Chinese Economics Thread

[crobato]

China increasing sophistication of exports

By TIFFANY AUMANN • Advocate Reporter • July 20, 2008

NEWARK -- Twenty years ago, China was known for making toys, shoes and clothing.

Today, the world's largest nation can make just about anything that any other nation can. There's one key reason for the quick catchup: Competition.

Songhua Lin, assistant professor of economics at Denison University, said international partnerships have been an effective way to inject dollars and knowledge into the Chinese economy.

"In order to make it better, you have to introduce competition, and that's coming from abroad," Lin said.

During the past couple decades, exports from China gradually have increased in sophistication.

In the 1980s, exports largely were raw materials. By the late '80s and early '90s, toys, shoes and clothing were flowing out of China.

Increasingly complex products, such as computers and auto parts, have been made in China in the past decade. According to the National Bureau of Economic Research, virtually no product is made by the United States, European Union or Japan that also is not made in China.

China now is the United States' second-largest trading partner, representing about 12 percent of all trade in 2007, according to the United States Census Bureau. Canada, at 18 percent, was the biggest.

China began to emerge as a world trading power after 1978, when its government began a series of economic reforms designed to lead it away from a socialist command economy and toward a market-driven one. Since 1991, the Chinese economy has grown at a rate of 10 percent per year. In 2001, China became a member of the World Trade Organization and was granted normal trading relations with the United States.

In 2007, the American trade deficit with China was $256 billion, about double what it was in 2003 and eight times what it was in 1995 -- $34 billion.
FOREIGN INVESTMENT AND PARTNERSHIPS

Several Chinese government policy decisions have contributed to the changes, including the formation of economic zones and incentives, and encouragement of foreign direct investment and joint ventures. Not only are land, materials and labor less expensive in China, but the government reduces taxes and waives some tariffs for foreign businesses.

Because of processing trade, where a final product is made of components from many places, it is difficult to determine how far China has come in improving the quality of its exports.

However, China is making strides is in the automotive industry. In 2006, the first Chinese automobile appeared at the North American International Auto Show.

China's largest automobile producer, Chery, doubled its number of passenger vehicle exports from 2006 to 2007, according to the company Web site, and is planning to enter the U.S. market in a couple of years.
FUTURE

The income level for most Chinese has not risen to what usually accompanies an economy that makes such sophisticated products, she said.

Despite friction between the United States and China about intellectual property rights, Lin said, little evidence exists that foreign know-how has in fact spilled into the Chinese economy. Safety and environmental standards still challenge exporters.

In a 2003 report written for the Woodrow Wilson International Center, Harvard professor Kelly Sims Gallagher wrote, "The U.S. companies' Chinese counterparts have gained some knowledge about manufacturing and business practices but little understanding of how to design automobiles. In other words, the foreign companies have had a modernizing, but not a truly developmental, effect on the Chinese automobile industry because the U.S. firms did not transfer much knowledge along with the products."

The National Bureau of Economic Research reports the share of China's exports produced by state-owned firms declined from 67 percent in 1995 to 40 percent in 2005. Foreign-invested firms produced a greater share of exports, from 32 percent to 58 percent during the same time period.

Privately owned Chinese firms represent a small portion of exports but had increased their share to about 18 percent in 2005.

Lin said most scholars think China still is operating beneath its potential for maximum efficiency and will continue to grow. In addition, an incentive exists for foreign firms to operate in China to capitalize on its consumer market.

Some American firms, however, might be reconsidering manufacturing in China.

"A lot of companies are re-examining their outsourcing strategy to China and looking at manufacturing here instead. The weak dollar makes it more expensive to manufacture there and bring here and cheaper to manufacture here and take there," said Jerry Besanceney, of Buckeye Lake, owner of Prestige Wood Products, based in Gahanna, and an Ohio State University-Newark board member.

He managed the building of the Universal Veneer mill in Dalian, China, five years ago and also owns Eagle Industries and Eagle Trucking Co., in Bowling Green, Ky.

Kent Mallett contributed to this report.

Tiffany Aumann can be reached at (740) 328-8544 or taedward@newarkadvocate.com.

http://www.newarkadvocate.com/apps/p...807200308/1002

[crobato]

China's economy to become world's biggest

Wednesday, 9 July 2008 11:17

China's economy will overtake that of the US by 2035 and be twice its size by mid-century, a new study by a US research organisation concludes.

The report, by economist Albert Keidel of the Carnegie Endowment for International Peace, said China's rapid growth is driven by domestic demand more than exports, which will be sustainable over the coming decades.

