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    Chinese property developers are increasingly raising funds through a method that some analysts say makes their debt loads look lighter than they are.

    Perpetual securities are corporate bonds with high interest rates and no maturity date. That means issuers have to continue to make interest payments on the bonds if they can't redeem them.

    They are increasingly popular among Chinese property developers hit by the country's real-estate slump and government limits on their ability to tap credit from state-controlled banks. Among their advantages to issuers, they can be treated on the balance sheet as equity, or a hybrid of equity and debt, rather than debt. That is because the payments are made at the discretion of the company, so they are considered dividends rather than interest payments.

    Some analysts said using the securities helped make the results of some property companies look better than they really were. "Beneath the looks-to-be good gearing in the first-half results, we note more developers have reported issuance of perpetual securities," said Citi Research analysts Oscar Choi and Marco Sze in a note. "We regard these instruments as 'toxic' for investors, as they can mask true real leverage and profitability through accounting moves." Gearing, or leverage, compares net debt to equity.

    As of June, eight listed property developers had issued perpetual securities totaling 86.5 billion yuan (US$14.1 billion), nearly double the 44.1 billion yuan recorded in the whole of 2013, Citi said. "If we reclassify their perpetuals as debt rather than equity, gearing would sharply escalate," Citi said.

    One issuer was Hong Kong-traded Beijing Capital Land Ltd., whose subsidiary last year sold US$400 million in perpetual securities that pay dividends at an annual rate of 8.375 per cent. It said the securities give it flexibility in terms of interest rates and the payment of principal, allowing the firm to make extensions depending on its financial position.

    "We have more flexibility in the usage of funds raised from such securities, which have longer tenors. While bank loans typically have tenors that are two to three years, it's actually much shorter because there are repayment requirements hinged on property sales," said a spokesman from the midsize developer.

    He said that the perpetual securities it issued had favourable interest rates compared with its peers, but didn't provide further details. He declined to comment on Citi Research's remarks.

    Three other companies cited by Citi-- Evergrande Real Estate Group Ltd., Guangzhou R&F Properties Co. and Agile Property Holdings Ltd.--declined to comment. The others-- Sino Ocean Land Holdings Ltd., Franshion Properties (China) Ltd., Kaisa Group Holdings Ltd. and CIFI Holdings (Group) Co.--didn't respond to requests for comment.

    Jefferies analyst Venant Chiang said such perpetual securities have worsened developers' financial positions. In his analysis of 18 property developers in the first half, when he reclassified perpetual securities as debt instead of equity, their average ratio of debt to equity hit a high of 83 per cent compared with 61 per cent as of the end of last year.

    Chinese property developers have been facing tighter credit conditions since 2010, and the industry faces falling sales amid this year's property slump. Restrictions on the use of bank loans have compelled many to seek alternative financing.

    "If companies are not able to fund themselves using more established channels such as construction loans, they would seek alternatives, which come at a steep price," said Christopher Lee, a managing director at Standard & Poor's Ratings Services.

    Depending on how they are structured,analysts view the perpetual bonds as equity, a hybrid of equity and debt, or simply as debt. Most of them have interest rates from 9 per cent to 12 per cent in first two to three years, which jump to as high as 20 per cent from the fourth year if the bonds aren't redeemed by then, according to analysts and ratings firms such as Moody's Investors Service and Standard & Poor's.

    "They feel that the cost is reasonable and are confident of using property sales proceeds to repay the perpetuals before maturity," said Franco Leung, a vice president at Moody's.

    Among the developers, analysts highlighted Guangzhou-based developer Evergrande as relying most heavily on perpetual securities. Evergrande's leverage would jump to 248 per cent from 90 per cent if the securities were classified as debt, Citi Research says.

    Evergrande has said it issued perpetual bonds on individual projects amounting to 17.58 billion yuan (US$2.86 billion) in new financing in the first half this year.

    Leverage for Guangzhou R&F, another property developer, would rise to 186 per cent from 92 per cent, according to Citi. For Agile Property, the ratio would rise to 107 per cent from 82 per cent.

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    Some analysts say perpetual securities make companies' debt loads appear lighter than they are.

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    Beijing's anticorruption and austerity campaigns are prompting some officials and state-sector bosses to look for greener pastures in the private sector.

    Government and state-sector jobs have been among the most sought-after in China in recent years because of job security, generous perks and access to powerful networks.

    Yet this is changing, as officials' benefits--from banquets to business-class seats and business-school education--have been stripped away in the Communist Party's austerity drive. Senior officials are facing restrictions on choosing resorts for business dealings, and have been told to scrap overseas leisure travel altogether.

    Next on the chopping block is pay packages. The party approved plans late last month to cut salaries across the board for bosses of state-owned enterprises. The Ministry of Human Resources and Social Security said recently that a majority of heads at state-owned businesses will suffer pay cuts, with some experiencing "significant" reductions. Bosses at the firms, among China's most powerful, can have salaries of as much as $300,000 a year.

    "Grey incomes for Chinese officials are becoming harder to come by, and the risks for corruption are rising," said Jianguang Shen, China economist for Mizuho Securities Asia. "That's why we see a lot of officials leaving the government, and I expect the trend to continue."

    Data is hard to find on officials defecting to the private sector, but examples are piling up. In March, Liu Zhenghua--51 years old and a former official at China's banking regulator--left his job as deputy mayor of Wuhu, a city of two million people, to be a senior vice president at Nanjing retail and properties conglomerate Sanpower Group Co.

    Wang Guiya, 49, director of investment and financing at China Construction Bank Corp.--one of the country's big four state-owned banks--in March became a senior vice president at Dalian Wanda Group Co., headed by China's richest man, Wang Jianlin. Wang Guiya will help build the property developer's financial services business.

    The latest example is Liu Yuan, former chief of the consumer-protection department at the China Banking Regulatory Commission. He joined China Merchants Bank Co. in August as chief supervisor.

    Even new graduates have voted with their feet. Last year, an average of 77 people fought for one civil-service position, based on the number of graduates taking the national exam for entry-level jobs in the bureaucracy.

    This year, 16 of the country's 23 provinces and municipalities experienced drops in registrations for the civil-servant exams, according to figures cited by Xinhua in March. The average decrease was about 10%.

    Private Chinese companies are hoping to lure former officials who can help open doors and smooth government relations. These people often have good insight into regulatory changes and new business opportunities created by reforms.

    And it isn't just about pay. More scrutiny on officials also makes state jobs less fulfilling in some ways, as people become more risk-averse and less willing to deal with bureaucratic red tape.

    Quitting civil-service jobs demands courage because the government can refuse to let people leave. It has taken some senior officials more than a year to persuade the government to release them.

