The corporate Olympics

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					                                                           REPORT Harry Potter and
                                                           the battle with the pirates   p38

                                                           Q&A Deloitte’s regional CEO
                                                           on accounting integration p24

                                                           TRAvEls TO ThE wEsT In
auGusT 2007 VOl. 17, NO.08   the first of the Three Gorges p56

             The corporate
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                                                                                                       un US
                                                                                                     cO OC
                                                                                                 Pi R F
                                                                                               ym CE
                                                          chinA EcOnOmic REviEw: winnER, 2007 sOPA AwARds, bEsT ExPlAnATORy REPORTing

                                                   40         sPEciAl REPORT
                                                              Beijing 2008 is the market-
                                                              ing opportunity of a lifetime
                                                    for Chinese firms looking to make good
Published monthly since 1990                        in the domestic and international arenas

China Economic Review Ltd.
Tim Burroughs
deputy Editor
Alfred Romann
contributing Editors
Wong Joon Ian, Jose Mitamura,
Sarah Wang, Brandon Zatt,
Kip Larson, Zhang Zheng
Production manager
Stephanie Cheng
Editor at large
Graham Earnshaw
Associate Publisher
Gareth Powell
marketing manager
Rain Ma
marketing consultant
Richard Williams

CHINa ECONOMIC REVIEW                                                                                  26 sPEciAl REPORT: bAnking
(ISSN: 1350-6390) is published by                6 OPiniOn                                             China Merchants Bank and the retail revolution
China Economic Review Publishing                 The closure of China Development Brief; M&A issues    30 ThERE And bAck AgAin
Enquiries                                        7 bEsT Of ThE EdiTORs’ jOuRnAl                        Electronic exports come back as toxic e-waste
                                                                                                       32 sAnd sOluTiOns
subscriptions                                    REviEw                                                China wants a piece of Canada’s Alberta oil sands
                                                 8 POliTics & sOciETy                                  34 gOldEn OPPORTuniTiEs
                                                 China tackles product safety concerns; Hu speaks of   Should China buy gold to diversify its forex holdings?
Units C & D, 9/F Neich Tower,
128 Gloucester Road, Wanchai,
                                                 democracy; Vatican praises “unappointed” bishop       34 EcOlOgicAl imbAlAncE
Hong Kong                                        10 fAT dRAgOn                                         The deserts of northern China are advancing
Telephone                                        All is sunshine down south                            36 giving bAck, cORPORATE sTylE
+852 3175 0322                                   10 chinA buzz                                         Venture philanthropy makes waves in the NGO sector
CHINa ECONOMIC REVIEW welcomes                   11 PundiTRy                                           38 mAgic mOnEy
letters. Please write to the Editor at:          12 lAw; EnviROnmEnT                                   Pirates lie in wait for the last Harry Potter book                  13 mEdiA, TEch & TElEcOm
                                                 14 bAnking & finAncE                                  sPOTlighT: ThE nEThERlAnds
                                                 1 EnERgy                                             49 Plugging ThE gAP
local Ad Agent
Shanghai Yanran Advertising Ltd.                 16 cOnsumER/RETAil; TRAdE                             Holland offers China environmental solutions
director of Accounts                             18 AuTOs                                              2 Q&A: lindA wOng
Patrick Tam                                      19 mAcROEcOnOmics                                     The country head of ABN AMRO talks expansion
deputy directors of Accounts
Patrick Linehan, Jr, Regan Richardson            PERsPEcTivE                                           culTuRE
Accounts managers
Caroline Fontaine, Seth Jacobs,                  20 kEn dEwOskin                                        bOOk REviEw
Miguel Hernandez                                 Crossing the quality line                             Miss Chopsticks
Accounts Executive                               21 wEb wORm                                            6 TRAvEls TO ThE wEsT
Jason Yan                                        Stuck in the backwaters                                At the source of the Dragon Boat Festival legend
Accounts Administrator
                                                 22 viEw fROm EuROPE
Felix Deng
                                                 New leaders, new divisions                            mARkETs
Advertising enquiries
                                                 23 PhiliP bOwRing                                     8 cOmPAny indEx
tel: +86 21 5385 8951 ext 811                    Seeds of progress                                     62 POdium
                                                                                                         The Foreign Investment Partnership Law
                                                 REPORTs                                                        63 ExPOs & cOnfEREncEs
                                                 24 Q&A: chAly mAh                                                64 indusTRy OvERviEw
   HKABC Membership Approved Pending First
                                                 chEE khEOng                                                       6 EcOnOmic indicATORs
   Certificate for Period ended March 31, 2008   Deloitte’s regional                                                  66 REd dRAgOn fund
                                                 CEO on integration                                                     Correction and consolidation

                                                                                               10                      China Economic Review • August 2007      

         Top-down control                                                                   NGOs often rely on the support of local officials who may
                                                                                        be unsure about whether their own superiors would support
                                                                                        them. Widespread belief notwithstanding, many of these offi-
                                                                                        cials have the best interests of their populations at heart but are
         The closure of a respected civil issues                                        savvy enough to know that the best publicity is no publicity.
                                                                                            Speaking to the New York Times, Young noted: “I have spent
         publication may mean trouble for NGOs                                          the last decade telling foreigners that China is not as repressive
                                                                                        as Western media often portray it to be… I hoped that if we had
                                                                                        an open, intelligent conversation, we would be accepted.”

                    hen the government shut down the Chinese edition                        Yet it doesn’t always work out like this in China. In the case
                    of the China Development Brief (CDB), a small and                   of NGOs, it has long been suggested that, while the government
                    reputable publication aimed at nongovernmental or-                  appreciates their values, it is worried that so-called hostile forces
         ganizations (NGOs), in July, speculation about the motivation                  might use NGOs to undermine its authority.
         spread quickly.                                                                    NGO people who have operated in the chaos of Africa or
             Officialy, CDB had broken the law by conducting surveys                    Latin America have grown to appreciate the order that a strong
         without permission. The relevant law, dating back to 1983, is                  government can provide. Official approval of a project – diffi-
         broad in its definition of surveys and covers virtually every con-             cult as it can be to obtain – is a virtual guarantee that it will go
         versation between a foreigner and a Chinese person, according                  through. Of course, the opposite is often true as well.
         to Nick Young, the publication’s founding editor.                                  CDB operated in a legal gray area often with the tacit sup-
             Whatever the problem – whether the surveys or wider gov-                   port of officials but it was never legally endorsed. Its work was
         ernment concern about NGOs ahead of the upcoming Party                         very useful and well respected but its existence was fragile. which
         Congress in October – the publicity probably made it worse.                    means that perhaps closure was always a risk. Neverthless, the
             Had the situation been kept quiet, any difficulties may well               demise of a reliable and balanced publication is unfortunate.
         have been resolved, Young noted on the CDB website. More                           The real reasons may not come to light anytime soon but the
         than once, intrepid reporters have done more harm than good                    legal reasons cited are valid enough, at least within the context
         by drawing attention to well-known ills. For example, NGOs                     of China. Foreigners here often view regulations as something
         were running projects for several years in the “AIDS villages” of              to be fixed and sidestepped rather than respected. No American
         Henan province before the news broke out that they were do-                    would tolerate a Chinese person flagrantly disregarding the laws
         ing so regardless of government approval. Beijing stepped in to                of the US, for example. And yet, foreigners in China often ex-
         block the organizations in the area. (That said, it is now generally           pect local laws to not apply to them.
         accepted that the government is coordinating aid work in these                     Beijing cannot publicly tolerate this. A lot of things should
         areas reasonably well.)                                                        and will change – but within the system, not in spite it.

            Squeezing the deal                                                                                                     indirectly by strong equity markets has seen
                                                                                                                                   domestic Chinese investors emerge as the key
                                                                                                                                   growth drivers.
            China hasn’t always been friendly territory for                                                                              According to PwC, the number of China
            private equity (PE) investors. Most notably,                                                                           M&A deals rose 19.9% year-on-year during
            an attempt last year by the Carlyle Group to                                                                           the first six months of 2007. Domestic firms
            take over construction equipment maker Xu-                                                                             accounted for 63.4% of the total volume and
            gong was put under severe public and regula-                                                                           59% of the total value, up from 53.1% and
            tory scrutiny. Just in the last month, it was re-                                                                      41.2% respectively in the first half of 2006.
            vealed that a Carlyle bid to buy into Chongqing                                                                              Most of these deals are classified as stra-
            City Commercial Bank was also vetoed.                                                                                  tegic, with foreigners still ruling the roost
                 Private equity has its detractors in nearly                                                                       in PE and venture capital (VC). Even here,
            every country. In many cases, there is a dis-                                                                          though, domestic firms are making inroads,
            comfort at “foreign” investors who perceived                                                                           albeit from a low base.
            to only care about the bottom line and are li-                                                                               In the long-run, it is only natural that a vi-
                                                                                                                China Foto Press

            able to cut and run within a matter of years.                                                                          brant domestic PE and VC environment should
                 This is given an added twist in China when                                                                        develop in China. Investing in Chinese firms
            state assets are at stake – no one wants to                                                                            means negotiating a business culture at times
            be accused of selling out on the cheap. Just        xugong: Tough times for Carlyle Group                              far removed from Western values and gov-

            remember how the critics railed at the stel-                                                                           erned by an opaque and arbitrary set of rules.

            lar profits made by foreign banks that bought       cent finding by PricewaterhouseCoopers that                              So what does this lead to – M&A with Chi-
ch r s ra ks 1,91

                in ahead of the big Chinese banks’ share        foreign firms are being forced to pay more                         nese characteristics? Possibly. Yet in a country
  in mor ise del 6


    a e d d: ive

                   listings. And these foreign investors        than local rivals in mergers and acquisitions                      still in need of principled corporate direction,
     nd Boo

     re et u re

                       could at least claim they were of-       isn't surprising.                                                  there are worse things than a foreign voice on
        ad ails S$3 d:

            fering         banking expertise.                        These foreigner mark-ups on prices that                       the board that rigorously pursues the interests
          in see 0,9

                                   With this in mind, the re-   are already being inflated either directly or                      of those he represents to the letter of the law.
             g p5 60
                    Pr 6)
 bEsT Of ThE EdiTORs’ jOuRnAl

                                                                                           China Foto Press
                                                      digging dEEP: Australian mines are
                                                       feeding China's commodities needs

Buried treasure
china commodities demand drives               modities supply chain. He placed the be-
up Australian property prices,                ginning of the growth trend at 2002.
june 26:
At a press briefing by CB Richard Ellis       better air traffic management
in Shanghai on cross-border transactions,     could save environment, june 2:
their regional director of research for       China has an easier way to cut its jets’
Australia and New Zealand, Kevin Stan-        emissions, by sorting out its skies. Better
ley, presented some interesting figures.      air traffic management should mean less
     Stanley showed that demand for of-       carbon emissions.
fice property in resource-rich Western            Every minute of flight costs US$120
Australia was rocketing. Brisbane (though     and emits 160 kg of CO2. Because Chi-
not in Western Australia) and Perth were      na’s military controls most of the airspace,
experiencing double-digit growth.             civil airlines have to take circuitous routes
     On a macro level, he said the West-      that add up to half an hour onto some
ern Australian market is still in the ac-     routes.
celerating growth phase, but the next four        Running more efficient jets is urgent
months should see a slight slowdown.          too, particularly as fuel prices stay stub-
     China’s rising demand for Australian     bornly high – fuel accounted for 34% of
commodities, of course, is behind this        Air China’s operating costs in 2006.
monstrous growth.                                 What's more, making China’s fleet
     “China has had a massive impact on       more fuel efficient should be easier. Chi-
the growth situation. The commodities         na’s average fleet age is 6.3 years, com-
sector is at a record high level both in      pared to a global fleet with a average of 12
terms of prices and volume,” Stanley said     years among other global fleets, so they’ll
after the presentation. “Two and a half       be more easily retrofitted.
years ago, vacancy rates were 13% — now           But anyone who’s seen the bare-ba-
they are at 2%.”                              sics approach of some Chinese carriers
     He said that Australian companies        on their newly acquired jets will wonder
were taking up a lot of the space, while      if they’ll want to spend more on fitting
global firms were also significant factors,   fuel-conserving equipment on their jet
because of the globalization of the com-      engines.
          REAd mORE OnlinE AT www.chinAEcOnOmicREviEw.cOm/EdiTORs

                                                                                                              China Economic Review • August 2007   7
    REviEw • politics & society

    hu speaks of democracy
    Further economic and politi-
    cal reform were promised by
    President Hu Jintao in a
                                                                                               Tit for tat
    speech made to senior cadres

                                                                         China Foto Press
    in June, though he stressed

    that the Communist Party                                                                               hat began three
    would ensure change follows                                                                            months ago with the
    the “correct direction.” In                                                                            largest recall of pet
    a statement that appeared             hk marks anniversary                                 food in US history had trans-
    contradictory but was seen            President Hu Jintao said                             formed into a diplomatic incident
    as emblematic of a Chinese            that the current “one country,                       by mid-July as safety concerns
    hybrid of democratic and              two systems” arrangement                             over Chinese products threat-
    authoritarian rule, Hu said,          between Hong Kong and the                            ened to undermine the country’s
    “We must maintain the party           mainland must remain, as he                          credibility as an exporter.
    leadership, empower the               officiated over celebrations                              Following the recall or black-
    people and rule the country           to mark the 10th anniversary                         listing of a string of China-made
    by law.” He also expressed            of Hong Kong’s handover                              or China partially-made prod-
    a desire to further develop           to China. Hu also oversaw                            ucts – including seafood, toys,
    intra-party democracy.                the swearing-in ceremony                             tires and even Independence
                                          of Chief Executive Donand                            Day fireworks – US Commerce
    china in global 00                   Tsang for a new five-year                            Secretary Carlos Gutierrez told
    A record 22 mainland com-             term. Later the same day,                            Beijing to put its house in order.
    panies made it onto the                       some 20,000 protesters                            “What we’ve told the Chi-
    2007 Fortune Global                             marched through                            nese is that they have to do this
    500 list published on                           central Hong Kong                          now,” he said. “This is something they need to take extremely
    July 12. State-owned oil                        demanding full                             seriously.”
    giant Sinopec was the                         democracy.                                        The US has also announced that it will set up an import
    top-ranked Chinese                                                                         safety panel, chaired by the secretary of health and human
    company on the list,                         cdb shut down                                 services and reporting to convey to the White House.
    coming in at 17.                             China Development                                  Beijing’s response to Gutierrez’s remarks was combative
    Also in the top 50                           Brief (CDB), the for-                         to say the least. Chicken and pork imports from seven US
    were China National                             eign-funded news-                          companies, including Tyson Foods, America’s largest meat
    Petroleum Corpora-                                letter that focuses                      processor, were suspended by Chinese authorities.
    tion (24) and State                                  on development                             Food safety regulators claimed that salmonella and feed
    Grid (29).                                             and human                           additives amongst other things had been found in the prod-
                                                            rights issues,                     ucts but the move was still widely regarded as a largely retal-
    Playboy in macau                                        was ordered                        iatory gesture.
    A Playboy Man-                                         by the govern-                           Nevertheless, some good is coming out of the situation. A
    sion is planned                                     ment to close                          State Food and Drug Administration official admitted that
    for Macau as                                      down its Chinese
    Asia’s gambling                                language edition.
    capital bids to                               Meanwhile, CDB                            munist Party members in the                      appointed to the cabinet in
    move toward more                               founding editor                          July edition of the progressive                  the last two months, follow-
    diversified enter-                            Nicholas Young was                        journal Yanhuang Chunqiu.                        ing Wan Gang’s appoint-
    tainment. Playboy                            deemed guilty of con-                      The article argues that the                      ment as science minister.
    Enterprises and                            ducting “unauthorized                        political reform agenda                          Both men have international
    Macau Studio City                         surveys” for the English                      pioneered by Deng Xiaoping                       backgrounds – Chen was
    will jointly open the                    language edition and or-                       has been allowed to stagnate                     educated in France and Wan
    40,000-square-foot                      dered to desist. It was said                    while the rampant social                         has lived and worked as an
    Playboy Mansion                        the closure might be part of                     problems, ranging from cor-                      engineer in Germany.
    Macau in late 2009.                    a wider clampdown ahead                          ruption to social injustice, are
    The mansion, which                      of China’s Communist                            the result of the Communist
    will offer accommoda-                   Party Congress in the fall.                     Party’s monopoly on power.
    tion, entertainment,
    and dining and shop-                    cadres: Reform slow                             non-party man gets job
    ping activities will be                  The pace and direction                         A non-Communist Party
    part of the US$2 billion                  of China’s political                          member, Chen Zhu, was
                                                                                                                               China Foto Press

    Studio City hotel and                     development has came                          granted the key post of health
    casino complex in                         in for criticism from                         minister. He is the second
    the Cotai area.                           liberal-minded Com-                           non-party member to be

8   China Economic Review • August 2007
                                                                                      panies. Supervision of food           chinAbynumbERs
                                                                                      and drugs in China “started
                                                                                      late and our foundation           162m          China has 162
                                                                                                                                      million internet
                                                                                      for this work is weak,” said          users, second only to
                                                                                      SFDA spokesperson Yan Ji-             America’s 211 million,
                                                                                      angying. Beijing now rotates          according to the China
                                                                                      SFDA officials so they can’t          Internet Network Informa-
                                                                                      get too close to companies.           tion Center.

                                                                                      local goods substandard
                                                                                      A fifth of all products sold
                                                                                                                            Beijing’s water
                                                                                                                            supply is safe        106
                                                                                      in China don’t meet quality           to drink without boiling
                                                                                      standards. In a review of 114         after passing 106 tests for
                                                                                      types of product by more              contaminants, the Beijing
                                                                                      than 6,300 companies, the             Waterworks Group said.
                                                                                      General Administration of
                                                                                      Quality Supervision, Inspec-
                                                                                      tion and Quarantine found
                                                                                      19.1% to be substandard.
                                                                                                                        3     China is now the world’s
                                                                                                                              third-largest gold
                                                                                                                            consumer and producer,
                                                                                      Larger firms proved more              according to the Gold Sur-
                                             fORbiddEn fRuiT: A                       reliable, with 93.1% of their         vey 2007 published by Gold
                                         Chinese official inspects a                  goods meeting requirements.           Fields Mineral Services.

                                              shipment of bananas
                                                                                      floods take 16 lives
                                                                                      Serious flooding across China
                                                                                                                            economy        11.9%
the export scandals posed a threat to China’s international                           took at least 156 lives in            expanded 11.9% year-on-
reputation and steps were taken to reassure trade partners.                           the week ending July 21. In           year between April and
     The General Administration of Quality Supervision, In-                           the southwestern province             June, the National Bureau
spection and Quarantine unveiled a new food-safety report-                            of Yunnan alone, mud-                 of Statistics announced.
ing system to go into effect on August 8, exactly a year before                       slides, landslides and heavy          It is the fastest rate of
the start of the 2008 Olympics. Products will be monitored                            floods resulted in 65 deaths.         growth in 12 years.
from their origin through to distribution, with reports in-                           Forty were killed in eastern
cluding details of any food-safety accidents. Food for export
must carry an inspection and quarantine symbol to guaran-
tee safety.
                                                                                      Shandong province, 42 in
                                                                                      southwestern Chongqing and
                                                                                      nine in far-western region of
                                                                                                                            China now controls 80% of
     This, together with other measures such as the banning of                        Xinjiang. Natural disasters           global Vitamin C produc-
certain ingredients and the closure of offending companies,                           have taken 715 lives so far           tion. Recent cutbacks have
is likely to force further consolidation in key sectors. It was                       this year, according to a re-         pushed prices up 200% to
suggested the regulatory crackdown could see the removal of                           port released by the Ministry         US$11 per kilo.
half of China’s 448,000 food processing companies by 2009.                            of Foreign Affairs on July

vatican praises bishop
                                                                                      19. Economic losses stand at
                                                                                      US$9.73 billion.
                                                                                                                            ing to     $2.64b
                                                                                                                            the Ministry of Educa-
The Vatican Secretary of                                                              ‘Rape of nanking’ movie               tion, financial assistance
State Cardinal Tarcisio                                                               A US-made film about the              granted to poor students
Bertone said Father Jo-                                                               “Rape of Nanking,” the mas-           will double to US$2.64
seph Li Shan who is set to                                                            sacre of Chinese civilians by         billion next year.
become the new bishop of                                                              Japanese troops during the

Beijing, is “well-suited” for                                                         Second World War in the                           Chinese firms
the job, despite that he was                                                          city now known as Nanjing,                        signed pur-
not chosen by the Pope.                                                               opened in Beijing in early            chase orders for US$53
Father Li’s appointment is         Catholicism poses no threat                        July. The movie, titled Nan-          million in Bangladesh
pending approval from the          to the Chinese government.                         king, focuses on the efforts of       commodities in a bid to re-
Chinese Catholic Patriotic                                                            Nanjing-based US mis-                 duce the trade imbalance.
Association (CCPA) and the         zheng xiaoyu executed                              sionaries and German Nazi
Catholic Bishop’s College,         Former State Food and Drug                         businessmen to set up a safe        china by numbers Now in
neither of which answer to         Administration (SFDA)                              zone for Chinese refugees. It       book form, a comprehensive
the Vatican. In early July, the    head Zheng Xiaoyu, was                             will go on general release on       listing of China statistics with
Pope wrote an open letter to       executed in July for taking                        July 7 to coincide with the         full sources. Visit www.chi-
China’s Catholics in which         US$855,094 in bribes from                          70th anniversary of Japan’s
he offered reassurances that       eight pharmaceuticals com-                         full-scale invasion of China.

                                                                                                                        China Economic Review • August 2007   9
     REviEw • FAT DRAGON

     All is sunshine down south
      fatdragon                              s the media turned up the propaganda levels      to return home. It wants quality listings to shore
                                             to celebrate 10 successful years of mainland     up standards and dampen volatility as investors
                                             rule in Hong Kong, you could forgive Fat         swap risky short-term plays for solid stock.
                                    Dragon for feeling a little cynical. Prince Charles’s         Big boys, including China Construction Bank
                                    “appalling old waxworks” epithet seemed only too          and Shenhua Energy as well as Hong Kong-in-
                                    apt as an awkward president toured the former             corporated red chips such as China Mobile and
                                    colony, waving stiffly at his southern minions.           Lenovo all plan to list on the Shanghai exchange.
                                         But even this sardonic old serpent has to agree          A-share IPOs are expected to rack up a further
                                    that Chinese rule of China’s richest city has not         US$20 billion in the second half of 2007, almost
                                    been the disaster that many feared. And for the           certainly putting the mainland’s bourses on top of
      An insider’s view of the
      changing face of China
                                    rulers here in Beijing, booming Hong Kong is in-          the world IPO league. For the big state-owned
                                    deed a propaganda triumph.                                companies going public, Shanghai is now a viable
                                         A far greater source of pride, though, is that       alternative to Hong Kong as a source of funding.
                                    mainland business no longer feels Hong Kong’s                 Ten years after the handover, does this spell di-
                                    inferior – especially when it comes to the nation’s       saster for Hong Kong’s own stock market?
                                    stock markets. Increasingly the feeling is that               Fat Dragon doesn’t think so. Beijing’s success
                                    whatever the Hang Seng can do, the Shanghai               at ramping up the mainland market makes stocks
                                    Composite can do better. Sure, there is too much          there less attractive to foreign investors looking for
                                    liquidity chasing too many poor-quality assets            China exposure than Hong Kong, where shares in
                                    – but formerly insolvent securities houses are mak-       the same firms trade an average 40% cheaper.
                                    ing buckets of cash and retail investors seem happy           Foreign players dumped mainland equities
                                    to take a punt on none-too-transparent stocks.            in record amounts in May and June as investors
                                         Domestic mutual funds, until recently puny           switched to Hong Kong stocks. Some of this re-
                                    compared to their Asian counterparts, are on the          flected fear of a correction in the mainland’s mar-
                                    march. A net increase of more than US$90 bil-             kets, but many investors told Fat Dragon the pre-
                                    lion of assets under management saw funds swell           mium for mainland stocks was simply too high.
                                    a stunning 60% in the second quarter, with total              A further reason for Hong Kongers to cel-
                                    gains of 110% since the start of the year.                ebrate: more of the mainland’s excess liquidity is
                                         Fund managers now control nearly US$260              finding ways to slop over the border. The regulators
                                    billion, equivalent to the total assets of the nation’s   are allowing both banks and insurers to invest in
                                    insurance companies.                                      overseas equities – which primarily means Hong
                                         A-share IPO volumes totaled US$17.3 billion          Kong. The qualified domestic institutional investor
                                    in the first six months, compared to US$9.2 billion       (QDII) quota currently stands at US$18.5 billion,
                                    from the H-share listings of mainland incorpo-            but this is set to grow as Beijing lets out more air.
                                    rated companies in Hong Kong.                                 So everything in Hong Kong is looking rosy.
                                         With public offerings and earnings soaring,          Here’s to another successful 10 years under Bei-
                                    Beijing is calling on Hong Kong-listed companies          jing’s care!

            Pope benedict xvi, in an open                 sentence and multiple jail sentenc-             ing a loan, failure to be cautious in their
              letter to chinese catholics,                es awarded to those involved in                 assessment at the time of lending, and a
                suggests that it is time for              june’s brick kiln slavery scandals:             failure of supervision and control after
                  underground (and vatican                “These cases have had a vile effect both        making the loan.”
                    loyal) and state-spon-                domestically and overseas and can only
                     sored catholic churches              be handled... in the most severe fash-          yan jiangying, a state food and
                     in china to reconcile:               ion... Only with a fast verdict can we          drugs Administration (sfdA)
                     “The misunderstanding and            deter these crimes.”                            spokeswoman, on the execution of
                    incomprehension weighs                                                                former sfdA head zheng xiaoyu,
                   heavily, serving neither the           The china banking Regulatory                    who took bribes to license drugs:
                  Chinese authorities nor the             commission on the fining of eight               “China is a developing country and our
                   Catholic Church in China.”             banks banks for illegally making                supervision of food and drugs started
                                                          loans that were used to invest in               late and our foundation for this work is
                                  liu jimin, high         the stock market:                               weak…The government [is] rotating of-
                                   court judge, on        “The banks’ chief problem is their failure      ficials in key posts to prevent them from
                                    the one death         to do proper due diligence before mak-          becoming too close to companies.”

