-08 China Metallurgical Group Corp. Jun-08 Tsinghua Tongfang
Sources: Multiple sources; Press; TBA Analysis

33
China non-Financial OFDI by Province 2008, USD mn
0 Guangdong Zhejiang Shandong Hunan Gansu Liaoning Shanghai Fujian Jiangsu Yunnan Henan Beijing Xinjiang Tianjin Shaanxi Heilongjiang Sichuan Chongqing Guangxi Jilin Anhui Hebei Hubei Shanxi Ningxia Jiangxi Inner Mongolia
Source: MOFCOM China

Destination of China's OFDI Flows of more than USD100 Million 2007, USD mn
0 HK, China Cayman Islands British Virgin Islands Canada Pakistan Britain Australia Russia South Africa Singapore Nigeria Kazakhstan Germany Papua New Guinea Mongolia USA Laos Algeria Argentina Zambia Saudi Arabia Vietnam Holland Niger
Source: MOFCOM China

100

200

300

400

500

600 1213.9

1000

2000

3000 13732.4

Top 30 Chinese non-financial Companies by Sales Revenue Abroad 2007
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Sinopec PetroChina Company China Mobile Legend Holdings Ltd China Resources Corp. COSCO Sinochem Corporation China Network Communications Group Corporation COFCO Huawei Technologies China Shipping (Group) Company China Minmetals Corporation Zhuhai Zhengrong Company China State Construction Engineering Corp. Baosteel Shanghai Automotive Industry Corp. CITS Group Corporation Sinosteel China Aviation Oil Group CNOOC China Electronics Corporation CITIC Anshan Steel Taigang Group International Trade Corp. Ltd Shougang China National Chemical Corp. China Merchants Group Guangdong Holdings Limited China North Industries Group Corporation Shanghai Zhangjiang High Technology Park Development Ltd.

Top 30 China non-financial Companies by Total Assets Abroad 2007
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 China Mobile China Resources Corp. China Network Communications Group Corporation China National Petroleum Corporation COSCO SINOPEC China Merchants Group China United Telecommunications Corporation CNOOC China State Construction Engineering Corp. Shenzhen Energy Investment COFCO CITIC Legend Holdings Ltd China National Aviation Holding Company Shum Yip Holdings Company Limited Guangzhou Yuexiu Group Guangdong Holdings Limited Huawei Technologies China Shipping (Group) Company Shanghai Zhangjiang High-Tech Park Development Limited CITS Group Corporation China Power Investment Corporation Sinochem Corporation China Minmetals Corporation Fengli Group Limited Shanghai Automotive Industry Corp. Sino Trans Limited China National Chemical Corp. Sinosteel

Source: MOFCOM China

Source: MOFCOM China

34

China Business News Highlights
While still grappling with negative effects of the ongoing financial crisis, in Q1 2009 the Chinese economy started to show signs of improvement. Exports, one of the essential attributes of the growth of the Chinese economy, have kept on falling, but at a slower pace. The first quarter of the year also saw a few successful deals for China in the realm of natural resources.
General China's GDP grew by 6.1% year-onyear in the first quarter, reaching RMB 6.5745 trillion (USD 939 billion). The quarterly growth rate was the lowest in 10 years as the global financial crisis continued to affect China’s economy. Q1 growth was 4.5 percentage points lower than the first quarter of 2008 and 0.7 percentage points lower than the previous quarter. China’s consumer price index (CPI) fell 1.2% year-on-year in March, compared to a decline of 1.6% in February, which was the first monthly fall since December 2002. For the first quarter, CPI declined 0.6% year-onyear. China's producer price index (PPI) fell 4.6% in the first quarter year-on-year. PPI declined 0.3% in March compared to the level for February. China’s trade surplus rose to USD 18.56 billion in March, up 41.2% from a year earlier. In March, China's exports fell for the fifth month in a row to USD 90.29 billion, down 17.1% from a year earlier, compared with a 25.7% year-on-year decline in February. Imports slumped 25.1% year-onyear in March to USD 71.73 billion, compared with a 24.1% decline in February Foreign direct investment (FDI) in China declined 20.6% year-on-year in the first quarter to USD 21.78 billion. In March FDI dropped for the sixth consecutive month to USD 8.4 billion, down 9.5% from a year earlier. Although the figure continues to fall, it showed an improvement from the 15.81% drop in February and the 32.67% drop in January. China's fixed asset investment in the first quarter rose 28.8% year-onyear to RMB 2.81 trillion (USD 411.4 billion). The growth rate was 4.2 percentage points higher than the year before. Urban fixed asset investment stood at RMB 2.36 trillion in the first quarter, 2.7 percentage points higher year-on-year. Fixed asset investment in rural areas was up 29.4% to RMB 456.7 billion, 11.1 percentage points higher year-on-year. Property prices in 70 major Chinese cities fell 1.3% in March from a year earlier. Prices continued to decline for a fourth consecutive month, having previously dropped 1.2% in February, 0.9% in January and 0.4% in December. German engineering giant Siemens has won an order for 100 trains for China's Beijing-Shanghai highspeed railway. Siemens will supply components worth 750 million euros (USD 1 billion) for the Velaro trains, which will be assembled in China and used on the Beijing-Shanghai route from 2010. The Velaro, a development of Siemens’ successful express train model used in Germany, has a total length of 400 meters, making it the world's longest single train used in high-speed transportation. Siemens has already delivered 11 high-speed trains to China of an earlier order for 60. Sales of domestically produced motor vehicles in China set a new record of 1.11 million units in March, up 5% from a year earlier, the China Association of Automobile Manufacturers (CAAM) announced on April 2. This was the third consecutive month that China's auto sales exceeded those in the United States, still the world's largest auto market. Mergers & Acquisitions Aluminum Corporation of China (Chinalco) in February announced its intention of investing USD 19.5 billion in the Anglo-Australian miner Rio Tinto. The deal, which is currently still being evaluated by the Australian Foreign Investment Review Board, would be the biggest overseas investment to date by a Chinese company. If approved, the deal would raise Chinalco’s stake in Rio Tinto to 18%, and would also increase its leverage in pricing negotiations for iron ore from Rio’s mines.

Signs of growth: Domestically-produced car sales in China set a new record in March, reaching 1.11 million units. (Photo: Passion84Photos / flickr)

35
On March 31, Australian regulators gave approval to Hunan Valin Iron & Steel Group’s USD 920 million investment in Fortescue Metals Group Ltd, Australia's third-largest iron ore producer. On April 23 Australian regulators approved a revised USD 850 million Minmetals bid for mines owned by OZ Minerals, Australia’s third-largest diversified mining company. Natural Resources China's crude oil output reached a total of 190 million tons in 2008, up 2.3% year-on-year, the highest growth reported in three years, according to the China Petroleum and Chemical Association. Imports of crude oil rose 9.6% year-on-year to 179 million tons last year, which accounted for 48% of China’s total crude oil demand. China and Russia have agreed to jointly construct a USD 3.1 billion oil refinery in the Chinese city of Tianjin. The refinery, to be built by China National Petroleum Corporation (CNPC) and Russia's OAO Rosneft, will eventually have an annual refining capacity of 10 million tons of crude oil. Construction of the refinery is scheduled to be completed by 2012. In February this year, China and Russia also completed the signing of a loans-for-oil agreement worth USD 25 billion for Russia to supply China with oil for 20 years. China is expected to own rights of more than 100 million tons of overseas iron ore assets by 2010, according to an estimation of Lange Steel Information Service, one of China's leading steel information provider. Industry Industrial production in China during the first quarter grew by 5.1% year-on-year. In March alone industrial production increased by 8.3%. The aggregate profit of China's nonferrous metal producers fell by 45% last year to RMB 80 billion (USD 11.73 billion), the China Nonferrous Metals Industry Association announced on March 19.

Holding steady: Retail sales growth in China remained robust in the first quarter, and was 15.2% higher y-o-y. (Photo: DCF pics / flickr)

China's top steel maker, Baoshan Iron & Steel Co. Ltd. (Baosteel), cut steel prices for a second straight month during March. Prices will be reduced by RMB 250 (USD 36.63) per ton for major hot-rolled steel products, and by RMB 200 (USD 29.27) for cold-rolled steel products. After the decreases, prices for hot-rolled steel products will be RMB 3,292 (USD 482) per ton, and 3,826 (USD 560) per ton for cold-rolled steel products. Retail China's total retail sales grew 15% to RMB 2.94 trillion (USD 430.4 billion) in the first quarter of 2009. ICT China Mobile, China’s largest mobile phone network operator, announced on March 19 that its net profits had jumped by 29.6% during 2008. In January, China Mobile was awarded one of the three licenses to operate 3G networks across the country. The other two license holders are China Unicom and China Telecom. China Mobile currently has more than 200,000 3G customers in China, and aims to have 238 Chinese cities covered by their 3G network by end of this year. Huawei Technologies, the Chinese telecommunications equipment maker, increased its global market share of deals to supply mobile infrastructure from 7.2% in 2007 to 15.5%

in 2008, making the company the third-largest supplier in the world after Ericsson and Nokia Siemens Networks. Finance Bank of China has announced that its 2008 Q4 net profit dropped 59% year-on-year to USD 646.8 million as the global economic crisis affected the lender’s overseas investments. Nonetheless, the bank's full-year income still increased by 14% to USD 9.4 billion. China’s foreign exchange reserves increased by 16% year-on-year to USD 1.9537 trillion by the end of March. Credit extended by China's banks in the first quarter of this year reached a total of RMB 4.58 trillion (USD 670 billion). In the month of March alone, new yuan-denominated loans increased by RMB 1.89 trillion (USD 276 billion), the third straight month that new loans exceeded the RMB 1 trillion mark. China's banking industry took the world's number one place in 2008 in terms of net profits, which grew by 30.6% year-on-year to reach a total sum of RMB 583.4 billion. Chinese banks also obtained first place in the global banking industry in terms of returns on investment, which stood at 17.1% last year, around 7 percentage points higher than that of the global average.

