Editors' Blog

22 Aug, 2006

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17 Aug, 2006

Norson Telecom Consulting is now plugging China Mobile to receive the first 3G license in mid-2007. However, in a departure from typical analyst thinking, Norson is picking the company to receive a license to deploy the unproven homegrown TD-SCDMA.

Most pundits, including Norson in earlier reports, have speculated the dominant fixed-line provider, China Telecom, would receive the license to deploy the homegrown standard, with China Mobile picking up a license for the proven international standard WCDMA.

Perhaps Norson analysts have been reading China Economic Review’s April cover story on 3G, which predicted such a scenario. The article argued that China Mobile was in a better position to ensure a smooth transition to TD-SCDMA than China Telecom.

China Mobile has an existing 2 to 2.5G GSM network and the world’s largest subscriber base. It would be a simple matter of maintaining and growing users on the existing network, and switching them at such time as its TD-SCDMA network was ready. Given that most existing 3G services can be run on 2G and 2.5 networks, it is unlikely to see a mass exodus of subscribers in the meantime.

If China Telecom received the homegrown license, it would be forced to build a network from scratch, and would be unlikely to ever close on China Mobile’s dominant mobile market share, effectively derailing the homegrown standard before it was launched:

“If China Telecom fails to establish a market for TD-SCDMA, as expected, the government's 3G aspirations would take a major hit," the cover story said.

"But even then, there is still a possibility that the homegrown standard will emerge with its reputation intact - China Telecom could get the WCDMA license and leave China Mobile stuck with TD-SCDMA. . . . . . For Beijing, handicapping its strongest mobile operator could be the only way to ensure the success of TD-SCDMA.”

But given that the government has set out its stall on having 3G available by the 2008 Beijing Olympics, a mid-2007 release is cutting things mighty fine. As the April cover story concluded:

“Reading newspaper and analyst reports from 2002 and 2004 gives an uncanny feeling of deja-vu. Analysts seem to make a living out of proclamations that 3G licenses are on the verge of being issued while the government is not slow to proclaim the commercial viability of TD-SCDMA. But as the rest of the world slowly turns its attention from 3G to fourth-generation mobile networks, China is in danger of getting left well and truly behind.

If the government is to honor its promise of 3G in time for the Olympics, it is time it stopped hedging its bets and announced some concrete plans. Failure to do so will be the surest sign yet that all is not well with Beijing's 3G ambitions.”

Keep an eye on the analysts' predictions or, better yet, watch this space.

14 Aug, 2006

Looks like Dell is not quite putting its money where its mouth is as it embraces its price war with main competitors HP and Lenovo.

To its credit, it is taking its effort to cut costs seriously. Problem is, it seems it forgot to tell its Chinese customers. . . . . and also forgot to pass on the savings.

Whoops, what price in bad PR a US$32 saving on a cheap as chips processor.

14 Aug, 2006

While I wouldn't want people to think that we at China Economic Review have an improper fascination with animals - we are animal-lovers, but in the socially-acceptable sense - I feel obliged to persevere with our dog-slaughtering thread.

We have established that dog-owners in Yunnan were offered US$0.63 a pooch to kill their pets as part of a provincial purge that saw 54,429 animals culled (here), and that China's new breed of animal lovers were outraged by it (here).

Now we find that China has in fact grown rather rich from allowing foreigners to hunt animals far more endangered than the domestic dog. By the end of 2005, a total of US$36 million had been earned by granting 1,101 foreign nationals permission to hunt, the South China Morning Post reported at the weekend.

This emerged after an auction was planned - and subsequently cancelled in response to (you've guessed it) a public outcry - in Chengdu that would have allowed four Chinese agents to bid for permits to hunt 289 individual animals. The permits, which would then have been sold overseas, covered white-lipped deer, Tibetan antelopes, wild yak, argali (a sheep with spiritual horns, apparently) and wolves.

It appears these hunts have been taking place for 20 years - in remote parts of Sichuan, Gansu and Qinghai - with licenses awarded by "internal administrative approval" as opposed to auctions.

It's difficult to know how to respond to this. In a way, the existence of such hunts isn't at all surprising but it makes for an interesting parallel to the dead dogs situation.

I suppose the answer would be to convince the Western hunters that the potentially rabid dogs are in fact unique creatures prized by game shooters across China (having seen the condition of some dogs in the country's less-developed areas, this might be deceptively easy). The hunters would then be persuaded to spend huge amounts of money on what is in fact a US$0.63-per-carcass killing, with the dog owners getting the difference.

But what is perhaps most interesting is the fact that the whole system was scuppered by its move to the auction format. Something that was previously decided in non-transparent and - probably - bribe-fueled circumstances was taken apart due to its entry into the public domain.

