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Lower China growth goal doesn't spook foreign companies

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Companies operating in China largely took the government's forecast of slowing growth in stride, with those reliant on business and government spending offering gloomier forecasts than companies focused on consumer demand. 

Chinese Premier Li Keqiang said in his opening address Thursday at the annual legislative National People's Congress that the government is now targeting growth of about 7 per cent for 2015, down from 7.4 per cent last year, its lowest level in nearly a quarter-century. 

The reduced target, dubbed by Beijing as "the new normal" after years of rapid growth, suggests another year of slower growth for businesses in the country, especially those reliant on large infrastructure projects and broad economic expansion. 

China expects fixed-asset investment--a measure of spending on building, infrastructure and machinery--will fall slightly to 15 per cent this year from 15.3 per cent last year. By contrast, China expects total retail sales of consumer goods to rise 13 per cent this year from 12 per cent last year. In his speech Thursday, Mr Li cited sluggish investment growth as one challenge to the Chinese economy. 

Many companies said the slowdown was already baked in to their previous forecasts. 

Japanese construction equipment maker Komatsu said demand in China's machinery market peaked during its fiscal year ended March 2011 due to government stimulus, and has been decreasing sharply in the years since. 

"Since we have been affected by recent slowdown already, we will continue to keep a careful eye on the Chinese economy," a Komatsu spokesman said. "The downgrade didn't surprise us, given that 'new normal' has been said for some time." 

For the fiscal year ended March 2011, China made up about 20 per cent of Komatsu's sales of construction and mining machinery, but the company lowered its forecast for the current fiscal year to about 8 per cent. Komatsu expects sales in China for the current fiscal year will fall about 20 per cent from the previous year to Yen130 billion ($A1.39bn). That figure would be a 61 per cent decline from its peak of Yen334.2bn for the year ended March 2011. 

Canon, the Japanese maker of cameras and printers, has been feeling the impact from China's austerity campaign. 

"We are seeing weaker demand for copiers and printers from government agencies and state-owned businesses," said Hideki Ozawa, the president of Canon China. 

Demand for cameras from consumers, on the other hand, has been solid, Mr Ozawa said, as purchasing power is rising among middle-class shoppers. Still, even though personal consumption remains strong, "it's not strong enough to lift up the whole economy," he said. 

Canon doesn't disclose the finances for its China business. The company's Asia and Oceania operations accounted for about 22 per cent of its fourth-quarter revenue, which stood at 1.06 trillion yenIn that quarter, 53 per cent of Canon's revenue came from office printers and copiers, while cameras and other imaging products accounted for 38 per cent. 

Chinese e-commerce company JD.com, however, expects its sector to continue to be a bright spot. In 2014, online retail sales accounted for about 10 per cent of total retail sales of consumer goods in China and grew 50 per cent from the prior year to 2.79 trillion yuan, the government said. 

"E-commerce growth has always far outpaced the overall Chinese economy, driven by the transition away from brick-and-mortar retail," a spokesman said. "We certainly expect that the trend of spending going online to continue for some time." 

Auto makers largely stood by previous growth forecasts, having already factored in slower growth in the world's largest car market. Sales of passenger cars including sedans, sport-utility vehicles and minivans totalled about 19.7 million units last year--up 9.9 per cent from 2013, according to the China Association of Automobile Manufacturers. In 2013, sales of such vehicles grew 16 per cent year-over-year. 

General Motors Co. was one of the few foreign auto makers to express some caution Thursday. A spokeswoman for the company said 2015 will be a "challenging year" for the broader car industry in China as the pace of growth of the country's market for vehicles is expected to slow. She said GM forecasts the overall auto industry in China will grow between 6 per cent to 8 per cent, "and we expect GM China to grow slightly faster," she said. 

A spokesman for Toyota Motor, the world's largest auto maker by sales, said its expectations for growth in China remain unchanged despite the revised target. Toyota forecast that the overall China market will increase slightly in 2015, from 23.5m vehicles in 2014. 

The spokesman said Toyota expects China's auto market will continue to expand, with the pace steadying in the mid- to long-term, fuelled by growth in inland provinces as the nation's growth broadens from coastal areas. 

A spokesman for Volkswagen's Audi in China declined to comment on the revised target. He said growth rates for car sales have been "normalising"--declining from unusually high double-digit rates a few years back to ones that are more in line with other major car markets. 

"But China clearly remains an important global growth market," he said. "It has a lot of potential still." 

Some executives, however, said their industries will continue to benefit from China's planned economy. 

Shawn Qu, chief executive of Canadian Solar Inc., said he doesn't see any impact of a slower economic growth target on the solar-panel manufacturing industry. 

China has set an ambitious target of reaching 70 gigawatts of solar-electricity capacity by the end of 2017, up from about 28 gigawatts now. The government Thursday didn't announce a 2015 target for solar capacity for a second straight year. But the National Development and Reform Commission, the country's top economic planning agency, said in its annual report that it would "vigorously" develop solar energy and "increase the proportion of clean energy and renewable energy resources in total energy consumption." 

"The GDP target of 7 per cent is just recognising the reality," Mr Qu said. "It doesn't mean China will control solar--the industry will continue to grow." 

Mr Qu cited other targets that China has already established over the past two years to boost solar-electricity capacity. "There's a strong demand for clean energy. The country is moving away from coal-based electricity and into a more balanced energy portfolio, and solar will continue to benefit from that." 

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Companies reliant on consumer demand more optimistic.

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HKEx results get lift from Shanghai stock link

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Hong Kong Exchanges & Clearing Ltd. , the city’s stock-exchange operator, reported a jump in trading activity in 2014 as the launch of a mutual market-access program with Shanghai proved a draw for mainland investors, while a new clearing subsidiary boosted revenue from its ownership of the London Metal Exchange.

HKEx reported profit attributable to shareholders of $5.16 billion Hong Kong dollars (US$665 million) during 2014, 13.5 per cent higher than the previous year.

In the same period, the company’s revenue grew 13 per cent to HK$9.8 billion as the average daily value of securities trading on the city’s stock exchange rose 11 per cent to HK$69.5 billion.

The exchange benefited from the launch of the Shanghai-Hong Kong Stock Connect trading link in November, which has allowed mainland individuals to buy stocks listed in the offshore finance centre and provided global investors freer access to Chinese stocks.

