Monthly Archives: November 2007

Financial Expansion

The steady movement overseas of Chinese financial institutions continues with Ping An Insurance taking a 4.2% stake in Fortis, the Belgo-Dutch group, for $2.7 billion. China Life, Ping An’s larger rival, said earlier this week it planned to buy a stake in a big European or North American insurance company.

In part this is reflection of Beijing’s switch from conservative management of its huge foreign exchange reserves to more return-oriented portfolio investment, but is also marks a widening of the range of companies Beijing is pushing out into the world. Last year a quarter of China’s $21 billion of outward investment went into natural resources. That focus is diffusing.

So far China’s banks have led the way for its financial services firms. ICBC took a 20% stake in Standard Bank in South Africa for $5.5 billion as well as a 90% stake in Indonesia’s Halim Bank. Bank of China is reportedly interested in buying Standard Chartered Bank. CITIC has taken a cross holding in the U.S.’s cash-strapped Bear Stearns investment bank and China Development Bank has taken a stake in the U.K’s Barclays and is tying up with the United Bank for Africa in Nigeria.

China is stacking up the reserves fast enough for this foreign buying spree to continue — just as European and American financial firms are stepping up their complaints that they aren’t getting fair access to the Chinese market.

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The World’s Most Middling Places To Live

China is a middling sort of place to live, but getting a bit better, according to the newly released annual U.N. Human Development Index. popularly known as its Best Places To Live list.

China is listed as 81st out of 177 countries ranked, the same position as it achieved last year. But its score — a composite of quality of life indicators such as education levels, life expectancy and wealth generation — improved to 0.777 from 0.768. It has gained some ground on the country at the top of the list, Iceland this year, Norway last, reaching 80.3% of top score this year versus 79.6% last time.

The 14.6% rise in per capita GDP is the overwhelming reason for the improved standing. The other six components of the ranking were little changed, though two for education fell a little.

In comparison, Hong Kong had a similar improvement in its overall score, to 0.937 from 0.927, but that was enough to push it up one place to 21st from 22nd last year, swapping places with Germany.

Again, it was the rise in per capita GDP that drove the improvement, with a slight fall in school enrollment and life expectancy being the drags.

What stands out with the U.N.’s list is that the countries at the top of it score well on the education and life expectancy measures. Only five of the countries above Hong Kong had a higher per capita GDP. Quality of life isn’t just about the money.

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Peeved Peter, Icy Yi

Peter Mandelson, the E.U.’s Trade Commissioner, touched a couple of raw nerves in his speech at the opening of a two-day international food-safety forum in Beijing on Monday: product safety and counterfeiting, saying that China, can’t solve the problems of the former without dealing with the latter first.

Mandelson said about half of the 1,000 product safety violations registered last year by the E.U.’s monitoring system were for non-food products made in China, a number that looks set to rise by 50% this year. Eight out of 10 fake products — including medicines — seized at Europe’s borders are made in Chin, he says.

He also brushed aside China’s progress on product safety issues, saying “Some Chinese officials pointed out that less than 1% of China’s exports to Europe had alleged health risks. But Europe imports half a billion euros worth of goods from China every day, so even 1% is not acceptable”.

Mandelson’s words got any icy reception from Vice Premier Wu Yi, who is heading up China’s task force on product safety and declared hereself “dissatisfied” by the speech.

Mandelson is known for not mincing his words but his speech reflects the frustration in Brussels over the E.U.’s growing range of issues with China beyond product safety, including a ballooning trade deficit, restrictions on access to the Chinese market for European firms and the slow pace of revaluation of the yuan against the euro.

With the regular China-E.U. meeting due to be held in Beijing on Wednesday, the tone is starting to sound a lot like the discussions between China and the U.S. — by no means a wholesome turn of events.

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Sarkozy Super Salesman

Areva, the French nuclear power plant builder, has at least got is contract to construct two third-generation pressurized water reactors in Guangdong. Signing the $11.9 billion contract had been expected in July or August, but it has had to wait for the visit to China of new French president Nicholas Sarkozy.

