By a staff reporter

The number of Chinese travelers to Australia and New Zealand is set to soar, according to the Boston Consulting Group.

BCG forecasts Chinese travelers will increase as a proportion of all inbound tourists from 16 per cent in 2012 to 28 per cent by 2020, as the number of trips they make rises from 910,000 in 2012 to 2.2 million by 2020.

The forecast is stronger than Tourism Australia figures.

Report co-author Frank Budde said Australia's tourism and hospitality industry has an opportunity similar to the resources boom for miners.

Former security Chief Zhou Yongkang has been put under virtual house arrest while he is put under investigation for corruption according to Reuters.

Citing several sources, Reuters reports that President Xi Jinping ordered a special task force in late November or early December to examine accusations against Zhou by his political rivals.

According to one source, Zhou is reportedly not permitted to leave his Beijing home or receive guests without prior approval.

The former head of the Chinese Communist Party's security services, Zhou was also a patron of the now disgraced ex-Chongqing leader Bo Xilai.

The investigation into Zhou breaks an unwritten understanding that retired Standing Committee members would not be investigated after retirement according to Reuters.

Confirmation that Rio Tinto has smashed its operating cost reduction target is exactly what the market wants to hear.

Bringing down operating costs and paying off debt is reducing the company's risk. Already eclipsing the $2 billion of cost savings this year, the target for the year ahead is another $1 billion. Rio is putting returns to shareholders ahead of the future growth profile of the company for now.

It is likely investors will pressure Rio Tinto to return more capital beyond standard dividends from the cash chest, but Rio’s focus for 2014 is reducing debt on the balance sheet. The full-year dividend in 2012 increased by 19 per cent after a 20 per cent increase in 2011. Expectation is the dividend will increase again this year, pleasing investors.

Of the capital allocation priorities, progressive dividends are second only to sustaining essential capital expenditure. That's a reflection that Rio is in tune with what shareholders want.

Despite having slashed operational costs, Rio has set new production records. The close of the mining boom has forced miners to readjust and become more efficient, something Rio has managed well. While surplus supply of iron ore is a realistic threat in the year ahead, Rio Tinto has taken measures to ensure operations are maximising efficiency, keeping  cost-per-tonne as low as possible. 

Beyond operational cost savings, Rio plans to continue cutting capital expenditure. Consequently investors can’t expect the same levels of growth in the near term or even in the years ahead. Decisions need to be made today to provide growth in the medium and long terms. A change in market conditions or demand would force Rio to respond and either leverage on this growth opportunity or let it slide. 

While there is often scepticism around China’s future growth potential, it is important to keep in mind China has continued to churn out GDP growth in excess of 7 per cent for some time, even as global economic conditions have created a weaker environment.

For investors, now it comes down to a matter of valuation and time frame. Global growth is improving, despite news headlines and market commentary often giving a negative slant. For Rio, China’s fixed-asset investment makes up the lion's share of iron ore revenues. There is a wager with this – less-than-expected government stimulus will offer downside risk. Conversely, a better-than-expected outcome will present an upside opportunity.

December 11 will go down in history as one of the darkest days for the Australian manufacturing industry after the Abbott government decided to switch off life-support to the car industry.

The death of GM Holden as a car manufacturer will also spell gloom for hundreds of auto-component makers who employ the majority of the estimated 50,000 workers in the Australian car industry. The remnant car-making industry lacks the critical mass required to support a viable auto component industry.

Is there a future for Australia’s auto component industry without GM Holden, Ford, and now possibly Toyota?

One car component maker has shown the way for its struggling peers – Futuris. The car seat and interiors company, which was formerly a subsidiary of agribusiness company Elders, took a huge gamble in Asia which paid off handsomely for the company.

However, it must be said from the outset that as a tier one supplier, Futuris’ international strategy may not be readily replicable for smaller players, which may not necessarily have the resources to pursue overseas markets.

The company took its plunge into China in 2004 when the Australian car industry was still relatively healthy. At the time, there were four vehicle manufacturers producing 420,000 units a year. Now there is one car maker left in the country making less than 200,000 vehicles a year.

Futuris saw that the centre of gravity for the industry was shifting to Asia and it wanted to follow its customers like Ford and GM into the fast growing region. The company then visited 180 car makers and suppliers to understand who the competition was, according to Manufacturing Monthly.

It decided to form a joint venture with Chery, a niche Chinese player that was only making 70,000 units a year back in 2004.  The business took off. Chery expanded its production capacity 10 times to 700,000 units, which is more than three times the size of the Australian industry.

Futuris has been riding the biggest car boom in modern history ever since. China has transformed itself from being a bicycle kingdom into the largest car market in the world, overtaking the United States in 2010.

The Chinese car sector grew at a compound average rate of 24 per cent a year between 2005 and 2011, according to McKinsey. Sales are forecast to reach 22 million units in 2020, which is likely to turn major cities like Beijing and Shanghai into the largest open air car parks in the world.

The company also turned its attention to Thailand, an automotive manufacturing hub for Southeast Asia. Futuris established two new plants at the Hemaraj industrial estate, dubbed the “Detroit of the East”, an ironic moniker considering the state of Detroit now.

It doubled its production within the first eighteen months. Early this year, I visited its new site, which is right next to a giant Ford factory that is operating at only 30 per cent of capacity. David Chuter, head of Futuris’ operation said, “We see this enormous growth opportunity. We don’t have to be greedy, just a fair share of this is going to get us into millions of products a year. “

Apart from the lure of the world’s fastest growing market, Asian governments also offer tempting incentives to lure foreign manufacturers to set up shops there including generous tax holidays lasting years.

Thai officials also try to make life easier for foreign manufacturers looking to set up operations by streamlining visa applications to finding skilled workers. In contrast, Australia offers very few incentives for new car makers.

