ZTE

Silent mode

Oct 16th 2008 | SHENZHEN
From The Economist print edition

An emerging Chinese telecoms giant is growing steadily—and stealthily

IN THE last quarter of 2007 there were three new entrants in the top ten list of mobile-phone makers. Most people know two of them—Apple, maker of the iPhone, and Research in Motion (RIM), maker of the BlackBerry—but not the third: ZTE of China. Its worldwide market share went from 0.4% at the start of 2007 to 1.2% in the second quarter of 2008, according to Gartner, a consultancy. Last month it sold its 100 millionth phone. Its goal is to become the third-biggest handset-maker, behind Nokia and Samsung (it now lies in seventh place). Yet ZTE is easy to overlook, because of its distinctive business model.

Founded in 1985, ZTE chiefly makes networking gear, rather than phones. With prices for comparable products 25-90% less than those of its Western competitors, ZTE has customers in over 60 countries. As Alcatel-Lucent, Nortel and other established telecoms-equipment makers have suffered, ZTE has thrived. Its revenues and profits increased by more than 50% in 2007. This year growth is also likely to be strong, for two reasons.

Export sales, which account for around two-thirds of revenues, continue to grow as poor countries expand the range and capacity of their mobile-phone networks. On October 13th, for example, ZTE announced a $400m contract to provide equipment for a new network in India. At the same time ZTE (along with its domestic rival, Huawei), will benefit from one of the largest telecoms projects in history: the construction of China’s much-delayed “third generation” (3G) mobile networks.

Behind ZTE’s emergence are the usual factors that have come to be associated with China’s economic rise, with a few twists. ZTE has benefited from the thousands of inexpensive and well-trained engineers coming out of China’s universities, many of whom are deployed at short notice to work on large projects in some of the world’s most difficult places. More fuzzy, but still important, has been ZTE’s ability to use help from the Chinese government to arrange cheap financing for its global customers, which often lack capital.

Beyond these broader factors, ZTE has done a good job of understanding how to pursue a low-cost strategy—and there is far more to it than merely producing cheap products. “ZTE is a strong technology company, but of a particular sort,” says James Liang, an analyst with Citigroup. ZTE focuses on making equipment that is cheap, reliable and unobtrusive.

In developed markets, makers of elaborate handsets such as Nokia, RIM and Apple have strong brands and fiercely loyal customers. This is a mixed blessing for network operators: offering a snazzy new handset can help them attract customers, but many users are more loyal to their handset-maker than to their operator. ZTE, by contrast, keeps itself in the background. It supplies handsets on a “white label” basis to operators, which then sell them under their own brands. The name ZTE is nowhere to be seen. In keeping with its roots as a network-equipment supplier, it sees operators, not consumers, as its customers.

ZTE moved into the handset market in 2002, and handsets accounted for 22% of its revenue last year; it expects this figure to reach 50% by 2012. ZTE does make some advanced handsets, but its strength is in combining low cost with a willingness to customise handsets for the operators. For Australia’s Telstra, for example, it produced a “country phone”, with a pull-out antenna, which suits people outside cities who need highly sensitive receivers. Although ZTE supplies phones to big names such as Vodafone and Telefónica, most of its customers are in the developing world, where overall handset sales are growing by 16% a year. ZTE’s steady but stealthy rise reflects how much of the growth in telecoms is at the bottom of the economic pyramid.

http://www.economist.com/business/displaystory.cfm?story_id=12429620

China Investment Corporation

Published: December 5 2007 09:03 | Last updated: December 5 2007 09:03

Wanted: managers to run $200bn portfolio. Pay not commensurate with market rates; controversy (virtually) guaranteed.

