Highlight's from this week's issue of the newspaper:
Nov 7, 2011
Translated by Zhu Na and Song Chunling
Cash Injection for the Ministry of Railways
News, Cover
~ The Ministry of Finance (MOF), the National Development and Reform Commission (NDRC) and the China Banking Regulatory Commission (CBRC) have been instructed by the State Council to arrange a cash injection for the heavily-indebted Ministry of Railways.
~ The ministry needs to redeem 40 billion yuan in railway construction bonds and super and short-term commercial paper this month and has a further 340 billion yuan in debt maturing over the next twelve months. By the end of June 2011, the ministry's total debt stood at about 2.09 trillion yuan.
~ One railway industry employee told the EO that the completion of rail projects that have already begun to be built, will require another 800 billion to one trillion yuan in funds. The ministry has applied for 400 billion yuan in financial assistance as well as the right to issue an additional 400 billion yuan in bonds.
~ So far, the ministry has also received approval for 200 billion yuan in funds - half of which would come in the form of a loan from the China Development Bank (CDB) - one arranged in spite of the banks' reluctance to issue the loan - and the other half through the issuing of a new tranche of railway construction bonds. That bond issuance would raise 20 billion yuan more than the amount raised last year, but is still subject to the NDRC's final consent and, in any case, wouldn't cover the railway ministry's debts.
~ One person familiar with the industry told the EO that 200 billion yuan isn't even enough to cover the money the department owes various companies let alone interest payments required on loans that will mature in November or restarting work on the suspended railway projects.
~ The ministry can't survive without financial support - its "great construction leap" has left obligations worth 2 trillion yuan, and there's no sign that the funding gap can be plugged through institutional reform or by a drive to attract private capital.
~ "The ministry's large debt is the main problem. It's suffering now, but if financial assistance is rushed, the taxpayers will be harmed in the long-term," said one banking insider.
Original article: [Chinese]
Outlook for Investment in Public Housing in 2012
Cover, 2nd headline
~ This article looks at the expectations among market analysts and officals at the Ministry of Housing Urban-Rural Development (MOHURD) for how much will be invested in China's huge push to build millions of new "social housing" units in 2012. Estimates suggest that they're expecting no less than 700 billion yuan in new investment next year
Original article: [Chinese]
Unwanted Iron Ore – Stockpiles At Chinese Ports Approach 100 Million Tons
News, page 2
~ With many Chinese steel furnaces mothballed and others running down iron ore inventories, there's nowhere for importers to move the commodity after they unload ships at the country's major ports. China Iron & Steel Association (CISA) says 98 million tons are in stockpiles, representing around a sixth of the total imported in 2010.
~ Since the beginning of October, the price of iron ore at ports in Qingdao and Tianjin have been declining.
~ "China's demand is falling. China's steel companies have stopped firing their furnaces. It made sense for iron ore prices to drop. I'm expecting more declines," said Zhang Changfu (张长富), vice-chairman of CISA.
~ Large state-owned steel companies have been first to react to the change in market conditions, by seeking to renegotiate ore prices, said one employee of a large privately-owned producer from Hebei.
~ All three of the major international mining companies that dominate global trade in iron ore, have even paid rare visits to CISA, and Zhang confirmed that the association is talking to these mining giants (BHP Billiton, Rio Tinto and Vale) about changes to their pricing mechanism.
~ Those talks sent an important signal to the market, prompting a sudden fall in ore prices, amid signs that the miners and steel producer both support a new pricing agreement.
~ One of CISA's representatives told the EO that global iron ore prices are on a downward trend and that prices are unlikely to return to $180 a ton even in an upturn. The CISA representative said that the mining companies want a stable pricing system and that it was the companies that reached out to contact CISA and individual Chinese steel companies.
~ However a director from steel industry website mysteel.net, said that the miners' motivation wasn't to renegotiate the pricing system, but to gather data on China's domestic market in order to make projections about future prices.
~ Compared with Platts' index, CISA's iron ore index cannot reflect the future changes to the market at all. For example, last week, CISA released iron ore index as about $160 U.S. dollars, meanwhile Platts' released index was $120 U.S. dollars.
