Little Red Blog

China News and Analysis

April 16, 2014
by admin

China’s flailing economy journeys into the unknown

China Air Pollution
Michael Sainsbury

China’s economy is moving closer to a possible dramatic tipping point as growth continues to slow and overall domestic confidence appears to be sapping.

Official figures released today reckon that the economy grew 7.4 per cent on a yearly basis, the slowest pace since 2012 and down from 7.7% last quarter but this disguises the fact that quarter to quarter growth slowed to a crawl at 1.4 % down from a sluggish 1.7% last quarter.

How anyone in the markets can see this as good news is bewildering.

It was unsurprising the often highly massaged GDP numbers came in just 0.1% ahead of market consensus, it’s a regular gift to the markets from China’s National Bureau of Statistics as the Chinese government does not wasn’t to spook all the horses in the stable at once.

But most of the key trends are pointing one way, and it is not up.

GDP may have been nominally just a tad ahead of expectations but March data was pretty much worse than expected across the board. As well as continuing tighter credit growth in investment continues to ease offand falling housing sales “all point to further downward pressures”, HSBC said.

So the real question is that while it remains unclear by how much growth is slowing, what happens next?

Already Chinese Premier Li Keqiang had said in three separate public speeches, the most recent at the Boao Forum for Asia two weeks ago, that the central government would instigate polices to yet and make sure the economy hooves reasonably closely to its growth target of about 7.5%.

The initiatives, so far, have been to accelerate public housing and subway construction, a series of tax breaks for SMEs although still no signs of giving them access to the credit they need.

Li, again, so far, has made it equally clear that there will not be concerted stimulus, but both he and his predecessor Wen Jiabao have said this before and then recanted in the face of slowing growth. The government’s 7.5% is widely a “soft” target with most analyst tipping annual growth somewhere between 7% and 7.5%.

ANZ for instance is predicting 7.2%, Nomura 71.1% and so on – but let’s not get too hung up on the numbers because nothing in that range remotely resembles the nightmare scenario of sharp slowdown. There are growing concerns this is now more possible than it has been previously, largely due to the rapid ramping up of debt over the past 5 years.

Here are a few reasons why people should be more worried than they were last year about the Chinese economy.

The most interesting part of the China story right now is tightening credit. New credit for the first quarter fell a whopping 19% compared with last year and money supply, or M2 as it is known by economists, grew at its slowest pace since 2001.

This will take a few months to feed into the economy but its singular effect will be to slow growth further if the trend continues.

Another interesting and concerning data point was that the slowdown was mainly led by secondary industry sectors (7.3% y-o-y vs. 7.8% in 4Q) while tertiary industry growth also moderated to 7.8% (vs. 8.1% in 4Q 2013) which somewhat belies the services sector boom being a new economic driver touted in some quarters. Right now the across the board gloom seems to be about a general lack of confidence and that can start feeding upon itself

As credit tightens China looks set to feel some Western style “market forces” with a long period of company defaults on both bond payments and “entrusted loans – generally made by big usually state owned companies with access to cheaper capital as the corporate sector begins the painful process of deleveraging.

At the core of all this is the Chinese property bubble, housing stocks in many second third and fourth tier cities runs past five years in many cases, the so-called ghost cities and suburbs strewn across the land.

The recent 30% slump in property prices in the major centre of Hangzhou, capital of wealthy Zhejiang province, and at the very top of the second tier is of particular concern. If this is a taste of things to come in other similarly sized (about 8 million people) cities then look out below.

Sales volumes in March were roughly 35% down year on year, and preliminary data from April suggested that sales volumes continued falling by more than 20%. Demand for steel and cement is abnormally low for the spring season, and inventories are rising,’ Anne Stevenson-Yang of J Capital Research said in the company’s weekly client note.

Stevenson –Yang is notoriously bearish but her time may be coming. If, indeed the Chinese property boom is seeing an end she mused that all assumptions about urbanisation rates may have to be thrown out the window, causing chaos to, amongst other things, Australia’s economy

Still, at present there is general confidence that China’s slowdown can be managed gradually, step-by-step but risks are increasing so at some point – and the timing inevitably takes most by surprise – it may trigger that feared sharp decline. If things start looking too bad come May, the government could well decide to step up its easing efforts but will be concerned that it is just exacerbating existing problems and putting off the inevitable.

