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    Graph for China’s two-child policy won't lift its demographic curse

    One of the most unthinkable things is happening in China: The world’s most populous country is about to run out of surplus labour. The wages of Chinese migrant workers increased 13.9 per cent in 2013. 11.8 per cent in 2012 and a whopping 21.2 per cent in 2011 (Is a labour shortage looming in China?, 21 February).

    The rapid increases in wages strongly indicate that the country has either reached or is about to reach the so-called Lewis turning point, which means the country is about to run out of surplus labour as wages increase.  

    In response, Beijing has ended its three decade old ‘one-child’ policy to address the looming demographic challenge.

    So just how bad is the problem?

    China’s huge population of 1.3 billion people gives the false impression that the country has no problem with fertility rates. In fact, China’s has one of the lowest birth rates in the world. In 2012, the year of the dragon, a popular year for people to give birth, it was only 1.26.

    In 2011, the birth rate was 1.04, and it was 1.18 the year before, according to data from the National Bureau of Statistics. The birth rate in China is less than half of the world’s average and significantly below the fertility replacement rate of 2.2 which the country needs just to maintain the current level of population.

    Modelling shows that if the current birth rate persists, China’s population could shrink by as much as 29 per cent between 2030 and 2070 and the number of women of child bearing age could be halved. If this prediction comes to fruition, China will have a worse demographic crisis than Russia, which is a basket case of declining demographic fortune.

    The sharply declining birth rate and working age population means there is a real possibility that the country is becoming grey before it becomes rich. By 2040, the world’s second largest population after India will have 400 million pensioners, according to Infosys founder Nandan Nilekani’s book Imagining India.

    Is the end of the one-child policy too little and too late to address China’s demographic challenge? The preliminary evidence indicates the end of the one-child policy will not reverse the declining birth rate.

    A population survey conducted by the Beijing Academy of Social Sciences after the government announced the end of the one-child policy, found that female Beijing residents of child-bearing age only wanted on average 1.3 children.

    Less than one third of those surveyed indicated their desire to take advantage of Beijing’s new policy and surprisingly, only 53 per cent of migrant workers, who traditionally prefer to have larger families.

    If the survey results from Beijing are indicative of the rest of China, this means the repudiation of the one-child policy will not have a significant impact on people’s desire to have more children. A rapid drop in birth rates across other East Asian countries, such as Japan, South Korea, Singapore and Taiwan also suggest China is likely to follow suit.

    China’s demographic dividend, which combined a slow fertility rate with faster economic growth, is coming to an end. This will have serious consequences on the country’s labour force, productivity, social security system and economic growth.

    One of the country’s foremost labour economists, Cai Fang, has warned “we should be psychologically and politically prepared for the situation.”

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    In an attempt to mitigate the effects of China's looming labour shortage, Beijing is ending the one-child policy – but will it be too little too late?

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    The developers of a proposed $4.2 billion mega-resort and casino in north Queensland are a step closer to buying casinos in Cairns and Canberra.

    Aquis Great Barrier Reef Resort Group this week signed a $269 million takeover bid agreement with the Reef Casino Trust (RCT) which owns the Reef Hotel Casino.

    The trust's board has unanimously supported the takeover offer.

    Aquis, owned by Chinese billionaire Tony Fung, has also separately agreed with Casinos Austria to acquire Casino Canberra.

    The company is hopeful the Cairns sale will improve its chances of acquiring a casino licence for its proposed mega-resort at Yorkeys Knob near Cairns.

    The planned 340-hectare Aquis Great Barrier Reef Resort includes nine luxury hotels, an 18-hole golf course, a 25,000 seat stadium and a cultural heritage centre.

    An Aquis spokesman said the company will apply to extend the Reef Casino licence to include the mega-resort.

    They've also applied for one of two new regional Queensland casino licences on offer by the state government.

    The developers have signalled they will only push forward with the project if the resort is granted a casino licence.

    They're expected to lodge an Environmental Impact Statement with the state government in April or May.

    Locals have raised concerns the project won't withstand a cyclone, will increase problem gambling, may damage the Great Barrier Reef and could hurt the region's nature-based tourism industry.

    Those in favour of the resort say it will bring much-needed jobs to the region and boost tourism.

    Mr Fung has said the resort would rival great man-made structures seen in Dubai and Singapore and would attract big spenders from China.

    The Reef Hotel Casino and Casino Canberra takeover bid is expected to take up to nine months and won't affect staff numbers at either casinos.

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    Aquis, owned by Chinese billionaire Tony Fung, is a step closer to buying casinos in Cairns and Canberra.

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    Chinese internet company Sina plans to spin off its Twitter-like microblog service, Weibo, in a US initial public offering to raise $US500 million ($A555 million).

    A person with knowledge of the deal says the company plans an IPO in New York.

    The person, who requested anonymity because they weren't authorised to speak publicly about the deal, said Goldman Sachs and Credit Suisse had been hired to manage the stock listing.

    The share sale is expected to be carried out in the second quarter.

    The plans were first reported by the Financial Times on Monday.

    Chinese microblogs have enjoyed explosive growth but have been curtailed recently by tighter Chinese government controls.

    Chinese microblogs had 281 million users at the end of 2013, down 9 per cent over the previous year.

    AP

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    Float expected to raise $US500 million

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    China's dependence on foreign iron ore will likely reach new records, industry officials said, which could help underpin slumping global prices and intensify Beijing's efforts to diversify sources of the important steelmaking ingredient.

    The forecast also foresees a rise in China's steel production despite government efforts to curb an industry widely seen as bloated and polluting. Beijing has pledged to curb industry suffering from overcapacity as part of its effort to restructure its economy, but the effort is politically difficult in places where such facilities are major employers.

    China is the world's biggest buyer of iron ore, accounting for 63 per cent of global imports last year. This year, its iron ore imports are likely to rise 6 per cent to a record 870 million metric tonnes, Li Xinchuang, executive deputy secretary-general with the state-backed China Iron and Steel Association, said at an industry conference Tuesday.

    Steelmakers are buying ore even as inventory at port-side warehouses piles up to near-record levels and a slowdown weighs on the broader Chinese economy. "A lot of mills are now importing ore in competition with each other," Mr Li said. "It's like, if I see that you're bringing in ore, I have to bring in ore as well."

    Part of the appetite may derive from rising global ore supply, which is making prices more attractive. The world's top iron ore producers are set to produce an additional 126 million tonnes, or 14 per cent more, iron ore by the end of this year compared with last year, according to analysts.

    For miners, Chinese demand could help ease that price slide. Iron ore prices are down 21 per cent from a year earlier to around $US122 a tonne this week for a benchmark grade of fine ore, due to slower global growth as well as oversupply, though they picked up slightly toward the end of 2013 on Chinese buying interest.

    China's cost of producing its own ore remains high at around 457 yuan ($80) a tonne, compared with $30 to $60 a tonne for imported ore, said Pan Guocheng, chief executive officer of China Hanking Holdings Ltd, a Chinese ore miner.

    The disparity is driving China's longer-term dependence on foreign ore, which Mr Pan expects will rise to 77 per cent of its total ore consumption in 2016 from 72 per cent last year. He projected China's ore imports in 2016 would reach 949 million tonnes.

    Sensitive to reducing its dependence on foreign suppliers, the country's top economic planners last month publicly urged Chinese steelmakers to continue shopping for ore assets abroad.