China Investment Corporation, the newest sovereign wealth fund on the block, caused a stir even before it was formally established. Its snap decision to invest $3bn in Blackstone’s initial public offering in June left it nursing a 30 per cent paper loss. Future investment policy, however, is on a back-burner while CIC concentrates on the more pressing matter of setting up shop. Top of the agenda, for now, are the basic issues of staffing, location and systems. Roll-out of international offices will provide some clues as to investment strategy. There must be decent odds on a Hong Kong office, but CIC is also mulling a presence in emerging markets, and western financial centres like London are courting CIC officials assiduously.

EDITOR’S CHOICE

UK welcome for China sovereign funds - Dec-05

Editorial comment: How to deal with sovereign funds - Oct-21

EU seeks accord on outside investors - Oct-18

Sovereign funds warning - Oct-14

FT series: Sovereign funds - Sep-19

Sovereign funds snap up bank stakes - Sep-25

Recruitment is trickier. CIC staff will technically be civil servants, whose packages can be as low as $1,000 a month. Top-ranking professionals will trump that but still take home substantially less than their Wall Street peers. Managers will also have less autonomy on investment strategy. First, the bulk of the $200bn cash-pile is already accounted for. Roughly one-third is held in domestic banks (a legacy of restructuring) and a similar amount will be used to recapitalise the two remaining unlisted big state banks. Secondly, the job is ridden with conflicts. CIC’s mandates include promoting China’s overseas expansion and rescuing domestic banks; supporting Chinese companies’ overseas initial public offerings and enhancing returns. These roles will also bring it into conflict with other mainland entities. Should CIC or the lenders it partially owns be looking at buying into distressed western financial institutions, for example? The simplest solution would be to farm management out to the private sector, but that would buck the more aggressive tone set by other sovereign wealth funds. With so many challenges and so little recompense, corporate titans like those who joined Dubai International Capital need not apply.

Copyright The Financial Times Limited 2007

 Last year, American consumers and companies purchased one-fifth of China’s exports.

http://www.treas.gov/press/releases/hp788.htm

January 30, 2008
HP-788

Remarks by Treasury Under Secretary
for International Affairs David H. McCormick at the
Council on Foreign Relations

U.S.-China Economic Engagement: The Road to Faster, Deeper Reform

New York � Thank you Paul for that warm introduction, and thanks to all of you for coming this morning. I am grateful to the Council on Foreign Relations for bringing us together to discuss an issue of great long-term importance: U.S.-China economic relations. Indeed, maintaining a mutually beneficial, open, and politically sustainable economic relationship with China is one of the United States’ most pressing challenges � and greatest opportunities � in the realm of international economic policy.

The challenge is great because the stakes are high � for the United States, for China, and for the global economy. For the United States, China is the world’s fastest growing major market for our goods and services. Since China’s accession to the World Trade Organization in 2001, U.S. exports to China have grown five times faster than our exports to the rest of the world.

At the same time, China’s prosperity depends on the United States. Last year, American consumers and companies purchased one-fifth of China’s exports. Even as China diversifies its export markets, American demand continues to shape China’s economy. Investment flows between our two countries are also expanding rapidly. Between just 2002 and 2006, U.S. foreign direct investment (FDI) in China grew from roughly $10 to $22 billion while in 2007 alone, Chinese direct and portfolio investment in the United States totaled nearly $10 billion.

As a consequence of this growth, the U.S.-China economic relationship has been forced to mature very quickly. With the increasing volume of trade and investment, it was inevitable that we would experience a range of frictions as we do in our economic relationships with other major trading partners. These frictions include growing concerns about trade imbalances, product safety, the Chinese government’s large holdings of foreign exchange reserves, and China’s foreign exchange policies.

While not surprising, these frictions have nevertheless caused some in the United States to question the benefits of maintaining an open and expansive economic relationship with China. The Bush Administration’s answer to this defining question is unwavering: We are committed to strengthening our economic relationship with China and opening its markets to create new opportunities for American firms and American workers. In this effort, we are making full use of the policy tools at our disposal, and we have developed new approaches, most notably the Strategic Economic Dialogue (SED) launched by Presidents Bush and Hu in 2006.