Though flows through the link in both directions have been lower than Beijing’s quotas, the exchange says that trading activity has improved substantially as a result of the link.

The total revenue and other income generated by Stock Connect was “approximately HK$68 million,” the exchange said.

“With its pivotal role in the Stock Connect scheme, HKEx has reinforced its position as the global exchange of choice for Chinese investors and the Chinese exchange of choice for international investors,” Chairman Chow Chung Kong said in a statement.

“Recognizing that we cannot be complacent, we will continue to work closely with the relevant authorities and regulators, our exchange partners and market participants to ensure that the Stock Connect scheme operates smoothly, and to gradually expand mutual market access in an orderly manner.”

During the year, Hong Kong Exchanges also launched LME Clear, a new metals-clearing subsidiary in London, which has generated HK$187 million of clearing fees since September.

Prior to the release of HKEx’s results on Thursday, premier Li Keqiang said in a report delivered to parliament that China will launch a trial program to connect Shenzhen’s stock market to Hong Kong at “an appropriate time.”

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Stock Connect program boosts trading activity.

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Chinese solar firm Hanergy rallies

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Chinese solar-equipment maker Hanergy Thin Film Power Group Ltd. shares rallied as much as 42 per cent Thursday, briefly making founder Li Hejun richer, at least on paper, than Li Ka-shing or Mark Zuckerberg.

Shares have climbed 62 per cent this week and ended Thursday trading at 7.30 Hong Kong dollars. A year earlier, shares traded at 1.18 Hong Kong dollars.

The company said in an exchange filing Thursday that it didn’t know the reason for the share-price movement.

Hanergy is tracked by only three analysts, and institutions hold just 2.8 per cent of shares outstanding, according to S&P Capital IQ.

“Everybody—from investors to journalists to industry participants—seems to agree that the stock is wildly overvalued,” said CLSA analysts Charles Yonts and Jonny Lau in a report published last Friday.

Chinese investors, buying through the Shanghai-Hong Kong stock-connect program, also are pushing up the stock. Hanergy was the most actively traded Hong Kong security traded through the connect program Thursday, with 827.6 million Hong Kong dollars ($106 million) of combined buy and sell trades, 30 times the second-most traded stock. Net inflows through the stock-connect program have pumped more than 1.2 billion Hong Kong dollars into the stock since January.

Hanergy’s stock is mostly held by mainland investors through the stock-connect program, according to data compiled by David Webb , a Hong Kong corporate-governance activist, using information provided by the Hong Kong exchange. Mainland investors held a 1.27 per cent stake in Hanergy, as of Wednesday’s close. Hanergy shares, which ended Thursday with a 14 per cent gain, have risen several times their price since the stock-connect program was launched on Nov. 17 last year.

Hanergy’s financials have come under scrutiny from media and analysts, with questions centering on the firm’s relationship with its unlisted parent, which is also its biggest customer.

The company couldn’t immediately be reached for comment.

Hanergy has a high level of receivables, nearly all due from the parent, as of June last year. The company responded in January saying that most of what the parent owed has been repaid, and the rest will be repaid “in accordance with the payment terms under the relevant agreements.”

This week’s surge adds around $11 billion to the wealth of Hanergy’s founder and major shareholder, who controls 73.1 per cent of the company through unlisted Hanergy Group. Li is now the richest man in China, overtaking Wanda Group founder Wang Jianlin, according to Forbes.

Market participants say the surge was partly caused by a short squeeze, as evidenced by skyrocketing borrowing costs. The annual rate charged to borrow Hanergy stocks is at least 35 per cent, according to traders. More than 120 million shares have been shorted on the stock so far this year, according to data from the Hong Kong bourse. This represents about 3 per cent of total turnover.

More shorts have piled onto the stock this week. Around 14 million shares are shorted this week, or about 1 per cent of turnover.

The firm on March 3 issued a profit alert on the Hong Kong exchange, saying it expects to see more than a 55 per cent profit rise on the year for 2014. The company also is riding a wave of enthusiasm for all Chinese solar stocks following release of the environmental documentary “Under the Dome”, which has had more than 100 million views on Chinese Internet sites.

The film was released just days before the start of China’s most public annual political event, the meetings of the national legislature and a government advisory body, and it is expected to stir the leadership to a more pro-environment stance.

Investors hope this will result in more funding for China’s solar sector, this week sending Solargiga Energy Holdings Limited up 35.7 per cent, GCL New Energy Holdings Limited up 33.8 per cent and Jun Yang Solar Power Investments Limited up 118.3 per cent.

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Solar-energy company’s Thursday gains add to week’s 62% share-price rise

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How China is cleaning up its global image

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Graph for How China is cleaning up its global image

Beijing put on quite a show this week. In case two straight days of clear blue skies weren’t fanciful enough, the week began with a fairytale meeting of two princes -- one an English prince and the other a “red princeling”.

The Duke of Cambridge did a deft job of repairing the damage done by his father, the Prince of Wales, some years earlier when he derided China’s Communist party leadership as “appalling old waxworks”.

At the time, Charles had complained about the “ridiculous rigmarole” and “awful Soviet-style display” of goose-stepping Chinese soldiers during the Hong Kong handover ceremony.

Clearly Chinese-style pomp and pageantry wasn’t Charles’ cup of tea.

But China’s new generation of leaders are far from the waxworks of Charles’ memory. As the son of one of the Chinese communist movements leading revolutionaries, Chinese President Xi Jinping is the closest thing the party has to royalty. Unlike his wooden predecessor Hu Jintao, Xi has a folksier image as well as a touch of glamour. His wife of over 20 years -- Peng Liyuan -- is one of China's leading folksingers and known for her fashion sense.

It’s impossible to gauge accurately, but it does seem Xi is genuinely liked by many Chinese people. Much of that support is down to the anti-corruption campaign he has been waging for the past two years.

While Xi’s carefully crafted image as a man of the people is seen cynically by some liberal bloggers, there are definitely many who are sincere in their admiration for him.

And as China’s leadership has changed, so has its message. While the CCP’s propaganda efforts can be ham-fisted, it has clearly become more sophisticated over time.

That’s not to say that old clunky communist jargons have disappeared. Political speeches at the annual ersatz parliamentary sessions which also started this week, are peppered with mentions of the “Eight Regulations”, the “Six Bans” and the “The Synchronisation of Four Modernisations”.