36

Regional Focus CHINA–AFRICA
China recently announced that bilateral trade with Africa in 2008 exceeded the USD 100 billion target that was set to be achieved only in 2011. China’s exports to Africa achieved double-digit growth, and mineral and oil imports from Africa have also accelerated. With the China-Africa Summit set for later this year, trade and investment between China and Africa are expected to grow further. By Jackie Li. China’s Exports to Africa, 2008 (USD bn)
China’s Exports to the World (USD 1428 bn) China’s Exports to Africa (USD 52.26 bn) China’s Exports to Africa, 1999-2008, USD bn

60 50

52.26 38.43 27.84 19.85 14.43 10.36

South Africa Asia
38.67%

19.11%

40 30

Nigeria

12.85%

20 10 0 4.1 4.65 6 7

Egypt Algeria Angola Morocco Benin Sudan Ghana Libya

11.06% 7.01% 5.57% 4.43% 4.38% 3.52% 3.30% 3.09%

EU

20.23%

99 00

01 02 03

04 05

06 07 08

China’s Exports to Africa by Sector in 2008

22.19%

50.96%
M echanical & Elect rical Product s Textile Yarn, Fabrics & Product s Rolled Steel Garments and Clot hing Accessories Footwear Ot hers

USA

17.67%

3.66% Africa Russia 2.31% Australia 1.56%

2.50%
Others
25.34%

5.78% 6.65% 11.92%

Others

15.90%

Sources: World Trade Atlas; SARS

? In 2008, China’s exports to Africa made up 3.66% of its total exports. Though relatively small, exports to Africa increased by 26.3% from 2007 to 2008, compared to 15.5% growth in China’s total exports to the world for the same period. Exports to Africa have been growing by an average of 27% for the past six years ? China’s exports to Africa continues to be concentrated in a small number of countries such as South Africa (USD 9.98 bn) and Nigeria (USD 6.76 bn). The top 10 African importing countries accounted for 75% of China’s total exports to Africa ? Since early 2003, China’s exports to Africa have moved away from textiles. In 2008, exports of mechanical and electrical products accounted for over 50% of total exports value to Africa

China’s Imports from Africa, 2008 (USD bn)
China’s Imports from the World (USD 1131 bn) China’s Imports from Africa (USD 50.96 bn) China’s Imports from Africa, 1999-2008, USD bn

60 50.95 50 40 33.78 26.8 19 13.74 2.37 4.8 4 4.6 7.4

Asia

45.59%

Angola

30
43.79%

20 10 0
Sudan EU USA Africa Australia Russia
11.73% 7.19% 4.5% 3.20% 2.10% 12.34%

99 00 01 02 03 04 05 06 07 08
China’s Imports from Africa by Sector in 2008

South Africa

8.62%

1% 2% 10% 3% 3%

82%

M ineral products Spec class/ parts f or motor vehicles Wood products Precious stones and metals Base met als Ot hers

Congo B. 7.29% Libya
5.04% 4.44% 3.49% 3.09% 2.02% 1.65% 8.23%

Others

E.G DRC Gabon 25.24% Mauritania Algeria Others

Sources: World Trade Atlas; SARS

? China’s imports from Africa grew at a similar rate as China’s exports to Africa. In 2008, China’s imports from the world grew 15% y-o-y, but imports from Africa increased by 28% y-o-y ? In the past ten years, the highest growth ever in China’s imports from Africa was 46.14% between 2003 and 2004. In the following 3 years, annual growth was between 20.66% and 29.10%. In 2008, China’s imports from Africa grew 33.7%. Implementation of several oil supply contracts was the major reason ? China’s top import partners in Africa remains among the oil- and resources-rich countries such as Angola (USD 21.77 bn), Sudan (USD 6.30 bn) and South Africa (USD 4.27 bn) ? Imports from Africa remain largely focused on mineral products, which amounted to USD 46 bn in 2008

37
African Countries’ Trade Surplus and Trade Deficit with China
Trade deficit with China Trade surplus with China Do not recognise China

Africa’s Top Trade Deficit & Trade Surplus Countries with China 2008, USD bn
Trade Surplus with China
Angola

Morocco Algeria Libya Egypt

Sudan Congo B. Equatorial Guinea Gabon Endowed with Oil reserves

Mauritania

Niger

Trade Deficit with China
Chad Sudan Not endowed with oil reserves Benin Algeria Egypt South Africa Nigeria

Nigeria Benin Gambia Burkina Faso

Central African Cameroon Republic E.G Gabon Congo DRC B. Uganda Rwanda

-20

-10

0

10

20

SADC Bilateral Trade with China, 2004-2008, USD bn
SADC Exports to China SADC Imports from China
40

COMESA Bilateral Trade with China, 2004-2008, USD bn
COMESA Exports to China COMESA Imports from China
40

Angola
2008 Top 10 Bilateral Trade Countries with China Angola South Africa Sudan Nigeria Egypt Algeria Congo B. Libya Morocco E. G. USD 25.30 bn USD 14.28 bn USD 8.15 bn USD 7.26 bn USD 6.24 bn USD 4.53 bn USD 4.34 bn USD 4.20 bn USD 2.79 bn USD 2.54 bn

Zambia

Malawi

Trade Balance Trade deficit peaked at USD 3 bn in 2007

Zimbabwe Namibia Botswana Swaziland South Africa
30

Trade surplus reached USD 13.9 bn in 2008

30

-5

20 10

20

10

0 '04 '05 '06 '07 '08

0 '04 '05 '06 '07 '08

0

Sources: World Trade Atlas; SARS

Sources: World Trade Atlas; SARS

China-Africa Trade Highlights
? ? ? ? Bilateral trade between China and Africa reached USD 103.21 bn in 2008. This is a significant 30% increase compared to the previous year of USD 72 bn. In 2008, Africa had a total trade deficit with China of USD 1.3 bn, which was a marked reduction compared to the USD 4.65 bn trade deficit in 2007 Much of the growth in bilateral trade was heavily focused on a selected number of countries such as Angola, South Africa, Sudan and Nigeria. The top 10 countries accounted for 77.2% of Africa’s total bilateral trade with China 15 of Africa’s 53 countries (28%) had a trade surplus with China last year. Of these countries, only six had a trade surplus of more than USD 1 bn. Angola had the single largest trade surplus with China, amounting to USD 18.24 bn, which constitutes 56.7% of the total trade surplus of the 15 countries The majority of the African countries that have a trade surplus with China are strong in oil, gas and natural re sources. Although Africa only holds a small percentage of the world’s proven oil reserves (9%), oil exports to China have grown significantly in the past three years. Africa currently supplies around 2.31 million barrels of oil per day to China. Africa’s principal oil-supplying countries to China are Angola, Sudan, Congo Brazzaville, Equatorial Guinea and Gabon, all of which enjoyed a trade surplus with China last year A number of African countries that have a trade surplus with China are also rich in agricultural products, such as timber, cocoa and cotton. Gabon, for example, is Africa’s largest timber exporter to China, having exported 278,800m? of logs in 2008, equivalent to USD 459 mn, which accounted for roughly 27% of Gabon’s total export value to China Coastal countries in Africa often have greater trade benefits by acting as a gateway for land-locked countries. In fact, 80% of the countries enjoying a trade surplus with China have a coastline. Poor and inefficient road & rail infrastructure is a major trade constraint for land-locked countries such as Uganda, Niger, Rwanda and Chad 38 African countries had a trade deficit with China in 2008. With 11 of these countries having a deficit greater than USD 1 bn, they collectively held 85% of Africa’s total deficit with China, which amounted to USD 30.59 bn. These countries generally rely on imports of capital goods, industrial goods, consumer goods, food and textiles The Southern African Development Community (SADC) has held a trade surplus with China for the past five years. In 2008, 9 of the 15 SADC countries held trade deficits with China, but Angola’s trade surplus was large enough to offset this. The Common Market for Eastern and Southern Africa (COMESA) countries (19 in total) incurred a trade deficit with China, but with COMESA including top trading countries such as Sudan and Libya, the trade balance is expected to shift due to ever-increasing oil exports to China The 3 countries (Gambia, Swaziland and Malawi) that maintain diplomatic relations with Taiwan have limited trading activities with mainland China, all maintaining less than USD 200 mn in bilateral trade

? ? ? ?