In spite of the continuing frustrations and inevitable tensions in our economic relations with China, this Administration is taking a thoughtful and effective approach to accelerating reform and promoting U.S. interests. Would we like more rapid, deeper reform? Of course. But we are making steady progress and bringing clear benefits to America’s workers, businesses, and consumers.

China’s Growth Challenge

China’s growth over the past three decades has been nothing short of miraculous. It has transformed itself from a poor, mostly agrarian, and almost closed economy into the world’s third most important trading nation. In the process, China has benefited from economic growth averaging nearly 10 percent per year that has lifted hundreds of millions of Chinese citizens out of poverty.

The growth model that produced this enormous success has also been highly resource-intensive, and driven by heavy investment in industrial production and exports rather than growth in domestic household consumption. We see evidence that this model is no longer sustainable in China’s increasingly wasteful investment, rising inequality, a large and growing current account surplus, and accelerating environmental degradation. We also see evidence of this in weak growth in Chinese employment and in household income growth that lags well behind the rise in GDP.

China’s imbalances at home are mirrored by the imbalances China continues to generate abroad. High national saving � and its counterpart, weak consumer demand � provide the structural basis for large Chinese trade and current account surpluses that make China’s economic growth increasingly dependent upon foreign demand, sometimes creating friction between China and its trading partners.

This is not simply an American critique of China’s economy. China’s most senior leaders tell us they are committed to addressing the imbalances between growth in rural and urban areas, between the coastal and interior regions, between reliance on domestic and foreign demand to drive growth, between rich and poor households, and between economic development and environmental protection. They are coming to realize, as we do, that their success in addressing these challenges would have enormous benefits for China and the United States.

Exchange Rate Policy

The critical question for U.S. policymakers is how we can best support and encourage this economic transformation. For our part, we understand that we will be judged by our success in helping the Chinese address this rebalancing challenge in a manner that brings continued benefits, while minimizing the risks, to the U.S. economy. China’s exchange rate is one issue that has been viewed by some, I think mistakenly, as a litmus test for our success.

The untold story of our approach to China’s currency policy is that it is working, albeit more slowly than we would like. Initially, after moving away from a pegged exchange rate in July 2005, China’s actions were cautious, with the RMB appreciating slowly. More recently, however, the pace of appreciation has increased sharply, to roughly 7 percent in 2007, and 4 percent in the last three months alone, or 17 percent annualized. Since China abandoned the peg to the dollar, the RMB has appreciated roughly 15 percent against the dollar and 9 percent against other major currencies on a real trade-weighted basis. The foreign exchange market in China is also developing: daily RMB fluctuations are larger, the market is deeper, and we have seen rapid expansion in the use of foreign currency hedging instruments.

Although RMB adjustment is still far from complete, the accelerated pace of appreciation is significant and welcome, and it should continue. China and the United States must be careful not to derail this reform through protectionist actions on either side that risk disrupting the relationship. The leadership and interest of the U.S. Congress on China’s currency reform � and China’s economic reform more broadly � are both needed and welcome. But it is especially important now, during a time of turmoil in global markets, that we remain steadfast in our commitment to an open and expanding trade and investment relationship between the United States and China.

As Secretary Paulson has often said, greater exchange rate flexibility is in China’s own interest. The RMB movement that I have noted reflects the Chinese leadership’s growing recognition that more rapid exchange rate adjustment allows for more effective management of the Chinese economy, including the risk of rising inflation. A continuation of the recent pace of RMB appreciation is also important to the United States, although it will not eliminate, or even decrease significantly, the U.S. global trade deficit or mitigate the challenges that American industries face from overseas competition. It will, however, remove a major source of perceived unfairness in the U.S.-China economic relationship, permitting us to devote greater attention to other issues with even more significant impact on our economic relationship.

