AAP

Oil giant BP forecasts world demand for energy will grow by 41 per cent by 2035, driven by growing consumption in the booming economies of China and India.

That represents a drop from 55 per cent growth in the previous period, and BP says the growing use of renewable energy will help energy suppliers meet the world's needs.

BP Chief Executive Bob Dudley says competition is "unlocking technology and innovation to meet the world's energy needs".

Dudley says "trends in global investment and policy leave us confident that production will be able to keep pace".

BP says rising energy use will boost global carbon dioxide emissions by 29 per cent in the period, even as emissions decline in Europe and the US.

AAP

China has launched a scathing diplomatic attack against Japan, warning African nations of an impending "resurrection of Japanese militarism" and branding Prime Minister Shinzo Abe a "troublemaker".

In a press conference held the day after Abe wrapped up a landmark African tour aimed at boosting Japan's presence in the continent, China's ambassador to the African Union accused him of trying to undermine Beijing's own diplomatic reach.

"Abe has become the biggest troublemaker in Asia," Xie Xiaoyan, who is also China's ambassador to Ethiopia, told reporters on Wednesday.

"He has worked hard to portray China as a threat, aiming to sow discord, raising regional tensions and so creating a convenient excuse for the resurrection of Japanese militarism," the ambassador said at the news conference, during which he showed photographs of tortured and dead Chinese victims of World War II.

He alleged that the conservative Japanese leader's visit to Africa was part of what he described as a "China containment policy".

"The world will have to be on the alert that this prime minister is leading the country onto a very dangerous road, and the international community should do everything to prevent Japan from going down even further along the road," he said.

Xie also repeated criticism over Abe's visit last month to the Yasukuni war shrine, believed to be the repository of around 2.5 million of Japan's war dead, including several high-level officials executed for war crimes after World War II.

"Think how provocative it would be if Germany were to pay homage to a shrine honouring say, Hitler," he said.

Abe's three-country Africa tour, which took him to Ivory Coast, Mozambique and Ethiopia, was aimed at boosting Japan's economic and political ties with Africa, where China's widespread investments and interests are long-established.

AAP

China and Australia have agreed during the 16th Defence Strategic Dialogue in Canberra to further co-operate on maritime engagement, strategic policy and practical exercises.

The Chinese People's Liberation Army's deputy chief of staff, Lieutenant General Wang Guanzhong, on Monday had talks with Australia's Defence department secretary Dennis Richardson and acting Defence Force chief Air Marshal Mark Binskin.

During the dialogue both nations endorsed the Australia-China Defence Engagement Action Plan, a Defence statement said.

The plan will mean further co-operation in maritime engagement, strategic policy discourse, educational exchanges and practical exercises, as well as reciprocal high-level visits.

The talks come months after Foreign Minister Julie Bishop drew China's ire for criticising the country's announcement of a new Air Defence Identification Zone (ADIZ), which covers a string of disputed islands claimed as Senkaku in Japan and Diaoyu in China.

Australia and China have had a series of Defence exchanges in the past year.

In October Defence welcomed a visit by General Zhao Keshi, a member of the Chinese Central Military Commission - the most senior Chinese military visitor to Australia in three years.

In 2013 Australia also hosted an inaugural Strategic Policy Exchange, in which both countries exchanged views on regional security and the formation of military capability requirements.

AAP

Australian billionaire Andrew "Twiggy" Forrest's risky gamble on China's appetite for iron ore is paying off with Fortescue Metals Group getting its debt pile below $US10 billion ($A11.19 billion).

Australia's third largest iron ore miner, founded by Mr Forrest, announced on Wednesday that it was paying back $US1.6 billion of debt not due until 2015 and 2016.

A cashed-up Fortescue is paying back debt early to take advantage of an iron ore price that has been above $US130 a tonne since July last year, defying widespread criticism by analysts predicting a fall in the price.

The latest repayments will reduce gross debt to $US9.6 billion, which peaked at $US12.7 billion last year, with net debt down to $US7.8 billion from a peak above $US10 billion.

Debt repayments and refinancing have reduced annual interest payments by $US300 million.

Fortescue used debt to drive what was seen as a risky tripling of production over the last two years to 155 million tonnes a year.

The world's largest miner BHP Billiton produced 155 million tonnes of iron ore, its biggest earnings business, two-and-a-half years ago.

Fortescue was forced into an emergency debt restructure in 2012 amid a cashflow crisis when iron ore prices plunged, but chief executive Nev Power has maintained he sees strong Chinese demand for at least another two decades.

The latest voluntary payment underscored the company's commitment to repay the debt that funded the expansion to 155 million tonnes a year due to be finished by March, he said on Wednesday.

"The substantial increase in production and strong market conditions have strengthened our balance sheet and enabled us to accelerate our debt reduction program," he said.

It hopes to reduce its gearing - equity (or capital) to borrowed funds - from a peak of 70 per cent to 40 per cent - this year and achieve an investment grade from ratings agencies.

Fortescue has long been criticised for trying to grow too quickly with too much debt but analysts have acknowledged that they are surprised by the high iron ore price and the miner is properly taking advantage.

"If prices stay good for another year or so they will have a lot of debt paid off," Morningstar analyst Mathew Hodge said.

"I think its inevitable that the iron ore price will fall, the amount of money the whole industry is making is obscene.

"Is that sustainable? I don't think so ... we are going to get more supply come in too from BHP, Rio, Vale, Gina Rinehart."

The company's shares rose 18 cents, or 3.5 per cent, to $5.33.

When BHP Billiton put its Ravensthorpe nickel asset on the auction block, there were several Chinese bidders interested. However, once the Chinese regulator anointed China Metallurgical Corporation as the preferred bidder, others dropped out.

When Chinese companies want to invest overseas, they first have to win a beauty contest held at the National Development Reform Commission, which oversees international mergers and acquisitions.   

They have to demonstrate to the NDRC why they are the best company to acquire the overseas asset. The commission will consider competing proposals from bidders and grant a ‘road pass’ – industry parlance for approval of the company it considers to be the best bidder.

The logic behind the one-bidder policy is simple. Andrew Michelmore, chief executive of MMG, a Chinese-owned and Melbourne-headquartered mining company, says that given state-owned banks mostly finance overseas acquisitions, it is in China’s best interest not to bid up the price through competing offers from Chinese entities.