?

38
China-Africa Investment
? Africa’s Foreign Direct Investment (FDI) inflows from the world reached USD 52.9 bn in 2007, and according to UNCTAD, the total amount for 2008 is estimated to have been USD 61.9 bn ? Africa’s top 10 countries in terms of FDI inflows accounted for 82% of t o t a l i n f l o w s i n 2 0 0 8 (based on estimates), with 9 countries receiving inflows of USD 1 bn or more ? Based on China’s Balance of Payments Report for H1 2008, China’s FDI to Africa reached USD 686 mn for the first half of 2008. It is expected that this figure will increase towards the third quarter of 2008, and finally reach USD 1.37 bn ? Based on the same report, China’s FDI outflows to Africa represented less than 3% of China’s global FDI outflows in 2007; this share is expected to remain at around 2% for 2008 ? Africa’s FDI inflows from China FDI Inflows from Mainland China to Africa 2003-2008, USD mn
1400 1200 1000 800 600 400 200 0 03 04 05 06 07 08 E
Source: UNCTAD

FDI Flows: World to Africa, China to Africa, 2003-2008, USD bn
70 60
World FDI to Africa China FDI to Africa

1574

1370

61.9 52.9 1.3 1.59

Inflows from China peaked in 2007 518 391.7 316.9 74.8

50 40
29.46

45.75 0.52

30 20 10 0

18.72

18.02 0.39

0.08

0.32

03

04

05

06

07

08 E

Source: UNCTAD

reached USD 1.57 bn in 2007. This figure is estimated to recede slightly to USD 1.37 bn in 2008, according to UNCTAD. This is mainly due to the impact of the global economic crisis ? In 2008, China introduced a series of favourable FDI policies, and further increased the China Africa Development Fund to USD 5 bn. These measures will encourage continuous growth in China’s investment into Africa

China’s OFDI to the World 1H08, USD 34.3bn
5% 4% 2% (USD 686 mn) of China’s total FDI went to Africa 0.6% 0.4% 88%

Asia North America Atlantic Africa Latin America Europe

Source: China’s Balance of Payments Report H1 08

China’s Trade Zones in Africa & Major Investments in 2008
The Lekki Free Trade Zone in Nigeria, with phase 1 being completed in Feb 2009. The Jiangning Economic and Technology Development Zone and a local partner are the major investors

Major Investments 2008-2009
1 2 3 4 5 6 7 Angola - USD 1 bn agricultural development (Mar 09) Nigeria - USD 16 mn vehicle assembly plant (Feb 09) Liberia - USD 2.6 bn iron ore mining project (Jan 09) Mauritania - USD 282 mn port, Nouakchott expansion (Jan 09) Zimbabwe - USD 500 mn electricity generation capacity (Dec 08) Cameroon - USD 340 mn cement factory & fertiliser plant (Nov 08 Ghana - USD 150 mn Ghana telecom system expansion programme (Sept 08) Uganda - USD 1.5 bn Lake Victoria Free Trade Zone (Aug 08) DRC - USD 6 bn infrastructure investment (July 2008) Gabon - USD 4.9 bn iron ore mining project (May 08) Congo B. - USD 2.9 bn copper & cobalt mining project (May 08) Sudan - USD 396 mn JV in power generation capacity (April 08) South Africa - USD 5.5 bn acquisition of 20% of Standard Bank (Jan 08) Zambia - USD 150 mn Chambishi copper mine investment to 2010

Economic Zones Major Investments

The Egypt Suez Economic and Trade Cooperation Zone, invested by Tianjin TEDA Investment Holdings, is situated in the North-East of Egypt. A number of Chinese firms have already been established in the zone The Ethiopian Oriental Industrial Park, is invested by the Jiangsu Yonggang Group. The zone will introduce 80 projects in the next 5 years

4 12 7

3

2 6 8 10 11 9

The Nigeria-Guangdong Economic and Trade Cooperation Zone. Invested by the Guangdong Xinguang International Group. The plan involves building mineral processing plants, heavy-industry plants, as well as introducing technology firms

1

14 5

The Mauritius–China Economic and Trade Cooperation Zone was established in 2008 by the Shanxi Tianli Enterprise Group. The zone is in a free port

8 9 10 11 12

13

The Zambia-China Economic and Trade Cooperation Zone was established in Feb 2007 by China Nonferrous Metal Mining with a focus on mining, copper processing, and the ferrous metals industry. A sub-zone was established in Lusaka in Jan 2009

13

14

Sources: China Daily; Various

39 CHINA–AFRICA Focus
as to take greater social responsibility into consideration. China currently has significant investments in Mali and Senegal, and is preparing relatively large investments in Mauritius. Although these are not China’s most strategic relationships in Africa, this trip reinforced the image of China benefiting from broad-based engagement with Africa. The trip was also seen as a necessary pre-cursor Country Visited
Mali 12 Feb 2009 Senegal 13-14 Feb 2009 USD 74.9 mn Bamako Bridge construction

A New Chapter for China and Africa - The Impact of President Hu Jintao’s visit

U

pon invitation from African and Middle Eastern countries, Chinese President Hu Jintao traveled to the Middle East and Africa from 10-16 February 2009. The trip, which was described as a ‘journey of friendship and cooperation’, took him to Saudi Arabia, Mali, Senegal, Tanzania and Mauritius. In Dakar (Senegal), President Hu commented that China would keep the promise it made at the Beijing Summit of the China-Africa Cooperation Forum in November 2006 not to reduce its aid to Africa, notwithstanding the country’s efforts at addressing the global financial crisis. President Hu expressed on a number of occasions during the trip that China was willing to boost trade with Africa by undertaking preferential measures to increase imports from the continent. The Chinese government also encouraged Chinese businesses to further invest in Africa, create more jobs for the local populations, increase technology transfers as well

to the Forum on China-Africa Cooperation (FOCAC), which will be held in Egypt in October 2009. During the trip, millions’ worth of agreements were signed, including infrastructure development, exports, interest free loans, grants and gifts. It once again confirmed Beijing’s longterm strategy for Africa and its determination to open a new chapter in the China-Africa relationship.

Major Agreements Signed
Aid to construct a hospital, a sugar plant and an aid centre for women and children USD 18 mn grant, Purchase of 10, and USD 49 mn 000 tons of national security ground nut oil loan USD 56 mn fund for building a 60,000 seat national stadium

USD 23 mn public USD 25 mn Govbus renovation ernment communi(CFA loan) cation system renovation (CFA loan) USD 17.5 mn agricultural finance USD 4.4 mn Zanzibar state radio and television rehabilitation

Tanzania 15 -16 Feb 2009

Mauritius 17 Feb 2009
Source: China Daily

USD 260 mn airport expansion

USD 6.5 mn inter- USD 5 mn grant est free loan

To further assure the USD 730 mn trade zone construction

Forum on China Africa Cooperation (FOCAC) - Cairo 2009

S

ince the first Forum on ChinaAfrica Cooperation (FOCAC) in Beijing in 2000, the political and economic relationship between Africa and China has strengthened significantly. Bilateral trade has increased from USD 10 bn in 2000 to USD 106 bn in 2008. From a Chinese point of view, FOCAC is a forum for facilitating collective consultation and for working together through pragmatic cooperation based on equality and mutual benefit. Yet FOCAC is also designed to advance South-South cooperation. In the wake of each of the Forums in the past 10 years, China-Africa economic cooperation has expanded, and a number of significant Chinese commitments have been made and put into action. During the first FOCAC held in Bei-

jing in 2000, over 80 ministers from China and delegates from 44 African countries and 17 regional and international organisations attended. Between 2000 and 2003, China agreed on debt exemption for 31 African countries, involving an amount of USD 1.3 bn. In addition, between 2002 and 2003, 117 Chinese companies invested in Africa, and 245 new economic assistance agreements were concluded with Africa. In 2003, FOCAC was held in Addis Ababa, Ethiopia. More than 70 Chinese ministers and 44 African countries attended. During and after the Forum, China committed to tariff exemption on 190 export items from Africa, as well as a contribution of USD 500,000 to the New Partnership for Africa’s Development (NEPAD). By the end of 2004, 127 economic assistance agreements had been concluded with Africa.

The most prominent Forum was FOCAC III, held in Beijing in 2006. This Forum was attended by 48 African countries, and a total of 1,700 delegates from China and Africa. After the Forum, China agreed to set up a USD 5 bn China-Africa Development Fund to support Chinese business and FDI into Africa. China also increased tariff-free African exports to over 400 items. China also aimed at establishing 7 special economic zones in Africa, two of which had commenced construction in 2009. FOCAC IV, scheduled for October 2009 in Cairo, will take place in the current gloomy global economic environment, yet China is set to achieve deeper cooperation with African countries. The promotion of bilateral trade, agricultural development, and cross-border investments will remain the main objectives for FOCAC this year.

