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Issue 622 03-06-2013
Summary:Summary: Bullet Train Construction Bidding is Back, Environmental Protection Law on Legislative Agenda and Controversial Ruling Highlights VIE Risk.

Highlights from the EO print edition, No. 622, Jun 3, 2013

Bullet Train Construction Bidding to Pick-up
New, page 2
~ Invitations to bid on for freight train production will be sent to locomotive producers in June, followed soon after by invitations to bid on bullet train production. However, the specific date for the latter is still unknown.
~ Bullet train production has been at a virtual standstill for the two years since the train crash in Wenzhou on July 23, 2011 that killed 40 people. Most railway lines and carriages under construction were delayed for safety concerns, which worried suppliers of railway equipment.
~ Because of speed reductions mandated after the crash, the number of bidding invitations issued for bullet trains has declined in recent years, while invitations for other kinds of carriages remained flat.
~ Assessment of bidding companies for their technological research and development ability, quality assurance and technology management have now been stopped. The coming bid invitations are expected to give many private companies new opportunities.
~ The biggest change for the coming bidding is that who will be invited to bid will now be decided by local railways bureaus. This is because under new railway reforms, local railways bureaus now have more management, investment and construction rights. After these bureaus decide on who can bid, China Railway Corporation will collect the information and then release the invitations.
~ It's estimated that the bidding will affect construction of over 400 new trains.
Original article: [Chinese]

Changes made to Draft Amendments to Environmental Protection Law
News, page 4
~ A draft of amendments to China's Environmental Protection Law will be submitted to the Standing Committee of the NPC for a second reading by the end of June.
~ An official with the Environmental Protection Ministry said that whether the draft could pass is still unclear, but the central government has paid much attention to it, so it is expected to be released by the end of the year.
~ It has been learnt that compared to draft of the first deliberation, changes have been made in the controversial parts, like information disclosure, public participation, imposing fines by the day from the discovery to the clearance of the pollution and environmental impact assessment.
~ Disputes have been ongoing since the decision to amend the law was made in January, 2011.
~ In September 2011, based on the first draft made by the Ministry of Environmental Protection and the proposals of scholars, the Environment and Resource Protection Commission of the NPC finished the draft amendment.
~ After several revisions were made, by the end of last August, the amendment had passed a first reading by the Standing Committee of the NPC and began to seek public opinions. It put forward several some compulsory constraints to local government on their role in environmental supervision and regulation like environment standards being included in the government performance evaluation.
~ However, after it was released, it surprised the public that many controversial issues had been laid aside and that the power of the Ministry of Environmental Protection had been weakened.
~ According to the draft after the first deliberation, the Ministry of Environmental Protection was required to work with other departments to formulate emission standards and establish the inspection system and the National Development and Reform Commission (NDRC) was responsible for the total emission control.
~ Luo Jianhua (骆建华), General Secretary of the China Environment Service Industry Association, said, "The key to amend Environmental Protection Law is to realise the environmental inspection system that has been establishing during the past 30 years in the new law and to disclose government information."
Original article: [Chinese]

Land Transfer Reform in Zhejiang
Nation, page 12
~ In April, Jiang Daming (姜大明), the new Minister of Land and Resources, listed land transfer reform as his top priority. Jiaxing (嘉兴) in Zhejiang Province is leading the charge with this reform.
~ In many rural farming areas, citizens are allotted a certain amount of farmland. But since going out to do migrant work in cities is now more lucrative than farming the land, they often opt to rent it to large agricultural companies. This is good for everyone, as the residents make more money and the agricultural companies can farm much more efficiently with their high-tech equipment. However, many farmers are hesitant to go this route since these companies have been known to withhold payment to the residents or refuse to return their land at the end of the rental contract.  
~ In April, 2008, the Zhejiang provincial government appointed Jiaxing as a pilot zone for land reform, encouraging it to explore a new model for land transfers in its 13 villages.  
~ Lu Qiao Agricultural Investment and Development Company, a state-owned investor, has served as a platform for farmers in Zhuangshi (庄史) Village of Jiaxing. Under the reform, local farmers transfer their land to Lu Qiao, which in turn rents it out to the agricultural companies.
~ A local farmer named Zhang Weixiang(张卫祥)said an agreement with Lu Qiao is actually a guarantee from the government. Now farmers don't need to worry about their payment or whether they can get the land back after the contract has expired.
~ According to the Jiaxing government, 41,942 local households have joined the land transfer pilot, resulting in 117 contracted agricultural projects and 1 billion yuan in investment. Now the per-capita annual income of farmers in Jiaxing has reached 18,600 yuan - 80 percent of which comes from agricultural income.  
~ "Land transfer is just the beginning of the rural reform in Jiaxing," said Chen Guilin (陈桂林), a deputy researcher in the Bureau of Agricultural Economics in Jiaxing. "The government has also created a model to protect farmers' interests after the land transfer.
~ According to Jiaxing government, farmers can choose to exchange their homesteads for housing in towns and cities, as well as exchange contractual and management rights on land for social security benefits.
Original article: [Chinese]