    Mr Li said China is likely to see more iron ore imports coming from China-owned projects in Africa, rather than its traditional suppliers in Brazil and Australia. The two countries -- home to the world's largest global miners BHP Billiton, Rio Tinto and Vale SA -- still supply a combined 70 per cent of China's ore.

    Africa currently accounts for just 8 per cent of China's supply -- 3 per cent if longtime supplier South Africa is excluded -- but Beijing has been building relations with at least 15 African nations, picking up small ore shipments last year from new suppliers such as Guinea-Bissau, Tanzania, Uganda, Zambia and Swaziland, customs data show.

    Last year, London-listed African Minerals Ltd said Tianjin Minerals & Equipment Group Corp, one of China's largest ore trading companies, will pay $US990 million for a mine in Sierra Leone. China Minmetals Corp has a six-year-old ore supply deal with Mauritania. State-owned Aluminum Corp of China is jointly developing the large Simandou iron ore deposit with Rio Tinto in the West African nation of Guinea.

    Mr Li said China still has a strategic need to break free of the market dominance held by BHP, Rio Tinto and Vale. "The speaking rights of global miners are still too strong," he said, using a Chinese term that roughly means "power."

    Beijing is trying to wield tighter control over a smaller steel industry, to reduce its price volatility and environmental footprint. But output of crude steel, most of which go into China's construction, automotive and manufacturing sectors, is likely to reach a record 815 million metric tonnes, Mr Li said.

    "Overstimulus in the past has produced complications and a reform dilemma," Mr Li said. "Overcapacity in the steel industry is larger than we imagined."

    Still, the association says the pace of growth will slow to 3 per cent this year from 7.5 per cent last year. Demand from the construction of smaller cities and towns will likely underpin the growth in steel consumption, Mr Li said.

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    China's foreign iron ore demand to hit record, looks for alternatives to market leaders.

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    Professional social networking website LinkedIn Corp has launched a Chinese language version of its website, a move that could jumpstart its expansion into the world's largest internet market by users even as the company acknowledged it will have to police what some of them say on its website.

    LinkedIn chief executive Jeff Weiner acknowledged in a blog post that the company would have to censor some of the content that users post on its website in order to comply with Chinese rules.

    But Weiner said the benefits of providing its online service to people in China outweighed those concerns. He vowed that the company would be "transparent" about its practices as it builds its presence in a country it said is home to one in five of the "knowledge workers" that are LinkedIn's core audience.

    Shares of LinkedIn were roughly flat in after-hours trading on Monday at $US199.49. The stock is down roughly 23 per cent from its 52 week-high of $US257.56 as investors fret about two consecutive quarters of declines in its page views.

    "Extending our service in China raises difficult questions, but it is clear to us that the decision to proceed is the right one," Weiner said.

    Foreign internet companies face difficulties operating in China. Beijing censors sensitive terms from the Internet and blocks social networks Facebook Inc and Twitter Inc, a widespread effort that analysts say is geared towards maintaining the Communist Party's hold on power and preserving social stability.

    LinkedIn's arguments about trade-offs for the greater good are reminiscent of Google's justification for its controversial 2006 decision to launch a self-censored version of its search service in China.

    Four years later, Google reversed course and relocated its search engine to Hong Kong from mainland China, following a dispute with the Chinese government over what Google said was increasingly onerous censorship and cyber-attacks it said originated in China.

    The Chinese language website that will be available on Monday is a "beta," or test, version of the site. LinkedIn is still in the process of getting a license to operate the Chinese language site, which will require that the company maintain server computers in China that will store data about its Chinese users, according to a source familiar with the matter.

    LinkedIn already has more than four million users in China who use its English language website, but the company has signalled that it is interested in making a broader expansion in the country.

    Weiner said the Chinese language site would help LinkedIn reach 140 million professionals in China, providing the potential for the company to significantly expand its current audience of 277 million members.

    The company's expansion into China comes as LinkedIn is trying to transform itself from a social network used primarily by job seekers and by recruiters into a more full-fledged online hub for professional workers.

    LinkedIn has recently begun encouraging its members to write career-related articles and post them on the website, a move the company hopes will boost the amount of time users spend on its site.

    Weiner said that China's restrictions on content would be implemented "only when and to the extent required."

    "LinkedIn strongly supports freedom of expression and fundamentally disagrees with government censorship," Weiner said.

    "At the same time, we also believe that LinkedIn's absence in China would deny Chinese professionals a means to connect with others on our global platform, thereby limiting the ability of individual Chinese citizens to pursue and realize the economic opportunities, dreams and rights most important to them," he said.

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    The social network for professionals launches a Chinese language version of its website

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  • 02/25/14--15:19: Yuan slides on PBOC guidance
  • China's yuan has charted its biggest decline in more than three years amid speculation China's central bank wants to end to the currency's steady appreciation and allow it to trade in a wider band.

    The yuan gave up about 0.5 per cent against the United States dollar on Tuesday, its biggest decline since 2010.

    The yuan is more than one per cent weaker over the past week, raising concern it may hurt property developers who have borrowed in dollars, and contribute to a slowing in the property market.

    The Chinese currency has depreciated against the US. dollar by 1.5 per cent from a record high hit in early January and has fallen by 1.2 per cent so far this year after gaining 2.9 per cent in 2013.

    China's central bank "is intervening in the market and will continue to guide the yuan weaker until onshore investors change their views about the yuan" a trader with a Shanghai-based local bank said.

    Investors have built up a large amount of positions since the start of this year to profit from the yuan's steady rise and dollar-yaun interest rate differential. They generally expected the yuan to break the 6.0000 psychological level later this year.

    "We believe that the central bank will be accepting of some more weakness in the coming days, given the need to support exporters and external demand as domestic demand weakens," Dariusz Kowalczyk, an economist at Crédit Agricole Credit & Investment Bank, said.

    The slide in the yuan pushed the yaun's trading level to converge with the reference exchange rates set by the PBOC and increased two-way volatility, paving the way for the authorities to widen theyuan's daily trading band, analysts said.

    The PBOC set the dollar-yuan reference exchange rate, officially known as the central parity, at 6.1184 Tuesday versus 6.1189 on Monday.

    The PBOC allows the yuan to move one per cent above or below the reference exchange rate. The band was last widened in April 2012, when the permitted deviation from the reference rate was 0.5 per cent.

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    Chinese currency falls most in three years as central bank looks to curb appreciation.

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    Graph for Alibaba and the Chinese banking thieves

    Graph for Alibaba and the Chinese banking thieves

    A netizen browses the website of Yuebao, the fund management platform under Alipay of Alibaba Group and Tian Hong Asset Management, in Yichang city, central Chinas Hubei province, 23 February 2014. AAP

    Chinese state-owned banking behemoths – some of the largest lenders in the world – are under attack. Their assailants are not their foreign rivals or budding private players but the country’s internet giants, including Alibaba, Baidu and Tencent.

    After the first round of boxing, the banks have been left bruised and scared. Alibaba’s online financial product Yuebao, which is managed by the company’s majority-owned Tianhung Fund, raised 250 billion yuan or $45 billion in less than seven months from a legion of depositors.

    The size of the fund increased from 250 billion yuan to 400 billion yuan or $72 billion in less than a month. This is the kind of record that would make even the best of the Wall Street bankers or private equity financiers envious and is making Chinese bankers shake in their boots.

