The China Analyst – and As Always We Welcome All Feedback

China Inc. Goes Global: OFDI/M&A OFDI/M&A Global: Goes Inc. China 32 32

China Sourcing Strategy Strategy Sourcing China 24 24

Macroeconomic Monitor Monitor Macroeconomic 16 16

Regulars Regulars

Financial Crisis: Beginning of the BRIC Era Era BRIC the of Beginning Crisis: Financial 12 12

Financial Crisis: China’s Response Response China’s Crisis: Financial 9 9

Impact China Crisis: Financial 6 6

Features Features

China and the financial crisis: 10-page special focus focus special 10-page crisis: financial the and China

A knowledge tool by THE BEIJING AXIS AXIS BEIJING THE by tool knowledge A for executives with a China agenda China a with executives for

CHINA ANALYST

CHINA CHINA ANALYST ANALYST

THE THE

THE THE 2009 2009

February February

Retail Sales Growth, % y-o-y Chi n a US 40 30 20 10 0 -10 Nov '05 Nov '06 Nov '07 Nov '08

“This is the worst financial crisis since the Great Depression….”

IMF, World Bank, OECD, etc

Export Growth, % y-o-y

30 Chi n a US

0 Nov '05 Nov '06 Nov '07 Nov '08 -10

Main Photo: Sonyasonya / flickr. Data: US Bureau of the Census; Nat. Bureau of Statistics 4

At the Highest Level China’s sharp slowdown will catch many by surprise and wrong-footed. Indeed, over the next 2-3 quarters a painful adjustment will continue to unfold, requiring good information, solid planning skills and a strong ability to implement. Anticipating and managing risk must be the focus. But do not lose sight of China’s long-term trajectory – it will remain a prominent market and opportunity, outperforming developing and developed countries over the medium and long term. Do not get caught out twice!

the country. Important though, is that pects remain solid. We must also con- we do see a rebound late in the year. sider that it is natural for developing countries to face periods of turmoil. In Still, it is clear that the ensuing period this respect China is really now just will be a very challenging phase. Dur- behaving ‘normally’ and there is no ing this time we identify a number of merit in becoming utterly disillusioned managerial imperatives for those that with China. Rather, see China for what manage businesses in China or that it is: a key developing market, with the have China exposures to watch. The associated dynamism (good and bad) overarching objective is to anticipate that is endemic in developing coun-

and manage risk in a few key areas: tries, but that will remain prominent

The landscape is changing – re- and even become more important over As we enter the Year of the Ox we • gions, sectors, policies and industry the long haul. look back on a year in which the global linkages and value chains are ad- economy underwent profound Also, as China adjusts we can expect justing and reacting in different changes. These changes include ad- policies and changes that would likely ways. Stay on top of these changes justments in the global banking and bring structural changes that would in and manage information well. financial system; new trajectories in themselves represent opportunity, for real economic growth; extreme volatil- • Strategic review is needed – the example, in casting the Chinese con- ity in energy, commodity, property and severity of the economic impact sumer as a key pillar of future growth. financial asset prices; dramatically may render existing strategies ei- We can also expect more moderate reduced trade; layoffs on an unprece- ther completely irrelevant or may at and therefore sustainable growth. Fi- dented scale; corporate and country least make them somewhat out of nally, we need to remind ourselves bankruptcies; and a scramble interna- date. A comprehensive strategic that populous China, with its roughly tionally to launch appropriate rescue review is necessary with some ele- USD 3.5 trillion GDP, is now the packages. In delivering these rescues ments of the strategy likely to world’s third-largest economy, growing many nations broke some of their own change much. – still – at a pace faster than the aver- sacred rules, even rules that were pre- • Re-discover partners – many Chi- age for all developing nations, all de- viously universally accepted as un- nese firms and players have been veloped nations and indeed the world. breakable. But worsening conditions affected already, some detrimentally Even in dynamic Asia it still leads the progressively became more systemic so. Know how their strategic focus field. Moreover, we do not see this and by the fourth quarter of 2008 im- and ability to perform have changed changing. As such, over the long-term pacted negatively on global sentiment and mitigate the associated risks. it will remain a focal point in board- and confidence – with most busi- • Supplier audits and health-checks – rooms around the world. nesses now, in 2009, unsure about many firms that source from China their prospects for the future. are really ‘outsiders’ to China. Now Ultimately, as we set out on the year of is the time to pay close attention to the ox, to navigate urgent short-term These unfolding global circumstances the health of suppliers and their risks, we must not lose sight of, or be are not encouraging. Towards the end ability to deliver on previously (or deflected from, the complex long-term of 2008, as China celebrated 30 suc- newly) agreed contracts and to do a maze that must simultaneously be cessful years of market-oriented re- rolling due diligence. ‘solved’ in order to capture full long- forms, it became clear that China’s term advantage in the world’s leading economy had been fully pulled into the So, we acknowledge the seriousness developing market. global financial and real economic cri- of the current and unfolding environ- sis and Q4 growth of 6.8% confirmed ment. We face testing times. But we I trust that our readers will enjoy this the severity of the adjustments that are must add that now, more than ever, it edition of The China Analyst – and as always we welcome all feedback. in train in China. Indeed, looking is necessary to maintain a balanced ahead there is significant concern over perspective on China’s future. We We wish all our readers a prosperous China’s short-term prospects. We con- must guard against a view that is too Year of the Ox! cur that over the next 2-3 quarters heavily influenced by adverse short- China will be growing at rates that are term trends or prevailing sentiment well below those that the world has that is so deeply negative (and deterio- Kobus van der Wath grown used to. In line with Q4’s head- rating). A balanced view would also Founder & Group Managing Director line GDP growth, we anticipate Q1 and enable planners to differentiate be- THE BEIJING AXIS Q2 2009 to see growth of well below tween short, medium and long term China Business Solutions the 7-8% range, widely viewed as the trends, issues and prospects. Over the Strategy I Sourcing I Investment ‘minimum’ that can ensure stability in medium and long-term China’s pros- [email protected]

Table of Contents February 2009 Financial Crisis: China Impact 6 China’s banking system has sustained limited direct losses from the financial crisis, yet the global slowdown has seriously impacted China’s exports, and GDP growth may slip below the crucial ‘minimum range’ of 7-8% in 2009. Financial Crisis: China’s Response 9 With the Chinese government finding itself among the best positioned in the world to inject and control the spending of a massive stimulus package without major debt, inflationary or exchange rate consequences, there is much room for hope. Financial Crisis: Beginning of the BRIC Era 12 The BRIC economies have been severely affected by the crisis. Yet they are now ready not only to deal with the current predicament, but also to rise above it by emerging from the crisis with an enhanced role in the global economy. Macroeconomic Monitor: China’s Slowdown 16 China’s economy has been slowing down dramatically since the middle of 2008, and while the adjustment will be significant over the next several quarters, over the longer term we expect China to become more prominent, not less. We examine. China Facts, Figures & Forecasts 22 China Facts, Figures & Forecasts provides a cross-section of data illustrating growth, transformations and trends in commerce and industry. China Sourcing Strategy 24 This section provides information and analyses to help formulate successful China Sourcing Strategies for the year ahead as international procurement managers assess the risk to China’s status as a top-tier global supplier. China Sourcing Blog Highlights 29 Highlights from The China Sourcing Blog, THE BEIJING AXIS online information portal and discussion forum on all issues relevant to sourcing from China. China Trade Roundup 30 This section illustrates the main trends in the growth and transformation of China’s trade profile, and summarises a selection of the latest available trade statistics for China. China Inc. Goes Global: OFDI and M&A 32 With Chinese firms increasingly ‘Going Global’, this section analyses Chinese Outbound Foreign Direct Investments and cross-border M&A by Chinese companies. BRICS Breakdown 36 Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS Breakdown is a comparative segment that evaluates and contrasts China with the other leading developing economies. Financial Markets 37 Tracking the dynamics of China’s Shanghai and Shenzhen Composite Index indicators and benchmark interest rates, Finan- cial Markets also illustrates recent trends and transformations in China’s exchange rate regime. China Business News Highlights 38 A roundup of the main business headlines from China during the fourth quarter of 2008, including the latest indications of the impact of the global slowdown on China, notably in the airline and shipping industries. Regional Focus: China-Africa 40 While China-Africa trade is still relatively small, the region has strategic importance for China as trade focuses on resource- rich countries like Angola, DRC and South Africa. Since 2006 China has also vastly increased its FDI to Africa. Regional Focus: China-Australia 42 China-Australia relations have become more strategic. This has allowed boom-times down-under on the back of significant growth for Australian exporters, but lower commodity prices and China’s current slowdown also show the risks. Regional Focus: China-Russia 44 Russia and China are actively developing their trade relationship, although bilateral FDI flows are not yet very significant. This section provides an overview of the status of trade and bilateral investments between China and Russia. Upcoming Events 46 A schedule of all the major upcoming fairs, exhibitions and conferences in China, with a focus on events pertaining to resources and industrial sourcing. Careers at THE BEIJING AXIS 48 THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and future business challenges. Positions are available in multiple international offices. THE BEIJING AXIS News 49 Company news for the fourth quarter, including attendance of China Mining 2008 in Beijing and the Global China Business Meeting in Barcelona, as well as exciting new team developments. THE CHINA ANALYST is published & distributed quarterly by THE BEIJING AXIS. For more on our services see p. 50.

6 China and the financial crisis Financial Crisis: China Impact China’s banking system has sustained limited direct losses from the financial crisis, and is in much better shape now than it was after the Asian financial crisis a decade ago. The global slowdown in demand is set to seriously undermine China’s export growth for 2009, yet the overall impact of the crisis is expected to be manageable, even though GDP growth may slip below 7-8% in 2009. By Barry van Wyk. Origins

When restrictions on the mixing of commercial and investment banking were eliminated in the United States in the 1990s because they were seen to be restricting competition, more opportunities were created for commercial banks. Yet partly as a consequence of this, investment banks evolved complex and risky derivative securities to sustain their profitability.

As part of these financial derivatives, banks in the US began packaging mortgages together and reselling Where is the money going? China is implementing a USD 586 billion stimulus them, creating more profits and al- package in an attempt to re-engineer growth, yet is the private sector being lowing more households to receive starved of funding? loans. Yet lax oversight allowed banks to grant loans to some buyers values backed by sub-prime mort- Contagion who were not able to pay them back, gages and their derivatives, credit and when US house prices began to markets stagnated and liquidity de- Asian financial institutions have sus- fall in 2006, the value of the financial creased substantially. Risk-aversion tained only 3% (or USD 30 billion) of derivatives exponentially decreased pervaded financial markets, and fear the USD 965 billion sub-prime- in value. What made this so damag- and uncertainty dominated investor related losses, and the bulk of this in ing, however, was that many banks sentiment. This remains the case. Japan. Improved liquidity manage- and hedge funds had included sub- ment since the 1997/1998 Asian fi- prime mortgage-backed securities in Central banks responded to the cri- nancial crisis, along with low levels their portfolios. This is now history. sis with various emergency meas- of lending to the corporate sector in ures, attempting to inject liquidity recent years, meant that capital The bursting of the US housing bub- into financial markets, while govern- losses have not seriously impaired ble revealed the extent of leverage ments implemented broader rescue the profitability of the region’s bank- used in the housing market and as- packages. Due to global financial ing systems. China’s banking sys- sociated mortgage-backed securities and commercial interdependence, tem, moreover, has also profited (to be running into many trillions of however, adjustments in the US fi- greatly from reforms in the last few dollars), and hence the devaluation nancial system have severely im- years that contributed to reducing of mortgage-related assets caused pacted US and world demand, caus- the level of non-performing loans substantial write-downs on the bal- ing commodity prices and exports extended by major Chinese com- ance sheets of financial institutions. from developing countries in Asia to mercial banks from 18% in 2003 to Yet in September 2008, when within slow amid the generalized weaken- 9% by 2005. a few days investment bank Lehman ing of economic growth. As an indi- Brothers collapsed and American cation of the extent of the slowdown, While by no means incapacitating International Group (AIG) was res- output in advanced economies is China’s banking system, uncertainty cued by the US Federal Reserve, a forecast to contract on a full-year about the economic outlook and risk- crisis of confidence in the financial basis in 2009 - the first such fall in aversion have nonetheless served to system itself seemed inevitable. By the post-war period. According to put pressure on domestic liquidity. December, banking systems world- World Bank estimates, world trade is Credit tightening and rising raw ma- wide had written down sub-prime- expected to contract by 2.5% in terial and labour costs in H1-2008 related losses of USD 965 billion. 2009, after an estimated expansion were an ordeal for small enterprises Amid heightened alarm about asset of 5.8% in 2008. in China, compounded by large de-

7 China and the financial crisis creases in overseas orders in H2- WB/IMF Outlook Comparing Earlier Downturns (Avg. Annual Change) 2008. By Q4-2008, 80% of small 1997 1998 2000 2001 2007 2008(f) 2009(f) enterprises in China were estimated to be under cash flow pressure. The World GDP (market exch. rates) advent of the financial crisis has also World Bank Nov 08 3.8 2.5 4.2 1.7 3.7 2.6 1.0 ignited debate about whether China’s entrepreneurial dynamism is IMF WEO Nov 08 3.8 2.5 4.2 1.7 3.7 2.6 1.1 being inhibited by remaining govern- China weighted world GDP ment controls in the financial sector, which could be hampering the flow World Bank Nov 08 3.7 1.7 4.3 1.4 4.1 3.0 1.2 of funding to smaller firms. A lot of IMF WEO Nov 08 3.7 1.7 4.3 1.4 4.1 2.9 1.4 the impetus for the slower growth outlook for China in 2009, however, World imports predates the real impact of the finan- World Bank Nov 08 9.7 4.8 12.2 0.3 7.4 5.8 -2.5 cial crisis. Tightened monetary policies since 2007 have likely been the IMF WEO Nov 08 9.7 4.8 12.2 0.3 7.2 4.8 2.1 main driver for dampened demand in China China’s real estate sector, and housing sales growth and housing prices Exports 22.6 7.1 30.6 9.6 15.3 11.0 3.5 have decreased throughout 2008. GDP 9.3 7.8 8.4 8.3 11.9 9.4 7.5 As a result, new real estate construction and investment have weak- Note: In constant prices. Data weighted using China’s export weights, corrected for re-export via Hong Kong ened accordingly. Source: World Bank

The financial crisis has impaired the manufacturing heartland in Guang- Of China’s four export powerhouses, flow of foreign direct investment to dong, where thousands of factory Guangdong, Shanghai, Zhejiang and closures and possibly as many as Jiangsu, only Jiangsu has main- China, with new FDI contracts de- five million job losses have led to tained double digit output growth into clining by 26% y-o-y in the first ten protests by laid-off workers. Yet not- Q4-2008. months of 2008 and actual flows withstanding the unrest engendered dropping in Q4-2008. The rapid de- by factory closures and job losses, While much of the media coverage cline of China’s stock market, more- the plight of Guangdong also reflects of the crisis has focused on factory over, which has fallen by as much as China’s loss of a competitive edge in closures and job losses in export- two-thirds since October 2007 (and some low value-added products, oriented sectors, the dramatic slow- losing RMB21 trillion since late notably toys, shoes and textiles. down in heavy industrial sectors re- 2007), has been aggravated by the lated to construction, automotive, weakened outlook for corporate Export growth to the EU started to steel, power and metallurgy has con- earnings and general risk-aversion weaken in August, although exports stituted a stronger warning of deeper associated with the crisis, yet much to emerging markets - the destina- systemic exposure in the Chinese of the fall in China’s stocks have tion of over half of China’s exports - economy. Considering that total in- also been ascribed to their inflated still grew 32% y-o-y in US dollar dustrial value-added growth for Jan- value after 2-3 years of super-gains. terms in Q3-2008. Prospects are for Oct 2008 amounted to 14.4%, and a sharp reduction in export growth in that industrial producer prices in- Exports only? 2009, however, as the crisis deep- creased by 8.2% in this period, ens in the US and Europe. The Pur- many of China’s large firms could Much of the focus of the impact of chasing Managers’ Index (PMI), face negative real growth in 2009. the crisis on China has been di- based on monthly questionnaires rected at the export sector. As gross sent to 400 manufacturers, suggests Nevertheless, the crisis in China is exports account for about 40% of that Chinese exports may contract expected to be largely manageable China’s nominal GDP, the chain of further in the months ahead. Drop- in 2009, although much of the re- events triggered by the financial cri- ping to a record low of 38.8 in No- sponsibility for sustaining growth sis has ominous implications for sus- vember before improving to 41.2 in now falls on the government. As taining high economic growth. Yet December, the PMI registered below growth falls below 7-8% we can ex- exports of higher value-added ma- 50 (with 50 and above indicating pect more bold stimulus. Still, China chinery, equipment and electronics expansion) for three consecutive will face its share of old and new continued to grow at a high pace for months at the end of 2008. challenges in the year ahead. the duration of 2008. The bulk of the retraction in exports has fallen on China’s industrial production growth light manufacturing such as toys and in November declined to 5.4%, from textiles. Hence the global slowdown 8.2% in October, and there are indi- has served to exacerbate the dete- cations that the industrial slowdown Barry van Wyk, Consultant riorating outlook for China’s light in China may be more broad-based. [email protected]

8 China and the financial crisis Financial Crisis Timeline, 2007-2008 22 June 07 Bear Sterns halts redemptions for investors in High-Grade Structured Credit Strategies Enhanced Lev- erage Fund and High-Grade Structured Credit Fund August 07 Discovery of sub-prime mortgage-backed securities in portfolios of banks and hedge funds around the globe sparks worldwide credit crunch August 07 US Federal Reserve injects USD 100 billion into money supply for banks to borrow at low rates 10 Aug 07 For the first time since 11 September 2001, banks coordinate efforts to increase liquidity 18 Feb 08 Shares in Northern Rock are suspended and the UK bank is nationalised 17 March 08 JPMorgan Chase buys investment bank Bear Stearns for USD 2 per share April - May 08 UBS, Deutsche Bank, Merrill Lynch, Citigroup, RBS, MBIA, Blackstone, HSBC and Barclays all report more sub-prime-related losses and write-downs 07 Sept 08 US government seizes mortgage lenders Fannie Mae and Freddie Mac, which account for half of all outstanding mortgages 15 Sept 08 Investment bank Lehman Brothers declares bankruptcy 15 Sept 08 Bank of America takes over Merrill Lynch for USD 50 billion 17 Sept 08 US government bails out AIG for USD 85 billion 26 Sept 08 In the largest bank failure yet in the US, Washington Mutual, the giant mortgage lender with assets valued at USD 307 billion, is closed down by regulators and sold to JPMorgan Chase 01 Oct 08 US Senate and House of Representatives approve revised bailout bill, the USD 700 billion Troubled Asset Relief Programme (TARP) Oct 08 Britain agrees a GDP400 billion three-pronged plan to bail out British banks; Russia approves measures worth USD 86 billion to assist its banks 09 Oct 08 The US stock market suffers its largest loss since the crash of 1987 amid panic over General Motors, Morgan Stanley and several big insurance companies 13 Oct 08 EU economies unveil bailout packages totaling over USD 2 trillion 26 Oct 08 IMF offers lines of credit, including USD 16.5 billion to the Ukraine and USD 25 billion to Hungary, which had earlier also received a EUR5 billion credit line from the European Central Bank Oct - Nov 08 The French government injects EUR10.5 billion into six of the country’s largest banks; Japan unveils fiscal stimulus of USD 51 billion, South Korea of USD 11 billion 31 Oct 08 The Bank of England says that the world’s financial firms had by now lost USD 2.8 trillion as a result of the ongoing crisis 09 Nov 08 China announces stimulus package of USD 586 billion to rebuild market confidence and spur domestic demand 15 Nov 08 G20 developed and emerging nations agree in Washington to enhance cooperation to revive economic growth and to implement financial reforms Nov 08 IMF approves USD 7.6 billion bailout for Pakistan; IMF approves a USD 2.1 billion loan for Iceland after its banking system collapsed, the first IMF loan for a Western nation since 1976 25 Nov 08 US Fed commits another USD 800 billion to revive lending 26 Nov 08 People’s Bank of China cuts lending and deposit rates by 108 basis points 26 Nov 08 The European Commission unveils an economic recovery plan worth EUR200 billion, aiming to stimulate spending and boost consumer confidence 23 Dec 08 China cuts interest rates for the fifth time in three months as the government tries to inject money into the economy Dec 08 Data provider Dealogic reports that companies abandoned 1,309 transactions valued at USD 911 billion in 2008, with total M&A volume reaching a total of USD 3.28 trillion for the whole year, down 29% from 2007 Sources: ADB Asia Economic Monitor Dec. 2008; Gtnews.com; Various

9 China and the financial crisis Financial Crisis: China’s Response

China has not escaped the consequences of the global financial crisis, and its economy has already taken a hit. But with the Chinese government among the best positioned in the world to inject and control the spending of a massive stimulus package into an ailing economy without major inflationary or exchange rate consequences, there is much room for hope. By Lilian Luca.