Strategic Economic Dialogue

Under Secretary Paulson’s leadership, the Strategic Economic Dialogue has created an unprecedented channel of communication between senior U.S. policymakers and their counterparts at the highest levels of the Chinese government that is focused on doing just that. Specifically, the SED is premised on the fact that China and the United States have shared economic interests and that we benefit from expanding our cooperation over the longer term. Central to our shared interests is leveraging U.S. expertise and support in helping China transition to a new model for economic growth that addresses its imbalances. This reform agenda runs broad and deep, ranging from macroeconomic policy to domestic regulation, investment policy to environmental protection.

For example, to assure China’s future growth � without heavy domestic costs and huge trade surpluses � China must put more income in the hands of households and change policies that force these households to save so much of what they earn. This involves increasing the dividend payments from China’s profitable companies, including state-owned enterprises, a reform that China has recently started. It also requires a stronger social safety net that reduces the need for Chinese households to over-save for a rainy day or old age. On these issues, we can contribute much in terms of expertise and capabilities in our ongoing dialogue with China’s leaders.

To create more sustainable growth, China will also need to develop a vibrant and efficient financial sector, to provide Chinese households and firms with better opportunities to build wealth and hedge risk, and to fuel innovation as an engine of economic growth. Clearly, the American financial services industry has much to offer China in this regard. As you know, we are working to improve access to China’s market for the American financial services industry. Like you, we are unsatisfied with the progress to date, but the SED has produced some significant Chinese commitments in financial services, such as China’s agreement to allow greater market access in the banking, securities, insurance, and asset management markets. As I have argued to my Chinese counterparts, building a modern financial sector is not an easy task � but foreign participation, and the knowledge and skills that come with it, can play a big role in accelerating this process.

Ensuring markets remain open to investment is every bit as important as ensuring that they remain open to trade, so we are also committed to focusing within the SED on maintaining and expanding investment flows between our two countries. This is a critical component of rebalancing China’s future growth from coastal to interior regions. As an example, we are intensifying discussions on the prospects for negotiating a Bilateral Investment Treaty and we have also recently established a U.S.-China Investment Forum to discuss the full range of investment issues that the United States and China face.

The SED has also made important progress in helping China address other barriers to its continued development. For example, in the area of product safety, China recently agreed to allow U.S. quality inspectors to conduct on-site audits of key Chinese exporters, a step that will help China develop improved standards and capabilities for critical export industries. Similarly, the SED has provided a forum to collaborate with China on addressing the terrible environmental cost of rapid growth to its air, soil, and water which looms as a significant challenge to its next chapter of economic prosperity. At last December’s SED, the United States and China agreed to work together to tackle this problem by developing an ambitious ten-year plan for cooperation.

The Way Forward

As these examples demonstrate, the SED is focused on critical strategic issues of interest to both of our countries that require long-term policy prescriptions. This is why it is so important that we look past next month, next year, or the next election as we consider our economic engagement with China. In practical terms, that means we have an obligation to turn over to a new Administration a healthy U.S.-China economic relationship and a robust and enduring dialogue capable of continuing the progress I have just described. As I hope I have made clear this morning, I think we’re on track. Through the SED we are making progress across a full, rich agenda of opportunities and challenges that are every bit as important to the United States as they are to China.

I understand and share the frustration of those who believe the Chinese are moving too slowly on many issues. On those, we must push. We must both cajole and support. We have been � and must continue to be � firm and clear when engaging with China that accelerated reform is as much in their interests as in ours. And when we are unsuccessful through dialogue in resolving key differences, we will not hesitate to take cases to the WTO or to make full use of WTO-sanctioned trade remedies established under U.S. law. But we must also take care not to vent our frustration in the form of punitive legislation or elevated rhetoric that could ultimately cost the American economy and set back the process of reform in China.

America’s economic relationship with China is of equal importance to Republicans and Democrats, Congress and the Executive Branch, this Treasury Secretary and the next. I firmly believe the next Administration will inherit a U.S.-China economic relationship that reflects more meaningful progress across a broader territory than ever before. To be sure, the road ahead is long. But we are taking important steps in the right direction.