    Moving on could soon get harder. Beijing is planning rules that restrict former officials from joining companies that they have dealt with while in government, according to people familiar with the situation. Anticipating these rules, some officials may take the jump early.

    Former officials don't have many choices. Multinationals are less eager to recruit them, according to executive search firms. Big foreign firms are more wary of legal risks, especially after U.S. investigations into banks hiring Chinese officials' children. The party also is more sensitive about officials leaving the government for foreign companies.

    One man left China's Banking Regulatory Commission last year to take a management job at a private Chinese bank.

    He enjoyed influencing public policy when he was at the banking regulator, but the 10,000 yuan ($1,600) monthly salary fell far short of what he could earn in the private sector, where comparable jobs easily offer 10 times as much.

    The former Wall Street banker, who was recruited to join the regulator a few years ago in its drive to gain international expertise, also says he felt he wasn't playing as big a role as he expected in government policy.

    So it was time to leave. "I want to get some hands-on experience in China's commercial banks and feel that I can make a bigger impact here," he said.

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    Anticorruption campaign has led to fewer perks at government jobs.

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    China’s economic miracle could not have happened without foreign direct investment.

    When former Chinese premier Zhu Rongi addressed his cabinet for the last time in 2003, the straight-talking architect of China’s economic transformation put it bluntly: “Foreign investment has spurred reforms in the state sector, improved enterprise and sales management systems, all of which are beyond our imagination.”

    Fast-forward to the present and an increasing number of foreign firms are now raising their voices about what they see as unfair treatment at the hands of the Chinese regulatory authorities.

    A recent string of anti-monopoly investigations into foreign firms have led to complaints from the European and US business chambers that their members are being unfairly targeted.

    A new report by the US-China Business Council has revealed that 86 per cent of its member companies are concerned about the enforcement measures, with 30 per cent fearing the laws will be used against them.

    The American Chamber of Commerce released its own survey this week that showed 60 per cent of respondents felt foreign businesses were less welcome in China than before. Last year the number was 41 per cent.

    The two surveys follow complaints from the European Chamber of Commerce in August that echo the same concerns and claimed China was using strong-arm tactics in their enforcement of the rules.

    In an interview with China Spectator, Australian Chamber of Commerce chair Tracy Colgan says that while the recent developments were of concern, Australia’s business engagement with China was different to the US and Europe.

    “These companies that we’re talking about are actually embedded in this economy. Those big companies have been here for a long time, and they’ve got substantial manufacturing and sales channels,” she says.

    In contrast, Australia’s business in China was more focused on trade rather than investment, Colgan says.

    “A lot of those members aren’t manufacturing and selling here, there’s a lot in the service industry, and lots of big traders -- it’s trade and not investment. ”

    However, Colgan says she has noticed a huge difference in the way foreign businesses have been treated, but that much of that was because the needs of the economy have changed.

    “In the past foreign companies were important. I think foreign investment drove a lot of the growth here and now that’s changing, so perhaps it’s not as important when there are local alternatives,” she says.

    Colgan would know. She’s lived and worked in China since 1987 when she came over to study poetry and economics. In the three decades she has worked in China, Colgan has been able to get a firm understanding of the China market.

    Colgan’s firm, Kamsky Associates was the first of its kind to be registered in 1980. It set up China's first wholly foreign-owned enterprise, which it negotiated before the corresponding laws were even finalised.

    As the Chinese economy has evolved, her firm’s work has changed too, shifting from a focus on inward investment, foreign direct investment, joint ventures and greenfields to more outbound work, corporate advisory work and troubleshooting.

    The work has changed, says Colgan, because the needs of the economy have changed. The increased scrutiny of foreign and domestic firms is largely a result of the maturing economy.

    “You could argue that that’s actually representative of China moving towards a more level playing field in many ways, you don’t have that preference for foreign investors,” she says.

    Colgan says the recent increased scrutiny of foreign firms should be seen in the context of a clear policy push from the Chinese government to increase the market share of local companies and help develop national champions.

    The investigations were concerning, but the issue is with how the rules and regulations are being implemented rather than the content of the laws themselves. The Chinese authorities are using the rules on the books, Colgan says, but “I wonder about the implementation, whether it’s as balanced as it could be.”

    She says it’s possible the laws were being applied selectively.

    “There are other local companies suffering under other recent developments but I would imagine that when it comes to the anti-monopoly laws there will also be local companies that could also easily be looked into.”

    It was perhaps inevitable that foreign companies -- many of them in joint ventures with Chinese state-owned companies -- would attract more scrutiny at first. Australian companies have been spared so far.

    But until more local companies are investigated, the perception that foreign companies are being singled out unfairly could grow and the international business community will lose faith in China’s economic reform agenda.

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    An increasing number of foreign businesses claim they are being unfairly treated by Chinese regulators. Should Australia be worried?

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    Nuclear power producer CGN Power Co. filed a listing application on Wednesday for its US$2 billion initial public offering in Hong Kong.

    The filing is the first step toward getting the stock exchange's approval to go public in the city. If it gets approval, the IPO is slated for the fourth quarter.

    China International Capital Corp., Bank of America Merrill Lynch and ABC International, the investment arm of Agricultural Bank of China are the joint-sponsors, in charge of due diligence on the deal.

    CGN recorded 5 billion yuan (US$654 million) profit in 2013, up 2 per cent from a year earlier, according to the preliminary prospectus.

    The potential listing of CGN comes as China, the world's largest energy consumer, is pushing hard to expand its nuclear sector to trim reliance on coal, now used to generate around 70 per cent of its power, and reduce the pollution choking large parts of the country.

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    CGN Power seeks approval for $2 billion offering.

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    Chinese police have detained eight people including the editor of a well-known business news website for blackmailing dozens of listed companies over coverage.

    Those held in the "huge" extortion case include the editor and deputy editor of the 21st Century Business Herald's site and employees of two public relations firms, the official Xinhua news agency said.

    The national business newspaper is part of the Nanfang Media Group, which is owned by the Guangdong provincial government, and is well-respected among financial professionals.

    Website staff colluded with others to demand payments for positive news from listed firms and prominent companies, while publishing "malicious" attacks on those who refused to cooperate, the reports said.

    The suspects also reportedly forced companies to place adverts or sign cooperation agreements for high fees.

    The 21st Century Business Herald website, which has offices in Guangzhou, Shenzhen, Beijing and Shanghai, confirmed in a statement that "several" employees were taken away by police on Wednesday, but gave no details.

    Police-supplied footage, broadcast on state television, showed officers in street clothes marching suspects with their hands behind their backs and capturing one by wrestling him to the ground.

    The two public relations firms involved in the case are Shanghai-based Roya Investment Services and Shenzhen-based Nukirin, which specialise in finance-related issues.

    A Roya representative said the company was assisting the police investigation. Shanghai police could not be reached for comment.