40

Regional Focus CHINA–AUSTRALIA
At such a critical juncture of the global economy, China-Australia relations are being tested and fashioned anew. With diminishing trade, ailing industries, stalled agreements, and political scandals battering both sides, Beijing and Canberra are scrambling to forge a mutually beneficial arrangement that will enable them to emerge stronger from the crisis. By Barbie Co. China-Australia Highlights
? China and Australia to expand military cooperation: Chen Bingde, Chief of the Ge neral Staff of the People’s Liberation Army, met with the Australian Chief of the Army Ken Gillespie in Beijing in March 2009. Both sides agreed to strengthen cooperation in combating terrorism, carrying out disaster relief and conducting peace-keeping operations ? Australian PM Kevin Rudd and China Propaganda Chief Li Changchun discussed ways to further develop bilateral relationship: In a private meeting in 21 March 2009, the two officials discussed the stalled FTA agreement, the economic crisis and China’s role in the IMF, among other issues ? China needs Australian uranium: With 11 power plants in operation, 24 under construction and 5 scheduled to be built this year, China’s inadequate uranium resources prompts it to look at Australia. The China National Nuclear Corp. has held preliminary talks with Australian uranium miners China-Australia Annual Trade 2001 - 2008, USD bn
Exports to Australia Trade Balance 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 -20
Despite the ongoing crisis, China’s imports of Australian resources remain robust

International Student Enrolments by Top 5 Nationalities in Australia (Feb 2009) Nationality Total China India South Korea Malaysia Nepal Other nationalities Total 89,907 68,854 22,068 17,573 14,683 161,366 374, 451

Source: Australian Education International

China-Australia Trade Highlights
0

Imports from Australia

-5

-10

-15

? China-Australia trade tells different stories depending on the source. Chinese statistics indicate that China had a USD 15 bn deficit with Australia in 2008, whereas the Australian Bureau of Statistics (ABS) indicate that Australia had a USD 3.8 bn deficit with China ? Whatever the case is, both countries are in agreement that China became Australia’s second-largest trade partner in 2008, while Australia was China’s eight-largest trade partner. Two-way trade reached USD 65.2 bn, an in crease of 28.3% year-on-year ? State-level figures show that New South Wales imports the most from China, while W. Australia exports the most ? Ores, slag and ash remain the major exports of Australia to China, while Australia imports a significant amount of Chinese electrical machinery and equipments
Sources: DFAT; ABS; Austrade; China Statistical Yearbook; UN Comtrade

Sources: China Statistical Yearbook; TBA Analysis

China-Australia Annual Trade 2001-2008, USD bn
40 35 30 25 20 15 10 5 0 2000-'01 2002-'03 2004-'05 2006-'07
Sources: Australian Bureau of Statistics; TBA Analysis ABS figures show a relatively stable trade balance between the 2 countries

China-Australia Trade by State 2008, USD mn
22,000 20,000 18,000 16,000 14,000 12,000
WA’s significant trade surplus with China is on account of its mineral resource exports

Exports to China Trade Balance

Imports from China 0

Exports

Imports

Trade Balance 20,000 15,000 10,000 5,000 0 -5,000 -10,000 -15,000 WA

-5

-10

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

-15

-20

0 ACT NSW NT QLD SA TAS VIC Sources: Australian Bureau of Statistics; TBA Analysis

41
China-Australia Investment Highlights
? The USD 438 mn Hunan Valin Iron and Steel–Fortescue deal and the USD 1.2 bn Minmetals–OZ Minerals deal have been granted approval by the Australian government, while the Chinalco–Rio Tinto deal is still in the hands of the FIRB and Federal Treasurer Wayne Swan. Approval of the Minmetals–OZ Minerals deal came after the Australian government rejected the Chinese company’s initial offer of USD 1.8 bn due to Prominent Hill security concerns. Minmetals immediately resubmitted an offer that was deemed acceptable by the government ? The Australian Greens will move for a Senate inquiry into whether foreign acquisitions of the country’s resources sector by foreign government entities are in the national interest. This comes in the wake of the successive mining deals ? Real estate investments have been steadily increasing from USD 83.36 mn in 2004 to USD 604.27 mn in 2007 as a growing number of affluent Chinese families set up their children in what will be their second homes in Australia Foreign Investment in Australia by Sector, 2007
100% 319.92 Mining
In 2005, the mining sector overtook the manufacturing sector, which used to receive the most direct investments from abroad Manufacturing 78.24 Wholesale and Retails Trade Finance and Insurance 57.34 Transport & Communications Property & Business Services 46.25 Constructions Unallocated 43.31

FIRB Approved Chinese Investments in Aus. by Industry
USD mn 6,000

5,000 4,000 3,000

80%

Services and tourism Real estate Mineral exploration and development Manufacturing Agriculture, forestry and fishing Number of Approved Investments

1000

800

60%

600 400

40%

2,000 1,000 0 1994-95 1997-98 2000-01 2003-04 Sources: FIRB Annual Reports; TBA Analysis 200

20%

27.45

26.82 13.2 Others 12.64 8.52 6.16 0% Sources: Australian Bureau of Statistics; TBA Analysis

Elec., gas & water

0 2006-07

Australian Natural Resources M&A Inflow by Buyer’s Nation
China China 2009 2008 2008 2007 US US Switzerland Switzerland UK UK Canada Canada Malaysia Malaysia Japan Japan HK HK Other Others

2006 2005
2004 2004

Figures have not yet taken into account the 2 latest approved deals: MinmetalsOZ Minerals and Hunan ValinFortescue

2003 2003 0% 0% Source: DEALOGIC 20% 20% 40% 40% 60% 60% 80% 80% 100% 100%

Recent Developments in China-Australia Foreign Investment 2008-2009 Month Acquirer Target Amount USD May-09 Anshan Iron and Steel Gindalbie Metals 108.85 bn Apr-09 Chinalco Apr-09 China Nonferrous Metals Mining Apr-09 Minmetals Mar-09 Hunan Valin Iron and Steel Mar-09 Minmetals Mar-09 Geely Automobile Mar-09 Sinosteel
Sources: Press; TBA Analysis

Stake Up to 36.28% 18% 12.29% 100% 17.55% 100% 100% 5.85% 25%

Status Approved Pending Pending Approved Approved Rejected Completed Completed Pending

Rio Tinto Terramin Australia Ltd. OZ Minerals Fortescue Metals Group OZ Minerals Drivetrain Systems Int’l Murchison Metals Ltd.

19.5 bn 46 mn 1.2 bn 438 mn 1.8 bn 40 mn Undisclosed 15.216 mn

Feb-09 Jiangsu Eastern China Nonferrous Arafura Resources Ltd.

42 CHINA–AUSTRALIA
The Changing Landscape of China’s Australian Investments
In the face of the current global crisis and China’s tireless development, the Rudd administration needs to adroitly juggle the demands of national security, economic advancement and the populace in considering the wealth of mining investments coming from China. By Barbie Co.
he approval of the 17.55% stake of Hunan Valin Iron and Steel in Fortescue Metals Group and the more recent approval of the USD 1.2 bn offer of Minmetals for OZ Minerals illustrates China’s continuing pursuit of resources to fuel the country’s development. Presently, the major deal that hangs in the balance is Chinalco’s USD 19.5 bn bid for a stake of debt-laden mining giant Rio Tinto.

Focus

T

panies financially vulnerable. Coupled with a weak Australian dollar and an ailing economy, Chinese investors saw this as a prime opportunity to enter the market, stimulate muchneeded production while at the same time securing a portion of Australia’s resources to fuel its own development. Herein lies the crux of the Australian government’s predicament: How does it find an acceptable compromise between the demands of national security, economic survival and the populace? The government has already identified several realities that need to be taken into serious consideration. There is a strategic dimension to the investments. Rio Tinto’s assets, in particular, are a strategic resource for the country. Unlike their gas deposits, Australia does not have many other iron ore deposits of Rio’s mines’ scale. Approval of this deal essentially means allowing considerable access and price leverage to a major consumer. On the other hand, this also provides a strategic opportunity for Rio to further establish itself in the Chinese market. The sellers are in a weak financial position. Last year, Rio Tinto announced redundancies of 14,000 workers after BHP Billiton abandoned its suit for the second-largest Australian miner. April this year saw the additional cutting of 700 positions due to falling demand and prices. OZ Minerals urgently needs funds to pay a standing debt of roughly USD 1.2 bn. So far, both of the Federal Government’s stimulus packages (worth USD 7.4 and 27 bn) have failed to adequately address the needs of the mining sector, leaving foreign investment as the sole helping hand of these firms. The buyer is a state-owned enterprise under the aegis of a centrally-planned

government. The Australian Foreign Investment Review Board (FIRB) finds itself in a unique position of weighing the growing consequences of having a singular foreign government invest in potentially strategic and sensitive areas of the Australian economy. This adds a distinct dimension of foreign policy to the list of items that the FIRB would be required to consider. Charting a course of action The Australian government already has a list of factors to consider when examining proposed investments by companies associated with foreign governments. In some cases, they may be easy to call as the nature of the investments does not impact national interest or state security. In others like the Rio Tinto and the OZ Minerals deals, a closer scrutiny is called for as key resources, security issues, large-scale employment and public acceptance are on the line. The FIRB has already decided to extend its review period for the Rio Tinto deal and this gives them a bit of breathing space to consider all the variables at play. They would have to carefully weigh the economic, diplomatic and social consequences of their decisions in the short term and in the long run, more so because the two countries are at a critical juncture of their economic relationship, with an FTA agreement in the works. At the end of the day, these companies urgently need financial assistance to survive the current global meltdown, and the Chinese companies have the cash that they need. Barring any further security concerns, there is arguably no reason for the FIRB and Wayne Swan to block this and future deals, as the alternative would be to deal a heavy blow to their mining industry, which has been the bedrock of the country’s boom in the past few years.