'China's economic performance clearly is no flash in the pan,' Keidel writes. 'Its growth this decade has averaged more than 10% a year and is still going strong in the first half of 2008. Because its success in recent decades has not been export-led but driven by domestic demand, its rapid growth can continue well into the 21st century, unfettered by world market limitation.'
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Keidel, who has worked as a World Bank economist and US Treasury official, said the rise of China to the world's biggest economy will happen regardless of the method of calculation.

Under current market-based estimates, China's gross domestic product is about $3 trillion compared to $14 trillion for the US. Based on purchasing power parity (PPP) measure used by the World Bank and others to correct low labour-cost distortions, he said China's GDP is roughly half of that of the US.

Keidel's calculations suggest that using the PPP method, China will catch up with the US as an economic power by 2020, with an equivalent GDP of $18 trillion. Based on the more commonly accepted market method, the turning point will come by 2035. By 2050, he estimated Chinese GDP at some $82 trillion compared with $44 trillion for the US.

However, the Chinese standard of living will remain lower - with per capita GDP in China between half and two-thirds the level of that in the US in 2050, according to the report. keidel said poverty will remain a significant problem in China for decades despite considerable progress.

http://www.rte.ie/business/2008/0709/china.html

[crobato]

China's income inequality looms large as biggest policy challenge
Mon Jul 21, 2008 6:05am EDT
By Alan Wheatley, China Economics Editor - Analysis
http://www.reuters.com/article/reute...080721?sp=true

BEIJING (Reuters) - When French cosmetics retailer L'Occitane en Provence eyes Hong Kong for a share listing because Asia is the fastest-growing market for its fig-scented soaps, it speaks volumes about the rise of the region's middle class.

China, in particular, with its 1.3 billion consumers, has marketing men salivating. Brands from Pizza Hut (YUM.N: Quote, Profile, Research, Stock Buzz) to Rolls Royce (BMWG.DE: Quote, Profile, Research, Stock Buzz) are increasingly counting on China, where retail sales rose 21.4 percent in the first six months, to drive growth.

At the tonier end of the discretionary spending spectrum, Richemont (CFR.VX: Quote, Profile, Research, Stock Buzz), the maker of Cartier jewellery and Mont Blanc fountain pens, last week cited strong demand in China and Hong Kong for forecast-beating quarterly sales.

Alongside swelling ranks of super-rich, there were still 204 million Chinese in 2005 living on less than $1.25 a day, according to the World Bank. The result is a gulf in incomes that is one of the country's greatest social and political challenges.

Which makes a new essay by the World Bank's chief economist, Justin Yifu Lin, intriguing reading.

Before his recent appointment, Lin was a prominent Peking University professor who frequently advised the government on development issues.

In "China's Dilemma", a collection of papers co-published by Australian National University and Asia Pacific Press, Lin argues fundamental flaws in China's economic model are partly to blame for the yawning gap between rich and poor.

Lin criticizes a basic Communist Party economic tenet that puts, in the name of "efficiency", the interests of corporations before those of workers and leaves it to government redistribution policies to tackle the ensuing inequalities.

"It is our task to ensure that in the course of development, the income of the poor grows faster than that of the rich, but it should not be accomplished by redistribution," Lin writes.

STABILITY RISKS

Firms may be raking in high profits thanks to the emphasis on "efficiency", but it is only because the state shields them from market competition and lavishes subsidies on them, Lin argues.

"Essentially, however, these profits are a kind of wealth transfer that will inevitably lead to social instability," he warns.

Lin's recommendations for a more equal share-out of China's wealth add up to a radical manifesto:

-- China must promote smaller banks to help small firms grow. He attacks the current set-up whereby big firms receive loans for capital-intensive projects from state-owned banks that would never dream of lending a peasant money for a new hen house.

-- Resource companies should pay significantly more tax. Low taxes and fees -- just 1.8 percent in China against 12 percent in America, Lin says -- have generated fabulous wealth for some mining and petroleum firms, further skewing income inequality.

-- Where possible, China should scrap monopolies and introduce competition, which would lower profits and prices.

"Income differences between urban and rural regions will decline once a complete market system is fully in place," Lin predicts.

These differences have been widening, not narrowing.

According to an Asian Development Bank report last year, the Gini coefficient for China soared to 47.3 in 2004 from 40.7 in 1993, putting it at a level more typical of Latin America.

In a society where income was perfectly distributed, the Gini coefficient would be zero; if all the income was in the hands of one person, it would be 100. The figure for India is 36.2.

By a different measure, when China embarked on market reforms in 1978, urban disposable incomes were 2.6 times greater than rural net income. By 2006 they were 3.3 times bigger, forming what Lin says is one of the biggest income gaps in the world.

