Net exports, the main driver of growth earlier this year, have deteriorated sharply during the June quarter. Despite export prices declining significantly in support of volumes, net exports are set to subtract at least 0.8 percentage points from growth in the June quarter.

Australia’s trade deficit narrowed to $1.7 billion in June -- from $2.0bn in May -- to complete a fairly ordinary quarter for trade. Nevertheless, the result exceeded market expectations for the deficit to remain at around $2bn.

The result follows a strong start to the year, which saw net exports contribute 1.4 percentage points to March quarter real GDP. The Reserve Bank of Australia noted a few months ago that they expected the trade sector to soften a little but the recent deterioration has been larger than widely anticipated.

The value of exports rose by 0.5 per cent in June, to be 0.9 per cent higher over the year. Exports declined in both April and May on the back of a sharp decline in prices. By comparison, imports fell by 0.8 per cent in June, to be 4.8 per cent higher over the year.

The Australian dollar has picked up in recent months, which combined with a sharp decline in commodity prices, has weighed on export income and margins throughout our mining sector and the broader economy.

Export values are likely to come under further pressure in July, with the RBA’s commodity price index falling a further 1.1 per cent in Australian dollar terms. This was the sixth consecutive decline in the series, with commodity prices falling by a total of almost 15 per cent over that period.

Adjusting for the change in prices, net exports are set to subtract from real GDP growth in the June quarter. According to a combination of ABS monthly data and a simple model, net exports will take between 0.8 and 1.4 percentage points from real GDP in the quarter. This largely offsets the gains from earlier this year.

It follows on from a string of fairly ordinary data. Yesterday I noted that retail trade volumes fell during the quarter and the outlook for mining investment points to sharp declines over the next couple of years (Households feel the pinch of a struggling economy, August 4). Building approvals remain elevated but are well past their peak.

Households are stretched by declining real wages and high indebtedness and the non-mining sector is cautious and waiting for conditions to improve before they commit to greater investment. Meanwhile, the federal budget indicates that public spending won’t contribute significantly to domestic demand for a number of years.

The Australian economy is relying on exports to do the heavy lifting and this hasn’t been the case for three months. Net exports are all but certain to improve over the remainder of the year but there is great deal of uncertainty surrounding that outlook, most of which comes from the Chinese economy.

Exports to China continue to rise and are 10.6 per cent higher over the year. But its real estate market appears increasingly shaky and seems set for at least a moderate correction over the next couple of years. This will weigh on iron ore demand at the same time that more production comes online from Australian suppliers. Export prices are set to fall further in the years ahead.

The trade data during the June quarter was fairly ordinary but export volumes are set to climb over the remainder of the year. The big question is whether the rise in volumes will offset the fall in export prices: if it does, then that provides some upside risk to income growth and the federal budget. If not, the benefits of the third stage of the mining boom may be a lot less than is commonly expected and may result in growth remaining below trend for longer than the RBA anticipates.

China’s economy, boosted by a wave of growing middle class wealth, is undergoing a significant shift in consumption, driven by a new generation of young, prosperous and independent consumers. The country’s huge population and strong economic growth will make it the world’s powerhouse of middle class consumerism over the next two decades, and Australia, with its strong export links to China, is ideally poised to capitalise on this.

China’s economy is still heavily dependent on investment for growth: consumption only accounted for 50 per cent of GDP last year, significantly less than the United States at over 80 per cent, and even India which was over 70 per cent. However, the Chinese government is actively encouraging more consumers to spend.  Consumption in China will account for 60 per cent of GDP by 2020; the equivalent of adding just under $1 trillion of consumer spending, even at today’s levels.

A massive push to urbanise will propel tens of millions of people, and billions of yuan, into the consumption equation. Spending by urban Chinese households will increase from 10 trillion yuan in 2012 to nearly 27 trillion yuan in 2022, according to McKinsey.

An HSBC Australia survey shows that a significant proportion of Australian SMEs are planning to expand into new countries or further grow their existing international operations in the next 12 months; with 49 per cent highlighting China as one of two top destinations for business activity and expansion.

Increasingly, we also see an increasing number of services-focused businesses poised to capitalise on China’s rapidly growing wealth amongst its middle class. HSBC forecasts rising demand within sectors such as food, tourism and education, among others, will provide real opportunities for Australian businesses, with figures showing a 25 per cent year-on-year increase of companies providing services to China.

Creative Instore Solutions, an Australian point of sale designer, is one such company to embrace these opportunities. The company has successfully evolved from its original manufacturing and export activities in China, to a services proposition which now includes procurement, quality control and sales offices on the ground, responding directly to the emerging need for more sophisticated retail environments across the country.

Status-conscious, upwardly mobile young people, with bold ambitions and a global mind set, are turning China toward a consumer-driven future. They are confident, independent, less price-sensitive and determined to display their worldliness through well-considered consumption. They are loyal to brands and prefer niche over mass market products.

Most of them are the only child in their families, and frequently the children of only children, giving rise to the so-called “4-2-1” dynamic: the savings of four grandparents and two parents are funnelled into the pocket of a single child.

This family model coupled with rising per capita household incomes are unleashing a wave of needs and aspirations that are getting people to rethink the ways they save and grow wealth. People are not only thinking about achieving or maintaining a certain quality of life, they are also aspiring for a good education for their children, both locally and overseas.

After a large number of years in decline, international student enrolments in Australia are now on the rise and the prospective rising salaries that accompany well-educated graduates will only serve to reinforce this trend. Looking to the future, with one child potentially supporting four people in their old age, financial security in retirement is a growing concern.

We believe that there are some areas that will present clear opportunities as China’s consumer-society develops, including tourism, luxury brands, and technology.

China already has the world’s largest number of overseas tourists and the largest proportion of tourist spending, and is still far from reaching its full potential. Chinese tourists made an estimated 98 million trips abroad last year, spending over US$120 billion on travel.

In Australia, Chinese tourist visits have increased by 110 per cent in the past four years and if we continue to attract the current share of visitors, and the more traditional tourism markets grow at their average rate, we anticipate that China will account for 1.8m visitors to Australia by 2020, up from 720,000 last year. This would see Chinese arrivals overtake New Zealand to be our single largest source of tourist numbers and account for 21 per cent of the total.

As the confidence of the new wave of Chinese tourists grows, the spending pattern is also changing. One of the factors driving the extraordinary growth in overseas tourism is the attraction of luxury brand shopping. Chinese consumers nowadays are developing a taste for the finer things in life. Western luxury brands have done particularly well in recent years because they are associated with a high quality of life and sophistication. Some people are also looking for the cache of products not available in the domestic market.

These rapidly emerging trends, driven by the rapid rise of middle class wealth, will profoundly shape China’s economy, but also have wider consequences, as Australia’s businesses increasingly position themselves to benefit from China’s push towards consumerism.

In 2011, a young Chinese woman named Guo Meimei became an internet sensation when she posted pictures of herself to social media, ostentatiously showing off luxury cars, high-end cosmetics and designer handbags while also claiming a connection to the Red Cross.

That affiliation to the state-backed charity was later proven to be false, but not after it first seriously hampered the organisation’s ability to raise funds and collect blood from a jaded citizenry.

Guo, now 23, became a lightning rod for public discussion about the misuse of funds, corruption and the ever-widening gap between rich and poor in the world’s second largest economy.

And now Guo is back in the spotlight after when she appeared in orange prison garb on TV screens on Sunday in to admit to gambling and prostitution allegations against her and to formally deny any connection to the Red Cross.

Since shooting to prominence three years ago, Guo has leveraged her notoriety to earned large sums of money as a mistress and operating an illegal gambling venue in Beijing.

“To be honest, after the China Red Cross scandal, many people knew me” Guo told CCTV.

“Many men wanted to pay to sleep with me and be their mistress.”

In one incident last year, Guo was accused online of prostituting herself at bacchanalian sex and drug parties at a Hainan yacht show. Guo’s response was to post photos of casino chips worth 5 million yuan to her almost 1.9 million Weibo followers arguing she was “too rich to need to sell sex.”

