Admiral Harry Harris, the Commander of the United States Pacific Fleet, has a reputation as a plain-spoken American military leader. In a long discussion with The Weekend Australian in his ­Hawaiian office this week, Harris amply fulfilled this high accolade.

To render some of the take-outs in their starkest form: Harris thinks China is engaging in destabilising and provocative conduct at sea. He is worried that this could lead to an incident which escalates dangerously. He thinks the American navy can defeat any Chinese missile threat. He is delighted at the intensified US-Australia military co-operation. He thinks the idea of a Japanese submarine with an American combat system, which the Australian government is considering as its Collins Class replacement, sounds great. And he thinks the US Navy needs to be a force of about 300 ships — it’s just below that now — and, despite budget cuts, the US will continue to fund the navy at that strength.

But it’s unfair to provide these bold statements out of context. Harris is an immensely sophisticated military leader. He has all the military campaign experience you would expect, having commanded the US seventh fleet in the Mediterranean, commanded naval forces in NATO and taken part in key US operations in the Middle East.

But like many at the top of the US military, he is also a four-star intellectual, with graduate degrees from Harvard, Oxford and Georgetown universities. The son of a US sailor father and a Japanese mother, he holds the highest rank any Japanese American has held in the US Navy.

So his tough-minded bottom line judgments deserve to be rendered with some of the nuance and balance he frames for them.

He approaches China, for example, through the experience of the Rim of the Pacific, or RIMPAC, exercises which the US has just concluded.

“I thought it was terrific,” he says. Some 22 countries participated with a further six observers. The exercise involved 50 ships, six submarines, 200 aircraft and some 25,000 service personnel.

The exercise also saw Australians in a lot of command positions: “More so than for any other RIMPAC, we put our partner nation leaders in key leadership roles. The deputy commander for the whole thing was Rear Admiral Simon Cullen from the Royal Australian Navy.”

Beyond Cullen, the RAAF’s Air Commodore Chris Westwood led the Combined Air Forces component and Commodore Peter Leavey was commander of the Expeditionary Strike Group.

But the most remarkable aspect of this year’s RIMPAC was China’s participation. In Harris’s view this participation showed both the good and the bad of the Chinese military.

“China was a full participant,” Harris says, “they sent their best ships, a frigate, a destroyer, a hospital ship. But here is the Chinese conundrum. They also brought with them an AGI spy ship.”

An AGI is an auxiliary general intelligence ship. Harris says the Chinese did not tell the Americans they were bringing it, though of course the Americans tracked it across the Pacific.

“The AGI operated in our exclusive economic zone but stayed outside our territorial waters, which accords with international law. I don’t have any issue with the AGI being there, nor with China’s right to have it there. My only issue is that it seems odd that they would bring an intelligence collector when we have invited them to participate and they have accepted our invitation.”

In other words it is slightly bizarre, though Harris of course doesn’t use that word, to spy on an exercise which you are taking part in yourself as an invited participant.

And their motive?

“You’d have to ask the Chinese why they brought the AGI. I don’t know why they did. I’d encourage you to ask them straight out — they might tell you.”

Harris says the Chinese performed well in their tasks in the RIMPAC exercise: “They’re not Australia, but they’re not beginners either.”

But in Harris’s view the Chinese are provocative and dangerous in their behaviour in the Pacific, although he balances this by acknowledging the good and positive things they do as well.

Harris doesn’t mince words: “China is responsible, in my opinion, for increasing tensions in the South China Sea. They are provocative in some of their actions in the South China Sea and the East China Sea. It concerns me.”

At the same time, he says, “we see China doing great things for the common good, like when they provided escort and security for the ships that carried chemical weapons out of Syria. They are involved in counter-piracy operations off the Horn of Africa. They were involved in the search for (missing Malaysia Airlines) MH 370. They sent their hospital ship to The Philippines (for disaster relief work).”

But Harris is deeply concerned about the trend of Chinese military behaviour in the Pacific. Given the gravity of Harris’s ­position, and that he would be among the best informed three or four people on the planet about this subject, this is a concern which should command the deepest ­attention.

US military commanders are particularly concerned at incidents where Chinese vessels and aircraft harass US, Japanese or other Asian planes and ships, buzz them in the air, sail across their path, try to intimidate them into changing course. I ask Harris whether the scale and nature of these incidents is steady, improving or getting worse.

“Just in the nine months I’ve been here (as Commander of the Pacific Fleet) I think it’s increasing.”

Harris is explicit here, provocative incidents in the air and on the sea, initiated by Chinese vessels or planes, are both getting worse.

Why does he think Beijing is doing this?

“In my view they have a maritime sovereignty campaign where they want to take control of the areas of the South China Sea and the East China Sea that they view as theirs.

“I had a good interaction with the Chinese at the Jakarta International Defence Dialogue a few months ago. They view this as their right. They view the Western powers — Australia, the US and so on — they view us as the source of tension in the East China Sea and the South China Sea, and that if we were gone and it were all left to China, all would be calm.

“That’s ridiculous in my view. It’s because of their actions I think that our relationships with Malaysia, Indonesia, Vietnam, The Philippines have improved. Their (China’s) actions are making it harder for them to realise their aspirations. I think the facts speak for themselves.”

Harris thinks this combination contains real dangers, not of intentional armed conflict but of some terrible accident leading to escalation: “The danger is in that accidental interaction that results in a loss of equipment or life on the high seas or in the air. I don’t think there would be an intentional attack on a US ship, for example. But I think it’s quite possible you might find an over zealous young captain on a small combatant or fishing boat that might find himself in an extreme situation at sea.

“Accidents happen. Unfortunately today because the tensions are so high, especially in the East China Sea, I worry about an incident at sea that could result in a loss of life and then escalate into something much bigger than the situation would normally warrant.”

Harris emphasises that the US makes a massive effort to consult Beijing and have the broadest and deepest dialogue possible with its leaders, both civilian and military. RIMPAC is just one part of that. But so far, while the dialogue has certainly had positive results, the provocative behaviour continues,

I ask Harris about a longer term Chinese challenge to the American naval presence in the Pacific, and that is the development by Beijing of ballistic anti-ship missiles which can hit US aircraft carriers at a range beyond that of the fighter aircraft on those carriers.

Some analysts argue that this is a game changer, which could even render aircraft carriers, the chief instrument of US military power in the Pacific, obsolete. This would reprise the experience of giant battle ships, which despite their fire power became obsolete because they could too easily be hit and destroyed.

Harris rejects this line of analysis absolutely: “I guess you’d have to ask the Chinese why they are building so many aircraft carriers of their own. If they think them so vulnerable, why would they want to have more of them? Finding an aircraft carrier at sea when it doesn’t want to be found is a very hard proposition, very complicated.

“We are very well aware of the capabilities that China has and is trying to develop and I’m very confident we would be able to carry out any mission that we have to.”

Harris says he can’t tell me of the nature of US anti-missile technology, but: “We work on it every day. I’m confident of our ability to defeat any Chinese missile threat and to be able to do whatever we need to do.”

Harris says he is deeply engaged in the development of the US air sea battle plan, which is an organisational concept designed to defeat an enemy that tries to implement what the boffins call anti-access and area denial warfare, that is, simply to make it too dangerous for US carriers to operate near its coast.

Although the air sea battle concept is notionally not directed at any one nation there is really only one nation that is implementing such policies directed at the US on a big scale and that is China.

Harris believes the US needs a navy of about 300 ships and, despite sequestration, the funding cuts mandated in a deal between congress and the Obama administration, he believes the US will always fund the navy at that level

He is a huge enthusiast for the continued US-Australia defence integration and believes momentum for it is continuing: “The momentum for integration and increased inter-operability is accelerating and I think it’s good for both countries.

I ask him about the widely discussed idea of Australia buying Japanese conventional submarines and integrating US combat systems into them.

His response? “Sounds good, doesn’t it?”

I ask him about proposals for eventually home porting one or more US ships in Perth and it is perhaps the only subject I raise on which he declines to offer an opinion: “I’m going to stay away from home porting because that’s a policy decision.”

The US Navy has been central to Australian security for well over 100 years, at least since the Spanish American war at the end of the 19th century transformed the US into a great Pacific power and a great naval power. In nine months in his new job, Harris has visited Australia three times. There are Australians all over the US Pacific forces headquarters in Hawaii. Indeed the deputy commander of the US Army in the Pacific is an Australian, General Ric Burr.