"As the old adage suggests, 'shortage is not a problem, but inequality really matters'," he writes.

FOOD PRICE RISES

For policy makers, the task of tackling inequality is complicated by rising food prices. The urban poor, who spend a lot of their disposable income on food, are obviously hit hard.

Yet higher food prices are a boon for those among China's 737 million rural population with spare produce to sell, said Wang Dewen, a researcher at the Institute of Population and Labor Economics with the Chinese Academy of Social Sciences in Beijing.

With heavy government spending on rural health, education and infrastructure also kicking in, rural incomes jumped 19.8 percent in the first six months from a year earlier, outstripping a 14.4 percent rise in urban incomes.

"As you can see, the income growth of Chinese farmers was higher than inflation, and that means an improvement in the standard of living," Wang said.

But he added: "Inflation always hits poor people more than rich people, and China is no exception."

A recent study by Asian brokerage CLSA found that 54 percent of households earning 1,000 yuan ($147) a month or less had cut back on meat consumption due to rising prices.

In the same vein, the World Bank said inequality in Vietnam was likely to increase, even though a lot of peasants near the poverty line are net sellers of rice and are benefiting from higher prices.

"The complexity of poverty and distributional impacts of rising food prices warns against sweeping 'one size fits all' responses," the bank concluded.

($1=6.816 Yuan)
(Additional reporting by Zhou Xin; Editing by Mathew Veedon)

http://www.reuters.com/article/reute...080721?sp=true

[crobato]

http://www.iht.com/articles/2008/07/22/asia/poll.php

Optimism high in China, survey shows
By Brian Knowlton
Published: July 22, 2008


WASHINGTON: Buoyed by years of extraordinary growth and with the promise of the Olympic Games just ahead, the Chinese hold strikingly positive views of their national economy and of the direction their country is heading, ranking first in both measures among 24 countries recently surveyed. They were almost universally optimistic about prospects for the Games, which open Aug. 8.

But the survey, part of the Pew Global Attitudes Project, also found rising concern in China about the corollary costs of rapid growth. Respondents' biggest concern - expressed by 96 percent - was rising prices. Corruption and environmental degradation also worried majorities of Chinese.

Over all, however, Chinese satisfaction with the country soared in recent years, according to a survey of Chinese adults after the onset of civil unrest over Tibet and before the May 12 earthquake in southwestern China.

"This is clearly a nation that sees itself as ascendant, and that leads to tremendous satisfaction with the way things are going nationwide, even though the people are still struggling on an individual level," said Andrew Kohut, president of the Pew Research Center, which conducted the survey.

Eighty-six percent of the Chinese surveyed said they were content with the country's direction, up from 48 percent in 2002 and a full 25 percentage points higher than the next highest country, Australia. And 82 percent of Chinese were satisfied with their national economy, up from 52 percent.

By comparison, only 23 percent of Americans surveyed said they were satisfied with the country's direction and only 20 percent said the U.S. economy was good.

Russians were the third most-satisfied people with their country's direction, at 54 percent.

Except for Spain, which placed fourth at 50 percent, the peoples of major European countries were far from content. Only about 3 in 10 British, French and Germans expressed satisfaction.

[for the rest of the article click link]

[Autumn Child]

Interesting editorials based on Nature Journal.

China's impact on science continues to grow
By Todd Morton | Published: July 25, 2008 - 01:24PM CT

The journal Nature has published a series of reports that provide some perspective on China's place in the scientific community. As China's economy continues to develop , the Chinese scientific community is moving lock-step to keep up with the economic growth and establish itself as a source of innovation.

The explosion of science is hardly a surprise, as the level of spending on science in China has skyrocketed—growing 20 percent per year for the last 20 years. However, most of this money is going toward secondary research on existing technologies rather than fundamental innovations. This is a disparity that China is attempting to remedy with its most recent set of initiatives, which contain a call for "indigenous innovation."

All of the money spent on research initiatives has provided China with a steadily climbing number of science and engineering graduates; the number of scientific publications has also seen growth, recently surpassing Japan in raw volume. China still has much work to do in improving the quality of the publications. Despite gains in the last two decades, the citation impact score—which is a measure of how a publication impacts the rest of the field and future research—is at 0.73, below the world average of 1.0. The burgeoning fields of materials science and nanotechnology, both Chinese specialties, show scores closer to that of the world average.

I personally do not find this news a shock, as China appears to be following a path similar to that taken in the American industrialization and scientific booms of the early and mid-20th century. The United States economy, at one time, was based on heavy industries and raw production capacity. As industrialization provides jobs and draws people out of poverty and into the middle class, education increases and provides a more capable work force.