But the Chinese government knows this and has changed its messaging. Government spokespeople now know that if they want to get their message across to the masses, it helps to drop trendy internet-speak in amongst the jargon.

Just look at Wang Qishan, the former history teacher who heads up the country’s feared and highly secretive anti-corruption agency, who grabbed headlines this week for teasing a TV reporter for using a selfie-stick at the NPC.

Underscoring this populist propaganda push is the party’s use of the country’s wealthiest business people and celebrities. Members of the Chinese People’s Political Consultative Conference, the more than 2,000-member body tasked with offering advice to the National People’s Congress, includes the actor Jackie Chan, film director Chen Kaige, and comedian Zhao Benshan.

The use of actors at these annual events is quite fitting. The meetings are largely theatrical, with most of the serious decisions ironed out beforehand. And like most actors, their lines are largely pre-scripted. In short, it’s all just for show, or what the Chinese call “zuo xiu”. The real battle is played out behind the scenes and by proxy through the media.

But while there’s a script, some of the truly talented are able to ad-lib from time to time. Artist Ai Weiwei, has made pushing the boundaries of acceptability in public discourse an art in itself. But in the lead-up to this week’s parliamentary sessions, it was former state-TV journalist Chai Jing who gave the country a master-class.

The release of “Under the Dome”, Chai’s anti-pollution documentary has made everyone sit up and take notice (The film that is going to change China, 2 March 2015). Environmental stocks surged on the back of the reception to Chai Jing’s documentary.

Some outsiders are scratching their heads that she hasn’t been arrested for making her hard-hitting expose of the China’s crippling pollution problem. But the video was pushed out on video sites like Youku with the imprimatur of official mouthpiece the People’s Daily.

Judging from the access Chai had to senior officials in the environment ministry and National Development Reform Commission and the fact that the environment minister came out immediately to praise the documentary suggests it had buy-in from some sections of the government.

Subsequent moves to dampen online discussion of the film would seem to suggest there are other factional interests who see it in their interests to push back. One executive from a state-owned oil giant  slammed her as a dilettante, poking holes in her argument.

It’s easy to think Chai Jing’s documentary is simply part of a coordinated government push. At the NPC this week, the government unveiled a five-year air pollution plan, and doubled down on plans to hold down coal consumption growth in “key areas”.

But Chai Jing’s documentary has built on a crescendo of work that has been pulled off by many before her. The ever-increasing public pressure from a fed-up citizenry has seen the issue sky-rocket to the top of the government’s list of priorities.

Only the most cynical would think she’s simply been handed a script from the powers that be above her.

The film has not come out in a vacuum. It comes at a time when anti-corruption investigators have set their sights on powerful vested interests in the energy and resources sector. It’s no secret that the top leadership has the powerful energy sector in its sights, and breaking up their monopolies has been flagged as key to rebalancing and restructuring the economy.

As a sophisticated media insider, Chai Jing has seen where the wind is blowing and has calibrated her message to fit the prevailing trend. What’s clear now is that the boundaries of the acceptable discussion have shifted, and anyone who has a stake in the status quo should prepare for change.

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The smog that has clouded China’s political past is slowly lifting, with its new leadership team keen to project an enlightened picture.

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Merger of two state-owned train companies approved by SASAC

The merger of China's two dominant rail manufacturers has received approval from the country's state-owned assets regulator, the State-owned Assets Supervision and Administration Commission, according to a Sina Finance report.

The State-owned CSR Corp and China CNR are already the world’s largest manufacturers of rolling stock, with annual revenues of $16bn each and a combined market capitalisation of $26bn.

The two companies were separated out from the same state-owned parent over a decade ago.

(Sina Finance)

NDRC: There's no "strong stimulus"

Reports that China is unleashing more stimulus are a misreading of the situation, according to Xu Shaoshi, the head of the NDRC, in response to a question at an NPC press conference yesterday.

Xu explained that given China is still in the process of industrialising and urbanising, there is great potential for investment in some sectors and it makes perfect sense to strengthen investment in these areas of the economy that require it.

Xu also noted that as the recovery of the global economy is still comparatively weak and as the domestic economy is also coming under pressure, external demand is unlikely to improve. Given this situation, it makes sense to take advantage of the critical role that investment can play.

Xu said the NDRC will ensure ample investment is provided, but will focus on improving the efficiency of investment so that it packs more of a punch.

(Caijing)

China Railway Corp mulls listing

The general manager of China Railway Group Sheng Guangzu says the company is considering a public listing or mixed ownership reform.

Mr Sheng, who was the last Railway Minister, told reporters that the company was open to private capital investment in building railway infrastructure. The Chinese government wants to invest 800 billion yuan in railways this year, concentrating on central and western parts of China.  

Beijing is also keen to export Chinese railway technology and construction expertise abroad. Beijing is currently working with the Thai government to export its technology there.

(Xinhua News)

Anti-graft commission targets state-owned enterprises

The party’s disciplinary watchdog will target state-owned enterprises exclusively in the first round of inspection tours in the New Year.

26 large and central government controlled enterprises include PetroChina, China Mobile and State Grid will be targeted by the watchdog.

Xinhua, the party-controlled news service, says the energy sector will be the focal point of Beijing’s crackdown this year. 14 out of 26 targeted companies are from energy sector.

Beijing News estimates 76 senior executives from state-owned enterprises were arrested last year.

(Beijing News)

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NDRC denies any "strong stimulus" and two state-owned train companies to merge.

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China approves merger of state-owned train companies

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The merger of China's two dominant rail manufacturers has received approval from the country's state-owned assets regulator, the State-owned Assets Supervision and Administration Commission, according to a Sina Finance report.

The State-owned CSR Corp and China CNR are already the world’s largest manufacturers of rolling stock, with annual revenues of $16bn each and a combined market capitalisation of $26bn.

The two companies were separated out from the same state-owned parent over a decade ago.

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State-owned CSR Corp and China CNR already the world’s largest manufacturers of rolling stock.

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Beijing denies strong stimulus

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Reports that China is unleashing more stimulus are a misreading of the situation, according to Xu Shaoshi, the head of the NDRC, in response to a question at an NPC press conference yesterday.

Xu explained that given China is still in the process of industrialising and urbanising, there is great potential for investment in some sectors and it makes perfect sense to strengthen investment in these areas of the economy that require it.

Xu also noted that as the recovery of the global economy is still comparatively weak and as the domestic economy is also coming under pressure, external demand is unlikely to improve. Given this situation, it makes sense to take advantage of the critical role that investment can play.