It is no longer a matter of debate and stimulus spending packages. In only the heavily export-oriented light whether or not China has been af- the latest World Bank forecast (Dec industries that have been signifi- fected by the global financial crisis. 2008), 7.5% GDP growth is pre- cantly affected. But news abound Only two to three months ago, one dicted for 2009, yet the Goldman about construction sites and proc- could still hear opinions from econo- Sachs forecast is 6% and that of essing plants being closed down, mists and other observers that the Asianomics, 0-4%. (Ours is 5.6%.) and it is only a matter of time before Chinese economy has ‘decoupled’, large layoffs in China’s industrial and that the crisis will therefore not November has delivered a series of sector hit the headlines. affect China’s real sector. Moreover, grave economic news flashes from some optimistic analysts saw China around the world, including China. Decoupled or not? as the economic saviour of the rest Chinese y-o-y imports have dropped of the world, at least in terms of sus- for the first time in two decades by Researchers (Anderson, He, Zhang) tained imports of raw materials and 17.9% (versus +25.3% last year), have argued that the dependence of manufactured goods, giving other reflecting not only the worldwide China’s GDP on exports – often countries some room to manoeuvre. drop in commodity prices, but also a quoted at around 40% – has been We have by now seen, however, significant decrease in the volume of overstated. They have suggested a that China’s economy is affected by Chinese imports. And China’s ex- smaller figure of about 8-10% as the the crisis, and the more pressing ports contracted in November by contribution of net exports to China’s issues are: How badly? What will the 2.2% (versus +22.8% last Nov) and GDP, meaning that even if net ex- government do? and Will that be by 2.8% in December, reflecting the ports will stall, GDP growth in China adequate? slowdown of the major world econo- could still be a healthy 8-9% - if, and mies. The growth of exports to de- only if, the other components of China starts to become affected veloping countries is still strong at GDP (private consumption, govern- +32% year-on-year, accounting for ment spending, and investments) The financial crisis has hit the world about half of total Chinese exports, keep on growing. At this moment in in two waves: the first one, affecting but that will also probably decline in time, it is not even a question of mainly financial institutions, has had the coming months. It also means whether consumption and invest- very little effect on China. Long criti- that China’s exports to developed ment will slow down in China – but cised for tight control over its finan- countries are shrinking fast. rather by how much, and what the cial markets and on the flow of capi- government needs to do in order to tal, China has gained in this situation In terms of job losses, so far it is positively influence consumption (via by being relatively isolated from the liquidity crisis and losses in the de- China’s Foreign Trade rivatives markets that have impacted many other countries. The second Trade Balance wave, with the real economy being affected by the crisis, has only now Exports, % change y-o-y started to hit China, with a delay of Imports, % change y-o-y 3-4 months compared to other parts 60 of the world. 50

The latest economic statistics from 40 China leave no room for doubt about the effects of the crisis. Imports are 30 down, export growth has halted, and GDP growth for next year is con- 20 stantly being revised downwards by analysts. The magic figure of 8% 10 growth that is the Chinese government’s minimum target for the econ- 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 omy is not very likely to be achieved -10 as things stand at the moment – that is, unless the government imple- -20 ments some more radical policies Source: China Customs

10 China and the financial crisis income tax cuts, one-time transfer lapse in the first place. Countries A major stimulus package worth payments, pension increases or such as South Korea have tried to RMB4 trillion (almost USD 600 bil- property transfers), encourage in- devalue their currency in an attempt lion) was announced near the end of vestments (via ensuring easier ac- to stop the progressive decline of October, in an attempt by the Chi- cess to cheap loans for enterprises, exports, only to waste all their efforts nese government to prop up the larger tax deductions for invest- – when exports are slowing down confidence of consumers, firms and ments, faster depreciation or govern- due to a sharp decline in demand, government agencies. ment-guaranteed long-term purchas- there is little if anything one can ing contracts) and directly affect achieve from enforcing a cheaper Infrastructure build-up package. The GDP via increased government currency. plan so far includes major transpor- spending. tation system upgrades (railroads, Of course there is also still the im- tunnels, highways) and build-up in Crisis containment responses mensely important ‘project’ of setting disaster-affected areas (earthquake- around the world up a new world financial system, but hit Sichuan, areas affected by this process will be excruciatingly floods, etc.) Utilities and rural infra- The current financial crisis appears slow and will not have much of a structure projects are also part of the too serious to hope or wait for it to short and medium term effect, there- plan, as well as projects aimed at correct itself. We are already seeing fore we will not focus on it in this environmental protection and tech- some of its negative effects, and article. nological innovation. these are bound to intensify further during at least the first half of 2009, Partial consensus around the world’s Large provincial-level infrastructure and perhaps even longer. A major governments now seems to indicate upgrade projects – such as the deflationary recession is already un- that the real economy needs a sub- bridges that will connect Hong Kong, derway around the world, with the stantial jolt of support in the form of Macao and Zhuhai, and the Hebei associated loss of jobs, decreases in a large Keynesian-styled stimulus “Three Year Big Changes” pro- household income (due mainly to package, and countries should avoid gramme – are all part of additional budget freezes and reduction of pay- descending into a negative trend of provincial packages worth around ments), and a decrease in corporate beggar-thy-neighbour policies of pro- RMB10 trillion. Some of these pro- profits. With the financial markets tectionism and currency devalua- jects have been rescheduled to com- remaining depressed, credit is and tions. mence earlier than was originally will remain tight for quite some time planned. still, leading to a significant drop in Questions still linger about the types the amount of new investments and of projects that need to be targeted Consumer spending support has not also to capital depletion in firms for the best overall long-term effect directly been part of the stimulus around the globe. and the best way to finance these plan so far, but economists point out stimulus packages. Will they be that spending in social and educa- The slowdown of the world economy spent on ‘bridges to nowhere’ or will tional areas will go a long way to is already putting social and political they help build the new Silicon Val- increase the average Chinese citi- pressure on governments worldwide, leys and ‘tiger economies’ of the zen’s safety net and quality of life, including China. Will the Chinese world? How does a government and reduce the need to continually government resort to more ‘positive’ make sure that the financing of a save for a rainy day, thus indirectly stimulus packages or will it enter (or stimulus package does not break the increasing consumer spending. Also be drawn into) a downward spiral of back of future generations? No-one indirectly affected will be consumer protectionism and currency devalua- has the answers yet, and we can be spending on tourism and leisure, tion? Will the government’s initia- certain to see a number of different resulting from investments in new tives have a positive effect long- approaches around the world, and railroads and high-speed trains, for term, or will they haunt the country in only time can tell which ones will example. 10-15 years if they are short- succeed. sighted? Social and educational measures Chinese government measures will take the form of projects for low- Governments around the world have thus far cost housing, new health care facili- announced and implemented some ties, spending on new schools and initial measures to combat the ef- Up to this juncture, the Chinese gov- educational projects - all necessary fects of the crisis. Some, such as ernment seems to be taking a measures for the country’s long-term Russia, Korea and Japan, have tried Keynesian stimulus package ap- success. In addition, the new Labour to inject liquidity in capital markets, proach, and we have reason to be- Law in effect since January 2008 will and have failed to achieve any sig- lieve that it will continue in the same further serve to improve the well- nificant results after spending enor- direction, with even bigger an- being and protection of China’s mous amounts. Another approach to nouncements in the pipeline of workers, indirectly affecting an in- ‘solve’ the financial crisis, attempted measures to support the ailing econ- crease in their consumption rate. by a few governments around the omy in Q1-2009. Let’s look at a few world, has been to buy out the ‘toxic of Beijing’s announced measures, to Support to corporations to encour- assets’ that partially caused the col- understand the general trend. age investments are a small compo-

11 China and the financial crisis ment would have it, more in the value-added industries of the future, more sustainable and environmen- tally-friendly.

With regard to financing its stimulus packages, China is probably best positioned of all the large economies to do so on a large scale, without a debilitating effect on future generations. The Chinese budget deficit has been minimal in the past, and the almost two trillion-plus USD in foreign reserves mean that the stimulus plan will not negatively affect the RMB exchange rate in any significant way. Moreover, for the first time ever, the central government will allow local and provincial governments to run deficits, in effect creating even more financing resources for future additional stimulus Engine of growth: The countryside has been the impetus behind China’s economic miracle for 30 years. With the government pushing land reforms and social packages on a local level. and educational projects, the countryside is well positioned to provide a much- needed consumer spending boost. (Photo: BriceFR / flickr) Peeking into the future nent of the measures announced Export-boosting measures, in the Will China during this crisis engage thus far, containing a few minor tax form of reinstated export rebates for in a worldwide shopping spree for cuts. more than 2,000 products and the technology, talent and markets? Will return of the policy of allowing toll it pursue a powerful push into devel- Ongoing financial market reforms trade of non-ferrous commodities, oping and utilising less resource- will also indirectly help alleviate the have recently been announced. The intensive green technologies? Will it economic distress: the Chinese renminbi also seems to have largely invest massively in the education stock market will allow short selling stabilised against the US dollar over and healthcare of its people? Will it and margin trading soon, which may the past two months, putting an end reduce its economy’s dependence encourage more trading activity. In to a three-year trend of sustained on cheap labour and migrate it on to an attempt to increase their financ- strengthening, and this should go the next level? ing ability, provinces will in the near some way to helping the chances of future also be allowed to issue Chinese exporters. We are still wait- Or will it pursue a strategy of unnec- bonds. ing to see the effects of all these essary and wasteful infrastructure measures, but with the worldwide build-up that will lead only to overca- Land reform has been speeded up in demand for imported consumer and pacity and a negative environmental the past few months, and the latest investment goods very much on impact, while creating jobs only in measures intended to legalise the hold, it is quite likely that their effect the short-term? transfer of rural land rights can pos- will be minimal, or at least smaller sibility have the largest long-term than Beijing might be hoping for. It will probably be a combination of positive impact on the Chinese these strategies that the government economy. In effect, the government The likely overall effects of these will pursue, some more, and some is creating additional assets out of and other possible forthcoming less successful. But we do not for ‘thin air’ – as land becomes property measures by the Chinese govern- one moment doubt the resolve of the it will at some point in the future be- ment will be to keep China on the government to steer the economy in come tradable in one way or an- path of becoming the largest world a direction that benefits the people, other, it will have a value attached to economy – and not by 2040, as fore- and the ability of the Chinese people it, and will allow the peasants who casted only a few years ago, but to work hard and look towards the own it to borrow against it, rent it out much earlier, perhaps as soon as future with optimism. or sell it. The multiplier effect, across 2030. The trade imbalances that 750 million people, will be significant have plagued China’s relationships – increased rural incomes, a nar- with the EU and the US will naturally rower income gap, and expansion of adjust themselves, and China will the financial system via the entrance become a stronger, more diversified of a whole new segment of clients economy, and will find its own place Lilian Luca, Director: Russia/CIS into the market. This would also in the field of global specialization – & Group Corporate Office have positive social consequences. perhaps, as the Chinese govern- [email protected]

12 China and the financial crisis Financial Crisis: Beginning of the BRIC Era

The BRIC economies have been severely affected by the global financial crisis. Yet in contrast to the vulnerabilities they have displayed in the past, the largest developing economies in the world are now ready not only to deal with the current predicament, but also to rise above it by emerging from the crisis with an enhanced role in the global economy. By Javier Cuñat.

In 2001, Jim O’Neill, head of global 2008, the four countries have al- Again, this is especially relevant economic research at Goldman ready experienced a notable eco- to export-based economies like Sachs, predicted in his article nomic slowdown which is expected that of China, where exports ac- ‘Dreaming with BRIC’ that the com- to persist for the duration of 2009, counted for around 40% of GDP bined GDP of Brazil, Russia, India impacting several parts of their in 2007, with most of these ex- and China will surpass the GDP of economies to varying degrees: ports going to the US and EU. the G7 economies by 2050. Accord- Similarly, India, heavily reliant on ing to O’Neill’s hypothesis, the inte- • As the liquidity crisis and risk its software and back-office ser- gration of BRIC countries with the adversity persists, enterprises will vices (export) sector, will suffer world economy will intensify in rela- shift capital to their home econo- from the decrease of outsourcing tion to the comparative advantages mies and hold back on invest- activities from Western compa- and endowment factors of their re- ment plans. This will naturally nies. In 2007, Indian exports con- spective economies. China and India result in a decrease of Foreign stituted 52.8% of its GDP. will become world-leading econo- Direct Investment (FDI) in 2009. • The decrease in demand is also mies for the supply of goods and This is pertinent to the BRIC having a serious effect on com- services, while Brazil and Russia will economies, especially China and modity prices, especially im- excel in providing raw materials. India, since the major part of in- pacting Russia and Brazil as ma- coming FDI in the past has origi- jor commodity exporters. Be- Irrespective of the occasional criti- nated from Western companies tween June and November 2008, cism directed at O’Neill’s hypothesis, seeking lower production costs the price of coffee and soybeans, the fact is that BRIC countries have and access to local markets. FDI two of the main commodities ex- experienced impressive economic has also played a significant role ported by Brazil, decreased by growth in recent years. Between as an engine of growth for the 16% and 40%, respectively. As 2000 and 2007, China grew at an BRIC countries, in 2007 constitut- for Russia, the least diversified average rate of over 10%, India and ing 4.4% of GDP in China, 2.6% economy of the BRIC nations, the Russia at 7%, and Brazil at 3.4% - in Brazil, 2.5% in Russia, and 2% falling price of brent crude oil— all exceeding the world average of in India. decreasing from USD 147 in July 3.26% and accounting for close to • Economic recession in the US to USD 39.8 in December 2008, 30% of global economic growth for and EU will be accompanied by has also had severe implications the same period of time. Today, an increase of unemployment of reduced revenue for compa- BRIC countries account for 14% of and saving rates and therefore a nies like Rostneft and Lukoil. As world GDP, increasing from the 9% decrease in consumer spending. producers and exporters suffer of ten years ago. This is already resulting in de- from the adjustment of commod- creased internal demand as well ity prices and cessation of loans, Yet in spite of optimistic trends in as reduced external demand for this will contribute to lower output recent years, the current global eco- imports from BRIC countries. and economic growth in 2009. nomic turbulence is threatening the long-term prospects of the four BRIC Exports by Destination 2007, USD bn emerging giants. While it is still un- certain what the full impact will be Others BRIC Developed Economies and what the end result of the implemented responses will look like, it is China clear that virtually nothing will remain the same in the wake of the financial crisis. What are the implications for India the BRIC nations?