Providing a service or technology that others cannot is the route to the highest profits; rather than investing in the massive capital and man-power required for heavy industry, one can simply innovate the industry and sell the innovation instead—this is the idea behind the so called Information Economy. It may be hard to imagine now but, at one point, every kid in America wanted to be an engineer. Science spending was huge, the space race was going at full speed, the education level of the population increased dramatically. I'd argue that this gave America the intellectuals that allowed it to move away from a goods-based economy to a service-based economy.

A quick glance at modern China reveals shades of mid-20th century America: a budding space program, huge industrial and manufacturing capacity, the growth of the middle class, and a young generation excited about science and engineering. China's shift away from raw materials and manufactured goods is only natural. Given it has several times the population of any other highly developed nation, watching China's shift to innovation will indeed be an exciting time for the global science community.

Nature, 2008. DOI: 10.1038/454382a

This trend is very significant and showing that China was developing on the right track. The "copy" or "cheap knock off" label on the Made in China brand will slowly go away. The thing is, I did not know that China leads in material science and nanotechnology innovation as the article cleimed. Can anyone with knowledge in this mater enlighten me?

[Autumn Child]

We all know that China will eventually surpass the US in this field. The question is what is the economic impact that one chinese online users compared to one US online users?

China says Web users top US at 253 mln
By JOE McDONALD – 9 hours ago

BEIJING (AP) — China's booming Internet population has surpassed the United States to become the world's biggest, with 253 million people online despite government controls on Web use, according to government data reported Friday.

The latest figure on Web use at the end of June is a 56 percent increase from a year ago, the China Internet Network Information Center said. It said the share of the Chinese public using the Internet is still just 19.1 percent, leaving more room for rapid growth.

The United States had an estimated 223.1 million Internet users in June, according to Nielsen Online, a research firm. The Pew Internet and American Life Project puts U.S. online penetration at 71 percent.

"This is the first time the number has drastically surpassed the United States, becoming the world's No. 1," a CNNIC statement said.

The communist government encourages Internet use for business and education but tries to block access to Web sites deemed pornographic or subversive. Web surfers have been jailed for posting or e-mailing material that criticizes communist rule or is deemed a violation of vague national security laws.

Beijing blocks access to Web sites run by dissidents, human rights groups and some foreign news media. Web surfers were blocked from seeing Google Inc.'s YouTube and other foreign sites with video footage of anti-government protests in Tibet in March.

That same month, the government said it would shut down 25 Chinese video sites and punish 32 others for violating new rules against carrying content that is deemed pornographic, violent or a threat to national security.

In financial terms, China's market lags those of the United States, South Korea and other economies. But online commerce, video sharing and other businesses are growing rapidly and have raised millions of dollars from investors.

The commercial boom has produced success stories such as games site Tencent.com and search engine Baidu.com, which are competing with foreign rivals for local market share. Baidu said Thursday its profits in the latest quarter soared 87 percent over the year-earlier period to 265 million yuan ($38.6 million).

Total revenues for China's Internet companies soared to 40.5 billion yuan ($5.9 billion) in 2007, up 48.6 percent from the previous year, the research firm Analysys International reported this week. It said revenues should keep growing at an annual rate of at least 30 percent in coming years, reaching 137.5 billion yuan by 2010.

By contrast, U.S. online advertising revenues alone in 2007 were $21.2 billion (145.2 billion yuan), according to a report by consulting firm PricewaterhouseCoopers for the Interactive Advertising Bureau.

The research firm BDA China Ltd. says China's online population should keep growing by 18 percent annually, reaching 490 million by 2012 — a number larger than the entire U.S. population.

Internet companies are looking forward to a new growth spurt once Chinese mobile phone carriers roll out third-generation, or 3G, technology that can support Web-surfing and other services. No date has been announced, but with more than 500 million mobile accounts, China has a vast pool of potential wireless Internet users.

China's Internet boom has gotten a boost from a sharp slowdown in demand for fixed-line phones as more customers opt for mobile service. Fixed-line carriers have responded by expanding into broadband Internet, Web-based cable television and other services. The CNNIC report Friday said that as a result, 214 million Chinese now have high-speed access.

[RedMercury]

I wouldn't say lead, but those are fields Chinese scientists are comparatively better at (than other fields).

[Schumacher]

The Nature article is 'interesting' in that it makes it sound like China's rise in science is new & not previously expected. I think this is reflective of a myopic view, unable/unwilling to see China's revolutionary contributions in science thru history, not to mention those of Chinese outside China in contemporary science as well.
Nothing magical abt it, the science & physics strength is always there, it's mostly the engineering part that's lacking. As the economy develops, the engineering shortcomings are being overcome.

