India has launched an investigation after a media report alleged that Chinese telecoms company Huawei had hacked into state-run telecoms carrier Bharat Sanchar Nigam, a senior government official said.

"An incident about the alleged hacking of Bharat Sanchar Nigam Ltd (BSNL) network by M/S Huawei ... has come to notice," Killi Kruparani, junior minister for communications and information technology, said in a written reply to a question from a member of parliament.

"The government has constituted an inter-ministerial committee to investigate the matter," the minister said, without giving details.

A senior government official said the decision to investigate came after a media report said Huawei had hacked a BSNL mobile base station controller. The official declined to be identified due to the sensitivity of the issue.

BSNL declined to comment beyond the minister's statement. A spokesman for the communications and information technology ministry said he did not have details of the allegation.

A spokesman for Huawei India denied any hacking.

"Huawei India denies such alleged hacking and continues to work closely with customers and governments in India to address any network security issue that may arise in technical and business operations," the spokesman, Suresh Vaidyanathan, said in a statement.

Vaidyanathan said Huawei, founded by a former officer of China's People's Liberation Army, fully complied with network security norms and regulations.

The Indian government has launched investigations in the past based on media reports.

Neighbours India and China fought a war more than 50 years ago and have a disagreement over their border. This is not the first time Huawei is facing scrutiny in India.

In 2010, India blocked for several months domestic carriers' imports of Chinese telecoms equipment over suspicions that it might have spying technology embedded to intercept sensitive conversations and government communications.

The unofficial ban was lifted after the Chinese makers, who had said their equipment was safe, agreed to new equipment rules with tougher checks.

The United States has also flagged Chinese telecoms equipment as a potential security risk.

In 2012, a US panel urged American companies to stop doing business with Huawei and ZTE warning that China could use firms' equipment to spy on certain communications and threaten vital systems through computerised links.

Microsoft Corp has denied allegations that it was omitting websites from its Bing search engine results for users outside China after a Chinese rights group said the US firm was censoring material the government deems politically sensitive.

GreatFire.org, a China-based freedom of speech advocacy group, said in a statement that Bing was filtering out both English and Chinese language search results for terms such as "Dalai Lama", the exiled Tibetan spiritual leader whom Beijing brands as a violence-seeking separatist, charges he denies.

Microsoft, responding to the rights group's allegations, said a system fault had removed some search results for users outside China. The company has in the past come under fire for censoring the Chinese version of internet phone and messaging software Skype.

"Due to an error in our system, we triggered an incorrect results removal notification for some searches noted in the report but the results themselves are and were unaltered outside of China," Stefan Weitz, senior director for Bing, said in a statement emailed to Reuters.

Weitz did not say if the error had been fixed and Microsoft officials in Beijing declined to elaborate.

Microsoft sent a shortened version of the statement to China-based media organisations which omitted all reference to GreatFire.org and did not address the allegations.

"There were too many points in the original statement," a China-based Microsoft spokeswoman told Reuters.

Reuters reporters found that Bing omitted several websites that showed up on the search engine of rival Google Inc when they searched for "Dalai Lama" in Chinese from Singapore. The English-language search results on both engines were similar.

China's ruling Communist Party sees censorship as key to maintaining its grip on power, recognising that social media offers a platform for citizens to air grievances and criticism of the government, a potential trigger for social unrest.

This censorship often means foreign Internet companies must tread a careful path in China to exploit business opportunities without compromising a carefully nurtured image as champions of open societies and free speech.

All internet firms operating in China comply with the government's web censorship requirements.

Microsoft has made no secret of its aim to build a bigger presence in China, a market where its software is widely used but rarely paid for.

Microsoft was criticised for censoring the Chinese version of Skype, which it ran jointly with Hong Kong-based TOM Group. In November, Microsoft said it had formed a new joint venture with Guangming Founder, and advocacy group GreatFire.org said Skype in China was no longer being censored.

Chinese Peoples' Liberation Army soldiers performing honour guard duties stand at attention with red ceremonial flags, 06 June 2001 in Beijing. [AFP PHOTO/Stephen SHAVER]

Since the founding of the People’s Republic more than six decades ago, school children in China have been taught that Communist guerrillas under the leadership of Mao played an instrumental role in the defeat of imperial Japan.

Propaganda movies, school textbooks and TV series lionise the CCP’s contribution to the war against Japan. Generations of young Chinese have grown up believing in the official mythology carefully cultivated by the party-state.

Margaret MacMillan, a noted Oxford historian, says the Party does it best to ensure the public gets only its version of history. Such a narrative is important for the CCP to bolster its nationalist credentials – one of the key pillars of its legitimacy to rule the world’s most populous nation.

In fact it was the Chinese Nationalist party, which lives in exile in Taiwan, which bore the brunt of fighting against Japan. Over 3.2 million Nationalist soldiers perished in the war including 210 generals.

Their contribution has been largely air-brushed from the official history. Nationalist veterans who fought against the Japanese were treated as “class enemies” and many had to endure discrimination for decades.

However, a growing legion of journalists, documentary film makers, business people, citizen activists and even movie stars are re-writing China’s wartime history, one of the most important episodes in the country’s turbulent modern history.

One of its mostly unlikely heroes is Fan Jianchuan, a former People’s Liberation Army officer, party official and property developer, who has devoted his entire fortune to build museums commemorating Nationalists and even American contributions to the war effort against Japan.