Still, while economists maybe be worried the ever-confident executives at Fortescue Metals are not. In the companies monthly conference call yesterday chief executive Nev Power was effusive in his confidence that China would continue to grow in much the same way it has in the past couple of years at about 7.5%.

Fortescue and BHP are both shipping more iron ore than ever according to their quarterly production reports issued today. Yet property in China the main consumer of steel is on a significant downturn and there have been increasing reports of credit being turned off for small mills and traders, There is now little doubt that China’s mega boom years are over but the immediate future could go several ways. Power and his shareholders may be in for nasty shock.

April 15, 2014
by admin

Demystifying Chinese Investment

It’s taken decades but the Australian government is finally getting serious about Chinese investment despite endless blather, thanks largely to Andrew Robb, the first really Asia savvy Trade Minister.

Unlike anyone else in the Australian Cabinet apart from Malcolm Turnbull, Robb has spent decades in business, and a wide range of them. Most importantly he  has spent a lot of time in Asia, particularly in China and Macau when he was working for James Packer and in Bangkok where he helped former Prime Minister Thaksin Shinawatra establish his first political party, now in exile but whose rural based parties keep winning elections despite the best efforts of the country’s establishment.

Last week, Robb launched a very comprehensive document written by KPMG  - which has for a very long time had its key people in high offices at the Australia China Business Council – and a team at University of Sydney where the China Studies Centre is run by the lively, commercially minded Professor Kerry Brown. 

The research found a  total of 182 deals worth around $60 billion involving Chinese enterprises in Australia between September 2006 and December 2013.

Demystifying Chinese Investment is available at

April 15, 2014
by admin

Better optics, but Abbott sidestepping tricky issues of trade

abbott in korea

Michael Sainsbury

An apparently chastened Tony Abbott ventured, at last, to north Asia this week, the epicentre of Australia’s continued prosperity. It was something of a relief to see him ratchet back the pro-Japanese rhetoric (at least in public) that has so incensed Beijing and deliver a much calmer and friendlier message to the Chinese on his first trip as Prime Minister.

In China — where apparently there were fewer in the travelling press pack than on his other stops — he wisely opted to emphasise that he was there as a friend of our largest trading partner. Clearly he’s learnt a few lessons, but insisting he was not there to “do a deal”, or at least pave the way for a few, was hard to swallow. Why else would he travel with a praetorian guard of 30 big-name chief executives and a further 500 Australian business people in Shanghai with Andrew Robb, his Trade and Investment Minister?

Robb, by the way, has impressed diplomats across the region with his clear-headed, low-key approach. Abbott is lucky to have him, and Robb’s focus on investment as well as trade is timely as National Party hysteria about Chinese investment in Australia fades and reality sets in.

Despite his more measured approach, Abbott’s decision to accept Japanese PM Shinzo Abe’s invitation to be the first foreign leader to meet with the National Security Council will have riled the Chinese, already furious over Abbott’s rhetoric casting Japan as Australia’s closest friend in the region.

No amount of friendly military-to military co-operation and exercises — which have never been under threat in any case — will make up for what the Chinese army and senior officials regard as outright insults.

There were some obviously staged “optics”, toonotably Foreign Minister Julie Bishop making nice with her counterpart Wang Yi, who only two months ago gave her an unprecedented public dressing down over Australia’s uniquely over-the-top reaction to China’s declaration of an Air Defence Identification Zone.

Abbott’s other main job in Japan was to agree to the Economic Partnership Agreement, not quite “a free-trade agreement” but better than nothing. It’s been well covered in this publication, but it’s worth noting that Australia’s former ambassador to Japan John Menadue has described the deal as “third rate” and provided some sensible analysis of the over-hyped deal his Pearls and Irritations blog.

A quick stop in South Korea for tough Tony to “eyeball” North Korean soldiers in the demilitarised zone, then onto China — really the main game of this visit and one he described as the “highlight”. Another tick.