Xu said the NDRC will ensure ample investment is provided, but will focus on improving the efficiency of investment so that it packs more of a punch.

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NDRC chief says stimulus reports are misleading.

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China Railway Corp mulls listing

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The general manager of China Railway Group Sheng Guangzu says the company is considering a public listing or mixed ownership reform.

Mr Sheng, who was the last Railway Minister, told reporters that the company was open to private capital investment in building railway infrastructure. The Chinese government wants to invest 800 billion yuan in railways this year, concentrating on central and western parts of China.  

Beijing is also keen to export Chinese railway technology and construction expertise abroad. Beijing is currently working with the Thai government to export its technology there.

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China Railway Group is open to private capital investment in building railway infrastructure.

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China's anti-graft commission targets SOEs

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The party’s disciplinary watchdog will target state-owned enterprises exclusively in the first round of inspection tours in the new year.

26 large and central government controlled enterprises including PetroChina, China Mobile and State Grid will be targeted by the watchdog.

Xinhua, the party-controlled news service, says the energy sector will be the focal point of Beijing’s crackdown this year. 14 out of 26 targeted companies are from energy sector.

Beijing News estimates 76 senior executives from state-owned enterprises were arrested last year.

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26 large and central government controlled enterprises will be targeted by the watchdog.

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China pushes small firm lending

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China's banking regulator Friday issued a new directive to banks to increase lending to the nation's small businesses facing headwinds, as the world's second-largest economy loses steam. 

The China Banking Regulatory Commission said in a notice that growth in bank loans to small businesses this year should be higher than in the previous year, and banks should issue credit to more small lenders. 

The regulator also called on Chinese lenders to be more tolerant of bad loans made to small businesses and asked them not to cut off credit to firms that were still competitive but facing temporary difficulties. 

China's economy grew 7.4 per cent in 2014, its weakest pace in more than two decades, and many companies, particularly smaller ones that aren't backed by the state, are struggling. 

On Thursday, Beijing lowered its growth target for 2015 to about 7 per cent. 

The slower growth level will mean more financial pressure for the country's small firms, analysts said, noting that the state-dominated banking sector tends to favour bigger government-run companies. 

As of the end of 2014, Chinese banks had 20.7 trillion yuan ($A4.3 trillion) of loans outstanding to small and micro firms, accounting for 24 per cent of total lending.

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Banking regulator directs banks to lend more to small businesses as economy slows.

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China says will spend more than meets the eye

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The Chinese government won't be as tight-fisted this year as official projects suggest, China's finance minister said on Friday, indicating the authorities will beef up spending to spur economic activity. 

A budget report delivered to the country's legislature on Thursday showed that Beijing projects only a slight increase in its fiscal deficit, to 2.3 per cent this year from 2.1 per cent in 2014. That has led some economists and analysts to question the leadership's commitment to use what it has called an expansionary fiscal policy to cushion the slowdown. 

At a news conference on Friday, Finance Minister Lou Jiwei sought to dispel the doubt. He said the real fiscal deficit will come considerably higher than the stated 2.3 per cent. 

Mr Lou cited a new budget law that took effect in January that allows the central government to take back unspent money it has given to various local governments in the past years and then spend it. Those funds aren't included in Beijing's spending for this year because they were previously allocated to local governments, even though the money hasn't been spent. 

Taking into account those funds, as well as new government borrowings to repay old debt, Mr Lou said China will incur a fiscal shortfall of 2.7 per cent of the nation's gross domestic product. 

"Fiscal policy will have to be expansionary" given the downward pressure on China's economy, Mr Lou said, while adding greater government spending would play "a relatively big role in counteracting the pressure." 

China is battling a host of economic ills, ranging from a slumping property market and persistent industrial overcapacity to rising debt levels. Recognizing the growing headwinds, the Chinese leadership lowered its annual growth target to 7 per cent for 2015, the lowest level in 24 years. Meanwhile, it has also pledged to use a more proactive fiscal policy to stabilize growth while keeping monetary policy "prudent," out of concern that too much credit would further worsen China's debt problems. 

However, Beijing also is facing a fiscal challenge as falling land sales and a struggling manufacturing sector hurt tax revenue at various levels of government. Total fiscal revenue grew 8.2 per cent to 14 trillion yuan ($A2.9 trillion) last year, the slowest pace in more than two decades. 

"The government faces huge pressure on its tax revenue," Mr Lou said, while projecting a "single-digit" growth rate in fiscal incomes in many years ahead. 

In response, the Finance Ministry has adopted some measures to beef up the state's coffers. For instance, it raised fuel-consumption taxes three times last year just as global oil prices plunged. Those tax increases didn't amount to a big burden on businesses and consumers because of the price drop, even as they increased the government's revenue, Mr Lou said. 

At Friday's news conference, Mr Lou also said the Finance Ministry will press ahead on reining in rampant local-government borrowings -- which, according to the International Monetary Fund, is responsible for one-fourth of the build-up in China's overall domestic debt since 2008. 

Part of Mr Lou's strategy involves banning thousands of financing firms set up by local governments from additional borrowing. Instead, local governments would be allowed to borrow directly each year a certain amount of funds set by the country's budget plan. 

But some economists are sceptical about the government's ability to push through the reform as it may squeeze local officials' ability to increase spending. 

"While policy makers are focused on improving the long-run sustainability of local government finance, they will not push ahead if the cost is a slump in near-term growth," said economist Mark Williams at Capital Economics. 

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China's Finance Minister says Beijing will beef up spending to spur growth.

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Online environmental doco blocked in China

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A popular documentary about China's environmental woes that has been viewed hundreds of millions of times over the past week has been removed from Chinese websites.

The 104-minute film called Under the Dome could no longer be seen on Saturday morning on popular Chinese video streaming sites.

An error message on the website of Chinese-based site Hao123 said the documentary did not pass the site's checks.

The movie could still be seen on Hong Kong-based news site ifeng.com and YouTube.

Former state television news reporter Chai Jing said she produced the movie to dramatise the health and societal costs of China's severe pollution problems.

The film was released this week as China's legislature kicked off its annual meeting.

It had originally received support from the country's environment minister.

China's severe environmental problems and government pledges to fix them have dominated the start of the country's closely watched annual legislative meeting this week.