11 Aug, 2006

Dogs are still getting killed around China. And people around the world are still throwing up their arms in shock.

“My God, man, they are murdering pooches!”

On August 4, officials in Jining, Shandong province, said they would kill all dogs within five kilometres of any rabies outbreak. In the last eight months, 16 people have died of rabies in Jining. State media did not say how many pooches would be harmed in the making of this policy but the city has about 500,000 dogs.

The day before, the good folks in Yunnan province killed 54,429 dogs in five days after three people died of rabies. Officials were creative in their efforts. They lit firecrackers and followed the barks. Owners were offered US$0.63 to kill their own dogs.

More than a century ago, a similar policy paid residents to kill rats and avoid the bubonic plague. The Chinese, creative entrepreneurs that they are, started importing rats by the truckload.

But as I was saying, the year of the dog is not working out well for our canine friends. (For more on this, see the previous blog Dead Dogs.)

The practice is not entirely new. In the three years leading to 1991, Yunnan folks killed 10 million dogs, Canada’s Globe and Mail reported. But that was before China became trendy, so it didn’t matter as much.

Nowadays, though, even commentaries within China are dead set against the slaughters. A big change from the last year of the dog, 1994, when the Communist party was demanding an end to the “uncivilised and unhealthy” practice of keeping dogs as pets, as the Financial Times tells us.

However, almost 2,400 people died of rabies in China last year. More affluent Chinese are buying dogs by the millions but only 3% are vaccinated.

I don’t know if buying a dog is a right or a privilege. Just like I don’t know what is more important, 2,400 human lives or half a million dogs. Although, I would probably go for the people – much as I like dogs. I also don’t know how you force hundreds of millions to vaccinate their dogs overnight. The Humane Society of the United States said Wednesday it would cough up US$100,000 for vaccines if China stops the killings. That’s like offering to make the Yangtze smaller by taking a sip through a straw.

I do know that no viable alternative step has been put forward, beyond letting dogs live and whoever is careless enough to get bitten take his or her chances with the rabies.

The most ridiculous comment came from People for the Ethical Treatment of Animals, an organization with some practice at the ridiculous comment business.

The group led by Ingrid Newkirk was “urging everyone to actively boycott – not a word we use lightly – anything from China, given the bludgeoning killing of thousands of dogs.”

PETA itself cancelled US$300,000 worth of orders of Chinese products.

That will show’em.

I can’t remember PETA making any kind of stink about the culling of millions of chickens whenever a new case of bird flu appears. Granted, bird flu is unknown and scary while there is a rabies vaccine. Still, that’s probably not much consolation for the chickens.

Imagine the conversation across rural Chinese households if the world actually listened to PETA.

Xiao Meimei: “Baba, where is Spot?”

Father: “Spot had to be killed daughter. We beat him. The government said he could have had rabies.”

Xiao Meimei: “What is rabies, Baba?”

Father: “A bad disease.”

Xiao Meimei: “Baba… why aren’t you at work?”

Father: “We were punished for doing what the government told us to do. They shut down the factory. Nobody wants to buy our things any more.”

Xiao Meimei: “How will we eat?”

Father: “Well, we still have Spot.”

9 Aug, 2006

... Must come down. A combination of Air China having to cut its IPO by 39% and the Shanghai Composite index dropping about 10% over the last month appear to have the regulator running scared. It was reported today - originally in the South China Morning Post - that a one-month IPO suspension is being considered to give the market a chance to cool down.

Rather than apportion blame to any one particular party, we might as well put it down to the inevitable hangover after the sudden and exciting return of IPO activity in Shanghai. Think of a plane crash survivor who stumbles upon an oasis after days in the desert without water - he overindulges and his body, which needs time to adapt, pays the price.

Yes, Air China probably did price its IPO too high - working out at 20 times forecast annual earnings, compared to P/E ratios of 10-14 for other listed airlines in Asia - but this merely provided the headline for something that had long been brewing.

Air China overreached itself, just as Chinese investors have been doing for a couple of months. Starved of fresh meat for a year, they overdosed once IPOs resumed, sending activity to a super-high that couldn't be sustained. Now, with a host of companies looking to list - together with the unravelling of previously non-tradable state-held shares - investors are holding back for the particularly good stuff.

Should we be surprised that the regulators are considering intervention? Not particularly. The relaunch of domestic share offerings has been micro-managed to such a degree - first we were drip-fed announcements of listing rules, then companies were escorted to the market in a fashion that would make a Broadway producer proud (start with some reliable dancing girls then bring on Bank of China for her big number...) - that further alterations seemed almost inevitable.