For example, when Shanghai Automotive Industry Corp, the largest carmaker in China, made a tilt at Korean automaker Ssangyong, the emergence of another Chinese bidder at the auction forced SAIC to increase its final offer.

In principle, the government should not be in a position to judge who is the best bidder for overseas assets. However, in China this is considered necessary because the country’s economic system favours certain state-owned players.  They often have access to cheap credit from state-owned banks and some senior executives prefer market share and size over profitability.

As a result, some Chinese companies are happy to pay above market price for assets. Regulators like the NDRC and the state-owned Assets Supervision and Administration Commission, which oversees the 113 largest state-owned companies, are very concerned about fratricidal wars between Chinese companies abroad.

So the NDRC normally just grants one road pass to bidders that are going after the same assets, preventing Chinese companies from bidding against each other at the ultimate cost to the Chinese state.

However, there are several cases in recent years that show the official ‘one Chinese bidder’ policy is under threat, especially in light of the recent relaxation of the outbound investment approval process.

This is an important development for the mergers and acquisitions market in Australia and overseas. Chinese players have emerged in the last few years as the most active M&A dealmakers.

If Beijing were to relax its one-bidder rule, it would certainly make the bidding process more competitive and benefit the sellers of assets. It would also make it easier for target boards and their advisors to deal with situations where there are multiple Chinese bidders.

In early 2012, two Chinese construction machinery companies, Zoomlion and Sany, were bidding for German concrete pumping company Putzmeister. Zoomlion got its road pass from the NDRC, but Sany gazumped Zoomlion by signing a binding agreement with Putzmeister before it had even obtained a road pass. The NDRC eventually gave the green light to Sany’s bid.  

There was a lot of speculation about Sany’s ability to out-manoeuvre both the NDRC and Zoomlion, a powerful state-owned enterprise. Two factors stood out” Sany financed the deal out of its own cash reserve and had no need to obtain state-backed financing, and Sany’s chairman Liang Wengeng is powerful businessman with strong political ties.

Most recently, two Chinese state-owned companies, Tsinghua Unigroup and Shanghai Pudong Science and Technology Investment, both bid for NASDAQ-listed RDA Microelectronics in late 2013.

Tsinghua won the two-way bidding war, despite the fact that the NDRC had only granted approval to Shanghai Pudong. Media reports suggested that the NDRC was not likely to bless Tsinghua’s fait accompli but the company was adamant that it could secure the regulator’s blessing and agreed to pay $70 million if it could not.

M&A lawyers and bankers waited keenly on the outcome of the case to provide them with better clarity over the one-bidder principle. However, the change to the outbound approval rule, which increased approval threshold increased to one billion, rendered the decision unnecessary.

“Had the Chinese regulators not eased outbound investment rules, the NDRC’s decision would have provided greater clarity to assist target boards and their advisors to navigate competitive situations where multiple Chinese bidders participate,” said Paul Schroder and Xiong Jin, partners from King & Wood and Mallesons, who have advised on some of the biggest Chinese transactions in recent years.

While it is the market perception that the NDRC only grants one road pass to Chinese bidders chasing after the same assets – with the result that Chinese companies will not bid against each other – recent cases suggest that perception is not always correct.

Beijing has taken positive steps to simplify the outbound approval process, returning investment decision-making powers to companies and individuals. As such, road passes may be become a thing of past in the not-too-distant future. This is good news for Australian assets sellers who can benefit from a more competitive bidding process.

By a staff reporter

Telstra has appointed a former Motorola executive to be the new head of its China operation at a time when the company is eyeing growth opportunities in the world’s second largest economy.

Guo Ruibin, the former chief executive of Motorola China will telco giant’s China operation which is undergoing significant re-organisation after the float of Autohome – one of China’s largest online car sales sites – on the New York Stock Exchange and the sale of Hong Kong mobile carrier CSL.

Telstra boss David Thodey identified Asia one of the company’s top three growth areas at the last year’s investor day presentation.

Tim Chen, head of Telstra International said Mr Guo would play an important role in developing Telstra’s business in the Greater China region, according to Sina News.

East Asia Forum

When renminbi internationalisation was making rapid progress in 2011, some leading investment banks predicted that by the end of 2012 Hong Kong’s offshore RMB deposits would reach more than 1 trillion yuan, cross-border RMB trade settlement would surpass 3.7 trillion yuan, and RMB-denominated bonds and loans would grow to 700 billion yuan. These predictions were way off the mark. However, on the other hand, RMB trade settlement has maintained its growth momentum  – amounting to 2.6 trillion yuan and accounting for some 10 per cent of China’s total trade settlement as of late-2012. This is quite a remarkable achievement.

The experience since the launch of RMB trade settlement schemes in 2009 shows that exchange rate arbitrage and interest rate arbitrage are the two key drivers for the progress of RMB internationalisation.

RMB import settlements enabled the RMB to flow into Hong Kong, which established a Hong Kong-based RMB pool. While the RMB exchange rate in Hong Kong, dubbed CNH, is decided by market forces, the rate in the mainland, dubbed CNY, is subject to constant intervention by the People’s Bank of China. As a result, two exchange rates coexist for the RMB. Whenever the RMB is under pressure to appreciate, the CNH-CNY spread increases, importers in the mainland purchase the US dollar in Hong Kong to pay their imports, and RMB liquidity flows into Hong Kong. Owing to appreciation expectations and the opportunities for investment in RMB-denominated assets in the mainland that have higher returns, RMB deposits and bond issuance in Hong Kong have increased correspondingly.

However, since late 2011, due to China’s shrinking current account surplus and large fluctuation of cross-border capital flows, the expectation of the RMB’s appreciation has weakened significantly. Due to the narrowing or reversing of the CNH-CNY spread and the remaining capital controls, while Chinese importers became less active in purchasing US dollars in Hong Kong for exchange rate arbitrage, residents in Hong Kong were less eager to hold RMB deposits.

But why have RMB trade settlements continued to increase despite declining opportunities for exchange rate arbitrage? While a contributing factor is the sheer size of China’s trade and the convenience of using the RMB for transaction settlements, an important additional factor is interest rate arbitrage, which has led to a rapid increase in RMB-denominated letters of credit (L/C).