10   China Economic Review • August 2007
                                                                           RE viEw • PUNDITRY

The bang of the buck
from “The real case for              A stronger yuan would have
revaluation” by ubs Asia             only a small effect on main-
chief Economist jonathan             land exporters, since they
Anderson, july 13 2007:              have demonstrated their abil-
                                     ity to raise prices to the final
consumer. But keep in mind that things look very different on
the import side of the equation. Unlike low-end manufactures
where China is a dominant force, every single heavy industrial
product category has a multitude of overseas competitors. And
while mainland exports tend to rely on imported components,
thus diluting the impact of revaluation in the final cost structure,
goods like chemicals, metals and machinery have a much higher
domestic value-added component. As a result, any increase in
the value of the renminbi has a much larger “bang for the buck”
in these sectors, making imports immediately more competi-
tive... Renminbi revaluation (i) helps reduce the trade balance,
(ii) lowers the incentive for further excess industrial capacity
creation, (iii) acts in a targeted way against the most energy-in-
tensive and polluting sectors, and (iv) redirects spending towards
higher imports from China’s Asian neighbors.

from “PbOc raised rates;              The central bank announced
further hikes unlikely”               a 27-basis point hike in both
by jPmorgan Asia Pacific              the benchmark one-year lend-
chief Economist frank                 ing and deposit rates, effective
gong, july 20 2007:                   July 21st... We do not expect
                                      significant rate hikes for the
rest of the year. While there have been growing concerns about
the risk of general overheating of the economy, the fact that non-
food inflation remains well contained (0.7% one-year average in
June), and that fixed investment is fundamentally supported by
healthy corporate profit growth, should provide some comfort to
policymakers that the overheating concerns may not be as severe
as in past cycles. Indeed, considering that the strength in the ex-
port sector and that widening trade surplus have been one of the
crucial factors behind the economy’s impressive strength in the
first half of this year, raising interest rates significantly may not
be the most desirable policy tool to slow overall growth.

from “issuance of spe-               The Ministry of Finance has
cial bonds to PbOc” by               clarified that special bonds
deutsche bank hong kong              [worth US$204.9 billion]
chief Economist jun ma,              would be issued to the Peo-
july 3 2007:                         ple’s Bank of China (PBOC),
                                     who would gradually sell
these bonds to banks, insurance companies and the National So-
cial Security Fund... It was thought that special bonds, if issued
directly to financial institutions... would cause sharp spikes in
market rates and overtightening of monetary conditions... Issu-
ing special bonds to the PBOC... avoids coordination problems
between the PBOC and finance ministry because the liquidity
management program will be solely run by the former. Secondly,
M2 [the broad money supply] and growth targets are unaffect-
ed by the special bonds. In other words, the issuance of special
bonds does not represent additional monetary tightening.

                                                                         China Economic Review • August 2007   11

     lAw                                          US, having trailed America
                                                  by 2% in 2005. Earlier pro-
     Tougher slavery rap                          jections made by the UN and
     The All-China Lawyers As-                    the US Energy Information
     sociation (ACLA) proposed                    Administration said China
     that the word “slavery”                      would overtake the US in
     be added to the country’s                    2009 or 2010.
     criminal code to the Standing
     Committee of the National                    Pollution charges rise
     People’s Congress in early                   Companies will have to pay
     July. The ACLA also called                   twice the current amount for
     for the corresponding pun-                   pollution charges once new
     ishment to be a maximum                      rules, announced June 27,
     sentence of life in prison.                  come into effect. Charges
     The existing Criminal Law                    on effluents like sewage and
     states that a person who il-                 sulfur dioxide emissions will
     legally detains another person               double from the current level
     or forces illegal labor may                  of US$0.09 per ton. China’s
     receive a jail sentence of up to             11th Five-Year Plan calls for
     three years only if no severe                cutting energy consumption
     bodily injury is involved.                   per unit of gross domestic
                                                  product by 20% between
                                                  2006 and 2010, but so far,
                                                  progress has fallen short of

                                                  Anti-desertification fund
                                                  China said it would invest
                                                  US$2.46 billion over the
                                                                                                      Paper mandates
                                                  next eight years to fight


                                                  desertification in the north-                                he much discussed     purchases of Chinese firms
                                                  west region of Xinjiang. The                                 labor contract law    under closer scrutiny. The
     Emergency response law                       investment is earmarked to                                   was passed by the     draft law requires foreign
     The National People’s Con-                   prevent the expansion of                            standing committee of the      buy-ins to be examined on
     gress amended an emergency                   desert in northern Xinjiang’s                       National People’s Congress,    national security, in addi-
     response draft law to give the               Junggar Basin and the Tarim                         the country’s highest law-     tion to antitrust grounds.
     media more freedom to re-                    Basin in the region’s south.                        making body, at its quar-          The new state invest-
     port on covered up emergen-                  The central government will                         terly meeting in late June.    ment agency, tasked with
     cies. It was decided that the                cover 80% of the project with                            The new law will          managing a portion of
     draft law should not single                  regional authorities providing                      make employment con-           China’s foreign exchange
     out the media for fines of up                the remainder.                                      tracts mandatory, increase     reserves, was also on the
     to US$13,000 for inaccurate                                                                      requirements on employers      agenda with the Ministry of
     reports of disasters, riots                  beijing’s trial car ban                             hiring short-term workers      Finance receiving approval
     and other emergencies. The                   Beijing may ban one mil-                            and establish standards for    to issue US$200 billion in
     revised draft says “units and                lion cars from its roads for                        severance pay.                 yuan-denominated bonds.
     individuals”, instead of the                 two weeks in August in                                   Employers have argued     This will be the agency’s
     media, could be punished.                    order to test its smog-con-                         that it erodes China’s         startup capital.
                                                  trol measures ahead of next                         low-cost labor advantage           Much of the focus,
                                                  year’s Olympics. If the plan                        because it makes workers       though, was on auditor-
     EnviROnmEnT                                  is implemented, the cars                            more difficult to hire and     general Li Jinhua, who
                                                  - which make up a third of                          fire. However, scandals such   presented findings from a
     study: china top for cO2                                                                         as the discovery of enslaved   government-wide audit.
     China has already overtaken                                                                      workers in Shanxi prov-            Li, nicknamed “iron
     the US to become the world’s                                                                     ince’s brick kilns in June     face” for his perceived
     top emitter of carbon dioxide,                                                                   have sparked outrage at the    incorruptibility, said more
     according to a report released                                                                   nation’s exploited workers.    than US$5 billion in central
     June 19 by the Netherlands                                                                            In addition, the com-     government funds was
     Environmental Assessment                                                                         mittee re-examined the         mismanaged or misused
                                                                                   China Foto Press

     Agency. It claims that in                                                                        draft anti-monopoly law        last year – US$919 million
     2006, China’s emissions were                                                                     which would place foreign      embezzled or misappropri-
     8% higher than those of the

12   China Economic Review • August 2007
                                               Named and                      the city’s total - would be
                                                                              taken out of circulation from
                                                                                                                                   The company said BlackBerry
                                                                                                                                   8700g handsets would go on
                                               shamed                         August 7 to 20. In June, air                         sale in China at the end of
                                                                              quality in the capital was the                       this month, priced at about
                                                State-related agen-           worst recorded in seven years.                       US$700. Customers, many
                                                cies and firms misused                                                             of them corporations, have
                                                or misappropriated                                                                 already placed 5,000 advance
                                                US$11.85 billion in 2006.     mEdiA, TEch, TElEcOm                                 orders, the company said. The
                                                The offending projects                                                             devices will be available in
                                                and sectors included:         key telecom jobs shuffled                            cities like Beijing, Shanghai
                                                                    $4.6b     A number of China’s top                              and Qingdao.
                                                      Central government      telecom officials switched
                                               $3b                            jobs in July, prompting talk of
                                               Highways                       impending restructuring in
                                                                 $2.22b       the industry. China Mobile’s
                                                                      Banks   Vice President and Executive
                                               $1.12b                         Director Zhang Chenshuang
                                               State-owned enterprises        resigned and took a new post

                                                                                                                China Foto Press
                                                                              with China Telecom, while
                                                                 $645m        China Telecom’s executive
                                                          Social insurance
                                                                              vice president Huang Wenlin
                                               $247m                          left to join China Mobile.
                                               Three Gorges project
                                                                                                                                   Phone output rises 33.7%

bETTER dEAl: Labor contracts
                                                                              China Unicom’s executive
                                                                   $17m       director, Li Jianguo, quit to                        China produced nearly 226
    now offer more to workers                    Forest protection project    join China Netcom. The                               million mobile phones in the
                                                                              job shuffle was seen as part                         first five months of the year,
ated and US$4.86 billion                       social security funds, fol-    of plans to let fixed-line                           up 33.7% from a year earlier,
poorly managed.                                lowing last year’s US$420      operators China Netcom                               according to statistics released
    Culprits included the                      million social security        and China Telecom operate                            by the Ministry of Informa-
government departments                         scandal in Shanghai.           mobile networks.                                     tion Industry (MII). The ris-
responsible for culture, the                        The banking industry                                                           ing rural market is believed to
environment, media and                         was not spared. Li said        blackberry set for china                             be a major driver behind the
publishing as well as the                      US$2 billion was used          Research in Motion (RIM),                            production boom, explained
National Development and                       illegally or improperly by     the company behind the                               ministry officials. China is
Reform Commission.                             China’s six largest banks,     BlackBerry mobile e-mail de-                         expected to manufacture 40%
    Li also warned that lo-                    and that real estate and       vice, announced in early July                        of the one billion mobile
cal governments would now                      foreign exchange loans were    that it had received permis-                         phones produced around the
have to pay for any misused                    poorly regulated.              sion to sell handsets in China.                      world this year.

                                                                                                                            China Economic Review • August 2007       13

                                                                                                                                                                   xinhua ups its services

         Mixed                                                                                                                                                  China’s official news agency,
                                                                                                                                                                Xinhua, began testing a new

                                                                                                                                                                real-time financial data ser-
                                                                                                                                                                vice on June 20. The “Xinhua
                                                                                                                                                                08” service provides infor-
                                                                                                                                                                mation to more than 190
                                                                                                                                                                major financial institutions

                 hina’s stock markets                                                                                                                           and companies in China,
                 endured a volatile                                                                                                                             the news agency claimed.
                 month as talk of                                                                                                                               The data covers currencies,
         economic tightening mea-                                                                                                                               financial markets, metals,
         sures and taxes on equity                                                                                                                              energy and real estate taken
         trading dampened investor                                                                                                                              from more than 20 foreign

                                                                                                                                             China Foto Press
         interest in shares already                                                                                                                             and domestic exchanges as
         widely seen as overvalued.                                                                                                                             well international economic
             On July 5, the Shang-                                                                                                                              and customs sources.
         hai Composite Index                         gAmE Of Risk: Domestic stock markets have been volatile
         (SCI) saw its biggest daily                                                                                                                            shanda buys games firm
         drop since the 8.3% decline                 stocks to 10%.                                            tutional Investors(QDII).                        Online game operator
         on June 4, closing down                          The real winner in                                       The key development                          Shanda Interactive Enter-
         5.3% at 3,615.87. Analysts                  all this was Hong Kong,                                   came on June 21 when                             tainment acquired game
         blamed uncertainty over                     which roared passed                                       mainland securities firms                        developer Chengdu Aurora
         government policy for the                   23,000 points for the first                               and mutual funds received                        Technology Development
         slump, with investors fear-                 time largely thanks to                                    the permission to invest                         for US$13.2 million. Au-
         ing another interest rate                   Beijing easing limits on                                  in overseas securities. The                      rora makes and operates the
         hike or even a capital gains                Qualified Domestic Insti-                                 Hang Seng Index (HSI)                            “Fengyun Online” game. The
         tax on share sales.                                                                                   ended up 1.25% to reach a                        Aurora deal marks the start
             As July progressed,                      The A-share premium                                      record high of 21,954.67,                        of Shanda’s plan to spend
         the focus shifted to strong                                                                           in anticipation of Hong                          US$263.1 million on acquisi-
                                                      Hang Seng China AH Premium Index
         company earnings pros-                                                                                Kong receiving the bulk of                       tions of game development
         pects and, on July 20, the                                                                            this money.                                      studios to expand its portfolio
         SCI crawled back over the                    160                                                          With banks already al-                       of titles.
         4,000-point line.                                                                                     lowed to invest in overseas
             The regulators helped                    140
                                                                                                               securities, approval for
         push things along, allow-                    120                                                      insurers to follow suit is                       bAnking & finAncE
         ing insurance companies                                                                               expected later this year,
         to double the proportion                     100
                                                            Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07   and this meant the HSI                           china iPOs to lead world
         of assets they can invest in                Source: HSI Services                                      retained its momentum.                           China could become the
                                                                                                                                                                world’s biggest capital raiser
          Top 10 new share listings                                                                                                                             this year, with more than
                                                                                                                                                                US$52 billion in new list-
          Listing                 Company name (                                                               Proceeds                         ings expected, according to
          date                                                                                                             (us$ million)                        PricewaterhouseCoopers.
                                                                                                                                                                At the beginning of the year
          Jun 26                  China COSCO Holdings (1919.SH)                                                                 1,988.4                        mainland markets were only
          Jul 16                  Fosun International (656.HK)                                                                   1,475.8                        expected to raise US$26.3
          Jul 19                  Bank of Nanjing (601009.SH)                                                                      917.2                        billion, half the current
          Jul 12                  Western Mining (601168.SH)                                                                       817.5
          Jul 3                   KWG Property Holding (1813.HK)                                                                   669.7                        bank misbehavior drops
          Jul 19                  Bank of Ningbo (2142.SZ)                                                                         547.9                        The China Banking Regu-
          Jul 10                  Anta Sports Products (2020.HK)                                                                   466.0                        latory Commission said it
                                                                                                                                                                found 58% fewer cases of
          Jul 20                  HSBC China Dragon Fund (820.HK)                                                                  413.5                        wrongdoing by the main-
          Jul 6                   Stella International Holdings (1836.HK)                                                          386.7                        land’s five largest banks this
          Jul 4                   China High Speed Transmission (658.SZ)                                                           312.7                        year. In total, there were 53
                                                                                                                                                                cases of “illegal and im-
                                  Total raised (from 24 offerings)                                                               9,436.2                        proper” activity that involved
          Source: Thomson Financial, data correct as of July 20
                                                                                                                                                                US$50.7 million. Earlier, 29
                                                                                                                                                                banks, 10 of them foreign,

14   China Economic Review • August 2007
were punished for channeling                                                                     Malaysian-born co-head of          EnERgy
speculative capital into Chi-                                                                    Goldman’s Asia investment
nese stocks and real estate.                                                                     banking division, has been at      sinopec boss quits
                                                                                                 Gao Hua Securities for six         Chen Tonghai, chairman of
yuan bonds set for hk                                                                            months. The securities regula-     Sinopec, resigned from his
China Development Bank                                                                           tor requires senior executives     post in July for “personal

                                                                              China Foto Press
said it would sell up to                                                                         to pass a Chinese financial        reasons.” Local media quoted
US$656 million in two-year,                                                                      knowledge test.                    sources from Sinopec’s par-
yuan-denominated bonds                                                                                                              ent company, China Petro-
in Hong Kong. It will be                                                                         icbc to start foreign fund         Chemical, as saying “serious
the first time yuan bonds                      share issues planned                              Industrial and Commercial          breaches of discipline” - an
have been sold outside the                     China Coal said it would is-                      Bank of China plans to invest      often-used euphemism for
mainland.                                      sue 1.525 billion A-shares in                     US$584.5 million abroad            official corruption - were
                                               order to raise up to US$2.85                      through an overseas-invest-        involved. Chen will be
ccbs soar on debut                             billion for project develop-                      ment fund. The fundraising
Shares in both Nanjing and                     ment. Meanwhile, Geely                            effort marks renewed interest
Ningbo City Commercial                         Automobile was said to be                         in the Qualified Domestic
Bank (CCB) surged as they                      planning a new share issue                        Insitutional Investor (QDII)
made their trading debuts on                   worth US$205.9 million and                        program, which allows Chi-
July 19. Nanjing CCB rose                      Minsheng Banking Corpo-                           nese investors to pour funds
72% on the Shanghai Stock                      ration announced its inten-                       into overseas stocks.
Exchange while Shenzhen-                       tion to list in Hong Kong.
listed Ningbo CCB posed a                      Minsheng’s original bid to                        stock blogger arrested
141% gain. They are the first                  list in Hong Kong in 2004                         A Chinese blogger whose
two CCBs to go public in                       was derailed when the bank                        site became popular for its
China. At least 20 more city                   admitted to faking sharehold-                     stock tips was arrested in July,
banks are expected follow                      ers’ meetings to facilitate its                   the Financial Times reported.
them over the next two years.                  Shanghai listing in 2000.                         Wang Xiujie’s detention,
                                                                                                 which came after an inves-
                                               language problems                                 tigation into his unauthor-
                                               The executive selected by                         ized investment consulting
                                               Goldman Sachs to run its                          business, poses a potential
                                               China joint venture was                           threat to the host of
                                               said to be unable to take                         stock advisory compa-
                                               the position because his                          nies and private “hedge
                                               Chinese language skills are                       funds” that have sprung

                                               not good enough. Richard                          up in response to the rise                                        OuT: Sinopec’s
                                               Ong, the ethnically Chinese,                      of the A-share market.                                             Chen Tonghai

                                                                                                                                    China Economic Review • August 2007   1

                                              replaced by Su Shulin,                  slow progress                                                         has closed. A management

         Thirst                            currently vice-president of
                                           PetroChina, one of Sinopec’s
                                                                                    Energy consumption per unit of GDP
                                                                                                                                                            representative at the Forbid-
                                                                                                                                                            den City said it had offered

         for oil
                                           largest rivals.                                                                                                  to continue serving Starbucks
                                                                                                    1.5                                                     coffee alongside other drinks

                                                                               Metric tons of SCE
                                           coal reserve considered                                                                                          under a unified brand, but
                                           The coal law is being amend-                             1.0
                                                                                                                                                            Starbucks declined. Starbucks
                                           ed to include provisions                                                                                         had been in the Forbidden

                  hina’s energy            for a strategic coal reserve                                                                                     City for seven years but its
                  appetite con-            designed to protect China’s                               0
                                                                                                          2002   2003   2004   2005   2006                  presence had drawn criticism
                  tinues to grow,          energy security. The National       Source: NBS                                                                  from academics and activists.
         as oil and gas compa-             People’s Congress (NPC)
         nies struck deals with            is drafting the amendment,          to require that construction                                                 gome expansion plans
         several troubled states           which will then be submit-          projects meet energy-savings                                                 China’s largest electronics
         last month.                       ted to the State Council for        standards and existing struc-                                                retailer, Gome Electrical Ap-
              China National               inspection before it is debated     tures undergo regular inspec-                                                pliances, said in June that it
         Petroleum Corpora-                at NPC sessions next year.          tions. The amendments were                                                   would use US$838 million to
         tion (CNPC) revived               China already has provisions        considered by the Standing                                                   build out its branch network,
         a 1997 deal with Iraq             for oil reserves, although          Committee of the National                                                    shorten payment periods to
         signed under Saddam               coal accounts for 70% of the        People’s Congress in June.                                                   suppliers and boost mobile
         Hussein’s regime to               country’s energy expenditure.                                                                                    phone sales. Gome presi-
         develop the al-Ahdab                                                                                                                               dent Chen Xiao said that, in
         oil field. It had a pre-          call for fuel price hike            cOnsumER/RETAil                                                              addition to opening 70 new
         war capacity of 90,000            China’s largest oil produc-                                                                                      outlets to reach a total of
         barrels a day and was             ers have asked the National         china third for dairy                                                        1,000, the company would
         worth US$1.2 billion.             Development and Reform              China overtook Russia and                                                    introduce 100 stand-alone
              In a busy month,             Commission for permis-              Pakistan to rank third in the                                                mobile phone stores this year.
         CNPC also picked                  sion to hike retail prices of       world after India and the US
         up two more con-                  petrol and diesel. Both China       in the production of dairy
         tracts: an offshore oil           Petroleum & Chemical                products in 2006. Dairy pro-                                                 TRAdE
         agreement in Sudan,               Corp (Sinopec) and China            duction grew 15% to reach
         partnering Indonesia’s            National Petroleum Corp             32.9 million metric tons in                                                  us takes dispute to wTO
         PT Pertamina in a                 (of which PetroChina is a           2006, said Liu Chengguo,                                                     The US put in a request for
         20-year concession                subsidiary) want to boost           director of the Dairy As-                                                    a WTO dispute settlement
         for oil exploration and           prices to curb losses from the      sociation of China. Chinese                                                  panel to deal with illegal
         production sharing;               rising cost of crude oil. China     residents consumed an aver-                                                  Chinese subsidies on a variety
         and a natural gas deal            has not raised prices since         age of 25.6 kilograms of dairy                                               of products. US officials say
         with Turkmenistan.                May 2006.                           products in 2006.                                                            Chinese subsidies on steel,
              Not to be outdone,                                                                                                                            paper, information technol-
         China National Off-               Energy conservation                 coffee house closes                                                          ogy and other industries
         shore Oil Corporation             China’s energy conserva-            The Starbucks coffee shop in-                                                allow China to export goods
         (CNOOC) clinched a                tion law could be amended           side Beijing’s Forbidden City                                                cheaply and enjoy an unfair
         Somalian oil explora-                                                                                                                              advantage over US firms. The
         tion contract, despite                                                                                                                             US trade deficit with China
         insurgency in the                                                                                                                                  reached US$96 billion in the
         capital, Mogadishu.                                                                                                                                first five months of 2007.
              These forays are
         not without contro-                                                                                                                                import increase plans
         versy. In Somalia, for                                                                                                                             China’s import volume could
         example, CNOOC’s                                                                                                                                   top US$1 trillion by 2010,
         deal is with an interim                                                                                                                            the Ministry of Commerce
         government only.                                                                                                                                   said in July. A surging trade
         Meanwhile, CNPC                                                                                                                                    surplus has caused a num-
         is likely to get more                                                                                                                              ber of trade frictions with
         flak from the West as                                                                                                                              partners so China is moving
         the al-Ahdab oil field                                                                                                                             to reverse the trend. Beijing
         is one of the first to                                                                                                                             has abolished import permit
         be given to a foreign                                                                                                                              certificates for more than

         investor since the US-                                                                                                                             1,600 types of goods and is
         led invasion.                                                                                                                                      offering loans and preferen-
                                           lAsT ORdERs: Forbidden City Starbucks finally closes                                                             tial treatment.

16   China Economic Review • August 2007
        eijing has been on                                                                                     speech, SEPA’s head said
        green alert in the past                                                                                worsening pollution was
        month, as environ-                                                                                     the cause of rising cases of
mental issues rose to the top                                                                                  “mass incidents”, or pro-
of the government’s agenda.                                                                                    tests, among the people.
    Premier Wen Jiabao,                                                                                        The agency promptly
who is not use to deliver-                                                                                     announced that companies
ing bad news, told the new                                                                                     caught breaking envi-
national environmental                                                                                         ronmental laws would be
taskforce, “the situation we                                                                                   barred from receiving bank
are facing is very grim, so                                                                                    loans in future.
we must have a strong sense                                                                                        Behind all this, the
of crisis and urgency.”                                                                                        scandals continued to
    Even as Wen urged the                                                                                      emerge. More than 200,000
nation to fight pollution,                                                                                     people faced water short-
the government worked to                                                                                       ages in Shuyang city in
suppress information about                                                                                     Jiangsu province after

                                                                                            China Foto Press
the extent of the problem.                                                                                     ammonia was found in a
    The latest instance of        Rising wATERs: Fleeing                                                       river, while recurring algae
government intervention           the Huai River floods                                                        blooms threatened Lake
occurred in mid-July, when                                                                                     Chao, triggering flashbacks

                                  Wen’s warning
the National Bureau of                                                                                         of May’s algal outbreak that
Statistics (NBS) announced                                                                                     caused water shortages to
that it was suspending the                                                                                     two million in Wuxi.
release of “green GDP” fig-                                                                                        Even China’s annual
ures this year. Green GDP                                                                                      floods have worsened this
numbers were released last        that the suspension was the    China’s environmental situ-                   year. In mid-July, the Huai
year for the first time, and      result of a fall-out between   ation. The report originally                  River, a major river that
they showed that pollution        the bureau and the State       said that pollution caused                    runs through three prov-
costs took up 3.05% of the        Environmental Protection       750,000 premature deaths                      inces in central and eastern
GDP in 2004.                      Agency (SEPA).                 in the country, but the Chi-                  China, experienced some
    The NBS said it would             An earlier case of         nese government later had                     of its worst floods since
not release figures this          information suppression        that figure removed.                          1954. Almost half a million
year because there are no         came when the Financial            Environmental degra-                      people, mainly villagers
international standards for       Times revealed that Beijing    dation has caught official                    from Anhui, Henan and
calculating green GDP. The        had pressured the World        eyes, and for good reason.                    Jiangsu provinces, were
Wall Street Journal reported      Bank to modify a report on         A day before Wen’s                        evacuated.