“Unfortunately, Australia competes in a global marketplace and there is hardly a country elsewhere in the world that does not throw money at incentives, particularly in Asia,” Chuter said.

A Melbourne-based manufacturer also told Business Spectator, “From government departments to suppliers such as gas and electricity it is impossible to minimise the cost impact on the business while operating. We had an electricity supplier that took 6 months to provide us with power. Our gas supplier is still setting our contract 9 months later.”

Back to Futuris’ Asia strategy, the company is also eyeing growth opportunities with another Asia giant – India. Carl de Koning told BRW that “By the end of the year we’ll be in a joint venture”.

Futuris has not only survived but prospered in the tough industry by integrating itself into a part of global supply chains that feeds the fast growing Asia demand. It is a textbook case of how to do business in the Asian Century.  

In an integrated global market, the company who dares wins.

By Peter Cai

Shares of Autohome, one of the largest online car sales sites in China, have surged as much as 77 per cent on the New York Stock Exchange on its debut, valuing the company at $3.3 billion.

Autohome, which is majority controlled by Telstra, priced its IPO offering at $17 per share, which was above analysts’ estimates. The float raised $133 million.

International investor appetite for “China Concept” shares recovered after a series of accounting scandals tarnished the reputation of Chinese listed entities such as Sino Forrest.

Telstra has nominated Asia as one of its top three growth priorities at a recent strategy briefing. “We just don’t have an option,” said David Thodey about the necessity of expanding into Asia.

Autohome’s websites have an average of 2.7 million unique visitors per day according to its prospectus lodged with the Securities and Exchange Commission.

The Chinese car sector grew at a compound average rate of 24 per cent a year between 2005 and 2011, according to McKinsey. Sales are forecast to reach 22 million units in 2020.

This week’s horrific smog over Shanghai and many other parts of China has been a terrible reminder of the challenges facing the nation as it competes with the United States to become the world’s leading economy.

Kids and the elderly have been told to stay inside, flights have been delayed, some 30 per cent of cars have been taken off the roads and factories have been ordered to close as Shanghai’s air quality index soared to a record 473 – an off-the-scales figure – and remained at dangerous levels. Unfortunately, this is not a unique experience for China, with Beijing and many other cities having endured similar pollution crises.

China’s political leadership understands its longer-term approach to addressing the pollution crisis will provide the foundations for future economic growth – infrastructure investment, development of strong clean technology industries and a movement away from coal-fired electricity generation and highly polluting factories. Through these measures, China will likely maintain its economic leadership as the world moves to a lower carbon economy.

Business Spectator has reported on (The silver lining in China’s smog, December 12) the opportunity to close down inefficient and highly polluting steel mills and coal-fired power stations – Hebei Province alone has announced an ambitious goal to reduce its steel production capacity by 60 million tonnes and coal consumption by 40 million tonnes in the next four years – but the crisis also presents the opportunity to modernise the economy and invest in the industries and infrastructure of the future.

China’s very fast train network, which sprawls 9000km across China, is a powerful symbol of how China has used 21st century infrastructure to position itself as a 21st century superpower.

By 2015, you will be able to travel from the island of Hong Kong to the metropolis of Beijing – a staggering 2200km – in just 10 hours by train. That has to be the engineering marvel of the 21st century.

I was fortunate enough to experience China’s very fast train network as a member of the Australian Solar Council’s recent solar industry delegation. We travelled from Shanghai to Tianjin – the same distance as from Sydney to Brisbane – in just 5.5 hours. It was clean, comfortable and fast, very fast (310kmh fast).

To be brutally honest, my perception of China before I left the comforts of Melbourne was of a nation struggling with the challenge of a large population, emerging economy and imposing political system. I did not imagine the 21st century infrastructure that was about to appear before me, with the high-speed trains, fantastic railway stations, impressive road system and stunning skylines. Shanghai is a city of the 21st century, a financial centre worthy of the world’s second largest economy – notwithstanding its recent pollution crisis. Indeed, I was fortunate to avoid severe smog throughout my visit.

China is using renewable energy as one of its anchors for the 21st century. It is the world’s largest manufacturer of solar hot water systems and solar panels. It has the world’s largest market for solar hot water and second largest market for PV. It is the world’s largest manufacturer of wind turbines and it is quickly growing its market share in LED lighting and battery storage. The future is being built in China.

China’s installed capacity for solar electricity should reach more than 35 gigawatts by 2015, up from about seven gigawatts last year. By 2020, total installed capacity could reach 50 gigawatts, with more than $40 billion worth of investment. Much of that drive from the Chinese Government is a direct response to tariffs imposed by the European Union and the United States, but it is also a trigger for innovation. I saw that innovation first hand as part of the Australian Solar Council’s delegation.

BYD is one company that is changing the world. Headquartered in Shenzhen with PV manufacturing near Shanghai, the company is one of the world’s largest car manufacturers and one of the largest battery manufacturers. Combine electric vehicles, batteries and solar PV, and you have a vision that could transform energy generation and seriously progress the low carbon economy.

The battery company Lishen has also combined its global leadership in battery storage with PV manufacturing to show a future that could see households going off grid with storage and large-scale renewable energy projects having substantial storage.  

Yingli is another company that is building the 21st century. The world’s largest solar PV manufacturer, it has already installed seven gigawatts around the world – 30 million solar panels. Yingli has an impressive fully automated production line. The giant robots that tower over and control the production facilities look like they have escaped from a bad science fiction movie but really they constitute 21st century infrastructure of a different form.

BYD, Lishen and Yingli are just three companies deserving of attention. The Australian Solar Council delegation met with many Chinese manufacturers focusing on PV, battery storage and LED lighting, and an impressive number are looking to invest in Australia and cement a footprint in the Australian market.