Guo’s TV confession has been widely criticized online as an attempt to divert public attention away from a string of bad news including yet another earthquake -- this time in Yunnan province -- a factory explosion and increasingly violent unrest in the western province of Xinjiang.

Indeed, censorship instructions issued to the media by the Chinese government yesterday and subsequently leaked to the internet indicate the level of prominence the government intends for the story. News websites have been ‘kindly asked’ to prominently display Xinhua and CCTV coverage of the story, and to "actively organize and direct commentary".

In many ways, Guo’s televised confession is like a throwback to the self-criticism sessions of the Mao era. It’s just the latest in a string of such televised confessions that serve as a warning to others but which take place before the accused is granted a trial or access to a lawyer but make a mockery of due process.

In September last year, American-Chinese investor Charles Xue made a similar confession on CCTV that he had posted regularly to his 12 million Weibo followers to “gratify my vanity”.  While Guo has been arrested for prostituting herself, Xue was arrested for allegedly soliciting prostitutes.

Since coming to power almost two years ago, President Xi Jinping has revived many tenets of Chinese communist orthodoxy including the use of such “criticism and self-criticism” sessions.

People can now be sent to gaol for three years if their social media posts that contain rumours or lies are visited by more than 5000 internet users or reposted more than 500 times.

Around the time of the Bo Xilai trial last year, the campaign saw many muckraking websites and blogs shutdown for “spreading lies” and “disturbing stability”.

In April, the first person to be put to trial in public for spreading online rumours pleaded guilty to charges of defaming the railway ministry. Qin Zhihui had used his Weibo account to accuse the railway ministry of making a huge payout to the family of a foreign victim of the Wenzhou train crash without making similar payouts to Chinese families.

As well as concocting erroneous reports about government officials, Qin’s marketing firm made hay with Guo Meimei’s exploits and drove huge amounts of traffic to the websites of clients (Cash for comment in China's murky media world, July 22).

The campaign against influential liberal voices both online and offline has had a chilling effect in public discussion about politics. Scores of lawyers and activists have been arrested and warned off examining corruption.

Not so long ago, public criticism and exposure and official misdeeds took place on Weibo; now it’s unfolding on the pages of the People’s Daily. Civil society has been sidelined as the anti-corruption campaign continues to claim scores of scalps each week.

But whereas the public shaming of Xue was a warning to other influential critics of the government, in the case of Guo, the warning is a more general admonition against vulgar displays of wealth.

As Xi Jinping’s anti-corruption campaign continues to  gather steam, it’s likely many wealthy Chinese will be quietly deleting their own boastful pictures their social media accounts.

The new message seems to be that being rich is still glorious, but do it discreetly please.

Sinology conferences are usually lacklustre affairs where scholars talk about anything from burial rituals in the Han dynasty to Tang poetry. However, a recent European sinology conference in Portugal has turned into a completely scandalous event thanks to some Chinese officials.       

When hundreds of European sinologists were given a conference program handbook on the 24th of July, they were "surprised and dismayed" to find pages had been torn from the handbook. The pages contained information about the Chiang Ching-kuo Foundation, a semi-official Taiwanese academic organisation that supports and promotes Chinese studies.   

As it turns out, Chinese officials presenting at the conference had secretly seized conference materials and removed these 'offending' pages from the handbooks. Vice Minister Xu Lin, director general of the Confucius Institute, ordered her underlings to remove the pages, according to a public report issued by the European Association for Chinese Studies (EACS).

The association issued a strong public protest, condemning this unceremonious act as interfering with academic freedom. "Such interference in the internal organisation of the international conference of an independent and democratically non-profitable academic organisation is totally unacceptable. It cannot and will never be tolerated by the EACS," said Roger Greatrex, president of the association.

The scandal has raised two interesting points. The first is about Beijing’s practice of soft-power diplomacy, and the second relates to the Chinese government’s interference in academic freedom at overseas higher-education institutions.

Vice Minister Xu’s behaviour at an academic conference is a sad reflection of China’s ability to project its soft power at a time when the world is growing increasingly jittery about the rise of China. It is interesting to note that Xu’s job is to charm foreign academics and students through the Confucius Institutes -- non-profit, Chinese government-affiliated institutions designed to promote Chinese language and culture around the world.

China is a giant in the hard-power leagues of military and economics -- the world’s second-largest economy with the largest standing army -- but it is a dwarf in the parallel universe of perception and ideas. Beijing is trying to improve the country’s image abroad through large-scale, centralised schemes such as the Confucius Institutes, which fund and promote Chinese language studies. 

Xu’s behaviour highlights the problem of executing Beijing’s charm offensive. Many officials like Xu still behave like party ideologues even when they are abroad, ordering people to censor materials at academic conferences and restricting topics of discussion at educational institutions.

They fail to understand that the essence of soft power is all in the mind -- unlike hard power, which is all about tangible assets. If Beijing wants to be liked and trusted internationally, it has to change its behaviour and handle sensitive issues such as Taiwan and Tibet with more tact and sensitivity.

The great irony of this incident is that the Chiang Ching-kuo Foundation is perceived to be pro-China in Taiwan. The namesake of the foundation is the much-loved late president of the Republic of China -- an ardent pro-unification statesman who ended the country’s military rule.

The president of the foundation, Professor Yun-Han Chu, told The Liberty Times -- a pro-independence Taiwanese newspaper -- that Chinese education bureaucrats got used to bossing people around in China and they could not help themselves from acting in a similar fashion even when they were abroad.

Joseph Nye, the noted Harvard scholar who coined the term 'soft power', wrote in the Wall Street Journal that despite "spending billions of dollars to increase its soft power … China has had a limited return on its investment".

The scandal also shines light on another problem about the Confucius Institutes and academic freedom. There are about 300 Chinese government funded institutes around the world -- including in Australia -- which are generally located inside leading universities. They have been long-regarded as a propaganda arm of the Chinese government.

Many scholars believe the presence of these government-funded institutes degrades academic freedom. The American Association of University Professors, which has more than 47,000 members, called for the agreement between the Confucius Institutes and universities to be either terminated or renegotiated to better reflect Western values of academic freedom.

"Confucius Institutes function as an arm of the Chinese state and are allowed to ignore academic freedom," said the association in a statement. 

Xu’s brazen behaviour raises serious doubts about whether Beijing can respect academic freedom at universities. China’s flagship soft-power project could suffer a serious blow if professors and universities start to boycott the Confucius Institutes.

German car company Daimler says it is helping Chinese authorities with an inquiry after reports that a Shanghai office of its subsidiary Mercedes Benz had been visited by anti-monopoly investigators.

"We confirm that we are assisting the authorities in their investigation," Daimler Greater China said.

It is the first confirmation of an official inquiry into a foreign automaker in China, the world's largest car market, after authorities targeted overseas firms in several different sectors over recent months.

Nine anti-monopoly investigators from China's National Development and Reform Commission visited a Mercedes-Benz premises in Shanghai on Monday, interviewed executives and checked computers, reported Jiemian, a new media platform of state-run Shanghai United Media Group.

It quoted an unnamed source saying that the investigation focussed on "Benz's prices of finished automobiles and its policy of maintaining minimum prices with distributors".

The Mercedes-Benz office, in a western suburb of Shanghai, consists of a dealership with a showroom and a service centre.

Several showroom employees said they were unaware of any investigation.

But a security guard said the premises were visited by an investigation team two days in a row.

"They were here all day yesterday and three or four hours this morning," he said.

McDonald's says a recent scandal over expired meat from a Chinese food supplier has had a "significant negative impact" on sales in China, Japan and some other markets.

The fast food giant also said on Monday that it was working to regain customer confidence in a region that accounts for 10 per cent of its revenues.

On July 21, Shanghai officials shut the Shanghai Husi Food Co. following a television report alleging the plant mixed out-of-date meat with fresh product.

Chinese police later detained five Shanghai Husi officials.

As a consequence, "McDonald's businesses in China, Japan and certain other markets are experiencing a significant negative impact to results", the company said in a quarterly securities filing.

"McDonald's is undertaking recovery strategies to restore the trust and confidence of our customers," it added.

