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Issue 626 01-07-2013
Summary:Directing Capital to Support the Real Economy, China's Major Video Websites Start Producing Own TV Series and China's Revolving Door

Highlights from the EO print edition, No. 626, July 1, 2013

The Revolving Door: Executives at SOEs Seek Government Posts
Nation, Page 10
~ It's been 100 days since China's new government took over the reins. Observers note that many of the newly appointed officials that have taken up positions with the State Council, similar to the country's cabinet, were formerly executives at state-owned enterprises (SOE).
~ In recent years, SOEs have become incubators for future government officials. Researchers from the School of Economics at Renmin University of China (中国人民大学) analyzed data on promotions at SOE between 2008 and 2011, finding work performance, social networks and academic performance to be three key factors that determine advancement opportunities for quasi-government officials.
~ According to Renmin University professor Nie Huihua (聂辉华), most executives at state firms ultimately become full-fledged government officials. Because the administrative level of top leaders within SOEs is capped at vice-minister, after a while becoming a fully-fledged government official is the only avenue for further advancement.
~ One of the stated goals of SOE reform was to abolish the use of such administrative levels. However, to this day, the importance of administrative levels in SOE remains high.
~ Heng Lin (桁林), a scholar with the China Academy of Social Sciences (CASS), says China is the only country in the world that maintains such administrative levels for executives working in state-owned companies.
~ Some government officials choose to return to positions with SOEs when their political careers are coming to a close or in order to collect the higher levels of pay that comes with working for a company. Nie believes that this does not help these state-backed firms when it comes to maintaining vitality and threatens to turn some SOEs into retirement homes.
Original article: [Chinese]

Policy Makers Mulling Changes to Help Direct Capital to Support Real Economy
News, page 1
~ Banks, investment agencies, the National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT) are all waiting for a decision from key policymakers in regard to specific steps that will be put forward to ensure that capital flows through to the "real economy." The Central Bank has taken the lead on the policy initiative and is researching along with other departments how to "get capital reserves flowing and guide finance to support the real economy" (盘活资金存量,引导金融支持实体经济). After the process of consultation has been completed, the State Council will announce the new policy.
~ Other central ministries are also waiting for the central bank to make decisions to help boost the real economy. Officials from MIIT told the EO that they are waiting for the People's Bank of China and the China Banking Regulatory Commission (CBRC) to announce specific operational details. These officials said that the solution to buoying the real economy will not only require changes to monetary policy but also fiscal policy. The Ministry of Commerce also waiting to see what the Central Bank's currency policy will look like and are hoping that exporters will be given some support.
~ A crucial State Council meeting devoted to analysing and discussing economic trends is scheduled for mid-July.
~ Statistics show that the majority of the money that banks injected in the first half of 2013 did not end up in real economy. At the same time, policymakers realize that the first step towards the restructuring and development of the Chinese economy is to ensure that capital flows to the real economy. In addition, officials want to make it easier for small and medium-sized enterprises (SME) to access financing, rather than have the vast majority of funds flow to large corporations or real estate companies.
~ An official from MIIT told the EO that, although in recent years the central government have been stressing the importance of expanding support for SMEs and the real economy, not much has yet been achieved. This time, however, the central government is determined to transfer the money to these areas. The official also said that this policy would be consistently pursued in order to prevent a further slow down in the real economy and a possible fall in the employment rate.
Original article: [Chinese]

Special Feature: A Look Back on Last Week's Money Market Mess
Market, page 17-23
Last week saw rates on China's inter-bank lending market soar while the stock markets declined sharply. By the end of the week the market had steadied after the central bank announced that it would not let the situation get out of hand. The "money shortage" (钱荒), as it's come to be referred to in the Chinese press, had a series of effects on various sectors of the country's financial industry. In this week's paper we look at what happened in terms of banks, equities, trusts, insurance companies and funds during last week's market turmoil.