Harris is not looking for a conflict with anybody. His job is keeping the peace. But the message he projects is one of American strength and commitment. In the Pacific, that has always meant the American navy.

There are few surviving grand strategists from the Cold War era. Among them are Henry Kissinger, Zbigniew Brzezinski and Lee Kuan Yew. They are elder statesmen who combine top level diplomatic skills with sheer raw intellect.

All of them have a strong interest in China and especially the future of the China-US relationship, arguably the most important relationship that determine the course of the 21^st century. Lee Kuan Yew is especially interesting, given his long association with both Washington and Beijing. He is trusted across the Pacific.

At the time of an increasingly strained relationship between the US and China over multiple fronts --from the South China Sea to cyber espionage -- what does Lee, the founding father of Singapore, think of the future of China and its relationship with the US?

Thanks to two Harvard scholars Graham Allison and Robert Blackwill, who quizzed Lee extensively last year about the major issues confronting the China-US relationship, we know what Lee thinks in substantial detail.

Lee is the ultimate pragmatist: he ruthlessly used leftist forces in Singapore and spat them out later once he ascended to power. He supports the central role of the United States in maintaining the peace and stability of the region but at the same time, he thinks the rise of China as a superpower is inevitable and that the US needs to engage China more pro-actively.

On the most important question whether there will be a major conflict between the US and China, Lee thinks it is unlikely. “This is not the Cold War. The Soviet Union was contesting the US for global supremacy. China is acting purely as China in its own national interests. It is not interested in changing the world,” he says.

Sino-US relations are both cooperative and competitive. China needs the US market and technology and there are no irreconcilable ideological differences. Unlike the Soviet Union, China is only nominally communist and is not interested in evangelising. It has more or less accepted the market economy as the guiding principle of organising the country’s economic life.

Like many other Asian leaders (including the Australian prime minister), Lee wants the US to stay in Asia as a counter-balancing force to China. “The question is whether the US can continue its role as a key security and economic player in the Pacific. If she can, East Asia’s future is excellent. But there will be problems if the US economy does not recover its competitiveness within the next ten years,” he says.

The calculus is simple. China is simply too big for any Asian power or even a consortium of Asian powers to take on. China’s economy is nearly twice the size of Japan, the third-largest economy in the world. China’s dominance in the region is assured without the involvement of the United States, which alone possesses the military and economic power to balance China.

Lee thinks the US, which has been the preeminent power for so long, is psychologically unprepared and unwilling to accept the rise of China as a great power. The founder of Singapore, who has been a vocal exponent of Asian values, says the American sense of cultural supremacy will make the adjustment process most difficult.

“Americans believe their ideas are universal: the supremacy of the individual and free, unfettered expression. But they are not -- never were,” says the old cultural warrior, in spite of his blue-blooded English education at Raffles, Cambridge, and the Middle Temple.

Lee’s pragmatism comes through prominently again in his assessment of the US’ strategy towards China. He admonishes Washington’s obsession with human rights issues, Dalai Lama, Taiwan and its plight with dissidents. 

“The State Department draws up its report on China’s human rights like a headmaster drawing up a pupil’s annual report for the parents. This may make Americans feel good and Chinese look small, but East Asians are uneasy over its long-term consequences,” he told Graham and Blackwill.

When he was asked about how to influence China’s trajectory and future behaviours, he said the greatest asset the US could deploy was its educational institutions.

“America’s greatest long-term influence on China comes from playing host to the thousands of students who come from China each year, some of the ablest of China’s scholars and scientists. They will be the most powerful agents for change in China.”

That is a prescient observation. Even President Xi Jinping’s daughter is reportedly studying at Harvard. A whole generation of a leading Chinese policymakers and scholars are schooled in the US and Xi’s most important economic advisor is also a graduate of Harvard’s Kennedy School of Government.

If we can boil down Lee’s idea to its essence, it actually bears resemblance to Hugh White’s thesis on how to engage with China. The United States needs to stay engaged in Asia but has to be prepared to accept China as an equal. “The US should say: We will eventually be equal, and you may eventually be bigger than me, but we have to work together. Have a seat, and let us discuss the world’s problems,” Lee advises.  

East Asia Forum

China’s growth outlook is the focus of analysts and economic policymakers all around the world. Nobody can afford now to ignore the scale of the economy and its impact on the global growth outlook. China already accounts for more than 12 per cent of world output in nominal terms and that share continues to grow steadily.

China’s contribution to global trade and output growth has been far bigger than that of any other economy over recent decades. This year too, though it’s a smaller economy, it is likely to contribute a larger share to global output growth than the United States.

Strong growth of heavy industry and infrastructure investment fuelled the huge global commodities boom during the first decade of this century. This was a welcome development, despite the adjustments it inevitably brought in world markets, as the industrial world struggled with a sharp decline in output and slow recovery through the global financial crisis.

There are some who question whether China’s growth was ever quite so rapid as the official data record. The sceptics suggest that there were incentives to over-estimate some elements of growth, and they may have a point in thinking so since meeting state output targets is -- how shall we put it -- subject to some fungibility. There is still a bunch of China growth-deniers entrenched in centres of strategic analysis in Japan, for example, who want to downplay China’s colossal growth achievement over these years as they hanker after the golden days of Japan’s own remarkable growth achievement and regional dominance.

There may have been fudging of the Chinese economic data and there may have been waste and profligacy in some state-backed investment projects around the edges. But there is no wishing away China’s remarkable growth and the substantial, positive benefits it has brought to hundreds of millions of ordinary Chinese people.

China’s economic stature, its newly accumulated economic assets and its transition to middle-income economic status are real. The achievement is also now a reality that Chinese policymakers have to face as they struggle to stay on course in guiding the economy through middle-income to OECD advanced country living standards over the next two decades or so.

With a GDP growth rate that has slipped below the average 10 per cent at which the economy barrelled along for more than three decades, China faces more and more questions about how its leadership and policymaking authorities should manage the next phase of the country’s economic development.

As one of the top analysts of the Chinese economy, Yiping Huang, points out in this week’s lead essay, a central question is whether the current deceleration in growth is cyclical or structural in character. Is growth tapering off because of under-utilised capacity in a weak global economy? Or has the real potential rate of growth of the economy been trimmed as aggregate labour supply has begun to shrink and real wages have begun to climb?

The official government growth target was set at around 7.5 per cent this year. But, when growth slowed to 7.4 per cent during the first quarter, as Huang reports it, "the government almost panicked". Policymakers feared that there could be major problems with unemployment, financial risk (with the bursting of real estate bubbles in some major centres) and investor confidence should growth slip below 7.2 per cent, although the evidence on which these fears were based is weak.

As the leading Chinese demographer and economist Cai Feng has written, "in the period 2001 to 2011, total urban employment (urban resident employees plus migrant workers) increased by 115 million. Even if this number is cut in half in the next decade, it will still be much higher than the new supply of labour constrained by the decline in the working age population. In the future as in the past, it will be rural-to-urban migrants -- not new local entrants to the labour force -- who will meet the demand for labour caused by economic growth".

Huang highlights three problems for the Chinese economy. The first is the slow global recovery and negative effects of previous stimulus policies that generated over-investment and capacity. The second is a growth model that no longer attacks the burning problems of the time, such as over-investment and income inequality. The third is steering a way through the middle-income trap challenge. Only the first of these is cyclical in character. The second two are structural and underline the challenge of maintaining higher growth potential through lifting productivity as the supply of cheap labour dries up.

Chinese exports can no longer, for example, continue to grow at more than 20 per cent a year because of the sheer size of China’s economy. The growing consensus among the experts, as Huang suggests, is that China’s current growth potential lies somewhere between 7 per cent and 7.75 per cent, possibly lower than the lower bound, depending on what can be assumed about the speed of putting in place productivity-enhancing reforms.

Is it still possible for China to achieve medium-to-rapid economic growth in the coming decade as the steam runs out of the export and investment-led growth model? As Huang argues, that will all depend on the policy strategy. Long-term growth cannot occur via fiscal stimulus, which will create more zombie firms, inhibit productivity, profitability and job creation in viable firms and deliver white elephant public investment projects.

