Highlights from the EO print edition
Issue Wrap No. 526, Jul 4, 2011

Guangdong to Lead Provincial Governments in Piloting Independent Issue of Local Government Bonds
News, cover
~ According to an authorative source, Guangdong and Zhejiang will be the first two provinces to pilot the independent issuing of local government bonds. Both provinces are currently in the process of drawing up the details of the bond sale. Officials from the Ministry of Finance told the EO that the two pilot areas will issue local government bonds this year.
~ Total debt for all levels of government in Guangdong, is currently more than 300 billion yuan, and the debt and liability ratios of most local governments are below the official warning levels.~ The budget division of Guangdong's Finance Bureau is working on drawing up the scheme for issuing local government bonds, and will present it to Guangdong local governments soon for implementation within the year.
~ Guangdong province is planning to issue 11 billion yuan worth of bonds. Although the amount of money involved is not especially large, an official from the Guangdong Finance Bureau said that the project was still very significant as this is the first time that local government bonds have ever really been issued.~ The authorities from Guangdong Finance Bureau told the EO, that Guangdong was chosen to pilot the program because the provincial government had been doing a good job of managing debt for many years.
~ The World Bank argues that greater financial transparency is required if local governments are to enter China's capital market and start issuing bonds. The Guangdong government is also at the forefront of efforts to improve information disclosure of government finance, which also helped in the decision to award them the privelege of piloting the local bond project.
~ Shanghai is also pushing to be included in the pilot project. "The (Shanghai) Municipal Government is also considering applying for permission to issue local government bonds, but the first thing we need to do is to identify our debt and see if we meet the requirement to issue local bonds or not." said an official from Shanghai government's finance bureau.
~ According to some insiders, the World Bank is also actively involved with drawing up plans to push ahead with local government bonds issuance in China, and they've provided a lot of technical support for the pilot project.
Original article:[Chinese]

Surprise Reduction In Personal Income Tax
News, page 2 
~ Everyone was taken by surprise on Thursday, when China's congress decided to raise the income tax exemption threshold to 3,500 yuan from 2,000 yuan, meaning that Chinese won't be taxed on the first 3,500 yuan of their monthly salaries. The surprise decision came after the standing committee of the National People's Congress had spent 3 days discussing draft changes to personal income tax law, including a provision that raised the tax threshold, but only to 3,000 yuan. 
~ Many interpreted to lifting of the threshold by an additional 500 yuan as an indication that NPC delegates were reacting to the large amount of public comment on the tax reform.
~ The NPC also voted to reduce the minimum tax rate to 3% from 5%. ~ The changes will mainly affect people aged from 35 to 45 with an average income of 4,000 yuan to 5,000 yuan. These people spend a large portion of their income supporting their families and repaying loans and will see a reduction in their tax rate to 5% from 10%.
~ With the higher threshold and lower tax rate, only 7.7% of all workers, or around 20 million people, will pay income tax, representing a reduction in government revenue of 16 million yuan.
Original article: [Chinese]

Small Businesses Suspend Work, Regional Competition Heats Up 
News, page 5
~ Small-and medium-size enterprises (SMEs) have been facing difficulties surviving since the second quarter of this year. Many SMEs from the Yangtze River delta and Chu Chiang Delta are suspending work due to increases in the price of raw materials, a shortage of workers, a dramatic increase in the cost of capital and the appreciation of the yuan. However, the most difficult problem for them is "how to ensure supply", not "how to find demand." 
~ One example is the shoe factory in Shuangyu Town (双屿镇), in Lucheng District of Wenzhou, where four fifths of China’s shoe manufacturers are located. “80% of shoes factories are shutting down this month,” said Jiangfei, the warden of this district. He emphasized that they are just shutting down, but not from bankruptcy.
~ At the same time, regions are competing with one another fiercely. Some of them rely on their policies; some rely on their resources and some rely on their services. 
~ There is more and more competition between SMEs since the market has been spread widely. According to the person in charge of Kangye Group, the shoe making industry used to be limited to Guangdong, Fujian and Wenzhou, but now the Northeast, Sichuan, Chengdu and Taizhou have all pitched in. With the increase in costs, the traditional low-margin factories have lost their advantage in East China, and it is hard for them to survive.
~ Many SMEs have now moved to Midwest China from coastal areas because the local government there has provided a preferential policy to support them, such as free use of the land and tax relief, according to Wuzhaoguang, Deputy Director General of Economic and Commercial Committee for SMEs in Wenzhou.
~ "It is a transition for SMEs, the local government has to do something to help them to move further during this period of time," said Xushundong, the Chief of Wenzhou Administration of Science & Technology.
Original article:[Chinese]