There are many ways of doing interest rate arbitrage through L/C. For example, Enterprise A, a mainland enterprise, can deposit a certain amount of RMB in a mainland bank for one year. Under the RMB import settlement scheme, it can use the RMB deposit as collateral to obtain a RMB-denominated L/C from the mainland bank, and use the L/C to purchase goods from its affiliate – Enterprise B in Hong Kong. Enterprise B in turn can use the L/C as collateral to borrow US dollars from a bank in Hong Kong and use the dollars to buy back the goods it has sold to Enterprise A. Enterprise A then converts the USD into RMB in the spot market and deposits it in its bank in the mainland. When the L/C is settled one year later, Enterprise A pays Enterprise B in RMB via the mainland bank. Finally, Enterprise B converts the RMB into the dollar at the exchange rate, which has already been locked in the NDF (non-deliverable forward) market, and repays the dollar loans extended by the Hong Kong bank. Because the interest rate on RMB deposits is significantly higher than that on dollar loans, Enterprise A and its affiliate Enterprise B obtain material profits from this process.

An unexpected development in RMB internationalisation in recent years is the significant increase in the use of the RMB as a reserve currency by foreign central banks. This is not only a reflection of China’s economic strength but also a result of the weakening status of traditional reserve currencies, particularly the US dollar and euro. This implies that efforts to expand the use of the RMB will also be influenced by changes in preference for the US dollar. The more political wrangles in Washington erode economic confidence, the more scope the RMB has to make inroads in becoming an international reserve currency.

A fundamental constraint for RMB internationalisation is China’s capital controls. Although the internationalisation of a currency is not tantamount to capital account liberalisation, the degree of internationalisation is conditional on the extent of capital-account liberalisation. China has embarked on the process of capital account liberalisation in a gradual manner since 1996, and the remaining capital controls are mainly used to regulate short-term capital movements.

The question facing the Chinese government at the moment is whether it should abandon such controls. Certainly, in the right circumstances, capital account liberalisation will give an extra boost to RMB internationalisation. But before having made the capital account fully open and the RMB freely convertible, China needs first to put its own house in order. Macroeconomic stability has to be achieved; the high ratio of financial leverage should be reduced; a rational and flexible interest rate structure must be created; risk management capacity across industries should be established; and intervention in the foreign exchange market minimised. Most importantly, China must make the RMB exchange rate flexible to reflect demand for and supply of foreign exchange in the forex market. The litany of tasks required does not end there. And all of this will take time. But without completing these reforms, hasty capital account liberalisation could lead to dire consequences.

My bet is that due to the high risks involved, the Chinese government will maintain a gradualist approach with regard to capital account liberalisation. Hence, RMB internationalisation will continue to enjoy steady progress but there will be no sensational developments. After the capital account has been fully liberalised and RMB dynamics are no longer driven by arbitrage, then the progress of RMB internationalisation – alongside the continuous expansion of the economy – will depend increasingly on the specific nature of Chinese firms, industrial organisation, business models, the type of products traded, and the bargaining power of Chinese firms and their counterparties.

There is no doubt whatsoever that the RMB will become a major international currency, but the internationalisation journey is a long march. China is just at the beginning.

Yu Yongding is former President of the Chinese Society of World Economy and was Director-General of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

This article was originally published at East Asia Forum. Reproduced with permission.

To what extent are Mainland Chinese state-owned companies subject to political control or influence from Beijing?

The CEO of the Rio Tinto Group, Sam Walsh, provided one answer in a speech in Beijing late last year. Bemoaning the ‘misconceptions’ regarding China’s state-owned enterprises, he argued:

“Their principal shareholder happens to be a government entity, but their corporate goals and motives are largely identical to ours. They seek to run a profitable business that is internationally competitive. They worry about safety and sustainability. About productivity and costs. They juggle the need to pay dividends with the desire to reinvest for the future. There is no hidden agenda, just the same goals and concerns that occupy the directors of any western company.”

This is certainly the line that many in Beijing like to promote. It is also one that I notice many in corporate Australia dutifully repeating.

However, suggesting some sort of equivalence between the management of private companies like Rio-Tinto, and enterprises that have the state as their ultimate controlling shareholder is overstating matters considerably. It also, I think, sells Rio Tinto management short.

Management of the Anglo-Australian mining company may have made some false moves of late, but it clearly would be a very different company – less profitable and more subject to government interference – if its ultimate controlling shareholder were Beijing.

It would also, for that matter, be a very different company if it were wholly or partly owned by Canberra.

This is not mere speculation. Australia, after all, has no shortage of experience with corporations fully or partly-owned by the state – and knows well their shortcomings. All the things that people say of China’s state-owned enterprises today, they used to say of our own “national champions”.

In the 1980s directors of state-owned Qantas, the Commonwealth Bank, Telecom Australia, etc. were often well-credentialed and sophisticated people. They also sought to run a profitably business, worried about productivity and cost, and juggled the need to pay dividends.  In theory, their management also had a high degree of autonomy and independence.

The reality though was that their investment and operational decisions were invariably influenced, directly or indirectly, by the government of the day: from what factories to open/close, to staffing levels, to the range of product/services provided, to the price they could charge for them, to who got to become and then remain directors of these companies.

If more evidence is required of how politics and commercial decisions clearly mix in state-owned companies then one need look no further than recent experience with Australia’s newly created behemoth, the National Broadband Network.

Even if one knew nothing about how politically charged the environment can sometimes be at the upper echelons in modern China (and it is), one would nevertheless be able to reasonably infer that Beijing does have some degree of political control or influence over its enterprises in which it is a principal shareholder. The laws of economics are, after all the same, in Shanghai as they are in Sydney.

It is true, the exact influence that the government (or, more accurately, the Party) does exert on particular decision-making varies considerably and often depends on the context – but it is rarely entirely absent and sometimes it reasserts itself at unpredictable times. A proper understanding of the mechanics of any proposed China-related deal or any on-going management China operations requires this to be taken in to account.

One does not have to believe in ‘hidden agendas’, for example, to believe that CITIC Pacific’s ill-fated Sino-Iron ore project in Western Australia was driven at least in part by national interest considerations in Beijing rather than by purely commercial objectives.

