Highlights from the EO print edition, No. 556, Feb 13, 2012
Guo Shuqing: How About we Drop Approval Procedures for IPOs?
News, Cover
~ The new chairman of the China Securities Regulatory Commission (CSRC), Guo Shuqing (郭树清), recently raised a crucial question at an internal meeting asking, "is it ok for an IPO not go through an approval procedure?" One offical from the CSRC told the EO how he had been surprised by the statement and how he admired Guo for his courage and willingness to reform, however he also shared his concerns that Guo's reform will no doubt face a lot of opposition.
~ Guo, who has only been in the position for a few months, has launched a series of reforms such as improving the delisting system for companies listed on the second board, requiring listed companies pay dividends, developing corporate bonds, working to eliminate illegal activities in the stock markets, promoting long-term funds to enter the market and, most importantly, making the IPO approval process more transparent.
~ Guo preaches the principles of "openness, fairness, and impartiality," all of which can be seen through his actions thus far. He also promotes and respects market orientation.
~ Yan Xiaoqing (阎小庆), the Vice President of HFT investment Management Co., Ltd stated that, in keeping with what many market participants had expected, Guo has enhanced the role of the market and has reduced government intervention.
~ However, some market participants reacted to Guo's push to simplify the IPO approval procedures by noting that even given the strictness of the current system, many cases of fraud still occur, which leads them to worry that if the process is left to the market to decide, will there still be a reliable legal environment that ensures that information disclosure and market transactions will be fair and just. After all, the current cost for companies found to have been involved in illegal activities is very low.
~ An official working with the CSRC told the EO that Guo's reform initiatives will face an enormous amount of opposition, particularly from the officials whose job it is to approve the IPOs.
Original article: [Chinese]
Local Governments Ranked According to Spending on Social Services
News, page 2
~ Since 2011, spending by local government began to be examined and ranked, allowing higher authorites to compare local government spending on "livelihood issues" (a Chinese term that basically equates to social services) between regions. According to recently calculated figures from last year, local government expenditure on livelihood concerns in various cities and provinces varied from 70 to 80 percent of total governmental outlays. This year, spending on these livelihood items will be singled out as one of the standards by which local governments are ranked by higher authorities.
~ Xu Shuna (徐曙娜), a professor at the Shanghai University of Finance and Economics, explained that there isn't an standard academic definition for what "livelihood expenditure" actually entails. Xu said that these rankings are more about encouraging local governments to focus more attention on increasing public expenditure rather than seeking to attract investment. A local official told the EO that "it's uncertain whether the rankings will be published, but the data will definitely be used to compare the performance of provinces."
~ The Ministry of Finance (MOF) has divided livelihood expenditures into 13 key aspects: education, science and technology, culture, sports, media, social security, employment, healthcare, etc. On average, most provinces will spend more than 70 percent of their outlays on such livelihood expenditures, while provinces in western China can spend up to 90 percent of their budget in these areas. The problem, however, is that although local governments have calculated what proportion of their budget has been allocated to social services, not all provinces have done so according to the 13 criteria laid out by the MOF, with various provinces using different standards when calculating their "livelihood" spending.
~ While cities like Chongqing, Shenzhen and Ningbo have argued that all cities should use the same criteria when assembling their figures, other governments have argued that the amount of spending on livelihood issues should be calculated in such a way that residents can believe that the numbers reflect the real situation.
~ Xu explains further that the basic function of local governments is to provide public services and therefore, aside from a small allocation to subsidize enterprises and spending aimed at promoting investment, all other expenditure should be considered as "livelihood spending".
~ Liu Shangxi (刘尚希), an official from the Ministry of Finance, said that "[for local governments] to make a big deal of the proportion of spending that goes on social services ... is misleading," since spending of anything less than 100 percent doesn't really make sense.
Original article: [Chinese]
Coal Price Fall Sharply as Electricity Demand Declines
News, page 3
~ The price of thermal coal at many ports including Qinhuangdao and Caofeidian has fallen sharply recently. Coal prices have fallen for 13 weeks in a row, with prices for a ton of 5,500-kilocalorie coal falling as far as 30 yuan below the price ceiling of 800 yuan per ton that was set by the National Development and Reform Commission in December last year.