For his first public speech in China as PM, Abbott chose, as his predecessor Julia Gillard did last year, the Boao Forum for Asia in Hainan. Boao is an odd event, pitched by the Chinese as the Asian “Davos”; it’s certainly not that, being uniquely Chinese — and it is a logistical nightmare. The “plenary session” traditionally addressed by one of China’s top two leaders is held three days into the conference.

This year it was the turn of Chinese Premier Li Keqiang. Following this a half dozen or so world leaders get a bite-sized chance — about five minutes — to say their piece.

It was here that Abbott appeared sensibly to emphasise his mission to come as a friend — reminiscent of Kevin Rudd in 2007, luckily without the controversial lecture on Tibet. He then veered off into a riff on Deng Xiaoping’s widely misquoted words on how “glorious” it is to “get rich”. No deals, huh?

Here, his office fell for the beginner’s error of lazily using the misquote. Deng in fact said that some people should get rich first. Given the Communist Party’s recent well-chronicled problems with corruption due to a surprisingly fierce campaign from leader Xi Jinping, this may have been an unintended diplomatic faux pas.

The “rich” thing is a particularly delicate issue in China right now, with Xi’s campaign centring around former security tsar Zhou Yongkang and hundreds of his closest associates, who had accumulated assets worth a reported US$15 billion. Former leaders Jiang Zemin and Hu Jintao are reported to have warned Xi about the consequences of his campaign. Perhaps not so glorious after all, Tony.

One journalist travelling with the PM described the PM’s office as being “very disorganised”.

Clearly, Abbott and his team still have plenty of work to do in getting to really understand China, but they better make quick sticks, as last year Australia ceded its status as China’s favourite investment destination to the United States. The $15.5 billion of Chinese investment approved by the Foreign Investment Review Board was hugely bolstered by two energy deals worth more than $3.3 billion, according to a report realised yesterday — Demystifying Chinese Investment — by KMPG and the Australia-China Council. China’s investment in Australia in 2013 fell to US$ 9,115 million from US$ 10,105 in 2012, reflecting a decline in the mining and gas sectors. Mining investment halved from US$5,693 to US$ ,133, in gas it was down US$2855 to US$1,930 respectively in 2012 and 2013 each. This is due to a combination of slowing deal-flow and sharply increased wariness in Beijing stemming from failures like the $10.5 billion Sino Iron project by state-owned CITIC Pacific.

Those same Chinese state-owned companies that Tony Abbott said he did not want to see owning Australian assets in July 2012 accounted for $8.2 billion, or 84% of total investment. And the hysteria over China “buying the farm” has proven to be just that, with agricultural investment accounting for just 3% of the total.

Yet there are plenty more biscuits in the Chinese tin, as Li Keqiang noted at the Myanmar World Economic Forum in September last year:

“In the next five years China is expected to import US$10 trillion of goods, invest US$500 billion overseas and send over 400 million tourists abroad.”

Abbott and his team need to make sure Australia continues to get enough to keep the economy from falling into a hole, and according to the Xinhua news service Li told him Australia must “continue to provide a fair environment for Chinese inbound investment”.

And that means giving the Chinese the new $1 billion review limit that Japan and Korea now have — up from $238 million. You can bet Barnaby Joyce will have something to say about that.

This story was originally published by Crikey,

April 10, 2014
by admin

New High-Level Groups Threaten Line Between Party and Government

xi hunmiWilliam Lam
The Jamestown Foundation

The Xi Jinping leadership is concentrating more powers in secretive leading groups and commissions at the apex of the Chinese Communist Party. These top-level decision-making and coordinating agencies—the Central National Security Commission (CNSC), the Central Leading Group on Comprehensively Deepening Reforms, and the Central Leading Group on Internet Security and Informatization—are run by Xi confidants who report mainly to the supremo. This raises questions about a lack of transparency and checks and balances, despite a pledge made by Premier Li Keqiang at the National People’s Congress (NPC) that the State Council would undergo a “self-revolution,” meaning that central government departments would be streamlined and their powers curtailed in the interest of giving a bigger role to the market and society. Read more….