The one-time property developer ranked number 397th on the Hurun Report’s China Rich List in 2007, with his wealth estimated at $270 million. He has used his considerable wealth to collect artefacts and documents from around the world including China, Japan and the United States.

Fan has commissioned hundreds of statues of Nationalists generals who died in the war against Japan and displayed them in a “Plaza of Heroes” in front of his museums. The former soldier also dedicated one museum to the Flying Tigers – American air force volunteers who fought in China during the Second World War.

His effort has not gone unnoticed. Newspapers and TV stations around China have reported on the country’s first private museum builder and the sensitive nature of his displays. Surprisingly, he has received support from some top-ranking PLA generals, including the few remaining ones who fought in the 1940s against the Japanese.

Fan’s museums are just one example of many grass-roots movements that want to set the record straight on this pivotal moment in China’s history.

Cui Yongyuan, a popular talk-show host from the country’s most influential state-owned broadcaster CCTV has embarked on a large-scale oral-history project to record testimonies of surviving Nationalist war veterans.

His oral history project has resulted in one of China’s most popular documentaries, which was viewed 10 million times within its first month of screening in 2010. Many viewers have been surprised by the untold history of China’s war against Japan and the role played by the CCP’s nemesis, the Nationalist Party.

These efforts have spurred many Chinese activists into action to search and care for the surviving war veterans who have been shunned by the Communist party for nearly six decades.

Young Chinese movie stars, journalists and ordinary citizens have formed NGOs to raise funds to care for dying veterans. Some have gone to Burma to locate the remains of a Chinese expeditionary force which fought alongside Australians, British and Americans against the Japanese.

A groundswell of public opinion and social activism has even prompted legislators from China’s rubber stamp parliament into action. Wang Mingang, a pro-Beijing legislator from Hong Kong formally petitioned the government last year to recognise veterans of the CCP’s former arch-enemy as war heroes.

In June last year, the Civil Affairs Ministry issued a notice that finally recognised the veteran status of former Nationalist soldiers, six decades after the end of the Second World War. The recognition is too late for many dying veterans but a landmark symbolic victory for China’s nascent civil society.

This relentless effort of Chinese citizens is re-writing the doctored official history of China and exposing the CCP’s duplicity in airbrushing its former enemy’s effort in the most important war against foreign invaders.

Fan, the museum builder, is itching to start another large project. This time, he wants to show the dire consequences of the Cultural Revolution, which brought chaos to the country in the 1960s and 70s. However, it is a topic that Beijing is yet to show willingness to concede ground.

He has already amassed a vast collection of Cultural Revolutions artefacts and is confident the true history will see the light of a day in the not too distant future. 

The profitability Of Chinese banks is set to slip further this year according to Standard & Poor's.

In a report released today, the ratings agency forecast a deterioration in Chinese bank's loan quality but added that it is unlikely to be severe.

Exposure to debt-laden local government financing platforms and manufacturers saddled with overcapacity were highlighted as reasons for the expected loan quality deterioration.

Rising credit costs, compressing interest margins, and slowing growth in noninterest income also expected to hit bank earnings in the next 12 months.

But the outlook for the sector remains stable according to the agency.

"In our view, banks' business position, capitalization, risk position, and funding and liquidity should support their stand-alone credit profiles, particularly for most of the major banks that we rate," said Standard & Poor's Senior Director Qiang Liao.

China's auto sales rose 6.0 per cent year-on-year in January to a record high for any month thanks to strong car sales before the Chinese New Year holiday.

A total of 2.16 million vehicles were sold in the world's largest car market last month, the China Association of Automobile Manufacturers (CAAM) said in a statement on Thursday.

"The domestic auto industry had a good start in January, with sales hitting a new record," CAAM said.

Sales of cars alone gained 7.0 per cent from a year earlier to 1.85 million units, helped by solid demand for multi-purpose vehicles and sport-utility vehicles, the group said.

Analysts say seasonal demand before the Chinese New Year, which fell on January 31 this year, boosted sales.

Auto sales surged 13.9 per cent to 21.98 million vehicles last year, CAAM has said, as a recovery in Japanese brands offset the impact of slowing economic growth.

While auto markets elsewhere in the world have been sluggish, China has proved to be an important market for foreign brands.

US auto giant Ford said on Wednesday its January sales in China surged 53 per cent year-on-year to 94,466 vehicles.

Competitor General Motors said on Tuesday its China sales hit an all-time high of 348,061 units in January, an increase of 12 per cent from a year earlier.

- AFP

Police officers escort suspected prostitutes and their customers out of a hotel during a campaign to crack down on prostitution in Dongguan city, south Chinas Guangdong province, 9 February 2014. AAP

Dongguan, a gritty manufacturing city at the heart of China’s industrial heartland, Guangdong province, has unexpectedly become the centre of media attention this week thanks to a 24-minute undercover report of the city’s bustling prostitution industry by state-owned broadcaster, CCTV.

CCTV’s moral crusade against the world’s oldest profession has sparked lively debate in China. Many people have even called for the decriminalisation of prostitution in China, which has grown rapidly in sync with the country’s booming economy.

Dubbed the ‘sex capital of China’, the city has the third biggest number of five star hotels after Beijing and Shanghai.  After the airing of the CCTV report, the embarrassed local government – which has until now turned a blind-eye to the highly visible sex trade – announced a major crackdown.

Police have rounded up thousands of sex workers, pimps and customers, while a local provincial party boss has ordered a three-month long anti-vice campaign to clean up Guangdong province.  Apart from providing endless hours of conversational fodders for Chinese citizens, the crackdown also has more serious consequences for the country’s strained economy.

