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China Inc. Goes Global: OFDI/M&A OFDI/M&A Global: Goes Inc. China 30 30

China Sourcing Strategy Strategy Sourcing China 22 22

Macroeconomic Monitor Monitor Macroeconomic 15 15

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China’s Africa Engagement: New Issues, Salient Trends Trends Salient Issues, New Engagement: Africa China’s 12 12

China’s Stimulus Package: How Green? Green? How Package: Stimulus China’s 9 9

Strategy Exit Crisis China’s Growth: Re-engineering 6 6

Features Features

– The road ahead in 2009 2009 in ahead road The –

Charting China’s crisis exit strategy strategy exit crisis China’s Charting

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

CHINA ANALYST

CHINA CHINA ANALYST ANALYST

THE THE

THE THE 2009 2009

May-July May-July

Advertisement GDPGDP 2008 2008 (USD tn) tn) Budget Balance GDP (%) Current Account Balance / GDP (%) 18.4 US US EU -3.2 -4.6 US 14.3 Japan -5.4 Japan 3.5 Japan 4.9 China -0.1 China 10.2 China 4.4 Germany 0.2 Germany 6.6 Germany 3.7 Britain -5.3 Britain -2.2 Britain 2.9 France -3.2 -1.8 France 2.7 France Canada 0.3 1 Canada 1.6 Canada Brazil 1.5 Brazil -0.7 Brazil -1.4 Poland 0.5 Poland -1.8 Poland -5.6

Worldwide Stimulus Packages (USD bn)

Hungary 6.5 Russia 42 Canada 30 Netherlands 7.5 Poland 31 Britain 30 Germany 109 Kazakhstan 25 USA 787 Spain 113 France 33 Japan 650 Italy 6.3 S. Korea 10.8 EU 255 China 586 Mexico 54 Saudi Arabia 17.3 India 4 Philippines 6.1 Singapore 13.6 Brazil 283

South Africa 3.7 Australia 27 Chile 4 Argentina 13.2 New Zealand 5

Breakdown of Selected Stimulus Packages

US China Japan Germany 5% 4% 1% 7% 1% 7% 3% 30% 7% 38% 9% 43% 10% 9% 46% 54% 70% 14% 18% 24%

Tax Relief Infrastructure First package First package Disaster Reconstruction Second package Second package State and Local Fiscal Relief Infrastructure and Science Rural Construction Environmental Protection USD 111 billion for tax cuts, 1st: Infrastructure; Tax relief & Protecting the Vulnerable more than half of total for capi- Support for SMEs; Education Health Care Social Welfare Education and Training Technological Innovation tal injections for lenders and 2nd: Aid to auto industry; Tax Energy Value-added Tax Cuts financial institutions relief for households Other Education and Health Care Sources: IMF; Various Press; TBA Analysis 4

At the Highest Level China has been able to weather the global economic storm better than most. China’s dramatic slowdown halted during March-April 2009, and further consolidation looks likely in the near future. But risks remain and unrealistic expectations should be avoided. At the very least, we must look out for regional, sectoral and value chain variability in the economy. Simply put, navigating in the Chinese landscape has just become even harder. But the long term prize is still unparalleled: China, the world’s third-largest market, is set to maintain its solid lead on developed and developing economies.

Expect changes in the relative and absolute attractive- ness of certain areas based on their share of exports in GDP, share of FDI, the cost of doing business, government incentives, infrastructure, etc. These regional dis- crepancies will be felt in the urban-rural divide, between eastern and western China, and between provinces in the east, i.e. those that form a contiguous belt on the coast. Location studies now become more important and it is necessary to think about the opportunity in second tier, third tier and fourth tier cities and areas • Sectoral disparities are also emerging. Gone are the days when almost all sub-sectors exhibit super-fast uring the latter part of Q1 2009, China’s economy growth. It will become far more difficult to identify sec- Demerged from a period of rapid slowdown that had tors and sub-sectors that will be the sustained drivers of ensued in Q3 2008. With 6.1% y-o-y GDP growth in Q1 overall growth 2009, and with many indicators pointing to a mild recovery • Not all areas of the value chain within a particular indus- in activity, the scene is now set for China to hover near 6- try will enjoy the same prospects. It is now more essen- 7% growth over the next few months before entering into a tial to identify which industries will see differences be- somewhat higher pace of growth towards the end of 2009 tween the upstream and downstream segments. This and into 2010. With a consolidating global environment— has widespread implications, i.e. for regulatory changes, albeit only a tentative consolidation based on a reduction for input and gate price changes and for fluctuating in- in negative news, somewhat stabilized financial markets, ter-dependencies between various industries the edge coming off the credit crunch and a more unified • The past 6-9 months have shown that economic reform G20 voice — there is scope for optimism. Confidence in in China is as unpredictable as ever and policy levers the global economy is a key requirement for an eventual can be used aggressively in order to stimulate or con- broad-based recovery. strain target areas, sectors and sub-sectors

Indeed, in recent months some Chinese economic sectors The list goes on, but it is clear that a more uncertain envi- (such as auto, selected property segments and credit ronment spells a new strategic landscape where strate- growth, etc) have recorded a markedly ‘better’ perform- gies will have to be more finely calibrated. The ability (or ance compared with the period of spontaneous destruction inability) to manage information and more sophisticated, between August 2008 and February 2009. But some sec- forward-looking planning processes will determine the win- tors remain weak and are unlikely to return to their previ- ners and losers in China. ous lofty levels. Herein lies the management challenge. It is now both more difficult and more important than ever to Yet this more complicated planning environment does not analyse the multitude of volatile indicators and divergent mean that the overall risks outweigh the rewards. On the trends that characterize the Chinese landscape. In short, contrary, China’s Q1 2009 performance clearly showed its the one-way-bet scenario of recent years, when most indi- continued dominance as the world’s most robust large cators trended higher, have come to an end and managers market. It leads global growth and continues to outperform with a China agenda must now manage in a more complex developing and developed markets alike. And nothing sug- environment. China has become a country where some gests that this is about to change. As such, while it is nec- sectors (perhaps most) far outpace global averages, but essary to carefully navigate the immediate challenges in a others are now below the waterline. This new environment changing landscape, we must not lose sight of, or be de- is in fact only an inevitable shift towards normalcy and is flected from, the opportunity to capture full long-term ad- likely to be with us over the long term. vantage in the world’s third-largest economy.

In order to mitigate risks that arise in this new era it is nec- I trust that our readers will enjoy this edition of The China essary to manage information well. That implies having the Analyst – and as always we welcome all feedback.

right people, processes, methodologies and systems in Kobus van der Wath place. Below we identify a number of focus areas for those Founder & Group Managing Director who manage China ventures: THE BEIJING AXIS China Business Solutions • Regional disparities are likely to become more distinct. Strategy I Sourcing I Investment

Table of Contents May-July 2009 Re-engineering Growth: China’s Crisis Exit Strategy 6 The financial crisis and the adherent global economic stasis have severely impacted China’s exporting growth engine, yet can China be the first nation to recover by reconfiguring its economy? China’s Stimulus Package: How Green? 9 One of China’s greatest concerns is the rising environmental damage that the past 30 years of breakneck economic development has created. Will the country continue its efforts in the areas of efficiency and environmental regulation? China’s Africa Engagement: New Issues, Salient Trends 12 As more Chinese companies feel the need to enter new markets and gain more resources, Africa will see increased Chinese business and investment activity in more sectors on the continent. Macroeconomic Monitor: China’s Tentative Consolidation 15 While the world remains firmly in recession, Q1 2009 has delivered tentative signs of a recovery in China. We expect China’s economy to recover gradually in 2009, and then more rapidly in 2010 as demand eventually rebounds. Financial Markets 19 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 Facts & Figures 20 China Facts & Figures provides a cross-section of data illustrating growth, transformations and trends in China’s commerce and industry. China Sourcing Strategy 22 China’s economy is exhibiting some positive signs, but how has the China sourcing risk profile changed for international procurement managers—and what can they do to formulate appropriate China Sourcing Strategies in 2009? China Sourcing Blog Highlights 26 Highlights from The China Sourcing Blog, THE BEIJING AXIS online information portal and discussion forum on all issues relevant to sourcing from China. BRICS Breakdown 27 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. China Trade Roundup 28 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 30 While the current investment climate continues to provide new opportunities for Chinese investors, Chinese firms may yet face more hurdles in their plans for making foreign acquisitions. China Business News Highlights 34 A roundup of the main business headlines from China during the first quarter of 2009, including positive signals of China’s economy slowly emerging from the crisis, as well as the latest on China’s headline deals in the natural resources sector. Regional Focus: China-Africa 36 China recently announced that trade between Africa and China exceeded its USD 100 bn goal, that was set to be achieved only in 2011. With the China-Africa Summit set for late 2009, trade and investment are expected to expand further. Regional Focus: China-Australia 40 At such a critical juncture of the global economy, China-Australia relations are being tested and fashioned anew. Beijing and Canberra are scrambling to forge a mutually-beneficial arrangement that will enable them to emerge stronger from the crisis. Regional Focus: China-Latin America 43 China’s influence in commodity prices and the likely rebound of its economy by the fourth quarter of 2009 are key for the growth prospects of Latin America’s resource-intensive economies. We analyze the drivers, enablers and constrains. Regional Focus: China-Russia 46 China and Russia bilateral trade values steadily declined in the first quarter of 2009. However, within this period a number of long-awaited agreements to promote strategic cooperation were signed between the two countries . Upcoming Events 50 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 52 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 53 TBA news for the first quarter, including speaking at Mining Indaba in Cape Town, PDAC in Toronto, AMEC in Perth, a series of TBA presentations delivered at Beijing’s Capital Club, 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. 54.

Re-engineering Growth: China’s Crisis Exit Strategy

The financial crisis and the adherent global economic stasis have severely impacted China’s exporting growth engine, and tens of millions of jobless makes anything less than the fabled 8% growth feel like a recession. Yet can China be the first nation to escape the recession by reconfiguring its economy? By Barry van Wyk.

n one highly symbolic picture of the increasing speculation on whether I line-up at the recent G20 Summit and when China’s economy may be in London, the fact that Chinese Presi- reaching the bottom of its downturn. dent Hu Jintao appeared in the pre- The economist Nouriel Roubini has eminent position on the right of host pointed out that if China measured its Gordon Brown in the front row, seemed GDP on a quarter-to-quarter annual- a clear indication of China’s importance ized basis, the figure for Q4 2008 in this gathering, the highest interna- would actually have been close to tional forum dealing with the crisis. In zero, or even negative. In the wake of line with appearances, both China’s the slowdown in developed econo- leaders have recently voiced their opti- mies from Q4 2008, a number of indi- mism at China’s resilience in the face of cators reflected that China’s economy the financial crisis. US President had followed suit: slowing GDP Obama, however, languishing in the growth, industrial production and PMI; back row in the picture, can still see lower production of electricity; weak nothing more than glimmers of hope auto sales; a fall in home sales; and when referring to the US economy. Ac- falling imports and exports. Most cording to Chinese premier Wen Jia- problematic of all, perhaps, is that the bao, however, China may have seen 6.1% GDP growth registered in Q1 the worst of it. 2009 is the slowest pace of growth in nearly a decade. China’s impeccable economic growth 20,000 hopefuls: Job fair in Beijing, trajectory of the last 30 years has to a February 2009. China’s phenomenal economic large extent relied on investment from growth in the last 30 years (averaging and exports to the developed world. While household con- 10% annual GDP growth) has largely been investment-led, sumption accounted for around 50% of China’s GDP in the supported by massive domestic savings and large inflows 1970s, economic reform since then has been accompa- of Foreign Direct Investment (FDI). This development strat- nied by a decline in the contribution of household con- egy has very effectively boosted growth, yet has been sumption to GDP, reaching a low of 35% in 2006 characterized by weak domestic consumption and an over- (compared to about 70% in the United States), and a con- reliance on exports, which has made the Chinese econ- comitant increase in household saving rates from 15% in omy vulnerable to the international economic slowdown. 1995 to 25% in 2007 (compared to less than 5% in Japan While China’s GDP expanded by 260% between 2000 and and Korea). Rapid growth has transformed China in the 2008, China’s net exports increased eleven-fold in the last three decades, yet the global financial crisis has driven same period. As the crisis intensified in Q4 2008, however, a temporary wedge in China’s economic relationship with China’s exports began to shrink, declining sharply in No- the rest of the world, and in mitigating the impact of the vember and falling a further 21% y-o-y in the first two crisis, China’s government have one place to turn: Inward. months of 2009. Exports in February were a full 26% less than a year earlier, and declined for a fifth consecutive The slowdown has seriously impacted China’s export sec- month in March, yet at a slower rate of 17.1%. tor and caused a large number of job losses, yet in the same instance it has also provided a massive incentive – a The marginally improved trade figures for March has in- compulsion even – to further wean China’s economy off spired talk of China ‘bottoming-out,’ complemented by a its traditional growth engines of exports and investment rebound in March of industrial output growth of 8.3% (from towards exports, and to focus more on spurring consump- a record low of 3.8% in the first two months of 2009), and tion in the domestic market. In fact, by means of its USD by the CFLP measure of the Purchasing Managers’ Index 586 billion stimulus package, China is not only attempting (PMI) rising for three months to finally break through the to keep its economy growing by offsetting the slack global 50-level mark (indicating expansion) in March. China’s demand for Chinese manufactures, but also to reconfigure stock market rallied in Q1, and retail sales and urban fixed the set of structural economic factors that has underpinned investment have remained robust if not growing particularly the Chinese success story of the last 30 years. fast. There is also some evidence of a recovery in the housing sector with an increase in sales volume, although Looking for the bottom home prices remain low due to excess inventories of un- sold homes. March has nonetheless delivered a slight Following Wen Jiabao’s optimism, there has recently been growth trend in the real estate market in China’s major cit-

7 ies, with the trade volume of residential units in Beijing China Major Growth Targets for 2009 reaching 2,124, up 23.6% compared to February. Media reports have also hailed the rising sales volume of pas- • 8% GDP growth senger vehicles in March, increasing 10% y-o-y and 27% • 9 million new jobs in urban areas from February. • Urban registered unemployment rate under 4.6% • Steady growth in urban and rural incomes While profits at China’s SOEs declined by 43.7% y-o-y in • CPI increase of about 4% the first two months of 2009 (which the Ministry of Fi- • Improvement of balance of payments nance described as the first decline in many years), March brought indications of the impact of the stimulus 2009 China Government Spending Plan (RMB bn) package. The chairman of the State-owned Assets Su- pervision and Administration Commission (SASAC) Social safety net 293 stated in April that 170 SOEs had increased their profits Science & Technology in March by 26% y-o-y. The various economic indicators 146 above clearly show signs of economic recovery, and fore- Sichuan reconstruction 130 casts are for accelerated growth in Q2-Q4 2009. Agriculture subsidies 123 Reaching the other China Employment policies 42 Striving to get near the self-imposed 8% growth benchmark is by their own admission not the Chinese govern- Teacher salaries 12 ment’s primary objective in their response to the current Funding for SMEs 10 crisis. Commerce Minister Chen Deming earlier this year said that he was not really worried about GDP growth; 0 100 200 300 China’s biggest challenge, he claimed, was unemploy- Source:Key figures in gov. work report by Chinese Premier, Xinhua (05/03/09). ment. China’s Academy of Social Sciences has reported that 670,000 small and medium enterprises in places like eas, and did not adequately cater to China’s large mi- Guangzhou, Dungun and Shenzhen have closed down, grant populations. Unsurprisingly, Chinese household with job losses of up to 2.7 million. Various media reports savings amounted to 24.7% of their disposable income in have indicated, moreover, that more than 20 million mi- 2006 (compared to only 0.7% in the US). The absence of grant workers may have lost their jobs due to the crisis – a substantial social security net, increasing joblessness yet these are not recorded in official statistics. With a fur- and falling rural incomes have continued to inspire high ther 6 million university graduates expected to join the precautionary saving rates among households in China, work force this year, the Asian Development Bank has and this structural barrier remains a clear impediment to concluded that China’s RMB 4 trillion fiscal stimulus will the government’s hopes of creating growth this year by not be able to create enough new jobs to absorb the labor increasing consumption in the domestic market. surplus. Bricks, people and confidence Increased rural unemployment and a downturn in farm product prices are severely inhibiting the government’s According to Wen Jiabao, confidence is more important stated goal this year of boosting rural incomes and nar- than money or gold. Hence to inspire more confidence in rowing the gap between the rich and poor. While over China’s population, and given the obvious latent potential 600 million people have been lifted out of extreme pov- of China’s under-spending, over-saving population, in- erty in China since 1981, the World Bank still groups vestment in ‘people’ by means of initiatives designed to China among lower-middle income countries, with USD boost domestic consumer spending, health care and so- 936–3,705 in annual per capita income in 2007, on a par cial security are among the key drivers of the stimulus with countries such as Bolivia, India, Morocco and Syria. package announced late last year. Real per capita income in rural households increased almost fivefold between 1980 and 2007, yet disparities Yet the largest share (RMB 1.5 trillion, or 38%) of the with urban areas in terms of income and the provision of stimulus spending is devoted to ‘bricks’: public infrastruc- public services have developed. In addition, while the ture, with projects lined up including railways, irrigation, permanent urban population (apart from migrants) is cov- roads, and airport construction. RMB 1 trillion is to be ered by medical insurance, the majority of the rural popu- spent on funding reconstruction work in the quake- lation remains subject to expensive medical treatment affected Sichuan province. RMB 400 billion has been ear- and tertiary education. marked for civil works, including low-income housing and renovation, while RMB 370 billion will be spent on rural Before the advent of China’s economic reform pro- infrastructure, including improvements to the power grid, gramme, a state-funded social security net was in opera- roads and substandard housing. In the revised outline of tion. Reform of the system in the 1980s, however, aimed the stimulus spending announced in March this year, at reducing the costs of SOEs by commercialising social RMB 370 billion was devoted to technology initiatives, security services and allowing the state, employers and and RMB 210 billion to energy-saving projects, while individuals to share the costs. Yet medical services came RMB 150 billion was allocated to educational, cultural and to be unequally distributed between urban and rural ar- family planning purposes. Following the release of

China’s GDP data for Q1 2009, 8 additional measures to light industry; electronics and information; logistics; auto- spur the economy were announced, laying out a range of mobile; shipbuilding; machinery; steel; nonferrous metals broad objectives including the boosting of fixed-asset in- and petrochemicals. Yet analysts have pointed to the po- vestment, consumption and exports. tential risk that these ten stimulus plans will not adequately address the concern of clearing out excess capacity, in- Intended both to encourage employment and expand stead creating more inventory and an illusion of increased China’s social security net, the stimulus package endeav- demand. ours to address the structural reasons why Chinese private and household savings are high and the consumption The government has limited its deficit to 3%, but has share of GDP is relatively low. The share of household placed no obvious limit on bank lending. In fact, China’s income in GDP is very low in China (about 40%) yet the banks are expected to fund much of the stimulus. The gov- share of corporate savings in GDP is relatively high as ernment has been encouraging banks since November to most of the corporate sector’s profits in China are held by extend more credit, and in March Chinese banks accord- firms in the form of retained earnings and not distributed to ingly lent a record amount of RMB 1.9 trillion, an increase shareholders as dividends. In a world where the US con- of more than six-fold compared to a year earlier and the sumer can no longer be the consumer of first and last re- third straight month that bank lending has exceeded RMB sort, government spending and investment in China must 1 trillion. This lending surge has raised fears of the emer- over time be compensated by private consumption. gence of a new credit bubble. According to the Bank of China’s infrastructure-dominated fiscal stimulus, however, China, first quarter 2009 lending amounted to RMB 4.6 while attempting to better develop China’s consumer mar- trillion, already more than 90% of the full-year target of ket, is still a capital-intensive growth strategy consistent RMB 5 trillion and fast approaching the full amount for the with China’s investment-led path of development and is whole of 2008 (RMB 4.9 trillion). Growth in M2, the broad- unlikely to raise a significant amount of confidence over est measure of money supply, hit a record 25.5% in March, the short term among Chinese consumers to dispense with 8.5 percentage points higher than the government’s tar- more of their savings. geted annual rate. In light of the vastly increased bank lending during Q1 2009, the chairman of the China Bank- China GDP Expenditure Approach Breakdown, RMB bn ing Regulatory Commission has warned China’s banks to 30,000 be cautious about loan assessment and management. Ex- Government Consumption Expenditures cessive discounted bill financing, however, which made up 25,000 Household Consumption Expenditures 40% of lending in January and 45.5% of loans in February, Gross Capital Formation have prompted a government investigation into where the capital went, with speculation that the funds may have 20,000 Net Exports of Goods and Services been diverted to the stock exchange. 15,000 In April, the French insurance firm Coface reported a rapid 10,000 deterioration in the ability of Chinese companies to honour payments to their suppliers which, it concluded, has signifi- 5,000 cantly increased the risk of doing business in China. The head of the firm’s underwriting and claims business in 0 China noted that the cost of insuring against customers 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 defaulting on payments in domestic trade has risen by 30% since the advent of the crisis. The change in the risk Source: China Statistical Yearbook 2008 environment, moreover, seems to be more acute for Plans for the two-year stimulus spending requires the cen- China’s SMEs (particularly in the export-oriented sectors) tral government to contribute RMB 1.2 trillion, divided into who have been faced with a liquidity crisis as China’s RMB 104 billion in Q4 2008, 488 billion in 2009, and the banks are traditionally more accustomed to extend credit rest in 2010. The first two installments, implemented this to large state-owned enterprises. year, makes up about 1.8% of China’s expected GDP for 2009, and combined with RMB 300 billion which the Minis- Riding out the storm try of Finance has earmarked for tax and fee cuts (0.9% of GDP) and the additional 0.3% of GDP for increased social China has embarked on a massive stimulus package to spending, the stimulus is expected to amount to about 3% get its economy back on track. As such, the spending-led of China’s GDP for 2009. Local governments will supple- intervention is not a significant break with trusted growth ment this amount, and much of this financing will be under- models. Yet inherent in the vigorous response is a more taken by banks, who have been asked to issue long-term long-term trend tied to China’s balanced growth as a na- loans to local government entities. tion. China’s future path lies in the development of its citi- zens as consumers and contributors to the economy, and Side effects if China’s population can be given incentives to play a greater role in China’s economy, the financial crisis may While the basic structure of the stimulus package can be just go from being a temporary jolt to a stepping stone. divided into infrastructure projects and spending to improve people’s livelihoods, revitalisation plans have also Barry van Wyk, Consultant been announced for ten manufacturing industries: textile; [email protected]

China’s Stimulus Package: How Green?