April 8, 2014
by admin

China Christians camp out to save their church and cross

Worshipers inside Sanjiang Church, Wenzhou.

Worshipers inside Sanjiang Church, Wenzhou.

Xu Yangjingjing,
Washington Post

Thousands of Chinese Christians have camped themselves in and around a church in the eastern part of China to prevent it from being demolished after several crosses have already been torn down under a provincial campaign to curb the spread of Christianity, local residents and religious leaders said Friday.

Concerned that Christianity was growing too fast and in an “unsustainable” manner, local officials in the province of Zhejiang began a campaign in February to demolish any church buildings that violated local regulations, according to a government Web site.

But the real targets, local Christians say, are the prominent crosses that many churches use to advertise their presence. Several Christian leaders allege that the provincial Communist Party secretary objected to seeing many large and bright crosses during a recent trip along a major highway, and ordered some to be removed. Read more…

April 4, 2014
by admin

Tables have turned on China’s former security chief

Happier days. Zhou Yongkang and Bo Xilai, out and about in official "casual" black (Fragrant Harbour)

Happier days. Zhou Yongkang and Bo Xilai, out and about in official “casual” black (Fragrant Harbour)

Michael Sainsbury

The imminent purge of Zhou Yongkang, China’s security chief from 2007 to 2012, brings to mind that wonderful Chinese expression: “The fish rots from the head down”.

Since the major clearout after Mao Zedong’s death in 1976, Zhou is now the most senior Communist Party official to be fingered by its internal affairs division, the Central Discipline Committee. He is the first former member of the elite Politburo Standing Committee (PBSC) to be cast out by the Party. His case has implicated a reported 300 allies and relatives with total assets of US$14.5 billion.

Zhou is the star victim of Chinese leader’s Xi Jinping’s showy, constantly publicized anti-corruption campaign. Zhou’s trial will be all about money and corruption, designed to showcase that Xi Jinping the reformer – who has promised to catch ”tigers” like Zhou as well as “flies”(lesser officials) is cleaning house in a ruthless and spectacular way – and at least officially – for all the right reasons. His campaign is the biggest in China’s history, yet it is destined to head precisely nowhere without political reform.

China must start at the very beginning with the establishment of rule of law, independent institutions such as the judiciary and financial regulators, as well as de-politicizing the police force and armed services. But Xi has already very clearly ruled that out.

Really, this is all about politics. In one way Zhou, the stony faced veteran of the oil and gas industry – his power base – was unlucky to be on the wrong side of the ledger when Bo Xilai, the former Politburo chief, went down in a mess of lurid tales of infidelity, poisoning and – yes – more corruption. Zhou wanted to back Bo into his old job but Xi cut it from the PBSC, which he trimmed from nine under Hu Jintao to just seven.

Yet Zhou’s fall has, more than many who have simply fallen to internal politics, been apposite. He was the prime mover behind the overriding policy of the Hu regime’s “stability maintenance”, a euphemism for crushing protest and dissent by any means possible.

Simply put, Zhou is a mass murderer. On his watch, thousands of people were executed by China’s pretence of a legal system, where judge, jury, prosecutors and police are presided over by the Communist Party’s Legal and Political Bureau, which he chaired during Hu’s regime.

We will never have any clue as to how many more Chinese citizens were knocked off by the country’s terrifying State Security Bureau, the country’s feared secret police who operate in a government-sanctioned zone of extralegal kidnapping, torture, evidence fabrication and murder.

Zhou has fallen victim to the same due process-free sham. He was last seen in public on October 12, after which Xi is reported to have ordered an investigation of him and his cronies. Under Zhou’s leadership, countless people were jailed without fair trial, and on the basis of flimsy or doctored evidence and with pre-ordained results. Let’s see how he likes it once he is on the other side of the fence, handcuffed and manacled – guilty until you are found guilty.

It’s interesting that Jiang Zemin, who backed Xi as leader and was the man at the nation’s helm for 13 years (1989-2002) as China’s crony capitalism flourished, was reported in the Financial Timesthis week to have urged Xi to tamp down his anti-corruption drive. No surprises there. After all, no one wants the other old blokes in their weekly card game in some swanky state-owned palace locked up.