One does also not need to be conspiratorially-minded to believe that – regardless of what crimes he may have in fact committed (if any) – the timing of the prosecution of Stern Hu was suspicious and likely a tactic for increasing the negotiating position of Chinese state-owned corporates against companies like Rio-Tinto.

All that said, the fact that Beijing does exert some degree of control over its state-owned enterprises is not the same thing as saying any investment by them in Australia is or could be a threat to our national security. It is the question of national security that needs to be assessed separately and on its own merits.

Some proposals, like Huawei’s planned investment in the National Broadband Network (NBN) will be rejected because the risk is deemed too high. Others, like Chinese participation in mining projects, will pose little national security risk.

Mainland Chinese investment clearly requires a higher degree of scrutiny in any national security risk assessment because of the different nature of the regime and its uncertain political future. But this also applies to other nations that are not traditional allies and which have systems of government very different to our own like Saudi Arabia and Russia. In theory, if handled properly, we could have accepted investment from state-owned companies from Mussolini’s Italy in, say, agriculture or mining, without imperilling our national security in any way.

The only way this will not work in the long term is if our political and corporate leaders, either because of commercial interest or simply lack of reflection, start increasingly favouring Beijing-style economic or political solutions to our country’s problems. Or by pretending – when it comes to corporate and political governance in our respective countries – that there are no real differences at all.

Dan Ryan is managing director of Serica Services, a China-focused corporate advisory firm.

AFP

Overseas investment into China rose 5.3 per cent last year, official data shows, bouncing back after declining in 2012 for the first time in three years.

Foreign direct investment (FDI), which excludes financial sectors, totalled $US117.59 billion ($A132.33 billion) last year, the commerce ministry said.

The figure is up from the $US111.72 billion posted in 2012, when it skidded 3.7 per cent in the face of economic weakness in developed markets and a growth slowdown at home.

For December alone FDI increased 3.3 per cent year on year to $US12.08 billion, the ministry said.

"In 2013, China's foreign direct investment steadily rebounded," the ministry said in a statement, adding that it had increased for 11 straight months from February.

The ministry said FDI in the services sector made up more than half the total for the first time, accounting for 52.3 per cent.

Services industry investment reached $US61.45 billion, a gain of 14.2 per cent, it said.

Chinese overseas investment rose 16.8 per cent to $US90.17 billion last year, the ministry said as mainland firms continue to buy foreign assets, particularly energy and resources, to power the world's number two economy

"China's overseas investment will probably exceed FDI next year or in 2016, if not this year," ministry spokesman Shen Danyang told reporters.

FDI from the European Union jumped 18.1 per cent to $US7.2 billion in 2013, while that from the United States rose 7.1 per cent to $US3.35 billion.

But by far the most investment into China comes from a group of 10 Asian countries and regions including Hong Kong, Taiwan, Japan, Thailand and Singapore. FDI from those economies rose 7.1 per cent to $US102.52 billion.

FDI from Japan, however, fell 4.3 per cent to $US7.1 billion, the figures showed, as Asia's two largest economies remain engaged in territorial disputes that have led to a frosting of relations.

Among China's outbound investment destinations, Russia soared 518.2 per cent to $US4.08 billion last year with a raft of projects under way, including in the energy sector.

Chinese investment to the United States also surged, 125 per cent to $US4.23 billion.

In September, shareholders of US pork giant Smithfield Foods agreed a takeover by China's Shuanghui International, the biggest ever Chinese acquisition of a US company.

Investment to the European Union, however, fell 13.6 per cent owing to trade disputes between Beijing and Brussels, including over Chinese solar panels and European wine.

Investment to Japan fell a sharp 23.5 per cent, while to Hong Kong it slipped six per cent, the ministry said, without providing totals.

AAP

Police in China have detained a prominent Uighur academic and outspoken critic of government policy towards the mostly Muslim minority, his wife says.

Ilham Tohti was taken to an unknown location by several dozen police on Wednesday along with his mother, his wife Guzaili Nu'er said, adding that police had confiscated their mobile phones and computers.

Tohti, 45, is an economist at a university in Beijing and has been critical of China's policies towards Uighurs, who are concentrated in the far western region of Xinjiang, which is regularly hit by unrest.

Police did not carry out any legal procedures while forcibly detaining Tohti in front of his two young children, his wife said.

"I asked (the police) where they had taken him, but they didn't say a word," she said.

"It had a big impact on my kids, they have been upset and crying since last night, now I don't even have a mobile phone."

Police combed through the family house, confiscating several computers and other items including phones and academic writings, she said.

It was not clear what triggered the police action, but Tohti has recently expressed fears on his website and in interviews with foreign media about increased pressure on Uighurs following a deadly attack in Beijing's Tiananmen Square in October.

Officials blamed the attack on suspects from Xinjiang.

Tohti has been detained on a number of occasions in the past few years, including for more than a week in 2009 after his website ran reports on riots in Xinjiang which killed around 200 people.

His website, Uighurbiz, was offline on Thursday after it published a story about the detention.

Tohti, who lectures at the Central University for Nationalities in Beijing, did not answer his personal phone on Thursday and Beijing police were not immediately available for comment.

The vast Xinjiang region, which borders central Asia, has been hit by a series of violent clashes in the past year, which have killed dozens and which China's government has sometimes blamed on "terrorists".

China heavily restricts reporting in Xinjiang and it is hard to obtain independent accounts of events in the area.

China's Foreign Ministry spokesman Hong Lei said on Thursday that Tohti had been "criminally detained" because he was "under suspicion of committing crimes and violating the law", suggesting he is likely to face criminal charges.

No details were provided.

When Chinese military police raided the palatial home of Lieutenant General Gu Junshan this week, they found enough ill-gotten goods to load up four military trucks. The goods included a large boat replica, a wash basin and a statue of Chairman Mao all made of solid gold, and hundreds of cases of Maotai, the poison of choice for Chinese elites.

The raid was carried out under the cover of night to avoid an unseemly sight for ordinary Chinese citizens who are already disenchanted with corruption epidemics in the country, according Caixin Media’s five-part investigative report on the scandal.

Gu’s palatial home, dubbed ‘The General Residence’ is modelled after the Forbidden Palace in Beijing and was designed by artists from the palace museum itself. Needless to say, the story has gone viral online.