And, not wanting to undermine investor confidence, it is unlikely the regulator will ever officially release news of a temporary suspension of listings into the public domain. Careful management, yes, but are frequent rule changes - often clothed in secrecy - good for the market in the long term? Probably not.

8 Aug, 2006

From dead dogs, we move right along to dead people. Getting a very Halloween-esque vibe around the Editors’ Blog this week. The top story on the front (web) page of the New York Times today really should have been saved for October 31. It describes a factory in China where workers are “cleaning, cutting, dissecting, preserving and re-engineering human corpses, preparing them for the international museum exhibition market.”

Wow. And you thought that trading in prisoners’ organs was bad. But guess what? Unlike selling death-row kidneys, this practice, so far, is completely legal. And what sinister force is behind this mummy factory phenomenon? From the Times:

“The mastermind behind this operation is Gunther von Hagens, a 61-year-old German scientist whose show, ‘Body Worlds,’ has attracted 20 million people worldwide over the past decade and has taken in over $200 million by displaying preserved, skinless human corpses with their well-defined muscles and sinewy tissues.”

The trade in corpses is apparently pretty brisk, with one American company paying US$25 million to keep a fresh supply of bodies coming from China.

The only question is, when is von Hagens bringing his show to Shanghai Circus World?

7 Aug, 2006

It may be the Year of the Dog, but this didn't stop government-ordered slaughter of nearly 55,000 pooches in Yunnan Province last week in response to three human fatalities from rabies.

So is a person's life roughly equal to that of 18,000 dogs? It appears that many Chinese people are asking the same question and their sympathies are on the side of the creature that we won't heartlessly and inappropriately refer to as "Yunnan's best friend".

The torrent of complaint prompted by this indiscriminate slaughter reopens the debate over man's relationship with domestic beast in China, one that I have always found somewhat perplexing.

Guangdong people's weakness for a taste of anything with a pulse is well documented, although it never really struck home with me until a visit to the Guangzhou animal market a few years ago. On weirdness alone, this is trumped by a story once told to me by an American girl who studied in Kunming. She and her Chinese roommate were happily watching a documentary about dinosaurs when said roommate broke the silence with: "Dinosaur meat ... I wonder what that would taste like ... perhaps a little tough."

I have nothing against people thinking with their stomach, but the increasing appetite for keeping - not eating - domestic pets among China's urban residents seems to create something of a double standard.

One day in Qingdao last year, I spent the morning visiting a market in the city suburbs. There, hanging in the fresh meat section, were the carcasses of several dogs, shorn of both fur and internal organs. Fast forward to the afternoon and I was in the company of a friend who had set up a business selling flashy accessories to dog owners with a penchant for grooming and dressing their pets as they might do a pampered child.

Stepping into a pet shop which stocked collars, leashes, brushes, hats and booties supplied by my friend, I was greeted by the sight of a miserable dog lying on a surgical couch attached to a drip. The animal's owner sat alongside, eyes moist, gently stroking her pet's back.

"What's wrong with your dog?" I asked. "He's been ill for a week," the distressed woman explained. "When I talk to him he doesn't answer back."

7 Aug, 2006

Anyone who still believes that the revaluation of the yuan is the magic bullet that is going to save US manufaturing needs to read this trade briefing paper from the Cato Institute, a libertarian thinktank in Washington, DC. In it, the case against Senator Chuck Schumer's proposed punitive tariffs against China is laid out carefully and thoughtfully. Some highlights:

• Imports from China are not the primary cause of the decline in US manufacturing jobs since 2000. The real reasons for the loss of some 3 million such jobs during this time were the US recession of 2001, sluggish demand abroad for US exports, and especially increased productivity in US manufacturing.
• 60% of China's exports are made in foreign-owned plants, and much of the increase in Chinese exports has come as a result of other Asian countries sending their products to China to be "finished" before being exported to America and Europe. As Chinese exports to the US have gone up, those from other East Asian countries have gone down as a percentage of all US imports.
• Tariffs on Chinese exports would do great harm to American consumers, whose access to low-cost Chinese-made textiles and shoes, home appliances and furniture, computers, electronics, toys, and other goods greatly increases their real wages by stretching the value of their paychecks.
• Since 2001, the euro has appreciated by one third against the dollar, yet the US trade deficit with the euro zone has increased by 69%, suggesting that RMB revaluation would do nothing to lower the US trade deficit with China.

Most importantly, the paper argues, "sanctions of the kind being contemplated in Congress would also violate the same set of international trade rules that members of Congress accuse China of violating", and furthermore, they would invite retaliatory measures from China. Do we really need a trade war between two of the biggest and most dynamic economies in the world?