The more effective strategy for achieving relatively rapid economic growth is through accelerating economic reform. It’s estimated, for example, that reform of the one-child policy and the hukou system of household registration, combined with improvement in human capital, could raise China’s future growth by 1 to 2 percentage points and that more complete financial reforms could lift growth by 1.4 percentage points. The International Monetary Fund finds that a comprehensive reform program, rigorously implemented, might see Chinese growth fall by 0.2 percentage points in the near term but increase by 2 percentage points by 2020.

Huang concludes that the government has to both accelerate structural reform and tolerate some growth slowdown in the near term, which is what Likonomics is supposed to be all about. The question for China is whether there is the nerve for it.

Peter Drysdale is Editor of the East Asia Forum. This article was originally published at East Asia Forum. Reproduced with permission. 

The Conversation

China’s raft of anti-monopoly investigations has become a source of growing controversy. Given that the targets are often American or European firms, much of the debate inevitably surrounds what the real motives for these actions might be. Yet perhaps the most important consideration -- one that has so far been largely overlooked -- is whether China might become a victim of its own zeal.

It was the recent announcement of an inquiry into the world’s largest software manufacturer that first drew international attention to the activities of the State Administration for Industry and Commerce. The seizure of computers and documents from Microsoft’s offices in four Chinese cities fuelled suspicions that some kind of crusade against high-tech Western companies could be under way. After all, leading wireless technology developers Qualcomm and InterDigital were already facing SAIC probes. On August 6, Microsoft was raided once again, this time along with Accenture, its partner in China.

Commentators have since argued that SAIC’s hit-list is shaped by mere coincidence, sheer necessity or something altogether different and there are indeed several points that might immediately be made in China’s defence. For a start, even state-owned enterprises have been the subject of anti-monopoly investigations: China’s foremost liquor producers, Kweichow Moutai Co and Wuliangye Group, were fined RMB449m ($US72 million) for price-fixing only last year.

The Chinese government has also not confined its interest to the high-tech sector: it has pursued a number of major foreign pharmaceutical companies, for instance, including GlaxoSmithKline, AstraZeneca, Roche, Bayer and Sanofi. Now, car firms Audi and Chrysler are in the regulators' sights. And China is hardly unique. High-tech firms -- Microsoft among them -- have been involved in similar cases all over the world, including in the US and within the EU.

Nonetheless, a straightforward desire to stamp out anti-competitive behaviour cannot entirely explain SAIC’s current fervour. It is right to concede, for instance, that China has long been concerned by the security implications of using US-made technology products -- witness the government’s reluctance to procure PCs loaded with Windows 8 -- and Edward Snowden’s claims about American IT companies’ complicity in far-reaching spying programs have undoubtedly heightened such fears.

But maybe the most realistic scenario of all can be found in the middle ground that stretches between the all-out apologists and the full-blown conspiracy theorists. It is that the principal aim of China’s push against Western monopolies is to protect and promote the cause of Chinese innovation.

Phoning home

By way of illustration, take TD-SCDMA, China’s so-called “indigenous standard” for third-generation mobile telecommunications. Having relied exclusively on Western technology in the 2G era, China was keen for its own version to compete directly with rival 3G standards developed in the West. The government offered financial support for TD-SCDMA developer Datang Telecom, set up a dedicated alliance of domestic and foreign vendors and granted a TD-SCDMA 3G licence to China Mobile.

Unfortunately, Datang owns only a small share of the technology patents used in TD-SCDMA, which remains primitive in comparison with its competitors. As a result, many Chinese consumers now find themselves saddled with an inferior technology that lags at least three to five years behind its Western rivals; and China Mobile, the largest mobile provider in China and the world, has seen its market share and value decline accordingly. Clearly, China’s efforts to come up with indigenous innovation are being hampered.

The advent of 4G promises little better. For China Mobile a smooth evolution requires huge extra investment in hardware and software: predictably hamstrung, its 4G service is still at a disadvantage even to some rivals' 3G offering. This is the social welfare loss that China pays for its sticking to its indigenous but inferior technology.

Bad old days

Situations such as these have uncomfortable echoes of a China many thought was long gone. During the years of isolation that preceded economic reform, Chinese consumers were wearily accustomed to second-class products and services. Any arbitrary rejection of cutting-edge technology from elsewhere in the world may well deliver a short-term boost to domestic firms, but it also risks a return to the bad old days.

The ban on accessing the likes of Google search, Gmail, Google Scholar, Facebook and Twitter represents the apogee of this trend to date. Complaints have been prolonged, loud and clear -- particularly from scientists, many of whom have been cut off from the international frontiers of research -- yet the situation persists.

It may only be a matter of time before China surpasses the US as the largest economy on Earth, and yet it is vital to remember that power is measured in much more than GDP. Technology also counts, and the fact is that China’s own capacity for innovation is still in its infancy, whatever the 15-year plans may say.

Now it increasingly appears China is determined to catch up with the West while simultaneously discriminating against the very same technological excellence it hopes one day to emulate. Such an approach is likely to demand both considerable patience and enormous cost. The de-Westernisation implicit in the anti-monopoly drive suggests policymakers are willing to pay the price, but denying consumers the best the market has to offer in the meantime must ultimately be deemed an act of wilful deprivation. It is fundamentally at odds with China’s declared ambition to become an innovation-orientated nation fit for the information age.

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

The market share of China’s domestic car brands has dipped below 20 per cent for the first time since 2009 even as the world largest auto market sees growth, according to news figures from China Association of Automobile Manufacturers.

During the first seven months of 2014, market share of Chinese-branded passenger vehicles fell 5.4 per cent to 17.7 per cent. Chinese car makers had one-third of the world’s largest car market just four years ago.

Chinese automakers have been struggling to compete with foreign car makers and their joint-ventures in China.  At the same time, European, American and Korean automakers are steadily eating into domestic producers’ turf.  European’s share of the market increased from 20.8 per cent in 2009 to 29.3 per cent last year.

Beijing has launched a wave of anti-monopoly investigations against foreign car makers including Mercedes.  Chinese antitrust officials raided German carmaker Mercedes’ office in Shanghai last week. 

SHANGHAI: Chinese conglomerate Wanda Commercial Properties (Group) Co. is investing up to 2.1 billion Hong Kong dollars ($271 million) in a project in Gold Coast, Australia, marking its latest venture abroad and its first investment Down Under. 

The Hong Kong-listed unit of Wanda Group will buy a 55% stake in a 11,355 square-metre site on Old Burleigh Road in Surfers Paradise in Queensland, Australia, it said in a statement. The remaining 45% would be owned by two individuals, Riyu Li and Fengliu Wu, the statement said. 

The site can be developed into a mixed-used project comprising three high-rise buildings, with a resort hotel, apartments, shops, cafes and restaurants. 

"With its beautiful beaches, amazing views and subtropical climate and night life, the Gold Coast is one of Australia's most beloved vacation holiday spots," Wanda said. "There is significant demand for hotel facilities as well as premium apartments and accommodation from local as well as foreign buyers." 

Wanda, which is run by tycoon Wang Jianlin, has been on a hunt for investments abroad to diversify its sources of income. 

It said Friday it is investing $1.2 billion in another real-estate project in Los Angeles, which "will serve as the Wanda Group's first important step into Hollywood." 

In July, Wanda said it would invest $900 million to build a new tower that would be the third-tallest building in Chicago. In June, it bought a 28-story building in Madrid from Spanish bank Banco Santander SA for 265 million euros ($361 million). 

The group also purchased US cinema chain AMC Entertainment Holdings in 2012 and UK yacht maker Sunseeker in 2013. 

Write to Esther Fung at esther.fung@wsj.com

Exchanges in Asia are nervously eyeing a new trading link between Hong Kong and Shanghai, and mulling how to stay competitive on worries it will soak up funds from global money managers. 

Amid already tepid trading volumes across the region, officials at exchanges in Asia are worried the Hong Kong-Shanghai link will leave less money for them if it proves successful and they don't take measures to keep up. The trial program is due to launch in October and would create a combined market capitalization of $5.5 trillion, according to data from the World Federation of Exchanges. 