Gu, a former deputy commander of the general logistics department of the People’s Liberation of Army, is one of the ‘tigers’ – codename for senior party officials that have been arrested in an ever widening crackdown on corruption.

The ruling party, which is besieged with corruption scandals at the highest level of the government – including former premier Wen Jiabao and relatives of the current party chief Xi Jinping – has launched a campaign to crack down on corruption. 

The man leading the anti-corruption charge is Wang Qishan. He is widely regarded as a high-calibre and relatively clean senior official and has a seat at the most inner sanctum of the party – the standing committee of the politburo. 

Under his watch, 18 minister-level senior officials were arrested in 2013, including the former head of the state-owned Assets Supervision and Administration Commission, which oversees the 119 largest companies in China. Others include a deputy minister for public security and a former head of the energy administration.

There is widespread speculation that Zhou Yongkang, the former security chief and a political ally of the now disgraced party leader Bo Xilai, is under virtual house arrest. Many of his protégés, including former executives from PetroChina and a former vice minister of public security, have been arrested. 

If the party were to crack down on Zhou, it would break the unspoken rule that current and former members of the standing committee of the politburo enjoy implicit immunity from prosecution.

How to handle the political and publicity fallouts from the possible indictment of a former member of the standing committee of the politburo will be a major test for Xi Jinping, who only ascended to power less than a year ago.

Xi has staked much of his personal reputation as well as the legitimacy of the ruling party on his war against corruption, which threatens to bring down the party.

Zhou’s prosecution would send a strong signal that the party is serious about anti-corruption and would help it win back some respect from a sceptical public about the government, which has been talking about an anti-graft campaign for as long as people can remember.

If Zhou were to be put in the dock, a transparent trial could do much to strengthen the rule of law in the country. The relatively open trial of former disgraced political star Bo Xilai offers hope that Zhou may get the same treatment.

However, the bigger question remains whether other former members of the politburo – such as ex- premier Wen, who has been tainted with an explosive New York Times story about his family’s alleged corruption – are immune from future probe?

It is one thing to take on a political ally of a disgraced ex-politician, but it’s an entirely different matter to probe a popular former premier. Unless Xi and Wang are willing to burn up a lot of political capital, it is perhaps a touch too fanciful to imagine them taking on a tiger the size of Wen.

However, China’s crackdown on corruption is making a lot of officials nervous and consumption of luxury goods is on the decline, including Maotai and Lafite from Chateau Rothschild. There are promising signs that Beijing is getting more serious about its anti-graft credentials.

Beijing must rein in corruption for it to become a modern and responsible superpower and it needs to look no further than across the Taiwan straits for inspiration. Former Taiwanese president Chen Shuibian is serving a lengthy jail sentence behind bars for corruption.

Dow Jones

Shares of Nu Skin Enterprises Inc. dropped sharply Thursday after Chinese officials said they would investigate accusations that the company is operating an illegal pyramid scheme.

China's State Administration of Industry and Commerce said it was taking seriously a report in Wednesday's edition of the People's Daily newspaper that made the allegations. "If the situation proves to be true, the commerce agency will deal with it according to the law and regulations," the agency said.

The People's Daily, the Communist Party's main propaganda organ, had said the U.S.-based company uses direct-marketing methods "akin to brainwashing." It called the company's bonus and worker-management systems "pyramid schemes" and said distributors were selling more types of products than are allowed by Chinese regulators. In a pyramid scheme, salespeople are rewarded by recruiting additional salespeople.

Nu Skin, which makes skin-care and nutritional products, said Thursday that there likely would be a negative impact on its China revenue but that it was is too early to know whether its previous forecast would be affected.

China is Nu Skin's biggest market. Mainland China accounted for $667.4 million, or 31%, of the company's $2.16 billion in total revenue for the nine months through September. In the Greater China region, which includes Taiwan and Hong Kong, the company had 57,780 so-called sales leaders, more than half its global total. The company defines sales leaders as Nu Skin sales employees, contracted sales promoters in mainlandChina and independent distributors that meet certain sales goals.

The company, which is based in Provo, Utah, in November forecast a 22% to 25% increase in revenue for this year and an increase of 25% to 30% in earnings per share.

Nu Skin's shares were down as much as 39% on the New York Stock Exchange shortly after the company released its statement. The stock closed down $30.43, or 26%, at $84.80. The decline followed a 16% drop Wednesday.

Nu Skin said it would communicate with Chinese regulators to address any questions and had begun its own review of business practices in the country. "Given the substantial growth in our China sales force over the last year, we are also taking additional steps to reinforce our training and education efforts," Nu Skin said.

The company said Wednesday that the People's Daily report "contains inaccuracies and exaggerations that are not representative of Nu Skin's business in China. The reporters did not attempt to verify any information with Nu Skin. We do not believe that the article was the result of any particular government inquiry."

In most places, Nu Skin sells its products through direct marketing. The company has said that in China it sells through physical stores, as well as through direct sales where permitted, to adhere to local regulations.

The Nu Skin probe sent Herbalife Ltd.'s stock tumbling. Shares of the nutritional-supplement maker, which operates entirely through direct marketing, fell $7.75, or 9.8%, to $71.63 on the Big Board. Shares of the two companies typically trade in tandem.

"We are confident in our consumption-based business model in China," said Herbalife spokesman James Golden.

The number of Chinese mobile internet users has passed 500 million for the first time in the country’s history, according to a report from the China Internet Network Information Centre.

Mobile internet users grew 19.1 per cent last year, becoming the most important force behind the exponential growth in the China’s internet industry. Over 80 per cent of mobile phone subscribers use their mobile devices to surf the internet.

Mobile users have grown fast on the back of a massive expansion of China’s 3G network. The country is also expected to roll out the world’s largest 4G network in the near future. 247 million mobile users use their devices to watch and download video, according to the report.

China’s internet penetration rate was close to 50 per cent in 2013. According to the report, the country has the world’s largest number of internet users – 618 million in total.

China’s on-line shoppers have grown to 300 million people, fuelling an explosive growth in the Chinese e-commerce industry. Alibaba, the Chinese e-commerce giant sells more merchandise than Amazon and eBay combined.

Chinese internet giants like Baidu and Tencent are amongst the top ten internet companies in the world, according to Mary Meeker of Kleiner Perkins Caulfield and Byers a Silcon Valley-based venture capital firm.