Three Problems Facing Government-subsidised Housing
News, page 6
~ China has an ambitious target to build ten million government-subsidised apartments this year. It plans to start construction of all the projects by the end of November. But there are three problems facing the construction of this policy-based housing.
~ Firstly, there are disputes about compensation for relocation and the demolition of the old apartment buildings. Some households that need to be relocated are demanding a higher price than the government is prepared to offer, according to an official in Lanzhou, Gansu Province. The State-owned Land Seizure and Compensation Regulations issued on Jan 21 this year raised expectations of higher compensation for relocated households. That regulation stipulates that if local governments cannot agree with households on compensation, officials can apply to the court for compulsory relocation, but not many cities are using this rule because local courts don't have detailed rules on how to apply for the general stipulation.
~ Secondly, the costs of construction have grown. Building materials and labor have become more expensive, raising construction costs to a level that can no longer be covered by government subsidies, according to the deputy chief of Lanzhou finance bureau. Some local finance bureaus are hoping to get financial support from higher-level governments.
~ The large-scale construction of low-income housing would squeeze the market for non-subsidized or commercial housing, which in turn would affect the land-based financing of local governments, said Zhao Xiao, a Chinese economist. The more governments build low-income housing, the greater the shortage of capital for infrastructure construction, and the more they depend on land sales for future revenue.
Original article:[Chinese]

There's Something Rotten in China's "Vegetable Basket"
Nation, Page 9
~ Other countries have bread baskets, China has a "vegetable basket" (菜篮子) – around Shouguang city in Shandong province - and it's now under threat. The area is having problems with vegetable quality and safety. The amount of pesticides and fertilizers used in Shouguang are more than four times times the national average. The land and groundwater is already polluted and the vegetables have suffered.
~ The story traces the vicious circle of overuse of pesticides and fertilizers in Sanyuan village, near Shouguang. Farmers need to use large amounts of pesticides and fertilisers because they need large yields to pay for the plastic film-covered greenhouses that they've built.
~ Shouguang's polluted land problem underlines China land shortage, and the use of fertilizers satisfies the government's need for more output and the farmer's need for income. However experts are encouraging the government to promote new fertilizing technologies and techniques in order to stop the overuse of fertilizer and protect the land. 
Original article: [Chinese link already removed from site]

The Future of Grazing Land in Inner Mongolia
Nation, page 11
~ Xilin Haote (锡林浩特), with a population of 200,000, is the capital city of Xilin Gol League (锡林郭勒盟), a prefecture in Inner Mongolia. 
~ Miners, environmentalists and the region's traditional nomadic herdsmen all stake claims to the grasslands and the future path of the area is unclear.~ According to local government sources, the development of the energy industry in Xilin Gol League has progressed in leaps and bounds in recent years. This has brought a big change to the local economy. By 2010, local government revenue had reached 7.68 billion yuan, 3.5 times what it was in 2005.
~ Xilin Gol League has both benefited and suffered from its coal deposits. There are many open cast coal mines in the area. "The black dust is all over the place when the spring winds arrive and there is little grass" said an official who works within the building of the local government administration office.
~ The business of grazing livestock is being hurt due to the deterioration of grasslands and the policy of "balancing the grassland and livestock" (草畜平衡) carried out by the local government. 
~ The livelihood of the herders has been effected by the deteriation of the grasslands and also increases in the cost of living. The local government is trying to organize multiple households of herder to settle down together in order to reduce their living costs.
Original article:[Chinese]
 