The recent sudden upsurge in the number of Chinese applications for investments in Australia, coloured by resource security concerns and political undertones, has been a controversial topic in the country. Financially distressed companies, particularly mining companies, are rejoicing at the thought of fresh cash inflows and a window into the biggest resource market in the world. A changed world China entered this recession with the world’s strongest forex reserve position of nearly USD 2,000 bn. With these resources at hand and their development plans calling for foreign technology, China is eager to do its part in stimulating the global economy by keeping investment and trade open, instead of falling into the protectionist trap which has traditionally been the knee-jerk reaction of the US to large-scale contagion. How does this affect Australia? Recent announcements have claimed that Australia has been weathering the global downturn quite well as their financial markets are in better shape than that of other countries. However, the sudden drop of commodity prices in the second half of 2008 sent panic rippling through the country’s mining sector. Companies across the board were announcing job cuts, project cancellations and production freezes, and this has continued well into 2009. This has left Australia’s mining com-

43

Regional Focus CHINA–LATIN AMERICA
As the financial crisis continues to unfold and commodity prices decline further, LatAm’s resourceintensive economies are set to experience a continuing economic slowdown. China’s influence in commodity prices and the likely rebound of its economy in Q4 2009 are key for LatAm economic growth prospects. We analyze the drivers, enablers and constraints. By Javier Cu?at. China-LatAm Highlights
LatAm economies have experienced economic growth in recent years, thanks largely to intense Chinese demand for their natural resources. China's consumption of iron ore, copper, soya and oil seeds among others, has helped push the price of commodities to new levels, presenting new opportunities for economic growth in the region. On the other hand, this optimistic scenario has become a concern since China is also accentuating LatAm’s dependence on exports of primary products and therefore outperforming LatAm in global manufacturing markets. While the current environment will not facilitate any industrial diversification strategy, which is a long-term approach desired by countries in the region, China’s demand for resources will potentially be able to mitigate the worst effects of the crisis in Latin America. Bilateral Trade China-LatAm 2003-2007, USD bn
50 40 30 20 China Exports to LatAm China’s China Imports from LatAm trade deficit

China-LatAm Trade Highlights*
? The dramatic growth of China-LatAm bilateral trade from USD 23 billion in 2003 to USD 90 billion by the end of 2007 not only reflects China’s hunger for natural resources and the expansion of commodity exports to China, but also the internationalisation of Chinese goods into LatAm’s growing consumption market Chinese imports from the region have increased by an annual average of 40% in the last eight years, enabling countries like Brazil, Argentina, Chile, Peru and Venezuela to have notable trade surpluses with China. In the case of Chile, for instance, China overtook the United States as the largest destination of Chilean exports in 2007 China’s imports from LatAm are concentrated in three countries: Brazil, Chile and Argentina. These accounted for 72% of the total import volume in 2007 China’s exports to LatAm are also concentrated in three countries (Mexico, Brazil and Chile - 67% of the total), with Mexico being the better example of the increasing competitiveness of China as a low cost country. China has already taken Mexico’s place as the second largest supplier of the United States while Chinese products are also flooding the Mexican market

?
10 0 2003 2004 2005 Sources: UN Comtrade; TBA Analysis 2006 2007

Breakdown of Trade by LatAm Country 2007, USD mn
50,000 40,000 30,000
Chile Chile Brazil Brazil

20,000
Argent.

10,000 0

Mexico

China Imports from China Exports to LatAm LatAm Sources: UN Comtrade; TBA Analysis

Brazil Chile Argentina Peru Mexico Venezuela Cuba Colombia Uruguay Ecuador Bolivia Paraguay

? ?

*Note: LatAm here refers to the Latin American Integration Association (LAIA). LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, México, Paraguay, Perú, Uruguay and Venezuela.

Breakdown of China Imports by Product (2007)
100% Primary driver: China’s hunger for natural resources 80% 60% 40% 20% 0%
Oil seeds Mineral fuels Ores Wood pulp Fats & oils Mineral fuels Ores Copper Oil seeds

Breakdown of China Exports by Product (2007)
100%

Secondary driver: LatAm consumption market
Elec. Electrical Machinery machinery Mech. appliances Opt./photo Opt./photo Tools tools Others Electrical machinery Mech. appliances Textiles, knitted

80% 60% 40% 20%

Others

Others Brazil Chile Sources: UN Comtrade; TBA Analysis

0%
Argentina

Mexico Brazil Sources: UN Comtrade; TBA Analysis

Chile

44
China-LatAm Investment Highlights
In 2007, Latin America and the Caribbean received USD 4.9 billion from China in investment, which accounted for 18% of the total Chinese OFDI for that year. These investments went mainly to the Cayman Islands and the British Virgin Islands, the two main tax havens of the region. Investment in these areas typically results in re-investment in other host economies, including China itself. Concerning other LatAm countries, the most favored areas of investment have been petroleum and gas, minerals and metals (primary driver), telecommunications and electronic equipment (secondary driver). In addition, Chinese investment in Latin America is also driven by the recognition of China’s status as a Market Economy, and by the One China Policy. Chinese OFDI Flow to LatAm 2003-2007, USD mn
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2003 2004 2005 2006 2007
Source: Statistics Bulletin of China’s Outward Foreign Direct Investment

Breakdown of Chinese OFDI Flow to LatAm 2007
54% Cayman Is Br. Virgin Is Argentina Venezuela Guyana Brazil Bahamas Suriname Mexico Others
Note: Others refers to Panama (USD 8.3 mn), Peru (USD 6.7 mn), Cuba (USD 6.5 mn), St. Vincent & Grenadine (USD 5.8 mn), Chile (USD 3.8 mn), Ecuador (USD 3.58 mn), Bolivia (USD 1.9 mn), Uruguay (USD 0.5 mn), Barbados (USD 0.4) mn , Colombia (USD 0.2 mn) and Honduras (USD 4.38 mn)

100% Chinese OFDI in LatAm % Total Chinese OFDI 80%
39%

60% 40% 20% 0%

Major Chinese Companies Operating In Latin America
Sector Petroleum and gas
Main driver

China-LatAm Investment Highlights
? Brazil’s Petrobras is negotiating the terms of a USD 10 bn loan with the China Development Bank after signing a memorandum of understanding in February 2009 ? The sale of MMX (USD 1.4 bn), the Brazilian iron ore project controlled by Eike Batista, is gaining momentum. Brazilian analysts said that Wuhan Iron and Steel Group and Baosteel are pursuing the asset ? Telemar (the Brazilian telecom, also known as Oi) has obtained a USD 300 mn loan from China Development Bank, which plans to use proceeds to finance its 2008-2009 investment activity in China with network equipment supplier Huawei ? The People’s Bank of China and Central Bank of Argentina announced the formal signing of a RMB 70 bn (USD 10 bn) bilateral currency swap arrangement ? Ecuador has formally begun negotiations with the Chinese state-owned Sinohydro to build the country's biggest hydropower plant (USD 2 bn, 85% financed by Sinohydro)
Sources: NY Times; Latin Finance

Mining CNMC Shougang Group

TeleMotor- ElecFishery IT com cycles tronics Shanghai Fisheries Nanjing Jincheng
Secondary driver

Company CNPC Sinopec

CNOOC Sinochem China Minmetals Baosteel Group Sinosteel

Huawei

Argentina Bolivia Brazil Chile Colombia Cuba Ecuador Mexico Peru Venezuela

Put your graphs/tables or text here. See attached file for chart-making
X X X X X X X X X X X X X X X X X X X X X X

X

X X X X

Lenovo

X

X X

X X

X

X X X X X X X

X

X X X

Sources: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Information from China’s consulates In Latin America and Ministry of Commerce of China, Statistics Bulletin of China’s Outward Foreign Direct Investment 2006

LatAm and The One China Policy
? The LatAm region and Central America contain 11 of the 26 countries that still have official diplomatic ties with Taiwan, which represents a strategic challenge for Beijing. In June 2007, Costa Rica broke off diplomatic relations with Taiwan, the first Central American country to do so ? Cuba, which recognised Beijing as early as 1960, was China’s major ally in the LatAm region prior to 1970, with a strong ideological connection with China. Chile recognised China at the start of the 1970’s, and today it is recognised by all LatAm countries except for six Central American countries (Belize, El Salvador, Guatemala, Honduras, Nicaragua, and Panama), four Caribbean countries (Dominican Republic, Haiti, St. Kitts and Nevis, and St. Vincent and the Grenadines), and one South American country (Paraguay)

TTE (TCL Thoms.)