Rus s ia Impact 39% of Chinese exports and more than 40% of Indian exports have the US and EU as destinations The extent of the impact on the Br az il BRIC economies will be partially de- termined by the intensity and duration of the economic recession in the 0 200 400 600 800 1000 1200 US and the EU. In the last quarter of Sources: UN Comtrade; Euromonitor International

13 China and the financial crisis • Falling commodity prices and fear Forex Reserves, % Annual Growth, end–2008, USD bn of larger losses have driven investors to pull their investments +32.9 out of stock markets in BRIC 2000 economies. The MSCI Emerging BRIC countries collectively hold 39% of Markets Index, (benchmark for the world’s foreign exchange reserves equities in 24 developing nations) 1500 fell 53% for the whole year 2008, with Russia’s and India’s stocks, two of the worst performing, div- 1000 +8.7 ing 72% and 65%, respectively. Brazil went down 56% and China +16.6 52% for the same period of time. 500 +56.8

+2.7 While the impact of the crisis on the +64.4 +105.9 BRIC economies is clearly substantial, it is also of a more indirect na- 0 China Japan Eurozone Russia Taiw an India Brazil ture due to knock-on effects of de- Source: CIA, World Factbook creased demand and the credit Source: CIA, The World Factbook crunch in the US and EU. Yet the duration and intensity of the impact sustained high GDP growth in rency reserves. China, which will depend not only on the current recent years has facilitated a no- held almost USD 2 trillion of for- outlook for these economies, but table increase in the purchasing eign reserves at the end of 2008, also on the BRIC’s own response power and disposable income of accounted for a full 27% of this capacity, the structural dimensions BRIC consumers. According to total. BRIC nations are currently of their economies, and the imple- Euromonitor International, from able to implement sizeable fiscal mentation of adequate fiscal and 2002 to 2007, the number of stimulus packages in order to monetary policies. households in BRIC countries spur internal consumption and with an annual disposable in- foster stability of their national Ready to respond come of USD 10,000 or more currencies during the financial increased more than four-fold crisis. China is at present consid- At the current juncture, the invest- from 20.6 million to 90.1 million. ering the possibility of increasing ment and external sectors have be- This illustrates the fast-paced its current package of RMB 4 tril- come less prominent as engines of growth of the middle class and its lion (USD 586 billion) to RMB 14 growth. But if consumption and gov- emerging importance in BRIC trillion (USD 2047 billion), while ernment investment will become nations. In 2007, moreover, the Russia has injected USD 20 bil- more significant in the years ahead, proportion of consumer spending lion into its economy and cut the the longer term outlook for BRIC in GDP in China was only 35%, tax on profits last November. The countries is still more optimistic than 48% in Russia, 54% in India, and Brazilian government has called that of developed nations: 61% in Brazil. This is still very low for USD 3.6 billion in tax cuts and • Collectively, the BRIC countries compared to developed nations. India announced last December make up a potential consumer • Sustained trade surpluses and that USD 4 billion will be added to market of 2.8 billion people, con- FDI inflows in recent years have its current fiscal package to ease stituting more than 40% of the enabled BRIC countries to garner credit access to the most affected world’s population. In addition, 39% of the world’s foreign cur- sectors of the economy. In addition, low public debt in BRIC countries will provide more room Companies from Emerging Countries in the Fortune 500, 2000–2007 for fiscal stimulus than in other emerging and developed nations. 70 In 2007, 35 Chinese Companies • From 2000 to 2007, the amount Non BRIC BRIC were in the Fortune 500 60 of multinational companies 50 from emerging economies in the Fortune 500 has increased enor- 40 mously from 25 to 62. Although the bulk of these have suffered 30 from the effects of currency depreciation and the fall of stock 20 markets, many large BRIC firms are currently better equipped to 10 overcome the challenges of the 0 financial crisis. This is due not 2000 2001 2002 2003 2004 2005 2006 2007 only to sustained growth in recent Sources: Fortune 500; The Economist years, but also because state-

14 China and the financial crisis South-South Foreign Direct Investment 1985–2007, USD bn

350

300 South South FDI FDI from Emerging Economies Chinese Companies ‘Going Global’ 250

200 Global Economic 150 East Asian Slowdown Financial Crisis 100

0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06E 07E

Sources: World Investment Report; UNCTAD

owned companies are direct potential scope of economic and ments in bilateral trade, especially in beneficiaries of government fiscal political cooperation among the four the energy sector. Considering the assistance. For example, with BRIC countries, the circumstances high fluctuation of the dollar and their balance sheets brimming of the current environment are im- euro exchange rates, the switch to with cash, and with lower interest pelling these nations to plan and national currencies is especially im- rates and an appetite for re- implement common actions. portant and will enhance BRIC coun- sources, we may see a new wave tries’ cooperation in the face of the of Chinese companies looking The G20 Summit that took place in global financial crisis. for bargains abroad in the second Washington on 15 November illus- half of 2009 and beyond. trated the enhanced role that the The current period also forms a criti- • Due to the limited operational BRIC countries will play in the deci- cal juncture with the highest ever capacity of foreign banks in BRIC sion-making processes that will level of FDI between emerging coun- countries, the larger market share shape the post-crisis environment. tries. The last five years have wit- of a few state-owned banks, The four countries assumed a com- nessed a dramatic increase in the lower levels of external debt, and mon position at the Summit, propos- flow of FDI both from and to emerg- the lesser degree of integration in ing reform of the Bretton Woods sys- ing nations, increasing from USD 36 the global financial system, BRIC tem, including the restructuring of billion in 2002 to close to USD 300 banking systems have been the WTO and IMF, considered inca- billion in 2007. Chinese companies shielded from the worst effects of pable of preventing and resolving have been especially prominent in the financial crisis. Furthermore, the current financial crisis, as well as this process, which has changed BRIC banks are able to learn the enlargement of the G7 to incor- from an intra-regional (China in Asia, from the mistakes of their West- porate the world’s leading emerging Brazil in LatAm etc.) to a global phe- ern counterparts and are already economies in a format more closely nomenon, characterised by Chinese implementing better risk manage- resembling the G20. In addition, re- investments in East Asia, Africa and ment strategies. form of the regulatory framework of Latin America, for instance. global financial supervision was also These are reason enough to believe proposed, including the admission of The IMF has actively sought the as- that BRIC economies will gradually the BRIC countries to the Financial sistance of the BRIC countries to recover from the current challenges Stability Forum (FSF). Developing find a workable solution out of the that they face. In some respects they nations were able to point to the in- current predicament. It is apparent may even pull up before the US and herent contradiction of continuing to that due to the current economic Europe are able to rebound on a utilise the traditional leadership recession in the developed world, cyclical basis. But more pertinent, structures of the G7 while the crisis emerging economies will be the only adequate structural reforms and emanated from the developed world viable engines of growth for the macroeconomic policies in the past itself. global economy in 2009. Longer decade have enabled the BRIC term tectonic plates are shifting: the economies to (still) enjoy sounder The G20 meeting of November 2008 structure of the world economy is medium to long term economic pros- also witnessed the first announce- changing and the global financial pects than the developed world. The ment that the BRIC leaders would crisis is enhancing this shift. This steps to be taken now, however, will convene the first official BRIC meet- new world will see the BRIC nations determine that future. ing in Russia in 2009 to further take claiming a prime position. common actions in terms of coop- Stronger together eration in trade and investment. Javier Cuñat, Manager: China While the Goldman Sachs prediction Russia, China and India are already Strategy Group & LatAm Desk did not include an indication of the experimenting with rouble settle- [email protected]

Macroeconomic Monitor: China’s Slowdown China’s economy has been slowing down dramatically since the middle of 2008. This slowdown is currently intensifying and economic statistics for late 2008 and the first half of 2009 will disappoint those who have become used to GDP growth rates of over 7-8%. Expect growth of below that magi- cal range in the next few quarters. However, do not be caught out twice. While China’s slowdown and adjustment will be significant over the next several quarters, we still expect China to outperform other Asian economies, developing economies (from other regions), and developed economies. In short, do not expect a V-shaped correction over the short-term, but count on China to remain a significant growth driver in the global sphere over the medium-term. Long-term we see China becoming more prominent, not less. By Kobus van der Wath. Over the coming six months we expect a dramatic economic slowdown China Annualised Quarterly GDP Growth, % y-o-y, 2007–2010F in China after the already slower y-o- 14 Q3 and Q4 2008 GDP Q1 and Q2 of Q3 and Q4 y GDP growth of 9.0% in Q3 and growth of 9.0% and 6.8% 2009 will see a of 2009 will 12 showed the initial slowdown continuation of the show a mild 6.8% in Q4 of 2008. (We expected slowdown but at a rebound that 6.5% for Q4.) Indeed, full year 2008 10 sharper rate will extend into 2010 GDP growth of 9.0% is in sharp con- 8 trast with 13% in 2007 (revised up from 11.9%) and well below the av- 6 erage annual rate of over 11% sus- 4 tained for the past 4 years. But the point here is that next several quar- 2 ters will test Beijing’s resolve even 0 more as it tries to buoy the economy Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F in order to maintain at least 7-8%. 2007 2008 2009 Sources: China Monthly Economic Indicators; TBA Analysis The deeper slowdown that we expect in the first and second quarter Q4-2008 - while for 2009 we are ex- ures are all in ranges that have not of 2009 is a continuation of a trend pecting growth rates of below or been seen recently (or even at all, that emerged in the first half of 2008 around 5% for both of the first two over the past 30 years). As this new and that became more pronounced quarters, before a mild rebound later reality materialises - and settles in in Q3-2008 as the global picture in the year. Much of that rebound will with the media, analysts and other changed, but that trend especially be a statistical phenomenon but it commentators - many businesses intensified in Q4-2008. Exports, in- will nevertheless buoy sentiment. will question what this means over dustrial production and many other Our full year 2009 forecast is 5.6%. the long-term. China just celebrated indicators in October, November and 30 years of pro-market reforms, but December already showed this in- But whether our forecast is 100% will the current set of economic chal- tensification clearly. (See charts on accurate is not the issue. What is lenges invite an appropriate re- next 2 pages.) To illustrate, y-o-y certain is that China’s slowdown is sponse and what will it mean for the GDP growth for the four quarters of serious and analysts around the next decade of policy-making and 2008 slowed from 10.6% in Q1 to world are revising their global and reform? Our view is that China’s re- 10.1% in Q2, 9% in Q3, and 6.8% in China forecasts down and these fig- form process is irreversible, and pol-

China Annual GDP Growth, % y-o-y, 1978–2010F

Temporary slowdown 16 Overheating below 7-8% ’minimum concerns range’ in 2009 14 Past periods 7-10% GDP of overheating 7-8% GDP 12 growth ‘band’ growth ‘band’ 10

6 4 2 0 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F

Sources: World Bank; China Statistical Abstract 2006; OECD Report; TBA Analysis

last few months are: coal production Monthly Imports, % y-o-y, USD bn grew 5.2% in November against 140 Imports (lhs) Growth Rate (rhs) 40% 9.2% in October; electricity production declined 9% in November ver- 120 30% sus a decline of 4% in October; and 20% 100 the Purchasing Managers Index 10% reached its lowest level in November 80 2008 since its introduction in 2005. 0% 60 (See China Sourcing Strategy for -10% more on PMI, p. 25.) Overall, indus- 40 -20% trial output in 2008 was up by 12.9% in 2008, much below the 17.9% in- 20 -30% crease in 2007. For 2009, we are 0 -40% looking for industrial output growth of 06-Jan 06-Jun 06-Nov 07-Apr 07-Sep 08-Feb 08-Jul 08-Dec below 10% at around 8-9%. Source: China Monthly Economic Indicators Thirdly, the world regions that China icy-making and implementation are while in 2007 the ratio came to about export to (70% of China’s exports go core competencies of the CCP. Our 40%. In fact, in 1997 - at the time of to the US, Western Europe and view is also that China is on a much the Asian crisis - this ratio was below Asia) are all likely to be affected for better footing now than say in 1997 19%. Secondly, and importantly, a considerable period. Some coun- during the Asian crisis, and although many other drivers of growth also tries’ economies and imports will a deep, painful adjustment is occur- depend on the export performance, likely not recover for 2-3 years or ring in some sectors and regions, for example employment, household more. This is a stark reminder that the medium to longer term prospects income, manufacturing output, in- ideas about decoupling, expounded for China remain sound. In short, vestment demand and so forth. The by many during the previous fat over the next few quarters, but also fact that imports are also slowing years, was mostly unrealistic. over say a five year horizon, China down means that net exports as a is still likely to outperform Asian, direct contributor to GDP remains Fourthly, many small and medium- developing country, developed coun- roughly intact (China is actually still sized (and some large) exporters try and world average rates of enlarging its trade surplus), but the have suffered a slow deterioration in growth as it has done before. But indirect effect of lower industrial pro- viability and financial health (due to over the short-term China’s slow- duction (see chart on the next page), rising costs, a firmer RMB, etc) for down will be severe and for many capacity utilisation, layoffs and re- quite a while. For many, notably in businesses and strategies the fallout duced taxes all contribute to an un- the Pearl River Delta (PRD), 2007 will be serious. Below we elaborate comfortable ripple-effect. and 2008 were already tough and key trends that are underway. the latest fall-off in exports was (or Industrial production, for instance, will be) the end of the game. Many Losing an engine in mid-flight: grew 5.4% year-on-year in Novem- have shut down and the resultant job Export growth disappears, stellar ber after an already slow 8.2% in losses and/or layoffs present a huge growth ends? October, and December (despite a challenge for Beijing. marginal increase 5.7%) was also During the past few months, China’s weak. (Industrial production related Social stability remains paramount, export growth has been on a down- to exports meanwhile grew by only and there is an urgent need to cre- ward trend and in November and 5.2% and 6.8% in October 2008 and ate jobs and revive ailing sectors December exports actually recorded November 2008, respectively.) Other and regions. Here it is notable that year-on-year declines of 2.2% and examples of weaker activity over the concerns over inflationary pressures, 2.8%. This poor performance will be repeated for several months and we Monthly Exports, % y-o-y, USD bn do not expect to see a revival in the Exp o r t s ( lh s ) Growth Rate (rhs) near term; in fact, we do not see 140 60% much of a rebound before the latter part of 2009 and then only a mild 120 50% one. This view is shared widely and 100 40% Beijing also realises that recent ex- 80 30% port trends have not been a temporary blip. For the full year 2009 we 60 20% actually see exports contracting. 40 10% This presents a problem for several 20 0% reasons. Firstly, China has become more reliant on exports over the past 0 -10% 5-10 years. In 2001 China’s exports 06-Jan 06-Jun 06-Nov 07-Apr 07-Sep 08-Feb 08-Jul 08-Dec amounted to around 23% of GDP, Source: China Monthly Economic Indicators

Growth Rate of Industrial Added Value, % y-o-y about-turn (from restraining the economy to providing strong impetus

30 for faster growth). We cover China’s Growth Rate of Industrial Added Value response elsewhere in this publica- 25 tion (see China Response, p9), but suffice to say that so far there has 20 already been a strong response that is likely to be augmented by addi- 15 tional measures in the period after Chinese New Year and over the 10 course of 2009. So far other measures have included: lower property 5 sector transaction taxes, subsidies to low income earners and the agri- 0 2001 2002 2003 2004 2005 2006 2007 2008 cultural sector and reduced export Source: National Statistics Database taxes for many industries. There has also been a slowdown (or even a that were rife from the middle of common. China, we expect, will not reversal) in the reduction of export 2007 to the middle of 2008, have make either of these two mistakes. subsidies. Expect more. now made room for concern over an extended deflationary cycle. CPI (Re)starting the backup engine: As mentioned above, our 2009 GDP peaked early in 2008, while PPI also Government stimulus to avoid a forecast projects a very weak H1- peaked around mid-year. Lower en- hard landing? 2009, a consolidation in Q3-2009 ergy, commodity and import prices and a mild recovery in Q4-2009. along with reduced food prices in- As the global financial crisis un- This recovery can be ascribed to a creasingly synchronises with much folded in H2-2008, and as the real somewhat less vulnerable global weaker demand growth for a low economic reality became evident picture at that time, a statistical inflation environment, creating clear around the world (and in China), windfall in terms of measuring year- risks of deflation into 2009. China’s policy makers and planners on-year growth against a weak Q4- became convinced that the impact 2008, and (our anticipation of) Bei- The upshot is that China must on the local economy would likely be jing’s success in delivering a stimu- quickly create new drivers of growth. severe. Moving seamlessly from a lus package. Our Q4-2009 forecast At the very least it must find ways to five-year phase of trying to slow eco- is 7.5%, which would again bring avoid a hard landing. But it is not nomic activity, there was a swift growth back into the usual easy to quickly stimulate domestic change to an expansionary policy ‘expected’ range. Moving forward demand in order to serve as a re- stance. Monetary measures were into 2010 we expect a continuation placement for external demand. taken (reserve requirements were of that momentum until statistics However, at least in China there is a cut, interest rates were cut and again work against us in H2-2010, long history of pump-priming, infra- money supply growth targets were but we nevertheless look for a full structure projects and other demand loosened while banks were encour- year GDP growth rate of 7.5% in stimulus experience to draw on. aged to keep lending growth up); 2010. Many other economies will move too and fiscal policy was quickly identi- slowly either in planning a stimulus fied for significant stimulus. Flying again: Unlocking China’s response, or in implementing the domestic consumer potential? plan. The US and Western Europe The four trillion yuan stimulus pack- are examples of long decision cycle age announced by Beijing in late Exports have contracted for the past systems where political deadlock is October formed part of this policy several months, yet to write off

Monthly Retail Sales, % y-o-y, USD bn Retail Sales Growth Rate 160 140 26% 120 22% 100 80 18% 60

40 14% 20 0 10% 07-Jan 07-Jun 07-Nov 08-Apr 08-Sep Source: National Statistics Database

Annual per Capita Rural and Urban Disposable Incomes, % y-o-y, USD 2,000 Per Capita Annual Disposable Income of Urban Households 25% 1,800 Per Capita Annual Net Income of Rural Households Growth Rate(Urban) 1,600 Growth Rate(Rural) 20% 1,400 1,200 15% 1,000 800 10% 600 400 5% 200 0 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: National Statistics Database

China’s ability to compete in export always been a key element of CCP tries affected by the crisis) and an markets over the longer term would planning. implementation apparatus that could be a mistake. But it is also true that see the Chinese consumer reshaped easy export gains, on the back of The problem of course is that this as a key pillar of the Chinese econ- low labour costs, are no longer pos- was supposed to be something that omy. These factors are central to our sible or viewed as the model for pull- would be addressed over multiple 5- continued optimism over China’s ing China ahead over the next 30 year plans. Suddenly, the need for medium to long term prospects. years. That, for example, is why the accelerated rural development, job export-intensive PRD is now rein- creation and social security is far venting itself to move to higher more urgent. While exports have Exchange rate outlook: No longer value-added industries, higher tech- practically fallen off a cliff over a a one-way bet nology sectors and a services-based matter of 3-4 months, it will take segment. This is also why there is so many quarters to kick-start the The gradual appreciation of the RMB much debate about how China could stimulus programme, spend the over the past three years, both unlock the potential of its vast popu- money, implement projects and see against a basket of currencies and lation as a credible and sustainable results at the grass-roots level (let against the USD, may be on hold. consumer market. After all, private alone in quarterly GDP growth statis- (Since the de-pegging in 2005 the consumption in China constitutes tics). This is a key challenge for Bei- RMB has appreciated by 20% only 30% of GDP as opposed to jing and commentators are sure to against the USD.) 70% in the US (and over 50-60% in highlight the risks to social stability. the UK, Germany and Japan), so But Beijing is aware of the risks too, It will be difficult for Beijing to engi- there is scope to expand that share. and will do everything possible to neer a sudden return to a weaker Recent events and reduced external expedite implementation of its meas- bias for the RMB, and a significantly demand have now forced Beijing to ures over the course of the next few weaker RMB would be politically stimulate household consumption. quarters. unacceptable. However, a simple Exports may remain important but it continuation of the appreciation can no longer be perceived as the In effect, as the global economic trend of the past three years is reliable engine of growth that it used situation deteriorates further and as unlikely too. At the very least the to be. At the very least we can ex- the impact on China becomes current circumstances will inject a pect China’s planners to think more worse, the Chinese government will good degree of two-way risk into the about their export composition, ex- select a number of longer term capi- business of forecasting the USD/ posure and policies. tal projects that were previously de- RMB. (Forward rates in the NDF layed or cancelled due to overheat- market has already illustrated this The long-term future will no doubt ing concerns over the past few clearly.) It will also fuel friction be- see much more emphasis on do- years, and re-launch them in a su- tween Beijing and the new admini- mestic demand, specifically on the per-package over the coming two to stration in Washington. private consumer. There is already a three years. Future 5-year plans will huge market of new rich and an up- likely also be reviewed in line with Our view is that the RMB will be and-coming middle class to tap into the notion of making the Chinese range-bound over the next six and grow. But it probably also suits consumer a top priority. months. The extent of the slowdown Beijing to put more emphasis on the globally, and in China, will then de- grassroots and in particular secure The fundamental fact remains that termine what we can expect for the the incomes and prospects of the China has an underdeveloped con- next stage of RMB adjustment. For rural poor (especially in central, sumer base that can be developed, the time being our forecast antici- western and north-eastern China). a national spending capability pates a further but slight apprecia- Pulling these households into the (higher savings and lower indebted- tion in the RMB during the second Eastern China success story has ness compared to most other coun- half of 2009.

