No. 385 Sept 15

Highlights from the Economist Observer, issue no. 385 September 15 2008

Commercial Banks to Rein in Loans
Cover
The EO has learned that a basket of policies currently brewing would further rein in loans by commercial banks. The policies, split between four new pieces of draft legislation that have been opened up for industry feedback, would affect both corporate and individual lending. For individuals, the monthly credit limit would be capped at 50% of their monthly salary and limitations set for loan extension period; for financial institutions, they would need to adhere to strict assessments of borrowers and projects' funding and operation background, and build up an early-warning and quality control systems, among others.
Original article:[Chinese]

Exclusive Interview with China's New Antitrust Czar
Cover
With Coca-Cola's purchase of Huiyuan Juice likely to be a first test of China's new Anti-Monopoly Law, the EO has interviewed Shang Mingshuo, first director of the Ministry of Commerce's new Antitrust Department. Ming told the EO how the new department differs from its previous incarnation at the MOF as an investigative office, clarifies its relationship to the State Council's Antitrust Standing Committee, and talked about other antitrust rules that are on the near horizon.
Original article:[Chinese]

Fifteen-Year-Old State-Owned Assets Law Enters Key Draft in October
News, page 3
A draft law on state-owned assets, which touches upon the still-formidable remnants of China's planned economy, would enter its third drafting phase next month. Li Shuguang, a scholar who helped draft the current version, told the EO that the second draft fell short in covering the types of state assets it dealt with. China's state assets could be split into three types: resource, administrative, and managed assets. The current draft only dealt with the last. What exactly should be considered "state-owned assets" has long been a contentious issue faced by legal experts roped in for drafting the law.
Original article:[Chinese]

New Rules for Foreign Acquisitions of Chinese Firms
News, page 3
Industry regulators would be striking back at foreign firms who had been channeling funds into industries meant to be restricted from foreign investment. New rules would come out by the end of the year aiming to close up loopholes by which foreign companies found or buy up local firms, exchange large sums of foreign currency into Chinese yuan, and then invest in industries such as real estate that are listed as closed-off to foreign investment. The new rulings would also attempt to deal with the proliferation of shell companies being registered in the British-Virgin Islands for the purpose of purchasing Chinese firms, and for use by Chinese firms as an intermediary hub before listing.
Original article:[Chinese]

China's Grain Reform Takes a Turn
News, page 6
A new round of grain reform will deviate from its original path of establishing a more market-based grain purchasing industry at the local level, according to the latest policy decisions by China's two main food producing provinces Jilin and Heilongjiang. Both decided to give priority to state-owned grain companies, and Heilongjiang would establish a new grain SOE to purchase most local grain storehouses. The original grain circulation reform plan launched in 2004 had declared to allow non-state-owned capital to enter the grain market and compete fairly.
Original article:[Chinese]

Democracy in the Factory
News, page 12
Unlike the bosses of sweatshops and militarized-management factories in Guangdong province's Pearl River Delta, one private entrepreneur, Guan Jianwen, has fostered a kind of democracy in his factory. Guan established a labor union through which he agreed to salary negotiations, set an eight-hour workday, and allowed workers to enjoy wedding holiday and 90-day maternity leaves. Guan said that through these initiatives he had reduced costs.
Original article: [Chinese]

Chongqing Property Scandal
Nation, page 14
Along with the rapid development of real estate in China's southwestern city of Chongqing, many high-ranking officials have been discovered to have taken bribes from the sector. The latest case involved Huang Yun, a district chief, and Jiang Yong, a former urban planning director. Huang's case was filed to the fifth intermediate people's court of Chongqing municipality on September 5.
Original article: [Chinese]

