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Issue 547 05-12-2011

Highlight's from This Week's Issue of The Economic Observer:
Dec 5, 2011
Translated by Zhu Na and Song Chunling

Muddy Waters' Fearless Founder

News, cover
~ Carson Block, the founder of Muddy Waters, has targeted seven Chinese companies, honing in most recently on Focus Media. In statements at the end of November, the short-seller accused the advertising company of exaggerating the scale of its network of displays screens, or LCDs, and said its executives were guilty of insider trading.
~ Those claims were rejected by Focus Media, but Block tells the EO that he has records and video footage to back them up.
~ Block said that all the funds deployed by Muddy Waters belong to its research team and dismissed allegations that his firm cooperates with hedge funds.
~ Block said he is "very angry" about an opinion piece that appeared on the Wall Street Journal's Chinese site that claimed Muddy Waters was investigating Sina and prompted a 10 percent slump in the internet company's stock. Muddy Waters hasn't "done research into Sina," he said.
~ Many other Chinese companies have fallen prey to Muddy Waters. For example, Dalian Rino Group (Nasdaq:INO), was delisted within 23 days of a Muddy Water's report being released. None of those companies have taken legal action against Block, and he suggests that the greater scrutiny of these companies' accounts during any lawsuit would have sent their stocks even lower.
~ In a break with his usual approach, Block says that now he's also looking for Chinese stocks to recommend.
~ Andrew Left, the founder of Citron, another short-seller, expects the sector to contract as the opportunities disappear.
Original article: [Chinese]

NDRC Mulls Settlement with Telecom Giants
News, cover
~ The National Development and Reform Commission (NDRC) has confirmed that they have received an application from China Telecom and China Unicom to put an end to the recently-launched investigation into the monopoly behaviour of the broadband internet arms of the two companies, they also received a plan from the company that outlines how they intend to change their behaviour. NDRC officials told the EO that any decision to halt the investigation would have to be made in accordance with the relevant laws.
~ China Telecom has admitted problems with its pricing and a failure to meet standards for interconnection to other networks. 
~ A person familiar with the situation said that China Telecom's admission that they had not met the requirments is similar to a drug company admitting that its products had fallen short of standards, which is in effect admitting that they have already broken the law.
~ A source close to the NDRC said its investigation was concerned with the telecoms giants' behavior, rather than their status as monopolies.
~ Shu Huaying (舒华英), an academic at Beijing University of Posts and Telecommunications, said that China Telecom and China Unicom attained such market dominance as a consequence of government policy that barred other firms from entering the fixed-line broadband sector. Shu says that in order to break up the power of the two firms, regulators should allow competitors to operate in the sector.
Original article: [Chinese]

Discrimination in China's Civil Service Exam

Nation, page 9
~ Approximately 960,000 people sat China's annual civil service examination on Nov. 27, meaning the average chance of getting offered a postion was 53:1. However the written examination is simply the first hoop that applicants have to jump through in order to get their hands on that elusive "golden rice bowl," after the exam there will be an interview, a physical and a political investigation (政审). Discrimination occurs in each of these additional steps.
~ Much has been done to make sure the written exam is fair and open in terms of not discrinating against a candidate because of their gender, whether they're from a urban or rural background or their ethnicity, says Nie Shengkui (聂生奎), the director of the examination and acceptance department of the State Administration of Civil Service in a recent interview. This year also marks the 20th year since China passed regulations requiring equal payment for men and women. However a recent investigation led by researchers from China University of Political Science and Law (CUPL) shows that much discrimination still takes place during the examination process.
~ Li Feng (李丰) participated in the examination in Shaanxi in 2010 and ranked 2nd after the written exam and the interview. However he was rejected after a physical examination revealed that he had hepatitis B, even when a subsequent physical examination showed that he did not have the virus. Another case involved a woman called Wang Ying (王莹) was rejected for a position in the Jiangsu civil service during the political-stage of vetting candidates because she had "violated the one-child policy." Wang had "wedded" in 2008 and had a baby the following year - but they only officialy registered their marriage three months later, which led to the accusation that Wang had a child before marriage and thus had violated the country's one-child policy. In 2010, a woman surnamed Chen from Taizhou (泰州) also had her application rejected on the same grounds. All three of these individuals lost the cases they brought to court to contest the decisions.
~ Aside from discrimination on health grounds and the invasion of people's privacy, the research done by CUPL also gives examples of other forms of discrimination that take place during the political investigation. These include cases of some bureaus only accepting candidates who are born in the same province.
Original article: [Chinese]