                                                                                                                China Economic Review • August 2007   17

              democrats target yuan            exports of the Dodge model,
           The top Democratic candi-           which will be the work of
           dates for the US presidency         Chery alone, will target other
           came out in support of a            markets.
           congressional move to label
           China a currency manipula-          vw jv to build global cars
           tor. Senators Barack Obama          Volkswagen and its China
           and Hillary Clinton signed          joint venture partner Shang-
           on as co-sponsors of a June         hai Automotive Industry
           13 bill by Senate Finance           Corp said they would work
           Committee chairman Max              together on developing a
           Baucus and ranking Republi-         car for the North American
           can Charles Grassley. The bill,     and China markets. It will
           which calls for swifter action      be the first time the Volk-
           against countries labeled as        swagen-SAIC joint venture
           currency manipulators, is           has participated in research
           primarily aimed at China.           and development for models
                                               targeting the global market.

           AuTOs                               Auto output, sales soar
                                               China’s auto industry main-
                                                                                    buffEd uP: Chryslers are next for automaker Geely
           chinese chryslers coming            tained strong momentum in
           Cars made by Chinese manu-          the first half of the year, with     develop and market cars                         essentially the same as the
           facturer Chery Automobile           both vehicle output and sales        under an original brand in                      Euro III rules imposed in the
           under the Chrysler brand            rising 28.94% and 26.71%,            China. Takeo Fukui, Honda’s                     EU seven years ago, require
           could go on sale in the US or       respectively, compared with          president, did not reveal the                   improvements to car engines
           Europe within 30 months,            the same period last year,           brand’s identity but said the                   and exhaust systems, as well
           it was announced on July 4.         according to the China               first cars could be sold as                     as the use of cleaner gasoline.
           Chrysler Group CEO Tom              Association of Automobile            early as 2010.                                  The NDRC said oil refiners
           LaSorda said they hoped to          Manufacturers. In total, 2.59
           start exporting small and sub-      million passenger cars and           delay to emissions cuts
           compact vehicles to the US in       1.31 million commercial ve-          Tighter auto emissions
           less than a year, with exports      hicles were made, up 40.30%          standards, which were due to
           to Western Europe beginning         and 7.16% year-on-year.              come into effect July 1, are
           within two years. The first                                              likely to be put on hold after
                                               honda eyes ‘china’ brand             the National Development         China Foto Press

                                               Honda said on July 18 that           and Reform Commission
                                               it would become the world’s          said the deadline was im-
                                               first foreign automaker to           practical. The new standards,

                                              Up, up and away                                                          In addition to the interest rate
                                                                                                                       hike and tax cut, an increase
                                                                                                                       in bank reserve ratio require-
                                                                                                                       ments was expected.
                                                                                                                            Urban fixed-asset invest-

                                                  hina raised interest rates      was the fastest single quarter       ment jumped 26.7% in the
                                                  for the fifth time in 15        rise in 12 years.                    first half of the year after an
                                                  months on July 20. It               The inflation rate was also      increase of 25.3% was posted
                                          also announced that the tax on          a worry, hitting 4.4% in June,       in the first quarter.
                                          bank deposit interest income            up nearly two percentage                  Economists said the
                                           would be cut to 5% from 20%            points year-on-year. It beat the     investment was fueled by
                                               on August 15. The moves            central bank’s 3% target for the     China’s rising trade surplus,
                                                 came just one day after          fourth month in a row.               which came to US$112.5
                                                   Beijing reported sec-              In fact, the writing was         billion in the first half, up 84%
                                                   ond quarter economic           on the wall long before the          on a year earlier. In turn, the
                                                    growth of 11.9%,              growth figures were an-              surging surplus sent China’s
                                                     up from the 11.1%            nounced. Over the preceding          foreign exchange reserves pass
                                                     GDP growth seen              days, China was rife with talk       US$1.33 trillion at the end of
                                                     in the first quarter. It     of how to rein in the economy.       June, up 41.6% year-on-year.

mA kAi: Fears Economic Review • August 2007
     18    China
about overheating
                                                     tion are now considered mid-
                                                     dle class. This is based on a
                                                     National Bureau of Statistics
                                                     definition that states middle-
                                                     income households have
                                                     an annual income between
                                                     US$7,792 and US$65,790.

                                                     chinese savings fall
                                                     Household bank savings fell
                                                     US$21 billion in April and
                                                     US$37 billion in May, ac-
                                                     cording to the People’s Bank
                                                     of China. These drops are the
                                                     first in six years. At the end of
                                                     March, Chinese individuals
                                                     had a record US$2.26 trillion
                                                     deposited in bank accounts
                                  China Foto Press

                                                     fter savings grew 2.5 times
                                                     between 2000 and 2006. It
                                                     is thought that much of the
                                                     withdrawn money is being
couldn’t produce cleaner fuels                       invested in the stock market.
in sufficient amounts for the
changes to be implemented                            china ‘regrets’ imf move
nationwide.                                          The International Monetary
                                                     Fund’s new mandate for sur-
                                                     veillance was branded unfair
mAcROEcOnOmics                                       to developing nations by
                                                     China’s representative to the
larger middle class                                  organization, Ge Huayong,
The number of Chinese of-                            The mandate – which was
ficially described as “middle                        last updated in 1977 – has
class” has risen by almost 15                        become stricter on exchange
million people in the last two                       rate policies. This is likely to
years to 80 million in total,                        increase tensions between
according to the Research                            China and the US over the
Office of the State Council.                         former’s attitude toward ap-
About 6.15% of the popula-                           preciation of the yuan.
     Viewed in the context
of this data, the observation
made earlier in the month by
                                                        world’s richest
                                                       World’s largest economies
Ma Kai, National Develop-                                              12

ment and Reform Com-                                                   10
                                                                                                                          leave the rest to us                     SM
                                                     US$ trillions

mission chairman, that the                                              6
economy is still in danger of                                           4
                                                                                                                          Sometimes, when you’re onto a good thing, it’s worth
                                                                                                                          sticking with. Ramada Plaza Shanghai offers its clients a
overheating, seemed some-                                               2
                                                                                                                          perfect location for business and leisure, a place to enjoy
what mundane.                                                           0
                                                                             2002     2003     2004    2005      2006
                                                                                                                          great meals and luxurious comfort with a warm welcome –
     The NBS announcement                                                    US     Japan     German     China      UK
                                                                                                                          again and again.
that it was revising its growth                        National trade balances
assessment from 2006 to                                               400

11.1% from 10.7% had an air                                           200
                                                                                                                          Ramada Plaza Shanghai
of predictability. The al-                                              0
                                                                                                                          700 Jiujiang Road, Shanghai, 200001
                                                     US$ billion

terations mean China’s 2006
                                                                                                                          Phone: (+86) 21 6350 0000
GDP was US$2.65 trillion.                                             -600
                                                                                                                          Toll Free: Northern China 108007440169
                                                                                                                          Toll Free: Southern China 108004400169
It looks set to soon pass Ger-                                        -800                                      
many and become the world’s                                          -1000
                                                                             2002    2003     2004     2005      2006
third-largest economy.                                                        US    Germany    China     UK       Japan
                                                     Source: CIA World Factbook

                                                                                                                                                              China Economic Review • August 2007   19
     PERsPEcT ivE

     Crossing the quality line
             Safety                           as China’s drive to higher val-              kEn                    “on average about two-thirds of all US
                                              ue exports hit a serious bump?        dEwOskin                      product recalls are of imported prod-
          concerns                            After winning recognition for                                       ucts, and the large majority of those
     about Chinese                  extraordinary improvements in areas                                           products are manufactured in China.”
                                    like consumer electronics and cloth-                                          An EU watchdog organization noted
       goods could                  ing, quality and safety concerns from                                         that 48% of all dangerous product re-
      peg back the                  overseas in recent weeks have left the                                        calls were for Chinese-made products,
                                    country in a quandary.                                                        some 440 cases in 2006.
          country’s                     In 1950, Japan famously invited W.                                             Both the US and EU have signed
                                    Edwards Deming to lecture on quality Senior advisor to PricewaterhouseCoo- cooperative agreements with China as
            export                  and followed up by pledging to train pers and professor Michigan at the part of efforts to reduce the risks of

                                                                                      University of
                                    20,000 engineers in statistical quality                                       hazardous imports.
                                    control in a decade. Rebranding “Made in Japan”                       Although the earliest complaints were met
                                    to mean quality and reliability resulted in global with denials or retaliation, Beijing is taking ac-
                                    leadership in high value products such as electron- tion. China has tough and detailed regulations
                                    ics and automobiles that continues to this day.                 concerning food and drugs. The government just
                                        Of course, Japan has always exported primarily amended 1,817 national food safety standards and
                                    under its own brands. It has never possessed a Chi- last year closed 152,000 unlicensed food manufac-
                                    na-style huge export base shrouded                                                turers and retailers for producing
                                    in the relative anonymity of an out-                                              or selling fake or inferior products.
                                    sourced manufacturing model.            The perception                            Meanwhile, two former State Food
                                        However, it’s this model that has                                             and Drug Administration officials
                                    been giving China grief. Mass man- hurts responsible (Zheng Xiaoyu, who led the regu-
                                    ufacturers are in danger of sending chinese business latory body, and Cao Wenzhuang,
                                    the “Made in China” tag back to the                                               a department director) have been
                                    wrong side of the quality line.         people and                                sentenced to death for taking bribes

                                    hard times
                                                                            also endangers                            to certify unproven antibiotics.
                                                                                                                          All of the above indicate a se-
                                    Chinese food-related exports now the country’s                                    rious and focused response to the
                                    reach deeply into US and EU sup-                                                  problems – but will enforcement
                                    ply chains. But recent international development                                  be sustained and consistent?
                                    coverage of what the New York calculus, not only
                                    Times described as “spreading in-                                                 common threads
                                    ternational fears over tainted and to grow exports                                Many of these problems are report-
                                    adulterated exports” from China but also to move                                  ed as intentional adulteration of
                                    has done potentially severe damage                                                products to increase profits rather
                                    to the country’s trade reputation.      up the product                            than quality lapses. Typical or not,
                                        Pet foods, seafood, toothpaste, value chain                                   reliable or not, the reports suggest a
                                    and cough medicine – ingredients                                                  callous attitude and obfuscation of
                                    made in China if not the products                                                 supply chain links to avoid respon-
                                    themselves – are in the spotlight after being found sibility by makers, traders, and even regulators.
                                    to contain antibiotics, carcinogens, veterinary                       The perception hurts those Chinese who are
                                    drugs, salmonella, or just “filth.” Among these, the responsible businesspeople and also endangers the
                                    dangerous substitution of diethylene glycol (DEG) country’s development calculus, not only to grow
                                    for glycerin has a long history. Chinese DEG has exports but also to move up the product value
                                    been blamed for deaths in Panama, Bangladesh, chain. US regulators hold importers responsible for
                                    Nigeria, Argentina, and India.                                  ensuring that foreign-made products meet safety
                                        Problems with non-consumables include lead standards, and liability lawsuits will torpedo the
                                    paint in model trains, “diesel hydrocarbon” skins on dense web of small-scale distributors that channel
       cER Perspectives             elastic balls and sharp metal objects in stuffed toys. many cheap Chinese goods around the globe.
       A selection of the best          Most recently, 250,000 light truck tires from                     Until effective remedies are put in place, in-
       columns published in         China were recalled because manufacturers structions given to US consumers to “throw out”
       China Economic Review.       skimped on a required anti-delamination strip, China-made toothpaste could be applied to a
       Find out more at             while the Brilliance BS6 mid-level “affordable” much wider range of products. Whether it is food,
       www.chinaeconomic            luxury car failed abysmally in basic EU crash tests. health and beauty supplies, toys or automobiles,                 The US Consumer Products Safety Commis- the key selling point in US and EU retail may be-
                                    sion’s (CPSC) 2007 China Program Plan reports, come “Not Made in China.”

20   China Economic Review • August 2007
Stuck in the backwaters
        China’s        n July, reports surfaced that Chi-                 wEb                       US$160 billion less than 10 years af-
                       na’s two mobile telecoms giants                  wORm                        ter it was founded.
   infatuation         had hit upon a novel marketing                                                    What is more, TD-SCDMA is
         with a    strategy. In the east China city of                                              stuck in the starting gate and China’s
                   Suqian, China Mobile and China                                                   telecoms regulator refuses to issue
  homegrown        Unicom were giving away cases of lo-                                             licenses for it or any other standard
  3G standard      cal beer to new subscribers.                                                     until it is ready. Licensing has slipped
                       An analyst quoted in the Financial                                           from 2004 to “early 2006” to “late
      is killing   Times noted that, although a duopoly,                                            2006 or early 2007” to “before the
                   the two companies were competing                                                 Olympics” to “we’ll get back to you.”
 innovation in     to lure subscribers as though there
                                                                Unravelling the forces driving the
                                                               development of Chinese technology         For Chinese users, this means
       telecom     were “10 competitors fighting it out.”                                           continued reliance on creaky “2.5G”
                       As effective as beer-driven marketing may be data networks and the same moldy basket of un-
                   during a sweltering summer, if this is what passes inspiring services.
                   for innovation in mobile telecommunications then                        What’s heartbreaking is that in the years Chi-
                   the nearly 500 million Chinese mobile phone us- na has dawdled over TD-SCDMA, all the ingre-
                   ers might want to reach for something stronger.                  dients that would have enabled it to be a global
                       The problem is that while China’s two mobile leader in mobile applications have come together.
                   phone operators might market with a competitive                         Global 3G standards and technologies have
                   verve, they behave like the government-managed improved and are beginning to live up to early ex-
                   duopoly they are when it comes to                                                   pectations. Handset technology has
                   technical innovation.                                                               also matured to the point where real
                       Wireless value-added services The lesson of                                     web browsing, IP telephony and
                   (WVAS) are largely limited to the                                                   even Chinese handwriting input are
                   standard 2G diet of ring tones, ring the internet’s                                 practical. Motorola’s Ming and the
                   back tones and text-based gim- success is that                                      turbo-hyped Apple iPhone, a sleek
                   micks. Many of these come from                                                      mobile PC cunningly disguised as a
                   small, third-party providers over the underlying                                    phone, are signposts to the future.
                   which the operators maintain rigid network is just
                   control. This has generated more                                                    Engine for growth
                   controversy than innovation as the starting line. With the largest mobile user base
                   WVAS providers have struggled
                   with shady customer recruiting
                                                          The explosion in in the world, China is in aapplica-
                                                                                                       position to be the mobile

                   practices, the duopoly’s financial innovation and                                   tion laboratory for Asia, if not the
                   demands and wide-ranging content                                                    world.
                   restrictions. Revenues are declining wealth creation                                    While many of China’s mo-
                   across the board and many WVAS has been in the                                      bile phone users are low-revenue
                   providers are teetering on the brink                                                customers content with basic ser-
                   of failure, let alone dreaming up ex- services that run vices, there is an increasingly afflu-
                   citing new products.
                       As a result, the largest mobile
                                                          on the network                               ent, mobile and internet-addicted
                                                                                                       youth generation already pushing
                   telephone market in the world is a technological the current services to the limit. Mobile internet
                   desert overshadowed by far more fertile territories access could have a much broader impact in China
                   in Korea and Japan.                                              than PC-based access has ever had.
                                                                                           China could exploit this potential by swallow-
                   A misguided strategy                                             ing its pride, accepting a proven global 3G stan-
                   Don’t be misled. China’s telecommunications dard and ordering mobile operators to open their
                   regulators are committed to domestic innovation. networks and support third-party IP-based servic-
                   Unfortunately, they have chosen to focus on the es. That could spur real innovation and make this
                   development of a domestic 3G standard, TD- the golden age of mobile services in China.
                   SCDMA, rather than using a foreign equivalent.                          But as long as the state-owned enterprise men-
                       This is exactly the wrong the approach.                      tality and top-down technical policy making pre-
                       The lesson of the internet’s success is that the vail, that golden age will remain elusive. Instead
                   underlying network is just the starting line. The of being the innovation leader it should be, China
                   great explosion in innovation and wealth creation will remain the world’s largest mobile telephony
                   has been in the services and applications that backwater and 500 million mobile phone users
                   run on the network. That’s why Google is worth will be left treading water.

                                                                                                        China Economic Review • August 2007    21
     PERsPEcT ivE

     New leaders, new divisions
         Fresh faces                        he political landscape in Eu-              duncAn                       ly help France, or the rest of Europe. It
                                            rope has changed significantly           fREEmAn                        is possible that it is all a smoke screen,
         in Paris and                       in recent months, bringing into                                         intended to divert domestic attention
          London are                sharp focus differing visions of the eco-                                       from some of the more controversial
                                    nomic future of the European Union.                                             aspects of his reform policies.
         likely to stir             The election of Nicolas Sarkozy as                                                   Even if his policy pronouncements
            up debate               president of France in place of Jacques                                         are genuine, there is no guarantee that
                                    Chirac, and Gordon Brown assuming                                               they will achieve anything. Other gov-
           in Europe.               the UK premiership from Tony Blair                                              ernments are opposed to many of his
                                    has removed from the scene two of the        VIEW FROM EUROPE                   aims. For example, the wording of the
       China will, as               region’s longest-serving and most im- Brussels-based writer and consultant new treaty, conceded by Tony Blair
        always, be a                portant leaders.                               specializing in China business   in one of his last acts, was apparently
                                        This change is not just an internal                                         strongly opposed by Brown.
        talking point               political concern for each country. It will have im-                   Although sometimes touted as being more in
                                    portant effects on Europe as a whole, and its rela- the mold of traditional Labor Party politics, Gor-
                                    tions with the rest of the world.                                don Brown has if anything shown himself to be
                                        Now, the key factor in pushing policy change more of a skeptic on Europe than Blair, and has
                                    are the efforts of the new French                                                   frequently drawn unfavorable com-
                                    president to impose his view of Eu-                                                 parisons between the performance
                                    rope on his counterparts. Sarkozy nicolas sarkozy                                   of mainland European economies
                                    sold himself to the voters as a man                                                 and the UK.
                                    with radically pro-market domestic has more or less                                     Germany’s Andrea Merkel,
                                    reform plans – at least by French openly called for another leader not long in power
                                    standards.                                                                          and one who presides over a much
                                        While most European part- the head of Trade improved economy, is unlikely to
                                    ners of France would applaud these commissioner                                     support the undermining of insti-
                                    aims, some of his other policy dec-                                                 tutions such as the European Cen-
                                    larations have caused concern.          Peter mandelson tral Bank and the euro by placing
                                                                                                                        them under the direct influence
                                    Protectionist goals?
                                                                            for failing to                              of political considerations. Indeed,
                                    One of his biggest triumphs so far protect Eu firms                                 Germany’s recent economic revival
                                    has been getting the wording of the                                                 has come within exactly the same
                                    new EU reform treaty changed so from outside                                        European policy framework that
                                    that “free and undistorted competi- competition,                                    Sarkozy complains about.
                                    tion” is no longer identified as one
                                    of the fundamental aims of the notably from                                         The beijing angle
                                    EU’s internal market. As a result, china                                            China does not directly feature in
                                    Sarkozy was able to declare that                                                    much this debate, but there is no
                                    competition is merely a dogma, and protection is question that it looms in the background.
                                    no longer taboo.                                                       The challenge of China is undoubtedly seen as
                                        He has also called for intervention to ensure part of the problem of economic policies in Eu-
                                    that the euro’s exchange rate favors European rope. To a large extent these are problems of Euro-
                                    businesses and has attacked the European Central pean competitiveness in a global economy. While
                                    Bank for its interest rate policy, which has brought Sarkozy may wish to make the French economy
                                    rising costs of borrowing, threatening to stifle eco- less rigid, he has no intention of allowing it to be
                                    nomic recovery.                                                  subject to the full force of the global marketplace,
                                        The possible international impact of the new of which China is an important part.
                                    French president’s policy positions goes even fur-                     The arrival of Sarkozy has not yet brought any
                                    ther. Sarkozy wants the EU to do more to protect substantive change in European policy toward
                                    European industries, and proclaimed the virtues of China, but it has sharpened the debate in Europe
                                    economic nationalism. He has more or less openly over the direction it should be taking.
                                    called for the head of the Trade Commissioner                          If nothing else, these discussions will undoubt-
                                    Peter Mandelson for failing to protect EU firms edly force the trade officials in Brussels to offer a
                                    from outside competition, notably from China.                    strong defense of their existing policies. This may
                                        It is still unclear to what extent Sarkozy’s at- in turn push them to take a stronger line on the
                                    tacks on EU economic policies stem from a genu- problems between Europe and China that so far
                                    ine belief that the changes he advocates will actual- remain largely unresolved.

22   China Economic Review • August 2007
Seeds of progress
   If Taiwan’s             ould 2008 be a breakthrough                PhiliP                    pulls off a surprise and wins one of the
                           year in cross-strait relations? It     bOwRing                       elections – more likely the presidential
 presidential              is unwise to be too optimistic                                       one than the legislative one – 2008 will
election goes     given the number of previous disap-                                           likely still see direct flights and ship-
                  pointments. Nonetheless there are in-                                         ping, a large influx of mainland tour-
      smoothly    tertwined reasons why we could be in                                          ists and a lifting of some investment
     in 2008, a   for a pleasant surprise.                                                      restrictions.
                      That may be a bold statement given                                            At the same time, Taiwan links to
   settlement     that there remain some concerns that,                                         the US are not what they were. Presi-
                  with the presidential election in Tai- Asia columnist for the International dent Chen’s undiplomatic posturing
  with Beijing    wan coming shortly before the Beijing Herald Tribune and former editor of the has annoyed Washington while Tai-
 will become
                                                                Far Eastern Economic Review
                  Olympics, President Chen Shui-bian                                            wan businessmen know they – as ma-
                  could be tempted to take rash pro-independence jor players in mainland exports of shoes, garments
      a remote    actions, which would meet with a very stiff Chi- and electronic goods – would be big losers if the
    possibility   nese response.                                                US gets tough with China over its trade surplus.
                      However, there are both immediate and long-                     There is of course no guarantee that closer eco-
                  term reasons why this is now most unlikely and nomic relations will lead to a dilution of Taiwan’s
                  that 2008 could see not only practical steps in the sense of separateness, but there are now new el-
                  direction of cross-strait exchanges                                               ements in the equation. The most
                  but also some more fundamental                                                    important is the attitude of Presi-
                  changes of attitude on both sides.        Although hard-                          dent Hu Jintao. He has persistently
                      First of all, however Chen may                                                followed a path of moderate words
                  want to champion separatism, his core voters are                                  and encouragement of cultural and
                  political clout is now limited. The still prepared                                other exchanges even while devel-
                  mix of corruption, proven and al-                                                 oping military capabilities that re-
                  leged, against his family with the to sacrifice                                   mind Taiwan of China’s ability to
                  broader perception of incompetent economic gains                                  impose itself should the need arise.
                  government has left him standing                                                      The emphasis is on soft power
                  low in the opinion polls.                 to protect                              influence, particularly in Asia. Bei-
                      There is limited public desire to                                             jing believes time is on its side and
                  follow him down an adventurous Taiwan’s identity that a sharp response merely puts
                  path such as rewriting the constitu- from being                                   Taiwan’s people on the defensive.
                  tion in a controversial way.
                      With legislative elections this swamped, the                                  The road is long
                  year and the presidential election majority now                                   Taiwan’s democratic system, its
                  in 2008, Chen’s Democratic Pro-                                                   strategic location and links with
                  gressive Party (DPP) has turned favor a reduction the US and Japan all mean détente
                  towards a more pragmatic leader in barriers                                       is a long way away. But if all goes
                  in Frank Hsieh, former mayor of                                                   well in 2008 it is possible that there
                  Kaohsiung and hence one well                                                      could be a settlement on the basis of
                  aware of the economic costs of failing to develop a very loose definition of “One China”. This might
                  cross-strait links.                                           allow a recognized separate Taiwan administration
                                                                                to continue for the foreseeable future and perhaps
                  A powerful majority                                           even gain UN membership in the same way that
                  Although hard-core voters are still prepared to China recognizes the reality of two Koreas.
                  sacrifice economic gains to protect Taiwan’s iden-                  Taiwan would have to abandon any notion of
                  tity from being swamped by too-close relations its being non-Chinese and accept demilitarization.
                  with the mainland, the majority – and certainly the At the same time the mainland would need to rec-
                  middle ground where elections are decided – now ognize that Taiwan is geographically, socially and
                  favor a reduction in barriers. Taiwan’s electronics historically very different despite being inhabited
                  and IT industries may be strong but its service in- by Chinese people.
                  dustries have lagged badly due to the lack of direct                This is all more possible than probable. But
                  links and two-way restrictions on investment.                 as the mainland economy gradually comes closer
                      The most rapid progress in cross-strait links is to that of Taiwan, it is quite possible that the dy-
                  likely if the KMT wins, if only because it is easier namics of the cross-strait relationship will change
                  for Beijing to deal with a party that genuinely be- from emphasizing differences to accepting them
                  lieves in eventual unification. But even if the DPP for what they are.

                                                                                                      China Economic Review • August 2007    23

     Setting the standard
                                           A                                             Q
           Accounting firms must                   s one of the Big Four global              : How are the challenges in China
                                                   accounting firms, Deloitte &              different to those in India?
              position themselves                  Touche Tohmatsu sees China
               to cater for a more
            financially integrated
                                           as one of the main drivers for growth
                                           in the Asia Pacific region. It has 6,000
                                           employees spread over 10 China offices
                                                                                         a     : In India, we have a similar invest-
                                                                                               ment program on which we have
                                                                                         spent US$50 million. We are also help-
            world, says Deloitte’s         and plans to invest a further US$150          ing our India firm set up proper infra-
                                           million in the country. Chaly Mah             structure. What we have needed to do is
                new regional boss          Chee Kheong, Deloitte’s new CEO for           make sure they have a common report-
                                           Singapore and Southeast Asia, spoke           ing platform, which has never been the
                                           to China Economic Review about                case before. Our India strategy is very
                                           how he hopes to take advantage of both        similar to our China strategy – and I
                                           emerging opportunities in China and           would say in China we are more or less
                                           growing regional interdependence.             there in terms of achieving our objective.
                                                                                         Both countries represent high growth

                                           Q   : This region is very diverse – in lan-
                                               guages, people and standards. How
                                           do you deal with that?
                                                                                         markets for us. Even though people talk
                                                                                         about China having 1.3 billion people
                                                                                         and India having 1.1 billion people we
                                                                                         still don’t hire enough accountants there.