These companies are also focused inwardly at the massive Chinese market. China’s competitive advantage in 21st century infrastructure places it in a perfect position to export those skills, but also allows it to meet the nation’s extraordinary challenges – unsustainable pollution, diminishing water supplies and the challenge of accommodating the 1 million people who move each month from the country to the big cities.   

Australia is well placed to help China transition to a lower carbon economy through the expertise generated by its markets for carbon pricing, renewable energy and energy efficiency. Companies that have engaged in these markets in Australia will be in high demand in China. Similarly, Australian companies like Greenbank Environmental – Australia’s leading independent trader of renewable energy certificates – can help Chinese companies looking to engage in Australian markets.

China will likely be the world’s biggest economy within a decade, but its growth towards that achievement cannot be based on business as usual. It cannot afford the economic, environmental and political consequences that would flow from a permanent poisonous smog haze like the one that has blanketed China over the last week. It’s in Australia’s interest to work with China as it builds a strong lower carbon economy.

Ben Redmond is the settlements manager and head of energy efficiency with Greenbank Environmental.

East Asia Forum

Auguste Comte, the father of sociology, famously said that "demographics is destiny". China now has an ageing population. The National Bureau of Statistics estimates that by 2015 there will be some 200 million Chinese people over 60, increasing to 300 million by 2030, and perhaps as many as 480 million by 2050. Average life expectancy is now 73 for men and 79 for women, up by more than 12 years since 1970.

The twin phenomena of enhanced longevity and the one-child policy, introduced in 1978, mean that China has seen the most rapid move from demographic ‘sweet spot’ to an ageing society. These days, discussions on how China will manage this transition are often referred to as the ‘will China get rich before it gets old?’ debate.

Here, China will inevitably see its economy challenged in two ways: a decline in the working population and a rise in fiscal deficits linked to increased government spending to cope with the ageing population. Healthcare spending, pensions, social welfare and long-term care will all be additional costs to China’s social system. They come at a time when China’s urban social welfare system, in terms of pensions, healthcare and labour-force reform (employer-funded retirement programs, mandatory retirement ages and so on), are still in a process of change.

Chinese people will face increased healthcare costs as they get older, meaning that they will increasingly need to make out-of-pocket spending from their pensions, to draw down on their life savings, or sell their homes in order to pay for expensive treatments for long-term, incurable illnesses that are gradually less likely to be covered by current healthcare insurance schemes. In addition to this, they will also be an ongoing financial burden on their families.

The general lack of appropriate state healthcare, despite reforms, means that many Chinese adults have to save heavily and plan financially to create their own safety net to deal with possible illness as they get older. This contributes to the large amounts of consumer cash locked up in savings accounts and out of the consumer economy. Chinese savers already suffer from ‘financial repression’. Low or non-existent interest rates, combined with a limited range of personal financial products available, mean that saving is a never-ending process for most Chinese and that, consequently, a secure retirement fund is difficult to achieve.

This is exacerbated by mandatory retirement ages that are low by international standards. Currently the retirement age to receive a pension is 60 for men and 50 for women. Beijing is considering raising these limits to create work for younger people but the concomitant strain on the pensions system is a concern. Worries over, for instance, ending work at 50 but not receiving a pension until the age of are 65, and therefore having to self-fund the 15 years in between, have alarmed many older people (and their children) on internet discussion forums.

The Confucian ethic of filial piety, expressed in caring for elderly parents, remains strong in Chinese culture. And it seems the government will largely rely on that continuing (and seek to strengthen it through education). The Ministry of Health has established a target that by 2020, 90 per cent of care for the elderly will be home-based (that is, within the family largely), 7 per cent community-based and just 3 per cent provided by nursing homes or hospitals. These percentages are thought to be based on the experience of Singapore, obviously a much smaller, wealthier country that has a longer history of healthcare reform and an active immigration policy to replace lost younger workers as the demographics move upwards. Singapore has struggled to provide this amount of home-based care, indicating that China faces a massive, if not impossible, task. This places the major emphasis of elderly care on offspring, who largely do not have siblings with whom to share the burden and expense.

Geriatric specialists also point to the fact that enhanced longevity among a greater proportion of the population will mean a greater incidence of health problems associated with old age. For instance, recent studies from China suggest that the country may have more than 9 million old people actually diagnosed as suffering from dementia, but that perhaps 93 per cent of cases are undiagnosed. However, at present there are fewer than 50 specialist dementia facilities nationwide in the PRC.

Chinese society does seem to be starting to respond to its ageing demographics. The government is slowly reforming the pension system while the savings rate remains high partly due to saving for retirement, or because people are setting aside funds to look after parents in their old age. Senior citizens’ homes and care facilities have started to appear, overwhelmingly in the private sector.

Despite this, old age will increasingly be a major strain on the Chinese economy. At a time when the government is seeking to boost personal consumption, increasing amounts of income and savings will have to be diverted into care for the elderly, geriatric healthcare and medicines. While the quality of life of China’s elderly will become a key ‘quality of national life’ indicator, the strain on family budgets will also see the cost of old age trickle down the system, forcing many to make hard choices between, say, paying for their child’s overseas education or their parents’ care.

China cannot escape its demographic bind. All China can do is realise it and make the best preparations possible. Providing quality of life for China’s elderly will require the current economic reforms to successfully create jobs, maintain wage rises, allow for continued savings and permit a more regulated and participatory tax base to allow for additional government spending on geriatric care. It is impossible to divorce China’s demographics from its macroeconomics – a secure and pleasant old age will, for most Chinese, depend on continued economic growth.