China's Banks Find a Way Around Regulator's Orders
Market, page 17
~ In late November, China's banking regulator informed banks that they were to cease offering short-term financial products which only last for a one-month period. In repsonse, the banks quickly launched new financial products which last for 31 days.
~ In fact, by extending the earlier ban on wealth management products which matured in less than 7 days, to new one month rule, the banking regulator hoped to put an end to the common industry practice of attracting deposits by offering high interests on short-term financial products in order to meet end-of-quarter or end-of-year capital adequacy requirments.
~ However, the new regulations haven't done anything to change the situation and there are still many short-term financial products being sold.
~ The EO learned that two weeks after the ban had been issued, all kinds of short-term financial products with maturities of less than one month were still being issued in the market. Both the larger state-owned commercial banks and the small and medium-sized joint-stock banks were issuing these financial products.
~ Doctor Cao Wen (曹文), an expert studying bank competitiveness, said that towards end of the year, the level of deposits not only determines a bank's performance report and profits, it also will influence the amount of loans and the number of clients that they will do business with the following year. Meanwhile, the bank's ranking, staff salaries and bonuses will all be influenced by the end-of-year performance report.
~ "Banks are also very helpless, if the assessment system doesn't change, then it will be difficult for them to change the current situation [in the bank industry]. Banks are actually not willing to against the order of the regulator," Cao said. In other words, the regulator issues the ban, but, in order to survive, the banks have little choice but to disobey the order.
Original article: [Chinese]

Christmas Lull: Big Losses in China's International Air Cargo

Corporation, page 28
~ 17 yuan, this was the domestic air cargo price transporting one kg freight from Shanghai to U.S this September, the lowest price witnessed in recent years. Although the price has increased slightly in early December, it is still not enough to cover the average per/kg transportation costs of 23 to 24 yuan.
~ Two or three months before Christmas every year is the traditional peak season for China's international air cargo industry. But this year the Christmas peak season is unusually quite. A common feeling of the major air cargo enterprises is that "the volume of freight is very small."
~ Since the second half of this year, the air cargo and mail traffic volume has continued to decline, with monthly volumes falling three months in a row since August, when compared to the same period last year.
~ The direct reason for the recent air cargo downturn is that the decline in the demand in Europe and U.S. have led to a slow down in China's export. Especially for the electronic products exported to Europe and America.
~ According to the analysis by Wang Xin (王欣), the vice president of the Greater China Office of Roland Berger Strategy Consultants, another reason for the decline in air cargo volume is that some products which used to be able to afford higher transportation fees by air, have now shifted to shipping due to the slow down.
~ According to an industry source, since this year the international business of several major domestic cargo airlines have all been making serious losses, in the rage of several hundred millions of yuan.
~ The fierce competition from foreign airlines and the profit squeeze from freight agencies have put China's air cargo industry in a difficult position.
~ The amount of carriers who are competing to offer their services for less freight, has led to a price war among the major enterprises operating in the industry.
~ Those who have benefited the most from the competition is not those who need to ship goods by air, but the agents who help to book air freight. For example, the 17 yuan per kilo price for transporting goods from Shanghai to the U.S. quoted above, is only the wholesale price paid by agents, once the agent fees have been added, those looking to transport goods will probably have to pay 27-28 yuan per kg.
Original article: [Chinese]

Focus Media Seeks to Clear the Waters
Corporation, page 30
~ "We've asked two independent research institutes to look into Focus Media's LCD screen numbers and deliver a report by the middle of December," Focus Media Deputy Director Ji Hairong (嵇海荣) told the EO in an interview.
~ Although Muddy Waters says Focus Media pledge is just an empty promise, Ji insists that the independent researchers' revised figures "could only be more, not less [than Focus has claimed]."
~ Unlike Muddy Waters' other targets who kept their silence, Focus Media has gone on the offensive. "Focus Media must strike back with the truth and facts and hit the short-sellers. It is not only about Focus Media's reputation, but also the reputation of China stocks," says Ji.
~ Ji gives his defense against Muddy Waters's claims and discusses his company's communications with shareholders. When asked whether Focus Media will take legal action against Muddy Waters, Ji says he is consulting U.S. and Chinese law.
Original article: [Chinese]


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