                                           a    : We formed a regional cluster about
                                                a year ago and the intention is to
                                           run it as one firm even though we have        Q   : What role does the region play?

                                           seven country firms in there. We think
                                           this will enable us to serve our clients
                                           better. [Pooling] our resources helps us
                                            share some of the expertise that resides
                                                                                         a    : As far as Deloitte is concerned,
                                                                                              the entire Asia Pacific region is our
                                                                                         number one priority. We embarked on
                                              in various countries so it can be used     this project to create a Southeast Asia
                                                across the entire region. At the same    cluster because we believe that, besides
                                                  time, it will help us develop our      China and India, there is a role for
                                                   people because they will now have     Southeast Asia to play. Singapore has
                                                   the opportunity to work with ex-      been very successful; exciting things are
                                                   perts on cross-border assignments.    happening in Thailand; Indonesia is very
                                                                                         stable. The total population of the entire

                                                 Q  : How do you amalgamate
                                                    all the standards across the
                                                                                         Southeast Asia region is about half a bil-
                                                                                         lion… that’s a pretty big region. I always
                                                                                         say to our clients operating in the region,
                                                                                         there is no point in competing with

                                            a    : We put together a project manage-
                                                 ment office that deals with change
                                           management. Basically, people’s mind-
                                                                                         China or India, you have to try and work
                                                                                         with them – if they are successful you
                                                                                         will be successful.
                                           sets have to change – we have to make
                                           sure everybody abides by Deloitte global
                                           standards. In China, a few years ago we
                                               started spending US$150 million as
                                                                                         Q   : What does this mean for you?

                                                    a global investment project. The
                                                      money has gone into bringing
                                                       talents to China and helping
                                                                                         a   : Our new global CEO’s focus is on
                                                                                             implementing our 2010 strategy.
                                                                                         In a nutshell, the strategy focuses on
                                                        develop the Chinese market.      three major areas: the promotion and
                                                        We started with just a small     enhancement of the Deloitte brand;
                                                        share of the big state-owned     generating our next generation of talents;
                                                        enterprise (SOE) audits.         and, of course, our clients. Many people
                                                        Today, we audit more than        have this misconception that the Big
                                                         20% of the top 50 SOEs in       Four firms focus only on big clients. It’s
                                                         China. We started out not       true we have our marquee clients but at
                                                         auditing any of the Big Five    the same time, when you look at most of
                                                          Chinese banks; now we          our markets… a big chunk of our busi-
                                                          audit two of them.             ness still comes from the ‘meat’ markets,

24   China Economic Review • August 2007
no matter how you define it. Not the            ciple-based – versus US GAAP, which
mom-and-pop shops but small- and                is rules-based – it requires a lot more
medium-sized enterprises, no matter             consultation. Our practitioners on the
how you define them.                            ground know the application in most
                                                cases. Having said that, because of this

Q   : Are there any particular targets you
    have identified as part of this three-
prong strategy?
                                                move towards IFRS, there is now a
                                                growing demand for IFRS-trained ac-
                                                countants. There will be shortage – it is
                                                already visible now.

a    : One of the things I will be focusing
     on is trying to get all the countries in
the Asia Pacific region to cooperate and        Q   : How can you deal with this?

make sure we are successful in cross bor-
der execution. In this globalized world,
a lot of our clients are not interested in
how well we can serve them in China.
                                                a   : The way we are solving it right
                                                    now is to reach out to firms that
                                                practice in IFRS jurisdictions and try
They want us to deliver the same De-            to get them to train more people. What
loitte experience to them wherever they         you are going to find is that, as more
operate. It’s a bit like eating a McDon-        countries move towards IFRS, the pool
ald’s hamburger – it tastes                                      of resources will grow.
the same no matter where
you eat it.
                                Our clients want                  Q   : Is it difficult to
                                                                      bridge the cultural

Q   : Is the problem within
    Deloitte or with differ-
ent standards?
                                us to deliver the
                                same deloitte
                                                                  and legal gaps between

a    : You are already seeing
     some conversion. For
                                experience to
                                them wherever
                                                                  a    : It is difficult, but
                                                                       one of the pluses
                                                                  of working for a global
many years the Koreans                                            organization is that you
have been pretty much in
                                they operate. it’s                start to think globally.
line with the US. You have      a bit like eating                 Cultural differences will
a lot of Korean companies                                         always be there but, as
that have listed in the         a mcdonald’s                      far as we are concerned,
US market and therefore         hamburger - it                    we want everybody
they adhere to US Gener-                                          to deliver the same
ally Accepted Accounting        tastes the same                   Deloitte experience.
Principals (GAAP).But
now many of them are
                                no matter where                   Because the China phe-
                                                                  nomenon happened so
asking for International        you eat it                        fast, everybody is chip-
Financial Reporting Stan-                                         ping in to help produce
dards (IFRS).                                   well-trained Chinese [accountants]. We
                                                have Chinese nationals who have been

Q   : What is driving the change?               posted outside to gain experience in
                                                foreign offices. At the same time, we are
                                                hiring many mainland Chinese who are

a   : More and more companies operate
    across borders. The Chinese them-
selves have committed to IFRS. A lot of
                                                studying in Singapore, the US and the
                                                UK, training them, and plowing them
                                                back into China. Eventually, we will end
Chinese companies have come to Hong             up with a lot of mainland Chinese who
Kong to list and they have Hong Kong            have trained overseas.
GAAP, which is IFRS compliant. If I
were to put a bet on whether we’ll end
up with IFRS or US GAAP, I’d say more
companies are going towards IFRS.
                                                Q   : Is the approach local-to-global or

Q   : What is your biggest challenge in
    dealing with all these standards?
                                                a    : For an organization like us it would
                                                     have to be a global experience but
                                                delivered locally by the right people. You
                                                can’t have a lot of expats running around

a   : We have IFRS centers all over
    the world. Because IFRS is prin-
                                                China… but you can bring in the exper-
                                                tise and deliver it through local staff.

                                                                                                China Economic Review • August 2007   2
           sPEciAl REPORT • BANKING

           Leader of the pack
              China Merchants Bank                                      s banking deals go, Taiwan finan-
                                                                        cial services provider Chinatrust
            has blazed a trail in retail                                advising on China Merchants
                 services. Now every                            Bank’s (CMB) nascent credit card op-
                                                                eration was hardly a barnstormer. Yet this
               other bank is trying to                          partnership, sealed at the start of the de-
                         do the same                            cade, is the closest a foreign investor has
                                                                come to playing a direct role in China’s
                                                                most dynamic retail banking operation.
                                                                    While almost every other bank in the
                                                                country has brought on-board overseas
                                                                investors as part of restructuring plans,
                                                                CMB has resisted.
                                                                    “The bank has always been run based
                                                                on the rules and practices of a real share-

                                                                                                                   China Foto Press
                                                                holding commercial bank,” said Tang
                                                                Zhihong, executive vice-president re-
                                                                sponsible for retail banking at CMB.
                                                                    “We had already accumulated a great
                                                                deal of experience along the lines of real                        of its success were planted long ago.
                                                                commercial banking as practiced overseas                              As early as the 1980s, it was track-
                                                                so we didn’t bring in any foreign strategic                       ing consumer banking developments in
                                                                investors ahead of our IPO [which raised                          Hong Kong. It studied the products of-
                                                                US$2.66 billion last September].”                                 fered and, riding the development wave
                                                                                                                                  that came when its home city of Shen-
                                                                new challenges                                                    zhen was named a special economic zone,
                                                                With its rivals busy cleaning up their fi-                        tailored its own services accordingly.
                                                                nances in recent years, CMB has enjoyed                               Consequently, retail deposits stand
                                                                a relatively clear run at the retail market.                      at 39% of total deposits, trailing only the
                                                                Now, though, foreign and domestic banks                           Big Four state banks. Also, while Indus-
                                                                are muscling in on the territory. China’s                         trial and Commercial Bank of China has
                                                                small segment of high-net worth clients                           18,000 branches to CMB’s 500, CMB
                                                                are spoiled for choice: Credit cards and                          focuses heavily on wealthier urban areas.
                                                                wealth management services are being                                  Tang describes the bank’s typical cli-
                                                                pitched at them from all directions.                              ent as “rich, young and white collar.”
                                                                    Competition is growing but CMB can                                This retail strategy saw CMB emerge
                                                                draw strength from the fact that the seeds                        as a pioneer in both debit cards (40 mil-

                                       CMB strategy: Never a state prop
                                   The fundamental difference between China Merchants Bank          the executive vice president responsible for retail banking at
                                  (CMB) and its domestic competitors is that it was never in-       CMB. “We had no clear responsibility to central or local gov-
                                  tended as a cash point for local government projects.             ernment. At the very beginning we were welcomed by foreign
                                      It all started in 1986 when Chen Muhua, governor of the       joint ventures and private companies in China because our po-
                                  People’s Bank of China, visited Shenzhen and was petitioned       sition and development trend met those clients’ targets.”
                                        by officials from China Merchants Group (CMG) who                This independence has also meant that CMB can’t rely on
                                          suggested the government establish a commercial           the state for financial backing. While billions of dollars has
                                            bank in the region.                                     been injected into China’s banking sector to wipe out the non-
                                                  A year later CMB was founded as the first         performing loans (NPLs) that have arisen from poor lending
                                             shareholding commercial bank wholly owned by           policies, CMB must resolve its own problems.
                                             corporate interests. It had one office, 36 employees        “We have to write these off with our own profits so CMB
                                              and about US$13 million in registered capital.        pays attention to risk management,” said Tang. “Our develop-
                                                   “CMB was born with a unique strategy – it had    ment philosophy can be summarized as: innovation, services
                                               to develop along its own path,” said Tang Zhihong,   and prudent development.”
TAng zhihOng:
CMB executive
     26    China Economic Review • August 2007
                                      sOmEThing fOR EvERyOnE:
                                       Chinese banks are looking to
                                       expand their product ranges

lion issued as of the end of March) and credit cards (13 million
issued in March). New credit card issues in the first five months
of 2007 exceeded the total number issued in 2006.
    “Compared to other Chinese banks, it does not come out as
the best on every parameter. But what is unique about CMB is
that is comes towards the top in all areas,” said Charlene Chu,
director of the Fitch Ratings financial institutions team in Bei-
jing. “CMB is smaller and more nimble than other banks, which
means it can adjust more easily in the operating environment.”

slick operator
Perhaps this is best illustrated by the fact that CMB didn’t actu-
ally have its own heaquarters building until 2001. Now, home is
a multistory office building in Shenzhen but when things first
started in 1987, the first piece of property the bank spent money
on was a base for its IT department.
     Without this early investment in technology – and the inter-
net banking platform that sprang from it – Tang doesn’t believe
the bank would be where it is today.
     “We have been limited in expanding our branch network due
to the regulator’s slow approvals process,” he said. “CMB ranks
sixth in terms of total assets. However, in terms of transaction
volume carried out on the internet, we rank second. Without the
development of internet banking, it would be very difficult for
CMB to become the sixth-largest bank in the country.”
     CMB’s e-banking service, first launched nationwide in 2000,
accounts for 20% of the internet banking market. Transaction
volume for the first five months of the year came to US$59.5
billion, equivalent to the full-year figure for 2006. A similar level
of effort goes into telephone banking, which is consists of a call
center in Shenzhen and a credit card call center in Shanghai.
     “Our internet and phone banking services offer almost all
the retail banking functions: money transfers, remittances, stocks
and mutual funds, utility bill and tax payment functions,” said
Tang. “Our system is better than that of some foreign banks.”
     A key contributing factor to this high level of service is what
Yan Meizhi, senior credit officer at Moody’s in Hong Kong, de-
scribes as a very positive corporate culture – something she

                                                                        China Economic Review • August 2007   27

         Card counting
         There is little doubt that credit card usage in             it went up to two million, followed by five million
         China is growing at a rapid pace. As many as 15.6           in 2005 and 10 million in 2006.
         million cards were issued in 2006 – an increase                  The bank is sitting pretty with a market
         of 39% year-on-year – taking the national total to          share of around 40%. But such is the pace of
         50 million, according to China UnionPay.                    credit card rollouts nationwide. Tang Zhihong,
              The difficulty is making money from them.              CMB’s executive vice president responsible for
              “Credit cards still haven’t really taken off           retail banking, is certain this figure will decline.
         with the general population as incomes are                       “When we did our IPO road show [late last
         relatively low,” said Charlene Chu, director of             summer], we said that we expected our share
         the Fitch Ratings financial institutions team in            of the credit card market to decrease to 20-25%
         Beijing. “People who do have credit cards tend              within three years. This doesn’t mean our profit-
         to pay off their balances every month. Building             ability is also falling – it means that other banks
         up debt just isn’t part of their behavior yet.”             are catching up and taking market share.”
              Banks, facing the high overheads typical                    Efforts are being made to provide the sys-
         of the card business and deprived of revolving              tems to cope with this expected growth. First,
         credit users, must issue a comparatively large              domestic banks must ensure they have the
         number of cards to breakeven. Those who get                 technology to handle the credit card business.
         involved now are waiting to make money off the                   “There are really only a few systems in the                             systems that are completely unproven.”
         more mature and credit-friendly market ex-                  world that can run tens of millions of cards,”                                    First Data is also concerned about the rela-
         pected to develop in the long term.                         said Nigel Lee, Asia president of First Data In-                             tively small number of merchants able to accept
              China Merchants Bank (CMB) got in early,               ternational, a credit card payment processing                                credit card transactions (188,000 were added
         first issuing its renminbi-US dollar dual cur-              group with over 100 people working in China.                                 last year, putting the total at 800,000). Even for-
         rency credit card in 2002. By the end of 2003,                   “It is very significant. If you go to India you                         eign banks, generally more enlightened when it
         more than 800,000 were in circulation. In 2004,             will hear about other banks running similar                                  comes to credit cards, appear to be doing little

     doesn’t see so much at other banks.                      ployees have become the most important                                                  “Now the banking system has been
         “The biggest banks are still full of gov-            people in the headhunter market.”                                                  largely cleaned up, banks have to focus on
     ernment bureaucrats who don’t care about                     Key positions in the credit card and                                           their profitability,” said Chu. “Banks that
     making money. Their attitude is that they                retail banking divisions at CMB are al-                                            don’t diversify into new areas will have to
     are doing a favor for their clients. It is a             ready occupied by experienced staff from                                           rely on the traditional lending business.”
     totally different mindset [from CMB].”                   Taiwan, Hong Kong and Singapore.                                                        In May, CMB received initial ap-
         Yet CMB’s strong workforce makes                     Tang said the bank would also look to re-                                          proval to become the largest shareholder
     for rich pickings in a market where good                 cruit from abroad as it expands its private                                        in China Merchants Fund Management
     bankers are in short supply.                             banking department.                                                                (CMFM). It is now waiting for the state
                                                                  The focus on private banking and                                               asset regulator to give the greenlight.
     foreign invasion                                         wealth management services is common                                                    “The fund can use the bank as a point
     In the last few months, HSBC, Citigroup,                 to all Chinese banks as they try to widen                                          of sale, with the branch offices as distri-
     Standard Chartered and Bank of East                      their non-interest income bases.                                                   bution channels,” said Yan. “The bank can
     Asia have received licenses to run full re-                                                                                                 also get custodian business, which adds
     tail banking operations in China and all                   Plastic fantastic                                                                diversity to its revenue streams.”
     have unveiled ambitious expansion strat-                                                                                                         CMFM has already worked with
     egies. Thousands of staff are required, and                                                                                                 CMB on a number of the bank’s wealth
     this doesn’t take into account the needs of                                                                                                 management products but Tang is keen
     domestic lenders.                                                                                                                           to point out that talks on integrating the

          “CMB is losing people to its com-                                                                                                      two companies are still at an early stage.
     petitors, with both foreign and domestic                                                                                                         Nevertheless, he is optimistic about
     rivals hiring away staff,” said Yan.                                                                                                        the prospects for the partnership and
                                                               Number of bank cards issued each year by CMB
          In response, CMB has bumped up                                                                                                         how it fits into CMB’s wider efforts to
     pay scales and is paying more attention to                             6
                                                                                                                                                 continue innovating.
     the needs of its staff but Tang accepts that                                                                                                     “It is important for CMB to carry on

     these efforts can only go so far.                                                                                                           developing as the foreign banks build up

          “CMB’s credit card center has become                              2
                                                                                                                                                 their experience in China and the domes-
     like the West Point Military Academy for                               1
                                                                                                                                                 tic banks make their internal changes. We
     Chinese banks. If they want to develop a                               0
                                                                                                                                                 have to keep changing earlier than the
     credit card business, they have to visit our                            2002         2003
                                                                                       Credit cards
                                                                                                      2004          2005
                                                                                                             Debit cards
                                                                                                                                                 others and it is upon this that our success
     center. But this also means that our em-                 Source: China Merchants Bank                                                       or failure will be decided.”

28   China Economic Review • August 2007
                                                                    country get its checks and balances in place fast    does not necessarily represent an advantage.
                                                                    enough to match the growth in card users?            To be truly effective, a credit database must be
                                                                         “My personal view is no, they will not,” said   comprehensive, covering the whole country and
                                                                    Lee. “A credit crisis will likely occur. The ques-   all the financial institutions.
                                                                    tion is will it be catastrophic or manageable.”           For China, such a system is years away. In
                                                                         Korea is often cited as an example of how       some banks, they are still grappling with more
                                                                    to kick-start a credit card market but it can also   fundamental aspects of the credit card busi-
                                                                    serve as a case study of credit meltdown. Com-       ness than scoring cards and, while usage will
                                                                    petition between banks became so intense that        certainly continue to grow, it will not come with-
                                                                    they began shifting balances between accounts,       out pains.
                                                                    papering over the surge in defaults in order to           “Part of the challenge is getting banks to
                                                                    carry on issuing more credit.                        understand credit cards and this is more of a
                                                                         Lee noted that the China’s banking regula-      problem in China,” said Lee. “Where do you get
                                                                    tors have spent a great deal of time with their      the skills from? There is not enough knowledge
                                                                    Korean counterparts to understand the crisis         throughout the whole business process.”
                                                                    and ensure it is not replicated in China.
                                                 China Foto Press

                                                                         For its part, CMB claims to be in a better
                 bEAuTy And ThE bEAsT: Is                           position than its competitors when it comes to
                                                                                                                           card wars
                  China in for credit trouble?                      managing credit. Tang puts it down to the huge        China’s overall credit card market

                                                                    amount of consumer data that has been col-                                                          CMB(33%)
to encourage progress in this area. A survey of                     lected through retail banking. This information
foreign bankers carried out by First Data and                       is channeled into the bank’s credit bureau, en-                                                     Others(4%)
the Economist Intelligence Unit found that only                     abling better informed lending decisions.                CCB (21%)                                  ABC(2%)
12% of respondents planned to develop mer-                               “Other banks have not accumulated this
chant acquiring services.                                           much data so it is harder to develop good scor-                                                     GDB(15%)
                                                                                                                             ICBC (17%)
    It is China’s credit infrastructure that rais-                  ing card models,” Tang argued.
es the most serious questions, though. Can the                           Chu contests that historical data alone         Source:China Securities Journal

                                                                                                                                                  China Economic Review • August 2007   29

     There and back again
     China’s electronic exports                              constant stream of high-tech ex-
                                                             ports are driving China’s record
           are returning to the                              trade surplus. But a reverse flow
     mainland as toxic e-waste                       of high-tech trash, dumping obsolete
                                                     electronics in the very cities that manu-
                                                     factures them, is plaguing the mainland.
                                                         Now it turns out that China’s red-hot
                                                     manufacturing engine could hold the key
                                                     to the mounting e-waste problem.
                                                         A United Nations group, StEP
                                                     – “Solving the E-waste Problem” – has
                                                     a project that turns the tables on big in-
                                                     dustry. It wants China’s workers to man
                                                     “disassembly” lines to recycle e-waste.
                                                         “The opportunity of having relative-
                                                     ly cheap labor in China is that you get
                                                     much better separation by hand than any
                                                     modern machine [can provide],” said Jaco
                                                     Huisman, who is coordinating StEP’s
                                                     China project. “What we [will] have is
                                                     the same conditions to do the reverse
                                                     thing of an assembly line – we will take
                                                     everything apart again.”
                                                                                                    wREcks TO RichEs: E-waste
                                                     in need of a cure                              can be profitable in China
                                                     China needs an e-waste solution badly.
                                                     Most of the world’s estimated 40 mil-         er” levels of lead in their blood. Exposure
                                                     lion annual tons of e-waste – production      to lead – commonly used in computer
                                                     scrap and discarded appliances – ends up      monitors, soldering and circuit boards –
                                                     illegally dumped in China. Domestic e-        can cause chronic damage to the nervous
                                                     waste is also rising rapidly. The Chinese     and reproductive systems. But process-
                                                     already trash 40 million personal com-        ing e-waste is so profitable that Guiyu’s
                                                     puters every year, according to the UN.       people carry on regardless.
                                                          Guiyu, in Guangdong province, is the          “For a small village, all the build-
                                                     best-known e-waste dumping ground. It         ings in Guiyu look very rich,” Lai said.
                                                     receives several million tons of smuggled     “The villagers don’t want to stop e-waste
                                                     e-waste a year, mainly from North Amer-       [dumping].”
                                                     ica and Europe.                                    This is where StEP’s “Best of Two
                                                          A “backyard recycling” industry          Worlds” project comes in. It hopes to cre-
                                                     has grown in Guiyu. Some 80% of the           ate an e-waste recycling model for China
                                                     132,000 villagers are now involved in e-      that will use better economics to render
                                                     waste. They extract metals like gold and      backyard recycling obsolete.
                                                     copper, and repair components to sell              According to Christian Hagelueken,
                                                     to factories. But lack of expertise means     of StEP’s recycling partner Umicore,
                                                     valuable materials are crudely extracted,     a good recycler can get precious metal
                                                     often releasing pollutants in the process.    yields that top 90%, while backyard op-
                                                          “Usually [villagers] use poor technol-   erations typically achieve 20% yields.
       unwanted electronics                          ogy, like open burning. After that the             The first stage will use China’s large,
      China’s e-waste imports                        waste is dumped into the river,” said Lai     relatively cheap workforce to dismantle
                            4                        Yun, a Greenpeace activist who has visited    and sort e-waste. Workers on these dis-
                                                     Guiyu numerous times. “The local river is     assembly lines would enjoy health and
                                                     now polluted. Even the groundwater has        safety protection, while toxic waste would
      Million metric tons

                            2                        been polluted, so local people have to buy    be properly disposed of.
                                                     drinking water from another town.”                 Simple components from the sorted
                                                          A 2003 study by Shantou University       waste would be recycled locally. Complex
                                1990   2000   2006   Medical College found that 81.8% of           parts, which can’t be efficiently processed
     Source: Friend of Nature                        Guiyu’s children had “significantly high-     in China, would be sent overseas. Precious

30   China Economic Review • August 2007
               metals, like gold and silver extracted from      amount of smuggling,” said Nie Yong-
               circuit boards, would either be bought by        feng, an environment professor at Tsin-
               the recycler or returned to China.               ghua University.
                   StEP is partnering electronics con-              The global economy makes e-waste
               glomerate Philips Electronics and Ger-           smuggling difficult to pin down. Elec-
               man precious metals recycler Umicore to          tronic scrap is collected by municipal
               test this model. It will start preprocessing     agencies and collection companies which
               work at a plant near Shanghai owned by a         sell the scrap to brokers who promise to
               Chinese partner, Taizhou Chiho Tiande,           dispose of it properly. This scrap is passed
               in October. Next year, it will increase its      along a daisy chain of other brokers be-
               capacity, taking in scrap from Phillips.         fore ending in countries like China.
                    Even if large-scale disassembly takes           Even if illegal imports are stopped, the
               off for StEP, it is unlikely to translate into   threat of rising domestic e-waste looms.
               a new outsourcing industry for China.                Blame for the problem, like the waste
                   “[Outsourcing preprocessed waste]            itself, is being passed around globally.
               only works if you can be sure that it’s          Greenpeace is pressuring manufacturers
               done in the right way. In China and India        like Apple to improve their design and
               at the moment it’s far from being con-           manufacturing. Academics like Nie say
               trolled,” Hagelueken said.                       developed countries are not regulating
                                                                their waste properly. Chinese officials are
               Policing problems                                blamed for not enforcing regulations. Ev-
               This lack of control is exemplified by the       eryone, it seems, is culpable.
               illegal e-waste trade. Although China                “These products are designed on a
               has ratified international laws and imple-       global supply chain; some parts are de-
               mented domestic regulations banning e-           signed in one part of the world and as-
               waste imports, conditions in villages like       sembled in another,” said Ruediger Kue-
               Guiyu have only worsened.                        hr, StEP’s executive secretary. “It’s really a

                    “China has strict regulations on e-         global problem, so finally there must be a
               waste imports, but there’s still a large         global solution.”

                                                                            China Economic Review • August 2007   31

                                                                                                                                           to climb to 60% of consumption early
                                                                                                                                           next decade, which is similar to US lev-
                                                                                                                                           els,” Mohr said at a recent conference
                                                                                                                                           in Shanghai. “In the meantime, Canada
                                                                                                                                           needs alternative market outlets, so ex-
                                                                                                                                           porting [from the] oil sands to China is a
                                                                                                                                           win-win trade for both sides.”
                                                                                                                                               For China, a deal with Canada rep-
                                                                                                                                           resents an opportunity to diversify away
                                                                                                                                           from the Middle East, Russia and Africa
                                                                                                                                           – which accounts for 70% of oil imports
                                                                                                                                           – and hedge geopolitical risk.
                                                                                                                                               Crude from the Venezuelan Tar oil
                                                                                                                                           sands is similar to Canada’s and, although
                                                                                                                                           easier to extract, it hasn’t been efficient-
                                                                                                                                           ly exploited. Twenty years ago, many
                                                                                                                                           thought extraction would be justifiable
                                                                                                                                           once the price of oil topped US$30 a bar-

                                                                                                                                           rel but efforts have been hampered by so-
                                                                                                                                           cial instability, bouts of privatization and
     slick bAlAncE: Canadian oil may help China diversify its Middle East-heavy imports                                                    endemic corruption.
                                                                                                                                               According to an oil industry executive,

     Sand solutions                                                                                                                        the problems experienced in Venezuela
                                                                                                                                           are pushing oil extractors to Canada.