Wenzhou Prepares for the Rising Generation of Entrepreneurs
Nation, page 12
~ A number of new business associations made up of members of the "second-generation of entrepreneurs" who are also commonly refered to as China's "second-generation wealthy" were founded in Zhejiang Province last month. ~ Though these kind of organizations, even in the famously entrepreneurial Wenzhou region, are rare, they're a sign that locals are beginning to think about the generational shift that will need to take place over the coming 10 to 20 years.
~ The members of these new associations are normally around 30 years old and most of them have studied overseas, according to the secretary general of one association in Wenzhou. 
~ According to a survey of Wenzhou business people conducted by the local business association, 72% of private business owners would prefer to pass on their business interests to their sons and daughters.
~ Due to the generation gap, the young and the old have different ideas on how best to run a business. The older generation has more experience but maintain conventional thinking, while the younger generation learned managerial expertise from overseas but are criticized for not being down to earth, said the director of one second generation entrepreneur association in Jinhua City. 
~ Some enterprises have achieved remarkable progress when they are transferred to the second generation owners.~ In terms of how they invest their returns, although they're also keen to keep expanding the family business, many members of the "second generation of entrepreneurs" are more interested in investing in property, wealth management products and small loans. 
Original article:[Chinese]

Chaos in China's Credit Rating Industry 

Market, page 17-18
~ The creditworthiness of many Chinese companies is overrated, said Xu Tianshi, the senior managing director of Standard & Poor. 
~ By the end of 2007, debt issued by urban investment corporations at municipality level was still receiving a rating of A+, whereas by 2010, many of these ratings had been raised to AA. In 2011, some of them were even at AA+.
~ On Jun 23, the Dagong Global Credit Rating Co. Ltd. raised its credit rating for Yunnan Investment Holding Group Company Ltd. to AA+. However, its asset-liability ratio was 71% by the end of 2010, and its core-asset, the Yunnan Power Investment Corporation, is going to be taken over by Yunnan Energy Investment Corporation.
~ An employee of the credit rating corporation says that raising credit ratings can help to win and keep customers.
~ An insider from the credit rating industry says the issuer pays model, where companies pay fees to the agencies rating their bonds, is the main reason for the inflated ratings. Credit rating agencies are motivated by profits and lower the rating criteria for their customers. 
~ The National Association of Financial Market Institutional Investors (NAFMII) have founded China Credit Rating Corporation which is trying out the investor pays model under which the credit rating fee is paid by investors.  
Original article:[Chinese]

Other Stories in the Market section:

Has the RMB Stopped Rising Against the Dollar? 

Bulk Commodities: Great Changes Ahead

Pingan Bank Approved to Acquire Shenzhen Development Bank

Little Movement in China's Stock Market Expected over Next 6 Months

PE Reaps Huge Profit from Chinext 

National Audit Office Investigates Shanghai International Group

Mutual Fund Face Losses in 1H

Futures Industry Begins Second Round of Restructuring

Personel Shake Up at China's 3 Largest Mutual Funds

Made in Italy by Chinese: A New Look at the Chinese OEM

Corporation, Page 25
~ Is "Made in China" still suspicious? The answer is yes, according to the experiences of Shi Jiheng, the chairman of the Xinxiu Group Co. Ltd, Zhejiang, and Sun Yafei, CEO of Fifth Avenue Globe Inc.
~ Although there have been Original Equipment Manufactures in Zhejiang and Guangdong since the 1980s, some customers still prefer products made outside China, which makes Sun wonder why Chinese consumers can’t accept a product that is made in China even when brands such as Prada are happy with it. After his visit of Chinese OEM factories for international brands like Burberry and Armani in China as well as Italian factories, Sun finds that the “Made in China” OEMs are professional and experienced, with advanced equipment, dust-free workshops and strict inspections by their clients at international brands. Since labor in Italy is expensive, Italian factories sometimes outsource their orders to other factories, including Chinese manufacturers in Italy who employ experienced Chinese workers – “made in Italy by Chinese”.
~ Compared with other countries, OEMs in China have advantages such as a mature supply chain and a large domestic market. Shi said that many OEM factories develop fast when they try to meet the high standards of international brands. However according to Shi, China’s manufacturing industry is still too dependent on the international market and lacks its own international brands. 
Original article: [Chinese]