    The 21st Century Business Herald was set up in 2001 as the government sought to make state-run media operate on more commercial terms, especially in less sensitive areas such as business news.

    The practice of paying media to run, or not to run, stories is believed to be widespread in China, and authorities announced a nationwide campaign against media extortion earlier this year.

    In July, authorities detained a prominent financial news anchor for state broadcaster China Central Television, Rui Chenggang, for setting up a public relations company to take payments for the type and duration of coverage he could deliver, media reports said.

    In another recent case, an official of online shopping giant Alibaba claimed last month that the IT Times Weekly magazine and its website had published "malicious" reports about the company, trying to coerce it into a business relationship.

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    Eight people, including journalists and PR execs detained for blackmailing dozens of listed companies over coverage.

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    A Chinese factory that supplies parts for Apple, Dell and other technology firms has made serious health, safety and labour violations according to a new report by China Labor Watch and Green America.

    The report claims that the factory called Catcher and located in Suqian, Jiangsu province, has not made progress in improving conditions since it was first investigated by China Labor Watch in April 2013.

    The findings comes less than a week before the expected launch of the iPhone 6.

    In addition to producing components for Apple and Dell, the factory also contracts with Hewlett-Packard, Lenovo, Sony, HTC and Motorola according to the report.

    Elizabeth O’Connell, campaigns director at Green America said the health and safety violations in the factory two years in a  row were startling.

    Kevin Slaten, a program coordinator at China Labor Watch said the investigation had exposed more than 20 legal and ethical violations at the factory.

    The violations include fire exits locked shut, workers not given equipment to protect them from toxic chemicals, and mandatory overtime.

    “Workers must take mandatory overtime, laboring on their feet for more than 10 hours a day, six days a week, and they are not even paid for all of that overtime work” he said.

    “This is exploitation by the factory and Apple for the sake of profit maximization.”

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    Report claims dangerous conditions, labour violations at another Apple plant.

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  • 09/04/14--17:52: Hong Kong's Piketty problem
  • Graph for Hong Kong's Piketty problem

    Lowy Interpreter

    Li Ka-shing may sleep better at night now. One of the world's richest men, the 86-year-old insomniac inveighed last month against the corrosive impact of Hong Kong's inequality, and fretted over lumpenproletariat discontent:

    The howl of rage from polarization and the crippling cost of welfare is a toxic cocktail commingled to stall growth and foster discontent. Trust enables us to live in harmony, without which more people will lose faith in the system, breeding skepticism towards what is fair and just, doubting everything, and believing all has turned sour and rancid.

    Although the speech was about economics, the political signal (particularly through references to 'harmony' and 'trust') was obvious to locals: Hong Kong is turning against big business at its peril, and democracy will lead to ruin.

    Beijing has delivered a predictably hard-line ruling on the nomination process for the 2017 chief executive election, presumably to Li's liking: Hong Kongers can vote, but candidates must be pre-approved by at least half the business-stackedelectoral college. Leader of the pro-democracy Occupy Central movement Benny Tai conceded quickly that he had failed to sway Beijing and that support from a pragmatic public is waning. Some mock Tai for chickening out, but he has made a Solomonic judgment to preserve rather than destroy.

    Preparing the ground a week before the announcement from Beijing, Tsinghua law dean Wang Zhenmin explained that 'the business community is a reality. Even though it's a small group of people, they control the destiny of the economy of Hong Kong. If we ignore their interest, Hong Kong capitalism will stop.' Wang reasonably advised patience: 'less perfect suffrage is better than no universal suffrage, leave some room for future growth.'

    The People's Daily pitched the decision as 'crucial to the fundamental interest of foreign investors.' The Great Helmsman must be turning in his mausoleum.

     The pro-business spin is described as 'killing democracy to save capitalism' by one commentator, who notes that Beijing's determination to control the 'political machinery' of Hong Kong underscores 'a clear interest in preserving (its) position as China's leading financial marketplace.' This then could all be seen as an affirmation of Hong Kong's robust capitalism.

    Curiously, though, Hong Kong capitalism is nothing like the unfettered competition its boosters claim.

    They mistake low tax rates and no-questions-asked transactions for free enterprise. In fact, almost every sector in the territory – land, retailing, telecoms, media, utilities, and the electoral nomination committee – is dominated by a few families. Anti-trust probes are toothless. The nexus between real estate and politics is dangerous everywhere, but in Hong Kong much more so because huge entry barriers are reinforced by ever-higher land tenders. In this spiral of oligo-capitalism, the big get bigger and customers pay up.

    The dissatisfaction is captured by Henny Sender in the FT, who wryly jokes that 'you know you have a problem when even second-tier tycoons feel disenfranchised.' Her view that mainlanders 'have prospered disproportionately more' than locals is widely shared, although debatable. Hong Kong's wealth inequality is home-grown, accumulating during and since British colonial rule. The land policies that have driven housing to the world's least affordable were established decades ago. We have a true Piketty problem, where capital returns have outstripped wage income for decades. Inequality fuels the democracy protests, and the insinuation is often made that Beijing, as the godfather of the robber barons, somehow is nefariously responsible. But the inequality cake was baked long before 1997.

    The more troubling contention is the democracy-versus-business debate. It is a false choice propagated by conservative elites who, rationally, seek to protect their wealth from the predation of the welfare state. The debate is cynically conflated with commercial fears over 'political instability', as if small businesses should care more about street marches than theheavy exactions of the oligarchs' cartels.

    At the middle of every cartel is Li Ka-shing. He is known locally as 'Superman' for his prophetic financial bets. So it is concerning, and ironic, that in recent years he has been systematically selling down his Hong Kong (and China) exposures and reinvesting in safe democracies overseas where rule of law is predictable. If even Beijing's strong business advocacy, backed by the PLA's nocturnal tank drills, fails to reassure him, perhaps the rest of Hong Kong should be sleepless too.

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

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    Inequality is fueling the democracy protests in Hong Kong, and many believe that Beijing is somehow responsible.

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  • 09/05/14--00:02: The Week Ahead
  • Graph for The Week Ahead

    Graph for The Week Ahead

    Another busy week

    After this week’s avalanche of data, another round of top-tier economic indicators is expected over the coming week. At least another seven economic indicators are due for release in Australia. In the US, the key economic data isn’t released until late in the week. And in China, key economic data is released on Monday, Thursday and Saturday, covering trade, inflation, production, investment and retail sales.

    In Australia, the week kicks off on Monday with job advertisements. In the past, the job advertisement figures were valuable as a leading indicator of employment. But now more jobs are posted on individual company websites, social media such as LinkedIn, Facebook and even Twitter, and job placement agencies.

    But the jobs ads data is still watched for turning points. In that context there have been encouraging signs, with a lift in business hiring intentions in the last couple of months.