Announced by Chinese premier Li Keqiang in April, the new mechanism will allow investors in mainland China to trade shares on the Hong Kong Stock Exchange, while overseas investors will gain easier access to shares listed in Shanghai via Hong Kong. At present, the only overseas buyers that can invest directly into China's domestic markets are institutional investors that have secured a quota from the government. 

Singapore, Hong Kong's longtime financial rival, has attempted to hitch a ride on the city's new connection by opening an office with a direct link to Hong Kong Exchanges & Clearing Ltd.'s new data center, purpose-built for high-frequency derivatives trading. 

The exchange's direct link to Hong Kong will result in faster and cheaper transactions, which should allow it to benefit if the Hong Kong-Shanghai trading link proves successful, said Chew Sutat, head of sales and clients at Singapore Exchange Ltd. 

"The devil is still in the details and there are a lot of rules and restrictions," he said. "We're not sure what kind of animal it is. But we are actually very keen to see it succeed...If the intended outcome is greater facilitation of cross-border flows between China and Hong Kong, we'll benefit." 

As mergers of exchanges increase on the back of heated competition globally, the Japanese government has called for an establishment of a comprehensive exchange for everything from stocks, interest rate products to commodities. 

Japan Exchange Group is considering offering the technology which powers its trading system to Tokyo Commodity Exchange, Inc., which is Japan's main commodity futures exchange and is considering replacing its current trading system. The common trading system, if realized, would simplify trading for investors in Japan and put the two exchanges a step closer to the integration. 

Korea Exchange (KRX) is also wary of the Hong Kong-Shanghai link, fearing it may result in a diminished share of capital flows. If successful, the trading link could see Chinese A-shares -- mainland securities denominated in yuan -- being included in MSCI's Emerging Market Index, which tracks around $4.1 trillion worth of equities. 

This would come at the cost of South Korea's weighting in the index, which would fall from 15.9% to 14.2%, said Kim Ki-kyung, head of a KRX team handling stock market regulations. "The 1.7 percentage-point drop is a setback--though not a serious one--for us," he said. 

In July, both Korea Exchange and Japan Exchange signed agreements with Bank of China seeking to cooperate on establishing markets in offshore yuan-denominated financial instruments and to facilitate clearing and settlement of products in the Chinese currency. 

Even in Hong Kong, there is concern about being dwarfed by China. Officials in the city have sought to play down fears that the Stock Connect scheme will sideline the city and leave Shanghai, which is developing its own financial free zone, as the main beneficiary. 

"I am confident that the scheme will raise Hong Kong's capital market and offshore renminbi business to new heights, thus rebutting the notion that Shanghai and Hong Kong are in a fight that only the winner can survive," wrote Norman Chan, chief executive of the Hong Kong Monetary Authority, in a blog last week. 

"And, more importantly, the scheme is a practical demonstration of close collaboration between Hong Kong and Shanghai, which in turn will contribute in no small way to China's reform and liberalization." 

One of Chinese e-commerce giant Alibaba Group Holding's fastest-growing online shopping platforms is becoming hard for luxury brands to ignore.

This year, U.K. luxury brand Burberry and high-end cosmetics maker Estee Lauder opened storefronts on Tmall, one of China's largest online malls, with 70,000 sellers of everything from clothes to electronics. Some big brands have shied away from the site because of steep discounting, but a growing number of analysts say that it's only a matter of time before more luxury players join. 

"Luxury brands will have to be much bigger on the Internet, and Tmall is one of the most professional players out there," said Luca Solca, a luxury analyst at Exane BNP Paribas. "Five years out, all the luxury brands will be present on (third-party) platforms." 

Alibaba has pledged to crack down on gray-market goods -- authentic products sold by retailers that aren't authorized by the brands -- and counterfeits for brands such as Burberry, a proposition that will be tempting to other luxury brands that want consumers to buy directly from their stores, analysts say. 

"For brands, the best way to combat (gray-market goods) is to open up a Tmall store," said Jordan Milan, an analyst with YipitData, an e-commerce analysis firm. "Our data show that brands that open flagship stores are able to dominate." 

YipitData's analysis for The Wall Street Journal found that all third-party sellers of brands like Estee Lauder and Burberry disappeared from Tmall around the time the brands opened up their official stores. 

Alibaba is also wooing luxury brands with its vision of creating a luxury site within Tmall -- the equivalent of devoting a floor of a shopping mall to such brands -- to separate high-end brands from mass-market merchants, according to people familiar with the matter. 

Still, Tmall will be a hard sell for some luxury brands. These brands are wary of sharing their closely guarded customer data with Alibaba, and also worry about not being able to customize their Tmall storefront as much as they could their own Chinese e-commerce site, according to Andrea Ciccoli, co-founder of the Level Group, an e-commerce consultancy. 

While luxury brands worry about damaging their brand by going onto Tmall, Clarins, a high-end French skincare brand, say it's thriving on the platform even without offering discounts. 

"My gut feeling is that in the coming 18 months, most of the luxury skincare brands will be on Tmall," said Julien Chiavassa, head of digital and e-commerce in Asia Pacific for Clarins, which opened its Tmall store in October 2013. 

Others have doubts that Tmall will be able to convince the most exclusive brand to join. 

"Burberry is more the exception than the rule," said Mario Ortelli, a luxury goods analyst for Sanford C. Bernstein. "I talked with many brands, they are very clear this experience (may work) for Burberry, but they are not willing to follow it."

There are more than 150 suspected Chinese fugitives at large in the US, according to Beijing’s state-controlled English language newspaper China Daily.

“The US has become the top destination for Chinese fugitives fleeing the law,” Liao Jinrong, director general of the International Cooperation Bureau under the Ministry of Public Security said.

The Chinese Academy of Social Sciences, a leading government think tank, estimates there are between 16,000 and 18,000 former officials who have fled overseas with 800 billion yuan or $140 billion.  

The Chinese government has recently announced plans to go after corrupt officials who have fled into hiding overseas. 

A new research discussion paper from the Reserve Bank of Australia, International Trade Costs, Global Supply Chains and Value-added Trade in Australia, provides fresh insight into global supply chains and Australia’s export sector, suggesting that Australia is more reliant on the US and Europe than commonly believed.

According to a recent paper, new "value-added trade" estimates "suggest that the US and Europe are more important for export demand than implied by conventional trade statistics, as some Australian content is indirectly exported there via east Asia".

International trade has increased significantly over the past two decades, from less than 20 per cent of output in the mid-1990s to more than 25 per cent more recently. Growth has been driven increasingly by intermediate goods -- that is, goods that form part of a supply chain -- highlighting the rise of production which spans across multiple countries.

The theory of specialisation, made famous by Adam Smith’s pin factories, has pushed beyond borders and individual goods and into particular phases or components of production. Advances in transportation and communication technologies, the removal of trade barriers and capital market liberalisation have facilitated such a move.

Australia has benefited greatly from the uptick in international trade. For example, iron ore and coal are intermediate goods for residential and non-residential construction. Our focus on these, combined with the economic ascendency of China, paved the way for an once-in-a-lifetime terms-of-trade and resources boom.

By comparison, Australia exports relatively few final goods and runs a considerable trade deficit in that area.

Conventional measures of international trade typically focus on the gross flow of exports and imports but do not consider where the exports and imports eventually end up. Essentially these measures neglect the impact of global supply chains.

To rectify this issue, the researchers constructed an estimate of value-added trade, which identifies the "contributions of each country and each industry to the final value of an exported good or service". Gross measures of trade typically overstate actual trade flows since goods that cross international borders on a number of occasions -- as part of a broader supply chain -- are counted multiple times. The figure below helps to explain the difference between the two measures.

According to the valued-added trade measure, the US and Europe are more important for Australian trade than is commonly believed. A range of Australian intermediate exports eventually find their way to the US and countries within Europe.

The VAX ratio, in the table below, is a ratio of value-added exports to gross exports for each bilateral trading pair. That measure, combined with the data in the second column, provides an insight into which regions are contributing the most to Australian output.

By industry, manufacturing accounted for around 38 per cent of gross exports between 2002 and 2011. But these exports contained a high share of either imported materials or inputs purchased from other sectors; as a result, manufacturing accounted for just 19 per cent of valued-added trade over that period.

Services on the other hand accounted for 22 per cent of gross exports but around 40 per cent of value-added exports. Most services are non-tradable in the traditional sense but they are used extensively as inputs into other goods in the manufacturing and resource sectors.