45 CHINA–LATIN AMERICA
Weaker Demand, Stronger Relationships
In contrast to the heavy dependence that Latin American countries have shown towards the US economy in recent decades, the LatAm region is currently looking for more alternatives to rebound from the global financial crisis. Despite the current recession, China has the potential to reinforce its growing influence in the region. By Javier Cu?at.

Focus

G

iven their strong commercial and investment linkages with the US, the economies of Latin America have been strongly impacted by the financial crisis. As the recession and liquidity crisis continue to hit the US and European economies, we will be expecting lower capital inflows into the region, lower exports due to reduced external demand and lower revenues from tourism and remittances. Furthermore, the decline in commodity prices, one of the main drivers of economic growth in the past years, is a serious setback for major LatAm economies such as Brazil, Argentina, China or Venezuela, whose economies are resourceintensive and export-oriented. Yet in contrast to the vulnerabilities that LatAm economies showed in the Great Depression or in the ‘lost decade’ of the 1980’s, the prospects for LatAm economies for 2009 are better than those of the developed world. While the US and Europe are mired in the worst recession in decades, countries like Peru are expected to grow as much as 5% in 2009, while other small economies such as Cuba, Panama and Uruguay will grow at around 4%. Argentina is expected to grow at 2.6%, Brazil at 2.1%, Chile at 2% and Venezuela at 3%. For the whole of South America, ECLAC estimates a 2.4% growth rate. Mexico and other Central American countries however, will experience the largest contraction given the lower demand from and the higher interdependence with the US economy. Improved monetary and fiscal policies, well regulated banking systems and current account surpluses have put some of the major LatAm economies in a better (or less worse) shape than in the past. However, LatAm countries’ recent economic growth, which owed much to increasing bilateral trade with China, undoubtedly

Fiscal Situation and Estimated Size of Announced Fiscal Stimulus Packages in Major LatAm countries
Country Initial Conditions Gross Pub- Budget lic Debt % balance (% GDP) GDP) Brazil Mexico Argentina Chile Peru 35.8% 20.3% 44.2% 4.8% 24.4% -1.4% -0.1% 1.3% 5.3% 2.2% Budget Expenditure (%GDP) N/A 24.9% 27.4% 19.0% 27.5% Estimated Size of Stimulus USD bn amount 8.6 8.6 4.4 4.0 1.4 % GDP 0.5% 1.0% 1.3% 2.2% 1.1% Estimated tax cut share 100% 0.0% 0.0% 63.0% 0.0%

Sources: EIU; IMF; Various

played a crucial role. In China’s economic boom and the need to feed its fast-growing economy, LatAm countries have seen a clear opportunity to diversify export markets. LatAm’s export-oriented economies are progressively changing the destination of their goods from developed economies (mainly the US) to the Asian emerging giants (mainly China). Today, China is LatAm’s second-largest trading partner (after only the US) and has become a critical part of the engine of economic growth in the region. In fact, China has just become Brazil’s biggest trading partner. Within the context of global financial turmoil, LatAm countries are now not only looking at the duration and intensity of the recession in the US, but also to the opportunities that China are offering. At the current juncture, as government intervention seems to be the most effective way to offset the contraction of external demand, LatAm countries are experiencing difficulties to formulate solid fiscal stimulus plans, mainly because of the decrease of export prices and government debt. China is currently injecting USD 586 billion in its economy, much of it in infrastructure, which is ex-

pected to progressively boost imports and prices of natural resources again. Facts and cash Far from being merely speculation, China is already facilitating liquidity in the region, negotiating and signing several deals. USD 2 bn to build a hydroelectric plant in Ecuador, a USD 10 bn loan to Petrobras or the USD 10 bn bilateral currency swap with Argentina are examples of the proactive, resources-oriented and cashbacked alternative that China provides to LatAm, especially relevant now in this time of crisis. This complements the recent engagements between the regions such as China’s membership in the IADB; China’s first policy paper on LatAm; President Hu’s visit to Peru (APEC Summit), Costa Rica and Cuba or Chinese Vice-President Xi Jinping’s visits to Jamaica, Colombia, Venezuela, Brazil and Mexico. While it is still uncertain what the full impact of the crisis will be for China and the LatAm economies, it is likely that the outcome of the interaction between the two regions in the current environment will not only be weaker demand but also stronger relationships.

46 50

Regional Focus CHINA–RUSSIA
Both China and Russia are still grappling with the negative effects of the financial crisis, and in Q1 2009 bilateral trade volumes steadily declined, while cross-border FDI investment did not see significant change. Yet the first quarter of the year also saw the signing of a number of long-awaited agreements between the two countries to promote strategic cooperation. By Julia Wang. China-Russia Highlights
? Despite the ongoing financial crisis, economic and trade cooperation between China and Russia still grew steadily in 2008. Bilateral trade volumes reached USD 56.83 bn, an increase of 18% compared with the previous year. Due to the crisis, however, these bilateral trade volumes have decreased since November 2008 ? In January, the total trade between the two countries declined by 35.4%, reducing Russia's exports by 42.7% and its imports by 29.9% ? Both China and Russia have been heavily influenced by the crisis, but anti-crisis policy responses have been very different. China's response has strongly supported infrastructure and industrial investment, while Russia’s commitment to public service areas and social stability has been prominent. Comparing 2008-2010 fiscal stimulus plans, Russia’s expenditure is USD 220 bn, accounting for a 13.9% share of GDP. China's expenditure is USD 568 bn, accounting for 13% of GDP. Judging from Q1 macroeconomic indicators, China has built up a good momentum of credit, investment and consumption growth, yet the outlook for the Russian economy remains very negative ? China and Russia will continue to promote the development of bilateral trade in various ways, such as the organising of exhibitions, the transfer of technology and a trial program for renminbi (RMB) settlement. The first China-Russia Machinery and Electrical Appliance Exhibition will be held on May 16-18 in Heilongjiang province in the north of China. China’s State Council has identified five key manufacturing cities: Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan, which have all been permitted to conduct international merchandise trade transactions entirely in RMB Russia-China Trade 1999-2008, USD mn
40,000 Russian Exports to China Russian Imports from China

China-Russia Trade Highlights
? China is Russia's second-largest trade partner after EU; Russia is China's ninth-largest trade partner ? By the end of 2008, China was Russia's largest source of imports ? In 2008, the total amount of Russian exports to China was USD 20.39 bn, an increase of 5.6% y-o-y; the total amount of Russian imports from China was USD 34.66 bn, growing 42.7% y-o-y ? Mineral products, wood and fertilizers remain the top Russian exports to China. Exports of mineral products increased by 68.7% y-o-y, while exports of wood decreased 8.9% y-o-y ? In 2008, mechanical and electrical appliances became China’s largest export commodity to Russia, displacing light industry products. Imports of mechanical and electrical appliances, textiles and base metal articles increased by 47.3%, 55.5% and 40.0%, respectively, taking the market share of these Chinese exports to Russia to 21.6%, 39.7% and 23.1%. These three imports accounted for 63.4% of Russia’s
total imports from China in 2008
Sources: Multiple sources; TBA Analysis

30,000

20,000

10,000

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: MOFCOM; TBA Analysis

Russia’s Imports from and Exports to China 2008, USD bn
Trans100% portequip80% ment 1.92 2.19 2.92 3.05 Light industry products Textiles

100% Others 80% 60%

0.81 1.14 1.66 2.40

Pulp and paper Base metals Wood

60% Base metals 40% 20% 0%

8.58
Others

2.48
Chemical products

40%

16.00

Mechanical and electrical appliances

11.91 20% 0% 2008 Exports
Mineral products

2008 Imports
Sources: MOFCOM; TBA Analysis

47
China-Russia Investment Highlights
? Mutual investment between China and Russia has been developing very slowly for a period of time. Yet Russia remains an important target market for Chinese investors ? China’s FDI outflows to Russia declined by 83% from USD 440 mn in 2007 to USD 240 mn in 2008, while Russia’s FDI outflows to China increased by 13% from USD 52 mn to USD 60 mn ? Investments by Chinese companies in Russia are concentrated in Siberia, the Far East, Moscow and St. Petersburg, with a prominent Chinese presence in the natural resources and related sectors such as oil, gas and forestry ? Russian companies’ investments in China are mainly concentrated in the manufacturing sector ? The Intergovernmental Agreement on the Encouragement and Mutual Protection of Investment, signed on 9 November 2006 and implemented from March 2009, injected new vitality into business cooperation between the companies of the two countries ? An increasing number of large Chinese companies, banks, and small and medium enterprises in various fields are presently re-evaluating potential market opportunities in Russia, and are actively searching for new forms and methods of cooperation Russia Industrial Production and Investment y-o-y Growth Rate (%)
40 20 0 -20 -40 -60 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Sources: Russian Publishing Company “Expert Group”; TBA Analysis

Fixed Investment

Industrial Production Index

Russia FDI Stock by countries 2008, USD bn
Ukraine Germany Armenia United Kingdom Sw itzerland Belarus Brit. Virgin Islands United State Netherlands Cyprus 0
Sources: ROSSTAT; TBA Analysis