    On Tuesday two indicators of note are released: the National Australia Bank business survey and housing finance data are released. The business survey covers key business indicators, a reading on business confidence as well as gauges on prices, wages and finance. The indicators of confidence and conditions have showed encouraging improvement since the budget, with a particular focus on a lift in profitability.

    The housing finance data are new commitments made by lenders for the purchase or building of homes and renovations. We expect that the number of loans made to owner-occupiers (those who want to live in the homes) rose by 1.3 per cent in July. Clearly housing has taken over as the growth driver for the broader economy.

    On Wednesday, results of the monthly Westpac/Melbourne Institute consumer confidence survey are released. But ANZ/Roy Morgan compiles a more timely weekly survey each Tuesday. Consumer views about their finances over the next year have improved to the best levels in four months -- a result that should show up in the monthly survey.

    On Thursday the ABS releases the monthly employment figures. Overall we expect that the number of jobs rose by around 17,000 in September, while the participation rate may have eased from 64.8 per cent to 64.7 per cent. As a result we expect that unemployment eased from 6.4 per cent to 6.2 per cent.

    Closing out the week on Friday, the Reserve Bank releases monthly data on credit and debit card lending. Consumers are still conservative, preferring to use their own money (debit cards) rather than use credit to make purchases. Also on Friday the Australian Bureau of Statistics will release lending finance figures, which include housing, personal, business and lease loans. Overall lending is holding at 6½-year highs driven by a healthy lift in home lending.

    Overseas: Chinese economic data in focus

    In the US, the week kicks off on Monday with consumer credit figures and the employment trends report. Economists expect that consumers continue to warm to low borrowing costs with credit tipped to have expanded by $US17.2 billion in July after a similar $US17.26bn increase in June.

    On Tuesday the weekly data on chain store sales is released – a timely gauge of consumer spending trends.

    On Wednesday wholesale inventories and sales data for July is released together with the weekly data on mortgage finance commitments, both for purchasing new dwellings and refinancing. Economists expect that both wholesale sales and inventories expanded by a healthy 0.4 per cent in July.

    On Thursday the weekly data on claims for unemployment insurance is issued alongside the monthly federal budget data. Economists expect that the budget was in deficit by $US105bn in August.

    And after a relatively uneventful four-day period, interest levels pick up on Friday. Not only will retail sales data for August be released, but also business inventories, import and export prices and the preliminary reading on consumer sentiment. Retail sales may have expanded by a good, but not great, 0.3 per cent in August -- both the headline and underlying (non-auto) measures.

    In China, the week kicks off on Monday when China releases its exports and imports data. Economists expect that exports grew at an 8 per cent annual rate in August, well ahead of a 1.7 per cent lift in imports. The trade surplus is expected to have remained healthy near $US40bn.

    On Thursday China’s National Bureau of Statistics issues inflation data for August for both consumer and producer prices. Inflation is well contained at present with producer prices still falling, not rising. Economists expect that producer prices fell 1.2 per cent over the year to August while consumer prices grew 2.2 per cent over the period.

    On Saturday the monthly batch of Chinese economic indicators are released: retail sales, production and investment. There are signs that Chinese economic activity is gaining pace and investors would want to see further confirmation of that trend. Expect annual retail sales growth near 12.2 per cent with production near 9 per cent and investment near 17 per cent. These metrics are effectively the 'new black'.

    Over the week (September 10-15) Chinese money supply and lending figures will also be released.

    Interest rates

    The Reserve Bank board meeting has come and gone for another month and it appears we are set for a long period of interest rate stability -- hardly a bad thing. The overnight index swap market has indicative pricing on the cash rate over the next year. And currently the cash rate is priced at 2.4575 per cent in nine months from now below the 2.50 per cent cash rate.

    What about fixed-term rates? The 3-year swap rate stands at 2.96 per cent – not far above the 2.81 per cent record low set on July 18. Bottom line: borrowers have never had it so good.

    Savanth Sebastian, CommSec

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    An avalanche of key economic data including housing finance and employment figures will be released locally, while Chinese inflation and trade surplus data will make headlines abroad.

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    Alibaba Group is planning to let employees and other people close to the Chinese e-commerce buy some shares in its impending initial public offering, people familiar with the matter said.

    The kind of share program it is conducting, known informally as a "friends and family" plan, lets employees and others buy some shares at the IPO price, before the stock begins trading publicly. That IPO price is normally available only to professional investors and a limited number of individual investors, who buy into the deal in the hope that the stock rises once trading starts.

    The program has been used in recent US listings of other Chinese companies, including messaging service Weibo and online shopping site JD.com earlier this year. General Motors also used one in its $US18 billion ($A19.2bn) IPO in 2010.

    Such programs for employees and others close to the company were more popular for US companies during the dot.com boom of 1999-2000, as a way to potentially reward employees, key customers and others. But their use has broadly been on the decline since then. Some companies have concluded the plans are more trouble than they are worth, as buyers can end up disgruntled if shares decline.

    Alibaba is nearing the launch of its potentially $US20bn-plus IPO. The final filing for the deal, which would include a price range for the shares, could come as soon as Friday, people familiar with the matter said. Alibaba currently plans to start pitching its shares to investors next week, beginning in New York, they said. Shares would begin trading the following week.

    Meanwhile, Alibaba has been doling out specific assignments to the handful of banks it has tapped to run the deal. Credit Suisse will oversee the friends and family program, formally known as a directed share program, the people said.

    Morgan Stanley, along with Credit Suisse, will be in charge of managing the so-called "lockup" agreement that dictates when pre-IPO shareholders will be able to sell once the stock starts trading, the people said.

    Goldman Sachs Group nabbed the plum role of so-called stabilisation agent, overseeing the stock's early trading.

    Alibaba has taken the unusual approach of appointing several banks--Credit Suisse, Deutsche, Goldman Sachs, JPMorgan Chase and Morgan Stanley--as co-equal leads of the deal, rather than designating one or two banks as clear leads among a group of senior banks. Twitter and Facebook took the more traditional approach in their IPOs, tapping Goldman Sachs and Morgan Stanley as lead banks, respectively. Citigroup also is working on the Alibaba deal.

    It is not yet clear what bearing banks' specific roles will have on the fees they reap. Alibaba has tried to keep the lead banks on equal footing, and it may choose not to portion out extra fees for the jobs, people familiar with the matter said.

    But the jobs do come with other potential benefits, such as prestige, trading commissions and a leg up on future business.

    The role handling lockups, for example, could lead to more work. "Lock ups" are standard agreements that prevent insiders such as executives, employees and early investors from selling stock for 180 days after the deal. Banks that oversee lockups are allowed to release those holders from the lockup before the term ends, which may give them an edge in working with them on secondary stock offerings.