One of China’s greatest concerns is the rising environmental damage that the past 30 years of breakneck economic development has created. Will the country continue its efforts in the areas of efficiency and environmental regulation for sustainable development, or will it sacrifice these issues in order to avoid the rise of unemployment and lower growth rates during this crisis? By Lilian Luca.

“China is fully aware of the consequences on energy de- it seems that China is well under way to exceed these mand, energy imports, and security of supply of its im- targets—the energy intensity of GDP has fallen by 4.2% pressive economic growth. Already China is using regula- in 2008 after an earlier decline of 3.7% in 2007. China’s tion to channel development into more energy-efficient environmental protection agency has been given addi- forms. [...] not just in the automobile industry — by tional powers and the rank of a ministry in 2008, but on clearly stated national policy it applies to all areas of in- the other hand, the project of “Green GDP”, a statistic dustrial activity.” measure championed by the agency’s energetic and vo- cal Mr. Pan Yue, originally designed to align the interests — Amory Lovins, Chairman, Rocky Mountain Institute. of economic development and sustainability, and was scrapped in March 2009.

Recent environmental pressure build-up in China In the area of renewable and clean energy, China has been very supportive of wind and solar power generation, ollution” is often the number one problem cited by and has for many years pursued hydro power. The coun- “P first-time visitors to China. The gray air of Beijing try is a world leader in terms of the proportion of hydro or Shanghai, or any other large Chinese city for that mat- power resources it utilises, and home to the International ter, takes a little getting used to. According to a 2007 Centre for Small Hydro Power, a UN-sponsored organiza- World Bank report, 20 of the world’s top 30 most-polluted tion. In addition, quite a few Chinese companies aggres- cities are Chinese. The energy intensity of the economy, sively pursue energy-efficient equipment and technolo- measured in BTU per USD of GDP, is still about five gies—for example, China is one of the largest markets for times that of Germany and eight times that of Japan GE’s most sophisticated and expensive diesel locomo- (2005 data). The numbers have improved somewhat for tives, partly due to their fuel-efficiency. the past 3 years, but there is still significant room for efficiency. Crisis response and environmental concerns

Increasing health problems for the population and a grow- A major concern voiced worldwide in recent few months ing burden for the nation’s healthcare system have not and in China is the fear that the economic priorities of the been the only problems associated with pollution and en- present downturn—job creation, support to industry and vironmental degradation. China has become the world’s boosts to consumption—will push energy and resource largest CO2 emitter in 2007, due to its heavy reliance on efficiency and environmental issues in general to the coal-generated power to fuel the economy. Environ- back burner. The Keynesian approach to an economic mental damage and resource overuse have also been stimulus plan, adopted by quite a few governments associated with floods, insufficient freshwater access in around the world, including China, stresses the impor- some areas of China, an increase in the number of en- tance of infrastructure projects to stimulate investment. dangered species and a general perceived lack of quality The cement and steel industries would be major benefici- scenic spots for tourism. aries of infrastructure stimulus plans, and these industries are generally not too environmentally-friendly. Investment Moreover, a recent phenomenon brings together accusa- plans may be selected for their ‘shovel-readiness’, rather tions of a lack of environmental protection and regulations Comparative Energy Intensity of GDP, Selected Countries and anti-dumping investigations. For example, US steelmakers announced in March a large-scale investigation of BTU per USD of GDP, 2005 China’s environmental policies and enforcement mecha- Russia 86,686 nisms as a way to prove unfair advantage for Chinese China 35,766 steelmakers and push the US Congress to pass legisla- India 24,799 tion for punitive tariffs on Chinese steel products. Similar Poland 18,425 studies and lobbying efforts are also contemplated by US S.Korea 14,539 industry associations against Chinese rubber, glass and Brazil 13,917 cement producers. Mexico 10,809 US 9,113 To address the environmental pains of its growing econ- Sw eden 8,662 omy, the Chinese government has in the past launched a Germany 7,396 number of initiatives, some more successful than others. UK 6,145 For example, the country’s development plans foresee a Japan 4,519 20% increase in energy efficiency from 2006 to 2010, and Source: HSBC

than economic and environmental efficiency. amount of RMB 230 billion (USD 34 billion) has been devoted to such projects. An additional concern not directly related to the stimulus package’s environmental impact has more to do with the In addition to the main stimulus plan, a separate plan price for oil and gas. China, among other countries, has supporting the car industry’s development of electric supported the renewable energy industry for many rea- cars—including rebates and sales tax reduction—was sons, the chief ones being the reduction of its depend- announced in January 2009. Industry experts hope that ence on imported oil. These projects were economically this measure will help China leapfrog into the electric car viable when energy prices were high, but it is uncertain leadership. Indeed, China is among the countries best whether the Chinese government will keep its commit- positioned to benefit from a shift of auto transportation to ment to the diversification of energy sources in an era of plug-in or hybrid electric cars. The commutes tend to be low oil prices. shorter than in other countries, and most of them are city commutes (electric cars tend to be more efficient in a city, China’s stimulus plan: USD221 bn devoted to ‘green’ ‘stop-go’ environment). In addition, China does not have a major technological and investment stock ’legacy’ in The government has detailed its economic stimulus plan traditional auto technologies—it can make the leap to in March, and now we can be fairly certain that many of electric easier than countries such as the US or Ger- the environmentalists’ concerns are indeed being ad- many. dressed in the plan. As researchers from HSBC have pointed out in a recent report, China is devoting a larger There are also other ways in which China’s central gov- amount than any other country to ‘green’ causes. The ernment’s actions and plans are having, directly or indi- main uses of these funds are for railway transportation, rectly, an overall positive environmental effect. A major upgrades to the electric grid and waste and water man- restructuring, driven by M&A activity and the closing agement. down of smaller, less efficient plants and mines, is expected in the metals and mining industry. A few deals in The railway investments are a big part of the plan— the steel sector have already been announced, including overall, China plans to spend over 5 trillion RMB (USD the one that created the largest listed Chinese steel com- 730 billion) on constructing over 16,000 km of rail lines, pany—a three-way merger of Tangshan, Handan and mainly for passenger transportation, and on railway stock. Chengde Xinxin. In the electricity generation sector, the Railway transportation emits less CO2 and is generally National Energy Bureau announced at the end of March more efficient and environmentally friendly than truck and that outdated, polluting coal-fired generation plants with a bus transportation that are so popular in China, so this total capacity of 200,000 kW will be closed down by the part of the plan is expected to have a major positive envi- end of this year. ronmental impact. The housing part of the stimulus plan, that which ear- In upgrading the electric grid, especially the transmission marks 20% of the stimulus package to affordable housing infrastructure, China is targeting efficiency (loss reduc- projects, while not directly a ‘green’ package, also has the tion) and flexibility in the utilisation of multiple, competing potential for positive environmental impact. China has energy sources, including renewable, in an intercon- adopted its own ‘green’ building standards in 2007, and nected, smart system. Over RMB 1.1 trillion (USD 146 may apply these selectively to the affordable housing pro- billion) has been earmarked by the stimulus plan to the jects to achieve higher short– and long-term cost effi- electric grid upgrades. ciency and resource utilisation efficiency for the new buildings. ‘Direct’ environmental projects, such as improving the waste treatment and water management infrastructure, The so-called ‘circular economy’ law adopted in 2007 (it as well as conservation and other environmental protec- came into force at the beginning of 2009) has the poten- tion areas, are also part of the stimulus plan, and an tial to make a very significant impact, especially for new projects in metals and mining, petrochemical and con- Green Stimulus Spending, USD bn struction industries. It includes stricter controls of emis- sions and waste, promotes recycling of water and energy China efficiency, and forbids the use of oil-fired fuel generators US and boilers in favour of natural gas and alternative fuels South Korea generators. Special economic incentives are reserved for EU the re-utilisation of mining and agricultural waste and by- Germany products. Japan France Implications for Chinese firms Canada Companies in China stand to mostly benefit from the Australia ‘green’ measures of the Chinese government in the UK stimulus package. Railway equipment companies, steel- 0 20 40 60 80 100 120 140 160 180 200 220 240 makers, construction industry players—all will benefit Source: HSBC from a surge in investments in railroads and railway

World Green Stimulus Spending Timing, USD bn* integrate some of the more sophisticated components of the ‘smart grid’. Low Carbon Energy Efficiency Wate/Waste Management 143 Opportunities for foreign companies

This leads us to another interesting issue—to what extent and how exactly can foreign companies benefit from the 88 Chinese stimulus package? Even though the government has tried hard to avoid protectionist language in the stimulus package legislation, one may expect that on a 48 40 project-by-project basis, both local authorities and the central government will prefer the funds to benefit domes- 21 22 12 14 15 10 tic firms, and thus trickle further down the economic 4 4 chain. This is especially true for traditional, established industries and projects where foreign companies do not 2009 2010 2011 2012 have a significant advantage over domestic firms. Source: HSBC. *For countries that have announced plans by 04/09. We therefore are inclined to recommend our clients, in stock. As noted by the Economist publication (April 16, their quest to benefit from the resilience of the Chinese 2009), railway investment has already tripled in China on economy, to focus more on technologies, knowledge and a year-on-year basis. In a similar fashion, the construc- products which China still lacks. tion and steel industries will benefit from the increased government spending on affordable housing. A few examples of such technologies come from our in- house research of the needs of Chinese mining firms. The Chinese government’s push for consolidation, cou- One area of interest for them is bio-leaching and other pled with more stringent environmental and labour com- advanced methods of efficient extraction of minerals from pliance supervision in the heavy industries (such as steel- poor ores and tailings. Deep-level underground mining making and mining), will probably damage the interests of technologies and modern use of IT in mining are also the shareholders in the smallest, least efficient (and most important areas for foreign suppliers to the mining indus- polluting) players. But it will no doubt benefit the modern, try to watch and pursue. large-scale players, many of which are state-owned— through increased market share, a more level playing Environmentally-friendly mining and metallurgical tech- field for all companies and less pressure from cut-throat nologies, such as low-waste, advanced water treatment cost competition. Further cost reductions from economies and circulation technologies are also interesting for Chi- of scale and quality improvement as a result of industry nese metals and mining firms. Sure, Chinese companies consolidation and increased investment levels should will face more stringent environmental controls and will follow suit. feel compelled to utilise environmentally-friendly technologies and methods in their work. But some will be In addition, the measures may prove extremely beneficial more readily acceptable than others—especially the tech- to these industries in the long run, by bringing them nologies that combine environmental damage limitation closer to international standards in terms of environ- and cost reduction. mental and labour compliance, which in turn may lift some worldwide barriers to Chinese exports. This should raise the image of Chinese producers abroad, and lower the instances of anti-dumping measures often initiated in other countries on the grounds of unfair advantage that Chinese companies have due to their minimal compliance costs, when compared to their Western counterparts.

The upgrade of the national electric grid, even though it is another substantial part of the stimulus package, is not strictly a new idea. The Chinese government has in the past few years pushed hard for new ’smart grid’ technologies that offer better monitoring of user activity and pricing / charging, minimising the losses of electricity in the system and allowing for better load balancing. With the stimulus now in place, the innovation and investments in these areas only stand to accelerate on the same trajectory. We expect this part of the stimulus to benefit domestic firms to a large extent, but at least some of the benefits will accrue to foreign firms. Areas to watch are the Lilian Luca, Director: Russia/CIS & Group Corporate ones in which Chinese firms do not yet possess the tech- Office nologies and knowledge to produce, and especially to [email protected]

China’s Africa Engagement: New Issues, Salient Trends

There are a number of African elements that are critically important to China’s global strategy: The African continent’s geopolitical importance, big untapped market, and rich natural resources. As more Chinese companies feel the need to enter new markets and gain more resources, Africa will see increased Chinese business and investment activity. By Edward Wang. frica has presented an untapped source of natural re- For almost half a century before the 1990’s, however, A sources and a big potential market for Chinese inves- China’s relations with Africa were of a more political rather tors with different mindsets and ways of doing business than economic nature. Before 1978 when China adopted compared to their western counterparts. China’s growing an opening-up policy, as part of its Third World strategy, demand for aluminium, copper, nickel, iron ore and oil has China had delivered many infrastructure projects in sup- compelled the Chinese government to establish mining port of African countries’ social and economic develop- interests in a range of African countries. China Inc. has ment. The Tanzania-Zambia Railway is a famous part of invested billions in Africa; it is harvesting, yet it is also feel- the legacy of China’s tangible assistance during this pe- ing backlash from some host governments and criticism riod. Medical teams were also sent to many African coun- from Western countries. Trade between China and Africa tries by China to treat African people with various illnesses, reached a record USD 106.84 billion in 2008, up 45.1% y- which has greatly helped relations between China and Af- o-y. The number of African countries with which China had rica at grass-root levels. more than USD 1 billion in trade increased to 17 in 2008 from 14 in 2007. China’s emerging political and economic For almost two decades after 1978, China’s relations with power in the world is set to lead to more Chinese political Africa entered into a kind of dormant phase. This is mainly influence and investment activities in Africa, which is because China had to deal with many new and difficult changing and reshaping the business landscape of the challenges derived from the strategic and fundamental continent. transformation of its economic system and development mode. Historical antecedents As China came to be more economically developed in the China sees its relations with Africa as firmly embedded in late 1990’s, the increasing demand for resources to sus- history. Ever since the 1950’s, China has viewed Africa as tain the high-speed economic growth required it to acquire a potential strategically important partner on the world po- oil, gas and minerals outside China. As China’s good rela- litical arena and has put a great deal of effort into develop- tions with Africa had previously helped China with its cor- ing stronger China-Africa relations in order to play a signifi- porate investments on the continent, the African continent cant role in gaining geopolitical weight for the Third World, naturally had much attraction for China. of which China saw itself as the leader at that time. There are a few African elements that are critically impor- China’s development of relations with Africa can be classi- tant to China when it comes to China’s global strategy: fied into three phases: Africa’s geopolitical importance, its big untapped market, and its rich natural resources. China knows Africa is dis- • The Political Phase (1950’s to late 1970’s) tinctively different from the West in many ways: views on • The Dormant Phase (late 1970’s to late 1990’s) domestic issues, goals of economic development, values • The Commercial Phase (late 1990’s up to now) and cultural norms. From the perspective of its global strat-

China has gone through three Phases in its Engagement with Africa

Political Phase Dormant Phase Commercial Phase • Relations primarily of a • China’s priority shifted to- • Followed the rise of China political nature wards establishing a more as an economic power market-based economic with surging demand for • Economic aid for infra- model while integrating raw materials structure and medical itself with the world’s lead- teams ing economic powers • FOCAC 2006 drew Chi- nese businesses’ attention • Effort to gain support for • Less effort towards gain- to Africa the Third World ing political influence • Increasing Chinese investment in more sectors

Source: TBA Analysis

Number and Size Distribution of Chinese-Financed Infrastructure Projects in Sub-Saharan Africa, 2001-2007 Estimated Number of New Projects Project Size Distribution, USD mn

50 Chinese Sources Total Press Reports 40

40 30

30 20 20

10 10

0 0 2001 2002 2003 2004 2005 2006 2007 <50 50-100 100-250 250-500 500- 1,000+ 1,000 Source: World Bank–PPIAF Chinese Projects Database Source: World Bank–PPIAF Chinese Projects Database egy and domestic economic development, China regards it 1990’s, when China’s economy was more developed and as in its strategic interests to deal with Africa in a fashion its growing economy required more markets and re- different from the West. sources, did Chinese companies start to look at overseas investment. Africa then became an attractive region for Though China’s strategy of engagement with Africa is re- market development and resources investment for some viewed, designed and implemented from a wider angle Chinese companies. Especially after the staging of the Fo- than economic or commercial considerations, China tries rum for China-Africa Cooperation (FOCAC) in Beijing in to separate political issues from commercial issues. Politi- 2006, more of Chinese companies’ attention was drawn to cally and diplomatically, China has dealt with sensitive is- the African continent and more Chinese companies started sues of African countries in a manner which is considered to consider and plan for doing business in Africa. Since by many African countries as non-interference in their in- then it can be seen that Chinese investment in Africa has ternal affairs, though the West has quite a different view on been growing more rapidly in various sectors and in value. China’s ways. Yet China’s diplomacy has rewarded it with more of Africa’s trust and cooperativeness. Salient features

China also took actions to counter the West’s criticism that From our observations and engagement with Chinese China’s goal is only to grab African resources. In February companies, we can observe some features of Chinese in- this year, President Hu Jintao visited four African coun- vestment in Africa. Firstly, Chinese investment is heavily tries, and it is clear that one important goal of this trip was slanted towards resources, i.e. China’s investments in Ni- to show the world that China's commitment to the continent geria and Sudan are in the oil industry; China’s invest- reaches beyond business and resources, as the four Afri- ments in the DRC and Zambia are in the copper mining can countries (Mali, Senegal, Tanzania and Mauritius) he industry. However, a diversified investment trend is also visited are not renowned for possessing natural resources. clearly visible in the last few years, i.e. ICBC acquired 20% of Standard Bank for USD 5.6 billion in October 2007; in China’s different political attitudes and measures, com- 2004, a Wenzhou shoe company set up a shoe-making bined with a long period of Chinese economic aid to Africa, plant with annual production of 6 million pairs of shoes in have helped China develop a close relationship with many Nigeria, and its total investment was more than USD13 African countries, which has created favourable conditions million by 2007; a large Chinese private cement producer for Chinese investment in Africa. invested in cement production in Madagascar; a Zhejiang company invested USD 51.8 million in setting up the Chinese investment in Africa grew very fast in the last few China-Botswana Economic & Trade Cooperation Zone years. OFDI flow into the continent stood at only USD 74.8 which includes a manufacturing base, a logistics centre million in 2003, yet this had increased to USD 1574.3 mil- and a free trade zone. lion by 2007. From oil contracts in Sudan to a substantive stake in a leading South African bank, China’s investment Over the last number of years, Chinese investors have activities are sprawling across the African continent. learnt many lessons from their engagements in Africa. Many Chinese companies have now realized that to re- At the high official level, the Chinese government already search and do due diligence on various aspects of invest- realized the strategic economic implication of China-Africa ment opportunities and targets are critically important. relations right after China’s opening-up policy was adopted They are now more accustomed to using advisory services in late 1970’s. Back in 1982, the then Chinese prime minis- before and during the process. More than 80% of Chinese ter visited 11 African countries with 4 principles for the de- investors in Africa are private companies. One model or velopment of economic and technological cooperation with pattern of the investments of these private companies is Africa. At the business level, however, only after the late that these companies normally start their engagement in

Africa by trading. For example, a Shanghai-based private Financially, China has cancelled the debts of 33 African company started its mining business in Africa by collecting countries as a gesture of goodwill. China has also cut im- and trading copper ores in the DRC and Zambia. Now this port tariffs on hundreds of items from 32 least-developed company has set up four other companies in the DRC and African countries to promote business development be- they are all engaged in mining exploration. It is estimated tween China and Africa. To support Chinese investors, that the company has invested about USD 100 million in China set up China-Africa Development Fund to provide a the DRC. source of finance.