                                                                                                                                           Reassuring washington
     Could Canada’s Alberta oil sands provide an answer to                                                                                 It is still unclear, however, whether North
                                                                                                                                           America will ultimately prove to be a se-
     China’s growing energy demands?                                                                                                       cure source for China.
                                                                                                                                                US fears about China’s aggressive
                                                                                                                                           oil search loom large so, even if Canada
                                                                                                                                           overcomes the technical challenges, it

             arly in the next decade, China may      Mohr believes extraction costs will only                                              may still have to work with Beijing to
             get its hands on the Holy Grail for     be met once the price of oil consistently                                             craft a political protocol acceptable for
             oil extractors – Canada’s vast oil      tops US$55 a barrel.                                                                  Washington.
     sands. But before Beijing can consider its          That said, the sheer size of the reserves                                              “By strategic arrangement, Alaskan oil
     energy prayers answered, much needs to          could prove detrimental to oil prices, par-                                           has not been exported to Japan, once ac-
     be done to get the oil flowing.                 ticularly if most of the oil goes to the US.                                          cused of unfair trading practices – much
         A proposed coast-to-interior pipe-          New pipelines to the US Midwest and                                                   as China is accused today,” said Yashiro
     line between Kitimat and Edmonton               a mammoth 3,000-kilometer connec-                                                     Masamoto, a former Exxon executive,
     will eventually have a capacity of 400,000      tion to refineries in Houston could pump                                              chairman of Shinsei Bank, Japan, and a
     barrels per day, with at least half of this     enough crude to depress oil prices. There-                                            non-executive board member at China
     intended for China, said Pat Mohr, vice         fore, Canada needs another big customer                                               Construction Bank.
     president of Scotia Economics, a think          to keep the balance. Enter China.                                                          As part of a push to secure further
     tank linked to Scotiabank.                          According to a BP study, China’s oil                                              access, Chinese corporations have been
         This means that Canada, with export         consumption has been growing 7.4% a                                                   considering investing in Alberta. How-
     capacity of 20 million tons per year, might     year over the past decade, but its produc-                                            ever, progess has been slow.
     become the third largest oil exporter to        tion has grown at just 1.5% per year.                                                      China National Offshore Oil Corp,
     China, after the Middle East and Russia.            “China’s imports of oil are likely                                                for example, entered into a bitumen proj-
                                                                                                                                           ect with Meg Energy but progress has
     money matters                                    imbalanced portfolio                                                                 been limited to the acquisition of tech-
     One of the challenges is profitability. The      Chinese oil imports in 2006 (by millions of barrels)
                                                                                                                                           nologies. A potential plan to sell an equity
     Alberta province oil sands are the second-                                                                                            stake in an oil sands pipeline to a Chinese
     largest proven oil reserves in the world at        Others 19.6m                                    Middle East 73.9m                  company has yet to be signed.
     178.4 billion barrels but they are made up                                                                                                 China’s slow and careful moves in Al-
     of bitumen, a heavy and viscous form of          South & Central
                                                       America 12.9m
                                                                                                                                           berta could suggest a movement towards a
     crude that is difficult to tap and expensive         Other Asia                                                                       more open market approach under which
     to exploit. Extraction involves injecting          Pacific 22.8m
                                                                                                                                           companies don’t necessarily have to buy
     steam into the oil sands to pump up the           Former Soviet                                    West Africa 37m                    equity stakes in oil interests to secure sup-
     bitumen.                                             Union 37m
                                                                                                                                           plies. At the end of the day, though, the
         Given these technical difficulties,         Source: BP                                                                            oil will go to whoever pays the most.

32   China Economic Review • August 2007

     Golden opportunity                                                                                                          Ecological
     A movement into the gold market is seen as a means
     of diversifying China’s US dollar holdings
                                                                                                                                 Desert areas in Northern

              s the US dollar weakens, China’s                         Precious metals go cheap                                  China are gaining ground.
              stock of dollars and dollar-de-                         Gold prices (Au999) in Shanghai                            The only solution may be
              nominated debt is falling in value.
     Unwilling to be caught holding the bag,
                                                                                                                                 to eliminate farmland
     bankers have been seeking ways to reduce                                        22

                                                                      US$ per gram
     their risk. In any other currency regime,
     this rebalancing would be simple: swap

     dollars on the open market. But Beijing’s                                                                                           he yellow dunes on the drive
     restricted system forbids this.                                                 20                                                  north from Minqin County,
         China’s export-dependent economy                                                 Jan   Feb
                                                                     Source: Shanghai Gold Exchange
                                                                                                      Mar   Apr   May   Jun
                                                                                                                                         Gansu Province, are impos-
     thrives on an artificially strong dollar and                                                                                sible to miss. They appear one after
     a relatively weak yuan. Lack of faith on                        the central bank to increase this from 3 to                 the other among the wheat fields and
     the part of the world’s largest buyer of                        5% of reserves. Such a move would bring                     are dotted with dead trees.
     dollars could trigger a run against the US                      China’s gold holdings more in line with                         At one point, small white shells
     currency and hurt China’s export sector.                        global averages.                                            can be seen, marking the edge of what
                                                                          To do this, China would have to lay                    was once a lake. The water was 40 me-
     diversification demands                                         its hands on an additional 2,500 tons of                    ters deep here in the 1950s.
     Local economists have seen the writing                          gold at today’s prices – an amount equal                        “There were many fish in the wa-
     on the wall and are calling on the gov-                         to nearly a quarter of America’s own
     ernment to identify alternatives. One of                        mammoth reserves.
     them is gold.                                                        “It’s impossible to do something like               hai Gold Exchange the green light to be-
         “More gold reserves will help the gov-                      that over a short period of time,” said Paul             gin trading gold derivatives futures.
     ernment prevent risks and handle emer-                          Walker, head of the World Gold Council,                      Another factor is, paradoxically, the
     gencies in case of future possible turbu-                       an advocacy group.                                       current low price of gold. A large buy by
     lence in the international political and                             There may also be supply issues. Bill               China would likely create a major price
     economic situation,” said Yan Tanling, a                        Murphy of LeMetropole Café, a gold-                      spike as investors anticipate a tighter
     researcher at the Bank of China.                                industry think tank, said the current gold               market. This would see the value of their
         Gold currently accounts for 1.3% of                         market would be hard-pressed to meet                     reserves appreciate.
     China’s foreign currency reserves, ac-                          the needs of a Chinese buying binge.                         Rather than embark on a risky com-
     cording to the Beijing Gold Economy                                  “There is no way the Chinese could                  modities drive, many prefer the more
     Development Research Center. For some                           buy anywhere near that amount of gold                    subtle technique of using the dollars
     years now, experts have been petitioning                        without sending the gold price bonkers.”                 to invest in US securities. Buying into
                                                                          That is, unless China can leverage its              American firms would reduce currency
                                                                     own domestic gold resources to support                   risk and boost returns while avoiding the
                                                                     its reserve rebalancing. Several prominent               appearance of abandoning the troubled
                                                                     mining firms made share offerings this                   dollar. Indeed, this is the principal objec-
                                                                     year as part of efforts to bring forward                 tive of China’s recently established first
                                                                     consolidation in the sector.                             state-owned foreign investment agency.
                                                                                                                                  However, the new agency is likely to
                                                                     home sourced                                             operate in a conservative manner and,
                                                                     Meanwhile, the country’s economic plan-                  even if it did not, bold takeover efforts
                                                                     ners have also announced a significant                   would face stiff opposition in the US.
                                                                     expansion of China’s existing gold mines                     As it stands, gold may not be an im-
                                                                     in the past year. Production is expected to              mediate fix for China’s reserve imbalance
                                                                     top 260 tons in 2007, so China may well                  but it is a viable option. Walker remains
                                                                     have the domestic supply in place to ex-                 convinced that gold will be part of what-
                                                                     pand its gold reserves.                                  ever exit strategy China chooses.
                                                  China Foto Press

                                                                         There are signs that Beijing may be                      “There’s no doubt in my mind at all
                                                                     putting in the structures required to sup-               that they will be in the [gold] market. I
                                                                     port this. In June, the China Securities                 would expect to see baby steps towards
     gOing fOR gOld: A diversification strategy                      Regulatory Commission gave the Shang-                    gold in the future.”

34   China Economic Review • August 2007
ter and reeds on the bank. My children                                                               stitute of Arid Meteorology at the Chi-
grew up playing there,” said a septuage-                                                             na Meteorological Administration.
narian resident named He, one of less                                                                    One third of of Minqin County has
than 10 people still living in the county’s                                                          already been lost to the desert. Another
Huanghui village. In the early 1980s, the                                                            1,506 square kilometers of arable land
village had more than 140 inhabitants.                                                               are lost every year in northern China.
     The problem of desertification is se-                                                               In this decade alone, desertification
rious. The desert has virtually overtaken                                                            has been responsible for as much as
Minqin County, moving eight to 10                                                                    US$7 billion in economic losses. If the
meters a year and eating up whatever                                                                 encroachment continues, natural won-
spots are left of a chain of oases known                                                             ders like the Dunhuang Grottoes could
as the Hexi Corridor. This once con-                                                                 be destroyed.

nected China’s central plains with the                                                                   The government has become so con-
grasslands in Xinjiang and separated                                                                 cerned about the developments that it is
the Tengger and Badain Jaran desserts.                                                               planning to move 20 villages – 10,500
                                              dRy PROsPEcTs: Less productive land
What’s more, the arid land is making                                                                 people – and replace them with freshly
inroads in Beijing.                           yang River and in the three decades                    planted grasslands and new trees to re-
                                              that followed, residents dug more than                 store the ecological balance.
feeding a nation                              10,000 wells. The positive economic im-                    These efforts have not come without
Ironically, much of the problem has been      pact was immediate: Minqin County                      controversy but provincial leaders are
caused by efforts to milk the land for        became the top producer of wheat and                   not deterred. In a recent interview with
more crops to feed a growing population.      corn in Gansu Province.                                state media, Gansu’s Communist Party
Forest clearing to create more room for           But in less than 20 years, the desert              Secretary Lu Hao said each migrant
farmland has destroyed the precarious         has taken away much of this prosperity                 would be compensated US$650.
balance of this fragile ecosystem.            and the Tengger and Badain Jaran could                     “We have to take decisive action,” he
    In the 1950s, the government built        soon combine into one giant stretch of                 said. “It is the quickest and most effec-
the Hongyashan reservoir on the Shi-          sand, said Han Yongxiang, from the In-                 tive way to reduce the farmland.”

                                                                                                                  China Economic Review • August 2007   3

                                                                                                   not take care of everything from cradle
                                                                                                   to grave as it did many years ago,” said
                                                                                                   Zhang Li Wei, associate general secretary
                                                                                                   at the Amity Foundation, one of China’s
                                                                                                   largest independent NGOs. Amity works
                                                                                                   on education, healthcare and disaster re-
                                                                                                   lief projects out of its Nanjing headquar-
                                                                                                   ters. It has 50 full-time staff and more
                                                                                                   than US$13 million in project funds.
                                                                                                        Amity has already adopted some prac-
                                                                                                   tices venture philanthropists advocate. It
                                                                                                   is audited yearly and posts the results.
                                                                                                        “With the marketization of the econ-
                                                                                                   omy, there’s more room for NGOs to
                                                                                                   grow, and the government is now more
                                                                                                   willing to delegate,” Zhang said.
                                                                                                        NPP’s approach may provide a natu-
                                                                                                   ral next step, said Rob John, a visiting fel-
                                                                                                   low at the Skoll Centre for Social Entre-
                                                                                                   preneurship at Oxford University.
                                                                                                        “It is likely that there are nonprofit
                                                                                                   organizations in China whose potential
                                                                                                   can be unlocked by partnership with
                                                                                                   NPP – bringing [together] the powerful
                                                                                                   combination of growth finance and busi-
     POsiTivE invEsTmEnT: A corporate nonprofit initiative in Qinghai                              ness skills.”

     Giving back, corporate style                                                                  changing the world
                                                                                                   Venture philanthropy rose to prominence
                                                                                                   in the mid-1990s when high-tech com-
                                                                                                   panies in the US, backed by venture capi-
     A new organization is bringing venture philanthropy to                                        tal, created a generation of wealthy indi-
                                                                                                   viduals with a thirst for world-changing
     China’s liberalizing NGO sector                                                               ideas. These technologists and financiers
                                                                                                   started to apply the principles of venture
                                                                                                   funding to charities.

                 ark Chen is better qualified        porate financial model to the nonprofits           Unlike the traditional grant-making
                 than most people to bridge          that are increasingly filling the vacuum      model, where funds passively hand out
                 China’s prosperous corporate        left behind by a shrinking welfare state.     money, venture philanthropy uses precise
     world and its burgeoning nonprofit in-               The increase in nongovernmental or-      metrics to link the level of financing to
     dustry. He has a long history in China          ganization (NGO) and the private sector       past performance.
     and Taiwan with consulting firm McK-            participation in providing public goods            That’s where NPP’s expertise comes
     insey & Company and has headed chari-           is being fueled by a rise in volunteerism.    in. The group has roped in marquee mul-
     table organizations for years. But there’s      More people are donating their time than      tinationals like McKinsey, Deloitte and
     a kicker: After the end of his corporate        ever before.                                  Ogilvy & Mather to teach business and
     life in 1992, before he started working on           For example, Junior Achievement, an      finance skills for free. It also plans to raise
     nonprofit projects in 1996, he was a Bud-       NGO that gets corporate volunteers to         “quite a number of millions of dollars” to
     dhist monk.                                     teach business skills to students, has seen   invest. It already has 11 staff in Beijing
          “I spent two years at a Zen monastery      its volunteer base skyrocket.                 and high-powered directors, including the
     in Taiwan and one year traveling around              “In 2001 we had 35 volunteers, but       heads of multinationals like Motorola.
     Qinghai, Tibet, Nepal, India, China,            today we have thousands,” said director            But NPP’s venture fund is still empty.
     searching for my guru, learning different       Gao Yang. “There is a lot of demand from      Fundraising will start when the group is
     practices,” he said.                            corporations to work with us.”                registered as a foundation, which could
          In 2005, he put his experiences in cor-                                                  take up to a year.
     porate consulting, monkhood and charity         Open to ideas                                      For now, it is limited to more modest
     management together. He rejoined McK-           At the same time, Beijing has shown           activities. In Qinghai, for example, NPP
     insey as a senior adviser, and worked with      some signs of being more open to NGOs.        helped a school for nomadic children turn
     the firm to start an organization called        The Ministry of Civil Affairs is consider-    around a yak cheese factory and channel
     Non-Profit Partners, LLC (NPP).                 ing a draft a charity law but details are     the profits back into education. It is also
          NPP is China’s first venture philan-       still sketchy.                                building a web database for China’s hun-
     thropy organization, bringing a more cor-            “The government realizes it can-         dreds of NGOs.

36   China Economic Review • August 2007

         China’s non-profit organizations have
     generally been supportive of a more cor-
     porate approach, but practical as the idea
     may seem, not everyone agrees with it.
                                                    Magic money
         “Organizations do need core compe-
     tencies,” said Nick Young, editor of the       Pirates make books appear out of nowhere and are
     China Development Brief, a newsletter
     that tracks social development. “But this      reaping substantial rewards
     whole vision of private sector-led social
     services depends critically on the govern-
     ment’s capacity to regulate, and it does

     not have that fundamental capacity.                    efore the fifth installment of the     ed copies appears set to grow and grow.
         “Look at [the] environment: It can                 Harry Potter series went on sale           “Hard copy piracy does the most
     publish rules, but it can’t inspect or en-             five years ago, pirates in China       damage to the majority of the markets
     force them. Developing a private sector-       worked some magic of their own. Harry          in Asia Pacific,” said Mike Ellis, vice
     led social welfare delivery model where        Potter and the Order of the Phoenix had        president of the MPAA. “Inevitably,
     the government has no proven capacity          not even been released when versions           there will continue to be a shift in the
     to regulate is a recipe for a big mess.”       hit China’s streets that looked like the       format that piracy takes in the near fu-
                                                    real deal but were nothing of the kind.        ture given the speed in which technol-
     unhappy families                                    In fact, Harry Potter and Leopard-        ogy has progressed.”
     But that’s not to say the government is        Walk-up-to-Dragon, as it translates into
     comfortable allowing all NGOs to grow.         English, was said to have more in com-         locals lose out
     Groups working in areas like human             mon with J.R.R. Tolkien’s The Hobbit.          But the MPAA figures can be some-
     rights, for example, are still frowned upon.        The seventh – and final – install-        thing of a guess – particularly the con-
     Indeed, not long after speaking to China       ment of J.K. Rowling’s hugely successful       sumer spending numbers – since the
     Economic Review, China Development             Harry Potter series was released worl-         assumption is that someone who buys
     Brief was ordered to cease publication.        wide on July 21 and again the specter of       a US$1 pirated DVD would also spend
         The official reason was that Young         piracy loomed over the release.                US$20 on the real thing; but the fact of
     had conducted surveys without approval              “We have not received reports of any      piracy remains. What’s more, said Ellis,
     but media speculated that the true reason      sales of books titled Harry Potter and the     it is the local industry that gets hit the
     was the sensitivity of the publication’s       Deathly Hallows that are in fact a cop-        most – domestic filmakers account for
     subject matter ahead of a Communist            ied cover and random text inside but we        55% of all consumer-spending losses.
     Party Congress later this year.                have seen such things being shared for              This is something that both the
         “[The government] is in a bind in that     free on the internet,” said Neil Blair of      book and film industries agree on. Pi-
     they want to promote market-led social         the Christopher Little Literary Agency         racy hurts domestic industries, often
     services delivery, but they also want to       which represents Rowling.                      with far-reaching impact.
     very carefully control the amount of citi-          “We do from time [to time] en-                 Jens Bammell, secretary general of
     zen advocacy there is,” Young said.            counter piracy… and there are some             the International Publishers Associa-
         “[But] more space will be given if the     examples of this right now we are ad-          tion (IPA), said the widespread avail-
     NGOs continue to show that they can            dressing.”                                     ability of copied books hinders domestic
     do useful work that doesn’t threaten the            China is still one of the major cul-      publishing industries, which keeps local
     government.”                                   prits when it comes to copyright piracy.       cultures from emerging and countries
                                                    Even within the difficult Asian region,        from developing.
                                                    it tops the list of problem areas for book          “If the international publisher gets
                                                    publishers and the movie industry.             a cold, local publishers get pneumonia,”
                                                         The latter has a well-oiled lobbying      said Bammell. “Piracy is by far the big-
                                                    effort, led by the Motion Picture Asso-        gest growth market, particularly in edu-
                                                    ciation of America (MPAA). According           cational books.”
                                                    to its latest study, losses to piracy in the
                                                    Asia Pacific region for MPAA members
                                                    are US$1.2 billion per year while global           The real experience
                                                    losses top US$6 billion. More impres-            Chinese cinema ticket revenue
                                                    sively, consumer spending losses due to                        400
                                                    piracy may be US$18 billion.
                                                         The spread of the internet is aggra-                      300
                                                                                                    US$ millions

                                                    vating the issue by making it easier to                        200

                                                    distribute copies of copyrighted prod-                         100
                                                    ucts. With China well on its way to
                                                    having the largest number of internet                           0
                                                                                                                         2002   2003   2004   2005   2006
                                                    users in the world, the number of pirat-       Source: SARFT
     jOinT EffORT: Social businesses

38   China Economic Review • August 2007
                                                             China Foto Press

mAgicAl APPROAch: Harry Potter attracts pirates

    Why publish a new book tailored to a specific demo-
graphic when copies of a single foreign book are available
for the taking?
    Like the Harry Potter books five years ago, the IPA has
also had reports of titles supposedly by authors from Spain
and South America appearing in China that are entirely fake
– the author’s name on the cover of a non-existent book.
    And the book publishing industry may have more to lose
than the movie industry. The more efficient public relations
machine of the MPAA makes it easy to overlook the fact
that, worldwide, book publishing is much bigger with sales
of US$83 billion annually, Bammell said.

books for schools
The issue of rampant piracy of the occasional big hit like the
Harry Potter series is secondary to the impact of piracy of
educational books. In China, one obvious example are books
used to teach English, which many schools photocopy for
their students.
    “The point is not really the big number of books but the
number of copies being made,” said Bammell.
    The big titles certainly take their hits from pirates but
the impact on these is limited. Harry Potter is now on the
shelves of booksellers around the world and, invariably, fake
copies are also available in the streets of China. Getting rid
of them would be a trick worth learning but there is no mag-
ical answer, just good old-fashioned muggle efforts.
    These efforts are hampered by problems identifying the
size of the problem since no hard numbers are available but
Bammell points out that it is “the biggest-growth industry.”
    “Local people are making a lot of money but not the
rights holders,” she said.

                                                                                China Economic Review • August 2007   39
     special report • OlympiCs

     The main
                       Beijing 2008 is crunch                                                         n 12 months time, the wait will finally
                                                                                                      be over. August 8, 2008 will see the
                     time for Chinese brands                                                          lights go up in the new National Sta-
                        looking to make good                                                     dium on a 16-day sporting spectacle that
                                                                                                 has been seven years in the making. For
                                                                                                 China, hosting the Olympics offers a po-
                                                                                                 tentially much longer-lasting legacy.
                                                                                                      Companies both foreign and domes-
                                                                                                 tic are looking to exploit the phenomenal
                                                                                                 marketing opportunities the event offers.
                                                                                                 Whether an official Olympic sponsor or
                                                                                                 an outsider hoping to muscle in on the
                                                                                                 action, the corporate stakes are very high.     top-tier “world level partner” but eight of
                                                                                                      “The Beijing Olympics are probably         the 11 tier-two sponsors are Chinese as
                                                                                                 the most important sporting event of our        well as six of the 10 in tier three.
                                                                                                 lifetime for global and local companies,”            In addition to this select bunch, there
                                                                                                 said Greg Paull, principal at marketing         are a myriad of other firms that plan on
                                                                                                 consultancy R3, which is conducting             linking their advertising to the Olympics
                                                                                                 tracking research on companies that are         on an unofficial basis.
                                                                                                 looking to leverage the Olympics.                    For larger Chinese companies looking
                                                                                                      “The CEOs of global companies are          to use the Olympics as a stepping-stone
                                                                                                 going to be spending 10-20% of their            from a national to global level brand, the
                                                                                                 time in China over the next year.”              targets are pretty clear. All of the com-
       Magic numbers                                                                                  Some sectors are obvious winners.          panies in the global Top 100 list drawn
                                                                                                 The boom in tourism will be good news           up by Interbrand, a branding consultancy,
      Olympics sponsorship revenue
                                                                                                 for hotels and travel agents; construction      bring in at least 50% of their revenues
                                                                                                 firms are already benefiting from infra-        from overseas markets.
                1200                                                                             structure expansion; Chinese media can               “China Mobile [which is comfortably
                                                                                                 expect bumper advertising revenues; and         top of the China internal rankings] only
      Us$ millions

                                                                                                 sportswear companies – global players           generates a fraction of its revenue from
                     400                                                                         like Nike and Adidas or ambitious locals        overseas,” said Jonathan Chajet, Asia Pa-
                                                                                                 such as Li Ning – can do well largely be-       cific strategy director at Interbrand.
                                       Atlanta 1996   sydney 2000   Athens 2004   Beijing 2008
                                                                                                 cause of the nature of the event.                    While the Olympics will undoubt-
                                                                                                      But the participants are not limited to    edly help certain companies address this
      Olympics television audience
                                                                                                 the realms of the predictable: In theory,       balance, Chajet believes the true winner
                                                                                                 any company willing to shell out enough         could be the China brand itself.
                      3                                                                          money for official sponsorship will also             “At present, ‘Made in China’ means
                                                                                                 profit.                                         ‘cheap and low quality.’ The Olympics

                                                                                                      There are three sponsorship levels         gives these brands an opportunity to
                      1                                                                          and, while official figures aren’t disclosed,   change this perception and be perceived
                                                                                                 CLSA estimates the prices range from            as world class on the global stage. The
                                       Atlanta 1996   sydney 2000   Athens 2004   Beijing 2008
                                                                                  (estimated)    US$20 million to more than US$60 mil-           country brand is inextricably intertwined
     source: iOC                                                                                 lion. PC maker Lenovo is China’s only           with companies’ global brands.”