Another of Zhou’s notable achievements in his reign of terror was presiding over the oppression of minorities and government critics. Together with Hu Jintao, Zhou was chiefly responsible for the post-July 2009 campaign of terror and oppression (and cultural destruction) waged against the Uighurs in Xinjiang. It continues today – as does the ongoing oppression and cultural destruction of Tibet.

Zhou persecuted without fear or favor campaigners for all manner of basic human rights. Just to take a couple of examples, religious practitioners – in particular, “underground” evangelical Christians – and people living with HIV caused by government officials knowingly buying infected blood and supplying it to hospitals.

Zhao locked up Chen Guangcheng, a blind advocate for the ending of state-sanctioned forced abortions and sterilizations. As soon as he came out in protest, he and his family were put under particularly oppressive house arrest until his miraculous escape to the US embassy in Beijing and later his emigration to the US.

More generally, Zhou presided over a system that persecuted any advocates for peaceful and gradual change of a system that allows all of the above (such as incarcerated Nobel Peace Laureate Liu Xiaobo). Anyone operating in that dangerous grey zone could get that knock on the door from one of Zhou’s boys any time, any day. It was not just these people that Zhou set out to destroy but their partners, children and parents.

Thousands of hard working business people who had the misfortune to cross the financial interests of a Party member suffered helplessly as years – sometimes decades – of hard work was destroyed or confiscated, all on Zhou’s say-so.

On Zhou’s watch the size of China’s domestic security surpassed at least officially that of the People’s Liberation Army. That in itself speaks volumes about both the repression in Communist China and how long the Party can hold on.

By pulling off this long expected but as yet not officially announced removal of a Party member previously considered untouchable, Xi has stamped himself as China’s most powerful leader since at least Deng Xiaoping. He’s made some progress (The destruction of Zhou is not progress; in fact, quite the opposite. It is reminiscent of Mao’s own purges.) but the jury is still very much out on whether he will wield power wisely.

For all of Xi’s boasting about the campaign against corruption, as long as the Party remains in control it will continue on its paranoid, willful and violent way. Zhou in many ways is the ultimate product of a system whose biggest threat is the very system it created.

The vilification of Zhou will be directed by the Propaganda Department in China’s state-run press, which once lavished Zhou with gushing praise. Now when you read eye-popping tales of 30-car garages, bulging Swiss bank accounts, villas worthy of America’s antebellum South and the endless stream of perfumed mistresses decked out in designer Versace, remember that Zhou, like others who were singled out for destruction before, was hoisted on his own petard.

Then spare some time to think about his victims – casualties of a rotting Party that encourages and sanctions evil people like Zhou Yongkang in order to continue to serve more of the same. Don’t for a moment think that this has anything to do with the people.

April 3, 2014
by admin

Talk is cheap: Abbott’s Asia trip missing the real opportunities?

Chinese Premier Li Keqiang (R) meets with his Australian counterpart Tony Abbott in Bandar Seri Begawan, Brunei, Oct. 9, 2013. (Xinhua/Huang Jingwen)

Chinese Premier Li Keqiang (R) meets with his Australian counterpart Tony Abbott in Bandar Seri Begawan, Brunei, Oct. 9, 2013. (Xinhua/Huang Jingwen)

Michael Sainsbury

Prime Minister Tony Abbott has firmly cast his trip to North Asia to be all about trade and investment. There has been much focus on free trade agreements with South Korea, Japan and China, Abbott’s destinations this trip. But for all the hype the real value, business-to-business deals, seem to have been lost in translation.

The PM’s travelling party of chief executives is heavy with vested interests, yet they will spend most of their limited time on the ground with Abbott, not the Chinese.

James Packer wants a casino in Tokyo, and BHP Billiton chief Andrew McKenzie and the slew of other mining executive are doubtless travelling with Abbott as a thank-you for dumping the mining tax. Likewise, media moguls Kerry and Ryan Stokes will be whispering in his ear about media reform. By dropping plans at short notice to make the PM look good, they all know they have favour now tucked in their back pockets. That is the way of the world.