The ‘trading’ of infrastructure projects for raw material con- Going global is a relatively new task for Chinese compa- tracts is one strategy China has used to establish itself on nies. Where more international standards and processes the continent. For example, in September 2007, China are required, Chinese companies will have more problems signed a deal to lend the DRC a total of USD 5 billion to and issues in terms of communication with foreign part- develop infrastructure and mining. In exchange, China will ners, sufficient managers with good skills, business system get rights to the DRC’s extensive natural resources, includ- standards etc. In addition to the above-mentioned issues ing timber, cobalt and copper. A similar earlier soft loan and problems, Chinese companies have encountered la- deal with Angola has resulted in that country now being the bour issues in Africa in particular. leading supplier of oil to China. Chinese companies prefer importing their own workforce, Supporting investment in Africa especially on big construction projects. Their unwillingness to employ local workers has created discontent in some The Chinese government and government-owned compa- African countries. In Angola in June last year, the Angolan nies have made much effort in the following five aspects to government cancelled a deal with Sinopec to build an oil promote and support China’s investment in Africa: refinery in Lobito, a USD 3 billion project, because of the Chinese company’s tendency to import labour rather than • High-level visits by Chinese top officials use locals. In some African countries where locals are em- • Policies and measures preferential to Africa ployed, Chinese companies have found it difficult to handle • Economic aid to Africa labour issues. • Financial support • Cultural influence Looking ahead

At the highest level, China has been actively engaging Af- China and Africa will continue to work together to cope rica, which has helped create a more favourable setting for with the economic difficulties brought about by the unfold- Chinese investors. China’s president, prime minister and ing global downturn, especially in the following six key ar- foreign minister have all visited the continent on a regular eas: basis. From early 2004 to most recently, President Hu Jin- tao has made four visits to Africa. The four visits have • Strengthen solidarity and mutual assistance to jointly taken him to 18 African countries, including Egypt, Gabon, meet the challenge of the global financial crisis Algeria, Morocco, Nigeria, Kenya, Cameroon, Liberia, Su- • Enhance mutual trust and cement the political dan, Zambia, Namibia, South Africa, Mozambique, Sey- foundation for traditional friendship chelles, Mali, Senegal, Tanzania, and Mauritius. On his • Raise the level of practical economic cooperation recent visit to four African countries, President Hu repeat- and trade on the basis of reciprocity and mutual edly pledged that China will continue to increase its aid to benefit Africa, reduce tariffs and expand trade with and investment • Expand people-to-people exchanges and deepen in African countries, within China's capabilities. cultural cooperation • Work closely together and strengthen coordination China has adopted a range of policies with the intention of in international affairs encouraging investment in African countries. In terms of • Enhance coordination and jointly promote the further investment, the Chinese government not only encourages development of the Forum on China-Africa and supports Chinese enterprises' investment and busi- Cooperation ness in Africa, but also provides preferential loans and buyer credits to this end. The Chinese government is also With the Chinese government working to improve strategic continuing to negotiate and implement the Agreement on cooperation between China and Africa in the areas men- Bilateral Facilitation and Protection of Investment and the tioned above, the business space between China and Af- Agreement on Avoidance of Double Taxation with African rica will be further broadened and deepened. As more Chi- Countries. nese companies feel pressured for new markets and resources, Africa will see more Chinese business and invest- In China’s African Policy, published in January 2006, ment activities, and in more sectors. China promised that, in light of its own financial capacity and economic situation, it will do its best to provide and gradually increase assistance to African nations with no political strings attached. Though not on the same scale as three decades ago, China is still continuing its economic Edward Wang, Director: China Capital Advisors aid to Africa as part of its strategy. [email protected]

Macroeconomic Monitor: China’s Tentative Consolidation While the world remains firmly in recession, Q1 2009 has delivered tentative signs of a recovery in China. We expect China’s economy to recover gradually in 2009, and then more rapidly in 2010 as demand from overseas markets eventually rebound. Over the longer term, however, the need to address structural issues in China’s economy remains. By Barry van Wyk and Javier Cuñat.

e were somewhat surprised by China’s Quarterly GDP Growth, % y-o-y, 2007–2010F the Q1 y-o-y GDP growth rate W 14 Q3 and Q4 2008 GDP of 6.1%. Looking at the macroeco- Q1 2009 sur- Q3 and Q4 of growth of 9.0% and 6.8% nomic picture in the developed world prised with a 2009 will likely 12 showed the initial slowdown and the link to Chinese exports, we firmer than see a mild re- 10 expected 6.1% covery from Q1 had expected a more dramatic eco- and Q2 levels nomic slowdown in China after the 8 already slower y-o-y GDP growth of 9.0% in Q3 and 6.8% in Q4 of 2008. 6 As such, the stronger number sug- 4 gests that China’s slowdown has been more modest and that a recov- 2 ery is perhaps underway. We there- 0 fore revise our 2009 GDP forecast Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F up by around 1% to 6.8%. 2007 2008 2009

Sources: China Monthly Economic Indicators; TBA Analysis This still represents a slowdown against full year 2008 GDP growth of weak overseas demand will limit reform and rebalancing the structural 9.0% and 13% in 2007 (revised up China’s export performance through- composition of China’s economic from 11.9%) - and well below the out 2009, China’s investment-led growth. average annual rate of over 11% economy, self-dependence on fi- sustained for the past 4 years - but it nancing and a stronger state-owned Yet over the short term, the heavy is nonetheless a relatively strong banking system provides the funda- reliance on exports for growth will performance in the context of recent mentals for a more substantial re- keep China from returning to the global events. The next few quarters bound of China’s economy in Q4 10% plus growth band—at least until will be critical to gauge China’s abil- 2009. recovery has fully set in in the devel- ity to maintain strong growth, but for oped world. But 10% plus growth now there is relief that the nation can China’s immediate fiscal policy re- was never healthy nor sustainable. potentially maintain at least a 6-8% sponse to the worldwide recession— Hence, we expect China’s economy range over 2009-10. the implementation of a RMB 4 tril- to begin a more sustained recovery lion (USD 586 billion) stimulus pack- in Q3-Q4 2009, albeit at lower levels, China’s Q1 GDP growth rate of 6.1% age as well as the RMB 4.85 trillion as the impact of the aggressive gov- could be the lowest since the gov- (USD 670 billion) of new loans is- ernment intervention intensifies in ernment began publishing quarterly sued by Chinese banks in the first the real economy. figures in 1992, yet this stands in three months of the year—will stark contrast to the negative 6.1% gradually boost domestic demand As reflected in the table on page 18, annual GDP growth recorded in the and domestic consumption, provid- in response to positive signs ema- US for Q1. Despite the fact that ing a renewed impetus for advancing nating from China’s Q1 data, several

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 8 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 09F10F

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

Monthly Imports, % y-o-y, USD bn Monthly Exports, % y-o-y, USD bn Imports (lhs) Grow th Rate (rhs) Exports (lhs) Grow th Rate (rhs) 140 40% 140 60% 120 30% 120 50% 40% 100 20% 100 30% 10% 80 80 20% 0% 60 60 10% -10% 0% 40 40 -20% -10% 20 -30% 20 -20% 0 -40% 0 -30% Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Source: China Monthly Economic Indicators Source: China Monthly Economic Indicators institutions have recently revised two months of the year Council announced that China’s upwards their forecasts for full-year • The Purchasing Managers Index industrial use of electricity actu- growth in 2009. At the present junc- (PMI) of China’s manufacturing ally fell by 8.38% in the first quar- ture, however, China’s recovery still sector rose to 52.4 in March, re- ter. remains at a preliminary stage. The bounding above 50 for the first government stimulus plan is a public time since July last year In essence, while the export outlook spending mechanism to engineer is still uncertain, China’s economy growth over the short term, yet over • As a more direct signal that China’s USD 586 bn stimulus seems to be showing hints of stabi- the medium to long term it remains lising and/or approaching the end of to be seen not only how successful package is taking effect, fixed investment soared by 30% in the worst part of the financial and China will be to engineer growth by economic crisis. raising consumption levels in the March. In conjunction with the government’s stimulus plan, domestic market, but also how fast Warning signs Chinese exports will recover. fixed-asset investment is forecast to maintain rapid growth in Q2 of Positive signals around 27% y-o-y Government-driven economic intervention is proving to be effective in • Tentative signs of improvement have also been apparent in the the short term, but the effectiveness By the end of Q1 2009, a few clear of this is still uncertain in the medium positive signals were apparent in real-estate market in the form of a rebound in property transaction to long term if market conditions and China’s economic statistics: financial flows do not improve in the volumes and the first rise in month-on-month prices since July economies of China’s trading part- • China’s leaders have hailed the ners. slightly improved trade figures for 2008. Prices in March still fell 1.3% y-o-y, however March. The decline in China’s Weaker labour demand is generat- exports decelerated in this • China’s oil demand in March de- ing notable pressure for job creation month, falling 17% y-o-y clined by 0.3% y-o-y, but stood at with the added risks of social insta- (compared to the -25.7% in Feb- its highest level since September bility. China retains a serious unem- ruary, see chart above) 2008 ployment problem, while given the • Industrial production growth rose • Power generation fell by 0.7% in capital-intensity of the stimulus pack- to 8.3% in March and 5.1% for March, yet declined at a slower age and the weaknesses of labour- Q1 y-o-y, after maintaining an rate compared to February. Ne- intensive SMEs in the export sector, average of 3.8% during the first vertheless, China’s Electricity the outlook for China’s labour mar-

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

40 14% 20 0 10% Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09

Source: National Statistics Database

17 kets in 2009 remains weak. Lower up again. China’s drive to attain 8% hoods and take up some of the slack external demand is also generating GDP growth in 2009-10 will be a of sagging demand from overseas. the problem of overcapacity, which contest between falling private in- at the same time may intensify un- vestment and shrinking exports on Ultimately, however, China’s recov- employment and put downward one hand, and rising public invest- ery remains in large part based on pressure on prices. ment on the other, with private con- the state of the global economy. It is sumption forming an additional, criti- likely, however, that growth in the While growth in domestic consump- cal variable. Growth of retail sales in US, EU and Japan will remain nega- tion in China has not slowed down China has held up well in Q1 2009, tive for the duration of 2009, while as yet, the ability of China to in- with record vehicle sales of 1.11 mil- 2010 could see no more than sub- crease domestic demand to com- lion units in March (during which dued growth. China’s stimulus pensate for slowing net exports re- brands such as Audi and GM regis- spending may be effective in the mains limited. Government spending tered their best sales ever in China). short term, but the rebalancing of and investment can in the short term Consumption growth seems to have China’s economy away from invest- fill up some of the slack, but over been especially fast in China’s less- ment- and export-led growth and time China faces a serious structural prosperous central and western re- more towards private consumption challenge to fundamentally increase gions. Thanks in part to government as a growth driver will require deter- domestic consumption. subsidies in rural areas, companies mined action to address income ine- like GM and Nissan have spoken of quality and to provide a better safety The lending surge may currently an auto boom in rural China. net and higher incomes. also be the main driver of positive signs in the property sector. The Structural concerns eventual need to contain credit growth renders this a temporary res- Since the global recession regis- pite, and once that reality hits home, tered its most severe impact during continued property price decreases Q4 2008, the Chinese government could precipitate a further downturn has undertaken a range of aggres- in real-estate investment. This would sive monetary and fiscal policy ac- also harm local governments, who tions in order to re-engineer eco- will be expected to fund much of the nomic growth. As a result of mone- government’s stimulus while relying tary and credit easing, China has on land sales and taxes for about experienced a credit boom in Q1, half of their fiscal income. while USD 586 billion of government spending, tax cuts, provision of a On the other hand, the surge in lend- social safety net and subsidies to ing may be able to bolster domestic poor and unemployed is being im- demand until global demand picks plemented to improve people’s liveli-

The China Compass—May 2009 A country in figures

By THE BEIJING AXIS China Strategy Group

Contents

History

Country Profile

China Economic Indicators

International Comparison

Conclusion

About THE BEIJING AXIS

The China Compass—May 2009 is a publication by THE BEIJING AXIS China Strategy Group. It is a navigational instrument for determining China’s direction relative to the world’s economic poles.

Combining basic country data with more detailed analysis of a wide range of macroeconomic and social data, The China Com- pass—May 2009 presents a comprehensive picture of the ever-changing and evolving Chinese landscape.

The China Compass, published in presentation form, is full of up to date statistics, topical themes and insights. It is easy to read and presents a rich, useful desk-reference for executives with a China agenda.

The China Compass can be downloaded from the Knowledge section of THE BEIJING AXIS website at www.thebeijingaxis.com Alternatively, to request a copy of The China Compass, please send an email to [email protected]

Selected Quarterly TBA Forecasts for China (% y-o-y) 2007 2008 2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F Real GDP 11.7 12.2 12.2 11.9 10.6 10.1 9.0 6.8 6.1 6.5 7.0 7.5 Retail 19.2 20.9 23.1 26.0 n/a 24.0 22.2 19.8 17.0 16.0 15.5 18.0 Sales Capital - - - 24.8 - - - 25.5 - - - 29.0 Formation 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 -15.0 -4.0 1.0 5.0 Imports 18.2 18.2 20.7 25.4 28.7 32.4 25.7 -10.1 -18.0 -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 Previous forecast for 2009 Previous forecast for 2009 (April 2009) (by December 2008, (by beginning of Q4-2008) January 2009) 9.3 CASS 8.3 (started to signal downside 9.7 risk) Goldman Sachs 8.3 6.0 n/a Wing Hang Bank 8 8 n/a Merrill Lynch 8 8 8.6 HSBC 7.8 8 n/a Asian Development 7.0 8.2 9.5 Bank Deutsche Bank 7.0 7.0 7.6 RBS 7.0 5.0 8.0 THE BEIJING AXIS 6.8 5.6 8.5 BMI 6-7 6-7 8.8 UOB 6.5 8.3 n/a EMIS 21 Source Consensus n/a 7.76 >9 (30 Dec 2008) 7.5 World Bank 6.5 (Reference to sub-6% 9.2 growth) UBS 6.5 7.5 9.5 AT Kearney 6.0 6.0 n/a EIU 6 6.0 7.5 Global Insight 5.9 6.9 n/a Asianomics n/a 0-4 (saw 30% risk of negative n/a growth)

Sources: Press; Various; TBA

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: April 30 2008 = 100% 500 USD ZAR AUD RUB 450 Shanghai Shenzhen 110 400 100 350 300 90 250 80 200 150 70 100 60 50 0 50 2003 2004 2005 2006 2007 2008 Q1-09 30 April 08 30 April 09

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

Benchmark Interest Rates, as on 30 April 2009 10 Largest Chinese Listed Companies, USD bn

15% PetroChina 282.85 10.25% ICBC 154.21 10% 8.50% Sinopec 103.42 Bank of China 92.61 4.75% 5.31% China Life 74.46 5% 3% 64.39 1.25% Shenhua Coal 0.10% 0.25% 0.50% Ping An Insurance 28.67 0% China Merchant Bank 28.00 EU US UK Bank of Comm. 26.40 India China Brazil Japan CITIC Securities 24.60 Australia 0 50 100 150 200 250 Source: Central banks AfricaSouth Source: Shanghai Stock Exchange, as on May 5 2009

Dow Jones Global Titans, YTD % change as on 1 May 2009 % y-o-y

38.3 -34.4 China 34.1 -57.9 Russia 17.0 -42.1 Sw eden 13.2 -37.9 Turkey 6.7 -29.1 South Africa 4.9 -58.4 Egy pt 3.5 -37.7 HK 3.1 -29.9 Australia -0.3 -46.5 UK -1.0 The Dow Jones Country Titans -53.0 Netherlands -2.4 Indexes span major markets from -42.4 Japan -4.1 across the globe -37.6 Sw itzerland -5.9 -42.4 Germany -6.2 -48.7 Italy -6.4 -37.1 US -7.3 -44.8 France -8.3 -44.3 Spain

Sources: Dow Jones Indexes; Google Finance

China Facts & Figures

China Facts & Figures provides a cross-section of data illustrating growth, transformations and trends in China’s commerce and industry.

China Selected Economic Indicators General Statistics 2004 2005 2006 2007 2008 Population (mn) 1,300 1,308 1,314 1,321 1,330 Nominal GDP ($bn) 1,932 2,244 2,645 3,242 4,445 GDP per capita ($) 1,486 1,716 2,012 2,454 3,342 Real GDP growth (%) 10.1 10.4 11.1 13 9.0 Prices, interest rates and exchange rates CPI inflation (%, December over December) 2.4 1.6 2.8 6.5 1.2 CPI inflation (% change in average index for the year) 3.9 1.8 1.5 4.8 5.9 Exchange rate (RMB per USD, average) 8.28 8.19 7.97 7.61 6.9 Fiscal data General government fiscal balance (% of GDP) -1.3 -1.2 -0.8 -0.6 -0.04 General government expenditure (% of GDP) 17.8 18.5 19.2 19.9 20.8 General Government revenue (% of GDP) 16.5 17.3 18.3 19.9 20.4 Money supply and credit Broad money supply (M2,% of GDP) 158.9 160.7 163.9 163.6 158.0 Broad money supply (M2,% year-on-year change) 14.6 17.6 16.9 16.7 17.8 Balance of payments Exports (total value, % of GDP) 34 37.3 40.1 41 32.1 Imports (total value, % of GDP) 31.4 31.7 32.2 32.2 25.5 Exports (goods and non-factor services, % increase in $value) 35.2 27.6 26.9 25.2 17.3 Imports (goods and non-factor services, % increase in $value) 35.1 17.4 19.8 22.2 19.4 Current account balance ($bn) 68.7 160.8 249.9 372 440 Current account (% of GDP) 3.6 7.2 9.4 11 10.1 FDI ($bn) 60.6 72.4 72.7 83.5 92.3 External debt outstanding ($bn) 247.6 283.8 325 373.6 420 Central bank gross FX reserves ($bn) 610 819 1,066 1,528 1,980

Sources: China Monthly Indicators; TBA Analysis

World GDP growth, % y-o-y, 1997-2010

China 14 Emerging and Developing Economies 13 12 World 11 10 Advanced Economies 9 8 7 6 5 4 3 2 1 0 -1 -2 98 99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -3 -4 -5 Sources: IMF; TBA Analysis

2008 Fixed Asset Investment in Urban Areas by Province

Provinces in red made up 70% of Total Fixed Asset Investment in Urban Areas in 2008 Heilongjiang

Jilin Xinjiang Beijing Liaoning Gansu Inner Mongolia

Hebei Tianjin Qinghai Ningxia Shandong Shanxi

Tibet Shaanxi Henan Jiangsu Sichuan Hubei Shanghai Anhui Chongqing Zhejiang Hunan Jiangxi Guizhou Regional Distribution, % of total Yunnan Fujian Taiwan Fixed Asset Projects Guangxi Guangdong Investment under Completed Construction Eastern Area 50% 38% Central Area 27% 33% Hainan Western Area 23% 29%

Fixed Asset Comparable Fixed Asset % of Projects under % of Projects under Comparable Investment % of Gross Fixed Investment Regional construction Regional construction % of total Gross Fixed Completed total Capital Invest- Completed GDP (units) GDP (units) Capital Investment (USD bn) ment (USD bn)

Anhui 87.8 69% 20,937 6% Indonesia Jiangsu 168.1 39% 15,843 4% Mexico Beijing 52.1 34% 2,930 1% Southern Africa Jiangxi 63.8 68% 10,308 3% Poland Chongqing 54.9 75% 7,743 2% Southern Africa Jilin 69.3 75% 9,181 3% Sweden Fujian 67.8 44% 11,627 3% Austria Liaoning 131.3 68% 14,733 4% Netherlands

Gansu 22.1 48% 7,822 2% Egypt Ningxia 10.9 69% 1,501 0% Belarus Qinghai 7.6 55% 2,522 1% Luxembourg Guangdong 127.2 25% 17,346 5% Netherlands Shaanxi 185.2 41% 27,614 8% Central America Guangxi 49.1 48% 17,185 5% Southern Africa Shandong 64.6 33% 5,237 1% Norway Guizhou 23.7 49% 9,100 3% Israel Shanghai 63.2 63% 6,778 2% Poland Hainan 9.9 47% 1,235 0% Slovenia Shanxi 47.2 47% 6,778 2% Poland Hebei 110.4 47% 21,000 6% Northern Africa Sichuan 93.7 52% 17,267 5% Northern Africa Heilongjiang 49.8 42% 7,715 2% Southern Africa Tianjin 46.9 51% 3,204 1% Southern Africa Henan 128.6 49% 29,559 8% Netherlands Tibet 3.9 69% 2,551 1% Uruguay Hubei 75.9 47% 14,316 4% Greece Xinjiang 29.2 48% 6,068 2% Algeria

Hunan 71.3 44% 18,611 5% Greece Yunnan 45.9 56% 13,360 4% Southern Africa

In. Mongolia 78.7 70% 9,612 3% Belgium Zhejiang 96.4 31% 15,161 4% Northern Africa

Sources: China Monthly Indicators; UNCTAD

China Sourcing Strategy Stimulated by a series of measures, China’s economy is exhibiting some positive signs such as a growing PMI and indications of stabilising exports. But how has the China sourcing risk profile changed for international procurement managers—and what can they do to formulate appropriate China Sourcing Strategies in 2009? By THE BEIJING AXIS China Sourcing Unit team.

Major Recent Developments Share of Net Exports in GDP Growth, y-o-y • Total trade (imports and exports) in March totalled 60% USD 162.02 billion, down 20.9% y-o-y. Exports 40% totalled USD 90.29 billion and imports USD 71.73 20% billion, decreasing 17.1% and 25.1% y-o-y, respect- 0% ively -20% • Total trade in March grew by 29.7% over the pre- -40% vious month, with exports up 39.1% and imports up -60% 19.5% -80% • China’s manufacturing Purchasing Manager Index 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E (PMI) reached 52.4% in March 2009, the first time Sources: China Statistical Yearbook 2008; Chinese Academy of Social Sciences during the past 6 months that the index exceeded 50%. The index has, however, indicated continuous growth since December China Monthly Exports, USD bn & Growth Rate, y-o-y • In April 2009 the PMI rose again to 53.5%, indicating 150 Ex por t Grow th Rate (y-o-y) 40% further consolidation in economic conditions 30% 120 • China announced industry-specific stimulus plans 20% during January and February 2009: Auto, steel, 90 10% shipbuilding, textile, machinery-manufacturing, electronics and information, light industry, petroche- 60 0% -10% micals, nonferrous metals and logistics 30 • China adjusted the export tax rebate rates for 3,802 -20% items from 1 April 2009. This is the sixth increase 0 -30% since last August when the government decided to Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 raise export tax refunds to stimulate exports Source: China Customs

In the Midst of a Crisis: Enhancing Supply Chain Risk Management in China with Good Access to Information Globalization has accelerated the China supply may include the follow- ronment requires extensive knowl- growth of organizations, but also ing: edge, timely market information and

somehow shaped the supply chain by • Do your suppliers have adequate accurate analysis of how supply increasing global interdependence chains are affected. But this is a chal- access to finance/credit? and the need for more overall stabil- lenge for international firms with time- ity. The current economic crisis is per- • What is the typical ‘demographic’ zone, language and cultural obstacles fect proof of this—as trade slumped of your Chinese suppliers? Many to overcome. For example, China an- and companies failed, the supply small and medium sized export- nounced a series of stimulus plans for chains of many organisations have ers will not survive or will suffer 10 industries, which included a host of been inhibited or put under severe severe dislocation so how to mine export encouragement regulations information about supplier health? stress. Therefore, it is more crucial and new policy trends. Without in- than ever to manage supply chain risk • How does the regulatory frame- depth analysis of the right information well. work look for your categories? Are the risk profile goes up exponentially. there prospects for changes in

China is no different. There is an ele- taxes/subsidies? Similarly, from the micro side, an or-

vated need to effectively manage the • What about foreign exchange rate ganisation must review its cooperation internal organization, customers, sup- risk now that the RMB apprecia- with its Chinese suppliers and service pliers, the business environment and tion has halted? providers as well as audit their current the web of links in-between all of situations via interviews, visits, sur- these. But implementation of this can The best way to manage risk is to pre- veys, and 3rd party due diligence. potentially be much more difficult in empt and anticipate. From a macro China due to the obstacles of lan- perspective the entire landscape in In short, not to be closely tapped into guage, business culture, differences China has changed: market growth, the state and condition of your suppli- in the economic system, etc. Pres- industry dynamics, profitability, confi- ers in the current environment simply ently, potentially pertinent risks in the dence, etc. To manage in this envi- injects unacceptable risk.