    Let me explain to you why bankers are so scared.

    For years Chinese banks have been able to enjoy lucrative returns on a guaranteed spread they earn from artificially controlled interest and deposit rates. They are able to suck in trillions of yuan in cheap funding from the world’s most diligent savers and in return pay them a pittance.

    Then the vast pool of funding was channelled into China’s industrialisation effort, including building factories and infrastructure. State-owned enterprises are often the favourite recipients of cheap funding. Economists call this rigged system of squeezing depositors “financial repression.”

    Long-suffering Chinese depositors have nowhere else to put their money into productive use, so they have to put up with banks. Returns on their money are often little better than stuffing cash under their mattresses.

    Alibaba’s Yuebao, which debuted last June, fired the first salvo at the banks. The e-commerce giant, which sells more goods than Amazon and eBay combined, offers competitive interest rates to millions of online shoppers who have Alibaba accounts. It raised 50 million yuan on day one.

    Chinese depositors are fleeing their banks at a record rate and Alibaba has been sucking in cash at a rate of three million yuan per minute, according to the managers of the Tianhung Fund, which runs Yuebao.

    In order to stem the rapid outflow of money, the five largest state-owned Chinese banks have been forced to raise their own interest rates within the maximum band set by the central bank in rapid succession to fight back.

    “The pressure of deposit fleeing is too great and we can’t control it. We have no option but to fight back,” said one banking executive, according to Caixin media, one of China’s top independent financial magazines. 

    Since June 2012, the central bank has allowed deposit-taking banks to set their own lending as well as saving rates within a 10 per cent range of the official cash rates. Medium and smaller banks have been forced to raise their deposit rates to the maximum ceiling, which is 10 per cent above official cash rates.

    Initially, big state-owned behemoths could hold out but eventually the onslaught of internet giants like Alibaba forced them to contemplate the previously unthinkable – raising deposit rates to the highest ceiling allowed by the central bank.

    “Our cost of capital increased from 0.35 per cent to 7 per cent and there is nothing we can do about it,” said the Chinese bankers according to Caixin.

    Alibaba is not alone in exerting pressure on China’s banks. Baidu, China’s answer to Google, launched a similar product to Yuebao back in October last year. On the 28th of that month, Baidu’s new internet finance platform had a melt-down due to the huge number of visitors who scrambled to sign up to Baidu’s new product, which offers a 4.9 per cent annualised return.

    Baidu raised the required amount – one billion yuan – within three hours.

    Chinese internet giants have thrown down the gauntlet. Alibaba is unstoppable says one Chinese banker. When the company gets listed this year, it is tipped to raise more than $US100 billion. Its high valuation is partly due to its ground-breaking role in the emergence of internet finance in China.

    Internet companies will hasten the pace of financial reform in China. The much-touted liberalisation of interest rates, which will spell the end of financial repression, will happen sooner on the back of the internet finance boom in China.

    Beijing has so far tolerated it, and one can even say implicitly encouraged the development of the sector. The central bank sponsored Internet Finance Association has been approved and is expected to release industry self-regulation in the future.

    Jack Ma, the founder of Alibaba and the Godfather of the internet industry in China famously said in 2008: “If banks don’t change, we will change them.”

    In a little less than five years, Chinese banks are already fighting a rear-guard action. China’s internet industry – the most dynamic and least government controlled sector – is smashing industry cartels and challenging existing models.

    Chinese banks will need to change or be changed.

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    China's internet industry – the most dynamic and least government controlled sector – is smashing industry cartels and hastening the pace of financial reform.

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    Private bidders are dominating inbound Chinese investment into Australia according to a new report from Corrs Chambers Westgarth.

    The report, released today, shows an exponential rise in investment by privately owned enterprises (POE).

    According to the report, Chinese bidders have shown a ‘boldness in approach’ and the ‘adoption of more sophisticated tactics’ by Chinese POE bidders with deals completed in faster time than bidders from any other country.

    Chinese investors continue to represent the largest proportion of foreign bidders with 29 per cent of the total 34 deals worth $25 million or more. US and Canadian investors shared second place at 14 per cent each.

    Resources remain the focus of investment with 100 per cent of deals done in that sector. Of those deals, half were in gold and copper assets.

    New restrictions on domestic property purchases and mooted changes to land use rights are expected to encourage further outward investment by Chinese investment into foreign markets including Australia.

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    Chinese private investors into Australia are increasingly bold and sophisticated a new report shows.

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    China's central bank engineered the recent decline in the country's currency to shake out speculators as it prepares to allow a wider trading range for the tightly tethered yuan, according to people familiar with the central bank's thinking.

    In the past week, the People's Bank of China has been guiding the yuan lower against the dollar. It has done so by setting a weaker benchmark against which the yuan can trade. It has also intervened in the currency market by directing state-owned Chinese banks to buy dollars, according to traders.

    The moves brought the yuan, also known as the renminbi, to its weakest level in seven months and represents a reversal of the practice for most of last year when the central bank kept pushing the yuan higher against the dollar, even as the currencies in other emerging countries tumbled. Money has been pouring into China -- sometimes, analysts have said, by circumventing currency controls -- to take advantage of the seemingly unstoppable rise.

    By guiding the yuan weaker, the PBOC intends to thwart short-term speculators betting on a continued rise and to introduce greater two-way volatility into its trading. "The PBOC is testing the market as it prepares to widen the yuan's trading band," said one of the people familiar with the bank's thinking.

    While a short-term move, making the yuan behave more like a market-driven currency fits into a broader plan to restructure the economy so that it is less dependent on investment and exports.

    Though increasingly important in international trade, the yuan isn't freely convertible. The central bank sets the value, permitting the yuan to fluctuate within a controlled range against the dollar. Currently, the PBOC allows investors to push the yuan's value 1 per cent in either direction from that set rate in daily trading.

    Many analysts and economists expect the central bank to expand that range this year by allowing the currency to move up or down by 2 per cent daily. The last time the band was widened was in April 2012, when it was increased to 1 per cent from 0.5 per cent.

    Surging inflows of capital have been complicating Beijing's efforts to manage the economy, contributing to soaring property prices and injecting excess cash into the financial system. China's central bank and commercial banks purchased nearly $US45 billion worth of foreign exchange in December, the fifth consecutive month of net purchases. A weaker yuan could also help exporters, whose goods would be cheaper in the US and other foreign markets.

    The PBOC decided to tamp down expectations for one-way appreciation in the yuan and curb speculative trading during two-day currency policy meeting that ended on February 18, the people said. At the meeting, a deputy governor, Hu Xiaolian, called for greater efforts to prevent risks from cross-border capital flows and joined other officials in expressing concern about "hot money" inflows, according to a PBOC statement issued after the meeting.

    At the meeting, the PBOC also decided to expand the yuan's trading band this year in an "orderly" manner, the central bank statement said, as it moves toward making the yuan a freer currency.

    On February 19, the day after the meeting, the yuan started its recent slide, falling to the lowest level in almost two months. The yuan ended at 6.1248 per dollar on Wednesday in mainland trading, barely changed from the closing of 6.1266 the previous day. The currency has fallen 1.2 per cent against the dollar since the beginning of this year, a dramatic move for a currency that often barely budges and that gained 2.9 per cent in 2013.