Last week, McDonald's said it stopped using food from all Chinese plants owned by Shanghai Husi's parent company, US-based OSI Group.

Japanese McDonald's restaurants also halted the sale of products made with chicken from China.

Both McDonald's and OSI have apologised for the safety problems and pledged action to ensure meat quality.

The McDonald's warning follows a similar statement last week by Yum Brands, which said the scandal has had a "significant, negative impact" on sales at its Pizza Hut and KFC chains in China.

McDonald's shares fell 0.7 per cent to $93.68 in midday trade yesterday.

Xiaomi has overtaken Samsung Electronics to become the biggest smartphone maker in China.

Market research firm Canalys said on Tuesday that Xiaomi sold 15 million smartphones in China during the second quarter, more than a threefold surge from a year earlier.

Canalys said Samsung's China smartphone sales decreased to 13.2 million units from 15.5 million a year earlier.

Xiaomi is little known in Europe or in North America as it sells nearly all of its smartphones in mainland China.

Canalys said China was the world's largest smartphone market during the period, with nearly four in every 10 smartphones sold there.

Samsung and Apple were the only non-Chinese vendors in the top 10.

Several foreign investors suffered steep losses when they recently exited a Chinese property fund once valued at $1 billion, according to the fund's adviser, in a cautionary tale for those seeking to profit from China's real-estate market.

The 31 investors in June sold their 12 per cent combined stake in Trophy Property Development Fund to investment firm Partners Group PGHN.EB +2.17 per cent  at a discount, according to the adviser, Venator Real Estate Capital Partners. CPA.WA +1.07 per cent

Venator didn't disclose the specifics of the discount, but it appeared to be significant. According to calculations by The Wall Street Journal, Partners Group paid less than $49.8 million for the stake. By contrast, the foreign investors put up a combined $120 million for the stake when it opened in early 2008, according to Venator.

The investors included a mix of wealthy individuals and boutique investment firms from Hong Kong, other parts of Asia and Europe, Venator said without releasing further details about their identities.

Trophy's troubles stemmed from delayed projects and a breakdown in its relationship with its partner, Shanghai-based developer Shui On Land Ltd. 0272.HK -0.48 per cent  , said Philip Mintz, Venator president. "There were significant development delays which would take the projects beyond the available life of the fund," he said.

Shui On said it didn't have an immediate comment.

While China's growth can be attractive, investing in real estate there is fraught with complexities. Apart from vague rules on land acquisitions, property developers and investors need to deal with different transaction and building practices and tax codes in different cities. They also often have to relocate those who already live on a plot of land, which can be politically difficult and expensive.

"When times are good, a rising tide lifts all boats. But when things aren't doing so well, you're able to tell who are the more thorough and cautious players," said a Shanghai-based lawyer with knowledge of the deal.

“ When things aren't doing so well, you're able to tell who are the more thorough and cautious players. ”

—A Shanghai-based lawyer with knowledge of the deal
The Trophy fund was headed by Kenneth Hung, who is married to the sister of the wife of Shui On Land Chairman Vincent Lo. Mr. Lo is widely known in China for developing Xintiandi, a popular restaurant and entertainment project in Shanghai.

Mr. Hung said he couldn't comment because the fund is still in the process of restructuring. He stepped down from managing the fund last year as part of a restructuring process.

The fund had initially invested in five real-estate projects in the cities of Shanghai, Wuhan and Chongqing—a mix of residential and commercial projects being developed by Shui On Land. They included Rui Hong Xin Cheng, or Rainbow City, which occupies a site of around 60 hectares in Shanghai's Hongkou district, with shopping malls and clubhouses as well as more than 30 residential towers in varying stages of completion.

Some of the projects ran into difficulties. In January 2013, Mr. Lo said progress with Rui Hong Xin Cheng and another project had been delayed due to snags in relocating residents. "Never again will I invest in a project that requires relocating people," he said at a press conference at the time.

The delays the projects' progress resulted in cost overruns. By the third quarter of 2013, the fund's value had weakened significantly and had a net asset value at around $415 million, compared with $1 billion in 2008, Venator said.

The parties involved in the fund agreed to restructure the fund and its management, and in October brought in Venator Real Estate Capital Partners to succeed Mr. Hung.

Increasing funding obligations and "an irretrievable breakdown in the relationship between the developer and the former management team" made it necessary for more sweeping changes at the Hong Kong-based fund, Mr. Mintz said.

As part of the restructuring, the fund is in the process of completing an asset swap with Shui On Land, exchanging its minority investments in four developments in China for the majority ownership in a residential project in Shanghai's downtown Xintiandi district. The asset swap is due to complete in the third quarter this year.

China's overseas borrowings are leaving the country increasingly vulnerable to a rise in U.S. interest rates, potentially creating funding problems for some companies and tighter conditions for the financial system overall.

The world's second-largest economy largely rode out the 2008 global financial crisis, shielded in part by a surge in domestic bank lending and capital controls that protected it from a sharp reversal in global money flows.

China still tightly controls capital flows, but authorities have allowed more foreign capital into the country to drive growth. As China's links with the global economy have increased, moreover, so have the leaks in its once watertight controls on capital.

Foreign loans into China in the first quarter of 2014 rose 38 per cent on year to almost US$800 billion, a fourfold increase since 2010, according to data released last week by the Bank for International Settlements. Chinese companies and banks have sold a record US$57 billion in dollar-denominated bonds so far this year, according to Dealogic, already eclipsing a record issuance of dollar bonds last year.

Some firms have borrowed cheaply offshore, especially in Hong Kong and Taiwan, to fund higher-yielding investments in China. Others, especially in the property sector, have gone overseas to fund operations as local funding has dried up. Banks, too, have borrowed overseas to raise funds amid more-stringent capital requirements.

The world's number-two economy remains better insulated than more-open developing countries such as South Korea or Indonesia, which suffered last year when the Federal Reserve announced it would begin scaling back massive asset purchases that had kept the world awash in cheap funds. But the buildup means Chinese firms are more exposed than ever to a rise in global interest rates, a greater risk as the U.S. economic recovery deepens.

"The idea that capital controls completely insulate them from this pressure is wrong," said Michael Spencer, chief economist at Deutsche Bank in Hong Kong. "Just as capital controls didn't prevent a lot of hot money from going into China, it won't prevent hot money from leaving."

A pickup in U.S. bond yields is already starting to make foreign borrowing less attractive. One sign that Chinese companies have begun to unwind some foreign exposure: investors pulled a net US$36.9 billion in capital out of China in the second quarter, reversing a US$94 billion inflow in the first three months of 2014, according to data released last week.

China's total overseas borrowing is only about 10 per cent of gross domestic product, lower than many nations. Its banking system is largely funded by local deposits, meaning a rise in overseas rates is unlikely to cause a widespread financial problem. And it still fixes the value of its currency and manages liquidity in the financial system, backed by US$4 trillion in foreign reserves.

Still, some companies are thinking twice about borrowing offshore as yields rise, instead looking at reducing overseas exposure or even switching exclusively to domestic borrowing.

Hong Kong-listed China developer Shimao Property Holdings often borrows twice a year, said James Yu, a company spokesman. The firm weighs a number of factors in deciding how much to borrow but "if the interest rate goes up more than we expected, we could reduce the loan or bond size," he added. The firm raised US$600 million in January selling dollar-denominated bonds.

Higher offshore rates could be another source of financial stress for Chinese borrowers, many of whom are highly leveraged.

"This is a real worry," said Vivian Lam, a Hong Kong-based lawyer with Paul Hastings LLP, which has advised Chinese property developers on offshore bond issuances.

As offshore rates move higher, companies borrowing overseas could move back onshore, helping push up borrowing costs, said Johanna Chua, head of Asia economics at Citigroup in Hong Kong. With China's more relaxed capital controls, "external financing conditions have more influence on domestic financing conditions," Ms. Chua said.

That could force the People's Bank of China to step in with easing measures to keep rates from rising.