Abbott’s first stop in China is the Boao Forum for Asia, where Andrew Forrest’s Fortescue Metals Group is a long-standing sponsor. Forrest’s brainchild, the Australia China Business Dialogue, was launched at Boao last year and excludes government, steadfastly refusing to waste its time on meaningless reports or communiques.

Instead, it’s designed to foster the business-to-business links that Australia painfully lacks. A handful of Abbott’s party such as Seek’s Andrew Bassat and ANZ’s Mike Smith will stay in Boao for the dialogue, where they will be joined by a bunch of other business folk including Macquarie’s Nicholas Moore and chairman Kevin McCann, outgoing NAB chief Cameron Clyne (he announced this morning he’ll stand down in August) and his chairman Michael Chaney. Some of Abbott’s party will lag behind for this and head straight for Beijing, missing an almost meaningless stop in Shanghai.

Five years ago Forrest would have struggled to pull a crowd, but now he has rustled up former deputy prime minister Mark Vaile, who has carved out probably the most successful post-politics career in China of anyone since Paul Keating, as well as Future Fund chairman Peter Costello, who is becoming a regular Boao attendee and panellist. One of Australia’s most China-savvy lawyers, Corrs boss John Denton, is a regular.

Facing them across the table will be a very impressive Chinese delegation, amongst others, the bosses of two Beijing-controlled companies responsible for uber-dud investments in Western Australian iron ore. Jia Baojun, chief executive of Sinosteel — which paid US$1.2 billion for Midwest Corporation. Then there’s Chang Zhenming, chairman of CITIC Group; it owns the Sino Iron Project, the most expensive investment by any Chinese group in Australia, at US$10 billion and counting and still years from completion.

Forrest will be hurt that his mate the PM is set to depart for Shanghai before the dialogue starts; even Julia Gillard stopped in last year.

Meanwhile, in other parts of China, Austrade has done a remarkable job under extreme pressure – after being handed a massive task in an almost impossible timeframe colloquially known as a shit sandwich: to organise a four-city “Australian Business Week”. There will be about 80 events all up, Andrew Robb’s office said last night.

But the real action in China lies not in hotel conference rooms, buses and airports but with the officials in Beijing and to some extent the provinces.

Perhaps most worryingly, and a sure sign of Abbott advisers’ tin ears, China’s main economic ministry, the National Development and Reform Commission, was keen to hold targeted get-togethers and explore investment opportunities. The NDRC signs off on all significant offshore investment. Sadly, the Prime Minister’s office decided a 1200-person lunch with Australian business people in Beijing was more important. Most of the state premiers are organising their own visits; New South Wales Premier Barry O’Farrell will co-lead the Shanghai financial services forum with federal Trade Minister Andrew Robb. Small Business Minister Bruce Billson will host the Guangzhou day of the business-fest and Robb will also travel west for a day in Chengdu.

The trip comes at a delicate time, with the Chinese furious over Abbott’s Cold War-era embrace of Japan. There is also very real and growing Chinese frustration with Australia’s highly regulated and unco-ordinated investment environment, despite the spin the government is putting on it.

Australia’s state and federal governments all compete with each other for investment; add in Austrade’s limp “Australia Unlimited” brand, and there’s little sense of a co-ordinated national approach. It’s something the Europeans and North Americans do so much better — they come to Beijing with small, targeted groups and walk away with tens of billions of dollars in business deals.

While Abbott is getting valuable face time with the prime ministers of Japan and China and the presidents of South Korea and China, that Beijing vignette seems to underscore the lack of focus on tangible results. Hopefully, the PM and his people have something up their sleeves.

This story was originally published by Crikey,, 3 April 2014

April 3, 2014
by admin
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Developing Asian Manufacturing Capacity from a China Operational Base

China-OutboundChris Devonshire-Ellis
Dezan Shira & Associates

As noted earlier this week on China Briefing, the ASEAN region generated more foreign direct investment than China did during 2013. The article on the subject provided the underlying trends behind this, with the basic premise meaning that rising production costs in China and a reduction in China-ASEAN import-exports duties on 90 percent of all products are moving manufacturing capacity away from China and deeper into Asia.