It has been a good trip for French business. Airbus picked up a $17 billion order for 160 planes. Telecoms-equipment maker Alcatel-Lucent, engineering group Alstom and water and waste management company Suez also sealed deals in what Sarkozy called an “unprecedented” haul. (Details here, via Bloomberg.)

None of that stopped the French president calling on his hosts to revalue the yuan, address human rights issues in China and to take a more robust diplomatic role over Iran, Burma and the Sudan. But all he got in return on those issues was an invitation to attend next summer’s Olympic games in Beijing, a vague agreement on climate change — and a lot of euros for the 40 French business leaders accompanying him.

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Steeling For A Takeover Fight

The unsourced report in China Business, here via AFX, that China’s newly launched sovereign wealth fund, China Investment Co., and a number of steel firms, including China’s biggest, Shanghai-based Baosteel, will bid $200 billion for U.K.-based Rio Tinto hits two themes.

The first is China’s concern that a combination of two of the world’s largest natural resources companies (Australia’s BHP Billiton has a $142 billion offer out that Rio Tinto has rejected as too cheap) would put near monopolistic pricing power over raw materials — iron ore for steelmaking in this case — that China needs to grow its economy in the hands of a private non-Chinese entity.

China is the world’s largest iron ore importer. World ore prices have tripled since since 2002, largely on demand from China. Similar concerns over the pricing power of a combined BHP and Rio have been expressed by the Japanese and European steelmakers’ industry associations. Brazil’s Cia. Vale do Rio Doce would be the only other iron ore supplier of similar size.

The second theme highlighted by the report is that Beijing is ready to redeploy its foreign exchange reserves for strategic economic ends via its sovereign wealth fund. That will send xenophobic jitters through the west, though it is what sovereign wealth funds do.

As I noted earlier, a Chinese-backed bid for Rio Tinto isn’t out of the question. I still think a stand ‘em up, knock ‘em down takeover fight for control is unlikely. That would not be the way one would expect China Investment Co. would want to announce itself to the world, but it does have Blackstone at its side should it so choose to do. (Update: China Investment Co, has denied China Business’s report.)

BHP will likely raise its offer. Rio Tinto has yet to lay out its defense (that may come as soon as Monday), and there are plenty of private equity companies that might be interested in getting in on the action. Still all to play for and the stakes remain high.

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Car Talk

This Bystander is amused by the news that Beijing is exhorting government officials to abstain from using four-wheel drive vehicles and other gas-guzzling cars, and to take more public transport in order to lower emissions and protect the environment.

Not because that is not a worthy aim; China has pledged to cut emissions and energy consumption, concerned that rapid industrialization is placing an unbearable strain on the environment, a strain that could become the focus of organized opposition to the government. Officials are being asked to do their part by cutting car use by 20% by the end of 2008.

But because of the unusual skirt-lifting on Chinese officialdom contained in the Xinhua report of the announcement. Official vehicles are not to be used in private business or leased for commercial purposes, the announcement says. It also reminds officials that using seniority to gain the use of government cars owned by lower-level departments, or accepting vehicle donations from private enterprises, are both strictly banned.

Using government cars for private purposes is rampant as is the increasing use of ever more luxurious cars in official circles. China’s low-emission vehicles tend to be bottom of the range. We’ll see how much trading down has been done by the end of next year. We suspect not much.

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Shanghai Bears

The Shanghai and Shenzhen stock markets are now approaching a level 20% below their peak in mid-October. Such a fall in a year is the rule of thumb for a market in a developed country to be called a bear market. Yet share prices on the Shenzhen exchange are still more than double and those in Shanghai more than four-fifths again higher than they were a year ago.

This is a flow of money bubble — just like Japan’s stock bubble in the 1980s and America’s in the 1990s. Stocks offer a better return than alternatives, which in China, like Japan at the time, are few in number, and so people are borrowing to invest speculatively on the basis that they will be able to get out in time. Full speed ahead and damn the risk.

The smarter fool theory rarely works. When the flow of money gets cut off — for whatever reason: government policy, some exogenous event, an unexpected shock — it drains away rapidly. Stock prices fall quickly and many investors — usually individuals who can least afford it — get left stranded high and dry.

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