Other observers are worried about the risk China's buildup of overseas debt poses outside of China. The run-up in lending to China by Hong Kong-based banks—many of them local units of Wall Street lenders—has alarmed the local monetary authority, which is demanding more robust funding requirements. Loans from Hong Kong institutions to China grew 30 per cent in 2013. In the first three months of 2014, they increased a further 8 per cent on year to US$317 billion. Taiwan has seen similarly rapid growth in credit to China, with loans growing 87 per cent on year in the first quarter to US$58.6 billion.

Many of those loans have funded the international expansion of big Chinese companies, monetary officials say. But some of them may have ended up in riskier property investments that could go sour if rates increase and growth slows.

Property companies in particular have sought loans offshore as funding from China's banks has dried up due to concerns the sector is oversupplied.

Some Chinese companies have begun to pay down their offshore loans, according to an official with an Asian monetary authority, who asked not to be identified. "The outflows in the second quarter already are a sign of that," the official said.

Months before security officials swooped on Zhou Bin's luxury villa in the suburbs of Beijing, hauling him away along with his wife, her father and their household staff, the son of China's former security czar had been planning for just such a family catastrophe.

Uppermost in the minds of Zhou Bin and his wife was the welfare of their daughter, then age 5 and attending a nearby Montessori preschool, according to the accounts of several people close to the family, who also described the early-morning raid on the family.

Mr. Zhou had good reason to be concerned: Dozens of close associates of his father, Zhou Yongkang, were being rounded up in an anticorruption campaign. It was becoming clear that China's new president, Xi Jinping, was preparing a takedown of the senior Mr. Zhou. Indeed, last week authorities announced that Zhou Yongkang is now under investigation for "serious disciplinary violations," the first time a ranking or retired member of the Politburo Standing Committee—the party's top decision-making body—has faced such charges.

So Zhou Bin and his wife— Fiona Huang Wan, a U.S. citizen—drew up a plan to have a guardian take responsibility for the girl in the event of a disaster. One morning late last year, their plan kicked in.

It's a scenario that, with variations, is playing out in gilded communities all over China.

First comes the sense of vulnerability among high-ranking officials, their associates and underlings as Mr. Xi's anticorruption dragnet spreads wider, well beyond Mr. Zhou and his sprawling network that covers the energy industry and provincial administrators. Then a sense of fear and panic as investigators start probing and questioning. In the final installment, the victims of Mr. Xi's campaign succumb meekly to their fates.

There are strong indications this isn't a power struggle of the kind that has periodically sundered the Communist Party's top ranks; it's a purge. That has led to a debate among China watchers whether the campaign will be extended to other former leaders and their families.

So far at least, there's little sign of resistance, though there's some evidence that the uncertainty is slowing government decision-making. And it's partly this apparent absence of a pushback to Mr. Xi that is bolstering his image as a new Chinese strongman, say many observers.

People who deal day-to-day with Chinese state-enterprise executives on the eve of their downfall report a sense of passive resignation. "One day you're sitting around a conference table with them discussing a deal; the next day they're gone. You'd never guess anything was wrong," says a top China-based investment banker at an international firm.

Some targeted officials are opting for suicide in preference to detention and public humiliation, according to reports in state media.

The elimination of rivals on corruption charges is part of the standard playbook in Chinese politics as new leaders entrench their power. The demise of Mr. Zhou fits neatly into that pattern. He was a close associate of the disgraced Politburo member Bo Xilai, who disrupted the carefully scripted political succession of Mr. Xi and is now in jail.

However, if that were the only motivation behind Mr. Xi's anticorruption campaign, we might expect it to be winding down. Close to 40 officials ranked vice minister and above have been purged. By now, Mr. Xi appears to have amassed more power than any Chinese leader since Deng Xiaoping.

Nevertheless, the campaign keeps rolling along. In its scale, intensity, duration and the lofty standing of its chief victims, it represents the most significant shake-up of the Communist Party in decades.

One obvious explanation for the sustained campaign is that Mr. Xi needs to show the public he's serious about cleaning up pervasive graft. There's an efficiency imperative, too. Corruption has reached the point where it is undermining the fighting capabilities of the People's Liberation Army. It warps decision-making at massive state enterprises.

A senior official describes a meeting that Mr. Xi presided over in Shanghai when he was party secretary there for a brief period in 2007. A decision had to be made about what to do with the supposedly incompetent manager of a large state company who was coming up for reassignment. Somebody suggested another post. Mr. Xi was irritated. "I don't owe him anything," he exclaimed. "The party doesn't owe him anything. Retire him!"

Beyond this, though, is the question of whether Mr. Xi's war on corruption has a wider political purpose.

In the early days of his administration, Chinese liberals harbored hopes that Mr. Xi would turn out to be a political reformer. And, as his anticorruption campaign progressed, some guessed it may be his way of bludgeoning the resistance to a new political liberalization. Those hopes have since dimmed. The fight against corruption has gone hand-in-hand with an equally ferocious assault on human-rights lawyers, social activists and bloggers.

The announcement of the investigation into Zhou Yongkang put it into the context of a new drive to institute the rule of law. Under Mr. Zhou's reign as domestic security chief, corruption engulfed the judiciary. Rule of law took second place to an obsession with "stability maintenance" that prioritized repression over judicial process.

But Mr. Xi's commitment to the primacy of law is open to question. There's no sign he will subject the party to supervision by the courts.

Over the summer, Zhou Bin's daughter celebrated her sixth birthday with a party in her Montessori classroom. She's cheerful but keeps asking: "When can I see my mummy," says one person who knows her situation.

The answer to that question, and the ones about China's political direction, now rests firmly with Mr. Xi.

Beijing will seek to build 50 new LNG tankers by 2020 as part of its quest to secure an energy supply chain, and to boost its ailing shipbuilding sector, Reuters reports. 

According to the news service, six home-built tankers, constructed by Hudong-Zhonghua, accounted for half of the communist giant's LNG imports last year, the rest coming on chartered ships.

Estimates from ship safety agency the American Bureau of Shipping mean the 50 vessels will account for about a fifth of the 225 high-tech vessels to come online during the period – each set to cost about $US200 million – taking the global fleet to 394.

The Conversation

During Chinese premier Li Keqiang’s last visit to the UK, China signed a series of deals on energy and low carbon technology, and a declaration of cooperation on climate change. A few weeks later, similar deals were signed with the US. The question is whether this demonstrates a genuine commitment from China to environmental protection, or whether it’s just rhetoric in the run up to important climate change conferences in New York and Paris.

There is no doubt that the Chinese leadership has instigated a number of measures to address the problems of environmental pollution at home. The world’s largest polluter has done much more than any other government in the developing world. In recent years China has standardised environmental laws and regulations, encouraged local governments to take on responsibility for environmental protection, and introduced the environmental information disclosure, urging enterprises to meet certain requirements.

Environmental NGOs, the mass media and online communication are also playing an increasing role in China’s environmental policy-making. The country is now the largest investor in renewable technology and ambitious targets have already been set to increase the portion of renewable energy generated in China and reduce its dependence on polluting coal.

China sees international cooperation on climate change as an opportunity. Its leadership wishes to be regarded as responsible global stakeholders by collaborating with major powers on big problems, without touching on sensitive issues concerning human rights, cyber-espionage or tensions in the East and South China Seas.

There is also an opportunity for China to open up foreign markets for its low-cost renewable energy products such as solar panels, ensuring itself a slice of the fast-growing renewable energy industry market. Nowhere is this most apparent than in those countries where Chinese state-owned companies and banks already provide infrastructure, investment and finance, in Africa and Latin America. As their economies grow these countries will face similar environmental problems, and so they watch China’s transformation carefully. Not only to see how a leader of the developing world tackles climate change and environmental issues, but also as a potential future supplier of environmentally-friendly technology.

Despite China’s aspirations and the positive ring to the speeches and deals signed with western nations, the key fact remains that China is not willing to sign up to any major international commitments on climate change. This has been demonstrated before: just before the Copenhagan COP15 in 2009, China announced its intention to reduce carbon dioxide emissions per unit of GDP by 40-45% (based on 2005 levels) by 2020. But during the conference it refused to agree to any specific targets.

China not only advocated on behalf of developing countries but also accused major powers of trying to divide the developing world. The Copenhagen summit took place just a few weeks after President Obama’s first visit to China, when the two countries agreed on joint cooperation on climate change and to establish the Sino-American Clean Energy Research Centre.