Regulation Watch Purchasing Managers Index, Jan 2007–Apr 2009 China raised export tax rebates twice during Jan - Apr PMI in Manufacturing Industry 2009: 60 1st time (effective 1 February 2009):

China increased the tax rebate rate for textiles and gar- 50 ments from 14% to 15% from 1 February 2009, which was announced along with the national plan to invigorate China's textile industry, as announced by China’s State The index has been Council. 40 growing for five consecutive months The textile sector is China’s traditional pillar industry. This is the 3rd time that the Chinese government adjusted tax rebates for textiles since August 2008. The previous in- 30 crease in November took the rate from 13% to 14%. Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 2nd time (effective 1 April 2009): Source: China Federation of Logistics & Purchasing (CFLP) China lifted the export rebate on 3,802 items from 1 April • The CFLP manufacturing PMI in March 2009 grew to 2009 in order to boost falling exports. The adjustment 52.4, which was the first time the index returned to covers the export rebate for textiles and garments, iron above 50 during the past 6 months and steel, non-ferrous metals as well as petrochemical • In April this trend continued with a small rise to 53.5 items. • By March 2009, 3 sub-indexes of the manufacturing PMI were over 50, including output, new orders and New export tax rebates for CRT colour TVs are 17%, quantity of purchasers. The other sub-indexes have 16% for textiles and garments, and 13% for non-ferrous also been growing, albeit at a slower rate metals and furniture. • Among the 20 industries surveyed in March 2009, the It was the sixth increase since last August when the gov- PMI of manufacturing in 15 industries (including elec- ernment decided to raise refunds in an attempt to deal tric equipment and machinery, transportation equip- with the problem of slumping exports amid the global fi- ment, general equipment and tobacco) registered nancial crisis. 50 or higher

WHY Source in China: Export Credit During China’s development over the past 30 years, ex- Export Buyer’s Credit Working Procedure port credit became an important financial facility for the 1. Commercial Contract Chinese government to encourage exports and the Chi- 5. Down Payment Importer Exporter nese ‘Going Global’ strategy. 6. Delivery of goods/services (Borrower)

The two main export credit players in China are China 2.Loan Agreement

Export & Credit Insurance Corporation (Sinosure) and 7. Disbursement 8. Repayment The Export-Import Bank of China (China Exim Bank). China Exim Bank 4. Export Credit Insurance Sinosure is the only officially-supported insurance com- 3. Repayment Guarantee pany specialising in credit and investment insurance in China Export &

China, playing the role of export credit agency for the Credit Guarantor state. Sinosure is one of 51 members of Berne Union, the leading international organisation of public and private Source: China Exim Bank sector providers of export credit and investment insurance. China Exim Bank Export Credit 2003-2008E, USD bn China Exim Bank is a government policy bank under the 30 direct leadership of the State Council. The bank approved an aggregate of RMB 402.4 billion loans in 2008, with Seller's credit Buyer's credit actual disbursement of RMB 296.1 billion, up by 53% and 20 51% respectively over 2007. These loans supported USD 102.8 billion-worth of exports of mechanical and electronic products, high- and new-tech products and agricul- 10 ture products as well as overseas investment projects and contracted construction work.

As China is increasing fiscal input to stimulate exports, 0 export credit will be supportive and helpful for financing of 2003 2004 2005 2006 2007 2008E Chinese exporters and overseas buyers. Source: China Exim Bank

WHAT to Source in China: Implications of the Stimulus Package During Jan—Feb 2009, China unveiled stimulus packages for 10 industrial sectors: Auto, steel, shipbuilding, textiles, machinery-manufacturing, electronics and information, light industry, petrochemical, nonferrous metals and logistics. As one of the most important measures the Chinese government has taken to keep the economy growing in 2009, these packages also include adjustment plans to stimulate exports, from which overseas buyers will also benefit. Here we se- lect 8 sectors to explain favourable trends for overseas buyers. Auto (announced on 14 Jan 2009) Steel (announced on 14 Jan 2009) • Encourage large auto companies as well as major • Adopt a more flexible tax rebate policy to retain inter- auto-part makers to expand through mergers and national market share acquisitions so as to optimise resources and im- • Allocate special funds from the central budget to prove their competitiveness on the international mar- promote technological advancement of the sector, ket readjustment of product mix and improvements of • Encourage auto exports; export 10% of China’s product quality locally-manufactured autos • Transforming ‘big’ industry competitors into ‘strong’ • Earmark RMB 10 billion as a special fund to support international players; eliminate outdated technology auto companies to upgrade technology and develop • From 1 April, the Chinese government increased ex new engines that use alternative energies in the next port VAT rebates of some more value added steel 3 years products

Machinery (announced on 4 Feb 2009) Textile (announced on 4 Feb 2009) • Encourage major equipment manufacturers to ex- • Develop new domestic and international markets; pand by M&A and develop large enterprises with maintain global market share by expanding new comprehensive capacity for turnkey project imple- overseas markets mentation, system integration, international trade and • Strengthen technical innovation and establish local financing brands; support the localisation of manufacturing and • Encourage machinery exports by increasing export textile machinery credit • Expand financial support: Increase the export VAT • Encourage introduction of overseas advanced tech- rebate for textiles and garments to 15%; provide nology and re-innovation; eliminate import duties and subsidies for small and medium sized companies value-added duties for the key parts and materials who are suffering from worsening business conditions which need to be imported and cash-flow problems

Shipbuilding (announced on 11 Feb 2009) Electronics & information (announced 18 Feb 2009) • Make effort to develop the international market; ex- • Promote outsourcing and encourage electronics and pand international market share of high-tech and high information enterprises to go overseas and build re- value-added ship and marine project equipment search and development centres, production bases • Encourage financing organisations to increase export and marketing networks buyer’s credit for shipbuilding exports • Increase financial input, including increasing the ex- • Support shipbuilding enterprises’ R&D to develop ma- port VAT rebate of key electronic products to 17% rine engineering equipment; encourage the develop- • Include 6 key projects under the stimulus plan: Inte- ment of marine engineering and power transmission grated circuit industry, plate-panel and colour TV, TD- and other critical systems and ancillary equipment; SCDMA, digital TV networks, computer and next- actively develop ship repair and modification abili- generation internet and software and information ser- ties vices

Light industry (announced on 19 Feb 2009) Non-ferrous (announced on 25 Feb 2009) • Further raise export rebates of some light industrial • Adjust the product to meet the demand of power, products, and extend fiscal and credit support to transportation, construction, mechanics and light in- small and medium-sized firms dustries; encourage exports of high-tech and high • Lift processing trade restrictions on some labour- value-added products intensive, technology-intensive, energy-efficient, and • Adjust export VAT rebate rates environmentally-friendly products • Promote company restructuring and offer subsidised • Speed up technological upgrades in the fields of pa- loans to support technical innovations per making, home appliance and plastic sectors • Eliminate technically undeveloped producers and • Increase supply of light industrial products in the avoid an increase of excessive output capacity domestic market, and improve foreign trade services • Establish a national reserve system; make full use of and maintain export volumes both domestic and foreign resources

HOW to Source in China Common Modes for Establishing a Sourcing Hub in China: Representative Offices and Trading Companies As a part of globalised sourcing strategy, many multinational companies are starting to establish their own sourcing hubs in China to better manage their Chinese suppliers. Apart from using 3rd party sourcing facilities, these companies com- monly have two options: A representative office or a WOFE (wholly owned foreign enterprise) trading company. Here we list the main features of these two types that procurement managers must know before decision-making:

Type Attribute Operation Features Benefits Cost Representative Has no qualification of a Cannot sign contracts Better understanding of Setup cost is low

Office legal entity, with incom- Cannot open LC suppliers Operational cost is plete economic functions Cannot apply for im- Better control of quality low to engage in commercial port/export license activities with common Better assurance of deli- significance Cannot employ staff very WOFE Trading With complete functions Can perform all duties Better understanding of Setup cost is higher Company of a company including signing con- suppliers than Rep office

tracts, applying for im- Better control of quality Operation cost is

port/export licenses, More assured of delivery higher than Rep employing staff inde- Can do domestic trade office pendently, issuing in- voices Can get export VAT rebate

Can utilize China banking

Process Flow of TBA China Sourcing Unit (CSU) - Systematic Industry Search & Supplier Identification This section introduces the process flow of THE BEIJING AXIS China Sourcing Unit, i.e. from the point of receiving enquiries from clients, the services included in the solu- tion process and the benefits provided to our clients, as well as lessons learnt. In this edition we discuss the stage after Needs Analysis: Industry search and supplier identification. Which supplier(s) to deal with is always a crucial decision, which directly impacts TCO, quality and lead time you can attain and the overall risk of the sourcing strategy that you are formulating. CSU identifies an initial universe list of suppliers by conducting a comprehensive and systematic industry search and employing on-the- ground reach & established networks to ensure that all the possible suppliers are included for evaluation.

3 Methodology Sources Research Systematic Determine Identify infor- Populate Supplier Industry appropriate mation nodes exhaustive Evaluation, Search approach, and all poten- UL based on 2 methodology tial sources methodology Application & Supplier to ensure full that encom- and sources of High- Identification universe list pass full UL and iterate level Filters (UL)

Guidelines for Systematic Industry Search and Supplier Identification

The key is to arrive at a comprehensive all-inclusive universe list (UL) that includes ALL potential candidate suppliers. Different industries, categories and product clusters would require a different approach in order to construct a UL. For example, high regional-concentration cluster industries often occur in the same region (i.e. most digital scanners are manufactured in Guangdong in the Pearl River Delta, but trailers or auto components are manufactured across China. Rank, classify possible suppliers from early on, based on industry ranking, technology, quality and specifications, commercial standing, export history, references, price point perception, etc. All this information must enter the project database. A good database would inform the specific sourcing strategy for this specific case, i.e. what tier of suppliers to approach in terms of supplier size, price position, product range, service level, etc. Also, how to approach them, i.e. by email, RFI, RFP, RFQ, by direct visit, via an introduction from guanxi, etc.

China Sourcing Blog Highlights

Amid an unfavourable economic environment, global trade and China sourcing are going on. CSB recently investigated measures China’s Ministry of Commerce has taken to reverse the situation with falling exports, and analyzed the role of e-commerce in global sourcing. We also offered practical tips on enhancing the efficiency of plant tours and on making optimal use of sourcing exhibitions.

The China Sourcing Blog (CSB) is THE BEIJING AXIS online media plat- form to track the latest trends on sourcing and the Chinese economy. Taking on a multi-faceted, dynamic subject and carefully scanning 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 is a selection of CSB postings that appeared over the last three months:

Posted: 3 February China's economy has sustained dire effects from the global economic Make your presence felt: Are you making the most of China’s sourcing fairs? In a slowdown, and the spillover has im- series of postings The China Sourcing Blog outlined how to choose the right fair pacted e-commerce as a trading plat- and how to optimize your experience of the fair. form. However, in these difficult times, online business has shown itself to Hence CSB collected everything you kept making efforts towards improving have many advantages in comparison need to know about the fair into one the situation with an innovative ap- with traditional trading methods. CSB posting, including exhibition dates, proach to economic development. analyzed the current role of e- composition of exhibitors and ways to commerce for global sourcing and register. Posted: 17 March presented several factors which can In recent years, a significant number facilitate further growth of this type of Posted: 4, 11 & 18 March of alarming incidents concerning food business. All international purchasing managers safety have taken place in China. try to minimize import risk, and in or- CSB listed all the recent food scan- Posted: 18 February der to achieve this goal in China we dals that occurred in China and ana- Surveys conducted by China's Minis- always recommend you to undertake lyzed possible reasons and current try of Commerce (MOC) indicated that plant visits before you place an or- problems standing behind the issue of the export growth of mechanical and der. In a series of three postings, CSB food security. electrical products will slow considera- provided its readers with tips for orga- bly in the first half of 2009, due to nizing a plant tour in China, including Posted: 30 March, 14, 16, 24 & 30 dwindling demand from overseas advice on making preparations before April markets. CSB investigated in more coming over and necessary actions Exhibitions are considered an impor- detail the measures that China’s after arrival. We also provided a thor- tant step for buyers to meet suppliers. MOC plans to take to maintain ough explanation of the advantages However, many people experience steady export growth for mechanical, of such plant visits. limited outcomes from attending exhi- electrical and high-tech products. bitions in China. Based on TBA ex- Posted: 6 March perts’ experience, CSB offered its Posted: 2 March For many years, China has been criti- readers some advice on achieving It is said that a trip to the Canton Fair cized for lacking innovative and crea- good results from sourcing exhibi- can save one from undertaking a tive ideas in the course of its eco- tions. Recommendations are divided sourcing trip to China. While this is nomic development, a shortcoming in into three main parts: Choosing the not necessarily true, the Canton fair is large part ascribed to the technologi- right exhibition, doing sufficient prepa- China’s premier sourcing event and cal gap between China and devel- ration, and following up afterwards. anyone sourcing from China or plan- oped countries. By means of a brief ning to source from China has to be overview of IPR in China in 2008, [email protected] aware of this event and what it offers. CSB demonstrated that China has www.chinasourcingblog.org

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.

Real GDP Growth for BRICS Countries, % Since the publication of the February edition of The China Analyst, economic observers and analysts 2008 2009 F from leading world institutions have revised down- 9.0 ward their 2009 forecasts for the leading world eco- 6.5 6.0 nomic activity indicators. The BRICS countries are 5.6 5.1 4.0 3.1 no exception. The World Bank, for example, has re- 1.0 vised the real GDP growth forecast in its March 30 0.5 -4.5 update by 1-2 percentage points downwards on average for these countries compared to its November 2008 publication.

India

India China and India are forecast to still have significant China Brazil China Brazil Russia Russia GDP growth of 6.5% and 4%, respectively, but the economies of South Africa and Brazil are feared to South AfricaSouth South AfricaSouth Source: World Bank, forecast as of 30 March 2009 have almost no growth this year or even decline slightly. The IMF, for example, forecast a 0.3% GDP decline for South Africa and 1.3% decline for Brazil’s Unemployment and Inflation in BRICS Countries, 2009F,% 2009 GDP.

China India Russia Brazil South Africa As for Russia, Q1 2009 real GDP fell by a stagger- -1% ing 9.5% compared to Q1 2008, as announced on -0.2 Inflation 2009F 4.4 April 23 by the Ministry of Economic Development. 5% 5.9 No one doubts that the Russian economy will shrink 8.3 4.2 6.0 this year—analysts only argue by what amount.

scale 10%

7.2 8.4 World Bank forecasts a 4.5% decline, IMF is more pessimistic with a 6.0% decline forecast (as of April 15% 13.5 2009). Inverted

20% Unemployment rate 21.9 Other BRICS trends to watch for over the next few months are the rising current account deficits for re- 25% source-rich countries, such as South Africa, Brazil Source: Economist Intelligence Unit and Russia; and the double impact of unemployment and inflation that is bound to hit the popula- Current Account Surplus/Deficit as % of GDP tions of the most vulnerable economies around the 12% globe. Again, China stands out as the only BRICS 10% China economy where both effects will be mild though still 8% significant. The most troubling scenarios will be 6% haunting Russia, where both unemployment and 4% inflation are forecast at high levels in 2009, and Bra- Russia 2% zil and South Africa, where inflation will be moder- 0% ate, but unemployment will be a major cause of con- Brazil -2% cern throughout 2009 and perhaps continuing into India -4% 2010 and 2011. -6% South -8% Africa -10% -12% 2005 2006 2007 2008 2009F

Source: IMF World Outlook

China Trade Roundup

China Trade Roundup 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 Total Imports & Exports 2000–Q109, USD bn China Total Trade Mar 08 – Mar 09, USD bn

Imports (CIF) Exports Imports Exports (FOB) 1,250 120

100 1,000 80 750 60 500 40

250 20

0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q109 Mar Apr Mar Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

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

Total Imports by Main Commodities, USD bn Total Exports by Main Commodities, USD bn

100% 183.20 Copper Products 100% 245.54 Furniture Refined Plastic Articles 22.51 Petroleum 28.80 Travel Good, 80% 80% 15.40 Handbags, etc 12.40 6.60 Others 11.90 6.00 4.10 7.40 6.20 Others 3.90 3.47 5.70 2.95 60% 2.91 60% 2.57 Soya Beans Steel Products Footwear 40% Plastic 40% Mobiles Phones 121.30 164.62 Data Processing Textile, Fabrics 20% 20% Crude Oil China Total Imports Garments & Clothing China Total Exports Jan—Mar 2009 Jan—Mar 2009 Electronic Appliances Data Processing USD 245.54 bn 0% USD 183.2 bn 0% Source: National Bureau of Statistics Source: National Bureau of Statistics

China Import and Export Monthly y-o-y Growth Rate, % 2008—Q1 2009

Exports Imports 45

5 Nov Dec Jan Feb Mar

Jan -5 Feb Mar Apr May Jun Jul Aug Sep Oct

-15

-25 Source: National Bureau of Statistics

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

40 70 EU 2008 Jan-Mar 2009 Jan-Mar 2008 Jan-Mar 2009 Jan-Mar Japan 65 35 60 EU ASEAN 55 US 30 S. Korea 50 Taiw an HK 25 45 US 40 20 35 30 Japan ASEAN 15 25 20 S. Korea 10 Australia 15 India Russia India Russia Taiw an 5 HK 10 Australia 5 0 0 Source: National Bureau of Statistics Source: National Bureau of Statistics

Total China Imports and Exports by Country/Region, % Jan–Mar 2009

Imports Exports Australia 2% Russia 2% India 2% Taiwan 2% India 2% Australia 4% Other 28% S. Korea 5% Taiwan 8% EU 20% ASEAN 8%

US 9%

Japan 9% ASEAN 10%

EU 14% Others 21% S. Korea 10% HK 12%

Japan 13% US 19% Source: National Bureau of Statistics

2007 China Trade Balance Map, USD bn (Top 5 Trade Surplus & Top 5 Trade Deficit Partners)

UK South Korea

Netherlands

USA

Japan

UAE China’s Top 5 Trade Surpluses and Deficits Hong Kong Philippines Surplus Deficit

HK, SAR 171.63 Malaysia Angola US 16 3 . 57

Netherlands 36.49 UK 23.88 UAE 14 . 0 1 -11.01 Malaysia -11.66 Angola -15.62 Philippines -31.93 Japan -47.65 S. Korea Source: UN Comtrade

China Inc. Goes Global: OFDI and M&A

The popular view that Chinese companies should take advantage of the ongoing global financial crisis to more actively acquire overseas assets continues to spread in China. Yet while the current climate provides new opportunities for Chinese investors, Chinese firms may yet face more hurdles in their plans for making foreign acquisitions. By Edward Wang.

Highlights: China Outward FDI and M&A in 2008 China Outward FDI Flow 2003-2008, USD bn

• China’s outward FDI in 2008 was rather unexpectedly OFDI Grow th Rate up 96.7% over 2007 to stand at USD52.2 billion, of which 78% were non-financial investments. Chinese 60 52.2 150% companies seemed more active in 2008 than the previous year, with some strategically important deals 40 100% being concluded 26.5 • Since 2000 when the Chinese government more 21.2 openly encouraged Chinese companies to go global, 20 12.3 50% Chinese companies have been integrating interna- 2.9 5.5 tional cross-border investment and M&A standards 0 0% and processes into their planning. In 2009, more Chinese companies from more sectors are clearly 2003 2004 2005 2006 2007 2008 considering and pursuing cross-border expansion Source: MOFCOM China • A steep fall in the price of key resources, triggered by the global economic downturn, has provided op- Structure of China’s OFDI Flow 2003-2008, USD bn portunities for Chinese companies to make overseas Non-Financial Financial investments. More Chinese companies have deve- 2008 40.7 11.5 loped an appetite for overseas business development as they see new opportunities with ‘distressed’ play- 2007 24.8 1.7 ers looking for capital / investors 2006 17.6 3.5 • But some high-profile Chinese acquisitions (e.g. Chi- nalco's investment in Rio Tinto) have roused signi- 2005 6.9 5.4 ficant public as well as government concern in the 2004 5.5 destination countries. It is expected that Chinese firms may yet face more hurdles in their OFDI activi- 2003 2.9 ties, such as national security issues and communi- 0 102030405060 cation problems Source: MOFCOM China

Major Cross-border Deals, Q1 2009

1 China Minmetals Thompson Iron Mines Ltd, in return from two Harbinger Capital funds for for a 19.9% stake of 29.7 million a combined 16.5% stake in Fortes- 2 Wuhan Iron & Steel common shares in the company. cue. Valin also has a ‘standstill 3 CNPC agreement’ that prevents it from rais- 3 February 2009: China National ing its stake in Fortescue above 4 Hunan Valin Iron & Steel Petroleum Corp (CNPC) will buy 17.5%. The deal has been approved 5 Chinalco Verenex Energy, a Canadian com- by the Australian government. pany that holds oil assets in Libya, 1 April 2009: China Minmetals has for USD 402 million. CNPC's offer is 5 February 2009: Chinalco has signed a USD 1.21 billion takeover subject to conditions, including the agreed to inject USD 19.5 billion into deal with Australian miner OZ Miner- approval of the Libyan National Oil Rio Tinto Ltd/Plc. This will bring Chi- als which will leave it with USD 366 Corp. Verenex's most valuable asset nalco's stake in Rio to 18%. Chi- million in cash. The revised bid is is a 50% stake in the Area 47 prop- nalco will invest USD 12.3 billion in well below Minmetals' original USD erty in northwest Libya. three partnerships with Rio's copper, 1.7 billion offer, and excludes the aluminum and iron ore divisions, Prominent Hill mine and other 4 February 2009: Hunan Valin Iron taking minority stakes in nine assets. "sensitive assets". & Steel has bought a 16.5% stake in Chinalco will also receive a seat on Australia's third-largest iron ore pro- Rio's board and the right to appoint 2 March 2009: Chinese steel ducer Fortescue Metals for USD 771 another at a later date. The cash maker Wuhan Iron & Steel will invest million. Valin purchased 225 million injection is pending regulatory ap- USD 240 million in the Canadian new Fortescue shares at USD 1.61 proval in countries affected by the mining company Consolidated per share, and 275 million shares deal, including Australia and Chile.