Original article: [Chinese]
Almost Half of Land Revenue to be Spent on Fixed Items
News, page 3
~ In this fourth part of a series of articles about how the central and local governments split China's tax take, the author focuses on revenue raised through land sales (or leases). In order to deal with the local government's over reliance on land revenue, over recent months the central government has added new rules that earmark a certain percentage of land revenue for various uses, such as 10% for social housing, 10% for water projects, 10% for education and 15% for developing agricultural land.
Original article: [Chinese]
News, page 4
~ Times are tough for China's wind power manufacturers –third quarter results showed profits falling at listed wind power companies, state-owned enterprises are crowding out private-owned rivals and quality and warranty terms are becoming more stringent.
~ After years competing only on price, turbine makers now have to adapt to more quality-savvy buyers.
~ Turbine maker Tianqi Ltd.'s (天齐股份) third-quarter disclosure revealed problems with its products, but similar issues have been well-known to manufacturers for years. "The biggest risk for wind power companies is the quality of components," says Long Xin (龙辛) from XEMC Windpower Co. (湘电风能). Many companies started mass production without adequate quality control. For example, some promoted new products based on only a few months' research, failing to flag problems with their turbines that have arisen after three years of use.
~ If many of the turbines currently connected to the power grid develop faults it will have serious consequences for the industry, and possibly for China's power supply.
~ The price of the wind power equipment and components keeps falling. However, quality issues have concerned the power companies that buy them, and so they're seeking longer warranties on their purchases; instead of the usual two years, they now want cover for three, five or even more than ten years.
~ Turbine makers have to wait until the end of the warranty period to receive the final 10 percent of their payments, and, since they also operate on profit margins of around 10 percent, business has become very tough.
~ To make matters worse for private operators, some state-owned electricity companies, such as Datang (大唐) and China Guodian (国电), are starting to manufacture their own turbines. They have access to the latest technology, and their status as both buyers and suppliers will distort competition to the detriment of the turbine-making industry.
Original article: [Chinese]
Jiangsu Province SASAC Tells its Businesses Not to Lend
News, Page 4
~ The Jiangsu Province branch of the State-owned Assets Supervision and Administration Commission (SASAC) has ordered the enterprises under its control not to lend to any businesses other than the other local SASAC companies.
~ Market experts said that Jiangsi SASAC's decision is motivated by a desire to protect the state-owned businesses from any credit crisis in the private sector.
~ A Jiangsu official said that the ban also covers entrusted loans - a form of lending, which the EO understands is used by around half of SASAC's Jiangsu businesses desparate to make money off their savings given that bonds and equity investments are banned.
~ According to economists' estimates, there are three main beneficiaries of entrusted loans: small and medium-sized manufacturing firms, the real estate industry and miners. Given the downturn in these sectors, many of these borrowers using entrusted loans will struggle to repay their creditors.
~ Some of these loans have already turned bad: for example, Sunny Loan Top Co.,Ltd (600830.SH) made a 71 million yuan entrusted loan to Hangzhou Modern United Holding Group (现代联合), which is now 15 months overdue.
~ The Jiangsu SASAC official said that loans made by non-financial companies are particularly worrying, given the secrecy of these agreements and the lack of reliable data on the total liabilities.
Original article: [Chinese]
How are China's Research Funds Really Being Spent?
Nation, page 9
~ It is already a well-known secret among researchers that research funds are often misused and wasted, said a researcher from the Chinese Academy of Social Sciences. The misuse of research funds is nothing new. According to a survey by the Chinese Association of Science and Technology, only 40% of the money appropriated for research funds is actually goes towards the projects themselves. In the past, lack of money was often blamed for restricting technological development in China, however the small amount of funds that are available are not even used for research now, according to one researcher from the Chinese Academy of Social Sciences.
~ According to a prosecutor that works in the district where most of Beijing's universities are located, there have been 17 crimes related to the siphoning of research funds since 2003, involving 21 individuals, many of which were senior academics. Many institutions, such as the Chinese Academy of Sciences and the Beijing Academy of Science and Technology have also been implicated.