How much China commits itself to cutting emissions will depend on how far western powers will go in their own national climate policies. With the current divisions among EU member states on directions for energy strategy and a declining priority on the issue following the recession, the Chinese leadership can feel at ease. Subsequent UN climate talks in Bonn in June have also yielded only disappointing results. Other nations' lack of commitment to emissions reduction gives China more room to manoeuvre.

Next year’s COP21 summit in Paris to replace the Kyoto Protocol might be another occasion for Chinese leaders to cut western counterparts down to size. China’s leaders' rhetoric is clear: the developed world should take the lead in addressing climate change, while China – seen when it needs to be as a developing country despite its place as the world’s largest economy and second largest polluter – prioritises national economic development.

Seen in this light, cooperation is best understood if placed in the context of China’s interests. Bilateral agreements under the umbrella of renewable energy can help China advance technologically, provide opportunities for state-owned enterprises to access markets abroad, and enhance China’s energy security. These are likely to succeed; any collaboration beyond this scope – agreements for the good of the international community and the world at the expense of Chinese interests – is doomed to failure.

Karolina Wysoczanska receives funding from the University of Nottingham and the Economic and Social Research Council (ESRC).

This article was originally published on The Conversation. Read the original article.

Stratfor.com

Chinese President Xi Jinping's anti-corruption campaign is the broadest and deepest effort to purge, reorganize and rectify the Communist Party leadership since the death of Mao Zedong in 1976 and the rise of Deng Xiaoping two years later. It has already probed more than 182,000 officials across numerous regions and at all levels of government. It has ensnared low-level cadres, mid-level functionaries and chiefs of major state-owned enterprises and ministries. It has deposed top military officials and even a former member of the hitherto immune Politburo Standing Committee, China's highest governing body. More than a year after its formal commencement and more than two years since its unofficial start with the downfall of Chongqing Party Secretary Bo Xilai, the campaign shows no sign of relenting.

It is becoming clear that this campaign is unlike anything seen under Presidents Jiang Zemin and Hu Jintao. Both carried out anti-corruption drives during their first year in office and periodically throughout their tenures as a means to strengthen their position within the Party and bureaucracy and to remind the public, however impotently, that Beijing still cared about its well being. But that was housekeeping. This appears to be different: longer, stronger, more comprehensive and more effective.

With this in mind, we ask: What is the fundamental purpose of Xi's anti-corruption campaign? An attempt to answer this question will not tell us China's political future, but it will tell us something about Xi's strategy -- not only for consolidating his personal influence within the Party, government and military apparatuses, but also and more important, for managing the immense social, economic, political and international pressures that are likely to come to a head in China during his tenure. Getting to the heart of the anti-corruption campaign -- and therefore understanding its inner logic and direction -- provides insights on the organization and deployment of political power in China and how those things are changing as the Party attempts to remake itself into an entity capable of ushering China safely through the transformation and crises to come.

The Campaign Continues

The announcement July 29 of a formal investigation into retired Politburo Standing Committee member Zhou Yongkang marked something of an end to the first major phase of Xi's anti-corruption campaign. By all accounts, Zhou was one of the most powerful men in China throughout the 2000s. During his tenure on the Standing Committee, Zhou controlled the country's domestic security apparatus, a pillar of the Chinese government's power. Prior to that, he had served as Party secretary of Sichuan province, an important inland industrial center and breadbasket with historically strong regionalist tendencies. And before Sichuan, Zhou chaired state-owned China National Petroleum Corp., the country's most powerful energy firm and the direct descendent of the Ministry of Petroleum. Zhou was known to sit at the apex of at least these three power bases, and his influence likely extended deep into many more, making him not only a formidable power broker but also, at least in the case of his oil industry ties, a major potential obstacle to reform. Certainly, Zhou and his vast networks of influence and patronage were not the sole targets of the Xi administration's crackdown, but he and his associates, including former Chongqing Party Secretary Bo Xilai, widely seen as an early competitor of Xi, formed its central axis.

Now begins another phase. There are indications that it will center on the military. There are other signs that it will target Shanghai, the primary power base of Jiang Zemin and the locus of financial sector reform in China. Further neutralization of Zhou's allies in energy and public security will likely be necessary, too, as the Xi administration seeks to accelerate market-oriented reforms in the oil and natural gas sectors and to reinforce its internal security footprint in peripheral regions like Xinjiang as well as the Han Core. But ultimately, it is unclear which individuals and networks will anchor the next phase. The possibilities are as numerous as the Xi administration's myriad near- and medium-term policy goals.

The question of who or what will be targeted next is subordinate to that of why. Not why, specifically, they will be targeted, but why the campaign must and will continue. This brings us back to our question regarding the fundamental purpose of the anti-corruption campaign. It may be impossible to divine, beyond mere speculation, its future on a tactical level -- that is, what will come in three, five or eight months' time. But the direction of the campaign so far, combined with other actions by Xi, such as the formation of a unified National Security Council chaired by Xi himself and his apparent wresting of the reins of economic and social reform from Premier Li Keqiang, suggest that some other and deeper shift is underway, one for which the anti-corruption campaign is at once a vehicle and a symptom. Stratfor believes this shift involves nothing less than an attempt to rework not only the way the Communist Party operates but also the foundations of its political legitimacy.

To understand why, we look first not at Xi and what he has done thus far but at China and what it will undergo over the next decade. This will give us a sense of the external constraints and pressures of which Xi's administration is no doubt aware and to which it has no option but to respond. These constraints and pressures, more than any other factor, will shape Xi's actions and the Communist Party's evolution in the years to come.

A World Constrained

Over the next decade, the defining constraints on China will emanate from within. They are fundamentally economic in nature, but they cannot be disassociated from politics and society.

China is in the midst of an economic transformation that is in many ways unprecedented. The core of this transformation is the shift from a growth model heavily reliant on low-cost, low value-added exports and state-led investment into construction to one grounded in a much greater dependence on high value-added industries, services and above all, domestic consumption. China is not the first country to attempt this. Others, including the United States, achieved it long ago. But China has unique constraints: its size, its political system and imperatives, and its profound regional geographic and social and economic imbalances. These constraints are exacerbated by a final and perhaps greatest limit: time. China is attempting to make this transition, one which took smaller and more geographically, socially and politically cohesive countries many decades to achieve, in less than 20 years.

The bulk of this work will take place over the next 10 years at most, and more likely sooner, not because the Xi administration wants it to, but because it must. The global financial crisis in 2007-08 brought China's decadeslong export boom cycle to a premature close. For the past six years, the Chinese government has kept the economy on life support in the form of massively expanded credit creation, government-directed investment into urban and transport infrastructure development and, most important, real estate construction. In the process, local governments, banks and businesses across China have amassed extraordinary levels of debt. Outstanding credit in China is now equivalent to 251 percent of the country's gross domestic product, up from 147 percent in 2008. Local governments alone owe more than $3 trillion. It is unknown -- deliberately so, most likely -- what portion of outstanding debts are nonperforming, but it is likely far higher than the official rate of 1 percent. 

Despite claims that China's investment drive was and is irresponsible -- and certainly there are myriad anecdotal cases of gross misallocation of capital -- it nonetheless fulfills the essential role of jumpstarting the country's effort to "rebalance" to a new, more urban and more consumption-based economic model. But the problem, again, is time. China's real estate sector is slowing. Sales, home prices and market sentiment are falling, even in the face of continued expansion of the overall credit supply. The days of high growth in the housing construction sector are numbered and prices, along with overall activity, are on a downward trend -- one that can and will be hedged by continued high levels of investment and credit expansion, but not one that can be stopped for long. Real estate and related construction activity will remain the crucial component of China's economy for the foreseeable future, but they will no longer be the national economic growth engines they were between 2009 and 2011.