    The slide added to jitters among investors already anxious about a slowing Chinese economy and touched off concerns about a sell-off of yuan in offshore markets. Chinese officials sought to calm nerves Wednesday. "The movement in renminbi is due to an adjustment of trading strategy by main market participants," China's foreign-exchange regulator said in the government's first comments, published on the regulator's website.

    "The yuan fluctuations are normal compared to volatility in developed and emerging market currencies," the regulator said. "Don't read too much into them." Following the comments, the yuan reversed course and strengthened slightly.

    PBOC officials have said in the past that the yuan is nearing its fair-market value, or "equilibrium level," meaning the chances of any drastic movements in the currency are limited.

    By making the currency more of a two-way bet, PBOC officials hope to relieve the pressure for it to rise and ease the way to widen the trading band, according to the people with knowledge of the PBOC's thinking.

    Widening the trading range won't eliminate the PBOC's grip on the currency, because the central bank will still maintain the daily reference rate for the yuan. Nonetheless, the potential change would be an important step toward establishing a market-based exchange-rate system, in which the yuan would move up and down just like any other major currency.

    The exchange rate reform is part of China's plan to overhaul its financial sector, elevate the country's status in the international monetary system and someday, according to some Chinese officials, rival the US dollar as the de facto global currency.

    A freer yuan may also help China deflect foreign complaints about its currency policies. The US and other advanced economies have pressed Beijing for years to relax its hold on the yuan, allowing it to rise in value and boost Chinese consumer demand.

    China has long resisted calls for a free float, preferring a gradual approach out of concern that drastic measures would destabilize its capital markets or hurt the country's powerful export market.

    A move to widen the yuan's trading range would come as China's juggernaut economic machine is slowing down, leading to questions of whether leaders might try to stimulate growth and help struggling companies.

    The yuan "has appreciated all these years and probably won't go too much higher from now on," said Du Hanbing, who runs a business in the southern city of Shenzhen that makes embossing machines and sells them in the US and Canada. "I'm more concerned about foreign demand and my customers' ability to pay me these days."

    Some investors seem undeterred by the weaker yuan. Among them is Andy Seaman, a portfolio manager at London-based investment firm Stratton Street, who said he has been increasing exposure to the yuan.

    Mr Seaman said the yuan will continue to appreciate "for many years to come," pointing to the rising demand for it in cross-border trade settlement. His yuan-bond fund is up 1.79 per cent this year in dollar terms, Mr Seaman said.

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    Recent shake-out in Chinese currency driven by nation's central bank.

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    Graph for Is China really on track for a forested future?

    Reuters

    China is on track to meet its 2020 target for expanding the nation's forests to cover 23 per cent of its landmass to combat climate change and soil erosion, the State Forestry Administration said on Tuesday.

    But some observers are critical of the massive reforestation, saying China is focusing on plantation forestry and ignoring the restoration of natural forests, which are still being lost.

    Since 2008, China has planted 13 million hectares (130,000 square kms) of new forests, roughly the size of Montenegro, taking total forest coverage to 208 million hectares (two million sq kms) or just over 21 per cent of its landmass.

    "We have completed 60 per cent of our task to meet the target for forest coverage and aim at 23 per cent (of the landmass) by 2020," Zhao Shucong, the director of the SFA, told reporters in Beijing.

    China launched its reforestation program in 1998, after devastating flooding of the Yangtze river was blamed on the loss of trees, which previously had acted as flood barriers.

    Large-scale deforestation in northern China has contributed to loss of topsoil, causing huge storms that sometimes carry sand and dust as far as eastern Canada.

    By regrowing its forests quickly, they now help conserve 581 billion cubic metres of water each year, while storing 8.4 billion tonnes of carbon dioxide equivalent that otherwise would be released into the atmosphere, according to the SFA.

    Reforestation has also contributed to the growth in China's domestic timber industry.

    But some experts question the sustainability of China's forestry program, arguing it focuses almost exclusively on plantation forestry and ignores restoration of natural forests.

    "The SFA only looks at forested land, but they forget the full picture," Xu Jianchu, a professor at the Kunming Institute of Botany, Chinese Academy of Sciences, told Reuters.

    He said most of the new forested land was low-quality, and pointed out that while new trees are planted rapidly, data shows that forest loss in many areas of China is increasing

    Local authorities often choose to plant non-native species such as fruit trees and rubber in order to maximise economic benefits, instead of opting for trees naturally suited to local areas.

    In arid and semi-arid regions, this has often worsened soil erosion and water scarcity instead of solving it, adding to food production problems.

    "They should also look at agriculture, and treat the ecosystem as a whole," said Xu.

    Originally published by Reuters. Reproduced with permission.

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    Beijing says its target for 23 per cent forest coverage by 2020 is being met but concerns linger over 'plantation versus natural restoration'.

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    Graph for China is caught in a steel trap

    China’s steel industry – the largest in the world –produced 300 million tonnes of excess steel last year which was twice that of total European production, according to Li Chuangxin, deputy secretary general of the China Iron and Steel Association.

    Excess capacity is like the sword of Damocles hanging over the head of the Chinese steel industry, which is under siege on multiple fronts. Profit margins have been squeezed to razor-thin, from around 7.5 per cent before the global financial crisis to less than one per cent last year.

    Some of the largest steel mills in China have turned to raising pigs and running plumbing services to stay in the black. Lately, they have also been under pressure to shut down their inefficient plants to combat the ever worsening pollution problem, which the industry is partly responsible for.

    The mayor of Beijing even made an heroic promise to serve up his own head on a platter if the problem is not addressed. However, Li from the China Iron and Steel Association said the difficulty of tackling the problem of excess capacity was “extremely difficult” and “more complicated than previously thought.”

    According to the association’s forecast, China’s steel production will increase another three per cent to 810 million tonne this year despite huge over capacity. Similarly, iron ore imports will increase another six per cent to 870 million tonnes this year.

    Why is it so difficult to tackle excess capacity in China when the business case for reducing production is so compelling?

    It’s all about employment and social stability. Steel mills are usually some of the largest employers in regional cities. They are not only providers of jobs, but also run social services like hospitals and schools.

    If the government shuts down plants, it will cause severe disruption to the social fabric of regional cities where steel mills dominate economic life. For example, the city of Tangshan is one of the largest steel towns in China and it needs to shed 40 million tonnes of steel capacity in the next five years. If the plan is implemented, it means that hundreds of thousands of jobs will be lost.

    In the absence of a comprehensive social security network, most local officials are not willing and prepared to take the risk of an army of unemployed steel mill workers taking to street. Maintaining social stability is still the number one concern for the party.

    Remember that China spends more money on curbing domestic social unrest than its ever-increasing defence budget.

    So in order to solve the problem of excess capacity, the government needs to develop a strategy to retrain and re-employ steel workers. This is a problem that is also confronting Industry Minister Ian MacFarlane at the moment, who is trying to protect livelihoods of laid off workers from Australia’s defunct car manufacturing industry.

    A special taskforce from the Chinese Academy of Social Sciences (a top government think tank) that is dealing with the excess capacity issue recommends training laid off workers as the top policy priority. The taskforce says the government should not forcibly shut down plants and it should offer a rescue package that is designed to ensure workers are looked after once the mills are closed down.

    Understanding how China will deal with the problem of excess capacity is the key to understanding the future of iron ore mining in Australia. China’s social security, environment as well as industry policy will have an important bearing on the demand dynamics of Australia’s most important customer.