CHINA MACRO STRATEGY: range over the medium and longer losses have been sustained in 2008 Risk & Reward Coexist, Business term of very close to but hopefully and how many are likely to occur in Planning is Crucial above the 7% level. This will be a 2009? This is an obvious area of departure from previous years when concern but very little information is Key elements of our global out- high (above 9%) but unsustainable available on the exact scale. look for 2009, 2010 and beyond growth became the norm. Strategic opportunities By 30 June 2009 we would have We view the upper end of a 6-8% seen the low for most financial asset GDP growth range as acceptable (in Despite a short-term disappointment and commodity prices globally. order to meet Beijing’s social chal- in growth we believe that the world lenges, avoid structural distortion will maintain the view that China is a After 30 June 2009 the chances of and/or overheating), and it will also significant developing country that good news increase in probability, be a more sustainable growth rate will continue to industrialise, urban- i.e. expect an end to a period of over the long-term. ise and modernise. As this history ‘one-way-bias’ in news. unfolds we expect to see opportuni- We expect changes in the long-term ties over the short, medium and long After 30 June psychology in global composition of GDP: regional, sec- term. A few preliminary ideas: markets will turn steadily from toral and internal/external demand. ‘gloom’ to ‘cautiously optimistic’ as • As Beijing continues to support intermittent signs of recovery be- Reasons for optimism domestic demand (in particular the come discernible over the medium- ‘grass-roots’) we can expect more term. Policy makers—Beijing’s resolve centers of growth and market op- and the realisation that in the short portunities in third-tier, fourth-tier In the second half of 2009, in Q3 to medium term domestic demand and fifth-tier cities and regions. It is and especially Q4, a statistical and needs to cushion the blow from re- time for go-to-market strategies in activity rebound will occur. This will duced exports. The stimulus meas- rural and Western China buoy the prevailing mood and cause ures announced so far are likely only • A shift away from ‘more-is-better’, a consolidation phase for 2010 to the beginning of an ongoing effort to quality and sustainability will potentially look much different. that will unfold in coming months. make global suppliers of key technologies and solutions attractive. The first half of 2010 will be meas- Implementation—A key strength of Efficiency and safety now become ured against very poor numbers in the Chinese system is the ability to priorities and foreign firms will the first half of 2009. This will help deliver on plans and there are many benefit if they develop the right anchor confidence and turn the page shovel-ready projects. channels-to-market in this phase on 2008/9 in a positive fashion. This • The next stage of growth will coin- Structural issues—China’s economy will hold true for the world but also cide with a renewed environmental for China. is structurally different from say the consciousness which will make US or Asian countries in 1997 with foreign technologies, services and lower indebtedness, higher savings There is scope for supply bottle- solutions in this sector more attrac- necks and capacity shortages and stronger bank balance sheets. tive. This is a long-term trend that across products as we enter deeper must be captured into 2010. This will lay the founda- Causes for concern tion for price escalation, fixed asset • The Chinese consumer is about to investment and a welcome sea- Duration—Exports are unlikely to become far more powerful and change in investor sentiment. come back anytime soon but just renowned. Firms that have well how long before this happens? developed Chinese consumer Key elements of our China out- knowledge and plans will excel look Marginal projects—There is a risk • Players in infrastructure must sell that marginal projects are taken on know-how and technology into China’s first half of 2009 will be in the stimulus programme that may large-scale projects during the weak, but the second half will be not ripple through far/wide enough. stimulus period better, followed by a stronger first • China Procurement will remain a half of 2010 as the stimulus starts to Consumer and general sentiment— big opportunity for firms that can kick in. Confidence, prices and ex- Property and stock markets have manage international projects and pectations will all ‘track’ this macro seen significant value-erosion. This risk. The end of a runaway world cycle for direction. is sure to weigh on consumer de- economy provides an environment mand just as we need more reliance where long-term supply relation- A V-shaped correction looks very on domestic demand. (From late ships can be forged and developed unlikely but we do not see a perma- 2007 to the end of 2008 the stock in a sober and rational manner nent reduction of China’s growth market lost 21 trillion yuan, or beneath the 7% level (that is so cru- roughly 100% of GDP in value.) Kobus van der Wath cial for social stability in China). Founder/Group Managing Director Rather we expect a new average Unemployment—Just how many job [email protected]

Selected Quarterly TBA Forecasts for China (% y-o-y) 2007 2008 2009F Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Real GDP 11.7 12.2 12.2 11.9 10.6 10.1 9.0 6.8 4.3 4.5 5.8 7.5 Retail Sales 19.2 20.9 23.1 26.0 n/a 24.0 22.2 19.8 17.0 16.0 15.5 18.0 Capital For- - - - 24.8 - - - 25.5 - - - 29.0 mation Industrial 15.1 18.3 18.7 17.5 16.6 15.9 13.0 6.8 6.0 8.2 9.5 10.5 Output Exports 27.9 27.4 26.2 22.2 21.3 22.3 23.1 14.6 -3.0 -4.0 1.0 5.0 Imports 18.2 18.2 20.7 25.4 28.7 32.4 25.7 -10.1 -10.0 -8.0 2.0 3 CPI 102.7 103.6 106.1 106.3 108.0 107.8 105.3 103.2 102.0 101.0 100 100 USD/RMB 7.76 7.68 7.56 7.43 7.16 6.96 6.84 6.83 6.8 6.8 6.7 6.65 China Consensus: China GDP Growth Forecasts for 2009 by Selected Analysts (% y-o-y) Highest to Lowest Latest forecast for 2009 Previous forecast for 2009 (by December 2008, January 2009) (by beginning of Q4-2008) CASS 9.3 (started to signal downside risk) 9.7 UOB 8.3 n/a Asian Development Bank 8.2 9.5 Merrill Lynch 8 8.6 Wing Hang Bank 8 n/a HSBC 8 n/a EMIS 21 Source Consensus 7.76 >9 (30 Dec 2008) World Bank 7.5 (Reference to sub-6% growth) 9.2 UBS 7.5 9.5 Deutsche Bank 7.0 7.6 BMI 6-7 8.8 Global Insight 6.9 n/a AT Kearney 6.0 n/a EIU 6.0 7.5

Goldman Sachs 6.0 n/a THE BEIJING AXIS 5.6 8.5 RBS 5.0 8.0 Asianomics 0-4 (see 30% risk of negative growth) n/a Sources: Press; Various; TBA

THE BEIJING AXIS China Strategy Group has again prepared a start-of-the-year ‘China Out- China Chart Pack look’ chart pack for the Chinese economy in 2009. The chart pack outlines historical and recent trends, along with forecasts for selected economic statistics and other indicators, cover-

ing China’s national accounts, prices, consumption, investment, public finances, external China Outlook 2009—Selected trade, financial indicators, demographics and comparative international statistics. The chart Economic & Other Indicators pack can be downloaded from the ‘Knowledge’ section on our website at: www.thebeijingaxis.com

China Facts, Figures & Forecasts

The following is a brief selection of data and forecasts that illustrate the main trends in the growth and transformation of China’s commerce and industry. We also include a forecast of developing and developed country growth, along with world average growth.

China Selected Economic Indicators 2003 2004 2005 2006 2007 Nominal GDP ($bn) 1,641 1,932 2,244 2,645 3,242 GDP per capita ($) 1,270 1,486 1,716 2,012 2,454 Real GDP growth (%) 10 10.1 10.4 11.1 13.0 Growth in private consumption (%) 9.2 10.5 12.1 12.7 14.9 Growth in real fixed asset investment (%) 26.7 25.8 25.7 24 24.8 Fixed investment (% of GDP) 39.4 40.7 42 42.8 44.1 CPI inflation (% change in average index for the year) 1.2 3.9 1.8 1.5 4.8 Exchange rate (RMB per USD, end-year) 8.28 8.28 8.07 7.8 7.09 Nominal wage growth (% change year-on-year, average) 13 14.1 14.6 14.4 16.5 3-month inter-bank rate (%, end-year) 3 3.6 3.6 2.8 4.4 Broad money supply (M2,% of GDP) 162.9 158.9 160.7 163.9 163.6 Broad money supply (M2,% change year-on-year) 19.6 14.6 17.6 16.9 16.7 Current account balance ($bn) 45.9 68.7 160.8 249.9 333.7 Net FDI ($bn) 47.2 53.1 67.8 60.3 67.7 Foreign debt ($bn, end-year) 193.6 247.5 281 323 373 Foreign debt (% of GDP, end-year) 11.8 12.8 12.5 12.2 11.5 Central bank gross FX reserves ($bn) 403 610 819 1,066 1,500

Source: Credit Suisse Capital Markets Report

World GDP growth, % y-o-y, 1990–2010F

14 China 13 Emerging and Developing Economies 12 World 11 Advanced Economies 10 9 8 7 6 5 4 3 2 1 0 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 -1 -2

Sources: IMF; TBA Analysis

FDI Statistics by Province

China’s Utilized Foreign Direct Investment

Heilongjiang

Jilin Xinjiang Beijing

Gansu Inner Mongolia Liaoning Ningxia Hebei Tianjin Qinghai Shanxi Shandong

Tibet Shaanxi Henan Jiangsu Sichuan

Hubei Anhui Shanghai Chongqing Zhejiang Flow Stock Jiangxi China’s FDI Hunan (USD bn) (USD bn) Guizhou Fujian 2003 53.50 228.37 Yunnan 2004 60.63 245.47 Taiwan Guangxi 2005 72.41 272.09 Guangdong 2006 72.72 292.56 2007 83.52 327.09 Provinces in red made up 75% of China’s Actual Utilized FDI in 2007 2008F 92.40 419.49 Hainan

FDI Actual OFDI From FDI Actual OFDI From % of % of Comparable % of % of Comparable Utilized Chinese Side Utilized Chinese Side Total Total FDI inflow Total Total FDI inflow (USD bn) (USD bn) (USD bn) (USD bn)

Anhui 3.0 2.5 0.02 0.2 Latvia Jiangsu 21.6 17.8 0.47 6.5 Chile

Beijing 5.1 4.2 0.37 5.1 Slovakia Jiangxi 3.1 2.5 0.02 0.2 Latvia

Chongqing 1.0 0.8 0.44 6.1 Iran Jilin 0.9 0.7 0.24 3.3 Venezuela Liaoning 9.1 7.5 0.22 3.1 Vietnam Fujian 4.1 3.3 0.31 4.3 Philippines Ningxia 0.1 0.1 0 0 Haiti Gansu 0.1 0.1 0 0 Sierra Leone Guangdong 17.1 14.0 1.47 20.5 Nigeria Qinghai 0.3 0.3 0 0 Netherlands

Guangxi 0.7 0.6 0.07 0.9 Botswana Shaanxi 1.2 1.0 0.04 0.5 Uruguay Guizhou 0.1 0.1 0.00 0.0 PNG Shandong 11.0 9.0 0.40 5.6 Malaysia Hainan 1.1 0.9 0.03 0.5 Honduras Shanghai 7.9 6.5 0.63 8.7 Argentina

Hebei 2.4 2.0 0.06 0.8 Bahrain Shanxi 2.5 2.0 0.12 1.7 Panama

Heilongjiang 0.5 0.4 0.03 0.4 Antigua Sichuan 1.5 1.2 0.79 11.0 Bahamas Tianjin 5.3 4.3 0.10 1.4 Serbia Henan 3.1 2.5 0.14 2.0 Latvia Tibet 0 0 0 0 Vanuatu Hubei 2.8 2.3 0.01 0.2 Bosnia Xinjiang 0.1 0.1 0.25 3.5 PNG Hunan 3.3 2.7 0.29 4.1 Oman Yunnan 0.4 0.3 0 0 Afghanistan In. Mongolia 2.1 1.8 0.07 1.0 El Salvador Zhejiang 10.4 8.5 0.61 8.4 Indonesia

Sources: UNCTAD Database; China Commercial Yearbook 2008

China Sourcing Strategy Affected by the financial crisis, China’s foreign trade slumped in Q4-2008, and the Chinese government has taken a series of measures to stimulate exports and domestic consumption. This section provides information and analysis to help formulate China Sourcing Strategies in 2009. By the CSU team.

Highlights China Exports as Share of GDP, % 1978–2007

• In November 2008 China’s exports suffered the first 45 monthly y-o-y decline in seven years

• China’s manufacturing Purchasing Manager Index 30 (PMI) in November fell to 38.8%, the lowest point since the PMI survey was initiated in China in 2005 • The Chinese government adjusted export tax re- 15 bates four times in H2-2008 • China’s Customs estimated the y-o-y growth rate of 0 the total value of imports and exports in 2008 to be 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 18%, and this will fall to below 5% in 2009 Source: World Bank • The RMB posted a record one-day decline against the US dollar on 1 December 2008, falling from 6.8349 to 6.8505 China Exports by Category, USD bn 1,400 Ot hers • China removed 1,757 items from its lists of product Sund ry 1,200 categories that had been either restricted or banned M achinery Eq uip ment from foreign investment in processing trade. These 1,000 Prod uct s Classif ied b y mat erial products, ranging from textiles to plastic goods, ac- 800 Chemicals and Relat ed Prod uct s 600 M ineral It ems count for 77% of the products designated as re- Foodstuffs stricted and may involve USD 30 bn in foreign trade 400 200 • China adjusted the rate and application scope for 0 some provisional and special taxes from 1 December 2001 2002 2003 2004 2005 2006 2007 Jan - 2008. The export duty was scrapped on 102 items Oct • Supplier audits have now become even more crucial Source: MOFCOM China 2008

Export Slowdown: Implications for Procurement Managers that Target China China’s November exports fell by tiles, parts of automatic data proc- ties; the RMB’s appreciation has 2.2%, the first monthly decline in essing machines, televisions/radios, slowed; and China’s energy and raw seven years. The number for De- garments, footwear and toys. material prices are going down. All of cember was –2.8%. these are drivers for better pricing. The main reason for the severity of Buyers in emerging markets and There were early signs of decreasing export declines is shrinking overseas developing countries, such as south exports, such as at the Canton Fair demand, as a result of the crisis. Asia, the Middle East, Latin America, where orders decreased by 17%. Africa and Eastern Europe, could Also, the PMI fell to its lowest point China’s government is seeking new benefit from the Chinese govern- since China introduced the survey economic growth angles, while some ment’s policy of encouraging export- system, and exports of some main measures have been taken to buoy ers to actively develop these mar- export commodities declined in Q1, struggling exporters, i.e.: kets in 2009 as developed country Q2 and Q3 of 2008, including tex- • assisting exporters to transform by imports weaken. stimulating domestic demand Monthly Export Growth, % y-o-y • encouraging M&A and to help with Annual Export Growth, % y-o-y

35 2008 monthly growth (y-o-y) industry consolidation, and 50 30 • guiding exporters to better antici- 40 25 pate RMB volatility by 1) better 30 20 managing FX risk, 2) improving 15 20 10 resilience despite a stronger RMB 10 5 0 Procurement managers that target 0 China may notice a series of favour- -5 -10 Jan M ar M ay Jul Sep Nov able trends: more export rebates are 1978 1988 1998 2008 Source: China Customs (again) provided; fewer export du- Source: China Customs

Regulatory Watch Purchasing Managers Index, Jan 2007–Dec 2008

China raised export tax rebates four times in the sec- PMI in Manufacturing Industry ond half of 2008 60 1st time (effective 1 August 2008):

China lifted export tax rebates on a range of textiles and 50 garments to 13%, some bamboo products to 11%. 2nd time (effective 1 November 2008): The index has been lower than 50% for three This adjustment involved 3,486 items of products, which 40 consecutive months is about 25.8% of total products. Rebates were increased on textiles, garments and toys to 14%, and furniture from 11% to 13%. In addition, rebates on exports of selected 30 ceramic, plastics, mechanical, electrical and medicinal Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 products were lifted by 1% to 2%. 3rd time (effective 1 December 2008): Source: China Federation of Logistics & Purchasing (CFLP) This adjustment raised rebates on 3,770 items of export • The FLP manufacturing PMI in November 2008 fell goods, about 27.9% of the total products, including labor- to 38.8%, which was the index's lowest point since intensive, mechanical and electrical products. The adjust- the PMI survey was initiated in China in 2005 ment reduced or eliminated export duties on certain types • It climbed again to 41.2% in December. The new of steel, chemical and some fertilizer products. order index rose by 5.0% and the purchasing price 4th time (effective 1 January 2009): index rose by 6.1%, while the new export order index was 30.7%, the lowest among all the composite ele- The last adjustment in 2008 increased rebates on 533 ments of the manufacturing PMI items of high-tech and machinery products. It raised re- • Among the 20 industries surveyed, the PMI of manu- bates on industrial robots and airplane navigation sys- facturing of beverages and manufacturing of medi- tems to 17%, motorcycles and sewing machines to 14%. cines was over 50%; while the PMI of 10 industries The RMB posted a record one-day fall to the USD of a total of 20 was lower than 40%

On July 21 2005, after more than a decade of strictly pegging the RMB to the USD at an exchange rate of 8.28, About the PMI the People's Bank of China announced a revaluation of The Purchasing Managers Index (PMI) is a commonly the currency and reform of the exchange rate regime used international macro-economic monitoring indicator, (pegged against a basket of currencies). Since then the but it is relatively new to China. It focuses on the areas of RMB started to appreciate. production and distribution, manufacturing and non- manufacturing. By the end of July 2008, the RMB had appreciated by about 18%, but then experienced a 20-day range-trade. The PMI is a composite index of five sub-indicators which Although it subsequently resumed its appreciation once are allocated the following weights: more, the speed of appreciation was much slower and Production level (25%) characterised by short reversals. New orders (30%) On 1 December, when the RMB median rate to the US Supplier deliveries (15%) dollar dropped 156 basis points from 6.8349 to 6.8505, it Inventories (10%) started off another round of depreciation and range- Employment level (20%) trading. This was considered a signal that China will re- sist further RMB strength (and international pressure) to The magic number for the PMI is 50. A reading of 50 or assist domestic manufacturers and maintain the current higher generally indicates that the industry is expanding. account surplus, which came to over 7% of GDP in 2007. There are over 20 countries and regions, such as the US, UK, Japan and Singapore that have established a PMI survey. The PMI system and its methodology is unified, China’s Long-term Exchange Rate Trend and therefore are comparable internationally. The establishment of the PMI survey in China has significance in 2 Average USD/RMB exchange rate the areas of macroeconomic and industrial economic ad- 4 justment, control and forecasting, and in the planning of enterprises’ operations. 6 8 The National Bureau of Statistics of China (NBS) and China Federation of Logistics & Purchasing (CFLP) re- 10 1988 1994 2005 2008 leased the first Purchasing Managers Index on Manufac- Source: MOFCOM China turing (PMI) on July 6 2005 in Beijing.