[ccL1]

The Nature article talks about China's shift away from manufacturing. That won't happen for a long time.

China still has hundreds of millions of people living just above the poverty line. While the middle class in China starts growing, these people living just above the poverty line will be the next generation factory workers and manufacturing labourers.

In America, their labourers just priced themselves out of competition. In China, that won't happen for quite a long time. So China will still be a high-tech country with what will be the largest middle class on earth, but it will also maintain it's low-cost manufacturing export sector. They won't price themselves out of competition for a while.

[Schumacher]

The Nature article talks about China's shift away from manufacturing. That won't happen for a long time.

China still has hundreds of millions of people living just above the poverty line. While the middle class in China starts growing, these people living just above the poverty line will be the next generation factory workers and manufacturing labourers.

In America, their labourers just priced themselves out of competition. In China, that won't happen for quite a long time. So China will still be a high-tech country with what will be the largest middle class on earth, but it will also maintain it's low-cost manufacturing export sector. They won't price themselves out of competition for a while.

Mostly agree with you. It'll become clear in coming years that China will be able to move into innovation & design while maintaining a good grip on lower level manufacturing, something few if any can do. Some say India & Vietnam will be the 'China killers' in the low-level manufacturing. I disagree, the next few decades will not be the same as the last few. Those who build their economy in the hope of taking over China's low level manufacturing will find the wages they get for doing it will not be enough to feed their families. Look at the close to 30% & double digit inflations in Vietnam & India.
China has had deliberate policies with regard to minimum wages, pollution, resources to phase out these industries with the results of many people returning to the farm where the money is.
Markets for low consumer goods will shrink or their prices will have to rise which can help the many remaining Chinese manufacturers to maintain margin.
Good news is as China moves to higher level, industrial goods from power, alternative energy, transport & even space will start to benefit from the 'China price' enabling developing countries to gain access to these technologies.

[Autumn Child]

There won't be any China killers in the short term. It is very hard to copy China's macro control. Vietnam wanted to copy the China model but opened up too fast with little to support the huge investment and hotmoney flow, while India's economy and politics are very different compared to China. By the time they learned about their mistakes, China will also have a different economy, mostly based on higher-tech level industries. China is unique in that it opened up and have so far came up with the right solution to tackle the worlds economy.

[Autumn Child]

China ranks first in US business climate survey
Last Updated(Beijing Time):2008-08-02 10:59

China was ranked as the best country outside the United States for business investment, according to a latest survey of top US corporate executives released here this week.



The "Winning Strategies in Economic Development Marketing" survey has been conducted every three years by a leading US marketing organization Development Counsellors International (DCI) since 1996. This is the first year respondents were asked to rank the business favor ability of the world's 25 largest countries, based on their GDP, outside the United States.



More than half of the 281 corporate executives who responded to the survey named China as the most favorable country. India was second with 45.1 percent, followed by Mexico, the United Kingdom and Canada.



The corporate decision-makers who named China as the best for investment most frequently cited its "growing economy/business opportunities," "labor cost" and "low overall/operating costs" as reasons for their positive perceptions.

With the global battle for business more intense than ever, perceptions about a location's business climate often play a crucial role in site selection decisions, said DCI President Andrew T. Levine.

India is catching up fast...

[crobato]

In China, low-end industries give way to high-tech
By David Barboza
Friday, August 1, 2008

http://www.iht.com/bin/printfriendly.php?id=14928348

SHENZHEN, China: Few people have heard of the BYD Corporation — BYD for Build Your Dream — but this little-known company has grown into the world's second-largest battery producer in less than a decade of existence. Now it plans to make a great leap forward: "We'd like to make a green energy car, a plug-in," said Paul Lin, a BYD marketing executive. "We think we can do that."

Even in go-go China, such lofty aspirations may sound far-fetched. But BYD has built a 1.6-million-square-foot auto assembly plant here and hired a team of Italian-trained car designers; it plans to build a green hybrid by the end of the year.

No longer content to be the home of low-skilled, low-cost, low-margin manufacturing for toys, pens, clothes and other goods, Chinese companies are trying to move up the value chain, hoping eventually to challenge the world's biggest corporations for business, customers, power and recognition.

The government is backing the drive with a two-pronged approach: using incentives to encourage companies to innovate, but also moving to discourage low-end manufacturers from operating in southern China. That step would reverse one of the crucial engines of this country's spectacular economic rise.

But by introducing tougher labor and environmental standards and ending tax breaks for thousands of factories here, the government has sent a powerful signal about its global ambitions, and helped encourage an exodus of factories from an area long considered the world's shop floor.