Quan Qingyou, a noted macro-economist who is the head of Minsheng Securities, one of China’s largest brokerage firms, says the crackdown will have an impact on consumer spending and investment and could be reflected in the country’s first quarter GDP data.

He says the size of the sex industry is huge in China and is intimately interwoven into the fabrics of the broader economy such the hotel, restaurant, cosmetic, tourism and transport industries. The sex industry accounts for nearly 10 per cent of local GDP, or 50 billion Yuan, and Qingyou estimates it could be as big as one trillion Yuan or $180 billion in China overall.

To put that in perspective, the two-way merchandise trade between Australia and China is $130 billion. Alternatively, it is about five times larger than the Kenyan economy, one of the best performers in Africa.

“Statistics related to the sex industry are often hidden data and they won’t show up in the official record,” he said in research notes to clients.

“However, they will be reflected through local investment, consumption and tax revenue data and the crackdown on sex trade will have large impact on these economic indices and also result in a higher unemployment rate,” he said.

It will be difficult to estimate its overall impact on China’s GDP.  It will depend on the intensity and duration of the crackdown. Even at the most conservative estimate, the crackdown will trim 10 per cent off the country’s sex-related GDP and that is 100 billion Yuan, or $18 billion.

Looking at the big picture, Beijing’s crackdown on prostitution and corruption will have as similar an effect as tightening fiscal policy, which will put the country’s already strained economic growth momentum under further pressure. And it will have global ramifications too.

For example, the Boston Consulting Group, a strategy consulting company, has already lowered the global growth forecast for the luxury goods industry and share prices for big luxury brands like LVMH have been impacted as well.

In China, overall consumption growth has slowed noticeably since Beijing announced the crackdown on corruption in December 2012.

In the first quarter of 2013, domestic consumption growth declined to 12.6 per cent, compared to 15.2 per cent in the final quarter of 2012. The impact on thr hospitality industry was even more dramatic, with the restaurant spending growth rate nearly halving from 15.1 per cent to 8.72 per cent. An estimated 100 billion Yuan was heaved off China’s GDP.

Some analysts have underestimated Beijing’s resolve to crack down on rampant corruption. The latest anti-vice campaign is further evidence that the battle against graft is only heating up.

These policies will have a noticeable short-term impact on consumption at a time when the economy is already under considerable pressure. However, the long-term benefits – such as reining in China’s runaway corruption problem – will be more significant.

Corrs Thinking

The Third Plenum’s recognition of the significance of a vibrant private sector to the Chinese economy is likely to mean increased outbound investment by privately owned enterprises (POEs).

This commitment supports the recent trend in outbound investment by POEs. In 2013, POEs accounted for four of China’s top 10 outbound M&A deals and more are likely to follow. A recent report “The Dream Goes On: Rethinking China's Globalization” concludes that many Chinese private firms have reached a "tipping point", at where "going out" is an effective way to upgrade and transform their business.

"Many Chinese enterprises have realised that outbound investment is not just a way to achieve geographical expansion or acquire natural resources. Once enterprises have reached a certain stage of development, outbound investment is a way to break through development bottlenecks," the Report concludes.

This new wave of Chinese outbound investment presents fresh opportunities for Australia. However, it is not without its challenges, particularly for targets keen to ensure deal certainty.

In the past, large State Owned Enterprises (SOEs) undertook the majority of outbound investment with the clear backing of the Chinese Government. In contrast, the POEs are not well known. These companies have, for the most part, minimal outbound M&A experience and, as a result, limited dealings with the relevant PRC regulatory agencies.

The rise of POEs has generally been viewed positively by foreign investment agencies as a retreat of Chinese state capitalism (the approval this month by US regulators of Shuanghui International’s takeover offer for Smithfields, is a case in point).  Nonetheless, many boards considering offers from a POE bidder are looking sceptically at bids including PRC regulatory conditions.

Like their SOE counterparts, POEs require PRC regulatory approvals for any acquisition (click here for an outline of the approval process at both provincial and national levels). In addition, financing of any proposed acquisition may also itself be conditional on PRC regulatory approvals.

While there have been recent announcements of relaxations to PRC regulatory approvals thresholds (including those introduced in the Shanghai Free Trade Zone), the PRC regulatory approval process remains opaque.   Our detailed review of Australian transactions involving PRC bidders (both SOEs and POEs) does not reveal any clear guidance about the timing of, or indeed ability of either type of PRC bidders to obtain, regulatory approvals.

In some cases approvals are obtained quickly or even prior to announcement (for example Tianqi’s bid for Talison). In other cases the approval is obtained in a time frame more normal for an Australian acquisition (for example China Molybdenum announced the receipt of NDRC approval for its acquisition of an 80 per cent stake in Northparkes within 4 weeks of its announcement). However, other cases show that PRC regulatory approvals can take a very long time or are not obtained at all (for example Hanlong’s aborted takeover of Sundance).

There is therefore some justification in a target board treating a PRC regulatory approval condition with suspicion. This is especially true if they are unfamiliar with the bidder.

Each case needs to be assessed on its merits, but our discussions with bidders and target boards about whether they will recommend an offer have usually focused on matters like the bidder’s reputation for successfully closing deals (likely to be the best indicator for demonstrating the quality of their relationship with PRC regulatory agencies), and whether the bidder has offered a financial inducement (such as a deposit or reverse break fee) to drive the behaviour of the bidder.