WHY Source in China: Logistics is Relatively Mature compared with other Middle Income Countries/LCCs On the Ground Situation • Delivery times depend on many factors – a quoted lead time is only an estimate • In China, speed is not always dependent on the factors that you are used to • Regard speed within the context of the time it takes to get one order delivered in perfect order, not the time it takes to deliver the first order • China has an overburdened rail system • Port capacity is large, expanding, but still at times inadequate for existing needs • Container space from China is very limited; this creates the potential, though not the certainty, of transportation delays. The current slowdown alleviates this but do not get caught out as exports revive • Factories may oversell their capacity in order to later cherry pick the ‘right’ client-portfolio • Input materials are not supplied with the same certainty as in Western economies; this is typically not a high priority for Chinese manufacturers, but domestic firm SCM is improving • In many cases after sales service consists of sending free parts with the next shipment, for the party on the other side to fix the machinery; a comprehensive maintenance and service mindset is still developing • Uncertainty about the supply of input materials may not always prevent suppliers from making a deal anyway • Delays are often caused by different interpretations of the responsibilities in terms of documentation China’s Relative Logistics Performance Country LPI Customs Infrastructure International Logistics compe- Tracking & tracing Domestic logistics Timeline shipments tence costs Singapore 4.19 3.90 4.27 4.04 4.21 4.25 2.70 4.53 Japan 4.02 3.79 4.11 3.77 4.12 4.08 2.02 4.34 China 3.32 2.99 3.20 3.31 3.40 3.37 2.97 3.68 Thailand 3.31 3.03 3.16 3.24 3.31 3.25 3.21 3.91 India 3.07 2.69 2.90 3.08 3.27 3.03 3.08 3.47 Vietnam 2.89 2.89 2.50 3.00 2.80 2.90 3.30 3.22 Brazil 2.75 2.39 2.75 2.61 2.94 2.77 2.58 3.10 Russia Federation 2.37 1.94 2.23 2.48 2.46 2.17 2.40 2.94

Source: World Bank LPI 2007

WHAT to Source in China: China’s Exports are led by Machinery and Mechanical Appliances China’s Export Mix, % 2007

10.24% Machinery and mechanical appliances; electrical equipment and parts 2.51% thereof; sound recorders and reproducers, television image and Machinery and sound recorders and reproducers, and parts and accessories of such 3.00% mechanical articles appliances: Textiles and textile articles 3.34% 43.42% Base metals and articles of base metal Miscellaneous manufactured articles 4.19% Vehicles, aircraft, vessels and associated transport equipment 4.51% Products of the chemical or allied industries Optical, photographic, cinematographic, measuring, checking, preci- 5.67% sion, medical or surgical instruments and apparatus; clocks and watches; musical instruments or parts and accessories thereof Plastics and articles thereof; rubber and articles thereof Base metals: Footwear, headgear, umbrellas, sun umbrellas, walking-sticks, seat- 9.49% sticks, whips, riding-crops and parts thereof; prepared feathers and Textiles and textile articles: 13.62% articles made therewith; artificial flowers; articles of human hair Source: China Customs Others Composition of China’s Exports of Machinery and Mechanical Appliances 2007, USD bn 528.82 112.24

46.79 42.66 32.74 24.68 18.73 17.88 14.22 10.80 207.80

Machinery Automatic Radio and TV Electric Parts, acces- Electronic Printing Television Electric Parts for Others data proc- transmitters, apparatus sories, ex- integrated and ancil- receivers, transform- radio, TV essing ma- television for line cept covers, circuits lary ma- video moni- ers, static transmis- chines cameras telephony, for office and micro chinery tors and pro- converters sion, receive (computers) telegraphy machines assem- jectors and rectifi- equipment blies ers Source: China Customs

HOW to Source in China China Sourcing in 2009: Procurement Risk Management Imperatives in Turbulent Times As the global financial and real economic crisis deepens and China becomes more affected, firms are engaging in supplier audits. Some firms are scaling back on China sourcing plans in the wake of the crisis but firms that are taking a long-term view remain active and are still viewing China as having an important share of supply. Looking at the general picture of sourcing in China in 2009, risk management is more critical than ever. Here we abstract 5 imperatives, all ba- sic and practical measures, that procurement managers must adopt in turbulent times:

1 Strategic review & sup- Measure exact China exposure (review current and planned future contribution of plier health check (audits your China procurement) in overall supply chain; and do a rigorous once-off sup- and due diligence) plier health check and audit to gauge fallout of the financial crisis in your supply base. Constantly review suppliers contract execution and focus on risk.

2 Review clauses in exist- Review and confirm if existing contracts are subject to premises in terms of RMB ing supply contracts exchange rates, export duty policy, energy and raw material prices, etc.

3 Renew supplier evalua- Renew evaluation process for new suppliers by integrating current reality market tion process research (are there better choices emerging?) given changed conditions.

4 Reassess 3rd party ser- Reassess all service providers, including logistics companies, law firms and con- vice providers sulting companies. Many are being squeezed by the current market presenting risk as they shed teams, close offices, cut costs, cut corners, etc.

5 Strengthen business rela- Get closer to suppliers than ever and develop strategic relationships, such as tionships with suppliers becoming an exclusive agency, signing long-term cooperation contracts, etc.

Process Flow of THE BEIJING AXIS China Sourcing Unit (CSU) - Needs Analysis This section introduces the process flow of THE BEIJING AXIS China Sourcing Unit, i.e. how we operate from the point of receiving enquiries from clients, the services included in this solution-process and the benefits provided to our clients, and lessons learnt. In this edition we touch on the initial stage of strategic sourcing: Needs Analysis. A thorough needs analysis will focus China efforts and increase effectiveness/efficiency. It will also help intro- duce a risk management orientation form the outset. CSU collaborates with clients in conducting the needs analysis by employing TBA’s research capacity, knowledge management system, on-the-ground reach & by utilising established networks. We are especially active in the testing stage as outlined below.

Preliminary Test for Final Systematic Categories China Categories Industry 1 Needs and ‘Wish- Relevance and ‘Target Search & Analysis List’ for and Lists’ for Supplier China Feasibility China Identifica- tion

Issues to consider: • Develop initial categories list; test for China relevance • Select products with low/stable trade barriers (duties) and feasibility; then formulate final ‘China target lists’ • Develop high-level SC cost model early and deter- • Formulate high-level strategic objectives and business mine if China’s delivery cycle can match SC limits priorities for sourcing from China, then focus on detail • Determine own resources and capacity, i.e.: language, • Start with categories/commodities that are: low risk; easy travel, risk management capability - and scale China to keep stock in; are known to see large exports from ambitions to these constraints (do not be unrealistic) China; specs and standards have been internationalised; • Determine costs to mitigate risks’, i.e.: travel, consult- for which current suppliers don’t have many competitors ants, 3rd party inspectors

China Sourcing Blog Highlights

The global financial crisis has overshadowed the economic landscape in 2008, and CSB has gauged the China impact and considered the economic landscape that could follow the crisis. Yet we have also continued our China sourcing analysis with an in-depth guide on how to make good enquiries, some tips on successful e-commerce, and a few reflections on the Canton Fair.

The China Sourcing Blog (CSB) is THE BEIJING AXIS online media platform to keep track of all the latest trends on sourcing and the Chinese economy. Taking on a multi-faceted, dynamic subject and carefully scan- ning everything from the mainstream media to the distant corners of the Internet, CSB strives to get to the bottom of all the best bits and pieces on China sourcing. The following are a selection of CSB postings that ap- peared over the last three months:

Posted: 30 November and 5, 16 and 19 December 2008 In a series of four postings providing Gloomy in Dongguan: The financial crisis and the resultant drop in foreign export practical insights on the sourcing orders has severely impacted the Pearl River Delta, causing factory closures and process, CSB illustrated the ins and job losses (Photo: Mariehavens / flickr). outs of How to Make a Good En- quiry. Based on the experience brunt of the financial crisis as the Posted: 7 November gained from years of conducting global slowdown in the demand for In a posting entitled What can you successful China sourcing opera- commodities has caused prices to get from Alibaba?, CSB offered tions, CSB was able to provide a plummet. With first-hand knowledge some tips for users of the online Chi- concise assessment of not only what of the consequences being experi- nese trading platform Alibaba. While exactly a good enquiry should con- enced in the industry, CSB analysed it has become an indispensable tool sist of and how it should be put to- the current state and future pros- for innumerable buyers and sellers gether, but also of the soft skills re- pects for China’s steel suppliers. of Chinese products, Alibaba does quired to make an enquiry suitable not necessarily by itself guarantee a and comprehensible for Chinese Posted: 20 November and 31 Oc- successful China sourcing operation, suppliers, enabling buyers to obtain tober 2008 and the experiences of buyers using the quotation they are looking for. The crisis that emanated with such the platform can often vary from find- force from the US financial centers ing many good suppliers to not find- Posted: 12 December in 2008 inevitably impacted China’s ing any quality suppliers at all. We As the financial crisis continues un- economy, and in an extensive two- provide some hints on what to look abated, Brazil, Russia, India and part series, CSB assessed both the out for when going online. China (the so-called BRIC nations) systemic impact of the crisis on are poised not merely to weather the China as well as the new opportu- Posted: 3 November current crisis but to go from strength nities presented by the situation. And finally, as the most prestigious to strength as a sense of normalcy With the decline in foreign export event in the China trading calendar, gradually returns in the year ahead. orders, the impact on China’s real the Canton Fair is integral to many CSB analysed the current outlook for economy has been reflected most foreign buyers’ China sourcing the BRIC nations and the measures prominently in the spate of factory plans. After attending the 2008 adopted in these countries to deal closures in China’s Pearl River Delta Spring session of the Canton Fair, with the crisis, and by all indications export manufacturing base. Yet the CSB reported back with some reflec- it appears that the aftermath of the crisis has also presented China with tions on the event and found that the financial crisis will see the BRICs in a novel opportunity to promote mod- best booths do not always equate to better shape than ever. ernisation in its export sector and to the best quality products... shift the balance of its economy from Posted: 28 November FDI and exports to domestic con- [email protected] China’s steel industry has felt the sumption, services and innovation. www.chinasourcingblog.org

China Trade Roundup

To illustrate the main trends in the growth and transformation of Chinese commerce and industry with an emphasis on trade and foreign investment, the China Trade Roundup summarizes the latest available China trade statistics.

China Total Imports & Exports 2000–2008, USD bn China Total Trade Dec 07–Dec 08, USD bn

1,500 Exp o r t s Imports Imports (CIF) 120 1,250 Exp o r t s ( FOB) 100 1,000 80

750 60

500 40

250 20

0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 DJ FMAMJ JASOND

Source: National Bureau of Statistics Source: National Bureau of Statistics

Total Imports by Main Commodities, % Jan–Nov 2008 Total Exports by Main Commodities, % Jan–Nov 08

1- Electronic Appliances 1% 4- Plastic Articles 1% 1- Toys 1% 2- Motor Vehicles 1% 2- Electronic Appliances 1% 3- Copper Products 2% 5- Furniture 2% 5- Steel Products 2% 4- Soya Beans 2% 6- Footwear 2% 3- Travel Goods and Handbags 1% 6- Data Processing 4% 7- Mobile Phones Articles 3% 7- Refined Petroleum Products 3% 2008.11 2007.11 % 8- Textiles and Makeup Articles 5% 2008.11 2007.11 % 8- Plastic in Primary Form 3% (USD bn) (USD bn) Change (USD bn) (USD bn) Change 9- Garments and Clothing Articles 8% 9- Electronic Components 10% 1 8 7 8.8 1 8 8 3 2 14 10 45.2 2 12 9 24 10- Crude Oil 12% 3 18 18 -0.3 10- Data Processing 11% 3 12 10 27 4 20 10 103.9 4 14 13 6 5 22 19 16.0 5 24 20 22 11- Others 65% 11- Others 60% 6 37 35 5.3 6 27 23 16 7 29 14 98.3 7 36 32 12 China Total Imports 8 32 30 8.3 China Total Exports 8 60 51 18 9 121 117 3.8 2008.10 2007.10 2008.10 2007.10 9 109 105 3 (USD bn) (USD bn) (USD bn) (USD bn) 10 123 71 73.6 10 155 141 10 1317 1103 1060 865 11 635 533 19.1 11 861 691 25 2000 2008.11 2008.11 2008.11 Source: National Bureau of Statistics Source: National Bureau of Statistics

China Import and Export Monthly y-o-y Growth Rate, % 2008

50 Exp o r t s Imports

10 Nov Dec 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct -10

-20 Source: National Bureau of Statistics

Total China Exports by Country/Region 2008, USD bn Total China Imports by Country/Region 2008, USD bn

EU 300 300 Others US 250 250 Other 200 Hong Kong 200 Japan 150 150 EU ASEAN Japan ASEAN S.Korea Taiwan 100 S. Korea 100 US Germany Germany Netherlands Australia 50 50 UK Russia Malaysia Brazil

0 0 Source: National Bureau of Statistics Source: National Bureau of Statistics

Total China Exports and Imports by Country/Region, % Jan–Nov 2008 Exports Imports UK 3% Netherlands 3% Malaysia 3% Russia 2% Australia 3% Brazil 3% Germany 4% Germany 5% Korea 5% EU 21% US 7% Others 25% ASEAN 8% Taiwan 9%

Japan 8% US 18% Korea 10% Japan 13% Hong Kong 13% ASEAN 10% EU 12% Source: National Bureau of Statistics Others 15%

World Trade Map: Imports and Exports of Goods for Selected Countries Jan–Aug 2008 Imports USD trillion % of Total % of Total 1.5 Country US World Exports World Imports 1.4 Total World Trade of Goods Germany 9.85% 8.45% 1.3 DEFICIT Jan-Aug 2008 USD trillions China 8.88% 7.87% 1.2 Exports of Goods 10.563 US 8.46% 14.70% SURPLUS 1.1 Imports of Goods 9.973 Japan 5.14% 5.13% Netherlands 4.27% 4.07% 1.0 France 4.11% 5.04% 0.9 Germany Italy 3.64% 3.97% 0.8 China Belgium 3.17% 3.37% Russia 3.14% 2.10% 0.7 United Kingdom 3.05% 4.49% 0.6 Canada 3.00% 2.81% France Japan 0.5 UK S. Korea 2.84% 3.08% Italy HK 2.26% 2.59% 0.4 S.Korea Netherlands Spain Belgium Singapore 2.26% 2.24% 0.3 HK Canada Mexico 1.93% 2.13% 0.2 Turkey Russia Spain 1.85% 3.01% Mexico Singapore Brazil 1.22% 1.20% 0.1 Australia Brazil Australia 1.17% 1.35% 0.0 Turkey 0.91% 1.50% 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 Exports USD trillion Source: IMF

China Inc. Goes Global: OFDI and M&A

China has attracted attention not only with its GDP growth but also with its increasingly active overseas investments. 2008 saw China’s OFDI diversify into more sectors. Although Chinese outbound investors are currently more cautious, due to the crisis and volatility, from H2-2009 we will see more deals. Do not expect a wave, expect surgical, focused banner transactions. By Edward Wang.

Highlights: China Outward FDI and M&A in 2008 China Outward FDI Flow 2003-2008, USD bn • While global Mergers & Acquisitions (M&A) de- Estimate for 2008: Over USD 40 bn Asia Latin America creased by 29% in transaction value in 2008, 26.51 China’s M&A transaction value grew by 25% as one Africa North America of only two countries in the world with M&A growth Europe Oceania in 2008 21.16 • In terms of OFDI, Chinese companies seemed more active in 2008 than the previous year, with some 12.27 strategically important deals concluded by Chinese companies. China’s OFDI flow for 2008 is expected 5.5 to be over USD 40 billion 2.85 • After a few years of doing overseas deals, Chinese 2003 2004 2005 2006 2007 2008 companies are now more familiar with cross-border Source: MOFCOM China M&A standards and processes and more Chinese companies are currently considering cross-border expansion. All surveys show the appetite is there Structure of China’s OFDI Flow 2006–2007 • There is at present a popular view that Chinese 2006 Total: USD 21.16 bn 2007 Total: USD 26.51 bn companies should take advantage of the ongoing global financial crisis to more actively acquire overseas assets, especially such targets as resources 24% 30% 33% companies which are ‘less complicated’ than banks. 45% Expecting a wave is, however, unrealistic; expect 31% focused and surgical transactions by leading firms 37% • Although Chinese companies are generally not short

of capital, they are now more cautious and conser- Equity investment Equity investment vative in their approach to cross-border deals Profits reinvestment Profits reinvestment • It is estimated that China’s OFDI activities will start Unclassified investment Unclassified investment to recover in the second half of 2009 Source: MOFCOM China

Major Recent Cross-border Deals

1 Wuhan Iron & Steel 2 December 2008: Mount Gibson 4 November 2008: China state- Iron Ltd shareholders have ap- owned Anshan Iron & Steel 2 Shougang proved a AUD 162.5 million Group agreed to raise its stake 3 Shenzhen Nonfemet (USD 107.2 million) package that to 36.28% by acquiring a further could see the mine being more 23.68% stake in Gindalbie Met- 4 Anshan Iron & Steel than 40% owned by Shougang als Ltd, an Australian iron ore 5 Sinopec Concord International Enter- and gold mining company, for a prises and APAC Resources Ltd. total of AUD 162.06 million (USD 1 December 2008: Wuhan Iron & 106.91 million) in a privately ne- Steel Co (WISCO) is set to pay 3 December 2008: China’s nonfer- gotiated transaction. up to AUD 180 million (USD 127 rous metals producer Shenzhen million) for a 50% stake in five Zhongjin Lingnan Nonfemet has 5 December 2008: Sinopec has iron ore mining projects owned received government approval to completed the acquisition of the by Australian miner Centrex Met- take a 50.1% stake in cash- Canada-based Tanganyika Oil als Ltd. WISCO, one of China's strapped Australian lead and Company after receiving ap- largest steelmakers, will also pay zinc miner Perilya Ltd for AUD proval from the Chinese govern- an additional AUD 9.7 million 45.5 million (USD 30 million). ment. Sinopec offered RMB 13 (USD 6.4 million) for a 15% The remaining conditions are billion to buy out the Canadian oil stake in Centrex itself. The deal approval by Perilya shareholders company in October 2008, the is still subject to Chinese and and by Australia's Foreign In- company's largest overseas ac- Australian government approval. vestment Review Board. quisition in recent years.