Foreign Investors: PetroChina's Share May Drop to Eight Yuan
Money & Investment, page 17
As China's A share stock index was struggling at a low of around 2,000 points, several foreign investment firms have projected the share price of PetroChina, once the most valuable firm in the world, would hit or break eight yuan in the near future. When PetroChina first "returned" last November to the Chinese mainland market after seven years of listing on the stock exchanges in Hong Kong and New York, it's A share price once hit 48.60 yuan, but recently it had dropped to around 10. Foreign investment firms, such as JP Morgan Chase & Co, had recently offloaded hundreds of millions in HK dollars worth of PetroChina shares in the Hong Kong market. All these came after PetroChina released its financial report for the first half of 2008, in which it revealed that its profit had dropped 34.5% compared to the same period last year.
Original article: [Chinese]

Hot Money Flows in through Insurance Policies
Money & Investment, page 21
The Guangdong authorities have recently investigated claims that large sums of hot money were brought into the province via investment-based insurance policies. The findings showed that the jump in "external" insurance policy holders were mainly concentrated in the Pearl Delta region bordering Hong Kong and Macau, and the sum invested between January and August this year amounted to 2.09 billion yuan. Authorities denied this was hot money; but the EO learned from insurance industry players that as the Chinese yuan continued to appreciate, residents from Hong Kong and Macau became increasingly interested in the mainland's insurance products. These "external" clients usually opted for products that provided investment bonus-sharing and were concerned with policy termination terms. Some industry players believed these "external" clients were looking for earnings through the foreign exchange gap between the mainland and these special administration regions.  
Original article: [Chinese]

China's Pension Fund Picks Managers for Overseas Investment 
Money & Investment, page 23
US-based Goldman Sachs and France-based BNP Paribas have been tapped to be among the eight global asset management firms picked by China's pension fund – National Council for Social Security Fund (NSSF) – to look after its overseas investment portfolios. Industry sources told the EO that the list of companies was finalized after a meeting in Shenzhen in late August, but the fund's media spokesperson denied any knowledge of it. The 64-billion-dollar-strong NSSF (by 2007 year-end) invited global investment managers to bid for the mandates in late May, and by the application closing date in mid-June, some 100 companies had submitted their bids, with some 20 companies shortlisted for the Shenzhen Meet. The successful bidders would help NSSF manage five types of global equity markets, namely MSCI China Index, MSCI Asia Pacific ex-Japan Index, MSCI Emerging Index, MSCI Europe Index, and MSCI World Index.
Original article: [Chinese]

Danone's Role in Coca-Cola's Biggest Takeover in China
Corporation, page 27
The pending 19.5-billion-yuan takeover of China's biggest fruit juice company Huiyuan by the world's largest beverage group Coca-Cola could be seen as yet another "break-off" between France-based Danone Group and the Chinese company, said market observers. Danone was the second largest shareholder of Huiyuan with a 22.98% stake. When Danone became the strategic investor of Huiyuan in 2006, it was agreed that the latter must give priority to Danone if it opted to sell the company. Industry sources said Danone, which was still entangled in a dispute with Chinese beverage group Wahaha, had declined to buyout Huiyuan as the latter might have faced tight cash flows following rapid expansion. In recent years, the multinational had soured its relationships with several domestic partners, whom it acquired to gain quick access to the Chinese market. Those domestic companies included Wahaha and dairy groups like Mengniu and Brightdairy.
Original article: [Chinese]

China Telecom's CDMA Wireless Equipment Bid Results
Info-Tech, page 37
Sources from within China Telecom told the EO that foreign companies had lost out to domestic ones in a recent bid for supplying wireless equipment to the company's newly acquired CDMA network. Sources said local telecommunication equipment makers like ZTE Corporation and Huawei had respectively gained 35% and 25% of the contracts, while foreign players Alcatel-Lucent obtained 20%, Nortel and Motorola got about 10% each, and Samsung had less than 2%. China Telecom had yet to officially notify the chosen suppliers of the bid results, which still needed approval at a meeting scheduled on Sept 16, to be attended by shareholders from both China Telecom and China Unicom. The latter had already agreed to sell its CDMA network to the former but legally, the transaction had yet to be completed, thus major decisions still required approval from both companies. 
Original article: [Chinese]