    In the case of Alibaba, those sellers could include its two biggest current holders Yahoo and SoftBank, though both firms have said they plan to remain long-term investors in the company.

    Morgan Stanley also will serve as the so-called billing and delivery agent that handles payments by investors for the shares they agree to buy in the offering, the people said.

    Alibaba is planning on making about 5 per cent of its shares available in the friends-and-family program, people familiar with the matter said. The average placement in 2014 has been 4.7 per cent of a company's offering, according to Ipreo, a capital markets data and advisory firm. If Alibaba raises some $US20bn, that percentage would amount to around $US1bn set aside. GM's program was 5 per cent of its $US18bn offering.

    "Friends and family" IPO programs are seen by some companies as a way to broaden their shareholder base and reward key people. So far in 2014, 18 per cent of US IPOs have had them, the lowest share in a decade. In 2004, two-thirds of IPOs featured them.

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    Final documents for potential Chinese e-commerce float could be lodged within days.

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    Foreign Minister Julie Bishop has welcomed her Chinese counterpart to Sydney and says the two nations were "on track" to sign a free-trade agreement this year strengthening their relationship.

    Foreign Minister Wang Yi is in the country for the second annual Australia-China Foreign and Strategic Dialogue, which comes ahead of Chinese President Xi Jinping's visit to Brisbane for the G20 summit in November.

    "The Australia-China relationship is strong, it is mature, it is growing," Ms Bishop said at a media conference with Mr Wang on Sunday.

    "China is Australia's largest two-way trading partner. We are on track to sign a free-trade agreement with China later this year which will further strengthen this relationship."

    The trade talks began in 2005, but stalled last year over agriculture and China's insistence on removing investment limits for state-owned enterprises.

    Over the past year Australia has sealed free trade deals with Japan and South Korea.

    The bilateral talks follow Australia's push to forge closer ties with Japan, China's regional rival. Japan's Prime Minister Shinzo Abe made a historic visit to Canberra and Perth in July.

    Speaking through a translator, Mr Wang acknowledged that China "may not be Australia's closest friend at the moment, but we can surely become your most sincere friend".

    He added that Australia was a "key co-operation power" for China in the Asian region.

    "China welcomes and supports Australia to further understand Asia and to integrate into Asia," he said.

    "And of course, we would also like Australia to play an active role as a bridge and as a link between the East and the West."

    Ms Bishop said the bilateral talks came at a time of "great global challenge" and were an opportunity to discuss the movement of citizens from the two countries to Iraq and Syria to fight for violent jihadist groups such as the Islamic State.

    "The conflict in Syria and Iraq affects both our nations, for foreign fighters are leaving our shores to take part in the brutal and bloody conflict in the Middle East," she said.

    "Our meeting together affords us an opportunity to discuss ways that we together can combat terrorism and extremism such as we've seen with the emergence of ISIL," she said.

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    Julie Bishop says progress being made on trade agreement, likely to be sealed this year.

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    China's Ministry of Commerce has issued new rules relaxing bureaucratic procedures for Chinese companies making overseas investments, the official Xinhua news agency said on Sunday. 

    Under the new rules, which take effect on October 6, only investments in countries or regions and industries identified as "sensitive" will require the ministry's approval, Xinhua said. 

    Sensitive countries and regions include nations that do not have diplomatic ties with China and those that are subject to United Nations sanctions, the report said. 

    It did not specify which industries were considered sensitive, but said the ministry had to approve investments from industries governed by China's export control regime, and in "projects affecting more than one foreign country's interests." 

    Foreign investment projects in all other areas would only need to be registered with the ministry, which previously had to approve any foreign investment projects worth more than $US100 million, Xinhua said. 

    The new rules are China's latest move to make foreign investment easier for Chinese companies, which are increasingly looking to buy foreign companies with good technology, recognisable brands, or effective marketing networks. 

    China's National Development and Reform Commission, its top economic planning agency, also has the power to approve or veto foreign investments by Chinese companies, Xinhua said. 

    The NDRC issued new rules in April that require Chinese companies investing less than $US1 billion overseas to register their investment, rather than to seek the NDRC's approval as before. 

    Any overseas investment project larger than $US1bn still requires NDRC approval and projects worth more than $US2bn must be approved by the State Council, or cabinet, Xinhua said.

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    Investors have a host of questions about the initial public offering of Alibaba Group Holding Ltd., the Chinese e-commerce giant.

    Yet the company’s latest filing, released after the close of trading Friday, offers up a slew of new information.

    1. How many shares are they selling, at what price and how much are they raising?

    The Chinese e-retailer said it would sell 320.1 million shares within an expected range of $60 and $66. In that range, Alibaba could raise between $19.2 billion and $21.1 billion.  Including the extra shares set aside for underwriters, the amount raised could jump to $24.3 billion.

    The e-retailer would be the largest IPO ever of a U.S.-listed company, if underwriters exercise their full provision and the company ultimately prices within the listed range. Visa Inc. raised $19.65 billion in its 2008 IPO; General Motors Co.GM -0.14% raised $18.1 billion in 2010; and Facebook Inc.FB +1.72% raised $16 billion.

    Both the price and the number of shares offered to the market could change in the next two weeks. The final price in the IPOs of both Twitter TWTR +0.92% and Facebook exceeded the initial ranges the two companies provided.

    2. What’s the starting point for the market value of this company?

    At the midpoint of the listed range, Alibaba would be valued at $155 billion.

    3. Who is selling?  

    Alibaba’s founder Jack Ma is selling 12.75 million of the 206.1 million shares he owns. He currently owns 8.8% of Alibaba, and the portion he’s selling works out to 0.5% of the company. Based on the price range listed, the sliver of his stake that he’s selling could be valued between $765 million and $841.5 million.

    Joseph Tsai, Alibaba’s co-founder, owns 83.5 million shares, or 3.6% of the company. Mr. Tsai disclosed that he’ll sell 4.25 million of those shares, amounting to 0.2%.

    SoftBank, which owns 34.1% of the company, had previously said it had no plans to sell down its stake and stuck to that in the latest filing.

    Yahoo, which owns 523 million shares, or 22.4% of the company, will be selling 121 million shares, or 4.9% of the company. The amount they’re selling is valued between $7.26 billion and $7.99 billion.

    Other major holders include a unit of the China Investment Corp., cited in the filing as Fengmao Investment Corp., which is selling 14.2 million shares, or 0.6%. It had held a 2.8% stake. Private-equity firm Silver Lake owns 58.9 million shares, or 2.5%, and it plans to sell 4.1 million shares.

    4. Can friends and family buy into the deal before it starts trading? 

    Yes. Alibaba is planning to let employees and other people close to the Chinese e-commerce company buy some shares in its impending IPO. In the filing, the company said it will set aside up to 6% of its shares in a so-called friends-and-family plan.