40   China Economic Review • August 2007
                                          Rise of the machines
                                          lenovo sees the Olympics as a means of boosting its
                                          international profile

                                                   ext June, the Olympic torch will     research on companies that have aligned
                                                   make its way to the summit of        themselves with the Olympics.
                                                   Mount Everest for the very first         Lenovo is the only local firm to be
                                          time. The publicity generated will be         one of the 12 global level Olympic spon-
                                          good for the 2008 Beijing Olympics. It        sors. Analysts say this honor has a US$60
                                          will also be good for Lenovo.                 million price tag, with another three or
                                              China’s leading computer maker is         four times that in additional ad spend to
                                          one of the official sponsors of the Olym-     get full leverage from the event.
                                          pic torch relay and is also responsible for       “The main objective of doing the
                                          the design of the torch itself. The com-      sponsorship is to build the Lenovo brand
                                          pany has even signed up the Chinese           globally,” said Alice Li, a vice-president in
                                          mountaineering team that will carry the       Lenovo’s Greater China brand commu-
                                          torch up Mount Everest.                       nications department who is responsible
                                              This is just one component of a far-      for Olympic marketing. “We have exclu-
                                          reaching Olympic marketing strategy           sive rights in the computer category to do
      preparing for
                                          drawn up by Lenovo.                           Olympic-related marketing.”
launch: Sports stars
                                              “They have upped the ante more than           Lenovo is already a leader among
                                          any other Chinese company,” said Greg         Chinese enterprises looking to expand

 at the unveiling of the
                                          Paull, principal at marketing consul-         overseas. To a large extent, this position
         Olympic torch
                                          tancy R3, which is conducting tracking        is due to the company’s US$1.75 bil-

                                                                                                   China Economic Review • August 2007   41
     special report • OlympiCs

         Home help: China
         While Lenovo has yet to win over con-
         sumers in the US and Europe, it reigns
         supreme in China. However, most ana-
         lysts agree that, given its 36% market
         share, the company’s domestic Olympic
         marketing efforts offer little room for
         growth. So why is the company spending
         big in China?
              “It means we can penetrate further
         into tier five and tier six cities,” said Alice

         Li, a vice-president in Lenovo’s Greater
         China brand communications depart-
         ment who is responsible for Olympic
         marketing.                                           rings gaMe: Lenovo wants to use the Olympics to promote itself globally
              “Last year we did a ‘One thousand
         county Olympic road show,’ bringing                     lion acquisition of IBM’s PC division        of the US market rise to 3.7% from 3.5%
         Olympic history and culture to people                in 2005, which boosted its reputation and       last year but it is still trailing global lead-
         living in remote cities. This was an op-             international market share overnight.           ers Dell and HP by a significant amount.
         portunity for them to experience both                    The acquisition adds a twist to Leno-           The Olympics will prove useful in
         the Olympic Games and computers.”                    vo’s Olympic marketing efforts. Its rights      reaching more consumers. Winning them
              Li reports that sales in tier five and          to the IBM name expire within three             over is not going to be easy, though.
         tier six cities are up 40% so far this year.         years so the pressure is on to establish            “They want to turn Lenovo and
         In addition to road shows, Lenovo is fo-             Lenovo as a recognized replacement.             ThinkPad into Apple and iPod,” said
         cusing on TV exposure. It is making a                    As part of the global sponsorship deal,     Charles Guo, technology analyst at in-
         string of commercials and is also the ti-            not only can Lenovo display Olympic             vestment bank JPMorgan. “But even
         tle sponsor of CCTV-1’s Olympic Games                symbols on all its products and advertise-      when Apple was in its difficult period, it
         countdown series.                                    ments across the globe, it will also serve as   was still quite well known internationally.
              “They have to sponsor internally                official IT supplier to the games. A net-       The Lenovo brand is very weak.”
         as it is a China event but really their              work comprising 20,000 Lenovo com-                  Li believes that getting rid of the IBM
         marketing is more about the non-Chi-                 puters will be responsible for managing         logo will not be a problem, provided cus-
         na market,” said Kirk Yang, managing                 everything from scoring to staffing and         tomers have confidence in the brand.
         director and head of Asia computer                   in 56 venues across the seven host cities.          For Shanghai-based Gartner Group
         hardware research at Citigroup. “From                    “The system we will put in place is         analyst Simon Ye, however, this battle of
         a stock perspective, Lenovo has to con-              equivalent to the IT requirements of a          consumer perceptions can only be won if
         tinue growing in the US and Europe.”                 Fortune 500 company,” said Li.                  Lenovo releases more products. He points
                                                                                                              out that since the IBM acquisition, the
                                                              corporate kudos                                 Lenovo 3000 is the only own-brand ma-
           small fish, big pond                               Running a large-scale system for such a         chine to debut in foreign markets.
          Global pC market share, march 2007                  high-profile event could do wonders for             “All the rest are related to ThinkPad
                                               Dell(15.2)     Lenovo in the corporate sector, which ac-       and most international consumers still
                                                              counts for two-thirds of the US market.         think these are IBM products,” Ye said.
                                                                   “When it bought IBM a lot of the               The company does plan on unveil-
                                                              corporate clients were not convinced by         ing new models to coincide with Beijing
            Others                             Fujitsu(4.1)
                                                              Lenovo and its competitors exploited this.      2008 but precise details remain under
             (41.1)                            Apple(2.6)     Now Lenovo has the chance to show off           wraps. Given that the designers inherited
                                                              its IT capabilities,” said Kirk Yang, man-      from IBM are still on the payroll, these
          Us pC market share, march 2007                      aging director and head of Asia computer        new products will probably be of accept-
                                               Hp(23.7)       hardware research at Citigroup.                 able quality. But it remains to be seen
                                                                   However, it is in the international        how well Lenovo can do in persuading
          Dell(26.2)                           Gateway(7)     consumer market where Lenovo really             consumers to pay a premium for them.
                                               Toshiba(4.8)   has to make up ground.                              “The Olympics will help improve
                                               Apple(4.7)          In the first quarter of 2007, Acer         brand awareness but this will not trans-
             (25.5)                            Acer(4.4)
                                               lenovo(3.7)    passed Lenovo to become the world’s             late into increased sales immediately,”
                                                              third-largest PC maker by market share,         said Guo. “Olympic sponsorship will not
         source: iDC
                                                              according to IDC. Lenovo did see its slice      just suddenly change everything.”

42   China Economic Review • August 2007
Window to the world                                                                                             It has signed up China’s shooting,
                                                                                                            gymnastics, diving and table tennis teams,
                                                                                                            which were collectively responsible for
                                                                                                            40% of China’s gold medals in Athens
sportswear maker li Ning’s Olympic marketing                                                                2004. Top Ethiopian marathon runner
                                                                                                            Ambesse Tolossa, Tanzania’s track and
strategy is precision-planned and very ambitious                                                            field team and the Swedish Olympic del-
                                                                                                            egation also have contracts with Li Ning.
                                                                                                                In addition, the company has a two-

        i Ning, one of China’s most rec-              Brands are not made from sponsorship                  year deal with domestic sports channel
        ognizable brands, is not an official          alone and it is this retail network that an-          CCTV-5 and is hoping some of the pro-
        sponsor of the 2008 Olympics, but             chors Li Ning’s Olympic strategy.                     grams will be carried by foreign networks,
the company’s surgical approach to brand                   “You must open enough outlets so the             providing a wave of free coverage.
building could see it leverage the games              consumer can buy your product after they                  The one gamble with the largest po-
for maximum visibility at minimum cost.               see your advertisement,” said Tan Wee                 tential payoff is the company’s sponsor-
    It has avoided expensive shotgun                  Seng, CFO and executive director at Li                ship of the Spanish and Argentinean
sponsorships, instead targeting teams                 Ning. “People [may] see an advertisement                               men’s basketball teams –
that are medal hopefuls and sponsoring                but after three months they forget about                                 two of world’s top four.
newscasts that will be watched across the             it if they don’t use the product.”                                           “If these two teams
country and even overseas. The ultimate                    And, while the company has one eye                                   make it to the finals
goal is to use the games to give the brand            firmly fixed on the international market,
an initial burst of global recognition.               the focus remains domestic.
    “I don’t think that Li Ning will spend                 “Although we have a very strong
large sums of money on the Olympic                    foundation, we have to make sure that we
Games,” said Charles Li, an analyst with              are somebody here before going interna-
First Shanghai Securities.                            tional because it will be much easier,”
                                                      Tan said. “For the next two years we
hey, big spenders                                     are still going to be very much fo-
This is not to say the company didn’t seek            cused in China.”
a larger role – Li Ning and Nike lost out                  Therefore, the objective
in the official Olympic sponsorship bid-              is to raise Li Ning’s stature
ding to Adidas, which reportedly paid                 among Chinese consumers
US$70 million for the privilege.                      while planting the seeds of
    The sponsorship could be a boon for               international expan-
Adidas, which is engaged in a fierce battle           sion. To this end,
with Nike, currently the leader in the top            the firm is spon-
-tier cities and in China as a whole, said            soring teams that
Greg Paull, principal at marketing con-               could give it max-
sultancy R3, which is tracking Olympic                imum interna-
marketing efforts.                                    tional visibility
    Li Ning also trails Nike in these top             at minimum
cities but it has a huge advantage in tier            costs.
three- and tier-four cities where its net-
work of 4,300 outlets comes into full play.

    Size matters: Going global
                                                                                                      the Man hiMself: Li Ning with
                                                                                                      sample of his typical target audience

   The largest shoe Li Ning has ever made was               “The most expensive investment in a pair      supply chain and global market access,
   for US basketball star Shaquille O’Neal.            of shoes is the mold,” Tan said. “I suspect even   as well as a significant portion of reve-
        “If you come to our office in Beijing you      the international brands they wouldn’t bring       nues – more than 40% – from abroad.
   will see it,” said Li Ning CFO and executive di-    these sizes [to China]. When you go abroad you     In 2006, 0.9% of Li Ning’s turnover
   rector Tan Wee Seng.                                have tens of thousands of customers out there,     came from overseas markets.
        That one shoe cost thousands of dollars,       so you can create the mold, no problem.”                According to Charles Li,
   because the mold had to be built from scratch            This is the type of cost-benefit analysis     an analyst with First Shanghai
   – Li Ning doesn’t make shoes that size for mass     that the company is wrestling with as it looks     Securities, it may be some time
   production. Indeed, as long as the company is       to leverage a carefully orchestrated Olympic       before Li Ning can expand glob-
   focused on China, it doesn’t make economic          presence into a global brand name.                 ally. “It lacks the channels and talents
   sense to produce anything over a size 44.                An international brand requires a global      to explore overseas markets at present.”

                                                                                                                        China Economic Review • August 2007   43
     special report • OlympiCs

         we will open bottles of champagne to
     celebrate,” Tan said.                       Star power: Signing up sports people
          He believes a gold medal basketball
     match between Argentina and Spain
     would represent a return of 10 to one on    The Olympic spirit may be all about fair play
     the company’s sponsorship investments.      and but the Olympics business is about get-
                                                                                                         famous faces
          Li Ning spends 16-18% of annual        ting bang for the buck. Only a handful of Chi-         most recognizable sports stars among Chinese people
     revenue on marketing. With turnover         nese athletes have achieved enough recog-                  40

     coming in at just over US$420 million in    nition to attract top endorsement deals.                   30
     2006, this means the company’s annual            The emergence of top athletes as
     marketing expenditure is about equal to     spokespeople is happening as domestic                      20

     what Adidas paid for its official Olympic                         brands are developing                10
     sponsorship package alone.                                          national or even global
          However, Li Ning is not putting all
                                                                          profiles and inter-                    yao ming  liu Xiang Ding Junhui Guo Jingjing Tian liang Wang Nan

     its eggs in the Olympic sponsorship bas-                             national brands are          source: R3-TNssport Olympic Tracking

     ket. Two weeks of sporting action is not                             looking for ways to relate to Chinese customers.
     long enough to transform a brand from                                     “It’s all about building association. The power of a star or sporting hero
     domestic to international.                                              makes a real impact on brand preference,” said Greg Paull, of market-
          “The management is fully aware that                                       ing consultancy 3R, which is tracking Olympic sponsorships. “The
     building an international brand is an                                               problem is that the top two guys [Yao Ming and Liu Xiang] hog
     evolving process,” said Wei Xiaopo,                                                   the limelight here in recall.”
     an analyst with CLSA. “The Beijing                                                            Among the handful of athletes attracting sponsorship
     Olympics will pave the way for Li                                                           and endorsement deals are:
     Ning to go international… but in the
     long term.”                                                                                                Yao Ming
     the next step                                                                                              Endorsements: Reebok, Pepsi, Gatorade, Mc-
     The question is how Li Ning                                                                                Donald’s, VISA, China Unicom, Apple, Tag Heu-
     will leverage its Olympic expo-                                                                           er, Sohu, Garmin Street Pilot 300, Sorrent, MIG,
     sure into a post-Olympic ex-                                                                            Upperdeck, God Milk, Yanjing Beer.
     pansion will be addressed in
     the company’s 2009-2013                                                                         By far the most popular and recognizable Chinese ath-
     strategic plan, said Tan.                                                                    lete in the world, Yao Ming has virtually created a new
         But being a big fish                                                                 profile for Chinese sports. Although he plays with the Houston
     in a relatively modest do-                                                            Rockets in America’s National Basketball Association, he main-
     mestic pond is different                                                              tains strong links in China, regularly participating in events
     from being a small fish in                                                             and charitable activities as well as leading the Olympic
     the global ocean.                                                                      basketball team.
         “I don’t think Li Ning has made
     adequate preparations for global de-                                                    liu Xiang
     velopment,” said Li. “In China, many                                                    track & field
     international firms come from manu-                                                      Endorsements: Nike, Coca Cola, Amwa,
     facturing industries… Few people be-                                                    Kia, Visa, Yili Dairy, Shanshan Xifu (a
     lieve China will have strong consumer                                                   state-owned suit company), China Post
     brands.”                                                                                 EMS, Jager, Baisha (a cigarette maker),
         The company is not sitting still,                                                    Loncin Motorcycle, Spring of Sudi Real
     though. The Olympics may go a long                                                      Estate, Long Xin Motor, Shengda Floor,
     way towards raising its international                                                    China Mobile, Konka.
     profile but Li Ning also has deals with
     other athletes. It sponsors NBA stars                                                     Among Chinese athletes, Liu has the
     Damon Jones and Chuck Hayes and                                                           highest profile behind Yao Ming.
     has a co-branding deal with Shaquille                                                    Full of potential, he delivered on
     O’Neal.                                                                                  the big stage with a world record
         Ultimately, the company wants to                                                    win at the 2004 Olympics in Ath-
     morph itself into a global power that is                                                ens. Two years later he beat his
     associated with quality products first                                                   own record. Liu gets about half
     and China second.                                                                         the money he earns, which is
         “We don’t want to be known                                                             thought to be the standard
     as the Nike of China,” Tan said.                sponsorship data source:
                                                                                                  for Chinese athletes.
     We want to be known as the Li                   R3-TNssport Olympic Tracking

     Ning of the world.”

44   China Economic Review • August 2007
guo Jingjing
sport: Diving
Endorsements: Red Earth cosmetics (Hong
Kong), Xizhilang, a food company, Dali Biscuits,
Shenzhen International Mansion, McDonald’s,
Sprite, Tag Heuer, Budweiser, Yili LGG Yoghurt,
Funlinmen Oil, Aodeli, Xizhilang Jelly, Shenzhen
International Park.
                                                                                                                                  Foreign Investment Report
Guo is China’s “Diving Queen,” with two Olympic
gold medals and numerous world titles to her
name. She has maintained a high profile in part
due to a much-publicized affair with charismat-
ic, and now disgraced, diver Tian Liang. She is a
strong favorite for a gold medal in Beijing next
                                                                                                                                  Whenever new capital
year. It has been claimed that the level of Guo’s
                                                                                                                                  moves into China, a

post-Athens exposure and number of commer-
cial endorsements aroused concern among
Chinese officials.                                                                                                                foreign company
                                                                   Wang nan                                                       starts business or a
                                                                   table tennis
                                                                   Endorsements: Ping An Insurance, Jinlaike                      domestic enterprise is
                                                                   Sports Shoes, Anerle Napkin, Kingkey Real
                                                                                                                                  bought, the Foreign
                                                                   Leader of the Chinese women’s table tennis
                                                                   team following the retirement of Deng Yaping,
                                                                                                                                  Investment Report is
                                                                   Wang won gold in both the singles and doubles
                                                                   events at the 2000 Olympics in Sydney. Disap-                  on top of it.
                                                                   pointment at the 2002 Asian Games had many
                                                                   saying she was on her way out, but this left-
                                                                   handed player rebounded winning four golds
                                                                                                                                  If you are involved in business
                                                                   at the 2003 World Championships and fol-
                                                                   lowed-up with victory in the women’s doubles                   planning in China, you need to
                                                                   at the 2004 Athens Olympics. She remains a
                                                                                                                                  stay ahead of the competition.
                                                                   favorite with Chinese audiences for her shot

                                                                   placement skills and general speed around                      The Foreign Investment Report, at
                                                                   the table.
                                                                                                                                  the touch of a button, provides
          Yi Jianlian                                                                                                             crucial insights to investment
          Basketball                                                                                                              deals as well as contact details of
          Endorsements: Yili, Amway Nutrilite,
          Nike, Freestyle (cell phone game                                                                                        the key representatives.
          launched by Coca-cola), GameKing.

          China’s latest export to America’s                                                                                      • Updated every day
          National Basketball Association, Yi
                                                                                                                                  • An average of 160 deals a month
          was in the headlines before he even
           set foot on a court. The former                                                                                        • Live intelligence on incoming capitals
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             forward was reportedly unhappy
              at being drafted by the Milwau-
              kee Bucks. He made his national
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               and went on to participate in the
                                                                                                               China Foto press

                2006 FIBA World Champion-
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                  ships, impressing Chinese
                        and foreign coaches.                                                                            

                                                                                                                                         China Economic Review • August 2007   45
     special report • OlympiCs

                                                                                                                  although coverage is likely to be limited
                                                                                                                  to Olympics venues and tourist hotspots.
                                                                                                                      According to Liu Qingchang, vice
                                                                                                                  president of corporate finance at China
                                                                                                                  GrenTech, which is providing equipment
                                                                                                                  for China Mobile’s wireless network, the
                                                                                                                  Olympics networks will be the base for
                                                                                                                  future citywide coverage.

                                                                                                                  the rising tide
                                                                                                                  The Olympics technology push that is
                                                                                                                  enabling the likes of GrenTech to move
                                                                                                                  from mobile phone network equipment
                                                                                                                  into wireless internet products, is likely
                                                                                                                  to have pervasive effects on the tech in-
                                                                                                                  dustry, according to recent research by
                                                                                                                  investment bank Citigroup.

                                                                                               China Foto press
                                                                                                                       Jason Brueschke and Catherine Leung
                                                                        olYMpics sponsor:                         argue that a rise in demand for online ad-
                                                                      Sohu CEO Charles Zhang                      vertising, paid web searches and internet
                                                                                                                  ticketing for travel and tourism will ben-

     A technological triumph?                                                                                     efit local tech companies like Tencent,
                                                                                                                  Baidu and Ctrip as well as Sohu.
                                                                                                                       “We expect Sohu to deliver a very
                                                                                                                  strong number for its portal advertising
     Beijing’s “high-tech Olympics” will give local tech                                                          business in the second quarter of 2007
                                                                                                                  as advertisers start to market 12 months
     firms a boost in revenue and publicity                                                                       ahead of the Olympics,” the report said.
                                                                                                                       The Olympics, besides being a rev-
                                                                                                                  enue booster, will also give China’s rela-

             hina’s leaders won’t be the only      likely TD-SCDMA, should be available.                          tively young tech industry a rare shot at
             ones applauding when the Olym-            It is unclear whether licenses for                         mainstream global exposure.
             pic torch lights up Beijing’s nest-   the two main global 3G standards,                                   “[The Olympics] is one of those
     shaped National Stadium next August.          CDMA2000 and WCDMA, will be is-                                game-changing events for local [tech]
         The country’s tech and telecoms set       sued in time for the Olympics. Without                         companies,” said Sage Brennan, research
     will be heaving a sigh of relief because it   global standards in place, tourists visiting                   director at technology research firm JLM
     should mean China’s long-delayed next-        during the games won’t be able to use                          Pacific Epoch in Shanghai. “They could
     generation, or 3G, mobile phone net-          their 3G handset, which would reflect                          really gain an international footprint.”
     works will finally be ready.                  poorly on China’s push to position Bei-                             Beijing’s “high-tech” games could
         “Three or four years ago, [people]        jing 2008 as a high-tech showcase.                             end up being the most wired Olympics
     might have thought there would have                                                                          yet, but that doesn’t mean much in an in-
     been tens of millions of 3G users by the      sohu sponsorship                                               dustry where obsolescence is measured in
     Olympics,” said Dave Carini, a co-found-      The organizers of the games have of-                           months. The games are helping tech firms
     er of telecommunications research group       ficially billed the event the “high-tech                       with event-driven earnings but they aren’t
     Maverick China. “Now, the safer predic-       Olympics,” and there is perhaps no better                      helping to break new boundaries.
     tion is a very limited [3G introduction],     example of this than Chinese web por-                               As Maverick’s Carini noted, the top-
     but nothing spectacular nationwide.”          tal operator Sohu. It paid “hundreds of                        heavy way which new technologies for
         China’s 3G networks, which can de-        millions” of yuan to call itself the Olym-                     the games are being implemented – in
     liver data at faster speeds than currently    pics’ first internet content sponsor, which                    3G’s case a reliance on ministerial edicts
     possible, have been in the works for years.   means it runs the Beijing 2008 official                        – could have hindered rather than helped
     But roll-out attempts have been halted by     website and has rights to publish Olym-                        the country’s technological progress.
     industry restructuring and problems with      pics-related content through its portal.                            “In a free market, you might have a
     China’s own 3G standard, TD-SCDMA.                 “This is a win-win situation and it’s                     dozen cities in other parts of China pro-
     Yet the industry and government always        happening for the first time in Olympics                       viding their own Wi-Fi networks, the way
     used the Olympics as both an excuse and       history,” said Chen Luming, Sohu’s vice                        it’s happening in cities across the Western
     motivator for 3G’s eventual unveiling.        president of Olympics sponsorship.                             world,” he said.
         Trial networks are being built to test         Beijing 2008 may also boast another                            “The overall sense of the Beijing
     TD-SCDMA this year. In October, Chi-          technological first: China’s first citywide                    Olympics is... they’re doing things that
     na Mobile will invite handset manufac-        wireless internet network – or the foun-                       are pretty well proven. I don’t see it as
     turers to bid for TD-SCDMA tenders.           dations of one, anyway. China Mobile has                       being particularly bold in technology; if
     By next year, some form of 3G, most           said it will install networks in host cities,                  anything, it’s a little bit conservative.”

46   China Economic Review • August 2007
Spin it to win it                                                                                                              market of the future.”
                                                                                                                                   Zeldenrust’s organization helped re-
                                                                                                                               lease a potentially damning report in June
                                                                                                                               that said children as young as 12 were be-
Beijing bureaucrats are handling the games’ delicate                                                                           ing used to manufacture Olympics mer-
                                                                                                                               chandise. International media interpreted
publicity matters well, for now                                                                                                the event as another chapter of an ongo-
                                                                                                                               ing forced-labor scandal, where abducted
                                                                                                                               peasants were found working as slaves in

        eijing’s bureaucrats are not natu-       file games in years – much higher profile                                     brick kilns and mines in Shanxi province.
        rals at public relations, yet they are   than Athens,” said Ineke Zeldenrust, who
        embracing the biggest PR exercise        works with the Cleanclothes Campaign,                                         proactive response
of all: the Olympic Games. A govern-             a labor rights group from Holland.                                            The Beijing Organizing Committee for
ment prone to heavy-handed crackdowns                 “[China] is the biggest producer of                                      the Games of the XXIX Olympiad (BO-
seems unlikely to fare well in the era of        exported garments, it is the host of the                                      COG) did not deny the claims. Instead
camera phones and blogging, especially           biggest games, it is the biggest reservoir                                    reacted swiftly, promising to mount an
with hundreds of foreign correspondents          of labor, and it’s the biggest consumer                                       investigation into the allegations.
roaming the country.                                                                                                               When asked for an update on the
     But banish the idea of a world-class                                                                                      situation at the time of writing, BOCOG
faux pas. So far, China has handled Olym-          under-emphasized?                                                           said local authorities were still investigat-
pics controversy with surprising savvy.           Olympics promotional costs                                                   ing the claims but it had implemented
     The Olympics limelight is as irre-                      1400                                                              several additional measures, including
sistible to governments and corporate                        1200                                                              commissioning an external agency to re-
sponsors as it is to activists and pressure                  1000
                                                                                                                               view all licensees’ working conditions.
                                                  Us$ millions

groups. The last games broadcasted 34.4                          600
                                                                                                                                   “BOCOG will deal with the issue se-
billion viewer hours to international au-                        400                                                           riously,” the media department said.
diences and the Beijing games are likely                         200                                                               Earlier this year, when activists tagged
to get even more attention.                                       0
                                                                       2000 sydney     2004 Athens   2008 Beijing (budgeted)   Beijing 2008 the “genocide Olympics,”
     “These are going to be the highest pro-     source: National Olympic Committees                                           pressuring China to intervene in Su-

                                                                                                                                          China Economic Review • August 2007   47
     special report • OlympiCs

         Macro matters: The
         post-2008 crash?
         It’s August 25, 2008, a day after the Bei-
         jing Olympics have ended. The Shanghai
         Composite Index has closed at 2,657, the
         same level as it was at the beginning of
         2007. Olympics-mania is dissipating, in-
         vestors are pulling out as quickly as they
         piled in, and the markets are collapsing.
              This apocalyptic scenario has been
         painted by China Cassandras predict-
         ing a long-anticipated meltdown. But a
         post-Olympics crash is highly unlikely,
         according to economists.