4 Aug, 2006

Doubts still remain as to whether Chinese computer giant Lenovo will be able to cut it in the real world, but its competitors seem to think so.

The company bought its way into third place in the global PC stakes in May last year when it bought the ailing PC unit of IBM for US$1.25 billion, in a move widely dismissed as an attempt to buy a brand rather than develop its own.

Now Dell, which is the world's largest PC maker - ahead of Hewlett-Packard - is planning to mount an aggressive price war to pull its rival’s feet from under it even as Lenovo struggles to restructure its way out of the mess left behind by the woefully wasteful IBM.

Lenovo estimates it can save US$250 million a year by cutting around 1,000 employees and shifting offices. However, the restructuring will cost it around US$100 million, which it must pay for now.

But it seems to be doing the job better than analysts expected, booking a US$5 million profit in the second quarter, including US$19 million of its planned restructuring costs, after posting a loss in the first. Sales were up, as were gross profit margins, while revenues in the Americas topped US$1 billion for the first time, up 6% and accounting for 30% of total sales.

The immediate future will be interesting for the company. Nobody does price wars better than the Chinese, so Dell’s plans to take it on in this space are like a red rag to a bull. But price cuts do not a good brand strategy make, so watch for Lenovo to hold firm.

This is the new China, and Lenovo in many ways carries the flag for China’s strategy to develop truly global brands (cheap Haier beer fridges do not apply). It’s already dropped the IBM brand, silencing those critics who thought it would hide its Chinese-ness behind a global name, and it is now ready for the big time.

Who knows, maybe next year I will be posting this from a brand new Lenovo PC.

31 Jul, 2006

Wal-Mart, the retailing giant known for its hostility towards organized workers, is likely receiving the news that some of its Chinese workforce has just formed a trade union considerably well. Why? Because the “union” has been organized by the All-China Federation of Trade Unions, a government organization which seeks not to defend workers’ rights and bargain collectively on their behalf, but to “promote good relations between employers and employees,” as its officials claim. In reality, it is not a workers’ union that is being formed, but a tool of government and management to keep workers in line.

Despite its well-known anti-union stance, Wal-Mart whole-heartedly welcomes them Chinese-style. But that’s because real unions are not allowed in China. All bodies purporting to represent workers must be organized under the ACFTU, a convenient way of making sure they don’t cause any actual reform. China is Wal-Mart’s most important market (as it is for many companies these days), and so the move to embrace the ACFTU is an important step. But not in the direction of greater protection for workers. Quite the opposite.

Wal-Mart announced it would allow its Chinese workers to “unionize” two years ago. Why has it taken this long for one to form? Perhaps its “associates” (as the company calls its employees) really haven’t been clamoring for representation. After all, a Wal-Mart job in China is surely better than toiling in an illegal coal mine. Or a sweatshop. Or prostitution. My gripe is that Wal-Mart is going to hold this up as a badge, showing how it actually stands for workers’ rights, and the ACFTU is going to say, “Look how great we are, we just unionized Wal-Mart!” Meanwhile another mine collapses on a hundred downtrodden in Hubei.

25 Jul, 2006

The CSRC is reviewing Air China's application to list on the Shanghai exchange and it seems obvious that they will be approved. Analysts are guessing that the IPO would raise about US$1 billion, which will be used to buy a whole bunch of new airplanes: 20 Airbuses and 25 Boeings, not to mention an expansion of their section of the Beijing airport.

It's a hefty sum when you consider that Air China raised the same amount in its original double-IPO, which debuted almost 2 years ago in Hong Kong and London. All this is very encouraging for those of us interested in seeing China’s markets show the same level of success that its economy has shown for the last decade. Bank of China’s IPO was a major milestone for the mainland markets, and Air China will be another. Years from now, this period could prove to have been the beginning of the end for the giant state-owned monoliths of China and the rise of its stock markets.

NB: This is not an endorsement of China’s stock markets or a solicitation to invest in them. Above comments are made for informational purposes only and should not be construed as advice, let alone considered important, by anyone.

21 Jul, 2006

Long awaited rules curbing foreign investment in China’s real estate market have apparently been released to real estate firms although they are yet to be officially announced.

Under the rules, individuals must reside in China for one year before buying property, while companies – and institutional buyers – must be registered in China, with registered capital of 50% of the purchase price, up from 33%.

Morgan Stanley, which plans to triple its investment in Chinese property to US$3 billion this year, is apparently the first to lose out under the new regime. According to a well-placed source, the company has been ordered to comply with the new rules before the regulator will give approval for an acquisition that the institutional investor likely felt was already in the bag.