The uncertainty about PRC regulatory approval processes can leave some target boards trading their recommendation for both a better price and a financial inducement designed to “underwrite” that the bidder getting the requisite PRC regulatory approvals. Recent market practice both in Australia and the US supports this approach.

Tianqi’s bid for Talison at the end of 2012 included a provision that Tianqi pay an upfront deposit of $25 million (approximately 2.82 per cent of the total deal value). While China Molybdenum paid a deposit of US$40 million (4.87 per cent of the total deal value) by way of bank guarantee to Rio Tinto.

On 23 September 2013, Shuanghui International Holdings Limited (a non SOE) completed its takeover of Smithfield Goods Inc. - the largest ever outbound acquisition by a Chinese company of a US target. In this $4.7 billion acquisition Shuanghui agreed to a $275 million reverse break fee (representing 5.74 per cent of the deal value) payable if the Merger Agreement terminated as a result of, among other things, a failure to obtain the required foreign anti-trust or other regulatory approvals (excluding CFIUS).

Clearly, Australian vendors need to engage with all possible bidders including Chinese POE bidders. What recent market practice and our deal analysis shows is that Chinese bidders can close deals. However, there is considerable advantage to both sides in designing deal protection mechanisms that address the opaqueness of the PRC regulatory approval process.

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

Documents related to the Nanjing Massacre are being submitted for inclusion on a UNESCO list by authorities in the Chinese city after uproar over a Japanese bid to include suicide pilots' farewell letters.

According to Thursday's Shanghai-based Oriental Morning Post, it is the third time that Nanjing has submitted the documents for inclusion in UNESCO's Memory of the World Register, which also includes such items as the diary of Anne Frank and Britain's Magna Carta.

The cache includes documents related to the atrocities committed by Japanese soldiers in the eastern Chinese city, where Tokyo's imperial forces went on a six-week spree of rape, slaughter and destruction from December 1937.

Estimates of the dead range as high as 300,000 people, although some are much lower.

The papers also include files on the use of "comfort women" forced into sex slavery by Japanese troops, the newspaper said.

Relations between Beijing and Tokyo are heavily coloured by their shared history, and tensions have escalated amid a row over disputed islands controlled by Japan but claimed by China.

A senior manager at Japanese national broadcaster NHK, Naoki Hyakuta, drew fire earlier this month when he denied that the Nanjing massacre had ever taken place.

"Countries in the world ignored the propaganda produced (by then-Chinese leader Chiang Kai-shek) ... that Japan's troops carried out a massacre in Nanjing. Why? There was no such thing," Hyakuta said, according to the Japanese daily Asahi Shimbun.

Another NHK official said last month that the practice of forcibly drafting women into military brothels during World War II was "common in any country at war".

The Japanese city of Minami-Kyushu drew widespread condemnation last week when it made a bid for the inclusion of letters written by World War II kamikaze pilots on the UNESCO register.

The Chiran Peace Museum - named after the small Japanese town from which kamikaze planes would depart on their flight of no return - is seeking the documents' inclusion "to forever hand down the letters to generations to come as a treasure of human life", it says on its website.

Both Beijing and Seoul swiftly blasted the move, which Chinese foreign ministry spokeswoman Hua Chunying contended was "an effort to beautify Japan's history of militaristic aggression".

AFP

Foreign Minister Julie Bishop says she doesn't have security concerns about China staging navy exercises south of Indonesia because they took place in international waters.

It's believed to be the first time Chinese ships have ventured into waters between Australia and Indonesia, but the foreign minister said she would not raise the issue with her counterpart in Beijing.

"These exercises are taking place in international waters and Australia conducts similar exercises in international waters," she told the Australia Network's Newsline program on Thursday.

"The Chinese navy is growing, commensurate with the increase in size and strength of the Chinese economy and its place in the region and its place in the globe."

It was important that China was recognised as an emerging power, and that Australia's foreign policy was "flexible enough and nimble" enough to deal with this changing landscape.

The government would continue to raise concerns about any unilateral action in the region that could increase tension or threaten Australia's interests.

Around 40 per cent of Australia's trade is with China, South Korea and Japan, and the majority of it passes through the South China Sea where territorial disputes aren't rare.

"We don't take sides on the territorial claims, we just urge parties to de-escalate tensions," she said.

Ms Bishop was publicly upbraided by her Chinese counterpart last year when she voiced concerns about China declaring a no-fly zone over a disputed island chain also claimed by Japan.

AAP

Chinese inflation rose in January, slightly more than expected, official data shows.

The country's consumer price index rose 2.5 per cent compared with a year earlier in January, the same pace as in December, data from the National Bureau of Statistics showed.

The rise in the key inflation gauge was sightly above Bloomberg's forecast of a 2.4 per cent year-on-year increase.

The CPI inclined one per cent in January from December.

Meanwhile, the country's producer price index fell 1.6 per cent on year in January, data from the National Bureau of Statistics showed.

There was a 1.4 per cent on-year decline in December.

The fall was in line with Bloomberg analysts' expectations.

The PPI held slipped slightly month-on-month, declining 0.1 per cent in January from December.

China's inflation rate was steady at 2.5 per cent year-on-year in January, the government says.

The consumer price index figure announced by the National Bureau of Statistics was unchanged from December, but higher than the median 2.3 per cent expected in a poll of 11 economists by the Wall Street Journal.

AFP

US Secretary of State John Kerry has expressed his support for online freedom in China during a meeting in Beijing with Chinese bloggers concerned about a crackdown by authorities on Internet discourse.