Paul French was the founder of the Shanghai-based market research publisher Access Asia (now part of Mintel International). He is now an independent China analyst and author based in Shanghai and London. French is the author of various books on China including Fat China: How Expanding Waistlines are Changing a Nation (Anthem Press, 2010).

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Leading China where?’.

The controversial former chief executive of Telstra Sol Trujillo is not much loved in Australia. But he has bequeathed one great legacy for the telco giant – investment in Chinese digital assets.

When our American amigo left the country in 2009, there were few tears shed. He left behind a country that bitter about his comments labelling Australia “racist” and “backward”.

More importantly, his relationship with customers, regulators and Canberra was in tatters. Telstra shares, a staple diet for Australia’s mum and dad investors had tanked.  Roughly $25 billion was wiped from Telstra’s market value.

However, Trujillo’s investment in Chinese digital assets has netted billions for Telstra’s 1.4 million shareholders.  

When the telco giant floated its majority-controlled Autohome – a leading Chinese online car sales site – on the New York Stock Exchange, its shares surged as much as 77 per cent, valuing the company at $3.3 billion.

Telstra bought into online assets back in 2008 under Trujillo’s watch, when the company paid $76 million for a 55 per cent stake in Sequel Media, which owned Autohome and other assets.  The telco also recently lifted its shareholding from 66 per cent to 71.5 per cent, paying $137 million to its shareholder West Crest.

Its initial and subsequent outlays of more than $200 million have mushroomed into more than $2.2 billion or profits. This is roughly a 1000 per cent return on investment in less than five years.

Autohome is not the only success story for Telstra in China. In 2006, Trujillo also saw the company buy into SouFun – China’s second most popular property website. Telstra paid $254 million for a 50.5 per cent shareholding in the site.

When David Thodey, the ‘steady as she goes’ chief executive took over from the much hated Trujillo, he decided to offload the company’s stake in Soufun. The company’s board was uncomfortable with Trujillo’s aggressive strategy in China and wanted out.

Telstra made US$190 million on the sale in 2010, a tidy profit of 70 per cent on its initial investment. 

However, had Telstra not lost its nerve back then, its investment could have been much more juicy. When Soufun was debuted on the New York Stock Exchange on September 16, 2010, it was worth about $10.6 per share and when it closed on December 12, it was worth about $71.8 per share.

What a terrible loss for Telstra shareholders!

When Trujillo invested in internet start-ups in China back in 2006, the country’s venture capital market was under-developed and Chinese entrepreneurs were desperate for foreign capital. As a result, foreign investors have been behind some of the biggest internet success stories in China.

Yahoo, an early strategic investor in Alibaba – an e-commerce giant which is tipped to list soon – is expected to reap as much as $US36 billion from its investment, according to RBC Capital.  It means that Yahoo’s 24 per cent stake in Alibaba is actually larger than the market capitalisation of the company itself!

South African investor Jacobus Bekker also made billions from his investment in Chinese internet giant Tencent. He bought half of the Shenzhen-based company in 2001 for $32 million. The company’s market value surpassed $100 billion within a decade after floating in Hong Kong, making it one of the largest internet companies in the world.

Despite China’s tough foreign ownership laws, foreign investors like Telstra have used clever legal mechanisms to invest in one of the biggest internet booms outside of the United States and reaped handsome profits.

Seek chief executive Andrew Bassat and his brother Paul Bassat are also set to profit handsomely from the proposed float of Zhaopin, one of the largest job sites in China, which they have an 80 per cent shareholding in.

When the corporate history of Telstra is written, Trujillo should be given credit for his foresight in investing early into the now booming Chinese market.

AAP

Moves to cut the oversupply of grapes and lift sales both domestically and in major export markets are key features of a new strategy released by Australia's wine industry.

The Winemakers Federation of Australia (WFA) says the industry must also continue to engage in the wine and health debate and do more to increase access to international markets through the promotion of free trade agreements.

"The actions are all designed at improving industry settings to grow domestic and export markets and lift industry profitability," WFA president Tony D'Aloisio said on Friday.

"This growth and lift in profitability is important for regional jobs and to attract the capital required to re-invest in infrastructure and in necessary innovation for the sector to retain and improve global competitiveness."

As part of its plan, wine producers and growers will work to speed up actions to deal with the oversupply of commercial grade grapes.

The two groups will produce a regular review of vineyard profitability, including projections for key markets.

They will also commission research on improving vineyard flexibility and on alternative uses for grapes, although the WFA has knocked back the idea of a vine buyback program.

On market access, the industry wants the federal government to "rigorously" pursue free trade agreements with China and other regional trading partners.

It also wants more funds to increase Australia's presence at international trade shows and for the promotion of Australian wine through social media.

On health, the plan says the WFA will continue to promote responsible consumption and to analyse the link between wine prices and at-risk consumption.

Mr D'Aloisio said the new plan had wide support across the wine industry.

AAP

Chinese leaders have warned that the world's second-largest economy faces "downward pressure" and called for boldness in carrying out promised reforms aimed at reviving slowing growth.

In a report issued after an annual planning meeting on Friday, the Communist Party cited an array of problems, possibly trying to stir urgency about carrying out sweeping reforms promised last month in a long-range development blueprint.

There was no immediate word on whether the meeting set a growth target for next year. Investors and analysts were watching to see whether the party would cut its target from this year's 7.5 per cent.

The statement cited a glut of unneeded production capacity in some industries, environmental degradation and concerns about the quality of food and drugs.

"We must clearly recognise there is downward pressure on the economy," the statement said. "The thoughts should be bold and the steps should be firm in carrying out reforms and the people should have real benefits."

Chinese leaders are under pressure to overhaul a growth model based on exports and investment that has run out of steam after delivering three decades of rapid growth.

The plan last month promised China's more dynamic entrepreneurs a bigger role but said state industry would remain the core of the economy, a move some analysts warn could drag on growth.