This means that in the next few years, China faces inexorable and potentially very rapid decline in the two sectors that have underpinned economic growth and social and political stability for the past two or more decades: exports and construction. And it does so in an environment of rapidly mounting local government and corporate debt, rising wages and input costs, rising cost of capital and falling return on investment (exacerbated by new environmental controls and efforts to combat corruption) and more. Add to these a surge in the number of workers entering the workforce and beginning to build careers between the late 2010s and early 2020s, the last of China's great population boom generations, and the contours emerge of an economic correction and employment crisis on a scale not seen in China since Deng came to power.

The solution, it would seem, lies in the Chinese urban consumer class. But here, once more, time is China's enemy. Chinese household consumption is extraordinarily weak. In 2013, it was equivalent to only 34 percent of gross domestic product, compared to 69-70 percent in the United States, 61 percent in Japan, 57 percent in Germany and 52 percent in South Korea. In fact, it has fallen by two percentage points since 2011, possibly on the back of the anti-corruption campaign, which has curbed spending by officials that appears to have been erroneously counted as private consumption. There is reason to believe that household consumption is somewhat stronger than the statistics let on, but it is not nearly strong enough to pick up the slack from China's depressed export sector and depressive construction industries. China's low rates of urbanization relative to advanced industrial economies underscore this fundamental incapacity.

Whatever the Chinese government's stated reform goals, it is very difficult to see how economic rebalancing toward a consumption- and services-based economy succeeds within the decade. It is very difficult to see how exports recover. And it is very difficult, but slightly less so, to see how the government maintains stable growth through continued investment into housing and infrastructure construction, especially as the real estate market inevitably cools. This leaves us with a central government that either accepts economic recession or persists in keeping the economy alive for the sake of providing jobs but at risk of peril to its reform initiatives, banks and local governments. The latter is ugly and very likely untenable under the current political model, which for three decades has staked its claim to legitimacy in the promise of stable employment, growth and rising material prosperity. The former is absolutely untenable under the current political model.

The pressures stemming from China's economy -- and emanating upward through Chinese society and politics -- will remain paramount over the next 5-10 years. The above has described only a very small selection of the internal social and economic constraints facing China's government today. It completely neglects public anger over pollution, the myriad economic and industrial constraints posed by both pollution and pervasive low-level corruption, the impact of changes in Chinese labor flows and dynamics, rising education levels and much more. It completely neglects the ambivalence with which many ordinary Chinese regard the Communist Party government.

It also neglects external pressures and risks, whether economic or military. What would another global economic crisis and recession do to China's already hobbled export sector? What would a prolonged spike in oil prices -- the result, perhaps, of deepening crises in Russia or Iraq -- mean for Chinese industry and its change to China's growing army of car drivers? What impact will structural changes in the East Asian and world systems, such as Japan's attempt at a national economic and military revival, have on China's overseas economic and maritime interests, or on Chinese society's confidence in the strength of its military and government? The potential risks, many of them of moderate to high probability, are legion. It takes only one to materialize to dramatically reduce the likelihood that the Communist Party, as currently constituted, survives China's transformation.

The Old Model Breaks Down

Xi knows this. He and his advisers know China's virtually insurmountable challenges better than anyone. They know how little time China has, how fragile the Party's political legitimacy -- its claim to the Mandate of Heaven -- has become over the past three decades and how great the consequences of inaction will be. But they also know how much potentially greater are the consequences of failure. Knowing all these things, they are acting to reconstitute the Party one cautious step at a time.

The anti-corruption campaign is one of those steps. It serves many overlapping functions: to clear out potential opponents, ideological or otherwise; to consolidate executive power and reduce bureaucratic red tape so as to ease the implementation of reform; to remind the Chinese people that the Communist Party has their best interests at heart; and to make it easier to make tough decisions.

Underlying and encompassing these, we see the specter of something else. The consensus-based model of politics that Deng built in order to regularize decision-making and bolster political stability during times of high growth and that effectively guided China throughout the post-Deng era is breaking down. It can no longer hold in the face of China's transformation and the crises this will bring. Simply put, now that its post-1978 contract with Chinese society -- a social contract grounded in the exchange of growth for stability -- is up, the Party risks losing the public support and political legitimacy that this contract undergirded. A new and more adaptive but potentially much less stable model is being erected, or resurrected, from within the old. This model is grounded more firmly in the personality and prestige of the president and more capable, or so Chinese leaders seem to hope, of harnessing and managing the Chinese nation through what could well be a period of turmoil.

This does not necessarily mean a return to Imperial China, nor does it mean a return to the days and methods of the Great Helmsman, Mao. It doesn't even mean the new model will succeed, even remotely. What it means will be decided only by the specific interplay of structure and contingency in the unfolding of history. But it is this transformation that serves as the fundamental, if latent, purpose for Xi's anti-corruption campaign.

Editor's Note: Writing in George Friedman's stead this week is Stratfor Asia-Pacific Analyst John Minnich.

This article was originally published on Stratfor.com. Republished with permission.

Whenever politicians or business people need to talk about China, it is obligatory to talk about China’s double-digit growth over the last three decades. Many leading international institutions such as the World Bank and the International Monetary Fund have accepted that figure as an article of faith.

However, many observers doubt the accuracy of the country’s GDP figures and even Chinese premier Li Keqiang secretly confided to the American ambassador back in 2007 that GDP figures in Liaoning, a rust-belt province where he was then party boss, were man-made and unreliable.

The reliability of Chinese GDP figures has come under the spotlight once again after 30 provinces and municipalities released their latest figures recently. If we tally up all provincial data for the first half of the year, the country produced 29.7 trillion yuan or $5.17 trillion in goods and services. It is 10.43 per cent more than the national figure released by the National Bureau of Statistics.

For China watchers, the discrepancy between provincial and national GDP figures is nothing new. This is a regular feature of the murky world of Chinese statistics. Senior Chinese economic officials, including those from the National Bureau of Statistics and the National Development and Reform Commission, the economic planning agency have publicly derided local officials’ efforts to inflate local GDP figures.

If a lot of people question the accuracy of China’s GDP: how fast has the world’s second largest economy really grown in the three decades from 1978 when China started its economic reform? Harry Wu, senior adviser to the Conference Board China Centre for Economic and Business, estimates that China’s GDP growth for the reform period 1978-2012 is only 7.2 per cent.

It is considerably lower than the official estimate of 9.8 per cent, making China’s economic growth less impressive. Wu argues the principal culprit behind China’s over-stated economic growth rate is due to an understatement of external shocks such as the global financial crisis.

For example, during the global subprime mortgage meltdown, China maintained a growth rate of 9.1 per cent, sparking wild talk of China’s ability to decouple its economic growth from that of the US and the eurozone.  However, Wu argues China only managed to grow 4.7 per cent in 2008, more than 50 per cent less than the official estimate. 

A prominent Chinese economist Wang Xiaolu made a similar observation recently at a forum held at Tsinghua University in Beijing. During the 2008 global financial crisis, the Chinese export sector, a key engine of growth, shrank by as much as 20 per cent from the fourth quarter of 2008 to 2009.

Electricity consumption was also down from 14.4 per cent growth in 2007 to a mere 5.6 per cent increase in 2008. Railway freight, another important indicator of economic activity, also declined from 9 per cent growth in 2007 to only 0.9 per cent in 2009. However, despite a significant decrease in these two key economic indicators, the official estimates for 2008 and 2009 GDP growth are still healthy at 9.6 per cent and 9.2 per cent, respectively.

“I think the figures from these two years are inflated and not very accurate,” said Professor Wang.

The Asian Financial Crisis of 1997-98 is also another period in which there was a significant discrepancy between key economic indicators and the official GDP estimate. 1997 was a difficult year for the Chinese economy after Beijing tightened its fiscal policy to cool down an overheated economy, electricity and railway freight both declined considerably, yet the official estimate still put the growth rate at 9.3 per cent.

The 1998 Asian financial crisis was a watershed event for many Asian economies. Many tiger economies fell like dominoes and the crisis also unleashed political change in places such as Indonesia where military strongman Suharto was ousted from power. Though China remained relative steady compared to other Asian economies, its economy took a massive hit nonetheless.