There are two important points that warrant further discussion.

First, the data contained in the table above is over the past decade, which can paint a misleading picture of trade flows for Australia. While Chinese exports only accounted 18 per cent of gross exports between 2002 and 2011, there is a distinct upward trend. For example, China accounts for almost 37 per cent of merchandise exports over the past year -- up from just 7 per cent in 2002.

Second, the data also shouldn’t be interpreted as saying that the US and Europe are more important than China for Australian trade. Instead, the data should be viewed as an acknowledgement that trade linkages are deep and complex.

A shock to any part of the global supply chain can ripple through to the Australian economy. If Chinese demand slows then Australia’s valued-added trade to the US and Europe will deteriorate. Furthermore, if final demand from the North Atlantic declines then Australia will also take a hit -- as we did during 2008 before China went on a spending spree.

The final location of our exports is interesting, and value-added trade is certainly a more accurate measure of aggregate trade flows, but we shouldn’t ignore the steps along the way. The more steps there are in supply chains, the greater the opportunity for disruption for Australian producers.

In the absence of elevated Chinese demand over the past few decades, the composition of Australian exports would be significantly different and the resources boom would never have happened, resulting in vastly lower income and wealth growth.

Furthermore, a slowdown in China remains the worst-case scenario for the Australian economy given the direct implications it has for our mining sector and the indirect effect it would have on real estate and banking. The same cannot be said for our exposure to the US or Europe.

On Monday, Business Spectator published an interesting interview with Justin Yifu Lin, the former chief economist of the World Bank, who remains optimistic that China can continue its fast-paced growth of 7-8 per cent for another couple of decades.

Lin accepts that this is far from inevitable, and depends on sensible reforms being successfully undertaken. But Lin's point is that it is possible and we should not be too quick to accept that slower growth is a structural inevitability. In this column, I have about 800 words to say why I think Lin is wrong.

Lin argues that late-developing countries like China can grow much faster than developed economies during the catch-up stage of their development. He points out that China's per capita income level is only 21 per cent of the US back in 2008, which roughly reflects Japan's position in 1951, Singapore's in 1967, Taiwan's in 1975 and South Korea's in 1977. These countries subsequently all grew between 7.6 and 9.2 per cent for two decades.

As he goes on to say, the large gap that exists between China and the US means that if China follows the growth pattern of these four advanced East Asian economies, there is a good chance that it can still deliver 8 per cent for another 20 years.

There are several problems with Lin's argument.

The first thing to note is that China has done things in reverse to these successful East Asian economies. It was only after these other East Asian economies reached around a quarter of GDP per capita levels of advanced economies such as the US -- where China was in 2008 -- that fixed investment took off.

China has done things differently. Even when it was a very poor country, with GDP per capita levels one-tenth that of the US, it embarked on a huge fixed investment splurge. In the 1980s, fixed investment as a proportion of GDP was already around 33 per cent of GDP, rising to just under 40 per cent of GDP by the late 1990s, and about 45 per cent of GDP during the middle of the last decade.

Moreover, China's fixed investment splurge when it was a poor country puts into the shade fixed-investment activity when Japan, Taiwan, South Korea and Singapore reached one quarter of America's per capita GDP. During the periods of rapid industrialisation in these other countries during the 1950s, '60s and '70s, fixed investment as a proportion of GDP was at around 30 per cent, and only for brief periods of several months did it reach 35 per cent.

As mentioned, China had already reached those levels by the late 1980s at a time when it was still immensely poor. But in case readers still thought China's fixed-investment model can continue for some time yet, fixed investment as a proportion of GDP has now reached around 50 per cent -- unprecedented for any significant length of time for any economy in history.

Take the last decade during which China's official GDP increased by around 162 per cent. Of this 162 per cent increase, additional labour inputs have contributed about 6 per cent. But an enormous 135 per cent can be attributed to fixed investment, according to World Bank figures, with total factor productivity (using labour and/or capital more productively) contributing to only 20 per cent of the 162 per cent growth. This means that fixed investment has been behind more than 80 per cent of China's GDP growth over the past decade.

The point is that China is close to exhausting its fixed-investment play, which is the fastest way to generate rapid growth. Rather than evidence of further latent high-growth potential, the absurd levels of fixed investment in China show an economy that does not allow market and price signals to determine the level and nature of economic activity, or else suppresses these signals altogether.    

In any event, we ought to remember Paul Krugman's famous 1994 article, "The Myth of Asia's Miracle" in the Foreign Affairs journal, which argued: "economic growth on expansion of (capital) inputs, rather than on growth per unit of input, is inevitably subject to diminishing returns". It could be that China has a way to defy the laws of economics. But the more likely reality is that economic gravity is already having its effect. After all, the amount of capital input needed to produce one additional dollar of output (the capital-output ratio) increased from 2:1 in the 1980s, to about 4:1 in the 1990s, and was well over 5:1 in 2011, according to OECD figures. At the end of 2012, the ratio was 5.5:1.

Furthermore, Lin argues that these other East Asian economies all went against prevailing economic wisdom at the time to become advanced economies. But the handful of economies that have escaped the 'middle-income' trap and become advanced economies -- including the East Asian ones -- all had one thing in common which does not apply to contemporary China: they all had strong and developed institutions required for sophisticated commercial interactions such as rule-of-law, strong property and intellectual property regimes that are reliably enforced, and an independent judiciary needed to fairly and reliably resolve commercial disputes between commercial actors.

Unlike modern-day China, the early stages of advanced and innovative economies also have political economies that largely allocate economic opportunity and credit based on commercial merit rather than on policy or political grounds. Every indicator shows that China's private firms are more innovative, use capital more efficiently and productively, and are far more responsive to market and price signals. Yet, President Xi Jinping, like his predecessors, has continually reaffirmed that state-owned-enterprises are to take the lead in every significant sector of the Chinese economy.

Perhaps China can transform its SOEs into world-beating firms. But that has not been the experience of the other successful East Asian countries, which have allowed the private sector to take the lead once low-middle income status was reached. Once again, China is doing the opposite.

The bottom line is that it may not be doom and disaster for China. But two things seem clear: for one, a structural slowdown is already occurring and the law of diminishing returns for ever increasing capital input is well and truly happening. Moreover, moving to a consumption-driven economy, even if that occurs, will not sustain growth rates of 7-8 per cent.

And two, China cannot become an advanced, innovative and responsive economy without drastic changes to its political economy. For the other East Asian economies that broke past the middle-income barrier, they had already entrenched many liberal civil and economic institutions by the time they reached middle-income status and did not require radical changes to their political and economic systems. This partly explains why they enjoyed a relatively smooth and non-violent transition to political pluralism and eventually democracy. If we throw in factors such as the certainty that China will grow old before it grows rich -- whereas the other successful East Asian economies grew rich first before they became old -- then China may not be able to take much comfort from the experience and successes of its advanced neighbours.

Dr. John Lee is an Adjunct Associate Professor at the University of Sydney, a senior fellow at the Hudson Institute in Washington DC, and a Director of the Kokoda Foundation defence and security think-tank in Canberra.

Pope Francis' first trip to Asia could afford the pontiff a fresh opportunity to reach out to China, one of the most complex and troublesome issues facing the Vatican.

Fraught relations between the Holy See and Beijing overshadow the Catholic Church's aspirations for Asia. China is attractive for the church given the country's huge population and the spiritual vacuum left by eroding Maoist ideology. But renewed troubles over the naming of Catholic bishops have cast a fresh chill on relations between the two sides.

Catholicism first reached China in 1294 and eventually gained influence, particularly among the upper classes. But after 1949 the officially atheist Communist Party expelled Catholic and other missionaries, and in 1957 it established the state-run Chinese Patriotic Catholic Association, which rejects Vatican authority.

Critically, the CPA also began appointing its own bishops, creating a rupture with the Vatican, which regards such decisions as an inalienable right of the Holy See. Moreover, during the 1966-1976 Cultural Revolution, many Catholics were beaten and some were killed.

Today, China has an estimated 12 million Catholics, many of whom practice in so-called underground churches beyond Beijing's direct control. But around 5.3 million are represented by the 70 bishops appointed by the CPA.

