No. 405 Feb 9

Highlights from the EO print, issue no. 405, Feb 9, 2009

China to Issue 200 billion Yuan Bonds for Local Governments
Cover, lead story
China's central government is planning to issue 200 billion yuan worth of bonds on behalf of cash-strapped local governments. The EO has learned that the maturity period for the bonds would likely be three years, and the funds raised would be for public welfare projects. Local governments to receive the funding would be required to pay the capital interest; the payment would be deducted directly from local treasury account at year-end. The major criteria for funding entitlement included the size of local projects with planned investments from the central government, local developmental needs, and the capacity to repay debts. The EO has learned that such bond issuance arrangement would only be valid for 2009, and thereafter, new regulations might be introduced to allow local governments to issue bonds directly.
Original article: [Chinese]

Chinalco and Rio Tinto in Assets Sales Talks
Cover, Second Lead
China's leading state-owned aluminum maker, Chinalco, has been rushing against a February 12 deadline to seal a deal on buying stakes in global mining giant Rio Tinto's operations and investing in convertible instruments. The EO has learned that China's sovereign wealth fund, the China Investment Corporation (CIC), was also interested in getting a share of the deal. Rio has been looking for ways to reduce its 39 billion US dollar debt burden. Chinalco had a year ago acquired 9% of the mining giant and has since incurred huge losses. But Chinalco's top management had said the investment was for long term benefits and that the company would not be deterred by short-term setbacks.
Original article: [Chinese]

Day-salary Back in Fashion
Cover, Human Interest
Daily-based salaries for ad-hoc employment has made a come back in the Pearl River Delta region, the manufacturing hub of China. With reduced orders from abroad in the past months, many factories face closure or cut production lines and workers. But whenever unexpected orders materialized, companies preferred to hire temporary workers and make daily payouts of between 80 and 100 yuan. Many workers recently prefered the day-salary scheme, not only because the rate is better than monthly-based ones, but it also cut potential losses in the event their employers are cease operations. However, day-salary scheme failed to provide social security benefits for the workers, a prime reason it fell out of fashion before the global economic slowdown hit China.
Original article: [Chinese]

Special Loans for Local Infrastructure Projects
News, page 4
To boost the capital adequacy of local infrastructure projects, China has drafted a formula for its commercial banks to provide special project loans to spur local economies and development. The proposal, drafted by China Development Bank, has been submitted for fiscal and monetary policy watchdogs for deliberation. The EO has learned that it suggested banks expand its lending and provide credit to local projects already approved by the government but which have yet to commence due to capital shortage. However, as a precaution against unhealthy surges in credit approval and defaulting loans, the formula also prescribed that banks float-down interest between 20% and 30% and required local governments to provide a similar percentage of interest subsidies.
Original article: [Chinese]

Direct Application for Foreign Loans Below 10-million-yuan
News, page 4
China's top economic planner, the National Reform and Development Commission, has announced that from January 1, 2009, its provincial level agencies may bypass state approval to apply directly for foreign loans worth less than 10-million-yuan. Previously, all foreign loan applications required state-level scrutiny. The latest move aimed to ease financial pressure on local treasuries, which face reduced revenues but must increase spending to stimulate local economies.
Original article: [Chinese]

Food Security Unshakable Despite Severe Drought
News, page 5
Thanks to surplus grain harvests for the past five years straight, China's grain reserves have reached a record high, and thus supplies and prices should remain stable despite that the country is experiencing its worst drought in 50 years. Food safety agencies and market observers have told the EO that though the dry spell would affect agriculture production this year, the impact would be contained. Summer harvests for rice and wheat would likely only drop marginally if prompt counter measures to divert water to dry fields yielded results; and the harvest of corn might not be affected at all as the seeding season has yet to commence during the dry spell.
Original article: [Chinese]

Melancholic Cities During the Spring Festival
Nation, special focus, page 9 - 12
Though still nursing the pain and scars left behind by natural and man-made disasters, the residents of Shijiazhuang, Beichuan, Xiangfen, and Fuyang - struck by poison-milk scandal, earthquake, bursting dam, and epidemic respectively last year - have ushered in the lunar new year with renewed energy. The EO dispatched a team of reporters to check on the people living in these melancholic cities.
Original articlse: [Chinese 1 2 3 4]

China Funds Hit Hard in 2008
Markets, page 17
Chinese open-ended investments funds were hit hard in 2008. In 2007, 163 such funds reported paying 220 billion yuan in dividends to clients. But after the financial crisis, only 81 such funds reported paying 76 billion yuan to clients in 2008, and 31 funds reported not paying dividends to clients at all. Funds often have contractual obligations to pay out at bare minimum ratio of their profits to clients in dividends, but some funds paid out less.

Wave of Compensation Cuts in Shanghai Finance Industry
Markets, page 20
Several Shanghai banks and financial institutions are cutting yearly bonuses despite good performance in 2008. One source close to Shanghai's financial working committee says that the cutbacks come in anticipation of lower performance over the next year or longer. The working committee recently met with various local financial institutions to discuss the issue, and there was agreement that efforts would be made to cut bonuses for high-level executives. The issue has gained in profile since the Finance Ministry in January ordered state-owned financial institutions to reign in compensation, and after the recent discovery of a major compensation bump at one of the country's top securities brokers that would average to one million yuan per employee. The Shanghai Pudong Development bank, which usually issues its bonuses before the Spring Festival, has delayed three times already.

Lenovo's Founder Back in Action
Corporation, page 25
China's leading computer maker Lenovo, also the world's fourth largest, has reinstated its found Liu Chuanzhi, 65, as its chairman on February 5, 2009. The company's share prices surged over 10% the day after the announcement was made public. Market observers have likened the return of Liu to Apple's Steve Jobs homecoming in 1997 and subsequently restored the glory of Apple. Liu had handed over the helm of Lenovo after it acquired IBM's personal computer operation in 2004. Lenovo has been hit in the recent global economic turbulences and its stock prices plunged. Earlier this year, the company announced cutting staff by 11% and reducing salaries of higher management personnel. Liu has indicated that home turf and emerging markets would be his prime focus in leading the company out of the current global financial storm.
Original article: [Chinese]

The Price War of McDonald's in China
Corporation, page 31
The world's biggest restaurant chain McDonald has announced price cuts for 40% of items on its menu in China, offering up to 30% of savings for consumers. The "super value strategy", the restaurant's largest promotion in the country to date, had been made possible due to an expanded network to locally-source raw material, thus cutting cost, according to its China CEO Jeffrey Schwartz. Market observers believed the strategy was in line with the chain store's promotion in America on one US dollar meals, which generated 14% of the company's revenue and an effective measure to attract and retain customers.
Original article: [Chinese]