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    Graph for Riding China’s infrastructure boom

    Tony Abbott famously declared he wants to be known as an “infrastructure Prime Minister”.

    China, it is worth noting, has had infrastructure leaders for well over 20 years. Since 1992, China has on average plowed over 8.5 per cent of its annual GDP into infrastructure – far exceeding what any other region or country spends. 

    In absolute terms, China’s annual infrastructure spending now surpasses that of United States and European Union. And there appear no immediate signs of this slowing down. Under China’s current 5-year plan (2011 - 2015) the government intends to invest as much as RMB 7 trillion (AUD 1.2 trillion) in urban public facilities. An additional RMB 3 trillion (AUD 550 billion) is planned for its national rail network.  

    Last year Beijing devoted over RMB 630 billion (AUD 114 billion) to spending on a range of capital works projects. In just one city, Wuhan, there are plans to spend over RMB 2 trillion (AUD 360 billion) over the next five years.  

    China’s consistently impressive growth figures are in a large part due to government-directed investment in ‘infrastructure’, broadly defined. Investment – of which infrastructure investment forms a dominant part – contributes up to 50 per cent of China's GDP. 

    To a large degree, one’s opinion of the China story depends on one’s assessment of the success of this infrastructure-driven growth – and the monetary and fiscal settings that support it.  It is certainly not hard to be impressed with some of what has been built: from high-speed rail networks to world-record long bridges to power plants and massive dams.

    But it is worth remembering that the success of infrastructure is ultimately determined not by whether something is awe-inspiring from an engineering perspective, but rather whether what has been built actually produces a net economic benefit. There is, after all, no point investing public or private funds in a project if the return on investment (properly defined) is less than what you put in.  

    So how do China’s plans measure up on this front?

    Some have been rather over the top in their assessments.

    “I don’t believe China is at risk of emulating the ‘bridges to nowhere’ phenomenon some other countries have experienced”, pronounced Australia’s then ambassador to China, Geoff Raby, back in 2010 – after China's enormous infrastructure binge fiscal stimulus project of 2008 – 2009. 

    What is a ‘bridge to nowhere’? The origin of the catchphrase comes from a notorious $US 300 million project to connect to sparsely populated towns in Alaska. It was picked up during the US Presidential Election of 2008 as an emblematic example of infrastructure investments made more to satisfy political considerations, than based on their economic benefit.

    Have there really been no examples of this type of thing in China?

    Even to the casual observer this would seem unlikely. Pictures of China’s ‘ghost cities’ have, after all, become internationally well known.  If a span in Alaska counts as a ‘bridge to nowhere’, then surely vast empty metropolises in the middle of the Gobi Desert do too.

    But China’s ‘ghost cities’ are really just the tip of the iceberg. From $US 4.8 billion dollar theme parks in Tibet, to an economically dubious $US 23 billion dollar railway from Lanzhou to Xinjiang, to ridiculously excessive government buildings resembling the US Capitol Building or (according to taste) the Kremlin, to Tianjin’s ‘replica Manhattan’ championed by China’s then President Hu Jintao – there are no shortage of questionable projects across the country. There has also been no shortage of collapsing bridges in recent years.

    Shrewd observers of the China scene typically have their own favorite examples of government-directed boondoggles and white elephants. The truth is such projects exist in almost every town across China if you know where to look.

    Indeed, given the political environment of China – where corruption is endemic, where decisions about government projects are often determined to meet political rather than commercial imperatives, and where infrastructure is rolled out at speed – it is remarkable that many projects do turn out to be economically beneficial.

    Even accepting many malinvestments, there is still a case that in aggregate China’s infrastructure investment to date has been largely beneficial. Economist Arthur Kroeber is probably one of the best proponents of this view.

    At the same time there are others, Charlene Chu (formerly of Fitch) is one of the more prominent, who argue that the rapid expansion of government-directed lending to infrastructure projects poses a real systemic risk to China's financial system.

    What is agreed is that the model for financing China’s infrastructure needs to change and could be much better.

    China’s infrastructure to date has almost been completely domestically financed – estimates currently put foreign investment in Chinese infrastructure at less than 1 per cent. Equally it has been financed overwhelming from the public purse rather than through Chinese private investment.

    China’s various levels of government provide, for example, over 96 per cent of general infrastructure finance; 99 per cent of funding for urban and airport projects; 80 – 85 per cent of power, water and port projects.

    It is also true that at least some in the Chinese leadership have belatedly recognized that the infrastructure-led growth model is not sustainable – as the amount of bad debts in the state-owned banks pile up.  

    The upshot is that there now appears to be a greater openness in China – explicitly encouraged in China’s current 5-year plan – to allow greater participation of foreign investment in future infrastructure projects.

    In Beijing alone the municipal authorities last year invited foreign participation on over 126 projects valued at $US 55 billion and are making soothing noises about ensuring foreign investors get a reasonable return. 

    Conceivably, in future some existing projects in China could even be privatized or handed over to foreign consortia to manage.

    Despite past poor experience with foreign investment in certain infrastructure projects in the late 90s and early 2000s, bona fide opportunities are again emerging for foreign project finance expertise in China.

    The appetite certainly exists among certain fund managers who, despite the risks with China, are attracted by the range of projects but also the usage numbers of proposed infrastructure which in many case are far more compelling than projects in their own jurisdictions.

    In theory there is no reason why, if prudently handled, opportunities could not arise to replicate the success achieved elsewhere in the region.

    Australia’s Treasurer Joe Hockey has made developing alternative models for future infrastructure investment a focus of the latest Finance Minister’s G20 meeting in Sydney. Details are still emerging about what he is proposing and whether it will be genuinely innovative.

    What is clear is that that there is a much more receptive audience for alternative models for infrastructure investment not only in Australia but also in China. What is also clear is that better infrastructure financing models hold the key for putting the Chinese economy on a lot more sustainable path. 

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

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    Lowy Interpreter

    Finance ministers and central bank governors from countries representing 85 per cent of the world's economic output who gathered in Sydney last weekend agreed to lift their combined five-year GDP forecast by more than 2 per cent. In real terms, the pledge would add $US2 trillion to the world economy.

    Reuters, which otherwise prides itself on objective reporting, almost made fun of the target:

    “The Group of 20's proposal to lift economic activity by 2 percent over the next five years has so many holes in it, there's no wonder it was the first official target that all members felt happy to agree on,” it wrote.

    Indeed one wonders why, if collective political head-nodding is all it takes to raise growth forecasts, the finance ministers hadn't decided on higher growth a couple of years ago. Markets on Monday shrugged at the news.

    One hole in the 2 per cent figure was left unpicked by Reuters and others: China didn't buy into it. Zhou Xiaochuan, governor of the People's Bank of China, said in a statement:

    “China will work on balancing the need for economic growth, reforms and stability. Growth of 7-8 per cent is not only suitable for China, it is also good for advancing world economic growth and sustaining the global economic environment.”

    China's growth rate for 2013 was 7.7 per cent, and the forecast for this year is about the same. In other words, China won't be attempting to hasten growth, post-G20. The country accounts for around 13 per cent of the total GDP of the group. Other countries will thus have to pick up the slack for the target to be met.

    China seemed to play along with other proposals at the G20 meeting. On structural reform, Governor Zhou said Beijing is taking a cautious response to the recent growth in shadow banking on the mainland.