President Hu Jintao hinted at China's Olympic-size ambitions during a meeting of China's scientific elite last June at the Chinese Academy of Sciences, where he called on scientists to challenge other countries in high technology. "We are ready for a fight," he said, "to control the scientific high ground and earn a seat on the world's high technology board. We will make some serious efforts to strengthen our nation's competence."

Government policies now favor high-tech economic zones, research and development centers and companies that promise higher salaries and more skills. A computer chip plant being built by Intel in the northern city of Dalian is welcomed; a textile mill churning out $1 pairs of socks is not.

"When a country is in its early stages of development, as China was 20 years ago, having an export processing center is good for growth," said Andy Rothman, a longtime China analyst at CLSA, the investment bank. "But there's a point when that's no longer appropriate. Now, China's saying, 'We don't want to be the world's sweatshop for junk any more."

Chinese firms are expanding into (or buying companies that work in) software and biotechnology, automobiles, medical devices and supercomputers. This year, a government-backed corporation even introduced its first commercial passenger jet, a move Beijing hopes will allow it to some day compete with Boeing and Airbus.

In some ways, the government is only riding the economic currents that come with development and high growth. For instance, many manufacturers in southern China — the country's biggest export zone — are moving to the interior because land and labor costs are cheaper, or expanding operations to include in lower-cost countries, like India, Vietnam or Bangladesh.

World-class brands that have grown dependent on outsourcing labor-intensive production to China are now searching for alternatives. Even the retail behemoth Wal-Mart, which moved its global procurement center here to Shenzhen in 2002, is going to be forced to find new sourcing channels to fill its 5,000 stores worldwide.

For millions of consumers around the world, experts say the policy shift could also mean higher prices for a broad array of goods, from pens and hammers to Barbie dolls and running shoes.

"Basically the cost of things China produces for Home Depot and Wal-Mart are going up," said Dong Tao, an economist at Credit Suisse. "But there is another side. In some areas that China's going to grab, like telecom equipment, they'll push prices lower."

Economists say China's development is following in the footsteps of Japan and South Korea, which successfully transitioned from low-skilled manufacturing to high technology, services and the creation of global brands.

There are still plenty of obstacles here, including weak intellectual property rights enforcement and a culture of copying or stealing technology from foreign companies or joint venture partners. But experts point to positives like a rising aggressive entrepreneurial class, legions of newly minted science and engineering graduates and a fiercely competitive domestic marketplace.

Peter Williamson, a professor of management at Cambridge University and co-author of "Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition," challenges the notion that China doesn't have technological know-how.

"They are some of the biggest in launching satellites. They have a lot of technology locked up in the military, and now the government is reducing budgets and pressing agencies to privatize," he said. "So suddenly, a lot of technology people thought didn't exist has come out from behind the curtain."

This is what China is betting on.

At BYD, executives are ramping up research and development spending, studying global marketing strategies. Founded in 1995 by a scientist who studied metallurgy, the company has made lithium batteries, cellphones, camera equipment, auto parts and other components for Nokia, Motorola and Sony, among others, gaining experience in producing high-quality goods.

"The technology for a car is not that sophisticated," Lin said. "It's big, but a lot of low technology." Five years ago BYD bought a state-owned carmaker to help make the transition.

Another company hoping to make the leap is Hasee, a fast-growing computer maker also based in Shenzhen, in an area that is home to Huawei, China's giant telecom equipment maker.

Founded just six years ago, Hasee is already selling 100,000 laptops a month and is the second biggest Chinese computer maker behind Lenovo, with revenue forecast to reach $800 million this year.

Hasee executives say the company is spending heavily on research and development, and that by focusing on innovative computers and laptops that now sell for just $370, it is on track to become the world's biggest computer maker within a decade.

"Our strategy in China is to always focus on innovation," said Zhang Xianyong, a Hasee vice president and sales manager for greater China. "We're now in the domestic market, but we'll spare no effort to grab overseas expansion."

Analysts say there are dozens of other little-known semiconductor, software and telecom equipment makers that could emerge as global companies over the next two decades.

The government is pressing companies to move up the value chain for economic, but also political reasons, analysts say. Promoting innovation and brand-name companies would probably bolster the economy and create better jobs.

The Hong Kong Small Business Association projects that by the end of the year, 20,000 factories in southern China will have closed or left China.

In April, Credit Suisse forecast that one-third of all export-oriented manufacturers could close within three years. And a study released in March by the American Chamber of Commerce Shanghai and Booz & Company, the consulting firm, says foreign investors are growing bearish on China and that rising costs are driving American manufacturing out of the country.