Thank you.

Young Chinese ‘addicted’ to the web

Online life ‘more intense than reality’ for many

Simon Burns in Taipei, vnunet.com 26 Nov 2007

Nearly two-thirds of young Chinese people have a “parallel online life”, according to a new survey.

Research conducted for advertising firm JWT and investment company IAC suggests that up to 80 per cent of young Chinese people see the internet as an “essential” part of their lives.

Online life is often more intense than reality, according to almost half of the 1,100 Chinese aged 16 to 25 questioned in the online survey. More than half also said that they have hidden behind a fake persona online.

This apparent obsession with the internet could have advantages, according to statements by IAC chairman Barry Diller.

“The Chinese people seem to be way ahead of Americans in living a digital life,” Diller told Chinese students in a speech last week.

“More activity online means a more connected and a more evolved workforce - just what China needs as it moves from being the workshop of the world to a developed economy in its own right.”

A similar survey in the US seemed to show a more even balance between the online and offline worlds, according to JWT.

For example, 42 per cent of Chinese youths admitted to feelings of addiction to the internet, compared to only 18 per cent of Americans.

And 32 per cent of young Chinese claimed that the internet had broadened their sex lives, compared to 11 per cent of their US counterparts.

“China’s speedy evolution in its use of the internet is fast eclipsing that of the US. I think this is great for China, and not so great for us,” added Diller.

IAC also announced plans to increase investment in China. The firm paid $110m in 2005 to take control of Chinese travel portal eLong, only to see the company beaten into second place by local giant Ctrip in the market for online ticket and hotel bookings in China.

http://www.vnunet.com/vnunet/news/2204286/china-youth-internet-obsession

Hu’s Big Challenge: Local Provinces

Chinese Leadership Aims to Push
Central Policies in Divided Nation

By ANDREW BATSON and JASON LEOW
October 23, 2007

BEIJING — Chinese leader Hu Jintao has spent the last five years struggling to contain problems ranging from environmental degradation to corruption and food safety. Now, as he begins his second term as party chief, he has gathered around himself a new group of top officials charged with getting solutions into place across a huge and increasingly divided nation.

AP

People watched live from a Beijing street Monday as President Hu Jintao introduced new members of the Politburo Standing Committee.

Yesterday, Mr. Hu presented to the world a new lineup of the party’s top leadership — the Politburo and its decision-making standing committee — that is heavily weighted toward officials with hands-on local government experience. At the gathering, held once every five years, the party elite also ratified Mr. Hu’s broad platform of policies, one that heavily emphasizes domestic issues and the economy.

Yet many of the declared priorities of Mr. Hu’s administration — narrower income gaps, improved environmental protections and a stronger social safety net — have so far been thwarted by local governments more concerned with keeping business flowing at any price. Few local authorities have, for instance, proved willing to shut down polluting factories, or spend heavily on new health-care programs.

While China has risen to the world’s fourth-largest national economy from its sixth-largest during Mr. Hu’s first term, inequality has worsened. The average urban household now earns more than three times in a year what their rural counterparts make.

“We are keenly aware of our difficult tasks and grave responsibilities,” Mr. Hu said yesterday in brief remarks to reporters. “We will be firmly committed to development, which is the party’s top priority in governing and rejuvenating the country,” he said. He pledged a commitment to “putting people first” and making growth “comprehensive, balanced and sustainable,” a reference to concerns about environmental damage and inequality.

That is going to require the central government to strengthen its authority over local interests. Many of China’s provinces are equivalent in geographic expanse and population to European nations, and running them has always required the central government to allow a fair amount of flexibility. But Mr. Hu’s administration has increasingly displayed frustration with local officials’ reluctance to fully back its policies. Recently, his government tightened central control over some key areas, such as land sales and the environment, where local actions were producing popular unrest. More such changes are now likely to be in the works.