Economic growth declined over the past two years, hitting a two-decade low of 7.5 per cent in the three months ending in June before rebounding to 7.8 per cent in the latest quarter. Analysts have warned growth might slow again in the current quarter or early 2014.

When Julie Bishop shifted Australia’s position on Israeli settlement activities in Palestine, there was no press release, no media conference and no interviews. It was not altogether surprising from a government determined to manage the media cycle more tightly, or simply to avoid controversy.

So it was significant when, two weeks ago, the foreign minister summoned the Chinese ambassador Ma Zhaoxu to upbraid him on China’s decision to unilaterally draw up an air defence zone over disputed islands in the East China Sea.

When dealing with such delicate geopolitical matters, the language used and the actions taken are always carefully calibrated. But in summoning Ma, Ms Bishop turned the dial up to eleven. It was as forceful a reaction as possible – short of sending him on the next flight back to Beijing. The aggressive stance was curious, considering that when Ms Bishop was in opposition, she was often quick to point out to the then Labor government that criticism of the Chinese is best done discreetly.

On her trip to Beijing last weekend, the extent of Australia’s diplomatic faux pas was made abundantly clear. China’s foreign minister Wang Yi took the unusual step of remonstrating Ms Bishop while the media were there to record it. As long as the cameras were trained on them, Wang was implacably po-faced. The Chinese, it seemed, were determined that the optics of this meeting would not be good.

Australia’s statements and actions on the establishment of the air defence zone had “damaged the mutual trust and affected the healthy development of the relations between the two countries,” said Minister Wang Yi.

“All sectors of the Chinese society and the Chinese people are deeply dissatisfied with it, which we believe the two countries don't want to see.”

A look at the reaction on Chinese social media, reveals he is largely right. With a few notable exceptions, the overwhelming response has been that Ms Bishop got what was coming. What does the defence zone even have to do with Australia? And who does this uppity foreign policy novice think she is anyway?

This weibo post by economist Mei Xinyu was typical:

“I heard Wang Yi gave visiting Australian Foreign Minister Bishop a serve? What does the establishment of our ADIZ even have to do with Australia? I get it that Bishop wants to protect Uncle Sam, but this was too much right? If you don't cut them down to size in the first instance they'll try to push their luck later and then you can forget any trade between the two countries.”

“America orders Australia “Jump!”,Australia says “How high?” posted China’s former ambassador to Iran Hua Liming on the Twitter-like site.

Ms Bishop’s reputation is taking a beating in traditional media too. This appraisal by one talking head on Phoenix TV got a good run:

“This person has no foreign affairs experience, no work experience. She’s been a spokesperson for the opposition party for so long, she was so taken aback [by Wang Yi’s comments] that she didn’t even know how to respond. The Australian ambassador sitting next to her had to remind her ‘You’ve got to speak up’ – only then did she respond.”

The game is fixed of course. It’s unclear whether that commentator was even in the room. China Spectator understands from a Chinese media source that their foreign ministry has requested that an extensive interview conducted with Ms Bishop be held back from broadcast. But before leaving for China, she did try to walk back her comments with the Chinese media in Canberra. 

Australia wasn’t taking sides in the territorial dispute, she argued, we were merely taking China to task for making the decision unilaterally. It’s a subtle but important distinction – but one that has failed to cut through for her.  

Other countries in the region – even those closer to the zone itself have managed to walk the line more adroitly. From the Chinese perspective, the USA ended up playing the role of mediator, Australia, on the other hand, looked like they were taking sides.

For the Chinese and Japanese, this isn’t a fight over a bunch of rocks in the East China Sea. As Kevin Rudd told a roundtable at The Atlantic magazine in Washington this week, it’s an historical issue that both sides have deeply invested their “public face” in.

"Anyone who thinks they've got a solution for solving the territorial dispute is deluding themselves. This has more than a century of toxicity attached to it, and a lot most recently,” he said.

Taking a principled stance against an increasingly powerful China has become more costly – just ask David Cameron. After he decided to meet with the Dalai Lama, UK-China relations were put in the deep-freeze for around eighteen months. On his recent trade mission to the country he went to great lengths to rebuild his image by publishing an op-ed in Caixin – China’s Economist– and he followed Rudd’s lead by opening a weibo account.

Julie Bishop needs to understand the full array of diplomatic tools available to her. Getting on Chinese social media should be a priority for her now.

AAP

A Chinese naval vessel came dangerously close to a US warship during a tense incident in the South China Sea last week, US military officials say.

The USS Cowpens, a guided missile cruiser, was forced to manoeuvre to avoid a collision with the Chinese ship that had crossed directly in front of it and halted, according to naval officers and defence officials.

China's amphibious dock ship came less than 500 metres from the American warship, a defence official said.

"This encounter happened in international waters in the South China Sea on December 5," the defence official, who spoke on condition of anonymity, said in an email.

"Eventually, effective bridge-to-bridge communication occurred between the US and Chinese crews and both vessels manoeuvred to ensure safe passage," the official said.

The official said the Cowpens had been in the vicinity of China's new aircraft carrier, the Liaoning, when the incident occurred.

The stand-off ended peacefully but underscored tensions between the United States and China, which escalated after Beijing last month declared an expanded air defence identification zone in the East China Sea.

Last week's confrontation occurred in the strategic South China Sea, where Beijing has aggressively moved to push for control over territory claimed by other countries in the region.

The US military has repeatedly vowed to keep operating in international waters and airspace and has increased its presence in Southeast Asia over the past year as a counter-balance to Beijing's more assertive regional stance.

China has declared an economic exclusion zone in part of the western Pacific but the United States considers the area international waters beyond Beijing's control.

US military leaders have warned that China's air defence zone could aggravate tensions and possibly trigger a dangerous incident.