~ The price of thermal coal in the Bohai area has also dropped 74 yuan over the past 13 weeks, a decline of almost 10 percent. Prices for ship-borne coal have also hit an all-time low. Given that coal reserves at both the downstream coal-fired power plants and also at ports remain at high levels, all the signs are suggesting that coal prices will continue to decline.
~ In addition, given the fall in demand for electricity and the China Electricity Council (中电联) along with other institutions have forecast that the growth in energy usage will slow this year, making it more likely that there will be a slowdown in China's economy at the beginning of this year.
~ "In general, the period from December to March is considered a low-season for the electricity and coal business and there have been similar price falls in the past. But it's rare that we see a consecutive decline in coal prices that lasts more than ten weeks," Li Zhaoli (李朝林), a researcher from the China Coal Transportation and Sales Society told the EO.
~ Other analysts said that the fall in coal prices is taking place against the back drop of the global economic slowdown, which has weakened market demand, with bad weather effecting iron ore production in Australia and Brazil also adding to likelihood that recent falls in the price of coal will continue.
Original article: [Chinese]
Chinese Agriculture Goes Global
News, page 4
~ The Chinese agricultural industry is speeding up the pace of its engagement with international agricultural markets as more policies aimed at encouraging companies to pursue "Going Out" (走出去) policies are released.
~ According to the Strategic Plan for Agricultural "Going Out" (农业‘走出去’战略规划) drafted by the National Development and Reform Commission (NDRC), Chinese enterprises investing in "agriculture, forestry, and fishery" in foreign countries will benefit from up to 30 million yuan in fiscal and financial support, in addition to tax breaks and help with insurance.
~ The EO has learned that some of the centrally-administered state owned enterprises and local-level state-owned agricultural companies with their ears to the ground, have begun to compete for access to government funds. Some local governments are also making regional plans to support the global expansion of agricultural companies.
~ As China's largest production base of commodity grain, the Heilongjiang Agricultural Reclamation Administration (黑龙江农垦总局), plans to build "foreign reclamation areas" of more than 40 million mu (2.67 million hectacres) in Russia, Brazil, and the Philippines by 2015.
~ The Chongqing government hopes to establish an additional five production bases in Brazil, Argentina and Canada to grow soybeans and rapeseed over the coming 4 years. The EO also learned that the China National Cereals, Oils, and Foodstuffs Corporation (COFCO 中粮集团) will expand their foreign trade in soybeans, wine and sugar, while the China National Agricultural Development Group (中国农业发展集团) will focus on agricultural and fishery resources in Africa, South America, Australia and Southeast Asia over the next three to five years.
~ The export of Chinese agricultural products has been slowly emerging, while China has also been increasing imports. According to the latest data from the Ministry of Agriculture, the increase in prices paid for agricultural imports, China's agriculture trade deficit has rose to 34.1 billion US dollars in 2011. More than 90 percent of high quality vegetable seeds are also imported from foreign countries.
~ Currently, most Chinese investment in agriculture that goes abroad is led by enterprises. Chinese companies have invested in cooperative agricultural resource developments in southern Asia, Russia, Africa, Central America and South America, but the size of the investments has remained modest. A high-profile 2.5 billion yuan investment in a Brazilian soybean base by Chongqing Grain Group (重粮集团) attracted a lot of attention domestically when announced as it was the largest overseas investment to date by a company operating in China's grain industry. The Chongqing Grain Group will send back 2 million tons of soybean from its base in Brazil this year, and that could climb to 10 million tons over the next few years.
Original article: [Chinese]
No Free Ride on Chinese Expressways
Nation, page 10
~ The Hujia Expressway (沪嘉高速) has been merged into the city "express route" and become the first free expressway in China. However, the case of the "Hujia Expressway" is special and is not likely to be followed by others, as local governments are still under heavy financial pressure and serious management issues related to the toll roads remain.