Last year China's Communist Party renewed a heavy-handed campaign to control online interaction, threatening legal action against people whose perceived rumours on microblogs such as Sina Weibo are reposted more than 500 times or seen by more than 5000 people.

Rights groups and dissidents have criticised the crackdown as another tool for the party to limit criticism of it and to further control freedom of expression.

The Chinese government says such steps are needed for social stability reasons and says every country in the world seeks to regulate the internet.

During an approximately 40-minute discussion with Kerry on Saturday, the bloggers focused on the need for internet freedom, human rights, China's territorial dispute with Japan and even President Barack Obama's travel plans, according to a US reporter who attended the session on behalf of journalists travelling with Kerry.

Kerry said he had urged Chinese leaders to support internet freedom and raised the issue of press freedom, in a country with tight controls on what the media can say and which blocks popular foreign social media sites like Twitter and Facebook.

"Obviously we think that the Chinese economy will be stronger with greater freedom of the internet," he said.

Blogger Zhang Jialong asked if the United States would get together with the "Chinese who aspire for freedom" and help "tear down the great Internet firewall", complaining that US companies were helping Beijing block access to sites like Twitter.

Kerry said it was the first time he had heard complaints that US companies were helping the Chinese government control access to the internet and that he would look into it.

Microsoft Corp denied this week it was omitting websites from its Bing search engine results for users outside China after a Chinese rights group said the US firm was censoring material the government deemed politically sensitive.

The United States and China have long clashed over freedom of expression and human rights, with Washington frequently calling for the release of dissidents such as anti-corruption campaigner Xu Zhiyong and Nobel Peace Prize laureate Liu Xiaobo.

Kerry said that he had raised human rights at high levels.

"We constantly press these issues at all of our meetings, whether it is in the United States or here, at every level, and we will continue to do so," he added.

But it was not the United States' role to lecture, he said, as "no one country can come crashing in and say 'do this our way, it is better'".

By Peter Cai

The chairman of China Construction Bank Corp, Wang Hongzhang, has downplayed concerns over the stability of the country’s financial system, saying the overall risk is modest.

The bank, which ranks the seventh largest in the world with nearly $2.5 trillion in assets, is expanding rapidly overseas. And it just added an ATM to its Melbourne branch over the weekend, the first outside of the Greater China region.

Mr Wang, who is an alternate member of the powerful Central Committee of the ruling Communist Party of China and a former senior official of the central bank, told Business Spectator in an exclusive interview that the country’s shadow banking system did not pose serious a problem.

“The biggest issue for the country’s shadow banking system is whether it is part of China’s prudential regulatory system,” he said. “The shadow banking systems, which include trust, managed funds and private wealth management products, are under adequate supervision.”

China’s shadow banking system (off-balance sheet lending) is estimated to be 46 trillion yuan, or 30 per cent of the assets of traditional banks, according to JP Morgan. Many investors and analysts regard the country’s shadow banking sector as one of the biggest threats to the economy.

Credit Equals Gold, a 3 billion yuan trust product, was on the verge of bankruptcy at the beginning of this year but it was bailed out by the government. Many economists including Yiping Huang, a former chief China economist for Citi Group and Barclays, regarded the bailout as a missed opportunity to reinforce the problem of moral hazard.

“The 3 billion yuan bad debt from Credit Equals Gold should not come as a surprise and it is quite normal.  The proportion of bad debt from the multi-trillion trust product industry is even lower than the non-performing loan sitting on banks’ balance sheets (which is less than one per cent),” Mr Wang said.

The chief of China’s second largest lender believes the best way to manage the looming problem facing China’s 11 trillion yuan trust industry is to raise risk awareness and clearly demarcate responsibility in the event of default.

“Investors think banks should bear the responsibility and banks believe investors should bear the cost of default,” he said. “Chinese investors don’t have adequate understanding of risk. I think investors of trust products should be responsible for their own investment decisions.”

He defended the government’s decision to bail out the troubled trust fund, saying bankruptcy is not necessarily the only solution to credit default.

“I support the decision to bail out Credit Equals Gold and it gives due consideration to the interests of all parties including the potential impact on social stability,” he said.

Nearly one third of China’s 11 trillion yuan trust products are due this year. Experts are predicting selected defaults are inevitable.

Mr Wang, a former central banker, says China’s more modest economic growth target of 7.5 per cent would be conducive to implement the country’s far-reaching reform package announced at the end of last year, which includes interest rate reform.

For a long time, Chinese banks have been able to earn handsome return from the country’s artificially low deposit rates, known as financial repression. However, the Chinese central bank has indicated strongly that liberalisation of interest rates is only matter of time.

“The impact on our profitability will be enormous and that is why we need to diversify our revenue streams. It is a must for all commercial banks in China,” he told Business Spectator. “Fifty per cent of our profits come from traditional lending activity and we are expanding into securities, investment banking, private wealth management, leasing and trust fund management.”

China has criticised US Secretary of State John Kerry for his "naive" call for more internet freedom in the country, and wondered why his discussion with Chinese bloggers had not touched upon Edward Snowden.

During an approximately 40-minute chat with bloggers in Beijing on Saturday, Kerry expressed his support for online freedom in China, as well as for human rights in general.

Chinese Foreign Ministry spokeswoman Hua Chunying said outsiders had no right to pass judgment and misunderstood the real situation.

"If China's internet had not gone through enormous development in the past few years then where would these bloggers have come from?" she told a daily news briefing.