Stock Market
On June 25, the Shanghai index dropped 220 points, or 10 percent within six hours, and about 23 billion yuan exited to market in one day. According to Chen Li (陈李), chief strategist for UBS Securities (瑞银证券), the reason for the panic on the stock market was that investors were worried about the liquidity problem. Chen said that even though the market had a technic rebounded and a short stable period after the sharp decline on June 25, many traders are still on edge and risks remain.
Original article: [Chinese]

Bill Discounting Market
For those who work in the bill discounting market, they just experienced a roller-coaster ride of up and down during last month. Before June 2013, the average interest rate in the market was about 2.5 to 2.6 percent. However, starting from a month ago, the rate at which bills are discounted quickly grew to 4 percent. During the middle of the month, the number increased to 8 percent, or even 10 percent. The rise in the inter-bank lending rate influenced the bills market to a large degree. Several commercial banks were force to shrink their balance sheets and close down their bills discounting business. Even major state-owned banks had to face the money shortage problem, which caused bill discounting rates to rise.
Original article: [Chinese]

Insurance companies also faced a shortage of cash last month, since they needed to provide money to the commercial banks so that they could pass their mid-year assessment, and also save some for those high-return financial products. In order to increase their profits, some companies bought back their monetary funds or bonds and invested them in interest rate products. In fact, when the market is short of money, it is usually a good chance for insurance companies to make some returns of short-term investments, since they are normally well funded.
Original article: [Chinese]

Reporting Season: Real Estate Companies Boom While Steel and Shipping Slump
Market, page 22
~ It's mid-year reporting season for China's listed companies. By June 26, 920 of the roughly 2,500 companies listed on China's two main boards had released their mid-year reports. According to an analysis of the reports issues so far, 36 percent of these 920 companies reported a fall in profits on last year. In particular, companies operating in cyclical industries have seen results fall dramatically, dragging down the overall performance in the market.
~ Both the shipping industry and steel sector are dealing with a slow down in orders and listed companies like CSSC (中国船舶工业集团公司) have suffered heavy losses.
~ Yan Jian (杨建), an analyst with an investment research company, told the EO that most of the state-owned enterprises (SOEs) are involved in steel, energy or chemical industry, which are typical cyclical industries that are usually greatly affected by the economic cycle.
~ On the other hand, the results of companies operating in industries like real-estate, automobiles, electronics and public utilities are likely to exceed expectations.
Original article: [Chinese]

China's Major Video Websites Start Producing Own TV Series
Corporation, page 28-29
~ Major Chinese video portals such as Youku (优酷), Tudou (土豆), Iqiyi (爱奇艺) and Sohu TV (搜狐) have been pursuing a new strategy, producing their own content.
~ Chinese video websites have traditionally tried to expand market share by bidding for the right to screen popular content (TV series, movies, etc.) that had been made by traditional production companies. However, increasingly they have come to realization that this pattern is not the most profitable. Aside from the huge costs associated with competitive auctions for key tv series, this business is not conducive to the establishment of customer loyalty. Customers could easily switch to other websites once the auction results of their favourite shows change.
~ Producing their own content is not only a lot cheaper and helps build brand loyalty, video websites can also tailor products for product placement, which is apparently very attractive to Chinese advertisers.
~ Experts suggest that this transition from paying for externally produced programming to "home-made" content reflects the intensified competition for traditional media and changes in viewing habits of Chinese audiences brought up by new media companies. According to some research, television viewing rates in Beijing have declined from 70 percent to 30 percent over the past three years, due to the development of new media platforms.
Original article: [Chinese]

Chinese Real Estate Firms Pursue Overseas Investments
Property, page 38
~ In June 19, Dalian Wanda Commercial Properties Company Limited (大連萬達商業地產股份有限公司), a major commercial property developer in China, announced plans to invest 700 million pounds in a five-star hotel project in England.
~ In fact, more than a dozen well-known real estate companies have announced projects abroad since 2012. These investments include projects in the United States, France, Britain, Australia, Singapore, Korea and Africa.
~ Over the past year, the second largest group of foreign buyers in the US were from Mainland China and Hong Kong, spending a total of $9 billion on property, according to data from the National Association of Realtors (全美房地产经纪人协会),
Original article: [Chinese]

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