China Total Outward FDI Capital Stock by Region 2007: USD 117.9 bn

Europe Asia USD 4.5 billion USD 79.2 billion

(3.8% of total)

North America (67.2% of total) USD 3.2 billion

(2.7% of total) China

Africa USD 4.5 billion

(3.8% of total) Oceania USD 1.8 billion

(1.6% of total) Latin America USD 24.7 billion (20.9% of total)

Source: MOFCOM China Note: FDI Stock is a cumulative concept (vs. Flow)

China’s Total Outward FDI Stock by Sector 2007 China OFDI Stock in Africa, Top 10 Countries 2007

Leasing & business services 30.5 Algeria Egypt Wholesale and retailing 20.2 USD 394 mn USD 132 mn Finance 16.7 Mining 15.0 Niger Sudan Transport, warehouse & postal services 12.1 USD 135 mn USD 575 mn Manufacturing 9.5 Real estate 4.5 Nigeria Ethiopia USD 630 mn USD 109 mn IT 1.9 Construction 1.6 Science research, service & geo-survey Zambia Tanzania 1.5 USD 429 mn USD 111 mn Residential & catering trades 1.3 Agriculture, forestry, husbandry, fishery 1.2 South Africa Water, environment & public facility mgmt. 0.9 Mauritius USD 702 mn USD 116 mn Power and other utilities 0.6 Other industries 0.2 Source: MOFCOM China Source: MOFCOM China

Features and Trends of China’s OFDI China’s Investment in Africa

• China’s OFDI grew at a low stable pace before 2004. • Chinese investment in Africa has been growing very Since 2004, however, China’s OFDI has been grow- fast in the last few years. OFDI flow into the conti- ing at a faster pace, with total OFDI flow increasing nent stood at only USD 74.8 million in 2003, yet this from USD 5.5 billion in 2004 to an estimated USD 40 had increased to USD 1574.3 million by 2007 billion-plus in 2008. It is widely believed that with • By 2007, South Africa had attracted USD 702 million China’s increasing integration into the global econ- in capital from China, the most among all African omy, this trend will continue in the near future countries. The major Chinese investors in South Af- • The sectors into which more of China’s OFDI has rica are Sinosteel, Zijin Mining (via a London-listed been invested in the last several years are business entity), and Gansu Jiuquan Iron and Steel. Nigeria services, wholesale and retail, finance, mining, trans- and Sudan have also had more investment from port, warehousing and postal services and manufac- China than most other African countries, with capital turing. By the end of 2007, more than 88% of China’s stock from China reaching USD 630 million and USD OFDI has been invested in these sectors across the 575 million by 2007, respectively. China’s invest- world ments in Nigeria and Sudan are heavily slanted to- • In terms of investment destinations, 67% of China’s wards the oil industry OFDI has been invested in Asia by 2007. (Bear in • Some major investment developments by Chinese mind HK effect!) However, in recent years, because companies in Africa in 2007 and 2008 are ICBC’s of China’s growing thirst for natural resources, a acquisition of a 20% stake in Standard Bank for USD greater share of China’s OFDI has been invested in 5.5 billion (2007/10); Sinosteel increasing its invest- resource-rich areas such as Australia and Africa. In ment in South Africa by USD 440 million (2008/02); 2007, investment in Oceania, mainly Australia, was and CREC announcing plans to invest a total of USD USD 770 million, an increase of 509% on 2006 3.1 billion in mining in the DRC (2008/09)

China Cross–border Investment Deal-sheet: Major Deals in 2008 Month Acquirer Target Amount Country Stake USD Dec Wuhan Iron & Steel (WISCO) Centrex 6.84 mn Australia 15% Dec Wuhan Iron & Steel (WISCO) Centrex's 5 iron ore projects 127 mn Australia 50% Dec Shougang Group Mount Gibson Iron Ltd. 110 mn Australia n/a Dec Shenzhen Nonfemet Perilya Limited 30 mn Australia 50.1% Nov Anshan Iron & Steel Gindalbie Metals 143 mn Australia 36% Oct Anshan Iron & Steel VIGANO n/a Italy 60% Oct China Merchants Bank Wing Lung Bank n/a Hong Kong 97.82% Sep Sinopec Tanganyika Oil 2 bn Canada 100% Sep China Oilfield Services Awilco Offshore ASA 2.49 bn Norway 100% Sep ICBC RosEvroBank 800 mn Russia 100% Sep People's Bank of China Drax Group 32.2 mn UK <1% Aug Sinopec & CNPC Petro-Tech Peruana 2 bn USA n/a Aug Zhuzhou CSR Dynex Power 15.7 mn UK 75% Aug Hunan Valin Golden West Resources 23.27 mn Australia 11.39% Aug People's Bank of China Prudential 234.71 mn UK 1% Aug FUQI International Inc. Temix 19.3 mn Italy 100% Aug Suntech Power Nitol Solar 100 mn Russia n/a Jul China Metallurgical Group Corp. Ramu nickel project 1.37 bn PNG n/a Jul Sinosteel Midwest Corp. 1.32 mn Australia 100% Jul China Healthcare Acquisition Corp. Europe Asia Huadu 60.375 mn Singapore 100% Jun Sinopec AED Oil 561 mn Australia n/a Jun China Metallurgical Group Corp. Cape Lambert‘ iron ore project 367 mn Australia n/a Jun Changsha Zoomlion CIFA S.p.A. 253.22 mn Italy 60% Jun Western Mining FerrAus 20 mn Australia 10% Jun Sinochem International Corporation GMG Global Ltd. 198 mn Singapore 51% May China Merchants Bank Wing Lung Bank 2.48 bn Hong Kong 53.12% May China Merchants Bank CIGNA & CMC Life Insurance 20.33 mn USA 50% Apr China Minmetals Non-ferrous Metals HPTec n/a Germany 100% Apr China National Gold Jinshan Gold Mines Inc. 218 mn Canada 41.99% Apr State Administration of FOREX Total 2.9 bn France 2% Apr China International Marine Containers Goodpack Ltd. 16 mn Singapore 1.5% Mar China Investment Corp. Visa 100 mn USA <1% Mar Huaneng Power Tuas Power 3 bn Singapore 100% Feb Chinalco - Alcoa Rio Tinto 14.1 bn Australia 12% Feb State Administration of FOREX BP 2 bn USA 1% Jan State Administration of FOREX ANZ Bank 176 mn Australia <1% Jan State Administration of FOREX Commonwealth Bank of Australia 176 mn Australia <1% Jan State Administration of FOREX National Bank of Australia 176 mn Australia <1% Jan Jinchuan Group Tyler Resources 210 mn Canada 100% Jan Wuxi Pharma Tech AppTec Lab Services 151 mn USA 100% Jan Minmetals / Jiangxi Copper North Peru Copper 470 mn Peru 100% Jan Jinchuan Group Fox Resources 15.7 mn Australia 11% Sources: Multiple sources; Press; TBA Analysis

China Outward FDI Flow by Sector 2007, USD mn

In August 2007, Chinalco acquired a 91% 26506 4063 4063 860 stake in Peru Copper Inc. for USD 860 million

4065 55 3148 Many Chinese 2127 6604 companies’ expansion In June 2007, Zijin Mining paid increased their 1668 USD 55 mn to purchase a demand for 7979 subsidiary of Avocet Mining, resources whose main assets are gold and exploration rights in Tajiki- stan

Total Mining Manufacturing TWP WR Finance Others Mining Chinalco Zijin Others

Source: MOFCOM China TWP = Transport, warehousing & postal service; WR = Wholesale & retail

Strategic Rationale: Chinese Outbound Deals by Strategic Rationale 1995–2007 (n=214) 1 Primary rationale Number of deals Total deal value, USD mn 2 Security, access to natural resources 68 27083 Access to new markets 48 15753 Financial investment/diversification 43 15055 Access to capabilities 31 4026 Gaining scale 10 1448 Access to financing 5 184 Government influences 5 448 CEO’s personal ambition 3 577 Export of capabilities 1 14 Sources: Dealogic; McKinsey Analysis. 1) All deals with value > USD 10 million; 2) USD 1 = RMB 7

China FDI Stock: Top 10 Countries/Regions 2007 Top 30 Chinese Companies by OFDI Stock 2007 1 China National Petroleum Corporation Pakistan 1.07 2 China Petrochemical Corporation Korea 1.21 3 China National Offshore Oil Corporation 4 China Ocean Shipping (Group) Company Canada 1.25 5 China Resources (Holdings) Co., Ltd. Russia 1.42 6 CITIC Group Singapore 1.44 7 China National Cereals, Oils & Foodstuffs Corp. Australia 1.44 8 China Mobile Communications Corporation USA 1.88 9 Sinochem Corporation 10 China Merchants Group Virgin Island 6.63 11 Shum Yip Holdings Company Limited Cayman Islands 16.81 12 China Shipping (Group) Company HK, China 68.78 13 China National Aviation Holding Corporation 14 China National Chemical Corporation Source: MOFCOM China. In USD bn. 15 China State Construction Engineering Corporation 16 SinoSteel Corporation Top 10 Provinces/Cities by OFDI Stock 2007, USD bn 17 China Network Communications Group Corporation

7.24 18 Aluminum Corporation of China GD = Guangdong ZJ = Zhejiang 19 GDH Limited SH = Shanghai FJ = Fujian SD = Shandong HLJ = Heilongjiang 20 China Minmetals Corporation BJ = Beijing LN = Liaoning 21 CITS Group Corporation JS = Jiangsu SC = Sichuan 22 Shanghai Automotive Industry Corporation

23 Legend Holdings Ltd. 24 China Power Investment Corporation 3.03 25 Haier Group 26 China Metallurgical Group Corp. 1.61 1.59 1.17 27 Guangzhou Yuexiu Holdings Limited 1.16 0.92 0.71 0.44 0.44 28 China National Foreign Trade Transportation (Group) Corp. 29 Shanghai Baosteel Group Corporation GD SH SD BJ JS ZJ FJ HLJ LN SC 30 ZTE Corporation Source: MOFCOM China Source: MOFCOM China

BRICS Breakdown

Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS Breakdown is a comparative segment that compares and contrasts China with the other leading developing economies.

GDP, Current USD bn Inflation, Average Consumer Price Index Index: 2000 = 100 4,500 300

4,000 275 Russia 3,500 China 250 3,000 225 2,500 200 2,000 Russia Brazil 175 Brazil 1,500 S. Africa India 1,000 150 India 500 South 125 China Africa 0 100 2005 2006 2007 2008E 2005 2006 2007 2008E Source: IMF Source: IMF

Current Account Balance 2005–2008E, USD bn Current Account Balance, % of GDP, 2005–2008E

450 2005 2006 2007 2008 15% 2005 2006 2007 2008 400 350 10% 300 250 5% 200 150 0% 100 50 -5% 0 -50 China Russia Brazil India South -10% China Russia Brazil India South Africa Africa Source: IMF Source: IMF

BRIC World Rankings–Selected Indicators 2007

World Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Total Area Population GDP Nominal Exports Imports FDI (received) Foreign Exch. Res. Electricity Consumption Mobile Phones Internet Users

Source: The Economist

Financial Markets

Tracking the dynamics of China’s Shanghai and Shenzhen stock markets and Benchmark Interest Rates, Financial Markets also illustrates recent trends and transformations in China’s exchange rate regime.

Shanghai & Shenzhen Composite Index, Monthly RMB Exchange Rates, 12 Month Trailing, Indexed Index: December 2002 = 100% Index: November 31 2007 = 100% 500 USD ZAR AUD RUB 110 450 Shanghai Shenzhen 400 100 350 300 90 250 80 200 150 70 100 60 50 0 50 2003 2004 2005 2006 2007 2008 1 December 07 1 December 08

Sources: Shanghai Stock Exchange; Shenzhen Stock Exchange Source: Oanda Corporation

Benchmark Interest Rates, as on 2 January 2009 10 Largest Chinese Listed Companies, USD bn

15% 13.8% Petro China 11.5% ICBCICBC 10% Bank of China SinopecSinopec 5.6% 5.5% China Life 4.3% 5% ShenhuaShenhua Coal Coal 2.5% 2.0% China Merchant Bank 0.3% 0.1% Ping An InsurancePingan 0% Changjiang Power EU

US UK Bank of CommunicationsBank of Comm. India Brazil China South Africa Japan 0 50 100 150 200 250 Source: Central banks Australia Source: Shanghai Stock Exchange

Dow Jones Global Titans, YTD % change as on 31 December 2008

-67.2 Russia -62.4 China 88 -62.1 Turkey -58.7 Egypt -55.3 Netherlands -53.2 Sweden -52.9 Italy -49.3 Japan -48.9 UK -47.6 Germany -47.0 France -46.9 Hong Kong -46.5 South Africa -42.8 The Dow Jones Country Titans Spain Indexes span major markets from -41.1 Switzerland across the globe -40.9 Australia -1.7 Cyprus Sri Lanka 7.7 Sources: Dow Jones Indexes; WSJ

China Business News Highlights

The fourth quarter of 2008 has delivered a series of negative business headlines for China, with sharp falls in export growth and industrial production illustrating China’s vulnerability to the global economic slowdown. A drop in inflation, however, has allowed the government a freer hand to attempt to re-ignite economic growth, including significant new investments in infrastructure.

General trillion, a third of the amount of 2007 decreased by 13% since 2006. and the lowest rate since 2005. China will increase investment in In December, Premier Wen Jiabao rail infrastructure to USD 730 bil- Property prices in 70 major Chi- declared that creating employment lion by 2020, as an extension of nese cities increased by 0.2% y-o-y opportunities for university students existing plans to spend USD 102 in November, the lowest growth rate would be Beijing’s top priority in billion on rail in the next year, which since publication of the data began 2009. China’s premier expressed forms part of the original USD 586 more than three years ago. Price concern about official government billion stimulus package. As a result growth fell consistently over the figures indicating that 10 million China’s rail network is expected to course of the year since reaching migrant workers had lost their increase by as much as 41,000 kilo- 11.3% in January 2008. jobs in the first 11 months of 2008, meters by 2020, and construction is while 4.85 million had returned to estimated to create 6 million new Chinese aviation conglomerate HNA their homes. jobs. Group, of which US billionaire George Soros is a shareholder, in Natural Resources Inflation in November declined to December became the first pri- the lowest level in two years as food vately-owned airline to receive a As of December 19, the price of and energy costs eased. The con- government bailout of USD 72.3 gasoline was reduced by 14% to sumer price index in November in- million. Earlier in the month, China USD 816 per metric ton, the first creased by 2.4% y-o-y, compared to Eastern Airlines and China Southern price cut since January 2007. The a 4% rise in October. Airlines each received capital injec- price of diesel was reduced by 18% tions of USD 437 million. In total, to USD 727 per metric ton, and that China’s monthly export growth fell China’s airlines lost USD 1.03 billion of jet fuel by 32% to USD 739 per by 2.2% in November from the same in the first 11 months of 2008, with metric ton. period last year, the first decline in Air China reporting a USD 280 mil- exports since June 2001. In Novem- lion loss in the third quarter alone. China’s top fuel refiners in early ber, China’s imports also registered About 192 billion people traveled by December prepared to cut produc- a 22% decrease y-o-y. air in China during 2008, a 3.3% in- tion to the lowest level in 20 months crease y-o-y, yet the growth rate has due to excess inventory and weak Foreign Direct Investment in China fell by 36.52% in November to USD 5.32 billion, pushing foreign investment growth down to 26% for the first 11 months of 2008, down from 35.06% y-o-y growth for the first ten months of 2008.

Merger and acquisition (M&A) activity from July to November 2008 slowed 47% compared to the same period last year, the South China Morning Post reported, citing accounting firm PricewaterhouseCoop- ers. 543 deals were announced in the five-month period, the lowest level since 2006, as investors re- mained cautious during the ongoing financial crisis. Nevertheless, according to a report issued by Thom- son Reuters, China’s M&A activity was the best in the region for the whole year 2008, growing by 44% to USD 159.6 billion. In contrast, global Catching Up: China’s rail infrastructure is to get a massive boost in the next few M&A volume dropped to USD 2.89 years as part of the government stimulus package. (Photo: Enzojz / flickr)

39 demand. Twelve of China’s largest plants reduced production by 5% in December, continuing the decline in production that commenced in No- vember. Industry sources have also suggested that refiners are cautious before the expected implementation of a fuel tax and other pricing reforms in January.

Plans were announced in early De- cember to stockpile 1 million metric tons of base metals - including aluminum, tin, copper, lead and zinc - to support domestic metal producers. Taking advantage of the low crude oil prices to increase its reserves, China has also been increasing its imports of oil, and some Running on empty: China’s airlines lost a total of USD 1.03 billion in the first 11 analysts estimate reserves to have months of 2008, and the growth rate of people traveling by air has decreased by grown by 25 million barrels since 13% since 2006. (Photo: mag3737 / flickr) August. China’s reserve capacity is currently 102 million barrels of crude by 40% from the level of 2008. cut interest rates by 108 basis oil, and this is expected to increase points, the largest cut in over 10 to 170 million with completion of the Retail years, in a further attempt to bolster current phase of construction on oil China’s slowing economy. reserve bases. China’s total retail sales for 2008 are expected to reach RMB10.8 tril- In a further effort to strengthen Industry lion, an increase of about 21% y-o-y. cross-strait financial relations, Indus- The National Bureau of Statistics trial and Commercial Bank of China, Industrial production in China reported that China’s retail sales Bank of China and China Develop- grew by 5.4% in November, the rose 21.9% to RMB9.78 trillion in the ment Bank have offered USD 19 slowest growth level for a non- first eleven months of 2008. billion in loans to Taiwanese com- holiday month since records companies operating on the mainland. menced in 1994. The drop in indus- ICT In addition, Beijing will also purchase trial production has hit China’s steel USD 2 billion worth of flat-panel dis- makers particularly hard, with Chi- In early January China issued third plays from Taiwanese manufactur- nese crude steel output down 18 generation (3G) mobile technol- ers, and lawyers from Taiwan will percentage points from October’s ogy licenses to three state-owned henceforth be allowed to work on the figure. telecom operators. China Mobile mainland. Regular scheduled ship- received a license for TD-SCDMA, ping between the mainland and Tai- As a clear indication of how China’s the domestically-developed 3G stan- wan was also launched earlier in Pearl River Delta has borne the dard, while China Unicom will use December. brunt of the global slowdown brought CDMA2000 from the US and China on by the financial crisis, provincial Telecom will use the WCDMA stan- China’s State Council announced in GDP growth for Guangdong - dard developed in Europe. All three December that it will increase the which produces nearly a third of standards will facilitate faster data money supply in China by 17% in China’s exports - slowed to 10.1% in downloads, video phone calls and 2009 as part of efforts to spur con- 2008, down from 14.7% a year ear- other advanced features. sumer spending and bolster the lier, while export growth slowed to economy. 5.6% in 2008 from 22.3% in 2007. Chinese internet and communications company 263 Network Com- China Construction Bank (CCB) in China’s shipbuilders have experi- munications announced in Decem- December received a USD 10 bil- enced a more rapid decline in new ber that it will acquire a 50% stake in lion quota from the State Admini- orders compared to their foreign US telecom service provider iTalk stration of Foreign Exchange competitors. According to a report by Global Communications. The trans- (SAFE) to provide financial guaran- Clarkson Research Studies, Chinese action will be the first expansion of tees to Chinese companies engaged shipyards have reported a decline of a private Chinese telecom service in cross-border investments. In- 44% in new orders, compared to the provider into a foreign market. tended to support mainland compa- global average of 37%. The Interna- nies that trade overseas, the quota tional Monetary Fund has predicted Finance is the largest among China’s banks. an ever gloomier outlook for 2009, CCB also plans to US72.6 billion forecasting new orders to decrease In November, China’s central bank available for loans.