Two days into the session of the National People's Congress in Beijing, Chinese President Xi Jinping pledged to "punish, with an iron hand, any violators who destroy the ecology or environment, with no exceptions," according to the official Xinhua News Agency.

At the meeting's opening event a day earlier, Premier Li Keqiang swore the government would cut back on major pollutants and improve energy efficiency.

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'Under the Dome' removed from Chinese websites.

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The coming Chinese crackup

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On Thursday, the National People’s Congress convened in Beijing in what has become a familiar annual ritual. Some 3,000 “elected” delegates from all over the country—ranging from colorfully clad ethnic minorities to urbane billionaires—will meet for a week to discuss the state of the nation and to engage in the pretence of political participation.

Some see this impressive gathering as a sign of the strength of the Chinese political system—but it masks serious weaknesses. Chinese politics has always had a theatrical veneer, with staged events like the congress intended to project the power and stability of the Chinese Communist Party, or CCP. Officials and citizens alike know that they are supposed to conform to these rituals, participating cheerfully and parroting back official slogans. This behaviour is known in Chinese as biaotai, “declaring where one stands,” but it is little more than an act of symbolic compliance.

Despite appearances, China’s political system is badly broken, and nobody knows it better than the Communist Party itself. China’s strongman leader, Xi Jinping , is hoping that a crackdown on dissent and corruption will shore up the party’s rule. He is determined to avoid becoming the Mikhail Gorbachev of China, presiding over the party’s collapse. But instead of being the antithesis of Mr. Gorbachev, Mr. Xi may well wind up having the same effect. His despotism is severely stressing China’s system and society—and bringing it closer to a breaking point.

Predicting the demise of authoritarian regimes is a risky business. Few Western experts forecast the collapse of the Soviet Union before it occurred in 1991; the CIA missed it entirely. The downfall of Eastern Europe’s communist states two years earlier was similarly scorned as the wishful thinking of anticommunists—until it happened. The post-Soviet “colour revolutions” in Georgia, Ukraine and Kyrgyzstan from 2003 to 2005, as well as the 2011 Arab Spring uprisings, all burst forth unanticipated.

China-watchers have been on high alert for telltale signs of regime decay and decline ever since the regime’s near-death experience in Tiananmen Square in 1989. Since then, several seasoned Sinologists have risked their professional reputations by asserting that the collapse of CCP rule was inevitable. Others were more cautious—myself included. But times change in China, and so must our analyses.

The endgame of Chinese communist rule has now begun, I believe, and it has progressed further than many think. We don’t know what the pathway from now until the end will look like, of course. It will probably be highly unstable and unsettled. But until the system begins to unravel in some obvious way, those inside of it will play along—thus contributing to the facade of stability.

Communist rule in China is unlikely to end quietly. A single event is unlikely to trigger a peaceful implosion of the regime. Its demise is likely to be protracted, messy and violent. I wouldn’t rule out the possibility that Mr. Xi will be deposed in a power struggle or coup d’état. With his aggressive anticorruption campaign—a focus of this week’s National People’s Congress—he is overplaying a weak hand and deeply aggravating key party, state, military and commercial constituencies.

The Chinese have a proverb, waiying, neiruan—hard on the outside, soft on the inside. Mr. Xi is a genuinely tough ruler. He exudes conviction and personal confidence. But this hard personality belies a party and political system that is extremely fragile on the inside.

Consider five telling indications of the regime’s vulnerability and the party’s systemic weaknesses.

First, China’s economic elites have one foot out the door, and they are ready to flee en masse if the system really begins to crumble. In 2014, Shanghai’s Hurun Research Institute, which studies China’s wealthy, found that 64 per cent of the “high net worth individuals” whom it polled—393 millionaires and billionaires—were either emigrating or planning to do so. Rich Chinese are sending their children to study abroad in record numbers (in itself, an indictment of the quality of the Chinese higher-education system).

Just this week, the Journal reported, federal agents searched several Southern California locations that U.S. authorities allege are linked to “multimillion-dollar birth-tourism businesses that enabled thousands of Chinese women to travel here and return home with infants born as U.S. citizens.” Wealthy Chinese are also buying property abroad at record levels and prices, and they are parking their financial assets overseas, often in well-shielded tax havens and shell companies.

Meanwhile, Beijing is trying to extradite back to China a large number of alleged financial fugitives living abroad. When a country’s elites—many of them party members—flee in such large numbers, it is a telling sign of lack of confidence in the regime and the country’s future.

Second, since taking office in 2012, Mr. Xi has greatly intensified the political repression that has blanketed China since 2009. The targets include the press, social media, film, arts and literature, religious groups, the Internet, intellectuals, Tibetans and Uighurs, dissidents, lawyers, NGOs, university students and textbooks. The Central Committee sent a draconian order known as Document No. 9 down through the party hierarchy in 2013, ordering all units to ferret out any seeming endorsement of the West’s “universal values”—including constitutional democracy, civil society, a free press and neoliberal economics.

A more secure and confident government would not institute such a severe crackdown. It is a symptom of the party leadership’s deep anxiety and insecurity.

Third, even many regime loyalists are just going through the motions. It is hard to miss the theater of false pretence that has permeated the Chinese body politic for the past few years. Last summer, I was one of a handful of foreigners (and the only American) who attended a conference about the “China Dream,” Mr. Xi’s signature concept, at a party-affiliated think tank in Beijing. We sat through two days of mind-numbing, nonstop presentations by two dozen party scholars—but their faces were frozen, their body language was wooden, and their boredom was palpable. They feigned compliance with the party and their leader’s latest mantra. But it was evident that the propaganda had lost its power, and the emperor had no clothes.

In December, I was back in Beijing for a conference at the Central Party School, the party’s highest institution of doctrinal instruction, and once again, the country’s top officials and foreign policy experts recited their stock slogans verbatim. During lunch one day, I went to the campus bookstore—always an important stop so that I can update myself on what China’s leading cadres are being taught. Tomes on the store’s shelves ranged from Lenin’s “Selected Works” to Condoleezza Rice’s memoirs, and a table at the entrance was piled high with copies of a pamphlet by Mr. Xi on his campaign to promote the “mass line”—that is, the party’s connection to the masses. “How is this selling?” I asked the clerk. “Oh, it’s not,” she replied. “We give it away.” The size of the stack suggested it was hardly a hot item.