China has emerged as the largest buyer of oil and gas assets internationally over the last financial year, according to a report released by the China National Petroleum Corporation’s Economics and Technology Research Institute.  

Chinese energy companies collectively bought US $22.2 billion worth of assets, a decline of 35 per cent of the previous year when China spent US$34 billion on mergers and acquisitions.

The largest deal in 2012 was China National Offshore Oil Corporation’s (CNOOC) US$15.1 billion acquisition of Nexen, a Canadian oil and gas company – the largest ever Chinese foreign takeover deal.

Chinese state-owned energy giants led the charge with $20.5 billion worth of acquisitions and the China National Petroleum Corporation was the largest spender followed by Sinopec. The companies spent $US14.9 billion and US$4.9 billion respectively.

Local Chinese energy companies, private enterprises and funds also joined the rush to acquire assets abroad spending about US$1.2 billion.

Indian, Japanese and Malaysian energy companies were also active last year, according to the report.

Today China announced its much anticipated 2013 GDP figure of 7.7 per cent, exceeding its official growth target of 7.5 per cent despite difficult economic conditions. China bears can retreat to their caves for another year.

Will China be able to grow at 7 per cent for the foreseeable future? It is an important question for the Australian economy, which has become more intertwined with the fortunes of the world’s second largest economy than ever before. 

Since 2012, the Chinese economy has been decelerating considerably from the double-digit growth it has enjoyed for the past three decades. The country is clearly transitioning from its high-speed growth phase to a lower but more sustainable pace of development.

Will China’s growth stabilise at around about 7 per cent, or even lower? International experience, especially that of Japan and South Korea, suggests GDP growth halved after periods of high growth ended.

However, China is still a relatively under-developed country compared to Japan or Korea. Parts of China such Guangdong and Fujian are relatively prosperous, with GDP per capita of more than $US10,000 a year, while the central and western provinces are still playing catch-up.

It is likely that China may settle for a higher rate of growth than Japan and Korea had experienced, given the country’s regional growth disparities. When Japan and Korea ended their high-speed growth phase, they had more or less reached the standard of living of the OECD.

China is still long way away from that. Justin Yifu Lin, the former chief economist of the World Bank, says based on the East Asian experience, China still has the potential to grow at 8 per cent for the next two decades. That may be an optimistic view.

The bigger question is: when and how will China settle into a more sustainable phase of growth? 

Liu Shijin, vice minister of the Development Research Centre of State Council (China’s cabinet), suggests that the economy needs to display the following characteristics before it can be considered to have entered the next phase of sustainable development, according to an essay he penned for China Reform magazine.

1. A fundamental change in the economic structure from a reliance on export and infrastructure spending to consumption, services industry and domestic demand.
2. The acceleration of innovation and scaling up on the technological ladder, easing of pressure on the environment and natural resources. Productivity gains to offset increase in cost of production.
3. Economic growth can provide ample employment opportunity for the country’s workforce.
4. Risks inherent in fiscal, financial and industrial areas become manageable and gradually reduced.
5. Stabilisation of companies’ profits after the economy enters the slow-growth phase and expansion of the middle class.

Much ink has been spilled on the need for China to change its current model of development (for example, less investment and more consumption).  However, the most interesting point Liu has raised is whether Chinese companies can survive or remain profitable in a lower growth environment.

Research modelling predicts nearly half of the Chinese companies will be in the red when economic growth dips below 7 per cent, according to Liu’s China Reform article. It’s a worrying result that should not come as a surprise: China’s manufacturing industry operates on a low-margin and high-volume model. Slower economic growth will squeeze companies’ already razor-thin margins.

In comparison, American companies are mostly profitable when US economic growth is hovering around 2 to 3 per cent; Japanese firms make money even when the economy is hardly growing at all.

One of the most crucial questions for the Chinese economy is whether companies can remain profitable when economic growth settles around 7 per cent, nearly a quarter lower than the double-digit growth they became used to.

There are some positive signs that Chinese companies, especially in the coastal provinces like Guangdong, Fujian and Zhejiang, are adjusting to the new reality of slower growth. These provinces account for significant part of China’s economic activity; for example, Guangdong’s GDP is about the same size as that of industrial powerhouse South Korea.

Inefficient companies have exited the marketplace; firms are diversifying from traditional manufacturing to more value-added and high technology sectors; the purchasing managers index, which measures industrial activity, is performing better in the eastern part of China than in the central and western parts.

Encouragingly, the employment situation, which is one of the highest policy priorities for Beijing, is holding up well. Demand for skilled technicians and engineers is growing, with many employers struggling to fill these positions.

However, at the same time, 7 million university graduates are entering the job market every year and many are struggling to find meaningful employment. There seems to be a structural mismatch between the demand and supply of skills.

China is in the middle of managing its transition from a high-growth economy to a more sustainable pace. It will be a while before it can find an equilibrium point. Preliminary evidence suggests 7 per cent is likely to be the new norm.

China Spectator will look at Beijing’s policies to support stable growth tomorrow. 

Former Chinese premier Wen Jiabao has pleaded innocence over claims that his family amassed huge wealth during his decade in power, a Hong Kong columnist says, as Beijing ramps up a much-publicised crackdown on official corruption.

"I have never been involved and would not get involved in one single deal of abusing my power for personal gain because no such gains whatsoever could shake my convictions," Wen said in a letter to Ng Hong-mun, a columnist with the Ming Pao newspaper, a Hong Kong-based Chinese-language daily.

"I want to walk the last journey in this world well. I came to this world with bare hands and I want to leave this world clean," Wen said, according to Ng's column published on Saturday.

Wen's letter dated December 27 follows a 2012 New York Times report that claimed his family controlled assets worth at least $US2.7 billion ($A3.07 billion) - a report China vigorously denounced as a smear.

Ng is a Hong Kong-based politician who frequently comments on relationships between Beijing and the semi-autonomous region, which was returned to Chinese rule in 1997.

He is known to have ties to Wen, and a photo taken of both men and their wives after an April 2011 dinner in Beijing was circulated widely in the Hong Kong press.

News of Wen's letter comes amid an escalating campaign by the current Chinese leadership, led by President Xi Jinping, to fight corruption among high-ranking officials, or "tigers", as well as low-level "flies".