    The plan lets employees and other chosen associates of Alibaba buy stock at its IPO price, a right that’s usually reserved mostly for mutual funds and other institutional investors. The plan gives the friends and family participants a chance to participate in a possible first-day stock pop–or suffer if the stock falls.

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    China's top broadcasting regulator said it must approve all foreign television shows before they are posted on popular Chinese video-streaming sites and that sites must pull unapproved content by early next year.

    In a statement on the official website of State Administration of Press, Publication, Radio, Film and Television on Friday, the regulator said TV show distributors had to get approval for their content before offering it in China. It also told local online video-streaming sites to register all foreign-TV content they offer with officials by the end of March. Unregistered foreign-TV content will be forbidden after that.

    The statement, which cited Beijing's intention to promote Chinese culture, also said video companies should import only TV shows that are "healthy and upbeat in content and style."

    The agency didn't respond to requests for further comment.

    People familiar with the industry said regulators met Friday with executives at major video sites to discuss details of the new regulation.

    Chinese video-streaming companies played down the new requirement. "We don't see material impact on our traffic or revenue in the near term," said a spokesman for Youku Tudou Inc., which operates one of China's most popular video-streaming services. "The new regulations won't take effect until 2015, which allows us time to adjust and comply."

    "The strengthened regulation is a good thing for the industry," said a spokeswoman with iQiyi, a video arm of Chinese Internet search giant Baidu Inc. "We would firmly abide by the policy."

    The Wall Street Journal reported this week that the Chinese government would set limits on foreign content that Chinese online video-streaming services can offer to 30%.

    The move comes as Chinese leaders try to tighten regulation of information circulating via chat apps and on Internet sites. China also is seeking to build its own culture of television, movies and animation to counter what it sees as the soft-power influence of the U.S.

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    New regulation to go into effect at end of March 2015.

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    China is easing rules to allow some listed property developers to raise funds in the interbank market, the latest move in a calculated effort to speed up consolidation in the country's fragmented housing market.

    China's financial regulators are allowing "well-known, well-established, highly regarded real-estate companies" to issue mid-term notes in the interbank market with fewer restrictions, said two people with knowledge of the matter. Previously, only a small number of property developers, including Shanghai Lujiazui Finance & Trade Zone Development Co. and Shanghai Shimao Co. have been able to issue mid-term notes in the interbank market.

    The interbank market, China's major bond market, is where the central government, banks and large enterprises borrow to meet their daily needs, and it offers a relatively cheap and more reliable source of funds than direct loans from banks.

    One of the people said the National Association of Financial Market Institutional Investors, which regulates China's interbank bond market, is ready to take applications from the property firms, but no potential bond issuer has moved forward so far. The association didn't return calls for comment.

    The biggest developers are the only ones likely to benefit from this credit loosening. China has over 85,000 property developers, and the authorities have been trying to streamline the numbers as part of their economic reforms to make the economy less reliant on property investment for growth. Lenders have also refrained from offering loans or favorable terms to smaller developers. That puts larger developers in a position to snap up smaller ones as they run into difficulties.

    "For small developers it might actually have little or few effects initially because the regulation states that it will apply only to a select few," said one of people.

    Property developers in China have faced a tighter credit environment since 2010. But this year has been more difficult for them because of declining sales and falling prices as firms grapple with a glut of apartments in many cities outside Beijing and Shanghai. Most developers said in their recent first-half earnings report that their leverage ratios are higher and that profit margins have narrowed as a result.

    The guidelines for the relaxation of the credit rules have yet to be finalized. But it will likely reduce the cost of raising capital for the beneficiaries, said Liu Dongliang, an analyst at China Merchants Bank. Interbank loans could be more appealing than more informal sources within China's shadow-banking sector, where many property companies turned after bank loans and more visible sources of lending cleared up. That has spurred worries about hidden time bombs in China's financial system.

    Reuters reported that China is relaxing financing rules for listed property firms to sell medium-term notes in the interbank market Wednesday.

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    Part of efforts to consolidate housing market.

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    China is kicking off a potentially significant experiment in ­injecting some entrepreneurial juice into its state-owned firms.

    State-owned China Petroleum & Chemical Corporation, known as Sinopec, has started the process of vetting would-be investors in a new unit that operates more than 30,000 petrol stations and 23,000 convenience stores in some of the richest areas of the country.

    Some 37 companies and consortia — including Chinese internet power Tencent Holdings — have expressed interest, according to insiders. Sinopec is selling as much as a 30 per cent stake in the unit, Sinopec Sales, which is ­valued by the company at $US56 billion ($60bn).

    Some of the potential investors, such as Tencent, are also signing up for business partnerships with the unit, according to an announcement by Sinopec. Those partners will get priority consideration for investment spots, Sinopec’s chairman, Fu Chengyu, told the WSJ.

    The Chinese e-commerce unit of Wal-Mart Stores has also signed a partnership agreement, according to Sinopec, although it is unclear whether the unit is also interested in investing. A spokeswoman for Wal-Mart’s China e-commerce unit, Yhd.com, confirmed the partnership with Sinopec Sales but didn’t respond to requests for further comment.

    In an unusual move, a few top investors will also be offered board seats at the unit, Mr Fu said.

    “The reaction from the capital market and potential investors is better than expected,” Mr Fu said. “Outside investors will be offered board seats, since this can help accelerate reform” of Sinopec Sales.

    The final roster of investors will be decided by the end of the month, Mr Fu said.

    At stake is more than a share in a sizeable gas-station chain — although that is a juicy enough: the operations included in Sinopec Sales account for just over half of the oil company’s 2.9 trillion yuan in revenue. Sinopec controls most of the gas stations in the relatively affluent eastern and southern ­regions of China. The associated convenience-store network is the biggest in the country, with a footprint 12 times as large as 7-Eleven’s, according to brokerage firm Bernstein Research.

    The offering of a stake in Sinopec Sales to private businesses is also a small but potentially significant step in the country’s attempt to shake up its sprawling state-owned enterprises, which employ millions of workers and control vital segments of the economy but operate so inefficiently that many economists warn they are dragging down growth.

    Chinese leaders called for an overhaul of the SOEs in the ­Communist party’s blueprint for economic change, released in ­November. In July, the government said it had chosen six SOEs for pilot programs that would ­introduce more private investors and improve management.

    In Sinopec Sales’ case, the offer of an undisclosed number of board seats to private investors — potentially giving them a say in the running of the company — is a particularly interesting step. SOEs have long had outside ­directors, including some foreigners. But significant investors have rarely been awarded directorships, as is common in the West.

    Sinopec has said it is hoping the new investment will help revitalise its gas-station business, where convenience stores bring in far less income than is common in the West.