Interview with Léo Apotheker CEO and President of HP
Corporation, page 31
~ The EO talks to Léo Apotheker, the CEO and president of HP about how he plans to maintain the company's impressive growth rate while at the same time transitioning to a new corporate structure.
~ Apotheker also talks about his meeting with Li Keqiang, one of China's vice-premiers.
~ Apotheker also told the EO that his company would be releasing the TouchPad in the China market some time after it's European and North American release date of Jul 1, 2011.
Original article: [Chinese]

Other Stories in the Corporation section:
 

From an SOE to a Diageo Subsidiary: The Story of Sichuan Swellfun 

Tencent and Baidu Invest Billions in E-commerce

An Institutional Investigation into Tempus

BYD IPO Raises Less than Expected

 DHL-SINOTRANS has given up on China's courier industry, and sold three companies for 100 million yuan, which is 200 million yuan less than it paid to buy the businesses.

Shenhua Group's gas project in Ordos, where it has already invested 20 billion yuan, hasn't yet started.

Sinosteel Corporation says its decision to suspend the Koolanooka and Blue Hills projects was made independently

Japan's MUJI has decided to open 20 stores in China this year

Government May Offer New Incentives for Car Buyers
Automobile, page 33
~ A week ago, the State Council hosted a small conference on the automobile industry. An industry source told the Economic Observer that the conference was mainly about the future of automobile industry and incentives for the sector.
~ According to the source, Beijing’s restrictions on car purchases will not be abolished in the short term, but other cities are being discouraged from introducing similar restrictions on car purchases.
~ In order to revive falling car sales, the government may introduce new incentives. The most likely policy will be to increase subsidies for trading-in old vehicles, says the source. 
~ Experts say the automobile industry isn’t only suffering because of the restrictions on new purchases, but also because of taxation on buying and owning cars.  The high oil price has also discouraged would-be car buyers.   
Original article: [Chinese]

Huang Yasheng: Amazing China
Business Review, page 41
~ The EO talks to Huang Yasheng, a professor in international management at the MIT Sloan School of Management,  about his latest book, How Unique is the "China Model"? (“中国模式”到底有多独特？)
~ Huang argues that China's economic development model is by no means unique and that both the succesful and unsuccesful elements of China's experience have been witnessed in other parts of the world.
~ Huang also questions the firm distinction that many make between Eastern and Western economic ideas, arguing that we should evaluate economic proposals on their efficacy. He also makes the point that many regions in China, including Guangzhou and Wenzhou, cannot be seen to have been developed according to the "China Model," as most of their growth was driven by private investment.  
~ Huang also argues that over the past three years the position of government-backed capital has increased in relation to that of domestic private capital and overseas investment, which he says has been restricted.
~ When asked his opinion about Jack Ma's recent move to break an agreement with Alibaba investors, Huang chooses to blame policy makers who put limits on foreign investment.
Original article: [Chinese]

Interview with Henry Kissinger
Observer, page 45-46
~ In this week's issue of the EO we have a partial transcript of an interview that Tian Wei, a host with CCTV English, conducted with former US Secretary of State Henry Kissinger.
~ Tian Wei asks Kissinger whether China and the U.S. are enemies or friends? Strategic partners or competitors?
~ Kissinger relates how when the U.S. overtook the U.K. as a global power in the 20th Century, rather than a conflict emerging between the two powers, they were able to become partners and he states that he hopes that the U.S. and China can do the same.
Original article: [Chinese]