~ Work began on the Hujia Expressway in 1984 and it was completed in 1988, making it the first expressway on the mainland, with a total investment of 230 million yuan. However since 2000, Shanghai representative to the National People's Congress (NPC) have been urging the state council to put a stop to the collection of tolls on the road, as the amount of tolls collected has already far exceeded the original 230 million yuan investment. In 1995, the business and management rights to the expressway were transferred to another company and from the transaction we can see that the value of the road had increased to approximately 1.8 billion yuan.
~ In 2006, the National Audit Office (NAO) released a report that revealed that in Beijing and 11 other provincial-level administrative regions, there were 35 expressways that had been accepting tolls in excess of the mandated time period and that some toll roads had collected more than ten times the original investment needed to construct the road in tolls.
~ The construction and operation of expressways has put a heavy financial burden on local governments. According to the data collected from 30 provinces last year, the total debts for toll roads that are being financed by loans stood at 2.29 trillion yuan. The 286 billion yuan in tolls that were collected last year were mainly used to service debts. While after adding the management and maintenance costs, some provinces even suffered a loss from their road toll operations.
~ Because of this lack of funds, the right to operate of freeways has been shifting between governments and companies over the past 20 to 30 years. For nine years in the early part of last decade, Shanghai experimented with drawing on private investment to fund the construction and operation of freeways, until investigations into Chen Liangyu (陈良宇), the former party boss of the city who was sentenced to 16 years in prison on corruption charges in 2008, which revealed corrupt relationships between government officials and companies, put a stop to the practice and now the management of the roads has largely returned to state-owned companies.
~ Aside from concerns about whether local governments have the funds to invest in the construction and management of expressways, the ability of SOE to efficiently manage the expressways has also been questioned. In fact, chaotic management is often given as the main reason for much of the losses. Despite the Huhang Expressway (沪杭高速), which was completed in 1998 at a total investment of 5.7 billion yuan and connects Shanghai and Hangzhou, being one of the busiest expressways in the country, it operated at a loss before 2002. One of the main reasons for the losses was the poor management of the toll road by a SOE. When a private company took control of the road in 2002, revenue shot up and maintenence costs feel sharply
~ While it’s still not clear what methods will be applied to reform the management of expressways in China, Yang Jianwen (杨建文) from the State-owned Assets Supervision and Administration Commission in Shanghai thinks that state-owned assets will still remain the dominant investor.
Original article: [Chinese]
Postal Savings Bank Seeks More Capital but Likely to Shun Foreign Investors
Market, page 17
~ The EO has learned that the Postal Savings Bank of China (PSBC 中国邮政储蓄银行) was given approval on Dec 31 last year to reform its share holding structure and as of Jan 21, the company has officially changed its name to "China Postal Savings Bank Co., Ltd" (中国邮政储蓄银行股份有限公司). The move follows the announcement that the bank's parent company has been given the green light to list another of its subsidiaries, the China Postal Express & Logistics Corporation, on the Shanghai Board.
~ PSBC is a commercial retail bank that was founded almost five years ago as part of reforms that saw business operations hived off from China's postal regulator. The bank has more branches than any other bank in the country. It operates under the control of the China Post Group Corporation which in turn is administered by the Ministry of Finance. By the end of 2010, the bank had 544.3 billion yuan worth of various loans on its books, while deposits at the banks had increased by almost 25 percent on the previous year to 3.26 trillion yuan.
~ In 2010, the bank made 11.4 billion in net profits and possessed assets of over 3.3 trillion yuan. To provide a comparison, China's Bank of Communications, often considered China's 5th largest bank after the "Big Four," had assets of 3.9 trillion and made profits of 39 billion over the same period. A smaller bank like China Merchants Bank with assets of only 2.4 trillion yuan, was able to make 25.7 billion in net profits that year. As of March 2010, China's largest bank by profit and market capitalization (ICBC) had assets of RMB 12.55 trillion.