China Total Outward FDI Capital Flow by Continent 2003-2007, USD mn* 2003 2004 2005 2006 2007

Europe 16593 1126 1540 58 126 321258 598 Asia 145 157 395

7663 North America China 4484

3014

1505 1574

392 520 8569 75 315

6466

4902 Africa 770 1763 203 34 120 126 1038

Oceania Latin America

Source: MOFCOM China *Note: The data illustrated here refers to investments from mainland China, and does not include investments from Hong Kong. This potentially significantly reduces the flows as it might exclude investments by Chinese companies in cases where they draw funds from IPO receipts in HK.

China OFDI Flow to Africa 2003 & 2007, USD mn

2003 Total: USD 74.81 mn 2007 Total: USD 1,574.31 mn Top 10 CAGR 8% Destinations 2007 2003-2007 2% South Africa 119.8% 12% 3% 28% Nigeria 74.1% 3% 4% Algeria 126.1% Zambia 84.8% 42% 4% Niger - Sudan - 33% 6% Congo DR 294.4% Libya 235.1% 8% Angola 193.2% 3% 7% 3% Egy pt 64.1% 9% 25% The rest of Africa 33.6% Source: MOFCOM China

Features and Trends of China’s OFDI China Investment in Africa • The view that Chinese companies should take ad- • Chinese investment in Africa is heavily slanted to- vantage of the ongoing global financial crisis to wards resources, i.e. China’s investments in Nigeria more actively acquire overseas assets continues and Sudan are in the oil industry; China’s invest- to spread in China. Resources companies are ments in the DRC and Zambia are in the copper/ particularly attractive to Chinese investors cobalt mining industry • The trading of infrastructure projects for raw materi- • However, a degree of diversification is also evident in al contracts is one strategy China has utilized to es- the last several years, i.e. ICBC acquired 20% of tablish itself in some foreign countries. In 2007, Standard Bank for USD 5.5 billion; a Wenzhou shoe China signed a deal to extend USD 5 billion of soft company set up a shoe-making plant with annual loans to the DRC to develop infrastructure and production of 6 million pairs of shoes in Nigeria; a mining. In exchange, China received rights to DRC’s large Chinese private cement producer invested in extensive natural resources. Subsequently China cement production in Madagascar; a Zhejiang com- has also used the strategy in other countries pany in vested USD 51.8 million in setting up the • China’s recent high-profile acquisitions in Australia, China–Botswana Economic & Trade Cooperation Peru and elsewhere has provided valuable insight for Zone Chinese companies to better utilize PR strategies in • More than 80% of Chinese investors in Africa are their overseas expansions, and a steadily more so- private companies. One model or pattern of the in- phisticated approach can be expected. It is clear that vestments of these private companies is that they in most cases Chinese SOEs are encountering more normally start their engagement in Africa by tra- resistance in overseas M&A than private companies, d ing. After they have learnt more about the environ- i.e. a sovereign state (company) buying into an- ment, they start to venture into investment other’s resources does not sit well with most recipi- • FOCAC 2009, to be held in Q4 2009, will further un- ent countries derpin China’s investment in Africa

China Cross–border Investment Deal-sheet: Major Deals in 2009 and the Second Half of 2008 Date Acquirer / Investor Target / New Company Value (USD) Country Stake Apr-09 Minmetals OZ Minerals 1.2 bn Australia 100% Mar-09 Beijing Jingxi Heavy Industry Co. Delphi Corporation 100 mn USA n/a Mar-09 Wuhan Iron & Steel Co. (WISCO) Consolidated Thompson 240 mn Canada 19.9% Mar-09 China Nonferrous Metals Mining Corp. Terramin Australia Ltd. 46 mn Australia 12.29% Mar-09 Geely Automobile Drivetrain Systems Int’l 40 mn Australia 100% Mar-09 Diigo Furl (LookSmart) n/a USA n/a Mar-09 Sinosteel Murchison Metals Ltd. undisclosed Australia 5.85% Feb-09 Hunan Valin Steel Co.,Ltd. Fortescue Metals Group 438 mn Australia Up to 17.55% Feb-09 China National Petroleum Corp. Verenex Energy 402 mn Canada 100% Feb-09 Weichai Power Moteurs Baudouin 380 mn France 100% Feb-09 Jiangsu Huadong Nonferrous Metals Arafura Resources Ltd. 5.4 mn Australia 25.0% Feb-09 China Mobile China Mobile Pakistan Corp. 0.5 bn Pakistan 100% Feb-09 Chinalco Rio Tinto 19.5 bn Australia 18% Feb-09 Anshan Iron & Steel Co.,Ltd. Gindalbie Metals 108.35 mn Australia 36% Jan-09 Lenovo Switchbox Labs undisclosed USA 100% Jan-09 Minmetals Vizirama n/a South Africa 70% Jan-09 LiveChain LCM GROUP 2 mn USA n/a Jan-09 Markor Schnadig 8.94 mn USA n/a Dec-08 China Union Ltd. Refining factory at Bong iron mines 2.6 bn Liberia n/a Dec-08 Wuhan Iron & Steel Co. (WISCO) Centrex 6.84 mn Australia 15% Dec-08 Wuhan Iron & Steel Co. (WISCO) Centrex's 5 iron ore projects 127 mn Australia 50% Dec-08 Kingsoft Sky Profit 8 mn UK 30% Dec-08 263 iTalk Global Communications n/a USA 50% Dec-08 Henan Yima Coal Mining Group Anju Coal Mining Association n/a Korea n/a Dec-08 Shougang Mount Gibson Iron Ltd. 110 mn Australia 28.6%-40.5% Dec-08 Shenzhen Nonfemet Perilya Limited 28.9 mn Australia 50.1% Nov-08 Zhuzhou CSR Time Electric Co.,Ltd. Dynex Power 14.53 mn Canada 75% Oct-08 China Everbright Alam Group 0.85 mn USA 51% Oct-08 Anshan Iron & Steel Co.,Ltd. Vigano n/a Italy 60% Oct-08 China Merchants Bank Wing Lung Bank n/a Hong Kong Up to 98% Sep-08 Sinopec Tanganyika Oil 2 bn Canada 100% Sep-08 CNOOC Awilco Offshore ASA 2.5 bn Norway 100% Sep-08 Sinochem International Corp. GMG Global Ltd. 197 mn Singapore 51% Sep-08 ICBC RosEvroBank 800-850 mn Russia 100% Sep-08 People's Bank of China Drax Group 32.2 mn UK 0.7% Aug-08 Sinopec & CNPC Petro-Tech Peruana 2 bn USA n/a Aug-08 Cheung Kong Infrastructure Holdings Taharoa Iron Sands Business 174.275 mn New Zealand 100% Aug-08 Jinchuan Group Tiomin 25 mn Canada 70% Aug-08 Hunan Valin Steel Co. Ltd. Golden West Resources 23.27 mn Australia 11% Aug-08 People's Bank of China Prudential 250 mn UK 1% Aug-08 People's Bank of China Legal & General n/a UK n/a Aug-08 People's Bank of China Old Mutual Plc n/a UK n/a Jul-08 Bank of China Heritage Fund Management 8.7 mn Switzerland 30% Papua New Jul-08 China Metallurgical Group Corp. Ramu nickel project 1.37 bn n/a Guinea Jul-08 Sinosteel Midwest 906 mn Australia 51% Jun-08 Sinopec AED Oil Ltd 561mn Australia n/a Jun-08 China Metallurgical Group Corp. Cape Lambert‘ iron ore project 367 mn Australia n/a Jun-08 Tsinghua Tongfang Tinggi 5 mn Singapore 60% Sources: Multiple sources; Press; TBA Analysis

China non-Financial OFDI by Province 2008, USD mn Destination of China's OFDI Flows of more than USD100 Million 2007, USD mn 0 100 200 300 400 500 600 0 1000 2000 3000 1213.9 13732.4 Guangdong HK, China Zhejiang Cayman Islands Shandong British Virgin Islands Hunan Canada Gansu Pakis tan Liaoning Shanghai Britain Fujian Australia Jiangsu Russia Yunnan South Africa Henan Singapore Beijing Nigeria Xinjiang Kazakhstan Tianjin Germany Shaanxi Heilongjiang Papua New Guinea Sichuan Mongolia Chongqing USA Guangxi Laos Jilin Algeria Anhui Argentina Hebei Zambia Hubei Saudi Arabia Shanxi Ningxia Vietnam Jiangxi Holland Inner Mongolia Niger Source: MOFCOM China Source: MOFCOM China

Top 30 Chinese non-financial Companies by Sales Top 30 China non-financial Companies by Total Revenue Abroad 2007 Assets Abroad 2007

1 Sinopec 1 China Mobile 2 PetroChina Company 2 China Resources Corp. 3 China Mobile 3 China Network Communications Group Corporation 4 Legend Holdings Ltd 4 China National Petroleum Corporation 5 China Resources Corp. 5 COSCO 6 COSCO 6 SINOPEC 7 Sinochem Corporation 7 China Merchants Group 8 China Network Communications Group Corporation 8 China United Telecommunications Corporation 9 COFCO 9 CNOOC 10 Huawei Technologies 10 China State Construction Engineering Corp. 11 China Shipping (Group) Company 11 Shenzhen Energy Investment 12 China Minmetals Corporation 12 COFCO 13 Zhuhai Zhengrong Company 13 CITIC 14 China State Construction Engineering Corp. 14 Legend Holdings Ltd 15 Baosteel 15 China National Aviation Holding Company 16 Shanghai Automotive Industry Corp. 16 Shum Yip Holdings Company Limited 17 CITS Group Corporation 17 Guangzhou Yuexiu Group 18 Sinosteel 18 Guangdong Holdings Limited 19 China Aviation Oil Group 19 Huawei Technologies 20 CNOOC 20 China Shipping (Group) Company 21 China Electronics Corporation 21 Shanghai Zhangjiang High-Tech Park Development Limited 22 CITIC 22 CITS Group Corporation 23 Anshan Steel 23 China Power Investment Corporation 24 Taigang Group International Trade Corp. Ltd 24 Sinochem Corporation 25 Shougang 25 China Minmetals Corporation 26 China National Chemical Corp. 26 Fengli Group Limited 27 China Merchants Group 27 Shanghai Automotive Industry Corp. 28 Guangdong Holdings Limited 28 Sino Trans Limited 29 China North Industries Group Corporation 29 China National Chemical Corp. 30 Shanghai Zhangjiang High Technology Park Development Ltd. 30 Sinosteel Source: MOFCOM China Source: MOFCOM China

China Business News Highlights

While still grappling with negative effects of the ongoing financial crisis, in Q1 2009 the Chinese economy started to show signs of improvement. Exports, one of the essential attributes of the growth of the Chinese economy, have kept on falling, but at a slower pace. The first quarter of the year also saw a few successful deals for China in the realm of natural resources.

General ment stood at RMB 2.36 trillion in the vered 11 high-speed trains to China first quarter, 2.7 percentage points of an earlier order for 60. China's GDP grew by 6.1% year-on- higher year-on-year. Fixed asset in- year in the first quarter, reaching RMB vestment in rural areas was up Sales of domestically produced 6.5745 trillion (USD 939 billion). The 29.4% to RMB 456.7 billion, 11.1 per- motor vehicles in China set a new quarterly growth rate was the lowest centage points higher year-on-year. record of 1.11 million units in March, in 10 years as the global financial cri- up 5% from a year earlier, the China sis continued to affect China’s econ- Property prices in 70 major Chinese Association of Automobile Manufac- omy. Q1 growth was 4.5 percentage cities fell 1.3% in March from a year turers (CAAM) announced on April 2. points lower than the first quarter of earlier. Prices continued to decline for This was the third consecutive month 2008 and 0.7 percentage points lower a fourth consecutive month, having that China's auto sales exceeded than the previous quarter. previously dropped 1.2% in February, those in the United States, still the 0.9% in January and 0.4% in Decem- world's largest auto market. China’s consumer price index (CPI) ber. fell 1.2% year-on-year in March, com- Mergers & Acquisitions pared to a decline of 1.6% in Febru- German engineering giant Siemens ary, which was the first monthly fall has won an order for 100 trains for Aluminum Corporation of China since December 2002. For the first China's Beijing-Shanghai high- (Chinalco) in February announced its quarter, CPI declined 0.6% year-on- speed railway. Siemens will supply intention of investing USD 19.5 billion year. China's producer price index components worth 750 million euros in the Anglo-Australian miner Rio (PPI) fell 4.6% in the first quarter (USD 1 billion) for the Velaro trains, Tinto. The deal, which is currently still year-on-year. PPI declined 0.3% in which will be assembled in China being evaluated by the Australian For- March compared to the level for Feb- and used on the Beijing-Shanghai eign Investment Review Board, would ruary. route from 2010. The Velaro, a de- be the biggest overseas investment to velopment of Siemens’ successful date by a Chinese company. If ap- China’s trade surplus rose to USD express train model used in Ger- proved, the deal would raise Chi- 18.56 billion in March, up 41.2% from many, has a total length of 400 me- nalco’s stake in Rio Tinto to 18%, and a year earlier. In March, China's ex- ters, making it the world's longest would also increase its leverage in ports fell for the fifth month in a row single train used in high-speed trans- pricing negotiations for iron ore from to USD 90.29 billion, down 17.1% portation. Siemens has already deli- Rio’s mines. from a year earlier, compared with a 25.7% year-on-year decline in Febru- ary. Imports slumped 25.1% year-on- year in March to USD 71.73 billion, compared with a 24.1% decline in February

Foreign direct investment (FDI) in China declined 20.6% year-on-year in the first quarter to USD 21.78 billion. In March FDI dropped for the sixth consecutive month to USD 8.4 billion, down 9.5% from a year earlier. Al- though the figure continues to fall, it showed an improvement from the 15.81% drop in February and the 32.67% drop in January.

China's fixed asset investment in the first quarter rose 28.8% year-on- year to RMB 2.81 trillion (USD 411.4 billion). The growth rate was 4.2 percentage points higher than the year Signs of growth: Domestically-produced car sales in China set a new record in before. Urban fixed asset invest- March, reaching 1.11 million units. (Photo: Passion84Photos / flickr)

On March 31, Australian regulators gave approval to Hunan Valin Iron & Steel Group’s USD 438 million investment in Fortescue Metals Group Ltd, Australia's third-largest iron ore producer.

On April 23 Australian regulators approved a revised USD 850 million Minmetals bid for mines owned by OZ Minerals, Australia’s third-largest diversified mining company.

Natural Resources

China's crude oil output reached a total of 190 million tons in 2008, up 2.3% year-on-year, the highest growth reported in three years, according to Holding steady: Retail sales growth in China remained robust in the first quarter, the China Petroleum and Chemical and was 15.2% higher y-o-y. (Photo: DCF pics / flickr) Association. Imports of crude oil rose 9.6% year-on-year to 179 million China's top steel maker, Baoshan in 2008, making the company the tons last year, which accounted for Iron & Steel Co. Ltd. (Baosteel), cut third-largest supplier in the world after 48% of China’s total crude oil de- steel prices for a second straight Ericsson and Nokia Siemens Net- mand. month during March. Prices will be works. reduced by RMB 250 (USD 36.63) China and Russia have agreed to per ton for major hot-rolled steel prod- Finance jointly construct a USD 3.1 billion oil ucts, and by RMB 200 (USD 29.27) refinery in the Chinese city of Tianjin. for cold-rolled steel products. After Bank of China has announced that The refinery, to be built by China Na- the decreases, prices for hot-rolled its 2008 Q4 net profit dropped 59% tional Petroleum Corporation steel products will be RMB 3,292 year-on-year to USD 646.8 million as (CNPC) and Russia's OAO Rosneft, (USD 482) per ton, and 3,826 (USD the global economic crisis affected the will eventually have an annual refining 560) per ton for cold-rolled steel pro- lender’s overseas investments. None- capacity of 10 million tons of crude oil. ducts. theless, the bank's full-year income Construction of the refinery is sche- still increased by 14% to USD 9.4 bil- duled to be completed by 2012. In Retail lion. February this year, China and Russia also completed the signing of a China's total retail sales grew 15% to China’s foreign exchange reserves loans-for-oil agreement worth USD RMB 2.94 trillion (USD 430.4 billion) increased by 16% year-on-year to 25 billion for Russia to supply China in the first quarter of 2009. USD 1.9537 trillion by the end of with oil for 20 years. March. ICT China is expected to own rights of Credit extended by China's banks in more than 100 million tons of over- China Mobile, China’s largest mobile the first quarter of this year reached a seas iron ore assets by 2010, ac- phone network operator, announced total of RMB 4.58 trillion (USD 670 cording to an estimation of Lange on March 19 that its net profits had billion). In the month of March alone, Steel Information Service, one of jumped by 29.6% during 2008. In new yuan-denominated loans in- China's leading steel information pro- January, China Mobile was awarded creased by RMB 1.89 trillion (USD vider. one of the three licenses to operate 276 billion), the third straight month 3G networks across the country. The that new loans exceeded the RMB 1 Industry other two license holders are China trillion mark. Unicom and China Telecom. China Industrial production in China dur- Mobile currently has more than China's banking industry took the ing the first quarter grew by 5.1% 200,000 3G customers in China, and world's number one place in 2008 in year-on-year. In March alone indus- aims to have 238 Chinese cities cov- terms of net profits, which grew by trial production increased by 8.3%. ered by their 3G network by end of 30.6% year-on-year to reach a total this year. sum of RMB 583.4 billion. Chinese The aggregate profit of China's non- banks also obtained first place in the ferrous metal producers fell by 45% Huawei Technologies, the Chinese global banking industry in terms of last year to RMB 80 billion (USD telecommunications equipment returns on investment, which stood at 11.73 billion), the China Nonferrous maker, increased its global market 17.1% last year, around 7 percentage Metals Industry Association an- share of deals to supply mobile infra- points higher than that of the global nounced on March 19. structure from 7.2% in 2007 to 15.5% average.