Russia–China Bilateral FDI 2004-2008, USD mn
500 450 400 350 300 250 200 150 100 50 0 2004 2005 Russia FDI to China China FDI to Russia

0.12 0.51 0.68 0.73 1.19 1.32 1.45 4.67 9.79 9.99 2 4 6 8 10

2006

2007

2008

Sources: MOFCOM; TBA Analysis

Foreign Investment into Russia by Sectors, USD bn
Total: 29.7 53.7 55.1 120.9 103.8

Russia FDI Inflow by Sectors 2008, USD mn
100% 27,027
Electronic appliances Crude oil Data processing Plastic in primary form Steel products

120

90

60

Ot hers Real est ate operat ions Financial act ivities Transport and communicat ions Dist ributive trades Construction Electricity, gas and water M anuf acturing M ining operations

17 8 12 15 47 9 6 13 15 2006 2007 2008 24

80% 5,918 60% 5,043

Soya beans Unwrought copper

30

0

6 5 11 7 2003

6 3 20 18 2005

40% 20%

4,979 3,994 2,332 1,713

32

34

Refined petroleum products Others 958 808

0%
Sources: ROSSTAT; TBA Analysis

1,282

Sources: ROSSTAT; TBA Analysis

48 CHINA–RUSSIA Focus

East Siberia-Pacific Ocean Crude Oil Pipeline Project: Long-awaited Agreement Finally Reached
China and Russia are making joint efforts on maintaining strategic cooperation in the energy field. With the slowing demand for natural resources, it is crucial for China to diversify its oil imports and for Russia to guarantee long-term oil contracts. The 60th anniversary of diplomatic ties between these countries has now been marked by the signing of an historic energy deal. By Nikita Popov.

O

n 17 February 2009, China and Russia finally reached consensus on the largest ever energy deal between these two countries. China National Petroleum Corporation (CNPC) signed the contract with Russian companies Rosneft and Transneft on construction of the East SiberiaPacific Ocean (ESPO) crude oil pipeline, which will supply 15 million tons of Russian crude oil per year to China during the next 20 years. According to the terms of the contract, designated volumes of oil will be supplied to China in exchange for the granting of a USD 25 billion loan to the two Russian companies, of which USD 15 billion will go to oil-producing company Rosneft and USD 10 billion to oil-transporting company Transneft. Changing times in 2008 The history of the ambitious project dates back to 2001, when former Russian oil-producing company Yukos proposed to build an oil pipeline to China. The pipeline was supposed to stretch from the Russian East-Siberian city of Angarsk, where Yukos operated a refinery, to Daqing in northern China. In 2002, Transneft proposed an alternative project to transfer oil from Taishet in the Irkutsk Region and to the far east port of Nakhodka, thus engaging Japan and Korea as more potential consumers. In May 2003, the government of the Russian Federation decided to combine these projects. According to the initial plan, Transneft was supposed to be in charge of the pipeline, while Yukos would supply the oil. On 29 May 2003, Russia and China finally signed the agreement on the construction of the pipeline. Actual implementation of the project, however, turned out to be easier said than done. During next five years,

Precious cargo: The new pipeline will pump up to 1.6 million barrels of crude oil per day from Siberia to Russia's Far East and then on to China and the AsiaPacific region. (Photo: RIA Novosti/Mikhail Fomichev)

construction was delayed many times for economic, technical, ecological and political reasons. Initial problems emerged just a few months after the agreement, when in September 2003 Mikhail Khodorkovsky, CEO of Yukos, was arrested on changes of fraud. As a result, further negotiations on the project were suspended. In 2006 a Russian court declared Yukos bankrupt, and the company was liquidated. Eventually, the other oil company, Rosneft, assumed the right of providing oil for the ESPO pipeline. Yet obstacles kept occurring along the way. During the first months of 2006, Rosneft and Transneft were confronted with complaints from the natural resources committee of Russia’s State Duma, Greenpeace and WWF. Consensus was eventually achieved, however, and on 28 April 2008 the first joints of the pipeline were welded together in Taishet, signaling the commencement of construction on the ESPO crude oil pipeline. Despite all the agreements and terms that were agreed to, the construction process at first progressed excrucia-

tingly slow. The route of the pipeline was altered a few times, and the deadline had to be postponed due to technical problems, according to the statements made by the Transneft leadership. All these lags, though carefully explained away by the representatives of Russian companies, induced lingering assumptions that the state-owned companies were deliberately stalling the construction process. With oil prices still soaring in the first half of 2008, it seemed that the Russian companies could afford taking their time, leisurely bargaining for better terms of the deal. The situation changed dramatically, however, with the advent of the financial crisis, which dragged oil prices to appallingly low levels. Once oil revenues began tumbling, the Russian oil companies had to jettison any excessive expectations. In light of the aggravated situation in the energy market, the plight of Rosneft was especially serious, considering the company’s urgent need to generate cash inflows in order to pay off bulging debts, which currently totals

49 CHINA–RUSSIA
nearly USD 21 billion, with USD 7 billion due for payment in 2009. Small print Details of the contract, signed on 17 February 2009, state that Russia will construct Phase 1 of the ESPO pipeline, which extends from Taishet to Skovorodino near the border with China. Under the agreement, Russia will build a 60km spur from Skovorodino to the border, and China will construct a 970km link to Daqing. Construction of Phase 1 is planned to be fully completed by the end of this year. The pipeline is expected to start operating to full capacity by the beginning of 2011. The USD 25 billion loan will be backed by China Development Bank (CDB), one of China’s largest state-owned enterprises. According to the spokespersons of Rosneft, apart from paying the company’s debts, money will also be spent on acquiring assets of oil companies abroad. Prices for oil supplies have not been disclosed yet. At present, it is already known that the new brand of oil for the ESPO crude oil pipeline, ESPL Blend, is at the final stage of development and will be completed during 2010. Discussions on establishing a GOST standard for this new oil brand are ongoing in the Russian government. The purpose of creating the ESPL Blend is to distinguish price formation for the oil in the ESPO project from the oil of the Urals brand of general Russian oil exports. Give and take Russian companies, trying to strike the deal on more profitable terms, had to make some concessions to the Chinese side. These concessions were not about the price of oil itself, but about the terms of receiving and paying back the loan from CDB. While both the Chinese and Russian top officials involved in the negotiations, including Chinese Vice Premier Li Keqiang and Russian Deputy Prime Minister Alexander Zhukov, agreed that the deal was mutually beneficial for both countries, it is still likely that

Focus (cont.)

Done deal: Chinese Vice Premier Li Keqiang (right) and Russian Deputy Prime Minister Alexander Zhukov during the meeting on strategic cooperation in Beijing, March 27, 2009. (Photo: Xinhua/Huang Jingwen)

Russia could have turned the deal more to their advantage had there not been a sharp decline in oil prices. At the end of March, CNPC and Rosneft also announced that they may soon begin construction of their longplanned Tianjin oil refinery. The idea for this refinery project received new impetus after Russia finally agreed to pump oil to China via the ESPO pipeline. The Tianjin city government said construction of the RMB 21 billion (USD 3.1 billion) plant, which will be located in its Binhai chemical area, could be completed by 2012. After the completion of construction of the link to Daqing (Phase 1 of the ESPO pipeline), China hopes to extend a pipeline from Daqing southward to Tianjin in order to secure supplies for the new refinery. A more assertive China China is clearly continuing to make efforts to diversify its oil imports, accelerating efforts for striking new deals in the energy field. The agreement with Russia, though the most notable and important, was not the only one. About one week after the contract with Rosneft and Transneft was signed, China Development Bank

agreed to lend USD 10 billion to Brazil’s oil giant Petrobras in exchange for long-term supplies of oil. The contract will be finalised within the following two months so it can be signed when Brazilian president Luiz Inácio Lula da Silva visits China in May. In addition, at the beginning of February, Chinese President Hu Jintao visited Saudi Arabia, the world’s largest oil exporter, to seek potential new oil contracts. Such increased activity demonstrates that, in the light of the current economic downturn, China is trying to satisfy its growing domestic needs and to attain strategic goals. It is also possible to view China as acting more assertively, ready to utilise its position as a country with the largest foreign reserves and a solid banking system to obtain better access to the natural resources of the main players in the energy market.