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    Sinopec intends to sell up to a 30 per cent stake in new gasoline, convenience-store unit.

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    The Dalai Lama has told a German newspaper that he should be the last Tibetan spiritual leader, ending a centuries-old religious tradition from his Himalayan homeland.

    His comments to the Welt am Sonntag newspaper echo his previous statement that "the institution of the Dalai Lama has served its purpose", but were even more explicit.

    "We had a Dalai Lama for almost five centuries. The 14th Dalai Lama now is very popular. Let us then finish with a popular Dalai Lama," he said.

    "If a weak Dalai Lama comes along, then it will just disgrace the Dalai Lama," he added with a laugh, according to a transcript of the English language interview.

    He also said: "Tibetan Buddhism is not dependent on one individual. We have a very good organisational structure with highly trained monks and scholars."

    China has governed Tibet since 1951, a year after invading, and the Dalai Lama fled across the Himalayas to India after a failed 1959 uprising against Chinese rule.

    The Nobel Peace Prize winner in 2011 retired from political duties and has upgraded the role of prime minister of the Tibetan exile community.

    But he is still the most powerful rallying point for Tibetans, both in exile and in their homeland, and remains the universally recognised face of the movement.

    Asked by the German newspaper how much longer he may carry on his advocacy duties, the 79-year-old said: "The doctors say I could become 100 years old. But in my dreams I will die at the age of 113 years.

    "I hope and pray that I may return to this world as long as sentient beings' suffering remains. I mean not in the same body, but with the same spirit and the same soul."

    On the question of whether he may ever be able to return to Tibet, he said: "Yes, I am sure of that. China can no longer isolate itself, it must follow the global trend towards a democratic society."

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    China’s monthly trade surplus rose to $US49.83 billion in August, its highest amount on record, official data showed Monday.

    The nation's trade surplus surged 77.8 per cent in August, as exports rose while imports showed a surprise decline.

    Bloomberg analysts had forecast a median trade surplus of $US40bn for the month.

    The surplus bested the previous all-time high of $US47.3bn recorded last month.

    Exports increased 9.4 per cent year-on-year to $US208.5bn, the General Administration of Customs announced on Monday, while imports fell 2.4 per cent to $US158.6bn.

    Export growth slowed from July's gain of 14.5 per cent, but beat the median expectation of a gain of 9.2 per cent.

    Imports, which had declined 1.6 per cent in July, worsened further in August and failed to match the median forecast of a 2.7 per cent increase.

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    China’s monthly trade surplus rose to $US49.83 billion in August, its highest amount on record, official data showed Monday.

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    When Australian politicians talk about China, it is either about the $150 billion-plus a year trade relationship or the potential threat of China as the country adopts a more assertive foreign policy. The quality of discussion is rather primitive here when compared with the ongoing debate in places such as the US.

    It is impossible to talk about China or understand it without a real appreciation of the country’s history and especially its turbulent modern history. When Australian politicians talk about China’s recent past, it often turns into mini-disasters.

    Prime Minister Tony Abbott’s remarks about the “skills and honour” of Japanese soldiers during the World War II stirred up deep emotions in China, which suffered the most from the brutal Japanese invasion. Mandarin-speaking Kevin Rudd’s lecture on Tibet also went down badly.

    However, there is one senior politician in Australia who thinks deeply and talks intelligently about China and shows a firm grasp of the country’s modern history. His name is Malcolm Turnbull.

    The depth of Turnbull’s insights and knowledge was on full display last Friday at the Australia China Business Forum. He delivered the keynote speech titled “More than a mine, more than a market -- history, empathy, economics in the China relationship.” 

    Turnbull reminded the audience that China was a vital ally of the West during World War II and he went as far as to argue that China saved the day for Australia. “Had China been defeated and become a collaborating puppet state, like Vichy, France, not only would Japan have been able to fling vastly greater resources into the war against Australia, but it would have been able to invade Siberia in 1942, as Hitler asked,” he says.

    “We may not have succeeded in resisting Japanese aggression without the tenacious heroism of our Chinese ally. “The central role of China as our ally in the Second World War is barely remembered in Australia today. But it will never be forgotten in China.”

    Turnbull’s speech is not starry-eyed historical revisionism. The central tenet of his argument is supported by the latest historical scholarship. One of Britain’s most prominent China historians Rana Mitter, a professor of history at Oxford, just published a book called Forgotten Ally: China’s World War II, 1937-1945.

    Just imagine for a moment, if Abbott had delivered Turnbull’s speech in Beijing during his recent visit. It would have been a diplomatic triumph for Australia; how could the Chinese not appreciate a Western leader’s empathetic understanding of the country’s darkest chapter?

    Turnbull’s empathetic understanding of China is influenced by Henry Kissinger’s masterpiece On China. The former US secretary of state, who played a vital role in re-establishing a diplomatic relationship with Beijing, believes China is so focused on maintaining economic growth that it has no desire to impose its system of government on the rest of world.

    “And as Kissinger has also pointed out, unlike the USSR or even the US, China does not seek to persuade other countries to adopt its values, let alone its system of government,” he said at Asialink in Melbourne in 2011.

    He also argued that China’s status as the world’s most important trading nation also supported his thesis that the rise of China would be largely peaceful. In 2010, China’s trade was 55 per cent of its GDP and comparable to the UK in the 1870s, when the British Empire was at the zenith of its power.

    “Given the importance of stable economy in the regime’s legitimacy, China rulers themselves have more to lose than almost anyone from conflict that disrupts global economic flows,” he says.

    A few things have changed since Turnbull delivered his 2011 Asialink speech. Beijing has become more aggressive in asserting its territorial claims against its neighbouring countries, which has alarmed many countries in the region including Australia.

    Turnbull cautioned that escalating disputes between China and other Asian countries could trigger a war, drawing in the US with unpredictable consequences. The cabinet minister, who believes in the peaceful rise of China, sees Beijing’s more assertive policy stance as counterproductive.

    “The counterproductive consequences have been to drive China’s neighbours not only into increasing their defence but into closer alliance with the United States,” he warns. “China’s better strategy would be one that builds trust with its neighbours and settles disputes pragmatically, as it did with Russia in 2004.”

    Regardless what people may think of Turnbull’s assessment of the rise of China, his empathetic understanding of China’s recent humiliating history is something that is lacking among Australia’s senior political leaders. China’s national narrative has been defined by its recent memories. Understanding that is the key to understand Beijing’s intention.

    Perhaps our political leaders need to read Kissinger’s On China, a grandmaster’s guide on modern China.  

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  • 09/07/14--20:31: The folly of fearing SOEs
  • Lowy Interpreter

    Mike Callaghan is spot-on in arguing that Australia's foreign investment policy needs a wider reassessment than simply looking at limits on state-owned enterprises (SOEs). Let's try to take this a bit further.