Vatican watchers say the Holy See has long been anxious to settle relations in China. In a conciliatory, 55-page open letter to Chinese Catholics in 2007, Pope Benedict XVI emphasized that the church had no political ambitions.

Regarding the nomination of bishops, he wrote: "It is understandable that governmental authorities are attentive to the choice of those who will carry out the important role of leading and shepherding the local Catholic communities. On the other hand, the Holy See follows the appointment of bishops with special care since this touches the very heart of the life of the church."

In the mid-2000s, Cardinal Pietro Parolin, who is now the Vatican's Secretary of State, played an important role in crafting a rapprochement with Chinese authorities allowing for a tacit accord that both sides would agree on the selection of bishops.

But that agreement broke down, with Chinese authorities ordaining a new bishop in 2010 without the approval of Rome. Then, in 2012, another bishop loyal to the Vatican disassociated himself from the government-controlled religious bureau and was placed under house arrest.

Catholics enjoy greater freedom than in the past, though Beijing remains wary that the church could fuel political dissent. Authorities launch periodic crackdowns involving church demolitions, beatings and imprisonment of worshipers or priests at underground churches.

Recent comments from Cardinal Parolin suggest the Vatican is anxious to repair ties with China. The Vatican has long expressed a desire to establish full diplomatic relations, even offering to move its embassy to China from Taiwan.

"The Catholic Church in China is alive and active," the cardinal said last week in an interview with an Italian Catholic publication. "The Holy See is in favor of a respectful and constructive dialogue with civil authorities in order to find a solution to the problems that limit the full exercise of the faith by Catholics."

Pope Francis has said very little on China during his 17-month pontificate, although he acknowledged contacts with the Chinese leadership soon after his election.

"We are close to China," he said in an interview with an Italian newspaper in March. "I sent a letter to President Xi Jinping when he was elected, just three days after I was. And he responded. There are relations. The Chinese are a great people whom I care about."

Vatican spokesman Father Federico Lombardi said last week that the pope may make reference to relations with China during his stay in South Korea. Before his arrival in Seoul, the pope could dispatch telegrammed greetings to Chinese authorities when his plane flies over the country, as is customary for papal flights.

The prison sentences last week for two of the best-known antifraud specialists in China was a reminder of the stiff risks that can accompany buying and using information that the government deems private.

Yet for businesses operating in the world's No. 2 economy, the case did little to clarify exactly what information is legally accessible. By prosecuting British corporate investigator Peter Humphrey and his American wife and business partner Yu Yingzeng, authorities took direct aim at some basic tactics used by the due-diligence firms that attempt to address uniquely vexing facets of conducting business in China.

The question now in business due diligence is, "How can I do that in China?" asked Manuel Maisog, chief China representative for law firm Hunton & Williams LLP.

Found guilty in a Shanghai court of misusing private information, Mr. Humphrey was sentenced to 30 months in prison and his wife to 24 months, with $57,000 in fines levied between them. The two have been jailed since last summer. Mr. Humphrey had testified that their work helped clients shine a light on corruption and cheating.

The verdict created new uncertainties for doing business in China since the case hinged on the couple's admissions that they purchased personal information about Chinese citizens on behalf of clients, said Mr. Maisog and other outside lawyers. Companies in China may need to adjust how they assess future merger partners, supplier proposals or whether employees are involved in bribery.

"It's not just that the tactical business practices need to change, it's the mind-set," Mr. Maisog said.

Lawyers said the limitations mean executives, often those sitting in foreign countries, will need to rely on less information to make decisions about their China operations. For instance, lawyers said that companies wary of holding certain kinds of data--such as the official Chinese identification documents prosecutors said were found on Mr. Humphrey's computers--are likely to limit background checks to public records. That will be a challenge in a country without household-telephone directories and where 30% of the population shares just five family names; almost 100 million people are named Wang.

In China, a citizen's national identification number is the key to a person's identity, fundamental in any kind of registration, from homeownership to bank account, and in many ways more guarded even than U.S. Social Security numbers.

Instead of relying on third parties such as investigations firms, says Jerry Ling, a partner at law firm Jones Day in Shanghai, companies increasingly will need to analyze Chinese accounting documents themselves and conduct more in-person interviews with anyone they want to know more about in China. "The challenge now for clients is that it's hard to get good information," he said.

Smaller businesses are likely to feel especially squeezed, said Barbara Li, a partner at law firm Norton Rose Fulbright LLP in Beijing. "They don't have large teams working to check every aspect of the companies on the ground," she said.

Among China's first corporate investigators, Mr. Humphrey helped start the Chinese operations of investigative firm Kroll Associates and the local antifraud department at PricewaterhouseCoopers. In 2003, Mr. Humphrey and Ms. Yu founded the niche business ChinaSHYWhys Co., which conducted background checks for hundreds of client companies to detect any potential problems with business partners, suppliers and employees. A major boost to their business: legislation several countries have enacted, like the U.S. Foreign Corrupt Practices Act, that harshly punish bribery overseas.

The case against the couple wasn't the first signal from Beijing that some data are off limits. In 2009, Chinese authorities announced tighter rules regarding the use of private information, including selling it. Prosecutors highlighted those rules during last week's trial, quizzing the couple on why they turned to a new source after the arrest of one of the people they had paid to obtain identification numbers. They each explained they didn't understand every aspect of the law and didn't know they were breaking laws.

China has long-standing sensitivities about information falling into foreign hands, from military movements and mapping points to certain geology measurements.

In 2010 Beijing said it was trying to clarify rules when it announced distinct categories for its feared state-secrets law, though law firm Jones Day termed the rewritten regulation "as vague as it is deep."

More recently, China said it is illegal to send certain auditing figures overseas.

A related concern for companies: ensuring that information that China could classify as part of national secrets doesn't leave the country. Lawyers say they advise clients not to email such information or store it on a computer server located outside the country.

The risks of handling personal information were on display months before Mr. Humphrey and his wife were detained. A Chinese court last year sentenced four former executives of a business owned by Dun & Bradstreet Corp. to prison for buying information on Chinese consumers. According to industry insiders, Chinese authorities also detained several private investigators around the country who were paid by stock-market investors to check suspected fraud by local companies with stock traded overseas.

In court last week, the Shanghai prosecutor described Mr. Humphrey's activity as dangerous to society when "everyone is worried about the security of their privacy."

Mr. Humphrey testified that handling personal data was a small part of what his firm did and that his services only reflected realities of China's fast growing economy.

Ms. Yu was more blunt, saying local regulators haven't been doing their jobs and that the government's case against the couple used the twisted logic that "those who catch thieves break the law."

The glut of vacant homes across China owned by small investors has fueled a cottage industry: companies that help owners rent their homes for short-term stays.

At least four short-term and vacation-home rental firms have sprung up since 2012, fueled in part by the higher number of vacant homes in the market. Long-term rentals in China have been around for some time, but they haven't been popular with homeowners, especially in smaller cities where yields are low and landlords complain tenants often wreck properties.

Chen Chi, chief executive of website Xiaozhu.com, a Chinese equivalent of U.S. rental-sharing website Airbnb, said the idea of renting out homes on a short-term basis is gaining acceptance as more people embrace the concept of a "sharing economy."

"Just like how carpooling is becoming more popular, people are becoming more comfortable with renting out their assets when no one is using them, " said Mr. Chen.

Over 5,000 landlords have registered their homes with Xiaozhu.com since its launch in 2011, Mr. Chen said. The site lists 20,000 homes in Beijing, Shanghai, Guangzhou, Chengdu, Nanjing, Qingdao, Chongqing and Xi'an.

Other startups have targeted property developers amid stiff competition in the building industry, saying rental income can make second and third homes more desirable to customers. In June, property developer China Vanke Co. signed a partnership with online startup Tujia.com to rent out vacation homes when their owners aren't using them. Tujia currently lists about 90,000 homes aimed at domestic travelers.

"Working with Tujia bridges the distance between second-home ownership and demand from travelers," said a Beijing-based Vanke spokesman.

The trend represents a change in the attitude of small property investors in China. In the past, they generally avoided renting out homes and apartments and instead left them vacant with plans to sell them later for a higher price. The strategy was profitable several years ago, when home prices were rising at a rapid clip. Most homeowners in China don't pay annual property taxes, so keeping the units empty didn't require large costs beyond the mortgage.