Regional Focus CHINA–AFRICA

China recently announced that bilateral trade with Africa in 2008 exceeded the USD 100 billion target that was set to be achieved only in 2011. China’s exports to Africa achieved double-digit growth, and mineral and oil imports from Africa have also accelerated. With the China-Africa Summit set for later this year, trade and investment between China and Africa are expected to grow further. By Jackie Li. China’s Exports to Africa, 2008 (USD bn)

China’s Exports China’s Exports China’s Exports to Africa, 1999-2008, USD bn to the World to Africa • In 2008, China’s exports to Africa 60 (USD 1428 bn) (USD 52.26 bn) 52.26 made up 3.66% of its total exports. 50 Though relatively small, exports to South 38.43 Africa increased by 35.99% from 19.11% Africa 40 2007 to 2008, compared to 15.5% 27.84 growth in China’s total exports to Asia 38.67% 30 the world for the same period. 19.85 Exports to Africa have been growing Nigeria 12.85% 20 14.43 10.36 by an average of 39.85% for the 7 10 4.1 4.65 6 past six years Egypt 11.06% • China’s exports to Africa continues 0 to be concentrated in a small num- Algeria 7.01% 99 00 01 02 03 04 05 06 07 08 EU 20.23% ber of countries such as South Angola 5.57% Africa (USD 9.98 bn) and Nigeria Morocco 4.43% China’s Exports to Africa by Sector in 2008 (USD 6.76 bn). The top 10 African Benin 4.38% 50.96% 22.19% importing countries accounted for USA 17.67% Sudan 3.52% M echanical & Elect rical 75% of China’s total exports to Af- Ghana 3.30% Product s Libya 3.09% Textile Yarn, Fabrics & rica Product s Africa 3.66% 2.50% Rolled Steel • Since early 2003, China’s exports to Russia 2.31% Africa have moved away from tex- Australia 1.56% Others 25.34% 5.78% Garment s and Clot hing Accessories tiles. In 2008, exports of mechanical 6.65% Foo t wear Others 15.90% and electrical products accounted Ot hers for over 50% of total exports value 11.92% Sources: World Trade Atlas; SARS to Africa China’s Imports from Africa, 2008 (USD bn) China’s Imports China’s Imports China’s Imports from Africa, 1999-2008, USD bn from the World from Africa • China’s imports from Africa grew at (USD 1131 bn) (USD 50.96 bn) 60 50.95 a similar rate as China’s exports 50 to Africa. In 2008, China’s imports from the world grew 15% y-o-y, but 40 33.78 imports from Africa increased by 50.83% y-o-y 30 26.8 Angola 43.79% In the past ten years, the highest Asia 45.59% 19 • 20 13.74 growth ever in China’s imports from Africa was 85.68% between 2003 7.4 10 4.8 4.6 2.37 4 and 2004. In the following 3 years, annual growth was between 20.66% 0 and 29.10%. In 2008, China’s im- 99 00 01 02 03 04 05 06 07 08 Sudan 12.34% ports from Africa grew 33.7%. Im- EU 11.73% China’s Imports from Africa by Sector in 2008 plementation of several oil supply South contracts was the major reason USA 7.19% 8.62% 1% Africa 2% 10% 82% 3% M ineral prod uct s • China’s top import partners in Af- Africa 4.5% 3% Congo B. 7.29% rica remains among the oil- and Australia 3.20% Spec class/parts for motor Russia 2.10% Libya 5.04% vehicles resources-rich countries such as Wood products E.G 4.44% Angola (USD 22.31 bn), Sudan DRC 3.49% Precio us st o nes and met als (USD 6.29 bn) and South Africa Others 25.24% Gabon 3.09% Mauritania 2.02% Base metals (USD 4.39 bn) Algeria 1.65% • Imports from Africa remain largely Others 8.23% Ot hers focused on mineral products, which Sources: World Trade Atlas; SARS amounted to USD 41.78 bn in 2008

African Countries’ Trade Surplus and Trade Deficit with China

Trade deficit Trade surplus Do not Africa’s Top Trade Deficit & Trade Surplus Countries with with China with China recognise China China 2008, USD bn Trade Surplus with China Angola Morocco Sudan Congo B. Libya Egypt Endowed with Algeria Equatorial Guinea Oil reserves Gabon

Mauritania Trade Deficit with China Niger Chad Benin Sudan Algeria Egypt Nigeria Not endowed Central African South Africa Benin with oil reserves Cameroon Republic Nigeria Gambia Burkina E.G Uganda -20 -10 0 10 20 Faso Gabon Congo Rwanda B. DRC SADC Bilateral Trade with COMESA Bilateral Trade with China, 2004-2008, USD bn China, 2004-2008, USD bn SADC Exports to China COMESA Exports to China Angola Malawi SADC Imports from China COMESA Imports from China Zambia 2008 Top 10 Bilateral Trade 40 Countries with China 40 Trade Balance Zimbabwe Angola USD 25.30 bn Namibia Trade surplus 30 reached USD 30 Trade deficit South Africa USD 14.28 bn peaked at USD Sudan USD 8.15 bn Botswana 13.9 bn in 2008 3 bn in 2007 -5 Nigeria USD 7.26 bn Swaziland 20 20 Egypt USD 6.24 bn Algeria USD 4.53 bn South Congo B. USD 4.34 bn Africa 10 10 Libya USD 4.20 bn Morocco USD 2.79 bn 0 0 0 E. G. USD 2.54 bn '04 '05 '06 '07 '08 '04 '05 '06 '07 '08 Sources: World Trade Atlas; SARS Sources: World Trade Atlas; SARS China-Africa Trade Highlights • Bilateral trade between China and Africa reached USD 103.21 bn in 2008. This is a significant 43.35% increase compared to the previous year of USD 72 bn. In 2008, Africa had a total trade deficit with China of USD 1.3 bn, which was a marked reduction compared to the USD 4.65 bn trade deficit in 2007 • Much of the growth in bilateral trade was heavily focused on a selected number of countries such as Angola, South Africa, Sudan and Nigeria. The top 10 countries accounted for 77.2% of Africa’s total bilateral trade with China • 15 of Africa’s 53 countries (28%) had a trade surplus with China last year. Of these countries, only six had a trade surplus of more than USD 1 bn. Angola had the single largest trade surplus with China, amounting to USD 18.24 bn, which constitutes 56.7% of the total trade surplus of the 15 countries • The majority of the African countries that have a trade surplus with China are strong in oil, gas and natural re sources. Although Africa only holds a small percentage of the world’s proven oil reserves (9%), oil exports to China have grown significantly in the past three years. Africa currently supplies around 2.31 million barrels of oil per day to China. Africa’s principal oil-supplying countries to China are Angola, Sudan, Congo Brazzaville, Equatorial Guinea and Gabon, all of which enjoyed a trade surplus with China last year • A number of African countries that have a trade surplus with China are also rich in agricultural products, such as timber, cocoa and cotton. Gabon, for example, is Africa’s largest timber exporter to China, having exported 278,800m³ of logs in 2008, equivalent to USD 459 mn, which accounted for roughly 27% of Gabon’s total export value to China • Coastal countries in Africa often have greater trade benefits by acting as a gateway for land-locked countries. In fact, 80% of the countries enjoying a trade surplus with China have a coastline. Poor and inefficient road & rail infrastructure is a major trade constraint for land-locked countries such as Uganda, Niger, Rwanda and Chad • 38 African countries had a trade deficit with China in 2008. With 11 of these countries having a deficit greater than USD 1 bn, they collectively held 85% of Africa’s total deficit with China, which amounted to USD 30.59 bn. These countries generally rely on imports of capital goods, industrial goods, consumer goods, food and textiles • The Southern African Development Community (SADC) has held a trade surplus with China for the past five years. In 2008, 9 of the 15 SADC countries held trade deficits with China, but Angola’s trade surplus was large enough to offset this. The Common Market for Eastern and Southern Africa (COMESA) countries (19 in total) in- curred a trade deficit with China, but with COMESA including top trading countries such as Sudan and Libya, the trade balance is expected to shift due to ever-increasing oil exports to China • The 3 countries (Gambia, Swaziland and Malawi) that maintain diplomatic relations with Taiwan have limited trading activities with mainland China, all maintaining less than USD 200 mn in bilateral trade

China-Africa Investment • Africa’s Foreign Direct Invest- FDI Inflows from Mainland China FDI Flows: World to Africa, China to ment (FDI) inflows from the world to Africa 2003-2008, USD mn Africa, 2003-2008, USD bn reached USD 52.9 bn in 2007, 70 World FDI to Africa 1574 1370 61.9 and according to UNCTAD, the 1400 China FDI to Africa 60 total amount for 2008 is esti- 1200 52.9 mated to have been USD 61.9 Inflows from 50 45.75 1.3 bn 1000 China peaked in 2007 40 1.59 • Africa’s top 10 countries in terms 800 29.46 0.52 518 30 of FDI inflows accounted for 82% 600 18.72 of total inflows in 2008 391.7 18.02 400 316.9 20 0.39 (based on estimates), with 9 10 countries receiving inflows of 200 74.8 0.08 0.32 USD 1 bn or more 0 0 • Based on China’s Balance of 03 04 05 06 07 08E 03 04 05 06 07 08E Payments Report for H1 2008, Source: UNCTAD Source: UNCTAD China’s FDI to Africa reached reached USD 1.57 bn in 2007. China’s OFDI to the World 1H08, USD 686 mn for the first half of This figure is estimated to recede USD 34.3bn 2008. It is expected that this fi- slightly to USD 1.37 bn in 2008, 2% (USD 686 mn) of China’s total FDI gure will increase towards the according to UNCTAD. This is went to Africa third quarter of 2008, and finally mainly due to the impact of the 5% 4% reach USD 1.37 bn global economic crisis 0.6% 0.4% Asia • Based on the same report, • In 2008, China introduced a se- North America China’s FDI outflows to Africa ries of favourable FDI policies, Atlantic represented less than 3% of and further increased the China 88% Africa China’s global FDI outflows in Africa Development Fund to USD Latin America 2007; this share is expected to 5 bn. These measures will en- Europe remain at around 2% for 2008 courage continuous growth in • Africa’s FDI inflows from China China’s investment into Africa Source: China’s Balance of Payments Report H1 08 China’s Trade Zones in Africa & Major Investments in 2008 Major Investments 2008-2009 1 Angola - USD 1 bn agricultural de- The Lekki Free Trade Zone in The Egypt Suez Economic and velopment (Mar 09) Nigeria, with phase 1 being Economic Zones Trade Cooperation Zone, invested completed in Feb 2009. The by Tianjin TEDA Investment Hold- 2 Nigeria - USD 16 mn vehicle as- Jiangning Economic and Tech- ings, is situated in the North-East of nology Development Zone and a Major Investments Egypt. A number of Chinese firms sembly plant (Feb 09) local partner are the major have already been established in 3 Liberia - USD 2.6 bn iron ore min- investors the zone ing project (Jan 09) 4 Mauritania - USD 282 mn port, The Ethiopian Oriental Industrial Park, is invested by the Jiangsu Nouakchott expansion (Jan 09) Yonggang Group. The zone will 5 Zimbabwe - USD 500 mn electri- introduce 80 projects in the next city generation capacity (Dec 08) 4 5 years 6 Cameroon - USD 340 mn cement 12 factory & fertiliser plant (Nov 08 7 Ghana - USD 150 mn Ghana tele- 7 2 3 6 com system expansion pro- gramme (Sept 08) 8 The Mauritius–China 10 11 Economic and Trade 8 Uganda - USD 1.5 bn Lake Victoria 9 Cooperation Zone was Free Trade Zone (Aug 08) established in 2008 by the Shanxi Tianli Enter- 9 DRC - USD 6 bn infrastructure in- prise Group. The zone vestment (July 2008) The Nigeria-Guangdong Economic 1 14 is in a free port and Trade Cooperation Zone. In- 10 Gabon - USD 4.9 bn iron ore mi- vested by the Guangdong Xinguang 5 ning project (May 08) International Group. The plan involves building mineral processing plants, 11 Congo B. - USD 2.9 bn copper & heavy-industry plants, as well as cobalt mining project (May 08) introducing technology firms 12 Sudan - USD 396 mn JV in power 13 The Zambia-China Economic and generation capacity (April 08) Trade Cooperation Zone was estab- 13 South Africa - USD 5.5 bn acquisi- lished in Feb 2007 by China Nonfer- rous Metal Mining with a focus on tion of 20% of Standard Bank (Jan mining, copper processing, and the 08) ferrous metals industry. A sub-zone was established in Lusaka in Jan 14 Zambia - USD 150 mn Chambishi 2009 copper mine investment to 2010 Sources: China Daily; Various

CHINA–AFRICA Focus

A New Chapter for China and Africa - The Impact of President Hu Jintao’s visit pon invitation from African and as to take greater social responsibility to the Forum on China-Africa Coop- UMiddle Eastern countries, Chi- into consideration. eration (FOCAC), which will be held in nese President Hu Jintao traveled to Egypt in October 2009. the Middle East and Africa from 10-16 China currently has significant invest- February 2009. The trip, which was ments in Mali and Senegal, and is During the trip, millions’ worth of described as a ‘journey of friendship preparing relatively large investments agreements were signed, including and cooperation’, took him to Saudi in Mauritius. Although these are not infrastructure development, exports, Arabia, Mali, Senegal, Tanzania and China’s most strategic relationships in interest free loans, grants and gifts. It Mauritius. Africa, this trip reinforced the image of once again confirmed Beijing’s long- China benefiting from broad-based term strategy for Africa and its deter- In Dakar (Senegal), President Hu engagement with Africa. The trip was mination to open a new chapter in the commented that China would keep also seen as a necessary pre-cursor China-Africa relationship. the promise it made at the Beijing Summit of the China-Africa Coopera- Country Visited Major Agreements Signed tion Forum in November 2006 not to Mali USD 74.9 mn Aid to construct a hospital, a sugar plant and an aid centre reduce its aid to Africa, notwithstand- 12 Feb 2009 Bamako Bridge for women and children ing the country’s efforts at addressing construction the global financial crisis. Senegal USD 23 mn public USD 25 mn Gov- USD 18 mn grant, Purchase of 10, 13-14 Feb 2009 bus renovation ernment communi- and USD 49 mn 000 tons of President Hu expressed on a number (CFA loan) cation system national security ground nut oil of occasions during the trip that China renovation (CFA loan was willing to boost trade with Africa loan) by undertaking preferential measures Tanzania USD 17.5 mn USD 4.4 mn Zan- USD 56 mn fund for building a 60,000 15 -16 Feb 2009 agricultural zibar state radio seat national stadium to increase imports from the conti- finance and television nent. The Chinese government also rehabilitation encouraged Chinese businesses to further invest in Africa, create more Mauritius USD 260 mn air- USD 6.5 mn inter- USD 5 mn grant To further assure 17 Feb 2009 port expansion est free loan the USD 730 mn jobs for the local populations, in- trade zone con- crease technology transfers as well Source: China Daily struction

Forum on China Africa Cooperation (FOCAC) - Cairo 2009 ince the first Forum on China- jing in 2000, over 80 ministers from The most prominent Forum was FO- S Africa Cooperation (FOCAC) in China and delegates from 44 African CAC III, held in Beijing in 2006. This Beijing in 2000, the political and eco- countries and 17 regional and inter- Forum was attended by 48 African nomic relationship between Africa national organisations attended. Be- countries, and a total of 1,700 dele- and China has strengthened signifi- tween 2000 and 2003, China agreed gates from China and Africa. After cantly. Bilateral trade has increased on debt exemption for 31 African the Forum, China agreed to set up a from USD 10 bn in 2000 to USD 106 countries, involving an amount of USD 5 bn China-Africa Development bn in 2008. USD 1.3 bn. In addition, between Fund to support Chinese business 2002 and 2003, 117 Chinese compa- and FDI into Africa. China also in- From a Chinese point of view, FO- nies invested in Africa, and 245 new creased tariff-free African exports to CAC is a forum for facilitating collec- economic assistance agreements over 400 items. China also aimed at tive consultation and for working to- were concluded with Africa. establishing 7 special economic gether through pragmatic cooperation zones in Africa, two of which had based on equality and mutual benefit. In 2003, FOCAC was held in Addis commenced construction in 2009. Yet FOCAC is also designed to ad- Ababa, Ethiopia. More than 70 Chi- vance South-South cooperation. nese ministers and 44 African coun- FOCAC IV, scheduled for October tries attended. During and after the 2009 in Cairo, will take place in the In the wake of each of the Forums in Forum, China committed to tariff ex- current gloomy global economic envi- the past 10 years, China-Africa eco- emption on 190 export items from ronment, yet China is set to achieve nomic cooperation has expanded, Africa, as well as a contribution of deeper cooperation with African and a number of significant Chinese USD 500,000 to the New Partnership countries. The promotion of bilateral commitments have been made and for Africa’s Development (NEPAD). trade, agricultural development, and put into action. By the end of 2004, 127 economic cross-border investments will remain assistance agreements had been the main objectives for FOCAC this During the first FOCAC held in Bei- concluded with Africa. year.

Regional Focus CHINA–AUSTRALIA

At such a critical juncture of the global economy, China-Australia relations are being tested and fashioned anew. With diminishing trade, ailing industries, stalled agreements, and political scandals battering both sides, Beijing and Canberra are scrambling to forge a mutually beneficial arrangement that will enable them to emerge stronger from the crisis. By Barbie Co.

China-Australia Highlights International Student Enrolments by Top 5 Nationalities in Australia • China and Australia to expand military cooperation: Chen Bingde, Chief (Feb 2009) of the General Staff of the People’s Liberation Army, met with the Aus- Nationality Total tralian Chief of the Army Ken Gillespie in Beijing in March 2009. Both sides agreed to strengthen cooperation in combating terrorism, carrying out disas- China 89,907 ter relief and conducting peace-keeping operations India 68,854 • Australian PM Kevin Rudd and China Propaganda Chief Li Changchun discussed ways to further develop bilateral relationship: In a private South Korea 22,068 meeting in 21 March 2009, the two officials discussed the stalled FTA Malaysia 17,573 agreement, the economic crisis and China’s role in the IMF, among other issues Nepal 14,683 • China needs Australian uranium: With 11 power plants in operation, 24 Other nationalities 161,366 under construction and 5 scheduled to be built this year, China’s inadequate uranium resources prompts it to look at Australia. The China National Nu- Total 374, 451 clear Corp. has held preliminary talks with Australian uranium miners Source: Australian Education International

China-Australia Annual Trade 2001 - 2008, USD bn China-Australia Trade Highlights Exports to Australia Imports from Australia • China-Australia trade tells different stories depending on Trade Balance the source. Chinese statistics indicate that China had a 40 0 USD 15 bn deficit with Australia in 2008, whereas the 35 Australian Bureau of Statistics (ABS) indicate that Austra- lia had a USD 3.8 bn deficit with China 30 -5 Despite the ongo- • Whatever the case is, both countries are in agreement 25 ing crisis, China’s that China became Australia’s second-largest trade part- imports of Austra- 20 lian resources -10 ner in 2008, while Australia was China’s eight-largest remain robust trade partner. Two-way trade reached USD 65.2 bn, an in 15 crease of 28.3% year-on-year 10 -15 • State-level figures show that New South Wales imports 5 the most from China, while W. Australia exports the most • Ores, slag and ash remain the major exports of Australia 0 -20 to China, while Australia imports a significant amount of 2001 2002 2003 2004 2005 2006 2007 2008 Chinese electrical machinery and equipments

Sources: China Statistical Yearbook; TBA Analysis Sources: DFAT; ABS; Austrade; China Statistical Yearbook; UN Comtrade

China-Australia Annual Trade 2001-2008, USD bn China-Australia Trade by State 2008, USD mn

Exports to China Imports from China Exports Imports Trade Balance Trade Balance 22,000 20,000 40 0 20,000 15,000 35 18,000 WA’s significant trade surplus with China is on 30 -5 16,000 account of its mineral 10,000 25 14,000 resource exports ABS figures show a 5,000 relatively stable trade 12,000 20 -10 balance between the 10,000 0 15 two countries 8,000 -5,000 10 -15 6,000 4,000 5 -10,000 2,000 0 -20 0 -15,000 2000-01 2002-03 2004-05 2006-07 NSW NT QLD SA TA S V IC WA Sources: Australian Bureau of Statistics; TBA Analysis Sources: Australian Bureau of Statistics; TBA Analysis

China-Australia Investment Highlights • The USD 438 mn Hunan Valin Iron and Steel–Fortescue deal and the USD 1.2 bn Minmetals–OZ Minerals deal have been granted approval by the Australian government, while the Chinalco–Rio Tinto deal is still in the hands of the FIRB and Federal Treasurer Wayne Swan. Approval of the Minmetals–OZ Minerals deal came after the Australian government rejected the Chinese company’s initial offer of USD 1.8 bn due to Prominent Hill security concerns. Minmetals immediately resubmitted an offer that was deemed acceptable by the government • The Australian Greens will move for a Senate inquiry into whether foreign acquisitions of the country’s resources sector by foreign government entities are in the national interest. This comes in the wake of the successive mining deals • Real estate investments have been steadily increasing from USD 83.36 mn in 2004 to USD 604.27 mn in 2007 as a growing number of affluent Chinese families set up their children in what will be their second homes in Australia

Foreign Investment in Australia by Sector, 2007, USD bn FIRB Approved Chinese Investments in Aus. by Industry USD mn 319.92 Mining In 2005, the mining sector overtook 6,000 Services and tourism 1000 100% the manufacturing sector, which used to receive the most direct invest- Real estate ments from abroad 5,000 Mineral exploration and development Manufacturing 800 80% Manufacturing Agriculture, forestry and fishing 78.24 4,000 Wholesale and Retails Trade Number of Approved Investments 600 60% Finance and Insurance 57.34 3,000 Transport & Communications Property & Business Services 400 40% 46.25 2,000 Constructions 43.31 Unallocated 200 1,000 20% 27.45 Elec., gas & water 26.82 13.2 Others 0 0 0% 12.64 8.52 6.16 1994-95 1997-98 2000-01 2003-04 2006-07 Sources: Australian Bureau of Statistics; TBA Analysis Sources: FIRB Annual Reports; TBA Analysis

Australian Natural Resources M&A Inflow by Buyer’s Nation

China US Switzerland UK Canada Malaysia JapanJapan HK OthersOther Figures have not 2009 yet taken into 2008 account the 2 2008 latest approved deals: Minmetals- 2007 OZ Minerals and Hunan Valin- 2006 Fortescue 2005

20042004

2003

0%0% 20%20% 40%40% 60%60% 80%80% 100% Source: DEALOGIC Recent Developments in China-Australia Foreign Investment 2008-2009 Month Acquirer Target Amount USD Stake Status May-09 Anshan Iron and Steel Gindalbie Metals 108.85 bn Up to 36.28% Approved Apr-09 Chinalco Rio Tinto 19.5 bn 18% Pending Apr-09 China Nonferrous Metals Mining Terramin Australia Ltd. 46 mn 12.29% Pending Apr-09 Minmetals OZ Minerals 1.2 bn 100% Approved Mar-09 Hunan Valin Iron and Steel Fortescue Metals Group 438 mn Up to 17.55% Approved Mar-09 Minmetals OZ Minerals 1.8 bn 100% Rejected Mar-09 Geely Automobile Drivetrain Systems Int’l 40 mn 100% Completed Mar-09 Sinosteel Murchison Metals Ltd. Undisclosed 5.85% Completed Feb-09 Jiangsu Eastern China Nonferrous Arafura Resources Ltd. 15.216 mn 25% Pending Sources: Press; TBA Analysis

CHINA–AUSTRALIA Focus The Changing Landscape of China’s Australian Investments In the face of the current global crisis and China’s tireless development, the Rudd administration needs to adroitly juggle the demands of national security, economic advancement and the populace in considering the wealth of mining investments coming from China. By Barbie Co. he approval of the 17.55% stake panies financially vulnerable. Coupled government. The Australian Foreign T of Hunan Valin Iron and Steel in with a weak Australian dollar and an Investment Review Board (FIRB) Fortescue Metals Group and the more ailing economy, Chinese investors finds itself in a unique position of recent approval of the USD 1.2 bn saw this as a prime opportunity to weighing the growing consequences offer of Minmetals for OZ Minerals enter the market, stimulate much- of having a singular foreign govern- illustrates China’s continuing pursuit needed production while at the same ment invest in potentially strategic and of resources to fuel the country’s de- time securing a portion of Australia’s sensitive areas of the Australian econ- velopment. Presently, the major deal resources to fuel its own develop- omy. This adds a distinct dimension of that hangs in the balance is Chi- ment. foreign policy to the list of items that nalco’s USD 19.5 bn bid for a stake of the FIRB would be required to con- debt-laden mining giant Rio Tinto. Herein lies the crux of the Australian sider. government’s predicament: How does The recent sudden upsurge in the it find an acceptable compromise be- Charting a course of action number of Chinese applications for tween the demands of national secu- investments in Australia, coloured by rity, economic survival and the popu- The Australian government already resource security concerns and politi- lace? has a list of factors to consider when cal undertones, has been a controver- examining proposed investments by sial topic in the country. Financially The government has already identi- companies associated with foreign distressed companies, particularly fied several realities that need to be governments. In some cases, they mining companies, are rejoicing at the taken into serious consideration. may be easy to call as the nature of thought of fresh cash inflows and a There is a strategic dimension to the the investments does not impact na- window into the biggest resource mar- investments. Rio Tinto’s assets, in tional interest or state security. In oth- ket in the world. particular, are a strategic resource for ers like the Rio Tinto and the OZ Min- the country. Unlike their gas deposits, erals deals, a closer scrutiny is called A changed world Australia does not have many other for as key resources, security issues, iron ore deposits of Rio’s mines’ large-scale employment and public China entered this recession with the scale. Approval of this deal essentially acceptance are on the line. world’s strongest forex reserve posi- means allowing considerable access tion of nearly USD 2,000 bn. With and price leverage to a major con- The FIRB has already decided to ex- these resources at hand and their sumer. On the other hand, this also tend its review period for the Rio Tinto development plans calling for foreign provides a strategic opportunity for deal and this gives them a bit of technology, China is eager to do its Rio to further establish itself in the breathing space to consider all the part in stimulating the global economy Chinese market. variables at play. They would have to by keeping investment and trade carefully weigh the economic, diplo- open, instead of falling into the protec- The sellers are in a weak financial matic and social consequences of tionist trap which has traditionally position. Last year, Rio Tinto an- their decisions in the short term and in been the knee-jerk reaction of the US nounced redundancies of 14,000 the long run, more so because the to large-scale contagion. workers after BHP Billiton abandoned two countries are at a critical juncture its suit for the second-largest Austra- of their economic relationship, with an How does this affect Australia? lian miner. April this year saw the ad- FTA agreement in the works. ditional cutting of 700 positions due to Recent announcements have claimed falling demand and prices. OZ Miner- At the end of the day, these compa- that Australia has been weathering als urgently needs funds to pay a nies urgently need financial assis- the global downturn quite well as their standing debt of roughly USD 1.2 bn. tance to survive the current global financial markets are in better shape So far, both of the Federal Govern- meltdown, and the Chinese compa- than that of other countries. However, ment’s stimulus packages (worth USD nies have the cash that they need. the sudden drop of commodity prices 7.4 and 27 bn) have failed to ade- Barring any further security concerns, in the second half of 2008 sent panic quately address the needs of the min- there is arguably no reason for the rippling through the country’s mining ing sector, leaving foreign investment FIRB and Wayne Swan to block this sector. Companies across the board as the sole helping hand of these and future deals, as the alternative were announcing job cuts, project firms. would be to deal a heavy blow to their cancellations and production freezes, mining industry, which has been the and this has continued well into 2009. The buyer is a state-owned enterprise bedrock of the country’s boom in the This has left Australia’s mining com- under the aegis of a centrally-planned past few years.