“On current trends, the central government will try to take back powers from local governments, rather than grant them more power,” says Chen Yufeng, a professor at Zhejiang Gongshang University. A particular challenge, Mr. Chen says, will be finding a better way to evaluate local-government officials, since the current system tends to reward those who generate fast economic growth, rather than those who have other priorities.

The party’s new leadership also reflects that concern with ensuring central policies are implemented at the local level: 18 of the 25 members of the new Politburo have experience running a provincial government, four more than in the previous Politburo. They are roughly split between those who have worked in the poorer inland or northeastern provinces and those who have spent time in the wealthier coastal areas.

The new lineup wasn’t decided by Mr. Hu alone, but is the result of months of bargaining behind closed doors by the entire party leadership. Yet it seems significant that two of the party’s rising stars are both provincial leaders who have distinguished themselves with local policies supporting Mr. Hu’s priorities.

Mr. Hu introduced two officials newly promoted to the Politburo Standing Committee — Xi Jinping and Li Keqiang — as “relatively young comrades.” They are the only members of the standing committee, the nerve center of political power in China, who are in their 50s: the other seven men are all in their 60s. That means they are the leaders now best placed to succeed Mr. Hu and other top leaders at the next party congress in 2012.

Mr. Xi, 54 years old, has spent the past two decades working in various capacities in wealthy areas on the coast, such as Zhejiang province, and for the past half year, Shanghai. He has developed a reputation as an effective and business-friendly administrator, but one who doesn’t neglect social issues.

“Xi Jinping doesn’t only focus on growth, but also on the quality of growth, and attaches importance to protecting people’s rights,” says Ge Licheng, an economist at the Zhejiang Academy of Social Sciences. Mr. Xi made that shift in thinking earlier than many other local government officials, he says.

Mr. Li, 52, has had less provincial experience, but his time spent running China’s relatively poorer regions fits into the top leadership’s focus on the worse-off. For nine years, Mr. Li was a party official in central Henan province and later Liaoning, a northeastern province that has long struggled to recover from the collapse of state-owned industry. He made a mark by, among other things, overseeing a program to provide permanent housing to more than one million laid-off workers, says Zhang Hongjun, a historian at the Liaoning Academy of Social Sciences.

Yet that emphasis on domestic problem-solving in the current leadership has made foreign policy a lower priority: The new Politburo has no official with experience in international relations aside from Mr. Hu himself, who handles them as China’s president. Some observers also have concerns about a lack of technical expertise at the highest level. While many of the new Politburo members are well-educated — several have graduate degrees — only one has experience in the financial system: Wang Qishan, a former banker who is mayor of Beijing.

And the Politburo still provides outsiders with few hints of its deliberations. The new standing committee members were presented yesterday to reporters gathered in Beijing’s Great Hall of the People, one of the very few occasions when they appear in public together. As Mr. Hu introduced them, the eight men, all dressed in dark suits and all but one wearing red ties, stood stiffly on a podium covered in red cloth. No one aside from Mr. Hu spoke, and he didn’t take questions.

–Zhou Yang and Sue Feng contributed to this article.

Write to Andrew Batson at andrew.batson@wsj.com and Jason Leow at jason.leow@wsj.com

http://www.chinaknowledge.com/commentary-analysis/article.aspx?id=175

China Tries Different Measures to Divest its Official Foreign Reserves

17 Aug 07

On August 14, news of RMB600 billion bonds to be issued soon as the first batch of special treasury bonds, topped China’s media headlines.

Just recently in June, the Standing Committee of the National People’s Congress approved the Ministry of Finance’s issuance of RMB1.55 trillion special treasury bonds for the purchase of about $200-billion foreign reserves. The foreign exchange will be used as registered capital of the newly founded state investment company, which is expected to be formally established by the end of September. The other two batches will be issued at RMB600 billion and RMB350 billion, respectively.