~ When it was first established, the PSBC committed itself to providing services to both urban and rural areas, to supporting agriculture and also to paying attention to providing financial services to small and very small businesses. It is often referred to as "China's Wells Fargo," due to the fact that like the American bank, it also specializes in providing small loans to rural customers.
~ PSBC has many obvious advantages, including the fact that its loan-to-deposit ratio is currently less than 20 percent; the proportion of bad loans on its books are extremely low and the banks share of total deposits is significant.
~ However, there are also problems need to be solved. The EO learned that the audit result by National Audit Office shows that the postal savings bank itself has various problems in relation to its corporate management.
~ According to an unnamed source, many strategic investors are interested in purchasing a significant share in the bank. Among foreign investors, J.P. Morgan has shown the most interest. But another source told the EO that the investment foreign capital may not be the bank's first choice, on the contrary, the China Post Group (the bank's parent company) may be more interested in attracting investment from large domestic financial institutions.
Original article: [Chinese]
iPad Trademark Battle Heats Up
Corporation, page 25
~ The trademark battle between Proview Technology (Shenzhen) Co., Ltd. (唯冠科技（深圳）有限公司), a Shenzhen-based electronics manufacturer, and global computing giant Apple is spiraling into an all-out war.
~ Proview, a Hong Kong-listed maker of computer displays, owns the iPad trademark through its Shenzhen unit and has been unable to reach an agreement with Apple over use of the name. As the dispute over who owns the trademark heats up, officials from local-level administrations of industry and commerce in some Chinese provinces have started to investigate stores that are selling Apple's iPad, some of these officials have started seizing iPads.
~ In April, 2010, the Shenzhen Intermediate People's Court accepted Apple and IP's (IP Application Development in Britain) complaint against Shenzhen Proview Technology, claiming that they own the iPad trademark in mainland China.
~ After three hearings were held in January, August and December last year, the court rejected Apple's appeal in December and Apple has since appealed to a higher court.
~ If the final appeal, which is to be heard by Guangdong Higher People's Court, affirms the original judgement handed down in December, outlets in mainland China might be prevented from stocking Apple's tablet computer and Apple may also face a fine of over 30 billion yuan.
~ The administrations of commerce and industry of some cities in Shandong and Jiangsu Provinces have begun to investigate stores selling iPads. Officials in other cities say they are watching developments closely.
Original article: [Chinese]
Is Shanghai Preparing to Relax Real Estate Restrictions?
Property, page 37
~ At the Shanghai Municipal "two sessions" held in the mid-January, Shanghai Mayor Han Zheng (韩正) announced that the Shanghai government would strengthen policies and measures aimed at regulating the city's real estate market over the coming year.
~ Mayor Han said that housing prices in Shanghai were still too high and emphasized that Shanghai would continue to strictly implement housing purchase restrictions.
~ However, when the Shanghai city government held its annual work conference on Feb 6, a meeting at which city officials outline their plans for the coming year, there was no mention of housing prices or the need to further regulate and control property prices included among the top 23 items of "important work" announced by the government.
~ Over the past few years, the phrase "regulation and control" has featured prominently in the Shanghai government's annual work conference.
~ An official working in the Shanghai real estate system told the EO, "Now the market is so bad, it is normal for the [Shanghai] local government not to emphasize regulation and control." No official notice related to relaxing current policy settings has been released.
~ Recently, Shanghai adjusted price criteria for ordinary residential housing for the first time in four years. The new standard are: the total price is lower than 3.3 million yuan for a house close to the center of the city; for houses located midway between the CBD and the outer ring road, the standard is now houses priced at below 2 million yuan; for houses located outside the ring road, a limit of 1.6 million yuan has been set, increases of 60 percent, 43 percent and 63 percent respectively compared to the standard set in 2008.
~ The EO learned that many banks in Shanghai have also made adjustments to interest rates for first home owners. According to person working at a Bank of China branch in Shanghai, the bank lowered the interest rates it was offering to first home owners back to the benchmark level on Feb 7. The pace of the approval process for loans made to first home buyers has also increased noticeably.
Original article: [Chinese]