Regional Focus CHINA–LATIN AMERICA As the financial crisis continues to unfold and commodity prices decline further, LatAm’s resource- intensive economies are set to experience a continuing economic slowdown. China’s influence in commodity prices and the likely rebound of its economy in Q4 2009 are key for LatAm economic growth prospects. We analyze the drivers, enablers and constraints. By Javier Cuñat.

China-LatAm Highlights LatAm economies have experienced fast-paced economic growth in recent years, thanks largely to intense Chinese demand for their natural resources. China's consumption of iron ore, copper, soya and oil seeds among others, has helped push the price of commodities to new levels, presenting new opportunities for the region. On the other hand, this optimis- tic scenario has become a concern since China is also accentuating LatAm’s dependence on exports of primary products and therefore outperforming LatAm in global manufacturing markets. While the current environment will not facilitate any industrial diversification strategy, which is a long-term approach desired by countries in the region, China’s demand for resources will potentially be able to mitigate the worst effects of the crisis in Latin America.

Bilateral Trade China-LatAm 2003-2007, USD bn China-LatAm Trade Highlights* 50 • The dramatic growth of China-LatAm bilateral trade China Exports to LatAm China’s China Imports from LatAm trade deficit from USD 23 billion in 2003 to USD 90 billion by the 40 end of 2007 not only reflects China’s hunger for natural resources and the expansion of commo- 30 dity exports to China, but also the internationalisation of Chinese goods into LatAm’s growing consumption 20 market • Chinese imports from the region have increased by an 10 annual average of 40% in the last eight years, ena- bling countries like Brazil, Argentina, Chile, Peru 0 and Venezuela to have notable trade surpluses with 2003 2004 2005 2006 2007 China. In the case of Chile, for instance, China over- Sources: UN Comtrade; TBA Analysis took the United States as the largest destination of Breakdown of Trade by LatAm Country 2007, USD mn Chilean exports in 2007 50,000 • China’s imports from LatAm are concentrated in three Brazil countries: Brazil, Chile and Argentina. These ac- Chile 40,000 counted for 72% of the total import volume in 2007 Brazil Argentina Brazil • China’s exports to LatAm are also concentrated in Per u 30,000 three countries (Mexico, Brazil and Chile - 67% of the Mexico Chile total), with Mexico being the better example of the Chile Venezuela 20,000 increasing competitiveness of China as a low cost Cuba Argent. country. China has already taken Mexico’s place as 10,000 Mexico Colombia Uruguay the second largest supplier of the United States while Chinese products are also flooding the Mexican 0 Ecuador Bolivia market China Imports from China Exports to Paraguay *Note: LatAm here refers to the Latin American Integration Association (LAIA). LatAm LatAm LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Sources: UN Comtrade; TBA Analysis México, Paraguay, Perú, Uruguay and Venezuela.

Breakdown of China Imports by Product (2007) Breakdown of China Exports by Product (2007) Primary driver: China’s hunger for natural resources Secondary driver: LatAm consumption market 100% 100% ElectricalElec. Electrical Ores Copper machineryMachinery machinery 80% Oil 80% seeds Mech. Mech. 60% 60% appliances appliances Oil Fats & Textiles, 40% 40% Opt./photo seeds Ores oils knitted toolsTools Mineral 20% fuels Mineral 20% Wood fuels Others Others pulp 0% Others 0% Brazil Chile Argentina Mexico Brazil Chile Sources: UN Comtrade; TBA Analysis Sources: UN Comtrade; TBA Analysis

China-LatAm Investment Highlights In 2007, Latin America and the Caribbean received USD 4.9 billion from China in investment, which accounted for 18% of the total Chinese OFDI for that year. These investments went mainly to the Cayman Islands and the British Virgin Islands, the two main tax havens of the region. Investment in these areas typically results in re-investment in other host economies, including China itself. Concerning other LatAm countries, the most favored areas of investment have been petroleum and gas, minerals and metals (primary driver), telecommunications and electronic equipment (secondary driver). In addition, Chinese investment in Latin America is also driven by the recognition of China’s status as a Market Economy, and by the One China Policy.

Chinese OFDI Flow to LatAm 2003-2007, USD mn Breakdown of Chinese OFDI Flow to LatAm 2007 9000 100% Chinese OFDI Cayman Is 8000 54% in LatAm Br. Virgin Is 7000 80% % Total 39% Argentina 6000 Chinese OFDI Venezuela 60% 5000 Guyana Brazil 4000 40% Bahamas 3000 Suriname 2000 20% Mexico 1000 Others 0 0% Note: Others refers to Panama (USD 8.3 mn), Peru (USD 6.7 mn), Cuba (USD 6.5 mn), St. Vincent & Grenadine (USD 5.8 mn), Chile (USD 3.8 mn), Ecuador 2003 2004 2005 2006 2007 (USD 3.58 mn), Bolivia (USD 1.9 mn), Uruguay (USD 0.5 mn), Barbados (USD Source: Statistics Bulletin of China’s Outward Foreign Direct Investment 0.4) mn , Colombia (USD 0.2 mn) and Honduras (USD 4.38 mn)

Major Chinese Companies Operating In Latin America China-LatAm Investment Highlights Petroleum Tele- Motor- Elec- • Brazil’s Petrobras is negotiating the terms of Sector Mining Fishery IT and gas com cycles tronics a USD 10 bn loan with the China Develop- Main driver Secondary ment Bank after signing a memorandum of driver understanding in February 2009 • The sale of MMX (USD 1.4 bn), the Brazilian

Company iron ore project controlled by Eike Batista, is gaining momentum. Brazilian analysts said Put your graphs/tables or text that Wuhan Iron and Steel Group and Baos- here. See attached file for teel are pursuing the asset TTE (TCL Thoms.) Sinopec Sinopec CNPC CNOOC Sinochem Nanjing Jincheng Jincheng Nanjing China Minmetals Sinosteel Sinosteel Huawei Baosteel Group Baosteel Shougang Group Group Shougang Shanghai Fisheries Fisheries Shanghai CNMC chart-making Lenovo Argentina X X X X X • Telemar (the Brazilian telecom, also known as Oi) has obtained a USD 300 mn loan from Bolivia X X China Development Bank, which plans to Brazil X X X X X X X use proceeds to finance its 2008-2009 in- Chile X X X vestment activity in China with network Colombia X X X X X equipment supplier Huawei Cuba X X • The People’s Bank of China and Central Bank of Argentina announced the formal Ecuador X X X X signing of a RMB 70 bn (USD 10 bn) bilateral Mexico X X X X X X currency swap arrangement Peru X X X X X X • Ecuador has formally begun negotiations with the Chinese state-owned Sinohydro to Venezuela X X X X build the country's biggest hydropower plant (USD 2 bn, 85% financed by Sinohydro) Sources: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Information from China’s consulates In Latin America and Ministry of Commerce of China, Statistics Bulletin of China’s Outward Foreign Sources: NY Times; Latin Finance Direct Investment 2006

LatAm and The One China Policy • The LatAm region and Central America contain 11 of the 26 countries that still have official diplomatic ties with Tai- wan, which represents a strategic challenge for Beijing. In June 2007, Costa Rica broke off diplomatic relations with Taiwan, the first Central American country to do so • Cuba, which recognised Beijing as early as 1960, was China’s major ally in the LatAm region prior to 1970, with a strong ideological connection with China. Chile recognised China at the start of the 1970’s, and today it is recognised by all LatAm countries except for six Central American countries (Belize, El Salvador, Guatemala, Honduras, Nicara- gua, and Panama), four Caribbean countries (Dominican Republic, Haiti, St. Kitts and Nevis, and St. Vincent and the Grenadines), and one South American country (Paraguay)

CHINA–LATIN AMERICA Focus Weaker Demand, Stronger Relationships In contrast to the heavy dependence that Latin American countries have shown towards the US economy in recent decades, the LatAm region is currently looking for more alternatives to rebound from the global financial crisis. Despite the current recession, China has the potential to reinforce its growing influence in the region. By Javier Cuñat.

iven their strong commercial and Fiscal Situation and Estimated Size of Announced Fiscal Stimulus Ginvestment linkages with the US, Packages in Major LatAm countries the economies of Latin America have been strongly impacted by the finan- Country Initial Conditions Estimated Size of Stimulus cial crisis. As the recession and li- Gross Pub- Budget Budget Ex- Estimated USD bn quidity crisis continue to hit the US lic Debt % balance (% penditure % GDP tax cut amount and European economies, we will be GDP) GDP) (%GDP) share expecting lower capital inflows into Brazil 35.8% -1.4% N/A 8.6 0.5% 100% the region, lower exports due to reduced external demand and lower Mexico 20.3% -0.1% 24.9% 8.6 1.0% 0.0% revenues from tourism and remit- Argentina 44.2% 1.3% 27.4% 4.4 1.3% 0.0% tances. Furthermore, the decline in commodity prices, one of the main Chile 4.8% 5.3% 19.0% 4.0 2.2% 63.0% drivers of economic growth in the Peru 24.4% 2.2% 27.5% 1.4 1.1% 0.0% past years, is a serious setback for Sources: EIU; IMF; Various major LatAm economies such as Bra- zil, Argentina, China or Venezuela, played a crucial role. pected to progressively boost imports whose economies are resource- and prices of natural resources intensive and export-oriented. In China’s economic boom and the again. need to feed its fast-growing econ- Yet in contrast to the vulnerabilities omy, LatAm countries have seen a Facts and cash that LatAm economies showed in the clear opportunity to diversify export Great Depression or in the ‘lost dec- markets. LatAm’s export-oriented Far from being merely speculation, ade’ of the 1980’s, the prospects for economies are progressively chang- China is already facilitating liquidity in LatAm economies for 2009 are better ing the destination of their goods the region, negotiating and signing than those of the developed world. from developed economies (mainly several deals. USD 2 bn to build a While the US and Europe are mired the US) to the Asian emerging giants hydroelectric plant in Ecuador, a USD in the worst recession in decades, (mainly China). Today, China is 10 bn loan to Petrobras or the USD countries like Peru are expected to LatAm’s second-largest trading part- 10 bn bilateral currency swap with grow as much as 5% in 2009, while ner (after only the US) and has be- Argentina are examples of the proac- other small economies such as Cuba, come a critical part of the engine of tive, resources-oriented and cash- Panama and Uruguay will grow at economic growth in the region. In backed alternative that China pro- around 4%. Argentina is expected to fact, China has just become Brazil’s vides to LatAm, especially relevant grow at 2.6%, Brazil at 2.1%, Chile at biggest trading partner. Within the now in this time of crisis. This com- 2% and Venezuela at 3%. For the context of global financial turmoil, plements the recent engagements whole of South America, ECLAC esti- LatAm countries are now not only between the regions such as China’s mates a 2.4% growth rate. Mexico looking at the duration and intensity membership in the IADB; China’s first and other Central American countries of the recession in the US, but also to policy paper on LatAm; President however, will experience the largest the opportunities that China are offer- Hu’s visit to Peru (APEC Summit), contraction given the lower demand ing. Costa Rica and Cuba or Chinese from and the higher interdependence Vice-President Xi Jinping’s visits to with the US economy. At the current juncture, as govern- Jamaica, Colombia, Venezuela, Bra- ment intervention seems to be the zil and Mexico. Improved monetary and fiscal poli- most effective way to offset the con- cies, well regulated banking systems traction of external demand, LatAm While it is still uncertain what the full and current account surpluses have countries are experiencing difficulties impact of the crisis will be for China put some of the major LatAm econo- to formulate solid fiscal stimulus and the LatAm economies, it is likely mies in a better (or less worse) shape plans, mainly because of the de- that the outcome of the interaction than in the past. However, LatAm crease of export prices and govern- between the two regions in the cur- countries’ recent economic growth, ment debt. China is currently injecting rent environment will not only be which owed much to increasing bilat- USD 586 billion in its economy, much weaker demand but also stronger eral trade with China, undoubtedly of it in infrastructure, which is ex- relationships.

5046

Regional Focus CHINA–RUSSIA

Both China and Russia are still grappling with the negative effects of the financial crisis, and in Q1 2009 bilateral trade volumes steadily declined, while cross-border FDI investment did not see significant change. Yet the first quarter of the year also saw the signing of a number of long-awaited agreements between the two countries to promote strategic cooperation. By Julia Wang.

China-Russia Highlights • Despite the ongoing financial crisis, economic and trade cooperation between China and Russia still grew steadily in 2008. Bilateral trade volumes reached USD 56.83 bn, an increase of 18% compared with the previous year. Due to the crisis, however, these bilateral trade volumes have decreased since November 2008 • In January, the total trade between the two countries declined by 35.4%, reducing Russia's exports by 42.7% and its imports by 29.9% • Both China and Russia have been heavily influenced by the crisis, but anti-crisis policy responses have been very different. China's response has strongly supported infrastructure and industrial investment, while Russia’s commitment to public service areas and social stability has been prominent. Comparing 2008-2010 fiscal stimulus plans, Russia’s expenditure is USD 220 bn, accounting for a 13.9% share of GDP. China's expenditure is USD 568 bn, accounting for 13% of GDP. Judging from Q1 macroeconomic indicators, China has built up a good momentum of credit, investment and consumption growth, yet the outlook for the Russian economy remains very negative • China and Russia will continue to promote the development of bilateral trade in various ways, such as the organi- sing of exhibitions, the transfer of technology and a trial program for renminbi (RMB) settlement. The first China-Rus- sia Machinery and Electrical Appliance Exhibition will be held on May 16-18 in Heilongjiang province in the north of China. China’s State Council has identified five key manufacturing cities: Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan, which have all been permitted to conduct international merchandise trade transactions entirely in RMB

Russia-China Trade 1999-2008, USD mn China-Russia Trade Highlights

40,000 Russian Exports to China • China is Russia's second-largest trade partner after EU; Russia is Russian Imports from China China's ninth-largest trade partner 30,000 • By the end of 2008, China was Russia's largest source of imports • In 2008, the total amount of Rus- 20,000 sian exports to China was USD 20.39 bn, an increase of 5.6% y-o-y; the total amount of Russian 10,000 imports from China was USD 34.66 bn, growing 42.7% y-o-y 0 • Mineral products, wood and fertili- zers remain the top Russian ex- 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ports to China. Exports of mineral Sources: MOFCOM; TBA Analysis products increased by 68.7% y-o-y, while exports of wood de- Russia’s Imports from and Exports to China 2008, USD bn creased 8.9% y-o-y • In 2008, mechanical and electrical Trans- Light appliances became China’s lar- 100% port- 100% Pulp and 1.92 industry Others 0.81 equip- 2.19 1.14 paper gest export commodity to Rus- 2.92 products 1.66 80% ment sia, displacing light industry prod- 3.05 80% 2.40 Base ucts. Imports of mechanical and Textiles metals 2.48 electrical appliances, textiles and 60% Base 8.58 60% metals Chemical base metal articles increased by Others products Wood 47.3%, 55.5% and 40.0%, re- 40% 40% spectively, taking the market Mechani- 11.91 share of these Chinese exports to 16.00 20% cal and 20% Mineral Russia to 21.6%, 39.7% and electrical products appli- 23.1%. These three imports ac- 0% ances 0% counted for 63.4% of Russia’s 2008 Imports 2008 Exports total imports from China in 2008 Sources: MOFCOM; TBA Analysis Sources: Multiple sources; TBA Analysis

China-Russia Investment Highlights • Mutual investment between China and Russia has been developing very slowly for a period of time. Yet Russia remains an important target market for Chinese investors • China’s FDI outflows to Russia declined by 83% from USD 440 mn in 2007 to USD 240 mn in 2008, while Russia’s FDI outflows to China increased by 13% from USD 52 mn to USD 60 mn • Investments by Chinese companies in Russia are concentrated in Siberia, the Far East, Moscow and St. Petersburg, with a prominent Chinese presence in the natural resources and related sectors such as oil, gas and forestry • Russian companies’ investments in China are mainly concentrated in the manufacturing sector • The Intergovernmental Agreement on the Encouragement and Mutual Protection of Investment, signed on 9 Novem- ber 2006 and implemented from March 2009, injected new vitality into business cooperation between the companies of the two countries • An increasing number of large Chinese companies, banks, and small and medium enterprises in various fields are presently re-evaluating potential market opportunities in Russia, and are actively searching for new forms and methods of cooperation

Russia Industrial Production and Investment y-o-y Growth Rate (%)

40 Fixed Investment Industrial Production Index

0 -20

-40

-60 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09

Sources: Russian Publishing Company “Expert Group”; TBA Analysis

Russia FDI Stock by countries 2008, USD bn Russia–China Bilateral FDI 2004-2008, USD mn Ukraine 0.12 Russia FDI to China China FDI to Russia Germany 0.51 500 Armenia 0.68 450 United Kingdom 0.73 400 350 Sw itzerland 1.19 300 Belarus 1.32 250 Brit. Virgin Islands 1.45 200 United State 4.67 150 Netherlands 9.79 100 50 Cyprus 9.99 0 0246810 2004 2005 2006 2007 2008 Sources: ROSSTAT; TBA Analysis Sources: MOFCOM; TBA Analysis

Foreign Investment into Russia by Sectors, USD bn Russia FDI Inflow by Sectors 2008, USD mn

Total: 29.7 53.7 55.1 120.9 103.8 Electronic appliances 100% 27,027 120 Ot hers Crude oil Real est at e op erat ions Data processing Financial act ivit ies Plastic in primary form Transp ort and co mmunicat ions 17 80% 90 Distributive trades 5,918 Steel products Co nst ruct ion 8 12 Elect ricit y, gas and wat er 60% 5,043 Soya beans M anuf act uring 15 60 Unwrought copper M ining operat io ns 47 6 24 40% 3 9 4,979 Refined 30 20 6 petroleum 6 13 products 5 32 34 20% 3,994 11 18 Others 15 2,332 0 7 958 808 1,713 2003 2005 2006 2007 2008 0% 1,282 Sources: ROSSTAT; TBA Analysis Sources: ROSSTAT; TBA Analysis

CHINA–RUSSIA Focus East Siberia-Pacific Ocean Crude Oil Pipeline Project: Long-awaited Agreement Finally Reached

China and Russia are making joint efforts on maintaining strategic cooperation in the energy field. With the slowing demand for natural resources, it is crucial for China to diversify its oil imports and for Russia to guarantee long-term oil contracts. The 60th anniversary of diplomatic ties between these countries has now been marked by the signing of an historic energy deal. By Nikita Popov.

n 17 February 2009, China and ORussia finally reached consensus on the largest ever energy deal between these two countries. China Na- tional Petroleum Corporation (CNPC) signed the contract with Russian companies Rosneft and Transneft on construction of the East Siberia- Pacific Ocean (ESPO) crude oil pipeline, which will supply 15 million tons of Russian crude oil per year to China during the next 20 years. According to the terms of the contract, designated volumes of oil will be supplied to China in exchange for the granting of a USD 25 billion loan to the two Rus- sian companies, of which USD 15 Precious cargo: The new pipeline will pump up to 1.6 million barrels of crude oil billion will go to oil-producing com- per day from Siberia to Russia's Far East and then on to China and the Asia- pany Rosneft and USD 10 billion to Pacific region. (Photo: RIA Novosti/Mikhail Fomichev) oil-transporting company Transneft. construction was delayed many times tingly slow. The route of the pipeline Changing times in 2008 for economic, technical, ecological was altered a few times, and the and political reasons. Initial problems deadline had to be postponed due to The history of the ambitious project emerged just a few months after the technical problems, according to the dates back to 2001, when former agreement, when in September 2003 statements made by the Transneft Russian oil-producing company Mikhail Khodorkovsky, CEO of Yukos, leadership. All these lags, though Yukos proposed to build an oil pipe- was arrested on changes of fraud. As carefully explained away by the repre- line to China. The pipeline was sup- a result, further negotiations on the sentatives of Russian companies, posed to stretch from the Russian project were suspended. In 2006 a induced lingering assumptions that East-Siberian city of Angarsk, where Russian court declared Yukos bank- the state-owned companies were de- Yukos operated a refinery, to Daqing rupt, and the company was liquidated. liberately stalling the construction in northern China. In 2002, Transneft Eventually, the other oil company, process. With oil prices still soaring in proposed an alternative project to Rosneft, assumed the right of provid- the first half of 2008, it seemed that transfer oil from Taishet in the Irkutsk ing oil for the ESPO pipeline. Yet ob- the Russian companies could afford Region and to the far east port of stacles kept occurring along the way. taking their time, leisurely bargaining Nakhodka, thus engaging Japan and During the first months of 2006, Ros- for better terms of the deal. The situa- Korea as more potential consumers. neft and Transneft were confronted tion changed dramatically, however, In May 2003, the government of the with complaints from the natural re- with the advent of the financial crisis, Russian Federation decided to com- sources committee of Russia’s State which dragged oil prices to appallingly bine these projects. According to the Duma, Greenpeace and WWF. Con- low levels. initial plan, Transneft was supposed sensus was eventually achieved, to be in charge of the pipeline, while however, and on 28 April 2008 the Once oil revenues began tumbling, Yukos would supply the oil. On 29 first joints of the pipeline were welded the Russian oil companies had to jetti- May 2003, Russia and China finally together in Taishet, signaling the com- son any excessive expectations. In signed the agreement on the con- mencement of construction on the light of the aggravated situation in the struction of the pipeline. ESPO crude oil pipeline. energy market, the plight of Rosneft was especially serious, considering Actual implementation of the project, Despite all the agreements and terms the company’s urgent need to gener- however, turned out to be easier said that were agreed to, the construction ate cash inflows in order to pay off than done. During next five years, process at first progressed excrucia- bulging debts, which currently totals

CHINA–RUSSIA Focus (cont.) nearly USD 21 billion, with USD 7 billion due for payment in 2009.