"China's affairs must be decided by Chinese people based on their own national condition. Using methods like this to push China in a direction of change they want, isn't that rather naive?" Hua added.

"I think the topic of this discussion could have been even more open, for example discussing Snowden's case and issues like that," she said, referring to the former US National Security Agency contractor whose leaks have embarrassed Washington.

Last year, China's Communist Party renewed a heavy-handed campaign to control online interaction, threatening legal action against people whose perceived rumors on microblogs such as Sina Weibo are reposted more than 500 times or seen by more than 5,000 people.

Rights groups and dissidents have criticised the crackdown as another tool for the party to limit criticism and to further control freedom of expression.

The government says such steps are needed for social stability and says every country in the world seeks to regulate the internet.

Australian Trade Minister Andrew Robb and his Korean counterpart, HE Yoon Sang-jick, Korea Minister of Trade, Industry and Energy, on Thursday, Dec. 5, 2013. (AAP Image/DFAT)

Australia has offered South Koreans a special privilege that Canberra has only extended to two allies in the past. The foreign investment screening threshold will be lifted to over $1 billion under the Australia-South Korea free agreement.

This means that South Korean investors can buy Australian assets up to $1.078 billion (annually indexed) without the need to submit their investment proposals to the watchful eyes of the Foreign Investment Review Board.

The $1 billion threshold was first offered to the Americans under John Howard as part of the hard-fought Australia-US free trade agreement. The special treatment was extended to Kiwis as part of the Australia-New Zealand closer economic relations trade agreement.

This major concession to Seoul will have far reaching consequences for the current free trade negotiations with Beijing as well as for the future integrity of Australia’s foreign investment regime. The agreement with Seoul means we have just used up one of the few bargaining chips Australian negotiators have got in dealing with Beijing.

As a result of Australia’s liberal trade regime, the foreign investment screening threshold is one of the few carrots that Australian trade negotiators can offer to their counterparts. For years, Australia has unilaterally dismantled trade barriers starting with the dramatic 25 per cent cut to all tariffs on 28^th July 1973 under Prime Minister Gough Whitlam.

Consequently, Australia has one of the lowest trade barriers. While it is good news for consumers who enjoy cheaper imports, it is a negative for trade negotiators who are engaged in difficult quid pro quo exchanges.  

In the case of free trade negotiations with China, Canberra also made one major concession to the Chinese early in the negotiation process, granting Beijing the coveted ‘market economy status.’ This has reduced the already limited arsenal at Canberra’s disposal.

Now it is almost impossible not to grant the same foreign threshold concession to China without appearing discriminatory.

It was once defensible to say $1 billion foreign investment was only for special allies like the United States and New Zealand. But now that Canberra has extended the same offer to South Korea, it is difficult not to make the same concession to other parties.

And foreign investment just happens to be one of the two major hurdles holding up the protracted negotiations that started more than a decade ago. Frances Adamson, Canberra’s top envoy in Beijing said in 2012: “We are up against some issues on both sides which are difficult to resolve. On the Chinese side, investment and movement of natural person issues… would be difficult to resolve.”

For years, Beijing has demanded that Australia relax its foreign investment screening regime especially in relation to state-owned enterprises, which need to submit their investment proposals for vetting irrespective of their value.

Now Chinese negotiators can rightfully ask Canberra to extend the same offer that Korea just got to them. If the Abbott government really wants to conclude the much sought-after free trade agreement with China this year, it would be hard to turn it down.

A workable compromise might be that Canberra offers the $1 billion threshold to private Chinese companies while maintaining the current special screening regime for state-owned enterprises.

Chinese private bidders are fast becoming a new force to be reckoned with in the market, according to Corrs Chambers Westgarth’s new M&A review. The compromise can take advantage of this new trend in outbound Chinese investment as well as maintaining the check on state-owned enterprise.

However, a far bigger and more serious consequence of the Australia-South Korea free trade agreement is its impact on the integrity of Australia’s foreign investment screening regime, which has played an important role in maintaining public confidence about the benefits of foreign investment into Australia.

The $1 billion threshold is likely to become the new benchmark for all future free trade negotiations. It would be difficult for Canberra to continue a differentiated approach to investment thresholds in the future.

China Investment Corp is selling energy and commodity holdings while seeking to capitalise on recovering United States and European economies, a major shift in strategy for the $US600 billion ($A660 billion) sovereign wealth fund.

Since late last year, CIC has unloaded more than $1.5 billion of shares in companies including AES Corp, a US power company, and GCL-Poly Energy Holdings Ltd, a Hong Kong-listed green energy company, according to regulatory filings by the companies. CIC, the world's fifth-largest government-controlled fund, has also sold stakes in two other Hong Kong-traded wind-power companies, according to filings.

In addition, CIC is considering selling direct ownership stakes in certain assets such as oil-sands projects, according to people with knowledge of the fund. The fund is undergoing a "more dynamic adjustment" of its energy portfolio, one of the people said.

CIC, which purchased billions of dollars in resources-related holdings between 2009 and the first half of 2012, is closely watched by investors worldwide for signals on where China is steering its deep pools of capital. The shift comes as the fund's new leadership grapples with a changing investment landscape triggered by the paring back of easy-money policies in the US.

As the US Federal Reserve starts to taper, or reduce, its bond-buying program intended to stimulate the US economy, CIC is finding energy and resources plays aimed at emerging markets less attractive because capital is flowing back to the developed world, the people said.