The move comes as Beijing tries to dampen investment in speculative high-end property and encourage the development of affordable housing.

A Ministry of Construction survey this year found the average size of new flats in 16 main cities was more than 120 square meters, much bigger than what an ordinary household could afford. Homebuyers have grown increasingly annoyed at soaring prices - a Beijing Normal University study found 70% of China's urban residents could not afford to buy a new apartment, based on average housing prices in east China.

Overall housing prices in 70 large and medium-sized cities rose 5.8% year-on-year in May, after climbing 5.6% in April and 5.4% in March. Prices for new properties climbed 6.1% year-on-year in the same period. At the same time, 123 million square meters of real estate remained unsold at the end of March, up 23.8% on the first quarter of 2005. In the residential sector, 69.8 million square meters of housing lay empty, representing about 700,000 unoccupied apartments.

As prices get further and further out of the grasp of domestic buyers, and apartments remain unsold, developers are increasingly trying to target offshore buyers. The strategy has proved successful, with foreign investment transactions in the mainland real estate market totaling US$5.4 billion in the first quarter this year, more than triple the same period last year.

It is this flow of money that the regulator feels is creating a situation whereby prices are climbing despite market force of supply and demand. In the absence of a market correction, the government feels it has a duty to step in.

It is easy to blame foreigners when the going gets too good. Rather than clamping down on the free flow of capital, the government should move faster to open up alternative investment channels.

According to a report by Jones Lang LaSalle last year, some 21.1% of China’s newly rich urban citizens - a total of about 15 million individuals - said they preferred to invest in real estate than bank savings or stocks.

Alternative investment instruments provide a much better hope for cooling real estate flames than any amount of government tinkering and finger pointing.

Watch now as the foreign investors find a way around the new barriers, and watch as prices continue to rise - just as fast as the new, unoccupied apartments.

21 Jul, 2006

And so it rolls on. Who would have thought that a mid-size bank teetering on the brink of insolvency could cause such a fuss?

The case of Guangdong Development Bank (GDB) is evidence of two things: a) the appetite Western banks have for establishing a significant foothold in China's financial sector; and b) just how bad a cut of meat these bankers are willing to chase.

When it moved in for an individual 40% slice of GDB at the head of a consortium seeking 85% of the troubled lender, Citigroup was clearly hoping that GDB's desperate need would trump the regulator's 20% limit on foreign investment in China's banks.

Rival bidder Société Générale cried foul play, Beijing shyed away from setting a precedent, and both groups were asked to re-submit bids.

Now what we appear to be seeing is something akin to a bottomless-pockets football game as both sides - now happy to settle for 20% of GDB as part of consortiums chasing an 80%+ stake - seek to fill their bench with the biggest and most Beijing-friendly talent.

Batting for Citigroup... China Life has been brought in as the big hitter with China Energy Investment Corp and telecom equipment maker China Potevio in support. Carlyle Group, while undoubtely a bulge bracket presence, may yet prove a poor selection if it shows its glass jaw in separate negotiations for a takeover of construction equipment manufacturer Xugong.

In the dug-out for Société Générale... Baoshan Iron and Steel and Sinopec - heavy industry stalwarts expected to produce heavyweight performances.

And to the winner... the chance to meet the tab on a bad lending legacy that stems back more than 15 years when Guangdong found itself awash with cash but had yet to impose rules on how to control it.

19 Jul, 2006

Hao Wu, a Chinese filmmaker detained by the government for unknown reasons for the last five months, was released from prison on July 11.

At the time of his arrest, Mr Wu was making a documentary about China's underground Catholic churches - those that answer to the Vatican, not to the official Chinese authorities - and so it is widely assumed that this was the reason for his being held. He was never charged, but his lawyer was told by the government that his detention was related to "state secrets", without elaborating.

Mr Wu, who holds an American green card, is also a blogger. His blog, Beijing or Bust, is sadly located on Google blogs, which are uniformly blocked in China. But I highly recommend accessing it through your favorite proxy to read wonderful posts like "Do I have to take a stand?" in which Wu lays out in bulletpoint fashion the pros and cons of China tranforming into some kind of democracy, which ends rather prophetically:

"I would forget about the bullet points, forget about analysis, forget about my desire to go with the “average” Chinese (because I don’t know the “average” Chinese and my decision has zero influence over the “average” Chinese’s), and stake my stand based only on me, on what I, as an individual, would want in a democratic society, because that’s the only decision making process capable of making any honest sense to me – I don’t want to live in a society that doesn’t allow me to express myself freely! But wait, would that land me in prison?"

Now that he's free again, I sincerely hope Hao Wu will return to his blog.