Small print

Details of the contract, signed on 17 February 2009, state that Russia will construct Phase 1 of the ESPO pipeline, which extends from Taishet to Skovorodino near the border with China. Under the agreement, Russia will build a 60km spur from Skovo- rodino to the border, and China will construct a 970km link to Daqing. Construction of Phase 1 is planned to be fully completed by the end of this year.

The pipeline is expected to start operating to full capacity by the beginning of 2011. The USD 25 billion loan will be backed by China Development Bank (CDB), one of China’s largest Done deal: Chinese Vice Premier Li Keqiang (right) and Russian Deputy Prime state-owned enterprises. According to Minister Alexander Zhukov during the meeting on strategic cooperation in Bei- the spokespersons of Rosneft, apart jing, March 27, 2009. (Photo: Xinhua/Huang Jingwen) from paying the company’s debts, money will also be spent on acquiring Russia could have turned the deal agreed to lend USD 10 billion to Bra- assets of oil companies abroad. more to their advantage had there not zil’s oil giant Petrobras in exchange been a sharp decline in oil prices. for long-term supplies of oil. The con- Prices for oil supplies have not been tract will be finalised within the follow- disclosed yet. At present, it is already At the end of March, CNPC and Ros- ing two months so it can be signed known that the new brand of oil for the neft also announced that they may when Brazilian president Luiz Inácio ESPO crude oil pipeline, ESPL Blend, soon begin construction of their long- Lula da Silva visits China in May. In is at the final stage of development planned Tianjin oil refinery. The idea addition, at the beginning of February, and will be completed during 2010. for this refinery project received new Chinese President Hu Jintao visited Discussions on establishing a GOST impetus after Russia finally agreed to Saudi Arabia, the world’s largest oil standard for this new oil brand are pump oil to China via the ESPO pipe- exporter, to seek potential new oil ongoing in the Russian government. line. The Tianjin city government said contracts. The purpose of creating the ESPL construction of the RMB 21 billion Blend is to distinguish price formation (USD 3.1 billion) plant, which will be Such increased activity demonstrates for the oil in the ESPO project from located in its Binhai chemical area, that, in the light of the current eco- the oil of the Urals brand of general could be completed by 2012. After the nomic downturn, China is trying to Russian oil exports. completion of construction of the link satisfy its growing domestic needs to Daqing (Phase 1 of the ESPO pipe- and to attain strategic goals. It is also Give and take line), China hopes to extend a pipe- possible to view China as acting more line from Daqing southward to Tianjin assertively, ready to utilise its position Russian companies, trying to strike in order to secure supplies for the new as a country with the largest foreign the deal on more profitable terms, had refinery. reserves and a solid banking system to make some concessions to the Chi- to obtain better access to the natural nese side. These concessions were A more assertive China resources of the main players in the not about the price of oil itself, but energy market. about the terms of receiving and pay- China is clearly continuing to make ing back the loan from CDB. While efforts to diversify its oil imports, ac- both the Chinese and Russian top celerating efforts for striking new officials involved in the negotiations, deals in the energy field. The agree- including Chinese Vice Premier Li ment with Russia, though the most Keqiang and Russian Deputy Prime notable and important, was not the Minister Alexander Zhukov, agreed only one. About one week after the that the deal was mutually beneficial contract with Rosneft and Transneft for both countries, it is still likely that was signed, China Development Bank

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 see ‘About THE BEIJING AXIS’ on page 54.

Date Event Location 3 - 7 May 09 China Import and Export Fair (Canton Fair) Guangzhou 5 - 7 May 09 5th Shanghai Tube Expo Shanghai 6 - 8 May 09 SNEC 3rd (2009) International Photovoltaic Power Generation Expo Shanghai 7 - 8 May 09 2nd Annual Energy Efficiency Asia 2009 Beijing 13 - 15 May 09 3rd China International Logistics Technology and Services Expo Suzhou 14 - 16 May 09 China International Foundry Fair Dongguan 8 - 12 Jun 09 8th China International Consumer Goods Fair Ningbo 10 - 12 Jun 09 6th PPI China Guangzhou 11 - 13 Jun 09 15th Shanghai Metallurgy Expo Shanghai 16 Jun 09 China Structured Products Forum 2009 Beijing 16 - 19 Jun 09 GMT - Canton Machine Tool Fair Guangzhou 17 - 21 Jun 09 Nonferrous Metals Mining Conference Guiyang 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 18 - 20 Jun 09 2009 China Inner Mongolia International Coal & Energy Industry Expo Mongolia 23 - 25 Jun 09 International Stainless Steel Conference Wuxi

23 - 26 Jun 09 4th China International Metals Industry Fair 2009 Guangzhou 23 - 26 Jun 09 10th China (Guangzhou) International Metal & Metallurgy Guangzhou

28 - 29 Jun 09 International Aluminium Fabricating Conference Shanghai 5th China International Coal Equipment and Mine Technical Equipment Exhibition 28 - 30 Jun 09 Beijing 2009 30 Jun - 2 Jul 09 Aluminium China 2009 Shanghai 8 - 10 July 09 7th International Exhibition on Electric Power Equipment & Technology Shanghai 10 - 11 July 09 2009 International conference on Information Engineering Taiyuan 17 - 21 Jul 09 7th Nonferrous Metals Mining Conference 2009 (NMM 2009) Guiyang 10th China International Industrial Automation and Instruments (Qingdao) Exhibi- 28 - 31 Jul 09 Qingdao tion 28 - 31 Jul 09 10th China International Machine Tools & Modules (Qingdao) Exhibition Qingdao 29 - 31 Jul 09 9th Shanghai Children Baby Maternity Products Expo Shanghai 2nd International Conference on Computer Science and Information Techno-logy 8 - 11 Aug 09 Beijing 2009 13 - 15 Aug 09 China (Beijing) International Steel Tube Industry Expo 2009 Beijing

Date Event Location 13 - 15 Aug 09 6th China (Beijing) International Casting & Forging Exhibition, 2009 Beijing 17 - 19 Aug 09 7th China International Auto Supplies Sourcing Fair Shanghai 18 - 20 Aug 09 5th China International Metal Working Technology & Equipment Exhibition Tianjin 19 - 21 Aug 09 2009 International Conference Industrial Globalization and Technology Innovation Shaanxi 21 - 23 Aug 09 7th International Symposium on Rockburst and Seismicity in Mines Dalian 1- 3 Sep 09 6th Shanghai International Stainless Steel Expo Shanghai 1 - 5 Sep 09 China International Equipment Manufacturing Expo (CIEME 2009) Shenyang 8 - 10 Sep 09 2009 China International Electronic Industry Expo Beijing 8 - 10 Sep 09 International Lead and Zinc Conference Lanzhou 8 - 10 Sep 09 International Manganese Conference Changsha 8 - 11 Sep 09 13th China International Fair for Investment and Trade Xiamen 17 - 18 Sep 09 4th Annual PorTech Asia 2008 Tianjin 24 - 26 Sep 09 China International Auto Parts Expo (CIAPE) Beijing 20 - 22 Oct 09 China Mining Tianjin

20 - 23 Oct 09 17th China (Shenzhen) International Toys & Gifts Fair Shenzhen

27 - 30 Oct 09 China Coal & Mining Expo 2009 Beijing

2 - 4 Nov 09 World Scrap Metal Congress 2009 Shanghai 3 - 7 Nov 09 Metalworking & CNC Machine Tool Show Shanghai

4 - 6 Nov 09 17th China International Industry Fair Chongqing

12 - 14 Nov 09 3rd China International Exhibition for Aluminium Industry Beijing

SUGGESTED READING China Entrepreneur (2009), reviewed by The Economist

Despite China’s remarkable transformation, it can still baffle foreign investors.

Yet for any entrepreneur planning a venture in China, China Entrepreneur:

Voices of Experience from 40 International Business Pioneers would be an excellent first step. 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, here distil the combined wisdom of 40 entrepreneurs who have succeeded in China, selected from a variety of industries and countries in the developed and developing world. The chapters deal with starting up, choosing partners, getting paid, hiring staff, corruption, negotiations, daily living and much more. The material is well- organised and clear, with summaries, case studies, call-outs and key rules. Par- ticularly illuminating are the insights on the importance of Guanxi - the network of social and business connections so vital to doing business in China, as well as material dealing with the pitfalls of business negotiations. The book is enli- vened by the interviewees’ colourful personal anecdotes, and as such China Entrepreneur successfully presents itself as an operational handbook for the newcomer in China.

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 business challenges. Applications will be treated confidentially. If you believe you can make a contribution, send your detailed CV with a letter of motivation and references to 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; ensure mainte- nance of professional ‘best prac- tice’ standards across assigned projects • Valuation, modelling, participation in overall investment process • Manage 2-4 deal-team consul- tants and analysts • Be a thought leader and promote the development of learning processes and platforms THE BEIJING AXIS is an entrepreneurial firm and welcomes applications • Improve process efficiencies, from persons with a well-grounded knowledge of their professional fields optimise workflow, control costs in a China context. We offer a rewarding experience, international expo- • Client relationship management sure and competitive remuneration. • Ensure alignment of Division’s CONSULTANT / ANALYSTS SOURCING ENGINEER objectives with those of the (CHINA STRATEGY GROUP) (CHINA SOURCING UNIT) Group • Multi-sector assignments with Beijing: 1 Consultant position Beijing: 1 position emphasis on resources, mining and industry Beijing, Singapore, Perth, Johan- • Significant (international) travel nesburg: 4 Analyst positions • Employed in the China Sourcing Unit of THE BEIJING AXIS Requirements • Employed in the Strategy Division • Sourcing (or manufacturing) pro- • Superior analytical and problem- of THE BEIJING AXIS ject management skills essential solving abilities: Valuation, mo- • Sound analytical and problem- • Focus: Project manage sourcing del ling and deal structuring solving skills schedules (i.e. ensure that spe- • Ability to work with diverse cul- • Ability to work in teams with cialised capital equipment is tures and backgrounds colleagues from diverse cultures manufactured to required stan- • Interest in and knowledge of and backgrounds dards and delivered on time); China’s cross-border business • Strong experience in the formula- technical QA/QC knowledge; ex- engagement tion and execution of research pediting experience and strong • Sound judgement, maturity and a methodologies and analysis supplier management skills systematic mind • A business and/or technical de- • Provide support and technical • Conceptual thinking and attention gree with a post-graduate qualifi- advice and expertise to China to detail cation Sourcing Unit colleagues and • MBA/CFA/CA or legal back- • Minimum 3 years experience in department ground preferred with more than an appropriate or related field • A degree in engineering, prefera- 3 years experience in finance/ • Excellent communication skills, bly mechanical/mining-related consulting including both spoken and written with a minimum of 10-years’ work • Native English written and verbal English experience in appropriate field communication skills essential • Mandarin not essential, but re- • Excellent English and Mandarin • Mandarin ability essential garded as an advantage written and spoken abilities • Willingness to travel • Willingness to travel • Willingness to travel

THE BEIJING AXIS News Learning & Getting Around Development Manager at the South Russia/CIS at The Capital Club in Africa Office, attended the Nepad Beijing (14 May 09) THE BEIJING AXIS Founder and Ithuba Forum in Sandton, SA. • China Investment in African Re- Group MD, Kobus van der Wath, souces at Macquarie’s Metals/ hosted a number of Business Round- On 19 March 09 Mitch Cosani at- Mining Investor Day in HK (18 May) tables in Asia in Jan 09. The roundta- tended a mining industry business • China Australia Business Con- bles, entitled ‘China in 2009’, were breakfast entitled: ‘The Future of the gress, Sydney (19 and 20 May) held in Vietnam (Ho Chi Minh City), SA Mining Sector’ in Rosebank, SA. • China Investment in Global Re Thailand (Bangkok) & Singapore. sources at AMEC 2009 in Perth On 19 March 09, Jackie Li attended a (21/22 May) Kobus van der Wath attended the Nedpad Business Forum entitled: • China Sourcing Presentation at the Macquarie China-Day Seminar on 6 ‘Doing Business in Africa’ in JHB, SA. IPSA/CIPS Annual pan-African

Feb 09 in Cape Town, South Africa. Conference in JHB, SA (26 May) On 23-27 March 09, staff members • IWCC Annual Copper Event in On 9-12 Feb 09, Kobus van der Wath from THE BEIJING AXIS’ global of- Seoul, South Korea (11-13 May 09) & Mitch Cosani, South Africa Office fices attended the Asia Mining Con- Manager, attended the 2009 Mining gress 2009 in Singapore. • Nonferrous Metals Mining Indaba in Cape Town, SA. Kobus de- Conference in Guiyang (17 May) livered a keynote presentation enti- On 27-29 March 09, staff members • Mines & Money Asia 2009 in Hong tled: ‘China’s Strategic Importance in from THE BEIJING AXIS attended the Kong (3-5 June 09) Global Mining’; and participated in a International Mining Equipment Fair in • Banking Outlook Africa 2009 in panel discussion with the topic, Handan, China. Johannesburg, SA (6-10 July 09) ‘Resource Curses & Blessings: Chal- • Africa Mining Congress 2009 in lenges for the Last Mineral Frontier’. On 31 March 09, Diana Wang, China Johannesburg, SA (14-17 July 09) Sourcing Unit Manager, and Cheryl On 20 Feb 09, Kobus van der Wath Tang, China General Manager, at- Team Developments hosted a China Business Roundtable tended the 4th China International in Singapore. Metals Industry Fair in Guangzhou. Elena Zhou, previously Senior Con- sultant within the Finance & Admin. On 26 Feb 09, The Capital Club (a On 29 April 09, Kobus van der Wath Dept., was asked to assume the re- premier private business club in Bei- delivered a presentation at the Capital sponsibility of Manager, effective jing) hosted a business seminar Club in Beijing, entitled ‘China’s rising from March 09. outward investment in Oil and Gas - where Kobus van der Wath and Ed- William Dey Chao, consultant with ward Wang, TBA Executive Director, what’s in it for Africa?’ the China Strategy Group, was pro- were invited to deliver two presenta- During April TBA was also repre- moted to the position of Lead Con- tions on the topic of China’s recent sented at a number of events in Aus- sultant, effective from Feb 09. bold international acquisitions and tralia, China, South Africa & Hong what specific implications these have Nikita Popov joined the Beijing Of- Kong, which included: for Africa, now and into the future. fice in Feb 09 as an Analyst on the • The 11th China International Ma- Russia/CIS desk. Mitch Cosani and Jackie Li from the chine Tool Exhibition in Beijing (6- SA Office were invited by the China 11 Apr 09) Jason Gao, previously an intern, Foreign Trade Centre to attend a pro- • The SA Power Conference in was asked to join as a full-time em- motion seminar in South Africa on 26 Sandton, SA (21-22 Apr 09) ployee, effective from Feb 09 - Ja- Feb 09 for the 105th China Import and • Presentation to an INSEAD son now holds the position of Ana- Export Fair (Canton Fair). Business School ‘China Entrepre- lyst: Knowledge Management, in neurship’ Study Tour in Beijing Beijing.

Staff from TBA’s investment unit, (26 Apr 09) Tarryn de Beer joined the SA Office China Capital Advisors, attended the in Jan 09 as an Analyst. Tarryn M&A Due Diligence conference in During May, June and July, TBA will further be represented at: holds an IMM Diploma and is cur- Shanghai on 26-27 Feb 09. rently studying towards her BBA. • M&A presentation to the Curtin Kobus van der Wath delivered the Business School China Study At the beginning of April 2009, THE keynote presentation at PDAC 2009 Tour 2009 in Beijing (2 May 09) BEIJING AXIS welcomed Avin in Toronto on 1-4 Mar 09. Kobus’ • China Sourcing presentation to Zhang, Sandy Yang and Macy Chen presentation was entitled: ‘China’s Australia Chamber of Commerce as interns at the Beijing Office. Role in Resources—Implications for Sourcing Working Group in Beijing Resource Demand and Strategic (5 May 09) We welcome them, congratulate Capital from China into the Sector.’ • CIPSA Western Australia Procure- them and wish them all the very best ment Forum in Perth (12 May 09) and continued success in the next On 12 March 09, Jackie Li, Business • Presentation on Doing Business in stage of their careers with TBA.

About THE BEIJING AXIS

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

Since our establishment in 2002, we have successfully worked with many large international and Chinese MNC clients across various sectors and industries, with a core focus 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’. Our principal office is in Beijing with additional offices in Shanghai and Hong Kong as well as in Singapore, Perth, Moscow and Johannesburg.

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 cor- formulation and implementation systematic and analytical approach porate 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, due seek overseas assets, equity, • Market entry strategy diligence and selection projects or foreign co-investors • Partnering strategy • Supplier engagement & negotiation • Advising foreign MNCs that are • Business planning • Commercial and contract seeking Chinese assets, equity, 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 • Target identification, filtering and • Operational support management selection • Negotiation • Transaction monitoring • Engagement • Agency services • QA/QC, expediting, managing 3rd • Project and target due diligence • Relationship management parties (QA inspectors, lawyers, • Fundraising support • Delegations etc.) • Valuations and modelling • Logistics • Opinions • Holistic risk management • Strategic relationship management

For further 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 Executive Director (T) +86 (0)10 6440 2106 [email protected] [email protected] [email protected] (F) +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] (T) +27 (0)11 201 2453 [email protected] Jackie Li Manager: Business Development [email protected] (T) +27 (0)11 201 2318

Previous Editions of THE CHINA ANALYST February 2009 October 2008 Regulars Regulars

Macroeconomic Monitor China Sourcing Strategy

China Facts, Figures & China Sourcing Blog Highlights

Forecasts Macroeconomic Monitor

China Sourcing Strategy China Facts, Figures & China Sourcing Blog Highlights Forecasts

China Trade Roundup China Trade Roundup

China OFDI and M&A Financial Markets

Regional Focus: Africa, Russia China OFDI and M&A

and Australia The C in BRICS

China Business News Highlights China Business Highlights

Features Features Financial Crisis: China Impact and Response China Inc. Goes Global: The Long Road Ahead The slowdown has impacted China’s exports, yet with a Chinese companies are making headlines with foreign ac- massive stimulus package, there’s much room for hope. quisitions, yet what are the drivers of this trend?

Financial Crisis: Beginning of the BRIC Era Taking a Step Into Latin America While not unaffected by the crisis, BRIC countries will China is intensifying its ties with LatAm. We examine the emerge from it with a greater role in the global economy. current critical juncture between these two regions.

July 2008 April 2008 Regulars Regulars

China Sourcing Strategy China in Statistics

China Sourcing Blog Highlights Statistics in the News

Macroeconomic Monitor China Business News

China Facts, Figures & China Perspectives

Forecasts China Sourcing Blog Highlights

China Trade Roundup Upcoming Events

Financial Markets

China OFDI and M&A

The C in BRICS

China Business Highlights

Features Features

The Scramble for Australia Putting China’s Urban Billion into Perspective We take a look as China’s Australian mining ventures To the business community, China’s population is an op- move from trade to investment. portunity, yet to the government it is a serious challenge.

Sourcing High-Value Industrial Products from China Africa & China: How Long will the Honeymoon Last? The era of Chinese high-value industrial exports is fast ap- As Chinese involvement in Africa grows, is there reason to proaching, yet pitfalls and peculiarities remain. be concerned about the sustainability of the relationship? 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 presented 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 judgement 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.