CIC is also responding to a slowdown in Chinese growth and Beijing's efforts to rely more on domestic consumption to fuel the economy, and less on big infrastructure and construction projects. China's consumption of commodities is still expected to grow, but the shift in emphasis has reduced the urgency for Chinese investors to snap up supplies, according to analysts and the people close to the fund.

Chinese companies last year plowed $44 billion into foreign mergers and acquisitions in oil, gas and mining, according to data provider Dealogic, up from $30 billion in 2012. But there are signs that China is growing more cautious. A top economic-planning official in December 2012 lauded Chinese efforts to secure mining assets abroad but cautioned against rising costs.

Meanwhile, CIC is showing greater interest in the rebounding US and European economies. The US economic recovery has been "accelerating" and Europe has "a lot of potential," CIC Chairman Ding Xuedong said at a January conference in Hong Kong. Mr Ding, who took the reins at CIC in June, added that emerging markets could suffer "capital outflows or a credit crunch" if the Fed continues to taper.

The fund is considering moving its North American base to New York from Toronto and expanding its presence in Europe, the people close to the fund said, though no final decision has been made. CIC's team in Toronto, led by Winston Wenyan Ma, a former Wall Street banker, so far has mainly focused on doing energy- and resources-related deals in Canada. A potential move to New York could lead to more investments by the fund in private equity, real estate and other US assets, the people said.

CIC has increased its stakes in General Growth Properties Inc, a big US mall owner, and in Rouse Properties Inc, a US real estate investment trust, as a way to bet on the recovery in the world's largest economy, according to the people familiar with the fund.

The fund started to pare down its energy and resources portfolio in late 2012, and has been accelerating that effort since late last year, according to these people. The fund in January sold a 7.8 per cent stake in GCL-Poly, a green-energy supplier listed in Hong Kong, for $402 million.

The sale, the second by CIC in six months, left the fund with 4.6 per cent of the company, down from its initial 20 per cent stake.

Lu Yeung, a spokesman at GCL-Poly, said the sale reflected "the change in direction in CIC's portfolio management" and that the company had attracted other big-name institutional investors. CIC paid $710 million for the 20 per cent stake in November 2009. So far it has reaped a total of $689 million from the sales.

In December, CIC sold 66 million shares in AES, a Virginia-based power-generation company with much of its business outside the US, cutting its stake in the company to 8.3 per cent from 15 per cent. CIC paid $12.60 a share, or $1.58 billion total, for the 15 per cent stake in 2010.

A regulatory filing by AES shows that the company bought back 20 million of those shares for $12.90 a share. An AES spokeswoman declined to comment.

In December, AES Chief Executive Officer Andres Gluski said in a statement that the share buyback was "in line with our capital-allocation framework to maximize value for our shareholders." Xu Dapeng, a CIC director, said in the same statement that the stock sale by CIC was a part of the fund's "normal investment-management process."

CIC also has recently sold stakes in China Longyuan Power Group Corp. and Huaneng Renewables Corp., both wind-power companies listed in Hong Kong. Officials in both companies didn't respond to requests for comment.

CIC, founded in 2007, invests part of China's vast hoard of foreign-exchange reserves abroad. The fund's focus on resources has been widely regarded as "strategically motivated," said Friedrich Wu, an adjunct associate professor at Nanyang Technological University in Singapore who follows CIC. "China, an export-dependent economy, requires access to secure supplies of energy and natural resources to power its economy," he said.

CIC officials have said the fund makes investment decisions based on commercial principles and energy investment was a good way for the fund to benefit from China's own economic growth.

Still, CIC officials have acknowledged that the energy sector's cyclical volatility poses a risk to the fund, which reports the value of its assets by market price. In 2011, when the fund suffered a 4.3 per cent loss on its international portfolio, the biggest decline since its inception, it blamed "a downward-trending market" that led to shrinking values of its energy and resources holdings.

Some of CIC's investments in the sector, including the initial $150 million invested for a 7.4 per cent stake in Canadian oil explorer Sunshine Oilsands Ltd, are now worth less than it paid for them.

CIC's international holdings returned 10.6 per cent in 2012, the most recent data available.

- Dow Jones Newswires

China, the largest foreign owner of United States Treasury debt, ramped up its holdings of longer-term securities last year at the fastest pace in five years, showing no worries over the sharp rise in US interest rates.

China increased its holdings of Treasury notes and bonds by $US81.1 billion ($A89.1 billion) during 2013 even as it slashed the holdings in December, based on calculations from the latest data released Tuesday on the Treasury Department's website. That represents the biggest calendar-year net increase since a gain of $US123.45 billion in 2009, according to data provided by Ian Lyngen, senior government bond strategist at CRT Capital Group LLC.

Investors are closely tracking China's demand from the $11.8 trillion US government bond market because the Federal Reserve, the largest buyer of Treasurys, has reduced its monthly purchases since the start of the year. Signs that other buyers stepped up could ease worries about rising Treasury yields, which are benchmarks to set borrowing costs for the public and private sectors in the US and abroad.

"China remains a long-term support for the US bond market," said Gennadiy Goldberg, US strategist at TD Securities. "Despite the monthly swings, China has continued to be a big source of demand for Treasurys as it needs a highly liquid market to invest their massive dollar reserves."

Including bills, or US government debt that mature in a year or less, China's overall holdings of US Treasury securities increased by $48.5 billion last year, after taking into account the net reduction of $47.8 billion in December, the first monthly decrease in four months. China's bill holdings fell by $32.6 billion in 2013.