For many Chinese economists, that is just fine. "The low end industries used to make a great contribution to Guangdong," said Liang Guiquan, an economist at the Guangdong Academy of Social Sciences, a government think tank. "But an enterprise is like a creation. They must get used to changes in the environment. If the environment changes, they must die out."

[getready]

Aug 5, 2008
Chinese banks hog top spots in financial Olympics
But Beijing's forays into overseas financial firms fail to pay dividends
TOP THREE BY MARKET VALUE: No. 1
View more photos
BEIJING - CHINA has already won most of the medals in the financial Olympics by avoiding the toxic debt investments that have devastated banks in the United States and Europe.

Chinese banks hold three of the top six spots among the world's largest financial companies based on market value, even though their shares have fallen by more than 20 per cent in Hong Kong trading since last October.

London-based HSBC Holdings, the biggest non-Chinese bank, is No. 3, trailing Industrial & Commercial Bank of China (ICBC) and China Construction Bank.

The Chinese banks owe their rankings in part to having avoided almost all of the US$480 billion (S$659 billion) in writedowns and credit market losses that have sent bank stocks tumbling worldwide, data compiled by Bloomberg show. Only two years ago, the world's biggest banks were led by Citigroup and Bank of America of the US and UBS in Europe.

ICBC's unaudited figures released on July 3 show its first-half profit has risen by more than 50 per cent. Three days later, China Citic Bank Company said its earnings jumped more than 150 per cent in the same period. China Construction Bank followed, saying its net income may have advanced by more than 50 per cent.

ICBC and China Construction Bank are the most expensive among the 15 largest global banks by market value, trading at 3.2 times and 3.4 times book value, respectively, according to data compiled by Bloomberg. That compares with Citigroup, which trades at less than 1 time book value. Bank of America, the world's fourth-biggest bank by market value, is at 1.07 times book value.

China considers starting state banks to cater to SMEs
CHINA is considering establishing state-backed banks focused on lending to small and medium-sized businesses to help boost economic growth, state media reported yesterday.

The proposal aims to help capital-hungry small and medium-sized firms through hard times and allow them to secure long-term financing, Guangzhou Daily reported, citing national development and reform commission officials.
... more
But China's success in growing its state-owned domestic banks has not been matched by its investments in overseas financial firms. Chinese funds and companies have spent US$19.3 billion buying stakes in Blackstone Group, Morgan Stanley, Barclays, Fortis and Standard Bank Group since May last year that are now worth US$7 billion less on paper.

The Chinese sprint into overseas financial stocks culminated last Dec 19 with China Investment Corp's US$5 billion purchase of a 9 per cent stake in Morgan Stanley. The firm has declined 18 per cent in trading since then.

The US$200 billion sovereign wealth fund invested US$3 billion in Blackstone, manager of the world's largest buyout fund, only to see the value fall 41 per cent since the firm's initial public offering in June last year.

China, unlike Singapore, has slowed its investments in overseas financial companies.

China Development Bank and Ping An's purchases of more shares in Barclays and Fortis were the only such investments this year.

Beijing blocked plans by China Development Bank to invest in Citigroup because of the US bank's mortgage-related losses, a person with knowledge of the decision said.

By contrast, foreign banks' investments in Chinese financial firms have fared much better, showing US$50 billion of paper profits, according to Bloomberg data.

BLOOMBERG

[crobato]

China outsourcing to India now. Brilliant.

Huawei's perfect marriage
By Pallavi Aiyar
http://www.atimes.com/atimes/China_B.../JH16Cb01.html

SHENZHEN, China - "I am so proud of my company," says Li Jian, also known as Amit Li, as he shows off the headquarters of Chinese telecommunication equipment maker Huawei, in Shenzhen. Li is a graduate of the Hindi department of Beijing University and has spent the past year based in Gurgaon, on the outskirts of Delhi, working as a public relations manager for Huawei's Indian subsidiary.

His pride in Huawei is understandable given that in the span of 20 years the company has gone from minnow to mammoth in one of the world's key industries: telecommunications gear. For long dismissed as an upstart with few sustainable prospects, Huawei has defied predictions, broken the virtual monopoly of Western firms in the sector and is today counted amongst the top five players in the industry.

At a time when established names like Ericsson and Alcatel-Lucent are reporting losses or plummeting profits, Huawei is aggressively expanding, its well-established position in emerging markets such as India proving to be an advantage.

Huawei's rise is a window into the aspirations of Chinese companies in the global market place. Not satisfied with China's emergence as the low-cost factory of the world, cultivation and support of selected "national champions" to compete against multinational firms is one of Beijing's stated objectives. However, it has not been easy going.