Analysts say that while there is little chance that Wen himself would be ensnared in that crackdown, the former premier is under pressure to clear his name following the New York Times investigation.

Recent reports of an official probe into China's former chief of internal security, Zhou Yongkang, a onetime member of the all-powerful Politburo Standing Committee, could have prompted Wen to act, said Willy Lam, a politics specialist at the Chinese University of Hong Kong.

"I think the point of Wen Jiabao's letter... is to pre-empt innuendo and speculation that he might be the next to go, after Zhou Yongkang," Lam said.

"Because of the widespread publicity generated by the New York Times and other reports, there has also been speculation that Wen Jiabao could be the next one to come under the party discipline, if not public prosecution," he added.

He noted that it was "highly unlikely" that Wen himself would be charged, "the major reason being that all this action against top officials is connected with a power struggle within the party".

The New York Times was awarded a Pulitzer Prize for its investigation into the wealth of Chinese leadership but has also had its website blocked in mainland China.

Several reporters for the newspaper have also had difficulty obtaining visas to report from China.

Wen stepped down as premier last March after a decade in power and was succeeded by Li Keqiang in the Communist Party's decennial leadership change.

AAP

Paladin shares have jumped six per cent after the uranium miner announced it will sell a 25 per cent stake in its Langer Heinrich mine in Namibia to China Uranium Corporation for $US190 million ($A217.18 million).

The sale will be largely used to pay down debt as the uranium price hovers around record lows.

At 1110 AEDT Paladin shares were three cents, or 6.2 per cent, higher at 60 cents.

The Perth-based uranium producer had been looking for a buyer for a minority stake in its flagship Langer Heinrich uranium mine to improve its balance sheet, following a $40 million loss in the September quarter.

Paladin said the deal with China Uranium Corporation Limited, a wholly owned subsidiary of China National Nuclear Corporation (CNNC), would allow CNNC to purchase its pro-rata share of product at the prevailing market spot price.

CNNC has agreed to pay a $US20 million non-refundable deposit.

Completion of the transaction is subject to Chinese regulatory approvals, including approval by the National Development and Reform Commission, which is expected to be obtained by mid-2014.

Paladin managing director John Borshoff said the company had conducted an exhaustive and wide-ranging sale process.

"The significant cash injection from this minority interest sale will largely be applied to debt reduction, which the board considers an essential step during a time of unprecedented low uranium prices," Mr Borshoff said.

"This will help stabilise the company, establishing an incredibly strong platform that will enable us to maximise the value of our assets and ensure increased production of much needed uranium once the price is sufficient to support the planned future growth of nuclear energy in China and elsewhere."

Director-in-General of CNNC Du Yunbin said CNNC was looking forward to having "further prosperous co-operation" with Paladin.

It comes after Paladin's shares rose eight per cent on Friday after announcing it will save more than $67 million after refinancing its debt facility.

Paladin's finance facilities for the Langer Heinrich uranium mine in Namibia and its Kayelekera mine in Malawi have both been refinanced, leading to a $US59 million reduction in debt repayments over the 2014/15 calendar years.

Langer Heinrich has a current design capacity of 5.2 million pounds of uranium concentrate per annum.

Paladin is targeting 5.7 million pounds of production in fiscal 2014, with a 20-year mine life.

The company says the mine is capable of being expanded further to produce about 8.5 million pounds per annum.

AAP

China's gross domestic product beat expectations in the fourth quarter, according to official data.

The nation's GDP grew 7.7 per cent year-on-year, beating expectations of a 7.6 per cent lift, and slightly lower than the 7.8 per cent growth recorded in the previous quarter.

Year-to-date growth also came in at 7.7 per cent, the same as in the previous quarter and in line with expectations.

Elsewhere, retail sales data for the quarter showed a 13.6 per cent increase year-on-year, in line with expectations.

Meanwhile, industrial production numbers for the same month showed a 9.7 per cent increase year-on-year, slightly lower than expectations of a 9.8 per cent lift.

East Asia Forum

When the first G20 summit was held at the end of 2008 in Washington DC, many believed that the time had finally come for developed and developing countries to work together to reconfigure the international economic architecture. Some even suggested that the US and China formally adopt the G2 mechanism to jointly manage global affairs.

Five years have passed since then. But the US and China have made limited progress in collaboration on international economic policymaking. In fact, new rivalry has developed over building new liberalisation standards. The US and 11 other countries are negotiating the Trans-Pacific Partnership (TPP), without China. And China and 15 other countries are negotiating the Regional Comprehensive Economic Partnership (RCEP), without the US. Competition in liberalisation is not necessarily a bad thing, but mutual exclusion could lead to significant disruption to trade and investment flows.

This unfortunate development was largely a result of misunderstanding and mistrust on both sides. When the US joined the TPP and decided to scale it up into a 21st-century model of globalisation in 2008, many Americans judged that China was too far away from the expected high standards, and that its participation in the negotiations could only spoil the party. Similarly, many Chinese experts advised the Chinese government that the TPP was an American design to deliberately isolate China economically, and that China should go its own way in liberalising trade and investment. Some scholars in both countries interpreted RCEP as part of China’s overall strategy to defeat the TPP.

Such an economic cold war mentality could be very damaging to both countries and the world. Economic studies have already confirmed significant income losses from the TPP for China and other countries. This is understandable because China is one of the largest export markets for all the individual TPP member economies, and is also at the centre of the Asia Pacific’s manufacturing supply chain. Therefore, implementation of TPP liberalisation could cause significant trade diversion away from China and disruption of the supply chain. Likewise, RCEP could also cause trade diversion away from the US and other non-member economies.

These scenarios are in sharp contrast with the close China-US economic cooperation of the past. China’s rapid economic growth during the reform period would not have been possible without the global free trade and investment system supported by the US. Chinese and American leaders also worked closely cementing the agreement on China’s entry into the WTO.

In the past, the US was the main architect of the global economic system. It did not see China as a potential competitor. And China passively accepted the existing rules.

But times have changed. Today, although the US is still the world’s largest economy, China is already the second-largest and is set to overtake the US within the next 10 years. It is, therefore, reasonable for China and other developing countries to want to be part of the new rule-making process. But a transition of global superpowers could make all parties very nervous, as in history it often ended in war. This makes China-US cooperation all the more important, not only to avoid major confrontation but also to build a better world.