    This fixation with SOEs is a peculiarly American priority seen also in the Trans-Pacific Partnership conditionality and the debate on sovereign wealth funds, and reflects a touching faith in the magic of the free market. Private sector players, pursuing their own interests, are assumed to also pursue the national interest, while SOEs may not.

    Of course the market is a powerful operational framework for a successful economy, but successful economies have often found an important place for government-owned enterprises as well. At the same time, there is ample evidence that private companies without appropriate regulation will not always pursue the national interest. This is not an issue to be determined on doctrinal grounds: we need to examine the behaviour of both private companies and SOEs.

    Here's an example. As a major commodity producer with an 80 per cent foreign-owned mining sector, Australia's national interest is to ensure that our minerals exporters get the best price in global markets and that we squeeze as much out of the miners as is sensible in the form of royalties and taxes. Our concerns should be to prevent transfer pricing, tax shifting, monopolistic price-setting or collusion between the demand and supply sides of the market. With these issues satisfied, there is no good economic reason to discriminate between domestic and foreign companies, or between private companies and SOEs. Our concern should be that the market is working well. For this, the national authorities need to have enough information about the operational market structure to ensure that our national interests are met.

    We've just seen an example which illustrates how far we are from where we should be. Last year Glencore (a commodity producer and trader with sales of $250 billion) took over Xstrata, our largest coal miner (and itself already foreign owned). The transaction was so large (the fifth-largest in the global history of gigantic resource take-overs) and important for world commodity trade that it needed to pass the scrutiny of competition authorities inSouth Africa and China. The Europeans required Glencore to unwind its relationship with a zinc company and the Chinese required divestiture of its Peruvian copper assets (giving China the opportunity to acquire these assets).

    Australia didn't require anything.

    It's hard to find any record that the Foreign Investment Review Board gave this matter substantive scrutiny, while the Australian Competition and Consumer Commission saw no problems within its remit. This is despite Glencore's reputation as an aggressive tax minimiser, its reputation for underhand dealings, its lack of transparency reflecting its Swiss domicile and its dominant position in segments of global commodity trade. Glencore itself says the transaction will allow it to 'capture value at every stage of the supply chain from sourcing raw materials deep underground to delivering products to an international customer base'. 

    What to do? For a start, why not require foreign investors (whether Swiss-based Glencore or Chinese SOEs) to provide the same degree of detailed public transparency required of Australian-domicile companies? This would give Australian authorities a starting point in assessing whether we are getting the best deal out of foreign investment.

    Of course there are bigger issues as well. Why do the BCA and the OECD start with a strong presumption that the flow of FDI should be maximised, when there are alternative sources of funding for the current account deficit (debt or portfolio flows) which might be cheaper or more suitable?

    In any case, foreign investment policy goes beyond economics. There are, for instance, no good economic reasons for limiting investment in real estate or agriculture, but many countries (including Australia) do so. When it comes to political issues, the overwhelmingly important one for Australia is that we are small and many of the investing countries are big. If Chinese companies (private or SOE) chose to make Australia an important part of their commodity security priorities, they will want to own a large proportion of our resources and agriculture. Politically, we will find this uncomfortable, perhaps even unacceptable.

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

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    Graph for Australia's strange fixation with state-owned enterprises

    Lowy Interpreter

    Mike Callaghan is spot-on in arguing that Australia's foreign investment policy needs a wider reassessment than simply looking at limits on state-owned enterprises. Let's try to take this a bit further.

    This fixation with SOEs is a peculiarly American priority, seen also in the Trans-Pacific Partnership conditionality and the debate on sovereign wealth funds, and reflects a touching faith in the magic of the free market. Private sector players, pursuing their own interests, are assumed to also pursue the national interest, while SOEs may not.

    Of course the market is a powerful operational framework for a successful economy, but successful economies have often found an important place for government-owned enterprises as well.

    At the same time, there is ample evidence that private companies without appropriate regulation will not always pursue the national interest. This is not an issue to be determined on doctrinal grounds; we need to examine the behaviour of both private companies and state-owned enterprises.

    Here's an example. As a major commodity producer with an 80 per cent foreign-owned mining sector, Australia's national interest is to ensure that our minerals exporters get the best price in global markets and that we squeeze as much out of the miners as is sensible in the form of royalties and taxes. Our concerns should be to prevent transfer pricing, tax shifting, monopolistic price-setting or collusion between the demand and supply sides of the market.

    With these issues satisfied, there is no good economic reason to discriminate between domestic and foreign companies, or between private companies and SOEs. Our concern should be that the market is working well. For this, the national authorities need to have enough information about the operational market structure to ensure that our national interests are met.

    We've just seen an example which illustrates how far we are from where we should be.

    Last year Glencore (a commodity producer and trader with sales of $250 billion) took over Xstrata, our largest coal miner (and itself already foreign-owned). The transaction was so large (the fifth-largest in the global history of gigantic resource take-overs) and important for world commodity trade that it needed to pass the scrutiny of competition authorities in South Africa and China. The Europeans required Glencore to unwind its relationship with a zinc company and the Chinese required divestiture of its Peruvian copper assets (giving China the opportunity to acquire these assets).

    Australia didn't require anything.

    It's hard to find any record that the Foreign Investment Review Board gave this matter substantive scrutiny, while the Australian Competition and Consumer Commission saw no problems within its remit. This is despite Glencore's reputation as an aggressive tax minimiser, its reputation for underhand dealings, its lack of transparency reflecting its Swiss domicile and its dominant position in segments of global commodity trade. Glencore itself says the transaction will allow it to "capture value at every stage of the supply chain from sourcing raw materials deep underground to delivering products to an international customer base".

    What to do?

    For a start, why not require foreign investors (whether Swiss-based Glencore or Chinese SOEs) to provide the same degree of detailed public transparency required of Australian-domicile companies? This would give Australian authorities a starting point in assessing whether we are getting the best deal out of foreign investment.

    Of course there are bigger issues as well. Why do the BCA and the OECD start with a strong presumption that the flow of FDI should be maximised, when there are alternative sources of funding for the current account deficit (debt or portfolio flows), which might be cheaper or more suitable?

    In any case, foreign investment policy goes beyond economics. There are, for instance, no good economic reasons for limiting investment in real estate or agriculture, but many countries (including Australia) do so. When it comes to political issues, the overwhelmingly important one for Australia is that we are small and many of the investing countries are big. If Chinese companies (private or SOE) chose to make Australia an important part of their commodity security priorities, they will want to own a large proportion of our resources and agriculture. Politically, we will find this uncomfortable, perhaps even unacceptable.

    This article was originally published at Lowy Interpreter. Reproduced with permission. 

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