Washington has refused to recognise the air zone and flew a pair of B-52 bombers through the area without notifying Beijing in advance.

The defence official renewed calls for bolstering military relations between the two countries to prevent misunderstandings.

"US leaders have been clear about our commitment to develop a stable and continuous military-to-military relationship with China," the defence official said.

"Whether it is a tactical at-sea encounter or strategic dialogue, sustained and reliable communication mitigates risk of mishaps, which is in the interest of both the US and China."

AAP

Australian coal mines are at risk of becoming "mothballed or abandoned" as China's commodity demands change, new research shows.

A study by Oxford University looked at how coal demand from China, which account's for half the world's coal consumption, due to environmental factors could lead to "stranded assets" in Australia.

Stranded assets have suffered from unanticipated devaluations.

The study, released on Monday from Oxford University's stranded assets program, outlines the environmentally-driven shifts already underway in China.

The shifts include a desire to reduce greenhouse gas emissions, reduce the exposure to the volatile commodity market and improving energy efficiency.

Researchers found these factors and others could force mine owners to re-evaluate the viability of developed coal projects and those in the pipeline.

"Demand below expectations, and lower coal prices as a result, would increase the risk that coal mines, reserves and coal-related infrastructure could become mothballed or abandoned," the report states.

"Prices could also drop to the point where it is in the interests of miners to cease production, resulting in stranded mines and dependent infrastructure such as railways."

Apart from the financial impacts on mine operators and magnates, state governments would also be hurt.

The study highlighted the significant impact posed to Queensland, where mega-mines are planned for the Galilee Basin.

State governments can reduce the risk of their investments ending up as stranded assets by limiting the use of taxpayer dollars on coal-related infrastructure, such as ports and railways.

Stranded assets program director and the study's co-author Ben Caldecott said these developments were not factored into positions most coal owners and operators were taking.

"Policy makers need to wake up to these risks as well," he said in a statement.

AFP

China has rejected as "slanderous" a renewed call by Japan's leader for Beijing to rescind its controversial air defence zone, the latest salvo in a territorial dispute that has increased friction in the region.

Beijing's retort came hours after Prime Minister Shinzo Abe said at a Japan-ASEAN summit in Tokyo on Saturday that he was "deeply concerned" by China's establishment of the air zone and that he believed many leaders of Southeast Asian countries attending the meeting shared his view.

"We express strong dissatisfaction with the Japanese leader's use of an international meeting to make slanderous remarks about China," Chinese foreign ministry spokesman Hong Lei said in an online statement late on Saturday.

He added that Japan's "attempt to promote a double standard and mislead international public opinion is doomed to fail".

"The one that has unilaterally changed the status quo over the Diaoyu islands is none other than Japan itself," Hong said.

He said China had taken lawful measures to safeguard its "sovereign territory" and was "fully justified and blameless".

China last month declared an air defence identification zone over an area of the East China Sea that includes the disputed Tokyo-controlled islands, which Japan calls the Senkakus.

Saturday's Japan-ASEAN summit was the first major gathering of Asian leaders since China's move to assert its power over the skies near its southeast coast.

In a joint statement, the heads of state on Saturday encouraged Japan's "proactive contribution to peace" and announced that they had "agreed to enhance co-operation in ensuring freedom of overflight and civil aviation safety", language viewed as a cautious show of support for Tokyo.

AAP

Japan and Southeast Asian countries have agreed to ensure freedom of movement in the skies, in the first major gathering of the continent's leaders since China declared a controversial air defence zone.

At a summit between Japanese Prime Minister Shinzo Abe and the leaders of the Association of Southeast Asian Nations (ASEAN) on Saturday, they "agreed to enhance co-operation in ensuring freedom of overflight and civil aviation safety".

The statement will be seen as a mild rap across the knuckles for Beijing, which is embroiled in sovereignty spats with Tokyo and four members of ASEAN.

The communique came at the end of a special summit to mark the 40 years of ties between Japan and the bloc, during which Abe pledged $US20 billion ($A22.50 billion) in aid and loans to the region over five years.

The meeting was the first significant gathering of Asian leaders since China announced an Air Defence Identification Zone (ADIZ) over the East China Sea last month, including the airspace above the Tokyo-administered Senkaku Islands, which Beijing claims as the Diaoyus.

At the time, Beijing said all aircraft entering the zone have to submit flight plans and obey orders issued by Chinese authorities, in an announcement that was widely denounced as inflammatory.

AAP

Chinese leaders have warned that the world's second-largest economy faces "downward pressure" and called for boldness in carrying out promised reforms aimed at reviving slowing growth.

In a report issued after an annual planning meeting on Friday, the Communist Party cited an array of problems, possibly trying to stir urgency about carrying out sweeping reforms promised last month in a long-range development blueprint.

There was no immediate word on whether the meeting set a growth target for next year. Investors and analysts were watching to see whether the party would cut its target from this year's 7.5 per cent.

The statement cited a glut of unneeded production capacity in some industries, environmental degradation and concerns about the quality of food and drugs.

"We must clearly recognise there is downward pressure on the economy," the statement said. "The thoughts should be bold and the steps should be firm in carrying out reforms and the people should have real benefits."

Chinese leaders are under pressure to overhaul a growth model based on exports and investment that has run out of steam after delivering three decades of rapid growth.

The plan last month promised China's more dynamic entrepreneurs a bigger role but said state industry would remain the core of the economy, a move some analysts warn could drag on growth.

Economic growth declined over the past two years, hitting a two-decade low of 7.5 per cent in the three months ending in June before rebounding to 7.8 per cent in the latest quarter. Analysts have warned growth might slow again in the current quarter or early 2014.