    Last year JP Morgan estimated China’s shadow banking industry nearly doubled between 2010 and 2012 to nearly $US6 trillion. Experts are divided on whether shadow banking poses a serious threat to China's economic stability.

    Zhou's 'cautious response', it should be noted, doesn't equate with eliminating shadow banking. A document issued by China's State Council last December and leaked to a domestic news outlet in January described shadow banking as 'beneficial', 'complementary to the regular financial system', and 'the inevitable result of financial innovation.' The document ordered financial regulators to increase 'oversight' of unregulated lending. At the G20, then, Governor Zhou didn't tell the full story.

    One Sydney resolution that gained a bit attention in China was the G20's reinforced commitment to clamping down on tax avoidance and 'neutralising' tax havens. Delegates endorsed common standards for sharing bank account information across borders and promised an automated tax information exchange by the end of next year.

    China watchers will remember revelations from the International Consortium of Investigative Journalists in January on the extensive use of tax havens by China's elite. The report found that at least five current or former top officials have incorporated companies in the Cook or British Virgin Islands. It estimated between $US1 trillion and $US4 trillion in untraced assets have left China since 2000.

    Chinese state media took more interest in the G20’s pronouncements on tax avoidance than other issues discussed in Sydney – without mentioning, of course, the extent of the problem in China. All trace of the ICIJ report has been wiped from the Chinese internet.

    Whether China will stand by the G20 commitment to share bank account information across borders remains to be seen. If the country’s response to the ICJI findings is anything to go by, it seems unlikely.

    Originally published by The Lowy Institute publication The Interpreter. Republished with permission.

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    Iron ore prices have tumbled to an eight-month low, putting a squeeze on mining companies' profits as they race to repay massive loans used to expand their operations.

    A slackening in demand from Chinese steel mills has pressed down iron ore prices in each of the past six trading days. China buys around 60 per cent of the iron ore traded by sea, which it uses to make steel for industries ranging from construction to auto manufacturing. In recent days, China's steelmakers have been spooked by concerns that credit to property developers is drying up, as that could portend a slump in the real-estate market and a tumble in demand for building materials.

    Robert Montefusco, a senior broker at London-based Sucden Financial, said iron ore prices may have further to fall as steelmakers are likely to delay new purchases until they can secure cargoes at a heavy discount.

    To companies like Rio Tinto and Fortescue Metals Group, which have pledged to cut debt and boost returns to investors, falling prices are a worry. Fortescue, in particular, has been racing to pay down debts with cash flow from record sales of iron ore produced at its Australian mines. Rio Tinto says iron ore prices averaged $US126 ($A139) a metric tonne last year, which enabled it to shave $US4 billion from its debt load in the latter half of 2013.

    But with prices of ore with 62 per cent iron content delivered to Beijing's Tianjin port -- the industry benchmark -- falling to $US117.80 a tonne on Wednesday, miners may have to slow their debt repayments. Iron-ore prices haven't been lower since July 1, 2013. Prices edged 0.2 per cent higher Thursday to US$118 a tonne.

    Fortescue built up massive debts during a decade-long campaign to break the dominance of rivals such as Rio Tinto, BHP Billiton and Vale SA in supplying China with iron ore. At its peak, Fortescue owed more than $US12 billion.

    The miner began paying off its debt last year, but still had $US8.6 billion in debt after subtracting cash on its balance sheet at the end of December.

    Chief Financial Officer Stephen Pearce said Fortescue wanted to pay back "another couple of billion" dollars by year-end, but acknowledged the pace at which the miner would be able to repay its debts would depend heavily on the strength of iron ore prices.

    Australian broker Morgans forecasts Fortescue could reduce its debt-to-equity ratio to 41 per cent by December versus an estimated 57 per cent a year earlier if prices hold around $US124 a tonne over 2014. At an average of $US100 a tonne, the miner would only be able to cut its gearing to 53 per cent by December, it estimates.

    "If the iron ore price holds up our profit will be strong...but it depends on where the price sits" as to how fast Fortescue can repay its loans, Mr Pearce said.

    Rio Tinto has also made debt reduction a priority amid an industry-wide push to cut spending and make mines more profitable. Executives want to rein in the debt pile that built up as the Anglo-Australian company expanded its mines and infrastructure in dozens of countries around the world, including Australia, the US and Mongolia. It also used loans to help fund several ill-timed acquisitions, including the $US38 billion purchase of Canada's Alcan.

    Rio Tinto is the world's second-biggest producer of iron ore, after Vale, and relies on sales of the steelmaking material for the majority of its earnings. Underscoring the risk that volatility in prices poses to its bottom line, Rio Tinto in February said $US1.2 billion would have been wiped off last year's $US10.2 billion underlying earnings had iron-ore prices averaged $US113 a tonne.

    Rio Tinto wants to cut its net debt to the "mid-teens" of billions over the next few years, from around $US22 billion in mid-2013.

    To be sure, some analysts don't expect iron ore prices to keep falling.

    Perth-based Morgans analyst James Wilson attributed recent price falls largely to seasonal changes in demand, as China's construction activity slowed during the northern hemisphere winter. He expects prices of between $US110 a tonne and $US130 a tonne in the coming months, supporting mining sector profits.

    "Even at current prices it is still a reasonable profit for these guys," said Mr Wilson.

    Still, if prices do start to fall below $US110 a tonne "then that's when you'll probably see people starting to re-evaluate their expectations," he said.

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    Slack Chinese demand could force Rio Tinto, Fortescue to alter debt plans.

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    Graph for Australia's Asian security imperative

    “No country is more important to Australia than Indonesia. If we fail to get this relationship right, and nurture and develop it, the whole web of our foreign relations is incomplete,” said former Prime Minister Paul Keating in 1994.

    Twenty years later, Keating’s prophetic insight still rings true and in fact it is more important than ever for Australia to maintain a close strategic relationship with Jakarta. The geopolitical order in the region in which we live is undergoing a fundamental transformation and the rise of China as the next superpower poses a stark choice for Australia.

    China’s economy will soon be larger than America’s and that economic weight will translate into military and political power over time. We have already seen signs of that as China builds more aircraft carriers, stealth fighter jets and nuclear submarines. The era of American dominance in the region is coming to an end whether we like it or not.

    Much of the debate happening in this country is around whether we should choose between China –our most important economic partner -- or the United States -- the most important security partner. This is a false dichotomy.

    Australia’s most important strategic partner should neither be Washington nor Beijing. This country’s future security depends on building a strategic buffer north of its territory. Luckily this buffer zone already exists and it takes the form of ASEAN (The Association of Southeast Asian Nations) of which Indonesian is the keystone member.

    Australia has been blessed by this unexpected, yet valuable geopolitical buffer says Kishore Mahbubani, a former Singaporean ambassador to the UN who served as President of the UN Security Council.

    “For all its flaws and defects, ASEAN has enhanced Australian security by keeping Southeast Asia at peace, keeping Asian powers like China and India at arm’s length and increasing multilateral webs of operation which have created greater geopolitical stability, “ he said in a speech during a recent visit to Australia.

    One of the biggest mistakes Australia has made recently has been to take ASEAN for granted, and one may even go as far to say to ignore it while the association has been embarked on an EU-like effort to create a common economic zone right at our door step.