Electricity consumption only grew 2.8 per cent and railway freight dipped into red at negative 4.6 per cent growth. Despite all that, Beijing confidently asserted that the economy grew at 7.8 per cent, which is just a touch below the 8 per cent official growth target set by the Chinese premier Zhu Rongji. Wu put China’s real growth rate somewhere around two per cent.

Chinese leaders also realised the problem of inflated GDP figures. During a visit by the then premier Zhu Rongji to the National Bureau of Statistics, he urged them "not to fudge numbers".  Chinese policymakers understand poor quality data can have a significant impact on the economic policymaking process, with potentially dire consequences.

Wu and Wang both blame the government’s obsession with 'GDPism' as the main culprit for the inflated economic data.  The career prospects of China’s local officials have been largely dependent on GDP related matrix including investment, urbanisation rate and employment figures. Though Beijing is introducing more inclusive incentives such as for environmental protection, it is likely that the GDP-related matrix will continue to dominate for many years to come.

German luxury car maker Audi and Chrysler of the United States have committed "monopoly behaviour" in China and will be punished, the country's regulator says, as a probe of foreign auto companies grows.

"It has been found out that the two companies did have monopoly behaviour and they will be punished accordingly in the near future," said Li Pumin, spokesman for the National Development and Reform Commission (NDRC).

The statement on Wednesday did not clarify what was meant by "monopoly behaviour", but the investigations are taking place as regulators show concern over what they view as unfairly high prices for both parts and vehicles in China, the world's largest car market.

Audi is the luxury car unit of Volkswagen, Europe's biggest auto group, while Chrysler has merged with Italy's Fiat.

Li also confirmed an investigation of Mercedes-Benz, a brand of Germany's Daimler, according to a transcript of a media conference posted online, following a raid at a Mercedes office in Shanghai on Monday.

Daimler said on Tuesday it was assisting in the investigation.

Beijing imposes heavy duties on imported cars and parts, which manufacturers say ramp up prices for Chinese consumers.

The NDRC spokesman said the anti-monopoly investigations in China started at the end of 2011, but analysts say they have increased recently.

The Shanghai branch of the NDRC is investigating Chrysler, while the central province of Hubei is inspecting Audi, and both probes were almost complete, Li said.

The NDRC is one of several Chinese government bodies that investigates violations of the country's "anti-monopoly" law. It is responsible for doing so from a pricing perspective.

On Sunday, Daimler announced it would slash prices of more than 10,000 spare parts for its Mercedes-Benz cars in China from September 1, according to a separate statement that linked the move to a pricing and "anti-monopoly" investigation of the entire auto industry in China.

Chinese antitrust regulators are intensifying pressure on foreign technology and auto companies in separate moves that experts say show Beijing's desire to give Chinese companies greater heft in their dealings with foreign firms.

Chinese antitrust regulators from the State Administration for Industry and Commerce said they conducted surprise inspections on Wednesday of Microsoft Corp.'s China offices for suspected monopolistic practices. They said they were seeking executives who weren't in their offices when they raided its offices last week over suspected monopolistic activities.

"We're serious about complying with China's laws and committed to addressing SAIC's questions and concerns," Microsoft said Wednesday.

SAIC officials also said they are investigating Accenture's offices in the northeastern Chinese city of Dalian because the consulting firm was doing outsourced financial-services work for the U.S. software giant.

"We can confirm that, as required by Chinese laws, we are cooperating with investigators of the State Administration for Industry and Commerce and help provide them with certain information related to one of our clients. We have no other information for public disclosure," said a written response from the marketing department of Accenture Greater China.

Separately, a second Chinese antitrust agency on Wednesday said it would punish Audi AG and Fiat Chrysler Automobiles' Chrysler arm after an investigation found the two luxury-car makers had pursued monopolistic practices. Under China's antimonopoly law, the companies could face fines of up to 10% of their sales from the preceding year.

The companies have said they are cooperating, though they declined to release further details.

Experts say the rush of antitrust probes stems from increasing aggressiveness by regulators and a greater focus on the prices Chinese consumers and companies pay.

In particular, they are increasingly focused on Chinese companies' dealings with foreign partners. In many of the recent antitrust cases, the focus has been on foreign companies with dominant market positions and few or no alternative providers in China.

In the car industry, Chinese auto dealers say foreign brands push them to take more cars into inventory than they want or can afford and stipulate that dealers must buy auto parts from the car maker. Audi, an arm of Volkswagen AG, said pricing officials in China's Hubei province are investigating the German car maker's network of dealers there.

"Currently car makers spare no efforts to manage everything, even if it could be something as trivial as a showroom desk," Chinese auto dealer Lentuo International Inc. Chief Executive Jing Yang said in a recent interview.

Speaking in terms of broad industry practice, he added, "they will tell you where you should buy and how much you should pay. Dealers have no options at all."

Lentuo dealerships sell brands including Audi, Volkswagen, Mazda, and Toyota.

An official at the China Automobile Dealers Association, an industry group, said the NDRC's investigation was a "good start" but that the impact on dealers will be limited until regulations governing how to sell cars in China are changed.

China's intent with Microsoft is less clear because SAIC officials haven't disclosed the focus of the probe, beyond citing compatibility and bundling issues with its Office and Windows software. But it comes as the Chinese government has reacted with increasing concern to Microsoft's efforts to switch users to its new Windows 8 operating system. China banned procurement of Windows 8 for government offices earlier this year.

In China, Microsoft's venerable Windows XP has a nearly 55% market share, according to analytics firm StatCounter.

"There's been some anger among consumers and companies over Microsoft dropping support for Windows XP," said Duncan Clark, chairman of Beijing-based consultancy BDA China.

Microsoft has also struggled to get customers to pay for its software in China, where piracy is rampant. In 2011, then-Chief Executive Steve Ballmer told employees that Microsoft's revenue from China that year would be only 5% of U.S. revenue due to piracy.

Confusing matters, China has three regulatory agencies that oversee antitrust issues. The auto probes are being conducted by China's National Development and Reform Commission, which is China's top economic policy body and its top authority on pricing. The Microsoft probe is being conducted by the SAIC, which oversees nonpricing antitrust issues. A third, China's Ministry of Commerce, oversees mergers.

"The SAIC, NDRC and even the Ministry of Commerce are jockeying for position, trying to be seen to be tough on foreign companies," Mr. Clark said. "There is the attempt to gain the upper hand among these bodies."

The potential impact on the auto companies isn't yet clear. Macquarie Securities analyst Zhixuan Lin said in a research note that fines on auto makers may be "insignificant" because they have been "very cooperative" and have cut prices "proactively."

The death toll from a devastating earthquake in China rose dramatically on Wednesday as rescuers reached deeper into the most heavily damaged areas.

The official Xinhua News Agency said 589 people were killed in the quake, which struck on Sunday in a relatively populated rural area of southwestern China's Yunnan province. On Tuesday the death toll stood at 410 people. It also said about 2,400 people were injured, up from 2,300.

More than 500 of the deaths were in Ludian county, a mountainous region of the province, Xinhua said.

Rescue personnel and supplies poured into the town of Longtoushan, in Ludian and the quake's epicenter, on Wednesday after workers completed a bridge that made the area easier to reach. Relief efforts on Wednesday were focusing on outlying villages in the area.

Authorities said the quake affected more than one million people in Yunnan province—a largely forested part of China that borders Vietnam, Laos and Myanmar—with tens of thousands of homes collapsing.

Rescue workers in Longtoushan said they were unlikely to find more survivors.

The fire brigade of China's People's Armed Police, which typically leads rescue efforts following national disasters, dug one survivor out of the rubble on Tuesday, according to Zhao You, the brigade commander.

The survivor, a 73-year-old woman, was buried under a relatively shallow pile of debris, Mr. Zhao said. But she was likely an exception.

"I don't want to say there's no hope, but the situation here is incredibly complicated," Mr. Zhao said. "After the quake, there was a downpour and since then it's been hot. That's a lot for the human body to take."

Rescue efforts have been hampered by continuous downpours that have loosened mountain soil already made unstable by the quake.

Mudslides have blocked the main road into Longtoushan, delaying the delivery of supplies and transportation of the injured. A flood of volunteers into the quake zone has also gummed up the road.