A day before also, the State Administration of Foreign Exchange announced on its website that the foreign-exchange quota in the current account of Chinese companies has been abolished. As a result, domestic companies are no longer obliged to convert their current account’s forex holdings into RMB.

Under the old rule, companies could retain foreign currencies equivalent to 80 percent of their previous financial year’s current-account income or 50 percent of spending. The remainder would have to be exchanged into RMB.

These are the most recent moves that China has employed in attempts to divest its vast official foreign reserves.

For individuals then, beginning February 2007, China has raised its individual annual forex quotas to $50,000 from $20,000 per year. In May, the China Banking Regulatory Commission announced that commercial banks with qualified domestic institutional investors status can issue wealth management products, which in turn can be invested in overseas stock markets. More securities companies are expected to join that investor list.

However while holding the same foreign currency reserves is prudent for one foreign-trade dependent country, China does feel its reserves are “too much.”

China’s fast-growing foreign currency reserves mainly stems from its double surplus in both current and capital accounts. In the first six months of 2007, China’s exports reached $546.7 billion, 27.6 percent higher than the same period last year and 9.4 percent higher than imports.

As a result, China witnessed a widening trade surplus, which hit a new high of $112.5 billion, an 83-percent increase compared with the same period last year.

Meanwhile, as one of the most-favored foreign direct investment destinations, its investment inflows have been growing again since 2006 after a temporary dip in 2005. Compared with the same period last year, utilized investments increased 12.2 percent, hitting $31.9 billion in the first half of 2007. At the end of June 2007, China’s foreign reserves reached $1.33 trillion.

Since China’s RMB is not fully convertible, China’s central bank, the People’s Bank of China, is forced to convert the accumulated foreign currency reserves into RMB and inject them into the financial system. This exacerbates the already-present problem of excessive liquidity.

In fact, the government worries more about the pace of foreign currency reserves accumulation, than the absolute amount. After all, China’s foreign currency reserves were only $400 billion at the end of 2003, and $140 billion at the end of 1997.

This excessive liquidity has caused China’s monetary tools, such as the interest rate hike and bank reserve ratio, to increase in attempt to rein in the economy. In the first half of 2007, China’s GDP grew at 11.5 percent, 0.5 percentage point higher than same period last year. While it is still arguable whether 11.5 percent means the economy is overheating, soaring asset prices should be of more concern.

On top of a 130-percent gain in 2006, China’s domestic stock markets rose another 60 percent by late May 2007. With an average price to earnings (P/E) of 50-60, China’s 10 percent growth hardly justifies the valuation.

Since the end of May, China’s stock markets have showed an extremely volatile pattern. On June 4, the Shanghai Composite Index dipped 8.26 percent and was even close to 3400 points the next day, over 900 points less than its peak on May 29. Yet since then, the Shanghai Composite Index continuously hits new highs, with only a temporary dip in July.

On August 13, the Shanghai Composite Index closed at a new high, reaching 4820, 1.49 percent higher than Friday’s closing. The Shanghai new high was created after the announcement of July consumer price index reaching 5.6 percent, a record-high in 10 years.

As millions of ordinary people’s fates are closely tied to the stock market, Beijing has been struggling to keep this bubble in check. Divesting official foreign reserves could be a more effective cure.

Haitong to sell stock at 38 percent discount

By Zhao Yidi Bloomberg News

Published: November 18, 2007

BEIJING: Haitong Securities, the second-biggest brokerage in China by market value, is selling shares at a 38 percent discount to its publicly traded stock in a $3.5 billion private placement, people familiar with the deal said.

Haitong will sell shares at 35.88 yuan, or $4.83, each to no more than 10 institutional investors, the three people said Friday, declining to be identified because the information is private. The price was set through a bidding process, they said. Haitong shares closed at 57.94 yuan.