    Canberra only appointed its first resident ambassador to ASEAN last September after years of bureaucratic wrangling. A senior Indonesian diplomat aired his concerns about Australia’s neglect of the region during his recent trip to Australia.  

    “Not many people in Australia are aware of ASEAN, although in terms of proximity we are not so apart,” Indonesian ambassador to ASEAN Gede Ngurah Swajaya told Business Spectator.

    “Australia views Asia through the lens of China. Not many people know we have a free trade agreement ASEAN. You are ignoring this terrific opportunity which is ASEAN.”

    In a time of uncertainty, Australia is naturally clinging to its powerful friends in Washington for comfort. At the same time, Canberra is engaging in a politically costly diplomatic fight with Jakarta over spying allegations and asylum seekers. The spat between Canberra and Jakarta will cost Australia political space in a region that is crucial to Australia’s future security.  

    The best way for Australia to achieve security is through membership in ASEAN. Something Paul Keating once hinted at through the formula of a ‘community of Twelve” comprising ASEAN, Australia and New Zealand.

    Ambassador Swajaya explained why Australian membership of ASEAN is crucial to this country’s success as well as its security. He used the example of Australia’s desire to be part of the solution to escalating disputes between China and other countries over maritime territories in the South China Sea.

    “The only way for Australia to get involved in the South China Sea dispute is through ASEAN,” he said.

     “ASEAN is the only party in the region who can talk to everybody freely. Australia can’t enhance its alliance with the US, which will make China unhappy.”

    Mahbubani, one of the foremost strategic thinkers in the region, argues that in the long run, Australia will have no choice but to seek membership in ASEAN. Australia can achieve long-term security by becoming part of a regional association that is able to withstand diplomatic, economic and military pressures from rising superpowers like China.

    Unfortunately, our political and foreign policy elites aren’t entertaining such an option and prefer to tie Australia’s security even closer to that of the United States. Mahbubani says the key obstacle is cultural reluctance.

    “The main reason why Australia will be uncomfortable as a member of ASEAN is that it will have to learn how to behave as an Asian rather than as a Western nation”. Australia needs to explore all serious options about this country’s place in an increasingly volatile, richer, powerful region populated by 3.5 billion Asians.

    Ambassador Swajaya’s gentle warning should be a wake-up call. “You can choose your friends, but you can’t choose your neighbours.”

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    Mantra Group, an Australian hotel operator backed by Hong Kong-based CVC Asia Pacific Ltd. and UBS AG, plans to raise 500 million Australian dollars (US$448 million) in a public listing before Easter, two people familiar with the deal said.

    The company had a strong response from Asian investors at an introductory roadshow in January, and it plans to make a final push to raise interest with another in the second week of March, the people said.

    The push to list Mantra comes as dozens of Australian companies try to lure investors into initial public offerings as confidence returns to market, but where a number of introductory roadshows have failed to gain traction.

    Mantra's goal is to create a listed rival to competitors like France's Accor SA and Oaks Group, a subsidiary of Thailand-based Minor International PCL, according to the people.

    The Australian company manages and leases tourist properties and markets them under three main categories--the budget BreakFree label, a midmarket range dubbed Mantra, and the Peppers luxury-resorts brand. It manages 116 properties in Australia, New Zealand and Indonesia.

    Mantra's advisers UBS and Macquarie Group Ltd. have been stressing to investors the earnings potential from rising Chinese tourism to Australia, a third person familiar with the deal said. They have also highlighted Mantra's plans to expand into Thailand and boost its presence in Indonesia.

    The number of visitors from China rose almost 20% in the year through September, according to Tourism Australia, which hopes Chinese tourism will generate A$9 billion for Australia in 2020, compared with around A$4.2 billion in 2012.

    A Deloitte Access Economics paper this month separately predicted national hotel occupancy rates over the next three years would climb to almost 70% from around 67% currently.

    Meanwhile, a UBS report this month showed short-stay tourist arrivals from all over the world rose by 9% last year, rebounding from a slump between 2005 and 2011 as a near-record-high Australian dollar kept visitors away. The Aussie weakened by about 15% last year.

    "With the Australian dollar peaking in 2011, there appears to be a renaissance in short-term arrivals," the UBS report said.

    The sharp rise in tourism from China and elsewhere in Asia has also been supported by a pickup in the number of airlines targeting Australia with low fares, including Malaysia's AirAsia X Bhd., Singapore's Scoot and China Southern Airlines Co.

    Mantra's chief executive, Bob East, said earlier this year that Mantra was tracking 10% above expected earnings before interest, taxes and amortization for the 2014 financial year ending June, which look set to eclipse the previous year's Ebitda of A$63 million. Still, to maintain growth, the company will need to continue winning management rights over new properties.

    Some Australian holiday resorts have struggled as the Australian dollar peaked, and remain in a state of disrepair. The price of holiday investment properties in Queensland state's Gold Coast have crashed by as much as 50% in recent years, damping interest in new developments.

    To compensate, Mantra has been looking to Southeast Asia. It recently opened its first Asian resort, in Bali, and plans to open another one nearby next month. Mantra's Mr. East said last year that the company wanted to open 20 more hotels in Indonesia over the next three years, and a similar number in Thailand over six years.

    An IPO would be a welcome opportunity for majority owner CVC to exit what has been a troubled investment. Mantra Group was originally one half of CVC's leveraged buyout of Global Voyager Holdings Ltd., which also included the travel agency Stella Travel Services Ltd.

    Mantra and Stella were demerged in 2009 in a deal between private-equity owner CVC and lender UBS. The agreement saw CVC and UBS convert almost A$1 billion Global Voyager debt to equity, barely a year after CVC bought the business following massive write-downs in the Stella businesses.

    CVC and UBS now control 60% and 40% of the restructured companies, respectively. CVC and UBS tried to sell Mantra Group in 2012, but struggled to find the right buyer.

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    The hotel operator plans another roadshow in the second week of March and aims to list before Easter after a strong response from Asian investors.

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    China's four biggest banks sank to their lowest valuations on record in Hong Kong trading yesterday, Bloomberg reports.

    According to the media outlet, China’s big four lenders have seen US$70 billion worth of value wiped from their stocks this year.

    Industrial & Commercial Bank of China -- China’s largest lender – has been knocked from its ranking as the world’s biggest bank by market value by Wells Fargo and JPMorgan. China Construction Bank Corp, Agricultural Bank of China and Bank of China also suffered steep falls in valuation.

    The drop in valuation follows an announcement by Central bank Governor Zhou Xiaochuan this week that China intends to free up deposit rates within two years to boost competition.

    The China Banking Regulatory Commission announced at the same press conference that five privately-owned banks will be permitted to be set up in the wealthier regions of Tianjin, Shanghai, Zhejiang and Guangdong.

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    Lenders sank to their lowest valuations on record in Hong Kong trading yesterday.

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    Graph for Australia-China FTA: Beijing means business

    Lowy Interpreter

    History shows that social unrest and political upheaval have one of two elemental causes: either empty stomachs or full stomachs. Hungry people are angry people, while a well-fed middle class looks beyond basic needs to metaphysical desires, like having a say in government.

    The central security challenge of Communist China has always focused on pulling the right levers to balance central authority with economic freedom and to control the rumblings of a billion stomachs. Under Mao, the preoccupation was coping with economic retardation, whether from natural calamities or man-made catastrophes such as the disastrous Great Leap Forward.