For all the hype, Apple Inc's long-awaited iPhone agreement with China Mobile Ltd may deliver little more than a fleeting revenue jolt for the US giant.

A deal with the world's largest mobile carrier, expected as early as this week, nets Apple 759 million potential new customers that could generate $US3 billion in 2014 revenue, or nearly one-quarter of Apple's projected revenue growth in its current fiscal year.

But after the initial haul, Apple will find itself in a familiar, expensive battle with its main smartphone rival, South Korea's Samsung Electronics Co Ltd, to win over customers, one wallet at a time.

And China Mobile will likely have to wait at least a year for its payout as it spends billions of dollars to build a 4G network so customers can make full use of their iPhones.

"The easiest way to grow iPhone sales was always distribution. This was the pot at the end of the rainbow and now that we're there, it's going to be an old-fashioned slog it out over customers," said Ben Thompson, a Taipei-based writer on the technology industry at stratechery.com.

China is Apple's second-largest market after the United States. Net sales in China for the fiscal year ended September 2013 rose 13 per cent to $US25.4 billion, accounting for about 15 per cent of Apple's $US170.9 billion in total net sales.

But its performance has been mixed. Where once there were lines around the block for the newest iPhone, now Apple faces intense competition from Samsung plus a host of local players such as Xiaomi making cheaper smartphones.

China Mobile, which says it already has 45 million iPhone users, could gain 17 million new activations and the deal should generate at least $3 billion in revenue for Apple in 2014, according to Forrester Research.

Analysts expect Apple's revenue to increase by $US13.2 billion in its fiscal year ending September 2014, according to Thomson Reuters I/B/E/S.

Apple declined to comment on its negotiations with China Mobile. China Mobile spokeswoman Rainie Lei said talks were ongoing and declined to elaborate.

After the gold rush

The last of the big-name carrier signings marks a shift in the smartphone battle: once availability is no longer an issue, marketing becomes the deciding factor.

Samsung has the spending edge.

The South Korean titan is expected to spend around $US14 billion on advertising and marketing this year. Samsung spends a bigger chunk of its annual revenue on advertising and promotion than any of the world's top 20 companies by sales - 5.4 per cent, according to Thomson Reuters data. Apple spends just 0.6 per cent.

"Apple is definitely going to have to increase marketing spend," said Bryan Wang, a Beijing-based analyst with Forrester Research.

"Apple is going to gain revenues from China through the upcoming China Mobile agreement. But its next question will be how to further compete with competitors after the first year."

Another problem for Apple is consumer habits in China, where smartphone buyers tend to prefer cheaper handsets. More than 88 per cent of people buying smartphone handsets in the third quarter spent less than $US500, according to data from Canalys.

The latest iPhone 5S costs $US868 in China while the 5C fetches $US737, according to Apple's China website.

To be sure, even winning over a tiny percentage of China Mobile's 759 million subscribers would be a boon for Apple.

"The absolute number of people who are rich and can afford an iPhone is quite large. It's a big deal," said stratechery.com's Thompson.

One-two punch

For China Mobile, the payout will have to wait as it pumps billions of dollars into its 4G network roll-out and iPhone subsidies eat into profit margins.

It will take at least one year before an iPhone deal is profitable for the carrier, according to Delta Partners, a global telecoms, media and technology advisory and investment firm based in Dubai.

Moody's Investors Service expects China Mobile's capital spending as a percentage of revenue will be about 30 per cent in 2014, due to 4G spending. That works out to about 196 billion yuan ($US32.28 billion), based on Thomson Reuters data on revenue forecasts from 29 analysts.

China Mobile's existing iPhone users can only use the company's slower 2G wireless speeds because its proprietary 3G TD-SCDMA standard is not compatible with iPhones.

The company hopes the one-two punch of high-speed 4G mobile Internet and Apple iPhones will bring back customers who abandoned the carrier for China Unicom Hong Kong Ltd and China Telecom Corp, both of which already offer the iPhone. China Mobile also hopes to get current subscribers to upgrade to premium product and service.

One wild card is how the deal will be structured. In the United States, Apple's home ground, wireless carriers subsidise the iPhone in return for two-year contracts. These subsidies help make the iPhone affordable to a wider US customer base.

Analysts estimate operators pay about $400 subsidy for each iPhone they sell, compared with about $US250 to $US300 for other smartphones.

While carriers take an initial margin hit, they typically recover the subsidy cost over the two-year contract because iPhone buyers typically tack on pricy data plans.

By a staff reporter

Activity in China's manufacturing sector continued to expand in December but at the slowest rate in three months, according to a private survey.

The HSBC flash China manufacturing purchasing managers' index printed at 50.5 in December, down from 50.8 in November.

A reading above 50 on the index indicates expansion, a reading below means contraction.

HSBC chief economist, China Hongbin Qu said the December PMI reading slowed marginally from November’s final reading, but still stands above the average reading for the third quarter implying that the recovering trend of the manufacturing sector starting from July still holds up.

"As a result, we expect China's GDP growth to stabilise at around 7.8 per cent year-on-year in the fourth quarter," he said.

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China has embarked on a new phase of economic development. In the future, it will no longer rely on export might for economic growth and prosperity. The mainland policymakers have started on a course to turn China into a fully-fledged economy based on domestic consumption, services and innovation. As a result, China has become one of the biggest trade and investment locations for South East Asia.

The Association of Southeast Asian Nations (ASEAN) continues to rise as an economic powerhouse with 600 million people and the combined GDP of US 2.1 trillion. As a region it will be one of world’s fastest growing consumer markets over the next two decades. The ASEAN Economic Community will come into existence at the end of 2015 effectively creating one of the world’s biggest single markets.