The new major-power relationship proposed by the Chinese leaders offers a useful framework and appears to be welcomed by American leaders. But as a first step toward this new model, the two countries should work closely to bridge the TPP and RCEP initiatives. There are high hurdles to achieving this goal. But they would not be higher than bringing President Nixon and Chairman Mao together in 1972.

Positive developments have occurred recently too. In Beijing, an increasing number of policy advisors are now urging the government to apply to join the TPP negotiations as early as possible. In particular, they argue that many of the TPP’s sticky issues – such as reform of state-owned enterprises, environmental and labour standards, protection of intellectual property rights and liberalisation of services trade – are also on China’s own reform agenda. In Washington, some government officials also argue that Chinese TPP participation would be positive for the world. And National Security Advisor Susan Rice recently said that the US would welcome China’s participation in TPP negotiations.

But these are not enough. To the Chinese, the American position that China can join after TPP negotiations are concluded represents old 20th-century thinking. China wants to be a part of the rule-making process, not just a passive rule-taker. In reality, it is possible that China could demand for modification to the rules when it joins later anyway, especially if it becomes the world’s largest economy. Therefore, it would be much better for the world if the TPP were to secure China’s commitments from the very beginning.

China also needs to do more to convince TPP participants that it can achieve high-quality liberalisation, especially in the areas of state-owned enterprises, intellectual property rights and cyber security. The reform program approved by the Third Plenum of the 18th Party Congress is a first step demonstrating the Chinese government’s determination in implementing aggressive and comprehensive reforms. But the government needs to take actions more quickly, through steps including experiments in the recently established Shanghai Free Trade Zone.

There is also the difficult question of whether China should be treated as a developing or developed country. It is reasonable for China to claim status as a developing nation given its income level. But the US objection to this is also understandable given China’s economic size and global influence. Perhaps a workable solution is for China to sign up to a high-quality agreement, which allows grace periods for liberalisation in certain areas.

There are practical difficulties for China to join TPP negotiations immediately, mainly because the current round of negotiation is likely at its final stage. Realistically, the earliest time that China could participate would be 2015 or later. But China, the US and other involved parties can start working on this now. For instance, the two governments should establish a TPP-RCEP joint working group, under the framework of the Strategic and Economic Dialogue. The two countries should also share information about both negotiations. The joint working group should also conduct feasibility analyses, identify the key obstacles and make important policy recommendations. Another possibility is to make China an observer at the TPP negotiations.

The TPP is only one area where China and the US can work together closely to develop a new major-power relationship. The two countries are already negotiating a bilateral investment treaty, successful conclusion of which could pave way for China’s TPP accession. The two governments may also want to consider the possibility of establishing a bilateral free trade agreement. China and the US should also collaborate closely on a range of international economic initiatives, such as the G20 summit, the Trade in Services Agreement and the WTO Doha Round.

Yiping Huang is a professor of economics at the National School of Development, Peking University, and an adjunct professor at the Crawford School of Public Policy, ANU.

This article was originally published at East Asia Forum. Reproduced with permission.

China's central bank said it has offered funds to the nation's large lenders on Monday in a bid to satisfy soaring cash demand ahead of the Lunar New Year holiday, showing an unusually accommodative stance that aims to prevent a nervous money market from suffering yet another severe liquidity crisis.

Following a newly established habit of releasing news via its official microblogging Weibo account, the People's Bank of China tweeted that it has provided short-term cash to big commercial lenders via the so-called standing lending facility, or SLF, a covert, targeted liquidity operation launched a year ago. It didn't give other details.

The PBOC said it will inject further liquidity into the system via reverse purchase agreements, a form of short-term loans to banks, when it conducts its twice-a-week open market operation on Tuesday.

It said the moves are intended to maintain the stability of China's money market ahead of the weeklong Spring Festival that kicks off on January 31.

"Financial institutions must strengthen liquidity and asset-liability management and protect the steady operation of the money market before the Chinese New Year," the PBOC tweeted.

The central bank's apparent reassurance came after China's financial system showed fresh signs of stress on Monday, with short-term borrowing costs for banks soaring on heavy holiday-induced demand for cash and rising worries over the vast shadow-banking sector.

The benchmark cost of short-term loans between banks, the weighted average of the seven-day repurchase agreement rate, rose to 6.59 per cent on Monday, from 5.17 per cent Friday and 4.35 per cent Thursday. The current level marks the rate's highest since December 23, when it hit 8.94 per cent.

The surging rates in the money markets also hammered stocks, with the benchmark Shanghai Composite falling below the key level of 2000 to 1991.25, its weakest in almost six months and down 5.9 per cent this year, the worst performer in Asia.

Over the past year, there have been severe liquidity crunches in June, October and December as the central bank has maintained a largely unsympathetic approach to banks' cry for cash because of its push to weed out risky lending.

In all three instances, it has refrained from offering a lifeline to cash-deprived lenders until the very last minute when the situation threatened to get out of control.

The central bank's tough and indifferent policy stance on those occasions suggested a strong resolve to reduce the economy's unhealthy dependence on easy credit and punish wayward banks heavily engaged risky financing behavior, analysts said.

But even before the PBOC posted the brief statement on Weibo, it had sent a signal that it might be reconsidering its tactics this time around.

In a routine weekly exercise, the central bank gauged demand earlier Monday for a new type of liquidity injection tool that appears to aim at addressing the coming holiday-specific needs for cash.

Before the market opened on Monday, the PBOC asked major money market participants whether they are interested in borrowing cash from the central bank via the 21-day reverse repurchase agreements, a short-term loan to commercial lenders. It also gauged demand for the more commonly used repos and bills.

Shortly after posting its tweet, the PBOC released a separate, more elaborate statement on its official website, saying that it has set up testing sites in 10 cities and provinces, including Beijing, Guangdong and Shenzhen, to experiment offering short-term funds to small- and medium-size financial institutions via the SLFs scheme as well.

The PBOC said it offers funds to such institutions with tenors ranging from overnight to seven and 14 days, using collateral such as government bonds, central bank bills and high-grade corporate bonds.

Dow Jones Newswires