Fourth, the corruption that riddles the party-state and the military also pervades Chinese society as a whole. Mr. Xi’s anticorruption campaign is more sustained and severe than any previous one, but no campaign can eliminate the problem. It is stubbornly rooted in the single-party system, patron-client networks, an economy utterly lacking in transparency, a state-controlled media and the absence of the rule of law.

Moreover, Mr. Xi’s campaign is turning out to be at least as much a selective purge as an antigraft campaign. Many of its targets to date have been political clients and allies of former Chinese leader Jiang Zemin . Now 88, Mr. Jiang is still the godfather figure of Chinese politics. Going after Mr. Jiang’s patronage network while he is still alive is highly risky for Mr. Xi, particularly since Mr. Xi doesn’t seem to have brought along his own coterie of loyal clients to promote into positions of power. Another problem: Mr. Xi, a child of China’s first-generation revolutionary elites, is one of the party’s “princelings,” and his political ties largely extend to other princelings. This silver-spoon generation is widely reviled in Chinese society at large.

Finally, China’s economy—for all the Western views of it as an unstoppable juggernaut—is stuck in a series of systemic traps from which there is no easy exit. In November 2013, Mr. Xi presided over the party’s Third Plenum, which unveiled a huge package of proposed economic reforms, but so far, they are sputtering on the launchpad. Yes, consumer spending has been rising, red tape has been reduced, and some fiscal reforms have been introduced, but overall, Mr. Xi’s ambitious goals have been stillborn. The reform package challenges powerful, deeply entrenched interest groups—such as state-owned enterprises and local party cadres—and they are plainly blocking its implementation.

These five increasingly evident cracks in the regime’s control can be fixed only through political reform. Until and unless China relaxes its draconian political controls, it will never become an innovative society and a “knowledge economy”—a main goal of the Third Plenum reforms. The political system has become the primary impediment to China’s needed social and economic reforms. If Mr. Xi and party leaders don’t relax their grip, they may be summoning precisely the fate they hope to avoid.

In the decades since the collapse of the Soviet Union, the upper reaches of China’s leadership have been obsessed with the fall of its fellow communist giant. Hundreds of Chinese postmortem analyses have dissected the causes of the Soviet disintegration.

Mr. Xi’s real “China Dream” has been to avoid the Soviet nightmare. Just a few months into his tenure, he gave a telling internal speech ruing the Soviet Union’s demise and bemoaning Mr. Gorbachev’s betrayals, arguing that Moscow had lacked a “real man” to stand up to its reformist last leader. Mr. Xi’s wave of repression today is meant to be the opposite of Mr. Gorbachev’s perestroika and glasnost. Instead of opening up, Mr. Xi is doubling down on controls over dissenters, the economy and even rivals within the party.

But reaction and repression aren’t Mr. Xi’s only option. His predecessors, Jiang Zemin and Hu Jintao, drew very different lessons from the Soviet collapse. From 2000 to 2008, they instituted policies intended to open up the system with carefully limited political reforms.

They strengthened local party committees and experimented with voting for multicandidate party secretaries. They recruited more businesspeople and intellectuals into the party. They expanded party consultation with non-party groups and made the Politburo’s proceedings more transparent. They improved feedback mechanisms within the party, implemented more meritocratic criteria for evaluation and promotion, and created a system of mandatory midcareer training for all 45 million state and party cadres. They enforced retirement requirements and rotated officials and military officers between job assignments every couple of years.

In effect, for a while Mr. Jiang and Mr. Hu sought to manage change, not to resist it. But Mr. Xi wants none of this. Since 2009 (when even the heretofore open-minded Mr. Hu changed course and started to clamp down), an increasingly anxious regime has rolled back every single one of these political reforms (with the exception of the cadre-training system). These reforms were masterminded by Mr. Jiang’s political acolyte and former vice president, Zeng Qinghong, who retired in 2008 and is now under suspicion in Mr. Xi’s anticorruption campaign—another symbol of Mr. Xi’s hostility to the measures that might ease the ills of a crumbling system.

Some experts think that Mr. Xi’s harsh tactics may actually presage a more open and reformist direction later in his term. I don’t buy it. This leader and regime see politics in zero-sum terms: Relaxing control, in their view, is a sure step toward the demise of the system and their own downfall. They also take the conspiratorial view that the U.S. is actively working to subvert Communist Party rule. None of this suggests that sweeping reforms are just around the corner.

We cannot predict when Chinese communism will collapse, but it is hard not to conclude that we are witnessing its final phase. The CCP is the world’s second-longest ruling regime (behind only North Korea), and no party can rule forever.

Looking ahead, China-watchers should keep their eyes on the regime’s instruments of control and on those assigned to use those instruments. Large numbers of citizens and party members alike are already voting with their feet and leaving the country or displaying their insincerity by pretending to comply with party dictates.

We should watch for the day when the regime’s propaganda agents and its internal security apparatus start becoming lax in enforcing the party’s writ—or when they begin to identify with dissidents, like the East German Stasi agent in the film “The Lives of Others” who came to sympathize with the targets of his spying. When human empathy starts to win out over ossified authority, the endgame of Chinese communism will really have begun.

Dr. Shambaugh is a professor of international affairs and the director of the China Policy Program at George Washington University and a nonresident senior fellow at the Brookings Institution. His books include “China’s Communist Party: Atrophy and Adaptation” and, most recently, “China Goes Global: The Partial Power.”

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How Australia can remain attractive to Chinese investors

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Corrs Thinking

2014 was the year Australia was knocked off its mantle as the most favoured destination for Chinese outbound investment. It’s a clear sign China’s investment appetite is changing – from a focus on natural resources to a wider portfolio of sectors including agriculture, manufacturing and technology.

As China reinvigorates its go global strategy, can Australia regain its charm and offer Chinese investors more than just minerals? Which sectors will attract inbound investment and what role will Australia’s FTA with China play?

In his Report on the Work of the Government (released on 5 March 2015 as part of China’s Third Session of the Twelfth National Party Congress) Premier Li Keqiang has stated that in the final year of the 12th Year Plan the Chinese Government will “speed up the implementation of the go global strategy”. This push for going global is supported by the PRC Government’s liberalisation of the outbound investment system introduced in May 2014.

According to the Report (supported also by the National Development Reform Commission’s 2015 Draft Plan for National Economic and Social Development released 5 March 2015 also as part of the National Party Congress) only 2% of all outbound Chinese investment required review and approval with the remainder being lodged online only.