Regional Focus CHINA-AFRICA

While China-Africa trade is still relatively small, the region has strategic importance for China as its trade with Africa focuses on resource-rich countries like Angola, the DRC and South Africa. Since 2006, China has vastly increased its investment in Africa. This section summarises the current trade and investment landscape, and analyses China’s current business footprint on the continent.

China-Africa Highlights

• Beijing sends naval deployment to patrol Somali waters: In China’s first such deployment outside its own waters, at the end of December three warships were despatched to the Gulf of Aden to patrol for Somali pirates. Earlier in De- cember, a Chinese merchant ship was rescued by a multinational force from Somali pirates

• Beijing asks for postponement of Bashir indictment: In early January China called for the war crimes indictment against the Sudanese president Omar al-Bashir to be postponed, stating that such an indictment would have ‘disastrous’ effects

• Angola seeks China’s help: Angolan president Jose Eduardo dos Santos visited China in December, seeking new loans as tumbling world oil prices started to threaten the country’s plans for big infrastructure spending in 2009

• China offers help to Zimbabwe: In December China offered humanitarian aid to cholera-stricken Zimbabwe, while urging the formation of a national unity government

• Chinese company to build power plant in Nigeria: Shenzhen Energy Group plans to build a 3,000 megawatts power plant in a joint venture with Nigeria’s First Bank at an estimated cost of USD 2.4 billion. When finished, the plant should significantly improve Nigeria’s power generation capacity

China-Africa Trade China is an increasingly important Africa’s Exports to China, 2007 trade partner for Africa. Exports to China have great potential for further USD 996 bn USD 36 bn expansion and is growing at a rapid pace. Although China only obtains Angola 35.4% 3.8% of its total imports from Africa, Asia 64.9% its trade with Africa is focused on resource-rich counties such as An- Others 33.2% gola, the Democratic Republic of Congo and South Africa. During the N. America 8.4% DR Congo 7.8% first half of 2008, exports to China Others 8.3% Eq. Guinea 4.7% increased substantially (to USD 30 Europe 14.6% South Africa 18.2% bn), indicating sustained strong Africa 3.8% growth for full year 2008, but lower World Exports to China Africa Exports to China* commodity prices will now impact Sources: WTO; China Statistic Bureau; TBA Analysis *Excludes Egypt: 0.7% this. (Full year China-Africa total trade in 2007 came to USD 73 bn Africa Imports and Exports, 2007 and is expected to have exceeded USD 100 bn in 2008.) Fuels and Agricultural Products Fuels & Mining Products mining products have always been Chemicals Clothing Africa’s major export products and Iron & Steel Textiles fuels and mining products repre- 1% 8% 3%3% 6% sented up to 82% of the continent’s 3% 8% overall exports of USD 325 bn in 29% 2007. Imports are more diversified, but to a great degree focused on processed products such as chemicals, clothing, textiles, iron & steel. 35% 20% The differences (surplus) between 82% 2% import and exports can be ascribed Africa’s Exports to the World Africa’s Imports from the World to high energy and commodity prices Total USD 325 bn Total USD 141 bn in 2007 and the start of 2008. Sources: WTO; TBA Analysis

Regional Focus CHINA-AFRICA

China-Africa Investment In 2007, FDI from China accounted China OFDI to Africa, 2003–2007, USD mn for only 3% of the total FDI inflow to Africa. Yet China is the biggest in- Nor th Afr ica vestor in Africa among the BRIC na- 2007 West Africa tions of China and Brazil, Russia and India. In 2006 and 2007, China 2006 Cental Africa almost tripled its FDI to Africa from USD 518 mn to USD 1,574 bn. At- 2005 Eas t Af r ica tracted to oil in West Africa and raw Southern 2004 materials in Southern Africa, this Africa trend reflects China’s strategic focus on Africa. Over the next 5-10 years a 2003 significant further ramp-up in Chi- 0 400 800 1200 1600 nese investment can be expected. Sources: FDI information; TBA Analysis

China’s Business Footprint in Africa China’s cumulative investments in Major Chinese Investments and Infrastructure Developments in Africa Africa has grown from USD 49 million in 1990 to USD 500 million in China has oil rights China has mineral rights China has both oil and mineral rights 2000, to over USD 13.0 billion in 2007. China’s investment in African Ghana Nigeria Gabon infrastructure projects rose from less Nearly USD 800 mn in hydro USD 5.4 bn in roads, railways, Deep water harbour, hydro than USD 1 billion in 2001 to at least and CCGT power plants coal power and hydro power power, railway USD 7 billion in 2007. While over 30 countries in Africa have benefited Mauritania Sudan from Chinese finance in some form, 430km railway 4 power plants, 2 hydro pro- 70% of China’s infrastructure fund- project jects, 1,506km oil pipeline, oil ing on the continent goes to only terminals. Total investment in Sudan of USD 15 billion four countries: Nigeria, Angola, Su- Guinea dan and Ethiopia. The two largest USD 1 bn Ethiopia sectors are power (mainly hydro- hydro project USD 500 million power) and transport (mainly rail- telecom network roads). DRC 3,500km highway and 3,200km Chinese contractors in Africa are railway. China Railway Group Angola-Zambia often served by Chinese service pro- invested USD 2.9 bn in copper USD 500 million in viders, i.e.: and cobalt mining project. repairs to the Norinco has cobalt interests 1400km Benguela • For loans, guarantees and railway bonds: Bank of China, China Zimbabwe Exim Bank, China Construction Sinosteel acquired 67% stake in Zambia-Tanzania the country’s largest ferrochrome Famous 1900km Bank, and others producer Tanzam railway,

• For miscellaneous credit: China completed in 1975 Exim Bank, Bank of China, China Angola South Africa Total Chinese infrastructure funding ICBC bought 20% of Standard Construction Bank, and others of USD 3.2 billion, including roads, Bank for USD 5.6 billion. Sinosteel Zambia

rail, power, water and telecoms. has two chromium mining JVs, CNMC invested • And for insurance: Sinosure, Sinopec has invested USD 2.4 bn to JISCO has one, and also did USD 150 million in PICC, PingAn Insurance, and explore 3 offshore oilfields COVEC Vresap water pipeline a copper mine others Sources: Various; Chinavest; TBA Analysis

Regional Focus CHINA-AUSTRALIA

China-Australia relations have become more strategic, their economies inter-twined. This has allowed boom-times down-under on the back of significant growth for Australian exporters, but lower commodity prices and China’s current slowdown has shown the risks. But even so, their bilateral relationship will become only more pivotal to both sides.

China-Australia Highlights • China remains one of Australia’s Australia-China Trade 1998–2008 (Jan-Sep), USD mn most important trading partners, 30,000 illustrated by the increasing vol- Exports to China Imports from China ume of both imports from and ex- 25,000 ports to China • Australia and China are still negoti- 20,000 ating a Free Trade Agreement. 15,000 The 13th round was held in Beijing in December. The next one is 10,000 planned for Q4-2009 5,000 • Ores, slag and ash remain the top Australian exports to China 0 • Due to the global financial crisis, 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* China is keen to establish tighter Sources: UN Comtrade; Australian Bureau of Statistics. 2008 figure is based on Jan-September data only. controls over iron ore imports (Australia’s second-largest export Major Australian Imports from and Exports to China 2008, USD mn commodity to China) to help drive Raw hides, down prices for steel-making in- Nickel Furniture, Leather 100% 100% 363 493 puts. Also, China’s first batch of Lighting, Articles of coking coal imports for 2009 are Signs, etc Apparel, 1,278 Accesso- Wool, Yarn, nearly half the levels they were a 80% ries 80% Fabrics year ago (9.62 mn tonnes) 2,683 Mineral 1,432 fuels, Oils, Nuclear • Australian firm RepuTex has re- 60% 60% etc Others reactors, Electronic 796 7,006 leased its list of the Top 10 most Machinery Equipment 4,594 5,111 sustainable Chinese companies 40% 40% from the CSI 100 Index. Inner Ores, Slag, Ash Mongolia Yili Industrial Group, the 20% 9,456 20% Others Shanghai Pudong Development 10,388 Bank and Baoshan Iron & Steel 0% 0% Company topped the list with an Imported Commodities Exported Commodities overall sustainable rating of ‘A’ Sources: Multiple sources; Press; TBA Analysis Source: UN Comtrade

State Trade Watch–How Important is China? Victoria dise trade in 2007. Exports include centrates, coal and copper ores China is Victoria’s largest trading part- copper ores, wool and coal South Australia ner. Two-way merchandise trade was Northern Territory • China is South Australia’s second- worth AUD 11.1 bn in 2007. Exports China is Northern Territory’s second- largest trading partner with two-way include wool, raw hides and skins, largest trading partner with AUD 979 merchandise trade worth AUD 1.7 and internal piston combustion en- mn two-way merchandise trade in bn in 2007. Exports include iron ore,

gines 2007. Exports include manganese/ copper and wool

Australian Capital Territory zinc ores and concentrates, iron ore Tasmania China is ACT’s seventh-largest trad- and stone • China is Tasmania’s fourth-largest ing partner. Two-way merchandise Queensland trading partner and total two-way trade was worth AUD396,000 in 2007 China is Queensland’s second-largest merchandise trade was worth AUD New South Wales trading partner with two-way merchan- 387 mn in 2007. Exports include China is NSW’s largest trading partner dise trade of AUD 5.8 bn in 2007. Ex- lead/zinc ores and concentrates, iron with AUD 16.4 bn two-way merchan- ports include lead/zinc ores and con- ore and zinc

Regional Focus CHINA-AUSTRALIA

China-Australia Investment • Chinese foreign direct investment Australia Export Sector Potential to Attract Investment, USD mn in Australia have increased rapidly 35 since 2004, while Australian direct Petroleum, 30 8,833.26 Reference Mining and investment in China haven experi- Bubble, 7,000.00 quarrying, M etal and metal 36,264.30 enced a relative decline in the 25 products, 22,518.59 same period of time 20 Chemicals & • Australia’s mining and quarrying chemical products, Growth of world trade, all products: 16% Motor 15 4,889.32 industry is continuing to attract sig- Transportation vehicles services, nificant amounts of FDI while the and other 10 6,320.85 transport Agriculture and equipment, Petroleum and Metal industries are hunting, 7,854.43 playing catch-up 4,307.20 5 • Australia’s cross-border deals con- 0 World Market Share of Australia (%) -5 0 5 10 15 20 25 tinue to outweigh China’s relatively World Export Growth since 2002 World market share, all products: 1.05% new M&A activities Sources: Investment Map; TBA Analysis

Australia–China Investment Trends, USD Cross–border M&A Deals in Australia & in China

Australia FDI Outflows Australian Deals (seller) China FDI Outflow s Australian Deals (purchaser) Australia Foreign Investment to China Chinese Deals (seller) China Foreign Investment to Australia Chinese Deals (purchaser) 30.00 2000 600 20.00 1500 500 10.00 1000 400 0.00 500 300 -10.00 0 200 -20.00 -500 100 Thousands -30.00 -1000 0

-40.00 -1500 9 2001 2002 2003 2004 2005 2006 2007 1998 199 2000 2001 2002 2003 2004 2005 2006 2007 2008* Sources: UNCTAD; Australian Bureau of Statistics Source: UNCTAD *First half of 2008

Latest Developments in China-Australia Foreign Investment H2–2008

Month Acquirer Target Amount USD Stake Status Jun Shougang Group Corp Sims Steel n.p. 100% Complete Jun Sinopec AED Oil– Expl. Permits (3) 555.96 mn 60% Complete Jul Sinosteel Midwest Corp. 1.32 bn 100% Complete Aug Chinalco Rio Tinto 14.3 bn 11% Complete Aug China Metallurgical Construction Cape Lambert Iron Ore– Project 373.44 mn 100% Complete Sep Sinosteel Murchison Metals 205.672 mn 49.9% Complete Oct China Stem Cells Holding Ltd. Cordlife 5.735 mn 18.9% (12.65%) Complete Nov China Shenhua Energy Co. Ltd. New South Wales– Coal Expl. 260.88 mn 100% Complete Dec Wuhan Iron & Steel Group Centrex Metals Ltd. 6.681 mn 14.9% Ongoing Dec Shougang Corp. (w/APAC) Mt. Gibson Iron 400 mn 20% Complete Sources: Multiple sources; Press; TBA Analysis

Regional Focus CHINA-RUSSIA

Russia and China are actively developing their trade relationship, although their bilateral FDI flows are not yet very significant. This section is an overview of the structure of trade and bilateral investment between the two countries.

Russia-China Highlights

• RUSAL will continue to invest in this deal is taking longer than origi- trols 25% China in spite of the current eco- nally expected, and Evraz is still • China will likely invest USD 6.4 bn in nomic crisis. In February 2008, RU- waiting for Beijing’s approval for its construction projects in Russia via SAL and China Power Investment planned USD 1.5 bn takeover of ASR (Russian Builders’ Association) Corporation signed a strategic busi- Delong. Evraz has agreed with Best and its Chinese counterpart. The ness partner agreement on bauxite Decade to extend the option exercise president of ASR, Nikolai Koshman, ore, alumina oxide and aluminum period from Aug 18 2008 until Feb said, “There are 30 selected projects production, including plans to build a 18, 2009 ready for construction so far, and 500,000 ton aluminium smelting plant • In July Evraz signed a cooperation related procedures have been com- in China’s Qinghai province agreement on setting up a JV with pleted” • Evraz Group has entered into a China Metallurgical Group (MCC) to • Donghua Investment Corporation Share Purchase Agreement with develop Australia’s Cape Lambert (Russia) acquired Mudanjiang Ce- Best Decade to acquire a 51% stake Iron Ore project. In the new built JV, ment Group Company Ltd. for USD of Delong Holdings Ltd. However, Evraz holds 75%, while MCC con- 40 mn Sources: Multiple sources; Press; TBA Analysis

China-Russia Trade • China is Russia’s fifth-largest trad- Russia-China Trade, 1997–Sep 2008, USD mn ing partner (and second-largest if EU countries are regarded as a Exports to China block) 30,000 Imports from China • Light industry products are China’s 25,000 largest export commodities to Rus- 20,000 sia, yet these are increasingly be- 15,000 ing displaced by machinery 10,000 • Russia was China’s seventh- 5,000 largest trading partner in 2007 and 0 ninth-largest in 2008. In 2007, 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 by Russia became the largest sup- Sep plier of logs and wood to China. 2008 Russian log exports account for Source: MOFCOM China 68.5% of China’s total log import volume Russia Imports from and Exports to China, Q1–Q3 2008, USD mn • Mechanic appliances, footwear,

electrical machinery, vehicles and 100% 100% Vehicles Footwear, Wood and Fertilizers parts, and textile products are the and parts Textiles articles of 1,002 1,278 1,703 wood, top Chinese exports to Russia, 80% 80% Pulp, Wood Others while mineral fuels, mineral oils, Electrical charcoal machinery, 4,300 Machinery 1,928 fertilizers and wood are the top equipment and me- 60% and parts 60% Russian exports to China chanical 5,914 appliances • Around 230 representative offices Mineral 5,939 or firms invested by Russian com- 40% 40% fuels, Mineral panies have been registered in Oils 7,919 China. Many Russian companies 20% Others 20% are planning to open sourcing of- 10,574 fices in China. Severstal, for example, opened a purchasing office in 0% 0% Beijing in November 2008 Imported Goods Exported Goods Sources: Multiple sources; Press; TBA Analysis Source: MOFCOM China

Regional Focus CHINA-RUSSIA

Russia-China Investment • Russia’s and China’s FDI to each Russia-China Bilateral FDI, 2004–2007, USD mn other are 1% or less of their total respective outward FDI. In 2007, Russia FDI to China China FDI to Russia China’s total outward FDI was USD 500 22.5 bn, and China’s FDI to Russia was USD 0.4 bn. Russia’s outward 400 FDI was USD 45.7 bn, and FDI to China was USD 0.05 bn 300 • Chinese investments in Russia focus on forestry, mining, construc- 200 tion, textiles and electrical appliances. Russian investments in 100 China concentrate on transporta- 0 tion and construction 2004 2005 2006 2007 Sources: Multiple sources; TBA Analysis Source: UNCTAD

Russia-China Investment

• In 2007, FDI into Russia amounted Russia Industrial Production and Investment, % y-o-y Growth Rate to USD 52 bn, yet this amount is expected to increase to USD 55-58 Investment Growth Rate Industrial Production Growth Rate bn in 2008 40 • Russian industrial production 20 growth dropped from 16.7% in 0 Nov. 2007 to -56.7% in Nov. 2008. The investment growth rate de- -20 clined from 17.1% to -2.1% -40 • The most attractive industry re- -60 mains real estate, followed by transport, communications, con- Jul-05 Jul-06 Jul-07 Jul-08 Oct-05 Oct-06 Oct-07 Oct-08 Jan-05 Jan-06 Jan-07 Jan-08 struction & mineral production Apr-05 Apr-06 Apr-07 Apr-08 Sources: Press; TBA Analysis Sources: Russian Publishing Company ‘Expert Group’; TBA Analysis

Investment into Russia by Sector, USD bn Investment in Russia by Countries, USD bn 2005 2006 2007 140 Real estate operations To a large extent, 120 Wholesale, retail (transport vehicles excluded) Brit. Virgin lslands returning Russian Transport facility production USA capital 100 Metallurgical production Germ any 37.7% Ireland 80 Construction Sw itzerland 60 Transport and communications 3.7% 7.0% France Others 21.5% Luxemburg 40 36.5% 12.3% Ne the r lands 33.7% 20 Cyprus 0 34.5% 27.1% 36.3% 30.2% United Kingdom 2003 2005 2006 2007 0 1020304050 Source: GKS (Federal State Statistics Service of Russia) Source: GKS (Federal State Statistics Service of Russia)

Upcoming Events

THE BEIJING AXIS can assist delegates who wish to attend fairs, exhibitions and conferences in China. Services include research, interpretation, negotiation and travel logistics. For more information, please send an email to [email protected], or for more contact details please see page 50.