              “Retail investors at the moment are
         very much in euphoria and the Olympics
         story will sell,” said Tai Hui, an econo-
         mist at Standard Chartered in Hong           actress anD activist: Mia Farrow has been vocal about China’s role in Darfur
         Kong. “But I don’t think you will suddenly
         wake up one morning [after the games]           dan’s civil war, Beijing listened and sent                             when new problems arise.
         and [find that] everything [is] lost.”       a senior official to refugee camps there. In                                  The Darfur groups have appointed
                                                      May, a Chinese military engineering unit                                  high-profile spokespeople like the actress
         one event, big country                       was dispatched to the region, underlining                                 Mia Farrow, who have rallied everyone
         Jonathan Anderson, chief Asia economist      China’s resolve to deal with the issue.                                   from Steven Spielberg to NBA basket-
         at UBS, dug up some numbers suggesting           “The relevant parties should continue                                 ball players to prod China into action.
         that Beijing 2008 will barely leave a dent   pushing forward the peace-keeping op-                                         The Olympics organizers in Beijing
         on China’s economy. Comparing the pop-       erations and political processes in a bal-                                take the image-making potential of the
         ulations of recent Olympics host cities to   anced way,” BOCOG’s media and com-                                        games seriously enough to have spent more
         their corresponding national populations,    munications department said. “China is                                    than a year, beginning in February 2005,
         Beijing came in last place, representing     willing to cooperate with the interna-                                    choosing a PR agency and finally settling
         1.1% of China’s population and less than     tional community to resolve the Darfur                                    on international firm Hill and Knowlton.
         3% of its GDP. The impact of the games       issue politically.”                                                           The organizing committee budgeted
         was strongest in South Korea and Greece          Even the activists agree that Beijing                                 US$60 million for advertising and pro-
         – Seoul has 20% its country’s population     has responded well to problems that have                                  motions in its original bid for the games.
         and Athens 40%.                              arisen so far.                                                            It did not respond when asked how much
               Still, the Olympics will cause vola-       “Chinese attention to Darfur issues                                   it has spent on marketing so far.
         tility in some industries. Retailers and     has skyrocketed since the beginning of
         hoteliers, for example, will probably        our campaign,” said Eric Reeves, a Smith                                  Keeping its cool
         experience demand “lumps” during the         University professor who works with                                       The Olympic Games are still a year away,
         games, but this is unlikely to affect an-    pressure groups like Dream for Darfur.                                    so the organizers are far from feeling the
         nual averages. Even Olympics infra-          “We are not assuming that China won’t                                     full heat of the spotlight. Protests and
         structure can be adapted for commer-         do the right thing.”                                                      demonstrations in some form are almost
         cial use, Tai said.                              This assumption is a massive step                                     a certainty when the games do start. The
               None of this evidence will appease     forward – one that underlines the impor-                                  trick will be for Beijing to stay cool and
         fevered market-watchers who insist           tance of Beijing responding appropriately                                 keep its promises.
         that a correction is coming.                                                                                               “[The Chinese government] will try
               Tai suggested the downturn could
                                                        economic importance                                                     very hard to be seen to be unruffled by
         happen during the six or seven months                                                                                  the protests and attention-getting stunts
                                                       Host cities’ share of national population
         in between this autumn’s Party Con-                                                                                    they’re going to face,” said a PR profes-
         gress and the Olympics but Anderson                  40
                                                                                                                                sional in China who has been follow-
         was rather more vague.                               30                                                                ing the publicity around the games and
               “We don’t expect the markets to                                                                                  wanted to remain anonymous.
                                                                                                                                    “But they also need to avoid the old

         crash in the near future – but in our view
         this has nothing whatsoever to do with               10                                                                trick of watching the demonstration, let-
         the Olympics. If there were to be a cor-
                                                                                                                                ting it happen, then cracking down after-
         rection, it could happen before or after.”                Barcelona
                                                                                Atlanta 1996   sydney
                                                                                                                 Beijing 2008
                                                                                                                                wards, [because] attention is not going to
                                                      source: CEiC, Wikipedia, UBs estimates                                    pass after the Olympics.”

48   China Economic Review • August 2007
                                                                                               NETHERlAND s

                                                                                                                      China Foto press
Plugging the gap
      sino-Dutch trade                hen summer rolls into China,       become the world’s leading carbon diox-
                                      melted snow runs down from         ide emitter in 2006. It was just the latest
   ties strengthen with               the mountains, rainstorms ride     in a series of international studies on the
 technological sharing    in on monsoon winds and the rivers rise.       growing risks of reduced rainfall, water
                              This is what led to the southwestern       scarcity, heat waves and floods in Asia.
    on the environment    city of Chongqing experiencing its worst           Beijing rejected the NEAA report as
                          floods in 115 years last month. Between        biased, but its sentiments did not go un-
                          July 16 and July 18, the municipality re-      noticed. Premier Wen Jiabao has warned
                          ceived 266.6 millimeters of rain and the       that abnormal weather conditions could
                          flooding took 37 lives. The authorities        see this year’s grain output fall after three
                          said 19,600 homes were destroyed.              consecutive years of bumper harvest.
                              Overall economic losses were put at
                          around US$331 million – and this in an         critical findings
                          area that, last summer, was hit by its worst   China is ramping up projects with global
                          drought in over a century.                     partners to try and balance its voracious
                              Such are the costs of climate change.      development needs with an ecosystem
                              A report on the subject published          that is increasingly under siege. In Hol-
                          by the Netherlands Environmental As-           land, it seems to have found a partner that
                          sessment Agency (NEAA) on June 20              can offer both environmental projects and
                          claimed that China overtook the US to          help to fuel its growth.

                                                                                    China Economic Review • August 2007                  49

                                                                                                           Earlier this year, China’s Vice Premier

                Open for business                                                                      Hui Liangyu inked an agreement with
                                                                                                       Dutch environmental institute Alterra,
                                                                                                       a research institute that focuses on the
                                                                                                       sustainable use of rural areas. Under the
                With foreign banks now able to offer more services                                     agreement, Alterra will develop an early-
                                                                                                       warning system for droughts in addition
                in China, ABN AmRO is looking to capitalize                                            to cooperating with China in water man-
                                                                                                       agement and flood deference.

                       BN AMRO has branches                 another step in this direction. Local            Since the beginning of 1996, the
                       and sub-branches in Shang-           incorporation allows us to expand          company has worked on about 17 proj-
                       hai, Shenzhen, Beijing,              our scope of business to offer more        ects in China, with four or five currently
                Chongqing and Chengdu, and                  renminbi products, applying our            in operation. They include large-scale
                representative offices in Guangzhou,        global expertise in foreign exchange       wastewater and heavy metals manage-
                Tianjin and Wuhan. Linda Wong,              and wealth management to our ren-          ment as well as polluted soil projects in
                country executive of ABN AMRO               minbi business for the benefit of our      the Yellow and Yangtze River basins.
                Bank (China) Co., Ltd., talked to           local customers.                               “In China, the Ministry of Water
                China Economic Review about                                                            Resources is responsible for monitoring
                where the bank’s expansion strategy.
                                                            Q   : In addition to ABN AMRO,
                                                                several other foreign banks are
                                                                                                       water quantity while the State Environ-
                                                                                                       mental Protection Agency oversees water

                Q   : How has ABN AMRO’s bank-
                    ing business in China evolved
                and grown over the years?
                                                            incorporating locally. What sort of
                                                            competitive landscape do you foresee,
                                                            now that foreign banks can compete
                                                                                                       quality,” Zhang Tiehan, the China repre-
                                                                                                       sentative for Alterra said.
                                                                                                           “At present, I don’t believe that we
                                                            more easily with local banks?              lack the ability to manage our water. We

                A    : ABN AMRO had been in the
                     China market for 104 years. We
                have grown in line with the country’s       A    : The opportunities in China’s
                                                                 banking industry are vast. This,
                                                                                                       aim to facilitate communication and ex-
                                                                                                       change between different government
                                                                                                       bureaus to create an administrative struc-
                economic reform processes and it            together with sustained economic           ture to do it more effectively.”
                will continue to be one of our key          growth and a growing middle-class              The Alterra deal is part of a larger, EU-
                markets in the future. In this regard,      population, means that there will be       funded project involving groups from the
                we have invested heavily in both            enough room to house multiple play-        UK, Denmark and Sweden. The aim is to
                infrastructure and human capital            ers for years to come.                     introduce European standards of water
                to cater to our future growth. In                                                      resource management into China.
                2006 and in the first half of 2007,
                we established six new branches and
                sub-branches in Beijing, Shanghai,
                                                            Q   : Local Chinese banks have an
                                                                advantage over foreign multi-
                                                            national banks through their more
                                                                                                           “The EU has high standards of wa-
                                                                                                       ter management and lots of experience,”
                                                                                                       Zhang added.
                Shenzhen, Chengdu and Chongq-               extensive branch networks. How
                ing. We now have over 1,000 staff in        does ABN AMRO overcome this?               long-term problems
                China.                                                                                 For thousands of years, floods have been

                                Q   : ABN AMRO re-
                                    cently received ap-
                                                            A    : We do not aim to be all things
                                                                 to all people. Our main focus is
                                                            on the affluent, mid-market consum-
                                                                                                       one of the defining banes of Chinese ex-
                                                                                                           In 250 BC, the governor of the Shu
                                 proval from the China      er clients and SME businesses.             prefecture of the Qin state, Li Bing, di-
                                  Banking Regulatory                                                   verted the overflowing Minjiang River
                                  Commission for lo-
                                  cal incorporation.
                                  What effect will this
                                                            Q   : How do you expect Sino-
                                                                Dutch trade to grow?
                                                                                                       that wrought havoc among residents
                                                                                                       downstream by building Sichuan’s Duji-
                                                                                                       angyan Irrigation Project. It was consid-
                                  have on the bank’s
                                 business in China?         A   : In the first five months of 2007,
                                                                China’s exports to and imports
                                                            from the Netherlands grew 36%
                                                                                                       ered a masterpiece of hydraulic engineer-
                                                                                                       ing and provided power and irrigation to
                                                                                                       the land for over 2,000 years.

                                 A    : We take pride
                                      in our ability
                                   to combine local
                                                            and 43%, respectively, compared to
                                                            the same period in 2006, accord-
                                                            ing to the Ministry of Commerce. I
                                                                                                           Today, China’s ecosystem is threat-
                                                                                                       ened by rapid urbanization and a lack of
                                                                                                       political will to enforce environmental
                                    intimacy and global     expect bilateral trade to continue to      protection to preserve its increasingly
                                    product expertise.      grow strongly over the next several        fragile ecosystem. Hence the need to
                                     The commence-          years. Multinational banks, and ABN        bring in foreign expertise.
                                     ment of business       AMRO in particular, will continue              With 25% of Holland’s landmass
                                      of ABN AMRO           to play a key role in facilitating trade   below sea level and two-thirds of it vul-
                                       (China) Co., Ltd.    and investment flows between the           nerable to flooding, the country has a
                                        on July 21 is yet   two countries.                             long-standing reputation for water man-
                                                                                                       agement and flood deference. Engi-

      50    China Economic Review • August 2007

                                                                                                                                                            rochemical processing.
                                                                                                                                                                It was also credited with heightening
                                                                                                                                                            environmental awareness in the industry
                                                                                                                                                            through its efforts in rain-water collec-
                                                                                                                                                            tion, dust reduction and the relocation of
                                                                                                                                                            coral further offshore from the plant.
                                                                                                                                                                Shell has inked several multimillion
                                                                                                                                                            dollar contracts over the years to supply
                                                                                                                                                            solar panels and power to tens of thou-
                                                                                                                                                            sands of households across China’s west-
                                                                                                                                                            ern regions. Now it is making its first
                                                                                                                                                            foray into the wind energy market. Al-
                                                                                                                                                            though project details have not yet been
                                                                                                                                                            released, Shell is reportedly in talks with a
                                                                                                                                                            large Chinese company to develop two to
                                                                                                                                                            three wind farms across the country.

                                                                                                                                                            small companies scared?
                                                                                                                                                            Although large Dutch companies like
                                                                                                                                                            Shell and DHV are heavily engaged

                                                                                                                                                            in China’s economy, the Netherlands
                                                                                                                                                            Guangzhou Chamber of Commerce
            Managing the floW: The Netherlands can offer China innovative water control systems                                                             Vice President Cornelius Bakker is dis-
                                                                                                                                                            mayed by what he sees as a reluctance by
                neering consultancy DHV has estab-         neighboring cities can learn.                                                                    smaller Dutch firms hoping to break into
            lished itself as one of the major players in       “This project has an educational mo-                                                         the China market.
            the field and first branched out into China    tive,” Yao said. “We want to teach these                                                              “What we see are large Dutch com-
            as early as the 1970s. It works on public      small cities and towns how to take care of                                                       panies investing heavily while smaller
            and private sector projects, promoting its     their own environment. Many of [these]                                                           firms are lagging far behind,” Bakker said.
            own technologies for waste-water man-          sites have already [begun operations] and                                                        “Although our amount of investment in
            agement and pollution reduction.               the results, so far, are quite good.”                                                            China is on par with other EU nations,
                 Citing China’s rapid economic de-             In 2006, international and domestic                                                          it’s very small compared to Dutch invest-
            velopment and consumption of natural           firms began clamoring at the gates when                                                          ment in other nations.”
            resources, DHV Vice-Director Ryan Yao          China passed their Renewable Energy                                                                   According to Bakker, the main reason
            believes the company does much to help         Act, mandating that the nation switch                                                            is fear, often drummed up by consultants
            tackle an increasingly serious problem.        10% of its power generating capacity to                                                          hoping to garner large fees.
                 “Government policies for environ-         renewable energy by 2020.                                                                             “Amongst smaller Dutch firms,
            mental protection are very supportive              Although Germany, Denmark and                                                                there’s such a lack of understanding,” he
            now and there are lots of areas to de-         Spain have taken the lion’s share of proj-                                                       said. “They’re worried about how to get
            velop,” he said. “In terms of pollution and    ects in China to date, Royal Dutch Shell                                                         money out of the country; they’re worried
            water management, Holland not only has         is now stepping into the fray.                                                                   about having to take on Chinese partners.
            technical know-how; they also have lots            Working in partnership with China                                                            Consultants keep telling them how dif-
            of experience with legal systems and im-       National Offshore Oil Corporation,                                                               ficult it is to do business in China. It’s not
            plementation. We are putting all this into     Shell has built the Nanhai Petrochemical                                                         difficult. You pay your taxes, you get your
            our industrial projects in China.”             Plant on the South China Sea coast near                                                          license and that’s it.”
                                                           Shenzhen. In addition to attracting large                                                             Despite these problems, though,
            targeted development                           investments from downstream chemical                                                             Bakker remains optimistic. This year,
            In 2005, in-line with China’s “Go West”        companies, the plant won praise in China                                                         Dutch-Chinese celebrated their 35-year
            initiative to promote prosperity in its        for introducing energy reductions to pet-                                                        anniversary of diplomatic relations and
            poorer regions, DHV invested US$55                                                                                                              there are already some 70 Dutch offices
            million provided by the Dutch Govern-                                                                                                           set up in south China. The Netherlands is
            ment to launch their Feasible Technolo-               green parternships                                                                        the second largest EU investor in China
            gies for Environmental Infrastructure              sino-Dutch environmental cooperation projects                                                after Germany, and trade ties are set to
            into smaller western Chinese cities. This                           14                                                                          strengthen in agriculture, education and
            two-year program entails the design and                             12                                                                          wastewater management.
            construction of six wastewater treatment                            10
                                                                                                                                                                 “It takes time to get comfortable with
                                                           Number of projects

            plants, three solid waste processing instal-                        6
                                                                                                                                                            nations that you may not really under-
            lations and one drinking water station in                           4                                                                           stand. Once [smaller] Dutch companies
            Sichuan, Chongqing and Yunnan.                                      2                                                                           get more familiar with China, it will be-
                The ultimate goal is that theses pi-                            0
                                                                                     2000   2001   2002   2003   2004   2005   2006   2007                  come easier and there should be more
            lot sites will serve as models from which      source: iVAm Environmental Research                                                              movement on both sides,” Bakker said.

      54    China Economic Review • August 2007
                                                                                          B ooK revie W • miss CHOpsTiCks

Migratory lifestyles
                                                               undreds of mil-              Three goes first, spurred by her Uncle Two
                                                               lions of Chinese         and the sudden possibility of a forced marriage to
                                                               have fought their        a rich cripple. In Nanjing, she has relatively good
                                                    way out of poverty in the           luck, running across people who are not only
                                                    last few decades.                   well-meaning but eager to help her. She finds a
                                                         It is one of the great         job at a restaurant and quickly becomes the favor-
                                                    economic success stories            ite of the owners.
                                                    of the modern world but it              When she returns to her village for a visit a
                                                    is a story foreigners often         year later, she is an instant success. The amout of
                                                    misunderstand. Invariably,          money she brings impresses the villagers and her
                                                    the government often gets           father wins back some of the face he lost by hav-
                                                    the credit for bringing rural       ing six daughters.
                                                    peasants over the US$1-                 On top of that, the adventurous Three be-
                                                    per-day breadline. Rarely           comes an example to her bookish sister Six and
                                                    does the life of the peas-          the apparently slow-witted Two.
                                                    ants themselves enter into
                                                    the equation.                       unhappy experiences
                                                         Beijing native Xin-            Six and Two also have incredible luck in Nanjing,
                                                    ran has made a career of            quickly finding jobs that suit their aptitudes and
                                                    writing about the lives of          inclinations. Generally, everybody they meet is
                                                    China’s rural dwellers and          kind to them.
                                                    continues this strong form               It is a little unbelievable to expect three sisters
                                                    with Miss Chopsticks.               to find good jobs within minutes of making it to
                                                         In Xinran’s book,              the big bad city but that is not the most interest-
                                                    “chopsticks” are daugh-             ing part. Much more fascinating are the insights
                                                    ters – the babies of rural          into what the sisters know and don’t know, their
                                                    peasants in a village from          expectations of city people, foreigners, life and
                                                    Anhui province that, unlike         China itself.
     Miss chopsticks         their male offspring (known as “roof-beams”),                   Two, Three and Six know very little beyond
   by Xinran; Random         are not obliged to support a household. It is in           their own small worlds and often have a difficult
House; US$20 (approx)        this village that one man has six daughters. He is         time comprehending much of what is going on
                             so shamed by this turn of fate that he cannot be           around them.
                             bothered to give the children proper names and                  There is a moment when the reportedly
                             instead identifies them by number.                         fragile reality of life for the migrant worker shines
                                                                                        through. Uncle Two gets arrested while look-
                             china by numbers                                           ing for his three nieces. He is taken into custody
                             This is the background to the tales of Three, Five         because the police officers have quotas to fill
                             and Six, the three daughters who leave their home          and they make it clear that, even though Uncle
                             in search of an invariably better life in Nanjing.         Two has done nothing wrong, they would have
                                                                                        thought of something to pin on him.
                                                                                             After a night in jail, the employers of the three
 Excerpt: Behind bars                                                                   sisters come together to help out the poor jailed
                                                                                        relative. From an outsider’s point of view, it seems
                                                                                        somewhat implausible that all three sisters would
 Uncle Two thought about his gangmaster on the building site, who owed him              find employers with such good natures, willing to
 three years’ wages. Some of his fellow workers had tried to sue the man, but the       use their contacts and to stand-up to the police to
 court had sent them packing because they didn’t have contracts. Then a few of the      help out a complete stranger. That said, it would
 workers whispered that the court had been paid a bribe and said they should go on      be nice if the world worked this way.
 strike, but their bosses warned them off. They were working on a key State proj-            Improbabilities aside, Xinran offers an inter-
 ect, they said, and any strike action would be considered anti-Party and anti-State.   esting look at the life of a migrant worker. The
 Who would risk that kind of charge?                                                    book underscores why a job in the city is the most
      Every since Uncle Two had gone out into the world, he had prided himself on       obvious avenue by which a farmer can escape a
 his caution. He’d watched fellow workers get into difficulties and listened to their   life of drudgery, poverty and the relative isola-
 complaints, thinking all the time that they were foolish not to learn how to do        tion of China’s villages – an existence that can be
 things the city people’s way… But here he was, arrested for waiting at a door. Who     numbing to the soul and stifling to the mind.
 would have thought that could be a crime.
                                                                                                                             Alfred romAnn

                                                                                                              China Economic Review • August 2007   55
     culture • 晏子 TRAVEls TO THE WE sT

              Graham Earnshaw                                     nce upon a time a long time
                                                                  ago, there was a Chinese official
         walks from shanghai to                                   named Qu Yuan who was so
           Tibet when he has the                        incensed by the corruption tolerated in
                                                        the Imperial Court that he commit-
            time, always starting                       ted suicide by throwing himself in the
           from the last place he                       Yangtze River. The sign in front of me
                                                        said that this man, who lived more than
         stopped. This month we                         2,300 years ago, had been born in this
                                                        very village.
                find him near the                           “The Hometown of Qu Yuan” was
              Three Gorges Dam,                         not much. A few new houses built along
                                                        a road cut into the cliff walls of the Xil-
                   Hubei province                       ing Gorge above the Yangtze River, plus
                                                        a small shop with a few people sitting
                                                        around inside.
                                                            I went into the shop and bought a
                                                        bottle of water as an excuse to ask about
                                                        the successful suicide.
                                                            “So this was where Qu Yuan was
                                                        born?” I asked.
                                                            They looked at me, thought about it
                                                        a bit, and shook their heads. “Up in the
                                                        mountains,” said one of them. Strange
                                                        that they didn’t leap at the chance to
                  In the Xiling Gorge, Hubei province   claim one of China’s most famous chil-
                                         Coordinates    dren trumpeted in such a prominent way
                                       110.43.05 East   right outside their doors.
                                       30.54.59 North       Anyway, Qu died and he was so
                  Distance from Shanghai - 1,080 km     respected for his fatal act of protest that
                     Distance from Lhasa - 1,805 km     even today Chinese people all over the
                                                        world mark the day, the fifth day of the
                                                        fifth month of the lunar calendar, with
                                                        dragon boat races. Why? The paddling
                                                        represents the way the people beat the
                                                        water to chase away the fish to try to
                                                        stop Qu Yuan’s body from being eaten.
                                                            Then there are the rice dumplings
                                                        wrapped in leaves (zongzi) eaten on that
                                                        day, harking back to mythical efforts by
                                                        the people to distract the fish, again in
                                                        an effort to keep Mr Qu’s body intact.
                                                            The exact place where he is said to
                                                        have committed suicide is down river at
                                                        Maoping, near the Three Gorges Dam.
                                                        Thanks to the dam, the water levels at
                                                        this part of the river are now around 30-
                                                        40 meters higher than they were from
                                                        the preceding 2,300 years.
                                                            People along this section of the
                                                        gorges have all been moved up to new
                                                        houses built alongside the new road,
                                                        provincial highway 334, constructed only
                                                        five or so years ago along the southern
                                                        banks of the river-reservoir.
                                                            The steep mountainsides above me          four seasons BriDge: Crossing a tributary

56   China Economic Review • August 2007
on the left and way across the water           particular morning, the scene was defi-
were formidable. High up there were            nitely one of after-the-rain clarity.
lonely houses, far from the road, far from         There was little traffic out on the
my world. Down below was the river, a          “water road”, as one person I spoke to
broad chocolate fondue that sparkled in        called the river. A few high speed ferries,
the sunshine.                                  some cargo barges. But it was a weekend,
    The colors of this section of the          and maybe the crews were resting at
gorge on this particular day were sharp        home, taking in some satellite televi-
and satisfyingly coordinated. The blue         sion. I passed a pile of cathode ray tubes
sky, the rocky grays and shrubby greens        nestling in the undergrowth. Cathode
of the gorge walls, and the rich browns        ray tubes? I know. Total disconnect – but
of the river. I had met a man several          welcome to 21st century China.
months previously near Yichang while               I passed some purple flowers and
looking out at a section of the river and      spent a couple of minutes photographing
bemoaning the misty pall hanging over          a besotted butterfly while a ferry glided
the scene.                                     below through the frame.
    “You should see it after it has just           The river widened for a while and
rained,” he said. “That is when it is clear-   the cliffs became less precipitous, and
est.”                                          then the gorge closed in again. The day
    He was right. Here in the gorges, it       was hot. In every vaguely suitable space,
had rained the day before, and on this         however small, there were orange

                                                          China Economic Review • August 2007   57
     culture • 晏子 TRAVEls TO THE WE sT

                                                                                                                                     by the roadside to dry in the sun; a huge
                                                                                                                                     pile of old shoes; a predictably disgusting
                                                                                                                                     cement factory surrounded by vegetation
                                                                                                                                     turned pale, every leaf covered with thick
                                                                                                                                     film of creamy cement dust; and the
                                                                                                                                     self-styled “orange town” of Guojiaba, a
                                                                                                                                     little settlement on the river’s southern
                                                                                                                                     bank, mostly newly built in the past few
                                                                                                                                     years, the old town invisible beneath the
                                                                                                                                     river waters.
                                                                                                                                          The problem with walking through
                                                                                                                                     the gorges is that the sections that are
                                                                                                                                     particularly steep and narrow are so
                                                                                                                                     attractive that they make the broader
                                                                                                                                     sections seem tedious by comparison,
                                                                                                                                     despite the magnificence of the sur-
                                                                                                                                     rounding mountains.
                                                                                                                                          On to the next narrows.

     the ButterflY anD the Boat: An afternoon snack by the Yangtze                                                                      the china reading project donates
                                                                                                                                        books to schools in rural areas of China. Dona-
        trees and corn growing. One a long                          wish to experience. I am not naturally                              tions are tax-deductible. Payments can be
     term investment, the other incredibly                          claustrophobic, but a few more of these                             remitted to The China Reading Project, Xinhua
     short. I was reliably informed that the                        tunnels could definitely change my mind                             Finance Library Foundation Limited, HSBC
     corn I was inspecting was a month away                         on the subject.                                                     Hong Kong account 809-215064-838, SWIFT
     from being ready to be picked.                                     But in between the tunnels were                                 code: HSBCHKHHHKH, HSBC Causeway Bay
         There were more tunnels dug                                stunning vistas out over the river with                             Branch. Visit
     through the cliffs above the river, long                       the steep walls and valleys of the gorge-                           for details. For more Walk photos and diary
     and dark, the air inside heavily laden                         plus interesting local sidelights. Chinese                          excerpts, visit
     with particles my lungs really did not                         medicinal herbs and ingredients laid out