~ "People claim they are competing for a project, but really they are competing for the project's research funds," says Xiao Wenkai (肖文凯), the head of an office at a local university. In many universities, the monthly salaries for lecturers and professors are only between 3,000 and 4,000 yuan. Since the professor's salary is not keeping up with the rising cost of living, many are instead are competing to be awarded research funds. In China, the labor cost for researchers is only 1/12 that of Japan and 1/6 that of Korea. The lack of legislation related to research funds also leads to misuse.
~ There are many ways in which research funds are misused. Sometimes researchers travel or shop abroad in the name of academic exchange or they found a company with the money allocated for research. Other times money is allocated for certain equipment, but much cheaper equipment is bought, therefore the institution can keep the difference. Everyone tries to spend the as much money as possible, because spending small amounts may mean less money is given to the next project, says Xiao.
~ The auditing of research institutions has begun in the past few years, but it exists only in name. Many institutions have cooperation agreements with the accounting firms, therefore both the institution and the accounting firms share the benefits of misusing funds. The manager of Liu Yang (刘浪), a five-star restaurant, says that members of higher education and research institutions spend a lot of money at his restaurant from March to May every year.
~ Increased supervision and intensive investigation is needed to put an end to this misuse of funds.
Original article: [Chinese]
Why is Shanghai the Most Expensive City in China to do Business?
Nation, page 14
~ What's going on in Shanghai - why is it the most expensive city in China to do business?
~ This articles puts the high price of doing business in Shanghai down to a newly introduced social security policy and also it doesn't offer the special incentives that other cities will offer to business in order to attract them to invest.
~ However, some business people say they are willing to accept the higher costs as the city's beauracracy is more efficient and standardized than other cities in China.
Original article: [Chinese]
Liu Mingkang's 10 Years as Head of CBRC
Market, page 17
~ Retrospective of the highlights of Liu Mingkang's tenure as chief of the CBRC.
Original article: [Chinese]
New Leaders New Challenges
Market, page 18
~ On Oct 29, new leaders were appointed to head China's top financial supervision and regulatory bodies. Shang Fulin (尚福林), former chairman of China Securities Regulatory Commission (CSRC) was appointed as the Chairman of the China Banking Regulatory Commission (CBRC), Guo Shuqing (郭树清), former Chairman of China Construction Bank has been appointed as Chairman of CSRC, and Xiang Junbo (项俊波), former chairman of Agricultural Bank of China has been appointed as the new Chairman of China Insurance Regulatory Commission (CIRC).
~ "Shang Fulin has made huge contribution to stock rights separation reform. No matter what the result will be, he has removed a big 'stone' for the development of the domestic securities market. He is honest, and has an excellent sense of balance, he dares to think big and also dares to act, he indeed has done something for CSRC." A source close to CSRC told the EO.
~ In CBRC, Shang's predecessor Liu Mingkang (刘明康) won the market's recognition by ruling with an iron fist. Some say that Shang mightn't be as tough as Liu, but others argue that Shang, who has worked with both the central bank and commercial banks, would actually be even tougher than Liu, as he would have a deeper understanding of the importance of risk prevention.
~ Guo Shuqing is a typical scholar-type official, he twice won the prestigious Sun Yefang Award, has a forthright character and he also has a very broad understanding of economic issues.
~ "There are many difficulties for the regulation of securities market. It is the time to straighten out the concept of regulation. We should change the methods we use to supervise the market and also strengthen the regulation process," said one official from CSRC.
~ He also pointed out there are four major problems with the way capital markets are currently supervised. The first is stock right separation reform, which has basically been solved. The second is the credibility issue of intermediary institutions; the third is a lack of liquidity; the fourth is the relationship between government and market. This official argued that on many occasions the government took the lead in the market, and didn't let market to play its own role, which is the most serious and difficult problem to deal with.
~ Xiang Junbo also faces a lot of challenges as he takes up the role of chief regulator of the insurance industry. One of the difficulties in regulating the insurance industry is the solvency adequacy ratio of Chinese insurance companies. The other challenge is the lack of qualified employees in China's insurance industry.