Date Event Location 5 - 8 Jan 09 Hong Kong Toys & Games Fair Hong Kong 13 - 16 Jan 09 35th International Fur Fair Beijing 14 - 16 Jan 09 10th China International Trade Show for Exhibition and Conference Industry Beijing 19 - 20 Jan 09 Asian Financial Forum 2009 Hong Kong 16 - 18 Feb 09 2009 China International Automotive Aftermarket Industry Fair Beijing 10th International Exhibition of Machinery and Accessories for Furniture Production, 17 - 20 Feb 09 Shanghai Upholstery and Furnishings International Exhibition of Machinery Components and Supplies for Timber Con- 17 - 20 Feb 09 Shanghai struction 17 - 20 Feb 09 10th International Forestry and Woodworking Machinery and Suppliers Exhibition Shanghai

20 - 22 Feb 09 International Conference on Computer Modelling and Simulation (ICCMS 2009) Macau 20 - 23 Feb 09 8th China International Auto Accessories Commercial Expo Beijing 23 - 25 Feb 09 2009 China International Catalyst Industry Technique and Application Exposition Beijing 23 - 25 Feb 09 7th China (Guangzhou) International Auto Parts Expo 2009 Guangzhou 24 - 27 Feb 09 10th China International Machinery Industry Exhibition Ningbo 24 - 28 Feb 09 China International Concrete Technology and Equipment Expo Beijing 25 - 27 Feb 09 Infrastructure Project Finance Shanghai China International Trade Fair for Auto Maintenance Technology and Equipment, 25 - 28 Feb 09 Beijing Auto Parts and Accessories 26 - 27 Feb 09 14th Annual International IC-China Conference & Exhibition Shenzhen 26 - 28 Feb 09 First Chinese Forum on Intelligent Finance Beijing 27 - 28 Feb 09 2009 International Conference on Communication Software and Networks Macau 6th CTLtec ASIA: Coal Gasification, Liquefaction, Coal-Chemicals Projects & Tech- 3 - 4 Mar 09 Beijing nologies 4 - 6 Mar 09 Pump, Valve & Pipe China Exhibition Guangzhou

4 - 7 Mar 09 China International Factory Automation & Instrument Exhibition Guangzhou

6 - 8 Mar 09 5th International Brand Forklift and Accessory Exhibition Guangzhou Guangzhou

12 - 13 Mar 09 2nd Annual China Petrochemical Summit 2009 Beijing 17 - 20 Mar 09 Asia Eco Green Building Congress 2009 Shanghai 18 - 19 Mar 09 16th Asia-Pacific CFO Roundtable Shanghai 18 - 21 Mar 09 China International Furniture Fair Guangzhou 25 - 27 Mar 09 2009 Flow Expo Guangzhou Guangzhou 27 - 30 Mar 09 China International Woodworking Machinery & Furniture Raw Materials Fair Guangzhou 4 - 11 Apr 09 Sign Expo Beijing

Date Event Location 12 - 15 Apr 09 China Sourcing Fair - Electronics & Components Hong Kong 19 - 22 Apr 09 8th International Exhibition on Nuclear Power Industry 2009 Shanghai 20 - 23 Apr 09 China Sourcing Fair - Baby & Children's Products Hong Kong 21 - 23 Apr 09 Export Controls and Trade Compliance Asia Summit Beijing 22 - 28 Apr 09 13th Shanghai International Automobile Industry Exhibition Shanghai 6 - 8 May 09 SNEC 3rd (2009) International Photovoltaic Power Generation Expo Shanghai 7 - 8 May 09 2nd Energy Efficiency Asia 2009 Beijing 3 - 5 Jun 09 Mines and Money Asia 2009 Hong Kong 8 - 12 Jun 09 8th China International Consumer Goods Fair Ningbo 15th Shanghai Metallurgy Expo / 2nd China (Shanghai) International Steel Trade 11 - 13 Jun 09 Shanghai Expo 16 Jun 09 China Structured Products Forum 2009 Beijing 17 - 18 Jun 09 Asia Mining Tunnelling Summit 2009 Beijing 18 - 20 Jun 09 9th China International Steel Construction Fair Beijing 14th China International Exhibition for Building Material, Building System, Construc- 18 - 20 Jun 09 Beijing tion Machinery & Architecture Inner Mon- 18 - 20 Jun 09 2009 China Inner Mongolia International Coal & Energy Industry Expo golia 23 - 26 Jun 09 4th China International Metals Industry Fair 2009 Guangzhou

23 - 26 Jun 09 The 10th China (Guangzhou) International Metal & Metallurgy Exhibition Guangzhou

5th China International Coal Equipment and Mine Technical Equipment Exhibition 28 - 30 Jun 09 Beijing 2009 10 - 11 Jul 09 2009 International Conference on Information Engineering Shanxi

SUGGESTED READING China Entrepreneur (Fernandez & Underwood, 2009)

China Entrepreneur: Voices of Experience from 40 International Business Pio- neers gives China-bound entrepreneurs and small business owners the opportunity to learn from experienced China hands before bringing their businesses to the world’s largest and most dynamic consumer market. China Entrepreneurs delivers street-tested advice on launching, growing, and operating your own business in China. Authors Juan Antonio Fernandez, professor of Management at the China Europe International Business School (CEIBS), and Laurie Under- wood, journalist and Director of External Communication at CEIBS, use their combined 26 years of China experience to interview 40 successful international entrepreneurs who have built businesses in China. These entrepreneurs share their first-hand advice, anecdotes and best practices in tackling the challenges of succeeding in China, from negotiating with government agencies and gaining necessary start-up approvals, to hiring and keeping the right staff, to collecting payments and safeguarding intellectual property. Yet China Entrepreneur also balances the practical business advice with insights from experienced China consultants who have risen to prominence in the Chinese business environment.

China Entrepreneur features THE BEIJING AXIS Founder & Group Managing Director, Kobus van der Wath, as one of the 40 foreign China entrepreneurs included in the book.

Careers at THE BEIJING AXIS THE BEIJING AXIS is constantly looking for dynamic, performance-driven individuals to assist us in meeting our present and future business challenges. Applications will be treated confidentially. If you believe that you can make a positive contribution, please send your detailed CV with a letter of motivation and references to our Group MD, Kobus van der Wath: [email protected]. Note: international relocation is possible.

LEAD CONSULTANT (CHINA CAPITAL ADVISORS)

Beijing: 1 position

Role • Lead multiple advisory assignments in the Investment Advisory Division of THE BEIJING AXIS • Project manage assignments and ensure quality and time objectives are met - and ensure professional ‘best practice’ standards across assigned projects • Valuation, modelling, participate in overall investment process • Manage 1-2 deal-team consultants and analysts • Be a thought leader and promote the development of learning processes and platforms • Improve process efficiencies, op- Going Places: THE BEIJING AXIS is an entrepreneurial firm and welcomes timise workflow and control costs applications from persons with a well-grounded knowledge of their pro- • Client relationship management fessional fields in a China context. We offer a rewarding experience, inter- • Ensure alignment of Division’s national exposure and highly competitive remuneration. objectives with those of the CONSULTANT / ANALYSTS SOURCING ENGINEER Group (CHINA STRATEGY GROUP) (CHINA SOURCING UNIT) • Multi-sector assignments with emphasis on resources, mining Beijing: 1 Consultant position Beijing: 1 position and industry • Significant (international) travel Beijing, Singapore, Perth, Johan- nesburg: 4 Analyst positions • Employed in the China Sourcing Requirements Unit of THE BEIJING AXIS • Superior analytical and problem- • Employed in the Strategy Divi- • Strong sourcing (or manufactur- solving ability: valuation, deal sion of THE BEIJING AXIS ing) project management skills structuring • Sound analytical and problem- • Focus: Project manage sourcing • Ability to work with diverse cul- solving skills schedules (i.e. ensure that spe- tures and backgrounds • Ability to work in teams with col- cialised capital equipment is • Interest in and knowledge of leagues from diverse cultures manufactured to required stan- China’s cross-border business and backgrounds dards and delivered on time); engagement • Strong experience in the formu- technical QA/QC knowledge; • Sound judgement, maturity and a lation and execution of research expediting experience and strong systematic mind methodologies and analysis supplier management skills • Conceptual thinking and attention • A business and/or technical de- • Provide support and technical to detail gree with a post-graduate quali- advice and expertise to China • MBA/CFA/CA or legal back- fication Sourcing Unit colleagues and department ground preferred with more than • Minimum 3 years experience in 3 years experience in finance/ an appropriate or related field • A degree in engineering, prefera- consulting • Excellent communication skills, bly mechanical/mining-related • Native English written and verbal including both spoken and writ- with a minimum of 10-years work communication skills essential ten English ability experience in appropriate field • Mandarin not essential but re- • Mandarin not essential, but re- • Excellent English and Mandarin garded as an advantage garded as an advantage written and spoken ability • Willingness to travel • Willingness to travel • Willingness to travel

THE BEIJING AXIS News

Community Kobus van der Wath attended the • Asia Mining Congress 2009 in

Global China Business Meeting in Singapore (23-27 Mar 2009) THE BEIJING AXIS would like to Barcelona, Spain from 17-19 No- • The International Mining Equip- extend warm wishes to all its valued vember 2008. The event is the fore- ment Fair in Handan, China (27- clients, stakeholders and readers of most annual gathering of Chinese 29 Mar 2009) The China Analyst for a healthy, business leaders and their global • The 4th China International happy, successful and prosperous counterparts in Europe and is at- Metals Industry Fair 2009 in 2009, and Year of the Ox! tended by CEOs and business lead- Guangzhou (31 Mar 2009) ers from leading organisations. Learning & Getting Around On 18-19 November 2008, Jackie Li THE BEIJING AXIS Founder & Team Developments attended the Africa Investment Fo- Group Managing Director, Kobus rum at Gallagher Estate, SA. Cheryl Tang, Director and previ- van der Wath, has been included in ously Head of Operations in the Bei- a new book, China Entrepreneur: PricewaterhouseCoopers, in asso- jing office, was appointed as the Bei- Voices of Experience from 40 In- ciation with TBA, hosted a workshop jing General Manager in October ternational Business Pioneers, as on 26 Nov 2008 in Bryanston, SA. 2008. In this position Cheryl is re- one of the 40 entrepreneurs. The The workshop was entitled Strate- sponsible for managing all aspects book, by Fernandez & Underwood, gic Imperatives in Times of Finan- of the day-to-day running of the Bei- was published in early 2009. cial and Economic Turbulence jing office. and Kobus van der Wath and Jackie Jackie Li, Business Development Li delivered presentations on how Lilian Luca, previously solely re- Manager for South Africa, delivered SA companies can improve their sponsible for Russia and CIS, has a presentation on Low-cost Country strategies and implementation suc- been asked to take on additional Sourcing from China at a Global cess when operating in China. responsibility as Director of the Sourcing Conference in Pretoria, Group Corporate Office from the SA, on 7-8 October 2008. In January 2009 Kobus van der beginning of 2009. Wath hosted ‘China in 2009’ Kobus van der Wath, Group MD, Roundtables in Vietnam, Thailand Javier Cuñat, previously working as and Mitch Cosani, Corporate Office and Singapore. a Senior Consultant in the Beijing Manager, attended a DTI-organised office, has been appointed as Man- SA Expo in HK on 2/3 Oct, Beijing TBA will be further represented at a ager of the China Strategy Group, on 8/9 Oct, and Shanghai on 14 Oct. number of events in China, South effective from the start of Feb 2009.

Africa, Australia and Canada in Mitch Cosani, currently at the end On 15 October 2008, Kobus van der January, February and March 2009; Wath delivered a presentation enti- of a 6-month secondment to the Bei- some of these include: jing office, returns to Johannesburg tled ‘Working with China B2B’ at the CIPSA Annual Procurement Con- where he will assume responsibility • Mining Indaba 2009 in Cape ference in Melbourne. as Manager of the office.

Town, SA, where Kobus van der China Business Development Man- Wath has been invited to deliver Elena Zhou joined the Beijing office ager Haiwei Huang and Senior Strat- a presentation on China’s role in in October as Senior Consultant in egy Consultants Javier Cuñat and the resource sector (9-12 Feb 09) the Finance & Admin Dept. Elena is William Dey Chao participated in the • Macquarie China-Day Seminar a CPA from the Chinese Institute of Certified Public Accountants. Second China-Latin America Busi- in CT (6 Feb 09) ness Summit in Harbin, Heilongji- • China Business Roundtable in TBA welcomed Christine Kirk to the ang, on 20-21 October 2008. Singapore by Kobus van der Beijing office in Nov last year as an Wath on 20 Feb 09 Executive Assistant in the Group On 11-13 November a number of • China Business Roundtable in Corporate Office. Christine previ- TBA staff from both the Beijing and Perth by Kobus van der Wath on ously worked for a number of lead- Johannesburg offices attended 24 Feb 09 ing international companies and also China Mining 2008 in Beijing. • Business Seminar at The Capital lived in Germany and SA. Kobus van der Wath was actively Club in Beijing: ‘China Inc Goes involved in both delivering a presen- Jason Gao joined in Dec in Beijing Global—Africa’s Important in tation entitled: ‘China Inc. Goes as an intern. Jason is currently com- China’s International Engage- Global’ as well as co-chairing an pleting post-graduate studies in In- ment’ (26 Feb 2009) Outbound Mining Investment Forum. ternational Relations at the China • PDAC 2009 in Toronto, Canada, Univ. of Political Science and Law. TBA staff attended Mining Invest- (1-4 Mar 09) where Kobus van ment Seminars held by the Cana- der Wath has been invited to de- We welcome them, congratulate dian, South African and Australian liver a keynote presentation them and wish them all the very best governments on 11 & 12 Nov 2008 • Minerals Processing 2009 in and continued success in the next in Beijing. Perth, Australia (24-25 Mar 2009) stage of their careers with TBA.

About THE BEIJING AXIS

THE BEIJING AXIS is a cross-border business bridge to/from China in three principal areas: Strategy, Sourcing and In- vestment.

Since our establishment in 2002, we have successfully worked with many international and Chinese MNC clients across various sectors and industries, but our core focus is on the Chinese mining and resources sector, and on China’s bur- geoning industrial and engineering sector. Our work is always cross-border — supporting international firms as they act in unfamiliar territory in China, or supporting Chinese firms as they venture out and ‘go global’. We are committed to safety and sustainability; and our solutions emphasise 'actions and transactions’.

THE BEIJING AXIS is organised along 3 synergistic cross-border China businesses: the China Strategy Group, the China Sourcing Unit and China Capital Advisors.

China Strategy Group China Sourcing Group China Capital Advisors

THE BEIJING AXIS China Strategy THE BEIJING AXIS China Sourcing THE BEIJING AXIS China Capital Group provides professional business Unit supports sourcing and procure- Advisors provides cross-border advi- solutions, with a clear focus on strategy ment initiatives to/from China with a sory services. The focus falls on corpo- formulation and implementation: systematic and analytical approach: rate finance origination activities:

Strategy Formulation Strategic Sourcing Corporate Finance Origination Market intelligence Supply needs analysis Advising Chinese MNCs as they Market and industry research Supplier identification, filtering, seek overseas assets, equity, pro- Market entry strategy due diligence and selection jects or foreign co-investors Partnering strategy Negotiation Advising foreign MNCs that are seeking Chinese assets, equity, Business planning Commercial and contract management support projects or Chinese co-investment partners

Strategy Implementation Supply Chain Management Financial Advisory Market entry support & Support Buy side & sell side M&A advisory Business development Comprehensive project Acquisition target identification, Operational support management filtering and selection Negotiation Transaction monitoring Project and target due diligence rd Agency services QA/QC, expediting, managing 3 Fundraising support parties (QA inspectors, lawyers, Relationship management Valuations etc.) Delegations Opinions Logistics Holistic risk management Strategic relationship management

For more information, please visit our English, Chinese, Russian or Spanish websites at www.thebeijingaxis.com

Contact Information Beijing, China Cheryl Tang China Strategy Group China Sourcing Unit China Capital Advisors Director & GM: China Javier Cuñat Diana Wang Edward Wang [email protected] Manager Manager Director & GM +86 (0)10 6440 2106 [email protected] [email protected] [email protected] +86 (0)10 6440 2672 Johannesburg, South Africa Moscow, Russia/CIS Perth, Australia Latin America Desk Michele (Mitch) Cosani Lilian Luca Jim Hu Javier Cuñat (in Beijing) Manager: Johannesburg Office Director: Russia/CIS & Senior Consultant Manager [email protected] Group Corporate Office [email protected] [email protected] [email protected] Jackie Li Manager: Business Development [email protected] +27 (0)11 201 2550 +27 (0)11 201 2508

THE CHINA ANALYST Previous Editions October 2008 July 2008 Regulars Regulars

China Sourcing Strategy China Sourcing Strategy

Macroeconomic Monitor Macroeconomic Monitor

China Sourcing Blog Highlights China Sourcing Blog Highlights

China Facts, Figures & China Facts, Figures & Forecasts Forecasts

China Trade Roundup China Trade Roundup

Financial Markets Financial Markets

China OFDI and M&A China OFDI and M&A

The C in BRICS The C in BRICS

China Business Highlights China Business Highlights

Features Features

China Inc. Goes Global: The Long Road Ahead The Scramble for Australia China companies are making headlines with foreign acqui- We take a look as China’s Australian mining moves from sitions, yet what are the drivers of this trend? trade to investment.

Taking a Step Into Latin America Sourcing High-Value Industrial Products from China China is intensifying its relationship with LatAm. We exam- The era of Chinese high-value industrial exports is fast ine the current critical juncture between these regions. approaching, yet pitfalls and peculiarities remain.

April 2008 January 2008 Regulars Regulars

China in Statistics China in Statistics

Statistics in the News Statistics in the News

China Business News China Business News

China Perspectives China Perspectives

China Sourcing Blog Highlights China Sourcing Blog Highlights

Upcoming Events Upcoming Events

Features Features Putting China’s Urban Billion into Perspective The Next Generation of Chinese Resource Companies To the business community China’s population is an oppor- The original trailblazers are still making headlines for big- tunity, yet to the government it is serious challenge. ticket deals, but what are the new kids on the block up to?

Africa & China: How Long will the Honeymoon Last? China’s Reaction to BHP’s Bid for Rio Tinto As Chinese involvement in Africa grows, is there reason to BHP’s bid turned into a guessing game, yet the Chinese be concerned about the sustainability of the relationship? reaction was no more than a shrug, and for good reason. To view or download a copy of current or previous editions of The China Analyst, visit our website at www.thebeijingaxis.com.

DISCLAIMER This document is issued by THE BEIJING AXIS Ltd. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information contained here has been compiled from sources believed to be reliable. While every effort has been made ensure that the information is correct and that the views are accurate, THE BEIJING AXIS cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommenda- tion or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily indica- tive of future performance; the value, price or income from investments may fall as well as rise. THE BEIJING AXIS, and/or a connected company may have a position in any of the investments mentioned in this document. All readers are advised to make their own independent judgements with respect to any matter contained in this document.

Copyright Notice: Copyright of all materials, text, articles and information contained herein resides in, and may only be reproduced with permission of, an authorised signatory of THE BEIJING AXIS. Copyright in materials created by third parties and the rights under copyright of such parties is hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests in and shall remain copyright of THE BEIJING AXIS and should not be reproduced or used except for business purposes on behalf of THE BEIJING AXIS or save with the express prior written consent of an authorised signatory of THE BEIJING AXIS. All rights reserved. © THE BEIJING AXIS 2009.