Chinese-ASEAN trade relations are essentially reciprocal in nature. No longer is China the same exporting competitor of past decades. China represents an important new consumer market for ASEAN, while ASEAN is growing in importance for mainland China’s manufacturing. These growing ties open up numerous opportunities for many ASEAN countries such as Indonesia, the Philippines, Vietnam and Cambodia, which have large pools of labour and make for competitive low cost production locations for mainland companies.

Trade between China and the ten member countries of ASEAN rose more than ten percent to US $400 billion (446 billion) in 2012. It is expected annual bilateral trade volume will boost to US 1 trillion by 2020. Two-way investment is expected to reach US 150 billion within the next eight years. Within ASEAN’s ten member countries, Malaysia, Singapore and Thailand lead the way and are considered to be the world’s most burgeoning economies, even in their own right.

China has announced an emphasis on ‘balanced trade’ strategies with ASEAN. Take Malaysia as an example; two-way trade with China reached an historical high of US 94.8 billion last year. Both countries have announced plans to significantly boost trade through measures, such as supporting industrial parks in each other’s countries that will increase two way trade 60 per cent to US 160 billion by 2017.

The changing nature of Asia’s economic generators is expected to support this ‘balanced trading’ in the region. The promise of growth in middle class consumerism to 1.75 billion people across Asia by 2020 is going to be a huge draw and China is expected to be a direct beneficiary of this rising ASEAN consumerism. The rapid rate of urbanization, which is also accompanied by the rise of middle-class families in China will also change consumer behaviours and lifestyles, stimulating the demand for imports of quality and luxury products and services that will benefit ASEAN countries.

ASEAN has surpassed Australia, the US and Russia to become the fourth largest destination for China's outward investment and is China's third-largest source of foreign direct investment. In 2012, China’s investment in ASEAN economies was US 4.42 billion, up 52 per cent from a year earlier. By the end of 2012, Singapore had become the destination where Chinese companies invested most, followed by Cambodia, Burma, Indonesia and Laos, according to China-ASEAN Business Council.

In the coming decade, Beijing is expected to do its part to help deepen economic links and integration in ASEAN. China is focussing on increasing direct investment and building infrastructure in the region, especially roads and high-speed trains. According to the rail strategy, the lines start in Yunnan's capital Kunming and will connect Laos, Vietnam, Cambodia, Myanmar, Thailand, Malaysia and Singapore. China will rely on its geostrategic position linking China’s southern region over land with its ASEAN neighbours.

Closer economic ties between China and ASEAN will create more mutual opportunities for corporates in both geographies. Most ASEAN member countries already tap into the Chinese market and are exporting a variety of goods, materials and commodities ranging from agricultural, electronics and to textiles.

For Chinese corporates, ASEAN offers a well-diversified mix of natural resources, agriculture, electronics, large consumer markets and rapidly developing infrastructure projects. Indonesia has an abundance of natural resources and a need to expand its infrastructure in transportation. Malaysia has opportunities in large-scale infrastructure projects such as power plants; rail; and oil and gas. Thailand is an automobile manufacturing hub and has significant opportunities in food, energy and communications.

Trade between the huge markets of China and ASEAN is expected to grow and the use of renminbi as an alternative trading currency will benefit businesses on both sides. Among the seven currencies in ASEAN, those of Indonesia, Malaysia, Philippines, Singapore and Thailand, tracked the RMB closer than the US dollar by a factor of 40%.

Chinese banks are poised to widen the use of the renminbi among the ASEAN countries by expanding the scope of currency convertibility and conducting offshore trials of the currency. Singapore is accounting for the third largest amount of renminbi payments in Asia (excluding Hong Kong and mainland China) which recently doubled the swap agreement to 300 billion yuan. This highlights the increasing importance of the Asean region to the use of RMB – potentially giving the South-east Asian city-state an advantage in renminbi offshore trade markets.

The past has seen China-ASEAN relations coloured by competition between these huge economic powers in the global economy. The expected growth in two-way trade and investment has set a new more positive tone for relations as these mighty regions become a fully-fledged economic market of 1.9 billion people.

Bruce Alter isHead of Global Trade and Receivables Finance, HSBC Bank (China)

AAP

Singapore budget carrier Tigerair and Taiwan's China Airlines will set up a new no-frills airline to tap growing demand for cheap travel in Asia.

Tigerair Taiwan will have a paid-up capital of $Tw2 billion (about $A75.67 million), with the Singapore-based carrier holding a 10 per cent stake, the two airlines said in a statement.

China Airlines, Taiwan's leading airline by fleet size, will hold the remaining 90 per cent.

Tigerair said in the statement the new airline will be managed as a standalone entity, but will utilise its website as well as sales and distribution platforms.

"The new JV (joint venture) will allow us to extend our presence into the new untapped markets of Taiwan, Japan and Korea," said Koay Peng Yen, group chief executive of Tigerair.

Sun Hung-Hsiang, chairman of China Airlines, said: "China Airlines' knowledge of the Taiwan market coupled with Tigerair's expertise in the no-frills sector should stimulate demand in the civil aviation market here."

The formation of the new carrier comes just a month after TransAsia Airways, Taiwan's first private airline, secured government approval to set up a so-far unnamed budget subsidiary.

Demand for discount flying has been rising in Asia. Currently 12 foreign budget airlines, including Malaysia-based AirAsia and Japan's Peach Aviation, offer services to and from Taiwan.

Singapore's Tigerair, which was previously known as Tiger Airways before a rebranding exercise this year, has been looking for expansion opportunities in Asia.

Last year, it bought a 33 per cent stake in beleaguered Indonesian carrier PT Mandala Airlines. In March, it raised more than $Sg297 million ($A265.70 million) to fund its Asian expansion plans.

Its shares rose 2.00 per cent to $Sg0.51 in mid-day trade on Monday after the announcement.