Since the start of 2009, China's holdings of notes and bonds have increased every calendar year except 2011. The nation's stockpile of these securities has climbed by $281.9 billion over that period, providing a steady source of funding for the US government.

The buying reflects China's limited options in parking its massive amount of foreign reserves accumulated from a trade surplus with the US, analysts said. China's foreign reserves rose to $3.82 trillion at the end of December from $3.66 trillion at the end of September and a majority is denominated in US dollars.

Some analysts have argued that it is highly unlikely China would sell its Treasury-bond holdings en masse. Any large-scale selloff not only hurts the US interest by raising long-term borrowing cost for consumers and businesses, but also shrinks the value of its Treasury- bond holdings considerably, they said.

December's cut from China's Treasury-debt portfolio was mostly in bills, a $43.1 billion reduction, while the holdings of notes and bonds fell by $4.66 billion.

The December reduction diluted China's overall holdings of Treasury debt to $1.2689 trillion at the end of last year, down from a record high of $1.3167 trillion at the end of November.

Some analysts said the cut could partly reflect the sell-off in Treasurys in December, which dilutes the value of the holdings.

The benchmark 10-year Treasury note's yield rose by nearly 0.3 percentage points in December, a month when the Fed announced its plan to cut bond buying in 2014 and as optimism over the US economy brightened. The yield rose by over 1 percentage point in 2013 and traded at 3.03 per cent at the end of December, the highest since 2011. When bond yields rise, their prices fall.

So far this year, Treasury yields have dropped and prices rallied amid renewed concerns over the US growth momentum. The benchmark 10-year Treasury yield fell to 2.700 per cent on Tuesday following disappointing US housing and manufacturing reports, down more than 0.3 percentage point for the year.

Aaron Kohli, US interest-rate strategist in New York at BNP Paribas, said it would become a bigger concern if China persistently reduces its Treasury holdings because the Treasury market needs other sources of support with the Fed winding down its bond buying this year.

The Fed now buys $65 billion a month in both Treasurys and mortgage-backed securities, down from $85 billion in December.

- Dow Jones Newswires

The federal government’s push to seal a free trade agreement with China before the end of the year is likely to end in failure, according to The Australian Financial Review.

A strategy update from Beijing on Tuesday failed to mention the possibility of an Australian deal as a priority for 2014, instead the Commerce Ministry is pinning its focus on deals with neighbouring countries South Korea and Japan.

Mei Xingyu, a researcher at a think tank affiliated with the Commerce Ministry, told the paper an Australian FTA was more than likely to be put on the backburner.

“If China was positive on reaching an agreement this year the spokesman would have mentioned it,” he said, according to the AFR.

Mr Mei suggested the Abbott government had “created too many unexpected problems” for Beijing to put a deal near the top of its agenda.

Chinese worker processes steel products at a factory in Qingdao city, east Chinas Shandong province. (Imaginechina)

Australia’s mining sector has lost its darling status in the eyes of Chinese investors, who have lost billions of dollars in projects dotted around the country. It was only few years ago that the Chinese would want to snap up anything from exploration projects to a chunk of mining giant Rio Tinto.

In 2013, deals in the energy and power sector accounted for three quarters of China’s total investment in Australia. Investment into this sector increased more than 43 per cent from the previous year, including China National Offshore Oil Corporation’s $1.9 billion investment into the Queensland Curtis  LNG project, according to PwC’s new report on Chinese outbound deals.

The mining and minerals sector, which once accounted for the lion’s share of Chinese money flowing into Australia, shrank to only 20 per cent of total M&A activity in 2012. The declining Chinese appetite for Australian mining assets was evident during a recent visit by a senior delegation from the APEC China Business Council to Australia.

One of China’s biggest traders of iron ore from Hebei Iron and Steel Group, China’s largest producer of steel, expressed interest in buying Australian iron ore assets. However, he made it categorically clear he didn’t want a greenfield project nor a magnetite asset.

The colossal failure of CITIC Pacific’s Sino Iron project, which is $6 billion over budget and four years behind schedule, has left a deep impression on many Chinese investors, including the senior executive from Hebei Iron and Steel.

The executive made it clear he was only interested in hematite (high-grade iron ore) projects that have well-supported infrastructure, such as railways and port facilities. It is a far cry from the days when Chinese investors bought multi-billion dollar magnetite (low-grade iron ore) projects in the middle of nowhere.

Many Chinese projects in the mid-west region of Western Australia have either stalled or mothballed. The region was once hailed as a potential new iron ore province for Australia, but has lost much of its lustre lately.

David La Ferla from Negotiation, a specialist energy and resource advisory firm, said failed Chinese projects would have a deterrent effect on other investors and was bad for Australia. It is also clear that the new crop of Chinese investors have much less tolerance for risk than their colleagues a few years ago.

The steel industry executive said he didn’t want to buy any mine outright and was happy to take a small equity stake in producing iron ore mines. During the height of the Chinese mining investment boom, many companies preferred to own mines outright. The Chinese have learnt that they are not always equipped to be successful buyers, owners and operators of overseas projects.

It is not only state-owned giants that are interested in Australian LNG assets, but hundreds of smaller Chinese private players. Some of the delegates from the APEC China Business Council also expressed interest in investing in the Australian LNG sector.

However, like their colleagues from steel industry, they prefer to take equity stakes in mature and producing assets and even depleted oil fields. But they don’t want to be involved in more risky and speculative exploration projects.