But now that home-price appreciation is cooling and there is the prospect of property taxes--on trial in some cities--being introduced nationwide, some homeowners are changing course.

"It helps offset my mortgage costs," said Liu Yu, a 40-year-old electronics salesman who, since November, has been renting out his two-bedroom Beijing apartment to short-term renters, charging 198 yuan (about $32) a night.

It wasn't an easy decision, Mr. Liu said. In 2008, he rented out the other apartment he owns, in the city of Chongqing, to a family. In the two years they stayed there, they trashed the place, he said, forcing him to spend all the money he made in rent on repairs. "It put me off renting out my homes for a while," he said. "It helps that there are more options now, such as short-term rentals." Stays at his home have ranged from as little as a day to as long as three months.

Average home prices in 35 Chinese cities more than tripled between 2000 and 2010, according to the Institute of Real Estate Studies and Tsinghua University, with most of the appreciation seen after a government economic-stimulus program in 2008. This sparked fears of a housing bubble, as home buyers snapped up multiple properties, resulting in uninhabited towers and empty villas.

More than one in five homes in Chinese cities is vacant, according to a survey by researchers from China's Southwestern University of Finance & Economics. If China's property market sees a sharp price decline, panicked investors of these empty units could rush to sell, said Li Gan, the professor who oversaw the survey, "and this could potentially trigger a housing-market collapse."

Price appreciation has eased since 2010, after the government adopted measures to rein in rising home costs. This year, the supply glut has eroded home prices in many cities outside Beijing and Shanghai, prompting some potential home buyers to put off purchases until prices stop falling. Housing sales nationwide fell 9.2% to 2.56 trillion yuan ($416 billion) in the first half of this year from the year-earlier period.

Wang Xiyuan, a Beijing-based tech executive, said he has no plans to buy more property, preferring instead to focus on managing what he already owns: three apartments in Beijing and two in Changzhou. "Buying investment homes in hopes of flipping them for profit? That era is over, " said the 39-year-old.

Mr. Wang reckons the first apartment in which he invested, bought in Beijing in 2003, has more than quadrupled in value. The following year, he bought a second apartment in Beijing as an investment, leaving it empty until 2008 before deciding to rent it out. The year after that, he bought a villa in Changzhou, a city in the Yangtze River Delta region about an hour from Shanghai by bullet train.

"The villa has been empty till now, but I'm considering putting it up for short-term rentals if there is demand," said Mr. Wang. His parents are staying in his first Changzhou apartment, and the other apartment in Beijing is leased to short-term tenants.

Hopes of resolving the South China Sea’s bitter territorial disputes have once again proven illusory.

Meeting in Myanmar over the week-end, the Association of Southeast Asian Nations (ASEAN) shied away from backing the Filipino proposal for a freeze on destabilising unilateral challenges to the territorial status quo.

Although this is typical of ASEAN’s limp diplomacy, even a strong Southeast Asian stance would be inadequate in the face of a great immovable: Chinese intransigence.

Beijing’s steadfast determination to press on with plans to extend its de facto sovereignty means that any well-intentioned initiative to establish a moratorium on unilateral challenges to the territorial status quo is quite literally dead in the water.

A brutally realist approach to the South China Sea’s territorial disputes is now needed.

Instead of vainly seeking a negotiated solution, Vietnam, the Philippines, Malaysia, Brunei and China should start drawing lines in the water and divide the South China Sea into spheres of influence.

Territorial claims among the five key claimant states overlap over vast swathes of sea.

With each claimant state looking to expand its de facto control to cover the full extent of its territorial claims, the net result is regular naval confrontations, harassment of fishermen, and sabotage of state-owned commercial operations.

Establishing tacitly accepted spheres of influence would guard against this aggressive cut and thrust of claimant states jockeying for control over additional territory.

Each claimant state would recognise the control of the other parties over certain sectors of the South China Sea in exchange for the same assurances vis-à-vis its own sphere of influence. And these assurances of mutual non-interference could be applied to the activities most likely to inflame tensions, including maritime patrols, commercial fishing, and natural resources exploration and exploitation.

A spheres of influence model would require mutual recognition of control of territory, and yet it would certainly not demand acceptance of the legitimacy of this control, much less acceptance of the underlying sovereignty claims.

In fact, the success of such a model depends on not adjudicating and resolving the fundamental question of which states have sovereignty over which tranches of territory. This is because claimant states may well be convinced to divide the South China Sea into spheres of influence for the sake of deescalating the conflict, but not if such a move means abandoning their own sovereignty claims.

Despite its apparent modesty, it might be objected that a spheres of influence model will still prove diabolically difficult to implement.

If claimant states cannot agree to simple rules of engagement in the South China Sea (e.g. the still unrealised Code of Conduct), then presumably they will not condone even a temporary division of disputed territory? And surely Beijing’s absolutist attitude towards its territorial claims will scuttle any attempt to establish spheres of influence?

Although coaxing claimant states into adopting a spheres of influence model may admittedly be challenging, such a strategy has a successful precedent.

Having traded numerous diplomatic barbs and fought a bloody war in 1962 over strategically valuable tracts of the Himalayas, China and India reached an agreement over the contested Line of Actual Control (LAC) in 1993.

Without prejudicing either the Chinese or the Indian claims to disputed territory, this landmark accord saw Beijing and New Delhi agree to restrict troop movements and air force overflights to their respective sides of the LAC.

To be sure, there have been many violations of the LAC, particularly by China, and the precise location of the dividing line is a matter of debate between Beijing and New Delhi.

Nevertheless, the LAC provides each country with a framework for peacefully calling for the withdrawal of armed forces when major transgressions occur. Indeed, even China’s 19km incursion—or ‘invasion,’ as it was dubbed by elements of India’s media—into Indian-controlled territory in 2013 resulted in swift Chinese disengagement and a rare admission of error from Beijing.

By separating Chinese and Indian-controlled territory, the LAC ensures that Sino-Indian territorial disputes are now far less violent and volatile than those in the South China Sea.

If this Sino-Indian experience with an LAC is at all indicative, dividing the South China Sea into spheres of influence could offer an effective means of taking the heat out of one of Asia’s most fraught geopolitical flashpoint.

A negotiated solution to the South China Sea’s territorial disputes might still be the ideal outcome. But with the perfect so often the enemy of the good, claimant states should not overlook more rough and ready remedies.

Dr Benjamin Herscovitch is a Beijing-based Research Fellow at The Centre for Independent Studies.

One of China's most senior banking executives, the former head of the Postal Savings Bank of China has been charged for bribe taking, embezzlement and corruption.
 
The arraignment was announced on the website of the country's top prosecutor, the Supreme People's Procuratorate (SPP) on Wednesday.

The Postal Savings Bank of China confirmed that Tao was under investigation in June 2012. He was made governor of the bank in 2007.

The bank, which is China’s seventh-largest bank by assets, is reported to be preparing for a listing in early 2015 worth potentially billions of dollars.
 
Beijing has launched a wave of anti-corruption probe against party officials including senior executives from state-owned companies and banks such as China Mobile and PetroChina.

Housing sales in China in the first seven months of the year fell 10.5 per cent to 2.98 trillion yuan ($US484 billion), signaling that property-loosening measures rolled out by about 30 local governments haven't yet made a meaningful impact. 

Sales were 2.56 trillion yuan in the first half of the year, down 9.2 per cent from the same period of 2013, according to data released by the National Bureau of Statistics Wednesday. 

July is typically a seasonally slower month for housing sales and analysts said they are awaiting sales data in August and September for signs a turnaround is in the works, but the continued fall in sales remains a cloud on China's economic prospects. 

Consumers are staying on the sidelines on expectations for further falls in prices, property agents said. 

Housing sales in July fell 17.9 per cent on a year-over-year basis and 28.2 per cent from June, according to calculations by The Wall Street Journal from data issued by the National Bureau of Statistics. The bureau doesn't issue data for individual months. 

Some economists were surprised by the weakened sales momentum, especially since more local governments made it easier for home buyers to purchase their second or subsequent homes. 

"What I can't really understand is why the housing sales were down so much," Société Générale economist Wei Yao said. "A lot of local governments had eased home purchase restrictions. Of course, it'll take some time for the measures to show effects, but still I'm surprised by how sluggish sales were in July," she added. 