On Tuesday afternoon, shortly after authorities lifted restrictions on vehicles traveling into the zone, a boulder fell onto the road, blocking traffic in both directions. In a sign of how the situation has changed in Longtoushan, the vehicles pushing hardest to leave the township weren't ambulances but vans carrying corpses.

One such van, trapped by the boulder, carried half a dozen bodies wrapped in blue tarps. The odor wafting out of the van's open windows prompted Wan Wendi, a photographer who worked as a volunteer during the massive earthquake that devastated Wenchuan in Sichuan province in 2008, to retch into a nearby ditch.

"I never encountered that smell in Wenchuan," he said. "There was a lot of death but the roads were cleared early and the rescuers moved the bodies out faster."

Rescuers lugged a steady stream of bodies, most wrapped in colored quilts and other makeshift shrouds, up out of the township, depositing them under a tent near a gas station.

The People's Armed Police pulled 32 bodies out of the rubble on Tuesday, Mr. Zhao said.

Opposite the tent, 70-year-old Xia Jufen took shelter with her three grandsons and daughter-in-law on cots set up under the canopy of the gas station. Ms. Xia said her husband had been killed while working on the mountain, while her son and daughter were both injured when their house collapsed.

"I can't mourn too much. I'm lucky that my grandsons all survived," she said.

In the township, adults stared dazed at the collapsed houses as many of the younger children chased each other around emergency tents.

In the absence of food beyond piles of instant noodles, soldiers slaughtered a pair of local pigs for a communal meal, the blood running down a dirt-covered road.

China has been burned by a backlash over its handling of previous disasters, notably in the 2008 Sichuan earthquake that killed some 87,000 people, including many children. After the quake struck on Sunday, Premier Li Keqiang was quick to rush to the scene, where state media said that he hiked five kilometers in heat and mud to visit victims and rescue personnel. State-run TV stations, meanwhile, carried footage of orange-clad rescuers rappelling over surges of muddy water holding victims in their arms on Tuesday and were quick to praise the heroism of rescue workers.

State media said that helicopters and planes flew in tons of relief goods, as authorities also worked to construct a 30-meter steel bridge to help restore access to one hard-hit region with the help of scores of workers. The government has said it would devote 600 million yuan, or about $97 million, to the relief effort.

Meanwhile, the water levels of one river located upstream from seven power stations continued to swell, threatening further interruptions in power supply, the official Xinhua News Agency reported. State media said that at least one rescue worker had been swept away in the rising waters in his determination to help potential victims.

As in the aftermath of many disasters, authorities struggled with the swell of well-meaning volunteers who clogged roads leading into the quake-stricken region, creating lengthy traffic jams. State media urged nonprofessional workers to avoid entering the disaster zone on their own and stressed that money was a more practical way of expressing any charitable impulses. By government figures, at least 650 volunteers had arrived at the scene within 48 hours of the quake.

The prospect of tapping into China’s ever-expanding mass of middle class consumers with money to burn is enough to make any foreign business chomp at the bit.

But at a time when even the biggest corporate players are finding it rough in the world’s second largest economy, what chance do small and medium enterprises have (A souring taste for multinationals in China 29 July, 2014)?

Still, for many SMEs that have already taken the plunge, the vast market, an expanding middle class, and plentiful suppliers are helping to boost revenue and sales growth.

A new survey conducted by HSBC found that 46 per cent of Australian SMEs with existing international operations are planning to expand into new countries or grow their existing international operations in the coming year.

Among the SMEs surveyed, the top two destinations for business activity and expansion are the US (54 per cent) and China (49 per cent).

But whereas the shift in cultural mindset from Australia to the US is manageable for many businesses, venturing into the Chinese market is like a step into the unknown.

One obvious way for these companies to get a handle on the Chinese market is to look at the experiences of those you’ve gone ahead of them. A new report from Deakin University's Graduate School of Business sheds some light on the pitfalls involved in doing business there.

The Deakin academics spoke with 40 different Australian SMEs from a variety of industries from business services to manufacturing, biotech and film to find out what the biggest challenges businesses face when they expand to China.

Here’s what they identified as the seven biggest lessons Australian SMEs learned from operating in China:

1.     Research, research, research

Just because your product or service is considered innovative back at home, doesn’t mean it’s definitely going to work in China.

One of the strong themes academics picked up in their discussions with SME operators was that China isn’t ready for some of the innovations offered by Australian businesses.

“China is not very innovative based – its only fast construction and making money, and therefore the Chinese are not interested in innovation” said one respondent.

The report recommends SMEs undertake thorough market research in order to gauge market appetite before plunging in.

“Innovative products should also be marketed to defined market niches, rather than broad markets, to facilitate addressing resistance to innovation,” the report added.

2.     Choose your mode of entry very carefully

Once you’ve done your research and decide you want to enter the Chinese market, the next thing to decide is how exactly to do so.

There are a number of different routes foreign businesses can take from to flying in and out until the business gains a foothold to setting up what’s known as a wholly owned foreign entity (WOFE), licencing, franchising and joint ventures.

The type of market entry depends on what you’re selling. One company sought to minimise costs through focussing solely on exporting whereas others saw more value in setting up a WOFE because it helped them build up a network of contacts.

And while going in half-cocked may reduce the risks involved to your business, it’s more likely to lead to smaller market penetration and slower growth.

3.     Get your guanxi right

Every guide to doing business in China comes with an obligatory explanation of the importance of connections or guanxi to doing business there.

The need to be hooked into established networks in China is especially important for SMEs which, due to their size and foreignness, struggle to gain recognition and legitimacy there.

Understanding even a little of China’s language and culture is a plus when trying to manage local talent.

 “It is important that foreign managers develop language skills, and have a good understanding of Chinese business culture,” the report notes.

4.     Protect your crown jewels

For any SME, your intellectual property is the crown jewel of the business and the risk of having it stolen from underneath you in China is huge.

Whilst the Chinese government has made progress on increasing the level of protection for IP in the legal system, it remains a persistent problem.

One SME featured in the report even said that they had heard of a person going for an interview at another company pretending to be them.

“I even had one person go to a job interview with a company who pretended to be our company. It wasn’t us selling, it was this guy pretending to be us and he went out there and they tied him up to a pole and robbed him.”

The report suggests SMEs should get their heads around the legal protections available to them including the use of copyrights, patents and trademarks.

The report found that in order to protect IP, the best practice is to limit the amount of it that’s brought into the country.

And for the companies where this isn’t a viable option, there are few alternatives. Sometimes in China “infringements of IP must be expected” says the report.

5.     Don’t be afraid to ask for help.

SMEs don’t have to go it alone when trying to crack the China market. There are a number of organisations, both government and non-government out there that have experience and resources to give you a helping hand.

Among the organisations the report mentions are the Australia China Council, Austrade and AusAID, the Australia China Business Council, Australian Chambers of Commerce in China as well as state government international offices.

“It is a good idea to attend at least one of the trade missions organized by the federal, state and city governments to learn about the latest business developments in China” the report suggests.

6.     If you’re not online, you’re not in business.

China is now the world’s number one digital retail market with shoppers there more willing to buy online than custumers in other markets. Having a digital strategy is now a necessity when selling into the Chinese market.

But a digital strategy for China needs to cater to the needs of the market there. For Australia, with low brand awareness, getting an insight into Chinese consumers’ minds is paramount.

Employing Chinese locals to assist in creating marketing materials is the fastest way to connect with Chinese consumers. Partnering with an established Chinese brand is also a possibility.

“Even though online shopping is a simpler environment, Australian companies should still consider the cultural differences between the two countries to tailor their marketing strategies to be locally effective,” notes the report.

7.     Find fitting foot soldiers

Human resources management continues to top the list of business challenges for foreign companies doing business in China. Finding staff who are creative is a particular challenge, according to the Deakin report.

Dealing with high staff turnover can create an onerous cost burden on SMEs as fickle workers move on to other jobs and new staff need to be trained.

“Managers should review compensation and benefits periodically to ensure they stay in step with the rapidly changing employment market in China,” the report says.

“They should also pay attention to employees’ personal needs and develop more flexible policies to create an engaging work environment.”