Issue Wrap No. 437, September 21

Highlights from the EO print edition, issue no. 437, September 21, 2009

China to Regulate COE's Derivatives Transaction
News, cover
~ China's State-owned Assets Supervision and Administration Commission (SASAC) is mulling over whether to formulate regulations to normalize derivatives contracts worked out between centrally-owned enterprises (COE) and foreign investment banks, the Economic Observer learned.
~ The commission argued that some derivatives contracts were misleading and others were possibly fraudulent.
~ A handful of COEs registered huge losses in the latter half of last year due to derivative contracts going wrong.
Original article: [Chinese]

Controversial Air Ticket Pricing System Collapses
News, cover
~ A new air ticket pricing system introduced by China's civil aviation industry in April this year, seems to have dissolved as more and more Chinese airlines gradually return to using the original pricing system.
~ The EO learned that the National Development and Reform Commission (NDRC) is behind the demise of the pricing system which was viewed as many as cartel pricing that unfairly inflated the price of domestic plane tickets in China.
~ The difference between the two pricing systems basically comes down to whether a discount is applied to both components of the full ticket price (the NDRC-set bench mark + the airline's floating price) or whether, as with the unpopular new system, only the benchmark price is taken in to account when working out the discount on a ticket.
Original article: [Chinese]

Centrally-ownned Enterprises Go After Local State-owned Enterprises
News, page 3
~ With encouragement from local governments, there has been a spike in the number of centrally-owned enterprises (COE) seeking to merge or acquire local state-owned enterprises (SOE), leading to more than 100 billion yuan worth of deals being agreed to this year.
~ The EO has learned that the Li Rongrong, chairman of the State Assets Supervision and Administration Commission (SASAC), recently outlined two main principles for COE to follow when considering merging with or acquiring a local SOE.
~ According to a SASAC employee, COE are being encouraged to limit their acquisitions to local companies that are engaged in the same business sector as they are, and also to be realistic in terms of the size of the deal, when attempting to merge with or acquire a local SOE.
~ Aside from these considerations, SASAC seems willing to allow COE to compete with each other in obtaining local SOE. Some commentators see the expansionary move being made by many of the COE as a tactic to make sure that they're able retain there independence in the ongoing shake up of centrally-owned companies that will see the number of such companies drop from the current 138 to between 80-100 by 2010.
Original Article: [Chinese]

State Administration of Foreign Exchange to Increase Staff Numbers
News, page 4
~ At present, monitoring and supervising cross-border capital flows has been one of the major tasks of the State Administration of Foreign Exchange (SAFE).
~ SAFE recently proposed to increase staff numbers in its branch administrative offices for overseeing the capital flows.
Original Article: [Chinese]

CIC Investing in Overseas Property
News, page 4
~ China Investment Company (CIC), China's sovereignty wealth fund, has quickened the pace of its investment in properties and bulk commodities abroad.
~ CIC recently agreed to take a 19% stake (including the right to appoint one board member) in Songbird Estates, a British property giant. Now the CIC is looking to invest in American real estate.
~ "The CIC needs to hedge risks and it's natural for it to choose properties and bulk commodities during a recession," an unnamed source close to CIC told the EO.
~ Although CIC is obviously keen to play a larger and more active role in international investing, the organization is held back by a lack of qualified employees.
Original Article: [Chinese]

More Chinese Enterprises Go Global
Nation, page 11
~ At the end of the recent 13th China International Fair for Investment & Trade in Xiamen, a coastal city in Fujian province, the Economic Observer sat down with Yang Shaojing, deputy director of China International Investment Promotion Center to talk about the country's outward investment situation.
~ Yang said some 40 foreign countries and areas had come to the fair to publicize their investment opportunities and projects to Chinese business.
~ Yang said the number of Chinese enterprises going global to seek investment opportunities is increasing gradually.
Original Article: [Chinese]

China's Nasdaq: Far From Creative
Market, page 17
~ Though claiming to be a platform for companies with creative products or business models, the Growth Enterprise Board (GEB), China's Nasdaq-style market, has found itself instead playing a role similar to that of a small and medium-sized enterprise (SME) board.
~ Close observation has found, for the seven companies that have firstly been permitted to list on the GEB, 5 of them are doing business related to traditional manufacturing industry. For example, the Beijing Lisichen company, though claiming to be a high-tech company, is in fact providing outsourcing equipment service for other firms.
~ To ensure a good beginning for the GEB, the China Securities Regulatory Commission (CSRC) has set the standard for profitability and earnings higher than originally announced. According to the most recent numbers, all applicant companies are required to have earned 20 million yuan in two years and 10 million yuan in one year, which is much higher than the standard  originally set for the GEB.
Original Article: [Chinese]

Banks Audit New Loans
Market, page 20
~ The China Banking Regulatory Commission (CBRC) has ordered that all of the four large state-owned banks and a handful of commercial banks, audit the loans they made since the huge round of stimulus lending began to flow last year.
~ Banks are required to do internal audits or "self examinations" of their own lending practices every quarter and will also be subject to two investigations every year.
~ When questioned by EO, each of the commercial banks revealed that they focus on five main areas when conducting these internal audits: whether the project's funds actually materialized, whether excessive financing was provided by local governments, the credit risk of loans taken to fund the project, the credit risk of bill financing and finally all kinds of real estate financing.
Original Article: [Chinese]