However, Australia has not been the recipient of this renewed focus on outbound investment, with 2014 representing a year of consolidation for Chinese buyers in Australia. While almost a fifth of all public M&A deals in Australia last year were driven by Chinese bidders, most transactions were by existing holders seeking to “average down” the cost of their investment. Most of the major deals - such as Baosteel in the joint takeover of Aquila Resources Limited and Guangdong Rising Assets in the indicative offer for PanAust Limited – involved a Chinese bidder that already had a significant and long standing investment in the target. The existing stakes in these companies were acquired closer to the top than the bottom of the resources cycle. So it’s likely PRC investors are picking what they see as the bottom of the resource cycle and looking to average down the costs of acquisition – fundamental given the current focus by the Chinese Government on profitability of SOEs (see Boost in Chinese buyers is good news for Australian companies - Understanding the drivers for this is key). 

The shift in China’s investment focus

Australia’s fall from the top as China’s preferred investment destination reflects the changing priorities of Chinese investors. In earlier years PRC investments were all about securing access to natural resources with Australia a clear beneficiary. But now Chinese buyers are diversifying and turning their attention to new industries. 

Premier Li’s Report suggests the likely beneficiaries of Chinese outbound investment 2015 will be investments which grow China’s market share in railway, electric power, communications (Unicom’s recent opening of an office in Sydney a prime example) and the provision of building materials. China intends to scale up export credit insurance to provide export credit insurance in these areas.

In addition Chinese investment is likely to focus on sectors which provide Chinese companies with channels of distribution, intellectual property and know-how and access to quality and safe food for distribution in China – each key to China’s shift to a developed services economy.

Australia can regain its charm

2015 is the Chinese year of the sheep and Australia, it is said, was built on the back of sheep. In this symbolic year it is the new China Australia Free Trade Agreement (CHAFTA) combined with a plummeting dollar that will ensure Chinese investment continues to help build Australia (despite high profile but case specific divestments). The political significance of the FTA with China goes beyond the promise of securing a greater share of the world’s largest market (see Australia's FTA with China - Better to grow slowly than stand still). It is the imprimatur for Chinese companies to make acquisitions and invest in Australia.

We expect 2015 to be a different story to 2014 with a boost in inbound PRC investment especially in sectors like large scale residential property (which will support China’s provision of building materials), greenfield infrastructure and food technology. With the ongoing focus on anti-bribery and corruption and reform of SOEs we expect to see a decline in SOE investment and a return to POE predominance.

The signs of a more vibrant M&A market for Chinese investment in 2015 are all there. The internationalisation of the RMB, the falling Australian dollar especially off the back of a more positive outlook for economic growth in the United States will see a better outlook for inbound PRC investments in the coming year.

This article first appeared on Corrs Thinking. Republished with permission.

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Kaisa seeks concessions on offshore debt

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BEIJING—Chinese property developer Kaisa Group Holdings Ltd. is seeking concessions from lenders behind its $2.5 billion in offshore debt as it struggles to keep a bailout by a second real-estate firm on track.

The cash-strapped company, which is in the midst of a rescue by Sunac China Holdings Ltd. , another Chinese property developer, stopped short of asking for a cut in the principal owed to offshore lenders. Such a move could have resulted in the creditors getting back less than they had loaned. Kaisa is trying to make good on its obligations after Chinese officials and local courts blocked sales of properties in many of its projects.

Still, the offer raises the question of what offshore lenders can do to push for a better deal. Chinese law offers foreign investors limited options through Chinese courts, say experts. Offshore creditors will also likely scrutinize the offer in light of an earlier proposal Kaisa made to its mainland Chinese creditors. Kaisa said it would discuss options with creditors in a Monday morning conference call.

In addition to bondholders, whom Kaisa hasn’t publicly named, its offshore creditors include lenders such as an arm of HSBC Holdings PLC and foreign affiliates of China’s state-controlled Industrial & Commercial Bank of China Ltd. , according to Sunday’s filing.

In a filing with the Hong Kong stock exchange late Sunday, Kaisa also offered its most detailed account yet of its troubles. It said the authorities in the southern Chinese city of Shenzhen, where it is headquartered and has a large number of properties, have blocked sales of properties in 11 of its projects. Local courts in cities across China have blocked for sale, or frozen, assets in 22 of its projects following litigation by its creditors, it said. Kaisa’s chairman, vice chairman, chief executive and chief financial officer, as well as 170 other employees, have resigned, Kaisa said.

“The company is facing acute liquidity pressure and severe business disruption and so it requires relief from its creditors,” the filing said. It adds that Kaisa expects its cash to run out in the first half of the year.

Kaisa added it would request to extend maturities by five years on six issuances of bonds and convertible bonds due between 2016 and 2020. The company is also asking for a significant reduction in interest rates, by more than half in some cases, though a sweetener of one half of a percentage point will be granted if enough bondholders sign up for the restructuring deal. For instance, for a $250 million bond due to mature in 2017, the proposed interest rate is 4.7 per cent compared to the existing rate of 12.875 per cent.

The firm said it proposes to reserve the right to make the coupon payments in kind, through the issuance of additional notes and convertible bonds on the same terms as the existing debt, for a period of two years.

“The situation at Kaisa is serious,” Kaisa said in a presentation accompanying its filing to the Hong Kong stock exchange.

Last week, the company offered a proposal for mainland Chinese creditors. That plan also avoided a cut to the 48 billion yuan ($7.7 billion) principal amount owed. Onshore creditors face a reduction in the rates payable on amounts owed to them to at least 70 per cent of the base rate set by the People’s Bank of China. The PBOC’s base rate is currently 5.35 per cent.

Kaisa also proposed to extend the tenors of onshore debt by between three and six years.

Sunac China Holdings Ltd. plans to acquire 49.25 per cent of Kaisa for 4.55 billion Hong Kong dollars, and then buy the remaining, publicly traded, stock from investors. The move could reduce the financial pressure on the developer, but Kaisa reiterated Sunday that the plan hinges on its ability to restructure its debt.

Kaisa said it “must reach an agreement with creditors by end March in order to complete all aspects of the restructuring before Sunac’s shareholder meeting in April.”

Kaisa’s woes started late last year, when authorities in Shenzhen blocked sales of its projects without providing a reason. Senior executives including the chairman, Kwok Ying Shing, later resigned. Many creditors asked for early repayment of amounts owed to them after Mr. Kwok’s resignation triggered contractual clauses allowing them to demand the money.