Haitong follows bigger rival Citic Securities in selling stock as China prepares to give greater access to foreign firms and introduce index futures that allow investors to bet on market declines. The company, after less than four months as a publicly traded company, is raising almost as much as Goldman Sachs did in its $3.7 billion initial share sale in 1999.

“Haitong needs the money to set aside more cash for underwriting and expand its proprietary stock investment,” said Leo Gao, a fund manager at APS Asset Management in Shanghai. “The extra funds can also help it get into private equity and short selling.”

Citic Securities raised 25 billion yuan selling shares in August, taking advantage of soaring stock prices. Shares in the firm have rallied 266 percent this year, propelling it past Nomura as the largest brokerage in Asia by market value.

The CSI 300 index in China has advanced 142 percent since Jan. 1, the best performance among world benchmarks. Rising valuations and increased trading allowed Haitong to grow third-quarter profit 45 times from a year earlier, to 2.1 billion yuan.

Jin Xiaobin, the Haitong board secretary, could not be reached for comment. Calls to Huatai Securities, which is arranging the sale, were not returned.

Haitong became a publicly traded company July 31 by taking over Shanghai Urban Agro-Business in a process known as a back door listing. That allowed it to get around a rule requiring companies to have at least three consecutive years of profits before selling stock in IPOs. The Chinese government, seeking to strengthen the industry before allowing greater access for overseas rivals like Goldman and Citigroup as early as next year, has encouraged brokerages to sell shares to bolster their finances.

“Haitong needs to rapidly boost capital using the cash-raising platform of a listed company to compete with domestic brokerages and foreign investment banks when the market opens,” the company said in a July 16 filing.

Northeast Securities and Guoyuan Securities have also gone public through a process similar to Haitong’s. Many of the securities firms in the nation posted losses in 2005, during the bottom of a five-year bear market.

Haitong said in September that it plans to more than double the amount of money it has invested in equities, to 3.5 billion yuan from 1.5 billion yuan.

Jiangsu Sunshine, a textile producer, and Nanjing Xingang High-Tech, an investment holding company, said in separate filings to the Shanghai Stock Exchange that they failed to buy Haitong shares in the placement after bidding too low.

http://www.iht.com/articles/2007/11/18/bloomberg/sxhaitong.php

Chinese property

Published: November 8 2007 09:45 | Last updated: November 8 2007 19:20

Turmoil in credit markets claimed a rare Asian casualty on Thursday. Country Garden Holdings, a Chinese property developer, was forced to scrap its planned $1bn-plus bond.

Asian high-yield bonds are an obvious asset class to dump in any flight to quality. The number of international high-yield bonds from Asian borrowers is small, with annual issuance of about $15bn. Chinese property developers account for a decent slug of that and, faced with limited supply, investors have demanded increasingly high returns. Country Garden’s 10-year bonds would have yielded 10 per cent and the five-year bonds 9.25 per cent.

The sector is also a lightning rod for contagion. Chinese developers are more reliant on global credit markets than most Asian companies. Domestic banks, under pressure from a government determined to cool the real estate market, are parsimonious with loans. That has prompted bigger developers to obtain Hong Kong listings: so far this year, 10 Chinese property developers have raised $8bn of equity, according to Thomson Financial. Several have followed up with global bond issues, to help top up coffers rapidly depleted by aggressive land-bank acquisition.

With an economy growing at an annual 10 per cent and rapid urbanisation, developers look like a classic punt on growth. Ultimately, however, the business model is unsustainable: raising funds at ever higher rates to acquire ever more expensive land. The sector is highly fragmented – Standard & Poor’s estimates there are 56,000 developers – creating strong competition for available property. The government’s concerns about overheating bring an added element of regulatory uncertainty. Some red lights are flashing. While property prices shoot higher, sales are flagging – luxury apartments in Beijing are a case in point. With credit markets temporarily shutting down on them, Chinese developers face a squeeze.

Copyright The Financial Times Limited 2007