         Company index                                Chongqing CCB
                                                      Christopher Little Literary Agency
                                                      Chrysler Group
                                                                                                    Industrial and Commercial Bank
                                                                                                    of China
                                                                                                                                                 Research in Motion
                                                                                                                                                 Royal Dutch Shell
                                                      Citigroup                          28,42,46   Jager                                  44    Shanda                                14
         ABC                                     29   CLSA                                  40,44   Jinlaike Sports Shoes                  45    Shanghai Automotive Industry
         ABN AMRO                                50   CMB                                27,28,29   Jinqiao Export                         66    Corporation                        8,18
         Acer                                    42   Coca-Cola                             44,45   JLM Pacific Epoch                      46    Shanghai Gold Exchange                34
         Adidas                            40,43,44   Ctrip                                    46   JPMorgan                               42    Shanghai Petrochemical                66
         Amway                                44,45   Dali Biscuits                            45   JPMorgan Asia Pacific                  11    Shanshan Xifu                         44
         Anerle Napkin                           45   Dell                                     42   Kia                                    44    Shengda Floor                         44
         Anta Sports Products                    14   Deloitte                              25,36   Kingkey Real Estate                    45    Shenhua Energy                        10
         Aodeli                                  45   Deloitte & Touche Tohmatsu               24   Konka                                  44    Shenzhen International Mansion        45
         Apple                                42,44   Deutsche Bank                            11   KWG Property Holding                   14    Shenzhen International Park           45
         Baidu                                   46   DHV                                      54   Lenovo                       10,40,41,42     Shinsei Bank                          32
         Baisha                                  44   Economist Intelligence Unit              29   Li Ning                          40,43,44    Siemens                               64
         Bank of China                      8,29,34   Ericsson                                 64   Loncin Motorcycle                      44    Sohu                              44, 46
         Bank of East Asia                       28   Exxon                                    32   Lucent Technologies                    64    Sorrent                               44
         Bank of Nanjing                         14   First Data International              28,29   Macau Studio City                       8    Spring of Sudi Real Estate            44
         Bank of Ningbo                          14   First Shanghai Securities                43   Maverick                               46    Sprite                                45
         BP                                      32   Fitch Ratings                         27,28   McDonald’s                       25,44,45    Standard Chartered Bank           28,48
         Budweiser                               45   Fosun International                      14   McKinsey & Company                     36    Starbucks                             16
         Carlyle Group                            6   Fujitsu                                  42   Meg Energy                             32    State Grid                             8
         Chengdu Aurora Technology                    Funlinmen Oil                            45   MIG                                    44    Stella International Holdings         14
         Development                             14   GameKing                                 45   Minsheng Banking Corporation           15    Tag Heuer                         44,45
         Chery Automobile                        18   Garmin Street Pilot 300                  44   Moody’s                                27    Taizhou Chiho Tiande                  30
         China Coal                              15   Gartner Group                            42   Motorola                         21,36,64    Tencent                               46
         China Construction Bank              10,32   Gateway                                  42   Nanhai Petrochemical Plant             54    Toshiba                               42
         China COSCO Holdings                 14,66   Gatorade                                 44   Nanjing CCB                            15    Tyson Foods                            8
         China Development Bank                  15   GDB                                      29   Nike                         40,43,44,45     UBS                                   48
         China Development Brief             6,8,38   Geely Automobile                         15   Ningbo CCB                             15    Umicore                           30,31
         China GrenTech                          46   God Milk                                 44   Nokia                                  64    Upperdeck                             44
         China High Speed Transmission           14   Goldman Sachs                            15   Nortel Networks                        64    Van Gogh Preferred Banking Centers 50
         China Life Insurance                    65   Gome Electrical Appliances               16   Ogilvy & Mather                        36    VISA                                  44
         China Merchants Bank                 26,29   Google                                   21   Oriental Securities                    66    Volkswagen                            18
         China Merchants Fund Management         28   Guotai Jun’an                            66   Pepsi                                  44    Volkswagen-SAIC                       18
         China Mobile       10,13,21,40,44,46,64,65   Haitong Securities                       66   PetroChina                             16    Western Mining                        14
         China National Offshore Oil Corp 16,32,54    Harbin Pharmaceutical                    66   Philips Electronics                    30    Xinhua                                14
         China National Petroleum Corp         8,16   Hill and Knowlton                        48   PICC Property & Casualty               65    Xizhilang                             45
         China Netcom                         13,64   Honda                                    18   Ping An Insurance                   45,65    Xugong                                 6
         China Petroleum & Chemical Corp              HP                                       42   Playboy Enterprises                     8    Yanjing Beer                          44
                                           16,18,35   HSBC                                     28   PricewaterhouseCoopers               6,14    Yanzhou Coal Mining                   65
         China Post                              44   HSBC China Dragon Fund                   14   PT Pertamina                           16    Yili                              44,45
         China Telecom                        13,64   Huawei                                   64   R3                           40,41,43,44     ZTE                                   64
         China Unicom                   13,21,44,64   IBM                                      42   Red Earth cosmetics                    45
         Chinatrust                              26   IDC                                      42   Reebok                                 44

58   China Economic Review • August 2007
      poDiuM • Al EXANDER mAy

      The fourth way
         The recently                        en years ago, overseas investors entering
                                             China were faced with a stark choice be-
               drafted                       tween a local joint venture ( JV) and a for-
               Foreign               eign registered representative office. This was fol-
                                     lowed in due course by the wholly-owned foreign
           investment                enterprise (WFOE) as Beijing began meeting the
          partnership                WTO’s market access requirements.
                                         Now there is a fourth way. The State Council
        law presents                 recently authorized the Ministry of Commerce
                                     (MOC) to create regulations allowing foreign
             overseas                individuals or companies to participate in part-
          players with               nerships in China. The first draft of the Foreign
                                     Invested Partnership Law (FIPL) is now pending
         another path                submission to the Standing Committee of the Na-
            into China               tional People’s Congress.
                                         The draft law is significant because it reduces
                                     the threshold for foreign investment in China. It
                                     could be of great advantage to small and medium-
                                     sized enterprises that cannot afford the level of in-
                                                                                             KnoW Your options: Foreign
                                     vestments required to set up a JV or a WFOE.
                                                                                             partnerships offer another
                                         The FIPL applies to both general and limited
                                                                                             means of entering China
                                     partnerships. These foreign investment partner-
                                     ships (FIPs) may be formed by any combination of
                                     foreign and Chinese individuals, and foreign and     relating to foreign investment. For example, where
                                     Chinese companies or organizations. Partnerships     a FIP is to participate in a sector from which
                                     can also comprise of two or more foreign compa-      WFOEs are legally excluded (i.e. a JV-only sec-
                                     nies. Moreover, the FIPL allows a parent company     tor), there must be one or more Chinese partners.
                                     and a subsidiary in China to form a partnership.         For FIPs operating in areas in which the law
                                                                                          does not simply require a JV but “Chinese majority
                                     fip is no Jv                                         ownership” or “Chinese relative control,” the Chi-
                                     While some have tried to argue                                             nese partners will have final
                                     otherwise, a FIP is in no way a                                            say over certain matters as ref-
                                     JV, but rather a completely new the draft law is                           erenced in various articles of
                                     method for foreign investment. significant because it                      the FIPL. Additionally, where
                                     Whereas parties to a Sino-for-                                             “Chinese majority ownership”
                                     eign JV in China must be legal reduces the threshold                       is required, the Chinese part-
                                     person entities (i.e. Chinese or                                           ners must have a stake of at
                                     foreign companies), enterpris- for foreign investment least 51%.
                                     es and individuals can qualify in china. it could be                           The draft FIPL allows
                                     as parties to a FIP.                                                      a FIP partner to inject cash,
      By Alexander May of                As a legal person entity, a of great advantage to                     intellectual property, land use
     Shuang Cheng, attorneys-        JV has limited liability but a small and medium-                          rights or make contributions
     at-law. China Axis Lim-         FIP has unlimited liability that                                          in kind among other things.
        ited in association with     passes to the partners as is the sized enterprises that                   However, while Chinese part-
     Shuang Cheng Attorneys-         case in partnerships in many
          at-Law are experts in      other jurisdictions around the
                                                                        cannot afford the level ners may contribute labor, for-
                                                                                                               eign partners may not. When
        matters of market entry      world. Furthermore, legal per- investment required                        a partner wants to make a
     and investment in China.        son entities are taxed both on                                            contribution – be it in-kind,
            They regularly assist    income and on dividends paid for a Jv or Wfoe                             intellectual property rights,
      companies in structuring       out to shareholders; for part-                                            or land use or other property
          investments in China       nerships, income tax obligations pass through to rights – the value of the asset or assets must first be
          and manage relation-       the partners, thereby eliminating the possibility of assessed and verified by a PRC-authorized valua-
      ships and risks involving      “double taxation.” Therefore, in the case of a FIP, tion entity. This is not the case in a solely Chinese
       local partners. For more      the individual income tax law is applicable as op- partnership where the value of the assets contrib-
            information, contact     posed to the new Enterprise Income Tax Law.          uted can be negotiated by the partners. or go             Although a FIP differs from a WFOE or JV,            All capital contributions made by partners,
         to         it must comply with the same government policies profits derived from the partnership and other

62    China Economic Review • August 2007
                                                                                                                            eX pos & conferences

                                                                                      arts & crafts                          Exhibition Center
                                                                                     august 3-5                    
                                                                                     The 4th China (Guangzhou)               august 30-september 3
                                                                                     international musical instruments       14th Beijing international Book
                                                                                     Expo 2007                               Fair/BiBF 2007
                                                                                     Guangzhou                               Beijing
                                                                                     Guangzhou int’l Convention &            China international Exhibition Center
                                                                                     Exhibition Center             
                                                                                     august 3-5                                electronics
                                                                                     The 5th China (Guangzhou)               august 7-9
                                                                                     international Expo on pro sound &       2007 Asia Electronics show
                                                                                     light 2007                              shenzhen
                                                                                     Guangzhou                               shenzhen Convention &
                                                                                     Guangzhou int’l Convention &            Exhibition Center
                                                                                     Exhibition Center             
                                                                                                    august 7-9
                                                                                                                             2007 Asia Electronics show
                                                                                      chemical                               shenzhen
                                                                                     august 18-20                            shenzhen Convention &
                                                                                     Aluminum China 2007                     Exhibition Center
                                                                                     shanghai New international
                                                                                     Expo Center                               health
                                                                  China Foto press

                                                                                             august 10-12
                                                                                                                             The 4th China international Adult
                                                                                      construction & Material                Toys and Reproductive Health
                                                                                     august 18-21                            Exhibition (China Adult-Care Expo)
property acquired in the name of the partnership are owned by                        The 19th China international            shanghai
the partnership. In the case of a FIP, the draft law provides that                   Furniture Fair (Guangzhou)              shanghai international
no funds may be transferred outside China prior to the liquida-                      Guangzhou                               Exhibition Center
tion of the FIP.                                                                     China import and Export Fair  
    While partners in a solely Chinese partnership can adjust                        Complex (pazhou)                        august 20-22
their capital contributions per the terms of their agreement or                                     Healthplex Expo 2007
upon the consent of all the partners, the FIPL restricts the part-                   august 19-21                            Beijing
ners’ ability to modify capital contributions in a FIP. However,                     Doors, Windows & structures             China World Trade Center
language does exist in the draft law which indicates contribu-                       China 2007                    
tions may be adjusted with appropriate government approvals.                         shanghai
    Additionally, research suggests capital contributions could                      shanghai Everbright Convention &          Mechanical
possibly be altered in the event of a major change in a FIP such                     Exhibition Center                       august 6-8
as a change in the scale of a partnership’s business operations.                           China Automobile manufacturing
                                                                                                                             Exposition 2007/CiAmE2007

sharing the wealth                                                                    consumer products                      Beijing
                                                                                     august 8-11                             Beijing Exhibition Center
One area where the draft FIPL does not offer specific guidance
                                                                                     The 16th China Beijing international
is profit and loss allocations. It is explained – without great de-
                                                                                     Gifts, Artware & Houseware              august 9-12
tail – that a partnership agreement should clearly describe the
                                                                                     Exhibition                              The 9th China international power
methods of sharing profits and losses. If a partnership fails to
                                                                                     Beijing                                 Transmission & Control Technology
address this issue, or does so inadequately, the partners will have
                                                                                     China World Trade Center                (Qingdao) Exhibition/2007 Jinnuo
to negotiate the profit and loss allocations when the issue arises.                            Exhibition-pTC
If such negotiations fail, profits or loss allocations must be pro-                  august 10-12                            Qingdao
portional to each partner’s actual capital contribution. Should                      international safety and Health &       Qingdao international
the information on this be unclear, profits or losses must be ap-                    Nutrition industries (shanghai) Expo    Convention Center
portioned among the partners equally.                                                shanghai                      
     In a FIP, the ratio of profit and loss distributions can be                     shanghai WTO mall/shanghaimart
agreed upon by the partners and need not accord proportionally                                  others
with each partner’s contribution. However, a FIP agreement may                                                               august13-15
not allocate all profits to one partner and all losses to another.                    education                              BHC shanghai 2007
     The creation of a new category of foreign investment in Chi-                    august 28-30                            shanghai
na is not an everyday occurrence. While certain restrictions that                    EDU Expo 2007                           shanghai New international
apply to foreign investors do not apply to domestic Chinese in-                      shenzhen                                Expo Center
vestors, draft rules such as the FIPL signal a significant change                    shenzhen Convention &         
in China’s attitude towards business.

                                                                                                                             China Economic Review • August 2007     63
     inDustr Y ove rvieW • TElECOmmUNiCAT iONs

     The generation game
                        China’s             he last decade has seen a fundamental shift     lion, up 9.6% year-on-year, according to the Min-
                                            in China’s state-owned telecom industry as      istry of Information Industry (MII).
                       telecom              nearly all the growth and most of the mon-          China’s 3G transition has been made more
                   industry is     ey has started coming from mobile rather than            complicated by TD-SCDMA, a homegrown ri-
                                   fixed-line services.                                     val to established 3G technologies WCDMA and
                 preparing for         Now, though, this closely guarded sector stands      CDMA2000. The idea is that by developing its
                 the launch of     on the brink of a new age – or so we have been           own standard China will not have to pay royalties
                                   led to believe. For fixed-line incumbents China          to the developed world - nations responsible for
                 3G networks,      Telecom and China Netcom, as well as mobile op-          the vast majority of telecom technology.
                                   erators China Mobile and                                                             However, problems met
                  but the wait     China Unicom, the future                                                         in the development of TD-
                   has been a      is dominated by dreams of                                                        SCDMA – and the issue of
                                   third-generation (3G) net-                                                       its compatibility with rival
                      long one     works.                                                                           standards in international
                                       First conceived in 2000                                                      roaming services – have
                                   after phone users showed a                                                       repeatedly delayed the roll-
                                   healthy appetite for receiv-                                                     out of 3G.
                                   ing updates from the Sydney
                                   Olympics by SMS, the idea                                                          investments
                                   was to have faster, better ser-                                                    There has also been much
                                   vices in place for Beijing 2008.                                                   speculation about the re-
                                   Market reports projected that                                                      structuring of the industry’s
                                   there will be an estimated 40                                                      four players in the buy-
                                   million 3G subscribers by                                                          ing, sharing, and merging
                                   the end of 2008, and by the                                                        between networks. In re-
                                   end of 2011, about a third                                                         sponse, the MII recently
                                   of all mobile subscribers in                                                       announced that licenses will
                                   China will have access to the                                                      not be issued for any 3G
                                   technology.                                                                        standard until restructuring
                                                                                                                      between the telecom giants
                                       3g dreams                                                                      are complete.
                                       For fixed-lined operators,                                                         The most rampant spec-
                                       3G represents an opportu-                                                      ulation is the merger be-

                                       nity to transition into the                                                    tween China Netcom and
                                       high-growth wireless mar-                                                      China Unicom, but these
                                       ket as demand for their own Big Base: China has 495 million mobile users rumors were denied.
                                       services flattens out. Mobile                                                      In June, China Mobile
                                       operators aren’t looking at anything seismic – 3G announced plans to build a new TD-SCDMA
                                       is simply a larger piece of an existing market, albeit network infrastructure in eight major cities across
                                       one with a more lucrative twist.                       the country, beginning trial tests in October 2007.
                                             3G will have the ability to transfer voice and It signed a US$2.28 billion contract with ZTE,
                                       non-voice data simultaneously – e.g. e-mail, in- China’s biggest publicly listed telecommunications
                                       stant messaging and downloading information equipment maker, to supply mobile phone net-
                                       – adding an additional dimension to the currently work equipment.
                                       popular text messaging wireless value-added ser-           Initially, ZTE or its domestic rival Huawei are
                                                          vice (WVAS) and ring-back expected to provide most of the handsets for the
       pushing half a billion                             tones (CRBT).                       3G network – China Mobile wants two million
                                                              Progress has been slow but for the eight-city launch – but this hasn’t stopped
      mobile phone users in China
                                                          then the stakes are high. There foreign players getting involved.
                                                          are now 495 million mobile sub-         Siemens and Nokia, Lucent Technologies,
           400                                            scribers in China, making it the Nortel Networks, Ericsson and Motorola have all
                                                          largest such market in the world. made alliances with China’s telecom giants.
      million users


           200                                            Fixed-line users number 372             Although the immediate future of 3G is still
                                                          million and broadband users 97 unclear and the telecom industry remains one of
                                                          million. In the first five months China’s most tightly regulated, foreign firms are
                 2003   2004      2005  2006   2007 may   of 2007, the telecom industry ‘s still bullish about capitalizing on the growth of
     source: mii                                          revenues reached US$37.9 bil- China’s large mobile user base.

64   China Economic Review • August 2007
                                                                                                                                                                                                           econo M ic inDicators

ftse all-World and ftse china indices                                                                                                                                trade balance
 150                                                                                                                                                                           30

 140                                                                                                                                                                           25

                                                                                                                                                               Us$ billions

 110                                                                                                                                                                           5
                                                                                                                                                                               Oct06    Nov06       Dec06        Jan07      Feb07       mar07      Apr07       may07   Jun07


                                                                                                                             foreign exchange reserves
                   march 2007                          may 2007                                July 2007                         1400
                                FTsE All-World index               FTsE China 25 index

                                                                                                                       Us$ billion
ftse/Xinhua                                            hang seng                                                                 1200

 130                                                     23000                                                                   1100

 120                                                     22000                                                                     Oct06    Nov06      Dec06                  Jan07    Feb07       mar07        Apr07      may07       Jun07

 110                                                     21000

 100                                                     20000
                                                                                                                                                                     gDp growth
   may             Jun                      Jul              may                           Jun                   Jul                                                      1000

shanghai composite index

 4500                                                                                                                                                          Us$ billion    600

 4000                                                                                                                                                                         400
                                                                                                                                                                               mar06            Jun06              sep06              Dec06            mar07           Jun07


                                                                                                                              economic data
 3000                                                                                                                                                                                     Value (Us$ billion)                       % change from a year earlier
                                                                                                                                Actual FDi                                                6.63                                      21.9
                                                                                                                                GDp                                                       745                                       11.5
    Feb          mar                  Apr                    may                         Jun               Jul                  Exports                                                   103.27                                    27.1
                                                                                                                                imports                                                   76.36                                     14.2
                                                                                                                                Trade balance                                             26.91                                     86.6

ftse/Xinhua china 25 index                                                                                                      Consumer price index
                                                                                                                                Foreign reserves                                          1333
Highest performers for the month to July 20                                                                                     m1                                                        1795.2                                    20.9
name                                        price (hK$)                                          change (%)                     m2                                                        4989.6                                    17.1
piCC property & Casualty                        6.65                                               19.82                        Urban fixed-asset investment                              185.2                                     28.4
                                                                                                                                Auto sales                                                                                          25.29*
ping An insurance                                62                                                18.77                        Auto production                                                                                     21.76*
yanzhou Coal mining                             13.4                                               15.52                        industrial ex-factory price                                                                         2.5
China mobile                                     92                                                 14.5                        Business climate index                                                                              11.9
                                                                                                                                Retail sales                                              92.75                                     16
China life insurance                            30.7                                               13.91                        National property index                                                                             1.45#
                                                                                                                                Confidence of enterpreneurs                                                                         11.4

us dollar-rMB exchange rate (us$100)                                                                                            shanghai real estate index
                                                                                                                                Consumer confidence

                                                                                                                                #April, *May

                                                                                                                              currency exchange rates on July 20

                                                                                                                               HkD 100                RmB 96.638                                                  AUD 100                  RmB 664.801
                                                                                                                               UsD 100                RmB 755.8                                                   GBp 100                  RmB 1548.63
                                                                                                                               Jpy 100                RmB 6.192                                                   myR 100                  RmB 220.285
   Feb           mar                  Apr                    may                         Jun               Jul
                                                                                                                               EUR 100                RmB 1043.83                                                 sGD 100                  RmB 499.768

                                                                                                                                                                                                                China Economic Review • August 2007                            65

     Correction and consolidation
             more ups and downs in                                                 t has been a case of rebound, cor-
                                                                                   rection and consolidation for the A-                  real time action The Red Dragon Fund
            the market but the mid-                                                share market this past month – pretty                 has gone online. Daily updates offering com-
              term outlook appears                                             much like the month before that.                          mentary on the market as well as explana-
                                                                                   In June, investors were hit with a                    tions of what trades we’re making and why.
                more bear than bull                                            stamp duty increase, lost their nerve and                 Find out more at www.chinaeconomicreview.
                                                                               regulatory intervention was required to                   com/reddragonfund
                                                                               bring things back to an even keel. The
     harbin pharmaceutical, last 6 months                                      market rebounded from 3,600-point ter-
              25                                                               ritory to 4,000-plus but, almost exactly a              ceutical Group 600664.
                                                                               month later, it was at it again. On June                    Jinqiao Export has various commer-
                                                                               4, the Shanghai Composite Index (SCI)                   cial real estate interests as well as stakes in
                                                                               compounded consecutive days of small                    several domestic brokers such as Guotai


                                                                               losses by closing 5.3% down at 3,615.87.                Jun’an, Haitong Securities and Oriental
                                                                                   The contributing factors? Certainly,                Securities, all of which are doing well on
               Feb07       mar07   Apr07     may07       Jun07    Jul07
                                                                               the easing of restrictions on Qualified                 the back of the gains made by the market
                                                                               Domestic Institutional Investors had an                 in the last year or so.
                                                                               impact but there was also talk of action                    With a limited number of pure play
     Jinqiao export, last 6 months                                             to cool the markets such as a capital gains             brokers, the best point of access for inves-
              25                                                               tax on share sales. Yes. Again.                         tors is often through companies that have
                                                                                                                                       ownerships stakes in unlisted brokerages.
              20                                                               unhealthy balance                                       As more financial products are intro-
                                                                               All this does very little to reassure us that           duced to the market and brokers learn to

              15                                                               China’s stock markets are not beholden                  manage their risk, we expect a shift away
                                                                               to the whims of government policy rath-                 from the profit-loss cycles of old towards
               Feb07       mar07   Apr07     may07       Jun07    Jul07
                                                                               er than any financial common sense. For                 more consistent income streams.
                                                                               several months now, the SCI has been                        For this reason, we are prepared to
                                                                               locked in a rebound-correction-consoli-                 hold Jinqiao Export for some time.
     total red Dragon fund value
                                                                               dation cycle – every month there is a dra-
            34000                                                              matic subplot fueled largely by hearsay.                Blowing bubbles
            31000                                                                  During the correction, fund managers                When it comes to other investments, like
                                                                               were busy accumulating blue chips. The                  many following the markets, we are left
                                                                               media calls it as “gathering for warmth”                uncertain by the regulator’s propensity for

                                                                               – preventing the lowering of their net val-             creating bubbles while trying to eliminate
                                                                               uation by buying index-weighted stocks,                 them. On June 26, A-shares in China
                Feb07      mar07   Apr07     may07      Jun07     Jul07
                                                                               most of which are blue chips.                           COSCO Holding 601919 began trading
                                                                                   For its part, on June 28, the Red                   at RMB8.48, which means a price/earn-
                                                                               Dragon Fund took Jinqiao Export                         ings ratio of 98.67. It rose 93% on its first
     In August 2005, ChinA eConomiC review                                     600639 into its portfolio. This brings the              day, closing at RMB16.38.
      decided to invest RMB10,000 in A-shares.                                 total holdings to three stocks: Shanghai                    In contrast, when COSCO Holding
       And so the Red Dragon Fund was born...                                  Petrochemical 600688, Harbin Pharma-                    debuted in Hong Kong, it sank below the
                                                                                                                                       IPO price and stayed there for 16 months,
                                                                                                                                       earning the nickname “submarine.”
      red Dragon fund holdings as of June 19 and July 20                                                                                   On the one hand, the government is
                                                                                                                                       clearly not educating the investors about
                                                     Jun 19                       trading Details                     Jul 20           the dangers of a stock market bubble and,
                                     no. of                                Buy/                             no. of                     on the other, its IPO pricing strategy is
                                                     price       value                 Date         price            price     value
                                     shares                                sell                             shares                     clearly playing an active role in creating
        shanghai petro-
                                       500           14.39       7195                                        500     11.97     5985
                                                                                                                                       bubbles in the first place.
        chemical 600688
                                                                                                                                           Taking a broader view of events, Chi-
      harbin pharmaceuti-
                                       800           17.77       14216                                       800     13.91     11128   na’s runaway growth in the first half, cou-
       cal group 600664
                                                                                                                                       pled with another record inflation figure
            Jinqiao export
                                                                          Buy 500     Jun 28        21.38    500     20.55     10275   for June, unsurprisingly led to another in-
                                                                                                                                       terest rate hike. This is unlikely to be the
                    cash                             11324                                                             634             last of the tightening measures and so we
              fund total                             32735                                                            28022
                                                                                                                                       have to conclude that a period of consoli-
                                                                                                                                       dation lies ahead for the stock market.

66   China Economic Review • August 2007