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Property developer speaks of ‘no impairment’ to any principal debt claim.

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Foxconn making progress in talks for China plant, official says

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BEIJING—Foxconn, Apple Inc.’s main assembler of iPhones, is progressing in its discussions to build a display factory in China’s northern city of Zhengzhou, a local industry official said.

“The discussions are ongoing,” said Xue Jingxia, chairwoman of Zhengzhou’s Industry and Commerce Association, speaking on the sidelines of the National People’s Congress, where she is a delegate. “It is being finalized.”

The Wall Street Journal reported in October that preliminary talks had begun for the plant, with a potential investment of as much as 35 billion yuan ($5.59 billion). Such a sum would be Foxconn’s biggest direct investment to date in high-end parts manufacturing.

Displays are harder to make than other parts and fetch higher profit margins.

Foxconn, formally known as Hon Hai Precision Industry Co. , is the world’s largest electronics contract manufacturer. It has sought to expand into higher-margin sectors in recent years, including high-end components and retailing.

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Potential investment could be Foxconn’s biggest so far in high-end parts manufacturing.

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Glaxo fires more than 100 employees in China

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GlaxoSmithKline PLC said it is firing about 110 employees in China for what it describes as misconduct, the latest fallout from a bribery scandal there that has dogged the U.K. drug company for more than a year.

The move comes six months after a Glaxo subsidiary in China was found guilty by a Chinese court of bribing doctors, hospitals and other nongovernment personnel and fined more than $490 million. A Glaxo spokeswoman said on Friday the misconduct leading to the dismissals dates back more than 18 months.

“Based on the findings, we have taken disciplinary action against employees whose conduct went against GSK’s values and code of conduct. We have zero tolerance for this kind of behavior,” the company said in a statement. The spokeswoman added that the drug maker has increased its monitoring of expense claims and compliance efforts in China, and also hired lawyers and consultants to review operations.

“As we’ve said before, GSK remains fully committed to China and has implemented fundamental policy reforms to ensure the company operates to the highest standards,” she said. “We continue to look to our business in China and expect to make further investments in the country as we evolve our business model there to best meet the needs of patients and customers in the country.”

A tally of Glaxo’s total workforce in China wasn’t immediately available.

The firings come as Glaxo seeks to rebound from the long-simmering bribery scandal in China, which resulted in suspended prison sentences for five of the company’s managers, including Mark Reilly, its former top China executive.

The episode set back Glaxo’s efforts to restore its image and revamp business practices in the wake of a $3 billion settlement with U.S. authorities three years ago. The drug maker had been accused of failing to disclose clinical trial data for certain medicines and improperly marketing drugs, among other things.

The troubles in China contributed to a 46 per cent pay cut that Glaxo Chief Executive Andrew Witty took for 2014, according to the company’s annual report. However, the board also praised his efforts to remake operations in China and a wide-ranging, $1.6 billion cost-cutting campaign, which was triggered, in part, by Glaxo’s struggling respiratory-drug business in the U.S.

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Move comes six months after Glaxo subsidiary found guilty of bribery and fined over US$490 million.

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Chinese tourists spend big in 2014

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Chinese tourists spent over 1 trillion yuan on overseas shopping in 2014, reports the Beijing Youth Daily.

Citing figures from the Ministry of Commerce, the paper reports outbound Chinese tourist numbers surpassed 100 million in the year.

Commerce Minister Gao Hucheng said on Saturday he was confident of meeting the annual trade growth target of 6.1 per cent this year.

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Chinese tourists spent over 1 trillion yuan on overseas shopping in 2014.

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China business news digest

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Click here to subscribe to the China Spectator daily newsletter.

Your daily digest of the biggest business news in China, translated and summarized every day. China Spectator has not verified these stories.

Shanghai pushes ahead with SOE reform

One third of Shanghai's state-owned firms operating in competitive sectors are expected to wholly-list over the coming years, according to an anonymous source cited by The Paper.

The Shanghai government plans to basically achieve an overhaul of the state-owned enterprise system over the coming three to five years.

An unnamed source told the paper that the municipal government has placed two tasks at the front of the SOE reform queue for this year.

The first is accelerating "mixed-ownership" reforms, which are aimed at attracting more private capital to invest in state-owned firms. The second is to establish an open, transparent and regulated platform to handle transfers of state capital.

The same source told The Paper that of the 29 locally-controlled SOEs operating in competitive fields, roughly a third will be wholly-listed, another third will have their core assets listed and another third will diversify the holdings of the company through a partial listing.

(The Paper)

Sinopec: Funds for sale of 30% stake of retail arm have been transferred

Nearly all of the 25 companies that agreed to pay a total of over 100 billion yuan for a piece of the 29.99 per cent stake in the retail arm of Sinopec have already transferred the funds, according to a statement to investors made by Sinopec on Friday.

Sinopec, which is China's top oil refiner, said that one of the investors failed to transfer the full amount due to difficulty in raising capital for the purchase.

The 25 companies involved in the deal have paid 105.04 billion yuan of the original 107.09 billion yuan agreed to last September.

The move is part of a broader effort to diversify ownership in China's state-owned companies.

(Securities Daily)

Beijing issues one trillion in new debt 

The Ministry of Finance has received the green light from the central government to issue one trillion yuan worth of new debt instruments to replace local government debt. 

The move is designed to ease the interest burden on local governments who are struggling to repay debts accumulated during the aftermath of global financial crisis. This new measure could save up 40 to 50 billion yuan in interest every year. 

(Hexun)

Chinese tourists spend big in 2014

Chinese tourists spent over 1 trillion yuan on overseas shopping in 2014, reports the Beijing Youth Daily.

Citing figures from the Ministry of Commerce, the paper reports outbound Chinese tourist numbers surpassed 100 million in the year.

Commerce Minister Gao Hucheng said on Saturday he was confident of meeting the annual trade growth target of 6.1 per cent this year.

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Beijing issues one trillion yuan in new debt

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China's Ministry of Finance has received the green light from the central government to issue one trillion yuan worth of new debt instruments to replace local government debt. 

The move is designed to ease the interest burden on local governments who are struggling to repay debts accumulated during the aftermath of global financial crisis.

The new measure could save up 40 to 50 billion yuan in interest every year. 

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Move designed to ease the interest burden on struggling local governments.

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