Currently, manufacturers in China are essentially servicing a Chinese middle class consumer base of 250 million. That number, though, will increase to 600 million in the next seven years, and it is that additional 350 million consumers whose purchasing requirements will increasingly be serviced by manufacturing capacity based elsewhere in Asia. The principal recipients of this manufacturing capacity will be Indonesia, Malaysia, Philippines, Thailand and Vietnam, as well as India. Each offer slightly different pros and cons, and choosing between them is a bespoke decision depending very much upon the different requirements of each business. The China manufacturing and operational base is likely to remain in China, it’s just the additional capacity that will be manufactured elsewhere.

That the centre of these operations remains in China makes sense. With a consumer market growing to 600 million, attention to detail and investment in supply chain and point of sale infrastructure in China needs to be well managed. Many of these new consumers are coming from China’s inland and Western regions – posing logistical challenges that extend way beyond the first tier consumer markets of Guangzhou, Shanghai and Beijing. That process can be managed and developed from the existing China operations, some of whom may well change the nature of their business from manufacturing to operational. Yet it is the development of a business to reach beyond China’s borders and actively grow into an Asian operation that is the real challenge. There are a number of issues to face:

Where Should My Trading Hub Be?

China is not a free trade nation, and developing an Asian business requires more than just a China manufacturing base. Many foreign investors have used Hong Kong companies to hold and own their China operations. Using a Hong Kong company to trade internationally makes a lot of sense. It is a free port, taxes are low and it has excellent financial services and logistics infrastructure. Either incorporating a Hong Kong company or “waking up” an existing shelf company is a good idea when looking at consolidating what will become a cross border trading business. Having an operational hub to manage and centralise all that makes a lot of sense.

So too, does Singapore, which has the added advantage of being a member of ASEAN. A trading company based in Singapore can also act as a regional hub when conducting multi-Asian operations, while the ASEAN treaty provides free trade across ASEAN itself. There is little to choose between the two, although if the vast majority of future growth is to be developed in China, then Hong Kong probably makes a more convenient choice. If business is expected to develop more in Asia, then for the same reasons Singapore is probably more appropriate. Both are nearly identical in their low income tax treatment of foreign companies.

This article was originally published by China Briefing, March 20 2014

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

 For further details or to contact the firm, please email or visit

April 2, 2014
by admin
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China’s property market steels itself for downturn

abandoned construction
Michael Sainsbury

 Market forces are finally achieving a number of things in China’s steel and property sectors that the Chinese government has been trying to force onto its economy in its still-lingering top down approach.

In the words of Tim Murray at J Capital Research, one of Little Red Blog’s favourite analysts, the outlook for steel in China is “bleak” and property is showing “signs of distress”.

Analysts are getting increasingly bearish about Chinese GDP figures for the first quarter due out in two weeks.

Westpac’s Phat Dragon newsletter by economist Huw MacKay had this to say: “Nominal activity is looking soft, with fixed investment growth slipping markedly and exports expected to be flat over the quarter while imports could be up close to 10%. The PBoC’s (central bank’s) business survey also presages weak nominal growth. Prices have also been slipping though. An outcome in the 7½% to 7¼% range (which is where the partials are pointing, with the only caveat being that the base effect is unchallenging) would only make the growing calls for stimulus more strident”

Not much of this will be particularly good news for Australia apart from pushing the dollar down to make its exports more competitive as further signs emerge that the Chinese property sector, which has been one the keys to its extraordinary growth in the past two decades, could be heading for a significant fall.

The country’s steel industry has seen its first default and at least four mills have stopped producing altogether, a sign that rationalisation and capacity cuts in the sector that Beijing has been trying and failing so hard for many years to execute are finally beginning to happen.

Shanxi’s largest private steel mill, Haixin Group Steel, appears to have defaulted on bank debt and owes wages dating to 2008, according to Chinese business publication Caijing, it is the province’s second-largest steel company and unable to pay its debts. It has more than RMB 7 Bn in outstanding loans from China Minsheng Bank. Of that RMB 2 Bn are reported to be unsecured. Minsheng, issued an announcement saying its total loans outstanding to Haixin amount to only RMB 1.95 Bn, all with collateral and guarantees.