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Upcoming Events
THE BEIJING AXIS can assist delegates who wish to attend fairs, exhibitions and conferences in China. Services include research, interpretation, negotiation and travel logistics. For more information, please send an email to info@thebeijingaxis.com, or for more contact details see ‘About THE BEIJING AXIS’ on page 54.
Date 3 - 7 May 09 5 - 7 May 09 6 - 8 May 09 7 - 8 May 09 13 - 15 May 09 14 - 16 May 09 8 - 12 Jun 09 10 - 12 Jun 09 11 - 13 Jun 09 16 Jun 09 16 - 19 Jun 09 17 - 21 Jun 09 18 - 20 Jun 09 18 - 20 Jun 09 18 - 20 Jun 09 23 - 25 Jun 09 23 - 26 Jun 09 23 - 26 Jun 09 28 - 29 Jun 09 28 - 30 Jun 09 30 Jun - 2 Jul 09 8 - 10 July 09 10 - 11 July 09 17 - 21 Jul 09 28 - 31 Jul 09 28 - 31 Jul 09 29 - 31 Jul 09 8 - 11 Aug 09 13 - 15 Aug 09 Event China Import and Export Fair (Canton Fair) 5th Shanghai Tube Expo SNEC 3rd (2009) International Photovoltaic Power Generation Expo 2nd Annual Energy Efficiency Asia 2009 3rd China International Logistics Technology and Services Expo China International Foundry Fair 8th China International Consumer Goods Fair 6th PPI China 15th Shanghai Metallurgy Expo China Structured Products Forum 2009 GMT - Canton Machine Tool Fair Nonferrous Metals Mining Conference 9th China International Steel Construction Fair 14th China International Exhibition for Building Material, Building System, Construction Machinery & Architecture 2009 China Inner Mongolia International Coal & Energy Industry Expo International Stainless Steel Conference 4th China International Metals Industry Fair 2009 10th China (Guangzhou) International Metal & Metallurgy International Aluminium Fabricating Conference 5th China International Coal Equipment and Mine Technical Equipment Exhibition 2009 Aluminium China 2009 7th International Exhibition on Electric Power Equipment & Technology 2009 International conference on Information Engineering 7th Nonferrous Metals Mining Conference 2009 (NMM 2009) 10th China International Industrial Automation and Instruments (Qingdao) Exhibition 10th China International Machine Tools & Modules (Qingdao) Exhibition 9th Shanghai Children Baby Maternity Products Expo 2nd International Conference on Computer Science and Information Techno-logy 2009 China (Beijing) International Steel Tube Industry Expo 2009 Location Guangzhou Shanghai Shanghai Beijing Suzhou Dongguan Ningbo Guangzhou Shanghai Beijing Guangzhou Guiyang Beijing Beijing Inner Mongolia Wuxi Guangzhou Guangzhou Shanghai Beijing Shanghai Shanghai Taiyuan Guiyang Qingdao Qingdao Shanghai Beijing Beijing

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Date 13 - 15 Aug 09 17 - 19 Aug 09 18 - 20 Aug 09 19 - 21 Aug 09 21 - 23 Aug 09 1- 3 Sep 09 1 - 5 Sep 09 8 - 10 Sep 09 8 - 10 Sep 09 8 - 10 Sep 09 8 - 11 Sep 09 17 - 18 Sep 09 24 - 26 Sep 09 20 - 22 Oct 09 20 - 23 Oct 09 27 - 30 Oct 09 2 - 4 Nov 09 3 - 7 Nov 09 4 - 6 Nov 09 12 - 14 Nov 09 Event 6th China (Beijing) International Casting & Forging Exhibition, 2009 7th China International Auto Supplies Sourcing Fair 5th China International Metal Working Technology & Equipment Exhibition 2009 International Conference Industrial Globalization and Technology Innovation 7th International Symposium on Rockburst and Seismicity in Mines 6th Shanghai International Stainless Steel Expo China International Equipment Manufacturing Expo (CIEME 2009) 2009 China International Electronic Industry Expo International Lead and Zinc Conference International Manganese Conference 13th China International Fair for Investment and Trade 4th Annual PorTech Asia 2008 China International Auto Parts Expo (CIAPE) China Mining 17th China (Shenzhen) International Toys & Gifts Fair China Coal & Mining Expo 2009 World Scrap Metal Congress 2009 Metalworking & CNC Machine Tool Show 17th China International Industry Fair 3rd China International Exhibition for Aluminium Industry Location Beijing Shanghai Tianjin Shaanxi Dalian Shanghai Shenyang Beijing Lanzhou Changsha Xiamen Tianjin Beijing Tianjin Shenzhen Beijing Shanghai Shanghai Chongqing Beijing

SUGGESTED READING

China Entrepreneur (2009), reviewed by The Economist
Despite China’s remarkable transformation, it can still baffle foreign investors. Yet for any entrepreneur planning a venture in China, China Entrepreneur: Voices of Experience from 40 International Business Pioneers would be an excellent first step. Authors Juan Antonio Fernandez, professor of Management at the China Europe International Business School (CEIBS), and Laurie Underwood, journalist and Director of External Communication at CEIBS, here distil the combined wisdom of 40 entrepreneurs who have succeeded in China, selected from a variety of industries and countries in the developed and developing world. The chapters deal with starting up, choosing partners, getting paid, hiring staff, corruption, negotiations, daily living and much more. The material is wellorganised and clear, with summaries, case studies, call-outs and key rules. Particularly illuminating are the insights on the importance of Guanxi - the network of social and business connections so vital to doing business in China, as well as material dealing with the pitfalls of business negotiations. The book is enlivened by the interviewees’ colourful personal anecdotes, and as such China Entrepreneur successfully presents itself as an operational handbook for the newcomer in China. China Entrepreneur features THE BEIJING AXIS Founder & Group Managing Director, Kobus van der Wath, as one of the 40 foreign China entrepreneurs included in the book.

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Careers at THE BEIJING AXIS
THE BEIJING AXIS is constantly looking for dynamic, performance-driven individuals to assist us in meeting our business challenges. Applications will be treated confidentially. If you believe you can make a contribution, send your detailed CV with a letter of motivation and references to Group MD Kobus van der Wath: kobus@thebeijingaxis.com. (Note: international relocation is possible)
LEAD CONSULTANT (CHINA CAPITAL ADVISORS) Beijing: 1 position Role ? Lead multiple advisory assignments in the Investment Advisory Division of THE BEIJING AXIS ? Project manage assignments and ensure quality and time objectives are met; ensure maintenance of professional ‘best practice’ standards across assigned projects ? Valuation, modelling, participation in overall investment process ? Manage 2-4 deal-team consultants and analysts ? Be a thought leader and promote the development of learning processes and platforms ? Improve process efficiencies, optimise workflow, control costs ? Client relationship management ? Ensure alignment of Division’s objectives with those of the Group ? Multi-sector assignments with emphasis on resources, mining and industry ? Significant (international) travel Requirements ? Superior analytical and problemsolving abilities: Valuation, model ling and deal structuring ? Ability to work with diverse cultures and backgrounds ? Interest in and knowledge of China’s cross-border business engagement ? Sound judgement, maturity and a systematic mind ? Conceptual thinking and attention to detail ? MBA/CFA/CA or legal background preferred with more than 3 years experience in finance/ consulting ? Native English written and verbal communication skills essential ? Mandarin ability essential ? Willingness to travel

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 competitive remuneration. CONSULTANT / ANALYSTS (CHINA STRATEGY GROUP) Beijing: 1 Consultant position Beijing, Singapore, Perth, Johannesburg: 4 Analyst positions ? Employed in the Strategy Division of THE BEIJING AXIS ? Sound analytical and problemsolving skills ? Ability to work in teams with colleagues from diverse cultures and backgrounds ? Strong experience in the formulation and execution of research methodologies and analysis ? A business and/or technical degree with a post-graduate qualification ? Minimum 3 years experience in an appropriate or related field ? Excellent communication skills, including both spoken and written English ? Mandarin not essential, but regarded as an advantage ? Willingness to travel SOURCING ENGINEER (CHINA SOURCING UNIT) Beijing: 1 position ? Employed in the China Sourcing Unit of THE BEIJING AXIS ? Sourcing (or manufacturing) project management skills essential ? Focus: Project manage sourcing schedules (i.e. ensure that specialised capital equipment is manufactured to required standards and delivered on time); technical QA/QC knowledge; expediting experience and strong supplier management skills ? Provide support and technical advice and expertise to China Sourcing Unit colleagues and department ? A degree in engineering, preferably mechanical/mining-related with a minimum of 10-years’ work experience in appropriate field ? Excellent English and Mandarin written and spoken abilities ? Willingness to travel

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THE BEIJING AXIS News
Learning & Getting Around
THE BEIJING AXIS Founder and Group MD, Kobus van der Wath, hosted a number of Business Roundtables in Asia in Jan 09. The roundtables, entitled ‘China in 2009’, were held in Vietnam (Ho Chi Minh City), Thailand (Bangkok) & Singapore. Kobus van der Wath attended the Macquarie China-Day Seminar on 6 Feb 09 in Cape Town, South Africa. On 9-12 Feb 09, Kobus van der Wath & Mitch Cosani, South Africa Office Manager, attended the 2009 Mining Indaba in Cape Town, SA. Kobus delivered a keynote presentation entitled: ‘China’s Strategic Importance in Global Mining’; and participated in a panel discussion with the topic, ‘Resource Curses & Blessings: Challenges for the Last Mineral Frontier’. On 20 Feb 09, Kobus van der Wath hosted a China Business Roundtable in Singapore. On 26 Feb 09, The Capital Club (a premier private business club in Beijing) hosted a business seminar where Kobus van der Wath and Edward Wang, TBA Executive Director, were invited to deliver two presentations on the topic of China’s recent bold international acquis

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