Controversial Ruling Highlights VIE Risk
Market, 17
~ A court ruling on a civil dispute involving over 5 billion yuan worth of shares and dividends of China Minsheng Banking Corporation could have an unexpected impact on China's VIE (Variable Interest Entities) structured companies.
~ The dispute has gone through several trials since 2001 and now, 12 years after legal preceedings began, the Supreme Court has handed down a final ruling.
~ The case centered on a deal between two firms that went sour and a dispute over who was legally entitled to the proceeds of an investment. Chinachem Financial Services (华懋金融服务公司), a Hong Kong based company, entrusted China Small and Medium Enterprise Investment Development or China S.M.E (中国中小企业投资有限公司), a mainland company, to invest in Minsheng Bank's stocks on its behalf as foreign investment in financial companies at the time was restricted.
~ In the final ruling the Supreme Court invalidated the deal between the two parties, saying that it "concealed illegal intentions with a lawful form." As a result the shares in the bank were ruled as belonging to the mainland company. Chinachem will receive compensation worth 2 billion yuan from China S.M.E, but China S.M.E will still hold on to 3 billion yuan. Both parties refused to comment on the decision.  
~ A Shanghai-based lawyer explained the complicated case to the EO like this: "Over a decade ago a foreign company set up a proxy company in China to make investments in sectors that were otherwise off limits to them. This proxy company, tempted by the large returns on the investment, than chose not go along with the deal and turned to the courts to back their position. Because the deal was illegal it was invalid."
~ The marathon case was full of ups and downs, but most details are still unknown to the public. The ruling has attracted the attention of foreign funds and lawyers who participate in foreign investment in China and are concerned what the potential impact of such a decision might be on the controversial issue of companies with a VIE structure.
~ Variable Interest Entities (VIE) refers to a corporate structure where an investor holds a controlling interest that is not based on the majority of voting rights. VIEs are often established in China to get around a prohibition on wholly foreign-owned enterprises working in the internet industry. The practice largely lies in a legal grey area. Many believe there are some similarities between this case and VIE.
~ "The VIE structure is more like a gentleman's agreement, mainly bound by morality. Investors can hardly get any legal protection. That's why there are a lot of disputes but seldom will these disputes go to court. A case like this will highlight the risks of these investments. When people find out that they can acquire huge interests with relatively low risk, many of them will do so. They are not saints," someone working at a private equity firm told the EO.
Original article: [Chinese]

Bond Market Weighed Down by Ongoing Investigation
Market, page 19
~ China's bond market is losing steam as an ongoing investigation into corruption has slowed marked activity significantly over the past month or so. A senior trader in the interbank bond market told the EO he hasn't had much to do recently. "Spot trading is almost impossible.
~ According to the central bank's April Financial Operations report released in late May, the volume of spot trading on interbank market fell significantly that month.
~ The ongoing investigation has already resulted in the arrest of several executives working for large financial institutions in mid-April. In late May, an executive at Harvest Fund Management was taken away by the police for questioning.
~ The central bank has released regulations aimed at tightening control of the interbank bond market following the outbreak of the scandal.
~ Recently the National Association of Financial Market Institutional investors (NAFMII), that helps to regulate the bond market, sent pamphlets to people working in the industry, explaining what kind of punishment they should expect for certain wrong doings.
~ China's interbank bond market has exploded in recent years, with outstanding interbank bonds totalling 24.4 trillion yuan ($3.95 trillion) at the end of March, up from 17.7 trillion yuan at end-2009 and 7.3 trillion yuan at the end 2005. Market participants say regulation has failed to keep pace with the growing size and complexity of the industry.
Original article: [Chinese]

Focus Media Delists
Corporation, page 25  
~ On May 25, Focus Media announced that it had completed its privatization with a $3.55 billion management buyout.
~ On May 29, Jiang Nanchun (江南春), chairman and CEO of Focus Media, said that delisting the company will be better for its development over the next decade. "We're now in an environment that allows long-term planning and reforms," Jiang said.
~ Focus Media was founded ten years ago and had been listed on the NASDAQ for eight years. Nowadays, Focus has enough capital and less demand for financing and acquisition. "In the future, Focus Media will try to use the internet and big data to develop itself," Jiang said.  
~ Focus will put more attention on technology as opposed to just products. It will put more screen advertisements in the third-tier and forth-tier cities and attach more importance to the application of technology to better achieve value in advertisements. "We're trying to analyze status and consumption habits of residents so as to offer different advertisements to different consumer groups," Jiang said.
~ According to Jiang, the privatization of Focus Media has been supported by private equity and banks. "Privatization must be a trend among China concept stocks," said Qian Zhonghua (钱中华), Managing Director of Fuxing Cultural Industry Investment (复兴文化产业投资).
~ Focus Media was one of many Chinese companies listed in the U.S. that saw its share price plummet after it was accused by Muddy Waters of fraud in 2011.
Original article: [Chinese]

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