It’s always hard to get to the truth in China which is what makes the current situation particularly uncertain. 

Likewise, nobody quite knows how much over capacity there is in the Chinese steel sector – some have estimates up to 300 million tonnes (last year China produced an official 780 million tonnes. In the words of Li Xinchuang, executive vice-secretary general of the China Iron & Steel Association (CISA) overcapacity in the industry was probably “beyond imagination”.

Four steel mills have stopped production, Xinda Iron and Steel (8 million tonnes per annum), Hebei, Jixi Iron and Steel (4 MTPA), Heilongjiang , Long Steel (8 MTPA), Shaanxi and Kunming Steel (7 MTPA), Yunnan, according to a report issued by Beijing based research form J Capital Research.

It also noted that Changzhou Zhongtian Iron and Steel (7.8 MTPA) in Jiangsu is said to be likely to collapse due to high debts. “Property markets are showing strong signs of distress in 2014 Q1” Murray wrote in a note to his clients this week on the back of a new quarterly survey the frim has commenced.

“In our March survey of steel executives, traders across the board reported no or few new customers post Spring Festival. For steel traders, a customer is a particular property or infrastructure project, not a developer as an entity. This signals that steel demand is down, and fewer new starts in construction are the main driver of that downturn in demand.”

It’s these signs that have seen Chinese premier Li Keqiang make two speeches in recent weeks indicating that the government will move to provide some stimulus to the economy.

But stimulus in China appears to be working less and less as companies use fresh funding to simply service old debts. This is particularly rife in the steel sector where profits have been marginal or negative for several years.

The troubles in the steel and property sectors have helped drive down the iron ore price, it fell as low as $104 last month but has rebounded somewhat to $116 yesterday as mills take advantage of lower prices to restock.

But CISA has estimated that growth for demand for iron ore in China will fall from about 10% last year to 6 % this year. Combined with increased supply over the next three to four years will see prices settle lower and volatility increase as mills wait for low prices to buy again.

The Australian dollar has rallied strongly recently on the back of expected monetary easing/stimulus by the Chinese government but market analysts now believes that this is already priced in.

“We believe that any easing will be aimed at stabilizing growth, rather than super-charging it, and this quantum of easing is priced.” ANZ analysts said “Further, the fact that the AUD has rallied on the expectation of stimulus means that any reaction to an improvement in the data will be muted, particularly if it occurs hand in hand with a rise in longer term yields.”

The combination of excess steel stock, lower demand and overcapacity means that something must give and its started to. There are strong signs that the widespread problems of too much inventory and falling prices in Tier 3 cities are quickly spreading up the chain,  and this could see the Australian dollar fall further than the US$0.90 mark that ANZ has forecast. The problem all-round is that if the Chinese government goes for more stimulus we are likely to get more of the same, which means further delay to the Chinese leadership’s much touted economic reforms.  


April 1, 2014
by admin
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Pop goes the property bubble

Ma Guangyuan
China Daily

Authorities should be aware of the risks and make timely moves to prevent it causing systematic economic collapse

Signs have emerged that the curtain is falling on the decade-long golden period for China’s real estate.

The average price of newly built homes in China’s 70 major cities rose 8.7 percent year-on-year in February, slightly lower than the 9 percent growth in January, according to data from the National Bureau of Statistics. Compared with 62 cities that saw a price rise in January, the number decreased to 57 in February and the margin of the average price rise declined from 1.2 percent month-on-month to 0.7 percent. The rise in the average house price in Beijing, Shanghai, Guangzhou and Shenzhen, the four first-tier cities that witnessed a frenetic price rise in 2013, fell below 20 percent year-on-year.

Along with the slowing price rises is the drastic drop in home sales. In Beijing, only 2,221 new homes were sold in February, a record low since 2007. The February volume for sales of secondhand houses was 5,441, decreasing by 38 percent from January and 46.3 percent from a year earlier, a new low in 24 months. The situation was even gloomier in March, with only 7,252 new and secondhand homes sold in the first half of the month, much lower than 28,900 sold during the same period of last year and also the lowest in six years. Read more…