    When Deng Xiaoping opened China's doors in 1978 to market reform, Beijing had to confront a new set of problems. Economic devolution, particularly into so-called Special Economic Zones, was impossible without a degree of political autonomy and administrative decentralisation. But how much was too much, before a consumerist middle class began looking beyond cars and refrigerators to satisfy its needs?

    In one of those delicious ironies of history, China's economic boom is forcing its political leadership to consider once again the vexing problems posed by empty stomachs or, to use the more academic label, Food Security.

    The path to wealth, prosperity and urbanisation has largely ignored the destructive impact on China's two most precious commodities: land and water. The extent of environmental degradation in China today is, literally, breathtaking. Its air is more lethal to the human respiratory system than Benson & Hedges. Immense expanses of its arable land have been covered in concrete and steel. The mineral content of its soil is so meagre that only millions of tonnes of phosphates can sustain its agriculture. Chemical and industrial effluent has been allowed to leech into every one of its waterways.

    As of today, China simply cannot feed itself without a comprehensive transformation of its economy. But the reforms required might not sit well with its aspirational middle class, whose steady rise to affluence would probably be halted were China forced to shift down its economic gears.

    Over the last 30 years, China's developmental needs have been sought in the world's forests, quarries and mines. Beijing is now looking for answers among mother earth's farms, fields and ranches. Scandals like the 2008 melamine baby milk outrage have intensified the Chinese middle class appetite for clean and green food.

    So China has a huge problem, and last week, it unmistakably signalled its belief that Australia offers a significant part of the answer.

    The public reference on 5 March to the Australia-China Free Trade Agreement in the opening session of the National People's Congress must be interpreted in the macro context of China's food security crisis. This bodes well for the success of Prime Minister Abbott's trade and business mission to China next month, during the landmark Australia in China Week. Ready or not, a Free Trade Agreement with China is coming soon. Under the right circumstances, it could even be signed the next time President Xi Jinping visits Australia.

    But what of Australia's national interests, which revolve less around food security and more around perpetuating an expected standard of living and ensuring an accustomed quality of life?

    Are we positioning ourselves now to take maximum advantage of the benefits, while hedging against the costs, of tariff-free trade with China? For there will be a downside. Just ask our neighbours across the Tasman what New Zealand's 2008 trade agreement with China has meant for them, especially in areas such as access to cheap Chinese labour and competition with certain Chinese manufactured goods.

    By interesting coincidence, on the same day Australia-China trade relations received such a public airing in the Great Hall of the People, the Victorian Government released its Food to Asia Action Plan. In the words Cambridge scholars used to describe the Oxford Dictionary, it is a useful if tendentious work. Looking beyond the election year hyperbole, it's the product of some imaginative collective thinking by elected officials, bureaucrats and primary-industry stakeholders across Victoria.

    But it is more armchair guide than action plan. It is a cost-benefit analysis without the cost, presenting only one side of the story. There is little mention of how free trade agreements across Asia might impact Australian exporters and no mention of China's expectations and how these might be received by Australian producers or the Australian people.

    Leaving aside the political imperatives and subtle demands by Beijing to rethink our relations with the US, there will be potentially unpalatable economic offshoots in the post-China FTA world.

    For Australia, it won't be all about exports alone, with little changing on the home front. A new climate will be created for both countries. We should anticipate joint ventures, outright takeovers of SMEs, imports of Chinese agricultural machinery, huge China-funded infrastructure projects, listings on the Shanghai-Hong Kong stock exchange, trade training courses for Chinese students and an influx of Chinese workers. All of which will be great news for our economy but a hard sell to some Australians.

    Dynamics are changing every day. A 2011 KPMG study of Australia-China trade relations noted that 'Chinese investors see the benefit in securing land assets, notably the source of food production.' In June 2013, a McKinsey report on the Chinese upper middle class said business strategies needed to reflect China's new constellation of rising incomes, shifting urban landscapes and generational change, since 'millions of Chinese are trading up and becoming more picky in their tastes.'

    An Australia-China Free Trade Agreement has been on the cards for some years. An impressive body of work has already been completed to scope its implications and how Australian exporters should prepare themselves.

    Until now, however, this has all been conjecture. In the words of the Chinese proverb, 'ten thousand things change, in the end nothing changes.' But an agreement will become reality in the life of our current federal government, because signing it is now more in China's national interest than our own.

    There is yeoman's work ahead of us to rebuild our ports and infrastructure, to reform our regulations, to rethink our customs and quarantine procedures, to reinvigorate our declining cooperative model for penetrating China markets and to differentiate our brands and products in line with rapidly evolving Chinese middle class tastes. In what will be a race to the swift, some states have already burst through the barrier, while others are still under starter's orders.

    Very soon, ten thousand things will change. In the end, little will stay the same. Freeing up bilateral trade with 1.3 billion people will do that. For its own reasons, Beijing means business. We should understand and prepare for that now as best we can.

    Originally published by The Lowy Institute publication The Interpreter. Republished with permission.

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    Japanese electronics giant Panasonic says it will give employees sent to China a wage premium to compensate for the country's hazardous air pollution, in a possible first for an international company.

    The move was part of a wider deal reached in Japan's annual labour talks on Thursday which saw major firms, including Panasonic and Toyota, agree to boost workers' salaries for the first time in years, amid concerns about an economic slowdown after a sales tax rise next month.

    A Panasonic spokesman confirmed the pollution-linked pay premium for its expatriate workers, but declined to give further details or say how many such workers it has in China, which has extensive trade and business links with Japan.

    So-called hardship pay is not unusual for employees of foreign firms sent to work to China, but Panasonic is believed to be the first to announce a premium to compensate for polluted air.

    A Panasonic document from the labour talks said: "As for the premium for expatriates to compensate for a different living environment, the company will have a special review for those sent to Chinese cities."

    On the weekend, a top Chinese environment official said that air quality was below national standards in almost all China's major cities last year, after Premier Li Keqiang pledged to "declare war" on pollution.

    Only three out of the 74 cities monitored by the government met a new air quality standard, said Wu Xiaoqing, a vice minister of environment protection, underscoring a problem that has set off alarm bells over health concerns.

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    Employees of Japanese firm in China to be given a bonus to compensate for its air pollution.

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    Sales of Bordeaux wines have fallen 1.4 per cent, with exports dropping by six per cent as Chinese drinkers cut their purchases by nearly a fifth, winemakers say.

    While last year the volume of wine from the southwestern French region sold edged up 0.3 per cent to 557 million litres, or 742 million bottles, by value it slipped 1.4 per cent to 4.24 billion euros ($A6.61 billion), the CIVB association of Bordeaux winemakers said on Thursday.

    Exports fell two per cent by volume to 213 million litres, and by six per cent in value to 2.14 billion euros.

    CIVB president Bernard Farges blamed the slump in exports on "the slowdown in China which has had exponential growth since 2005".

    Sales in China fell 16 per cent by volume and 18 per cent by value, a drop of about 60 million euros. China and Hong Kong together account a quarter of Bordeaux's exports.

    A crackdown on corruption by China's new leadership has hit sales of Western luxury goods as lavish gifts were often used to curry favour with officials.

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    Sales of Bordeaux wines in 2013 fell 1.4 per cent by volume and six per cent by value, thanks to a fall in the Chinese market.

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