Huawei's growth has thus been dogged by accusations of murky finances, military links, and intellectual property rights violations. The company has been charged with opaque accounting and too-close government connections and support.

In India for example, the company's expansion plans have been regularly blocked by intelligence agencies on the grounds of potential security risks. Huawei India was also barred for a while from bidding for contracts from state-owned companies.

But after almost 10 years in the Indian market, George Huang, the chief operating officer of Huawei's research and development center in Bangalore, the company's largest outside of China, says that Huawei's troubles are a thing of the past. "Security is no longer an issue. It's never mentioned by our customers or even by the government any more."

Today, Huawei India boasts US$600 million in revenues. The Bangalore center employs 1,600 people, only 40 of whom are Chinese. The company has won multi-million dollar contracts with Reliance, and Tata Indicom in addition to a $150 million third-generation phone-network rollout for Bharti Airtel in Sri Lanka. Its relationship with public sector enterprises BSNL and MTNL is also improving. Huawei is in the running for securing a BSNL tender for 93 million GSM lines.

"In terms of market, India has the biggest potential in telecom and we want India to become our biggest market outside of China," says Huang. He adds, "We want our India research and development center to support our global operations, leveraging India's English-language skills and software expertise to our advantage globally."

Huawei's Bangalore center is one of the few tangible examples of the much touted, but rarely realized, potential for the coming together of Indian software with Chinese hardware. At the center, Indian engineers develop software for use in Chinese hardware, demonstrating "how Indian and Chinese comparative advantages can be combined for use globally", says Huang.

Given Huawei's relentless ascent on the global stage, this is not an empty boast. "I would say Huawei is China's most successful multinational; it is on the leading edge of China going international," says Duncan Clarke, head of Beijing-based telecommunications consultancy BDA.

Calling the company the "Wal-mart of global telecom" given its emphasis on volume and price, (Huawei has been known to undercut the price of competitors by as much as 70%) Clarke says he likes "the impertinence" of Huawei. "The sector needed shaking up and that is what Huawei has achieved."

Clarke attributes recent merger activity in the industry, such as the creation of Alcatel-Lucent and Nokia-Siemens networks, in part to competition from Huawei. The Chinese heavyweight today has a presence in over 100 countries, having recorded $16 billion in contract orders in 2007, over 70% of which were generated from international markets

Clarke says Huawei is still some five years away from being able to count itself as part of the exclusive top tier in the sector, given that it remains relatively weak in the area of network management and other more high-end tasks. Its inability thus far to break into the United States market is another handicap as is the lack of internationalization of its top management.

At the company's Shenzhen headquarters, Ross Gan, Huawei's global spokesperson, admits that many challenges remain to be overcome. He lists increasing transparency as one of them. Huawei's founder Ren Zhengfei, a former People's Liberation Army soldier, is noted for never having given an interview to a journalist.

But Gan rejects accusations of Huawei's "suspicious" government links. "Less than 0.5% of Huawei's total business is conducted with the Chinese government," he says.

Clarke concurs. "I think far from being beholden to the state, Huawei in many ways sees itself as above the state." He adds that Beijing's fingerprints are far stronger on Huawei's main domestic competitor, ZTE Corporation, as well as on other emerging Chinese multinationals, such as computer-maker Lenovo, which is partly owned by the Chinese Academy of Social Sciences.

Anxious to rid itself of a reputation for copyright violations - in 2003 Cisco sued the company for copying computer codes - Huawei's primary focus today is to invest in constant innovation. As a result, it spends 10% of revenue on research and development and almost 50% of it's more than 68,000 employees are engaged in research and development (R&D)activities. By the end of 2007, Huawei had applied for 26,880 patents of which 4,256 had been approved.

Back in Shenzhen, it is lunch time and employees come streaming out of the state-of-the art R&D facility that bears a distinct architectural resemblance to the White House. Among the hungry crowds that head for the cafeteria are dozens of Indians, the bulk of whom trot towards a special Indian canteen that serves up daal (dried bean) sand rajma chawal (kidney beans and rice.)

A short drive away from the R&D center, the Norman Foster-designed Huawei University rubs up against the company's European style employee housing complex, all of which Amit Li points out with visible satisfaction.

Later in the day, the boom town of Shenzhen recedes as Li's car speeds towards the airport. But very soon, Li will be in another boomtown: Gurgaon. "I feel equally at home in Shenzhen and Gurgaon," the young Huawei employee says chattily, wearing the mantle of his pioneering "Chindian" identity lightly.


(Copyright 2008 Pallavi Aiyar.)