Original article: [Chinese]
Plan to Split CIC Approved
Market, page 19
~ China's State Council has approved a plan to separate the international operations of the country's sovereign wealth fund China Investment Corp. (中国投资有限责任公司) from its wholly-owned, domestically-focused unit Central Huijin Investment Ltd. (中央汇金投资有限责任公司) so that the two companies operate as separate subsidaries under the control of CIC.
~ A source has told the EO that the government will establish a new entity, CIC International (中投国际), that will focus on overseas investment, the new entity will be a wholly-owned subsidary of the CIC parent company, with the Ministry of Finance (MOF) and the People's of Bank of China also taking shares in the company.
~ The newly-formed CIC International will be separated off from Central Huijin, becoming something of a "mini CIC," though both companies will still be under the control of the larger CIC entity.
~ For more details read a fuller translation of the article here.
Original article: [Chinese]
Foreign Banks Boost Advertising Spend, Lured by China's Tycoons
Market, Page 20
~ "It's just over the last six months, that foreign banks have increased their advertising, they weren't buying advertising before," says the Zhang Yu, who works in the EO's advertising department.
~ Citi, HSBC, Standard Chartered, JP Morgan, UBS, the Royal Bank of Scotland and BNP Paribas have been amoung the prominent advertisers.
~ For example, data from market analysts meihu.com indicates that the Royal Bank of Scotland has bought 40 ads in some mainstream financial media since December 2010, whereas it was scarcely advertising at all in China before then.
~ Until now, foreign bank have struggled to make money in China. UBS for example earned less than 0.1% of 2010 global net profit in the country.
~ Last month's Global Wealth Report by Hurun calculated that there are more than a million "dollar millionaires" in China, and more than 5,000 people with $50 million or more. Foreign banks are competing to manage the assets and wealth of these millionaires.
~ "China and India are the most valued markets for Deutsche Bank," said Georg Schuh, chief investment officer of the bank's European asset management business.
Original article: [Chinese]
IT "Landlords" in China
Corporation, page 25
~ Many E-commerce companies are taking adavantage of incentives being offered by local governments to purchase land to build storage facilities. In the long run, buying large amounts of land is still considered a good deal for these cash-rich companies.
~ For those IT companies with large amounts of money at hand, now seems to be the right time to buy land. One industry source told the EO that Baidu has built a center in Shanxi province as well as two buildings in Shenzhen. The company also plans to buy more land within Beijing's Yizhuang Economic Development Zone (亦庄经济开发区). Meanwhile, Tencent (腾讯) is also investing in more land. Zhang Zhaoyang (张朝阳) from Sohu (搜狐) is focusing on second and third tier cities to build more offices.
~ Apart from offices, many companies are also buying land for business. Ninetowns Internet Technology Group (九城集团) has moved into Yizhuang Economic Zone to build an E-commerce park there. In October 2011, Amazon China started to use its operations center, which is now the biggest and most advanced in China. However, all the land is rented under the 5+2 model instead of being purchased. Therefore, Amazon will rent the land for five years and decide whether or not to renew the contract. Land purchase is not the business of IT companies, says Wang Hanhua (王汉华), CEO if Amazon China. However, Zhao Zhaoyang from Sohu has a different take on it, he believes, although personnel and creativity is the most important thing among IT companies, land purchase by IT companies will be a long-lasting trend in China. As China continues to urbanize, rents will increase. Therefore, IT companies are more likely to buy land and build their own buildings instead of renting.
~ Governments' land prices are often dependent on the function: commercial, comprehensive, residential, or industrial. The industrial land is the cheapest, however the price of land for storage for many IT companies is double that of the normal industrial land cost. An insider says that many companies buy industrial land and then use them for other functions.
Original article: [Chinese]
How China's TV Industry Will Cope with "Entertainment Restrictions"
Corporation, page 28
~ This article takes a look at the economic impact of the new "entertainment restrictions" introduced by the State Administration of Film and Television recently and what effect they will have on Chinese TV production companies and local broadcasters.
Original article: [Chinese]