Many Chinese investors who previously piled into the housing market are now looking at alternatives, such as wealth-management products or property abroad. 

"The housing market isn't doing well now and I don't dare to buy any more homes," 34-year-old Li Jun, a Shanghai-based machinery salesman who bought an investment apartment in Hefei three years ago, said. "I regret buying that apartment now; the price is now lower than what I paid." 

Mr Li said he might have to purchase another home near a school when he and his wife start a family, but said that would probably be his final home purchase. 

The property sector is an important pillar for China's economy, with related sectors such as construction, steel, chemicals and furniture accounting for as much as 23 per cent of the country's gross domestic product, according to data from Moody's Analytics. 

The decline in construction starts continued to moderate, as property developers start work on land already bought. Construction starts in the January-to-July period fell 12.8 per cent from the same period a year earlier, an improvement from the 16.4 per cent decline recorded in the first half. 

In July alone, construction starts grew 8 per cent from a year earlier, the first monthly growth so far this year, according to calculations by The Wall Street Journal. But a strong rebound in construction is unlikely to be sustainable. Property developers have reined in their appetite for land amid prospects of poor sales and rising financing costs. 

Growth in property investment nationwide has slowed, rising 13.7 per cent in the first seven months this year from the 14.1 per cent growth in the first half. A lagging indicator, this reflects continuing building activity from land purchased last year. 

When China’s richest man, Wang Jianlin, came to Australia for a whirlwind visit in June, he was feted by the most senior political figures in the country -- from Prime Minister Tony Abbott, to Trade Minister Andrew Robb and NSW Premier Mike Baird.

Just two months later, his property conglomerate Wanda, which is listed on the Hong Kong Stock Exchange, announced that it would invest $HK12.5 billion, or $A1.7 billion, in the Australian real estate sector, including building a $900 million tourist resort on the Gold Coast.

Wang, one of the most powerful property tycoons in China, is no stranger to mega overseas deals. He made his debut as a global player in 2012 when he snatched up AMC Theatre, the second largest cinema chain in the US for $2.6bn. It was the biggest US acquisition ever by a private Chinese company.

Over a short period of time, Wanda has committed to 80bn yuan, or $A14bn worth of overseas projects including a pledge to splurge between £2-3bn to rejuvenate British cities after his meeting with the British Prime Minister David Cameron.

Wanda’s aggressive offshore expansion is one example of Chinese property developers marching overseas. According to Caixin media, Chinese property developers invested in 35 major projects worth over $US37bn, or $A40bn, in the first half of 2014.

“Chinese outbound property investments beyond Asia really took off in 2009, and they reached a record $US9bn in 2013. We believe more Chinese developers will look overseas to support the needs of their clientele,” says Terence Tang, managing director of Capital Markets and Investment Services at Colliers International.

Chinese buyers’ insatiable appetite for overseas property is one of the major driving forces behind the aggressive investment strategy of major developers. Chinese real estate buyers have become a major force to be reckoned with at several major Western countries, such as the US, Canada and Australia.

In the US, cashed-up Chinese are the biggest buyers of high-end luxury real estate in New York and they have outspent their main competitor, the Russian oligarchs. China has replaced Canada as the leading foreign buyer of American properties. According to the National Association of Realtors, Chinese account for 24 per cent of total foreign buying activity, up from 19 per cent.

Australia is also another perennial favourite for Chinese investors. China replaced the US as the largest investor in Australian properties last year. Chinese interest is driving an apartment construction boom in major cities in Australia such as Sydney and Melbourne. Credit Suisse estimates that Chinese buyers are currently purchasing around 12 per cent of new houses in Australia.

Greenland is another major player in the rapid expansion of Chinese property developers abroad, including Australia. The company is building the largest residential tower in Australia at Sydney CBD. The company also announced the largest ever foreign project in Malaysia, which is estimated to be around 20bn yuan or $A3.5bn.

Another major force driving Chinese property developers to look abroad for opportunities is the downturn in the domestic market, which has been under pressure recently as the economy cools down, with home sales down 10.5 per cent in the first seven months of the calendar year. Many analysts describe the real estate sector as the largest risk for the country’s economy.

The chief executive of Vanke, the country’s largest developer, said the “golden age” for the industry was over. Many developers, and even second-tier ones, are looking abroad to increase their returns as well as diversify their risks from a slowing domestic market. According to an article posted on the Ministry of Commerce website, analysts estimate that some overseas projects could earn 100 per cent more than their projects in China.

Chinese property developers are driving a new wave of investment abroad, which has increased 230 times since 2008. This new wave will bring with it both opportunities and challenges for host countries like Australia. The new money will bring fresh opportunities for construction, tourism and other related industries.

But at the same time, there is already considerable community disquiet and opposition to further Chinese investment in the real estate sector -- and especially the new projects that are aimed at attracting Chinese buyers.  These new projects may add to the tension in the community.

The iron ore price has slumped to its lowest level in two months as investors fret about the strength of the Chinese economy.

Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently trading at $US93.20 a tonne, down almost 1 per cent from its $US94.00 closing mark in the previous session.

At the current price point, iron ore is at its lowest level since June 20, when it traded at $US92.10.

Earlier in June, the iron ore price dropped to as low as $US89 a tonne, but despite a minor rebound since then year-to-date falls are still over 30 per cent.

The latest downward move comes amid continued oversupply in the market due to increased supply from heavyweights like BHP Billiton and Rio Tinto and softer demand from China.

Much of the focus in the past 24 hours has been on demand as Chinese economic data failed to flatter yesterday. Of particular concern were signs of a continued slowdown in industrial production and a sharp fall in credit growth.

The recent decline comes after Goldman Sachs last week confirmed its warning for iron ore prices to average $US80 a tonne next year on the back of comments from iron ore giant Vale that hinted the glut of supply was not likely to resolve itself anytime soon.

At the same time local firm BC Iron, which made a $250 million bid for Kerry Stokes’ Iron Ore Holdings this week, suggested prices above $US100 a tonne could be expected in the next six months.

Also backing higher prices recently was Westpac senior economist Justin Smirk, who suggested prices could again rise above $US120 a tonne within the next 12 months.

“We are likely to see softer near-term growth in ore supply overall as Chinese and other sources of ore moderate production,” Mr Smirk wrote in a report last Wednesday.

“Any near-term upside surprise in demand will be a positive for prices.”

“I’ve been hearing that China is in for a hard landing for the last 30 years, and most people I don’t think truly understand the dynamic of China,” he said during a business lunch in Melbourne.

“China has its issues — it struggles with the whole reform and deregulation (process), but it is going ahead.

“It is absolutely focused on moving from a manufacturing and export-based economy to a domestic consumption-based economy. That will take 30 years, and they understand that.”

Mr Smith said he had no doubt global economic growth could hit the 2 per cent annual increase over the next five years that Joe Hockey had pushed the G20 to accept in February.

“If the recommendations of the B20 were all accepted by the G20, we’d actually get above 2 per cent,” he said.

The B20 forum of business leaders last month made a series of recommendations to the G20 leadership calling for reductions in trade barriers for goods, services, labour and capital, as well as more consistent and effective regulation, and action to stamp out corruption.

Mr Smith noted trade within the Asian region had grown exponentially over the past 10 years to dwarf China’s trading relationship with either the US or Europe.

“It is massive growth and we’re very much a part of that, and that’s our opportunity,” he said.

“There’s a lot of these urban myths around that Australian businesses can’t succeed in Asia, but for every one that has failed there’s a hundred that succeed.”

Mr Smith said the rebalancing of the Australian economy from an over-reliance on mining was fostering growth in other sectors, but some areas were unlikely to recover.

“We are beginning to see a slow return of confidence, there is a bit of pent-up demand in terms of capital equipment and indeed on expansion plans,” he said.

“But we also have to appreciate that we’re a country in economic transition and we’re struggling a bit with that concept — the move from a 20th century economic model to a 21st century economic model is happening to us, and not always on our terms,” he added, citing the car and media sectors as areas that could not expect to fall back on their old business models.

“The new era is going to be very much more technology-driven, and companies will be much smaller ... you’ll need to be more nimble and flexible.”

This article originally appeared in The Australian.