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Tencent to increase China south city stake

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Chinese Internet giant Tencent Holdings plans to pay an additional 822.5 million Hong Kong dollars (US$106.1 million) to raise its stake in a Chinese e-commerce and logistics firm to 11.55 per cent.

The firm, China South City Holdings, said in a statement late Tuesday that Tencent would exercise an option on or before Sept. 30 to purchase 244.8 million additional shares of the company for HK$3.36 a share. Tencent bought a 9.9 per cent stake in China South City in January for about HK$1.5 billion.

Since January, China South City, which owns one of the largest industrial-materials complexes in southern China, said it has cooperated with Tencent in integrating its online and offline businesses. The companies signed a preliminary agreement in June to promote China South City's online services on Tencent's popular mobile instant-messaging service, WeChat. The service, known as Weixin in China, had 438 million monthly active users as of the second quarter and is by far China's largest mobile-messaging provider.

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Company is exercising option to buy 244.8 million additional shares.

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Chinese consumer sentiment hits 3-year low

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Chinese consumer sentiment fell for the second month in a row in September to its lowest point since 2011, as the jobs market worsens amid personal finance and housing nerves, according to a Westpac-MNI survey.

The index fell 0.1 per cent in the month to 113.2 points, meaning it has fallen 7 per cent since January. 

It's the lowest the index has been since the fourth quarter of 2011. 

Concerns over current and expected personal finances, which fell slightly from already low levels, are blamed for this month's fall. 

Labour market worries added to the downgrade in sentiment, as the employment outlook indicator fell for the fourth consecutive month to its lowest point since February 2009.

Less respondents believed it was a good time to buy into the Chinese property market, and those who thought it was a bad time to buy implied that housing market stability will require an overall improvement in the labour market.

Chief economist of MNI Indicators, Philip Uglow, said the results from the index "raises questions about whether the authorities’ efforts to support the economy since the spring will be sufficient to keep growth in line with the 7.5% target this year".

Westpac’s senior international economist, Huw McKay, said it would be most unwise for the Chinese authorities to return to a neutral policy posture.

"Selective monetary and fiscal easing ought to continue, in addition to a further loosening of housing controls at the local level," said Mr McKay

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Consumer sentiment lowest since 2011, dragged by labour market nerves: Westpac-MNI

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Samsung launches Note 4 'phablet'

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South Korea's Samsung is launching the latest version of its oversized Galaxy Note smartphone earlier than expected after US rival Apple reported record sales of its latest iPhone 6.

Samsung said on Wednesday the Galaxy Note 4 - initially scheduled for launch in October - would hit stores in South Korea and China this week before being sold in 140 nations by the end of next month.

It would be the first time a flagship Samsung product has gone on sale in China ahead of other markets, reflecting the firm's desire to battle growing competition from cheaper Chinese-made rivals.

The decision to bring forward the launch date also came after rival Apple reported a record opening weekend for its latest range of iPhones, including the iPhone 6 Plus - the US firm's first foray into the big-screen market.

Sales topped 10 million in just three days following Friday's launch in the United States, Britain, Australia, Canada, France, Germany, Hong Kong, Japan, Puerto Rico and Singapore.

The new iPhone is not yet available in China.

Samsung initially pioneered the market for the "phablet" devices - sized between a smartphone and a tablet computer - when it introduced its Galaxy Note series in 2011.

Along with the Galaxy S smartphones, they helped the South Korean electronics giant dethrone Apple as the world's top maker of smartphones.

But Samsung has faced a growing challenge in an increasingly saturated market, where competition from cheaper Chinese handset makers has intensified in recent years.

The company in July reported a 20-per cent drop in its net profit for the second quarter, and its shares are currently trading at a two-year low.

"We are temporarily going through a difficult business situation," Lee Don-Joo, head of sales and marketing for Samsung's mobile unit, told reporters at Wednesday's launch in Seoul.

"But ... we hope that we would be able to recover soon based on our fundamental capability for technical innovation," Lee said.

Sales of Galaxy Note 3 topped 10 million in two months after its launch in 2013, and Lee predicted the Note 4 would outperform that.

The 5.7-inch Note 4 comes with S-pen stylus allowing users to draw and write on the screen and perform various tasks simultaneously.

The presence of a stylus pen - not offered by iPhone 6 - offers a "unique input methodology," said Lee Young-Hee, executive vice president of Samsung's mobile unit.

"No other phablets offered by rival companies offer such an intuitive experience," Lee said.

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Earlier than expected launch will be first time a flagship Samsung product has gone on sale in China ahead of other markets.

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PBOC head may be forced out

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China's long-serving central banker Zhou Xiaochuan -- the face of the Chinese economy to markets globally -- may be pushed out before the end of the year. 

Chinese leader Xi Jinping is considering replacing Mr Zhou, say party officials, as part of a wider personnel reshuffle that also comes after internal battles over economic reforms. 

The discussions occur as Mr Xi, now two years in office, tries to place more allies into top positions in the government, military and Communist Party, according to the officials with knowledge of the plans. The personnel shifts are expected around a major party conclave to be held next month, the officials said, while cautioning that no final decision about Mr Zhou has been made. 

The top contender to succeed Mr Zhou at the People's Bank of China is Guo Shuqing, a former banker and top securities regulator who is currently governor of Shandong, a prosperous eastern province, the officials said. 

Within the central bank, word of Mr Zhou's coming retirement has been water-cooler talk for weeks, according to PBOC officials and advisers. They were especially surprised when Mr Guo unexpectedly and unusually attended a monthly meeting convened by the secretariat of the central bank's monetary policy committee on September 16, according to the PBOC officials and advisers. 

President Xi named Mr Zhou to a third term in March 2013, despite Mr Zhou having passed the retirement age of 65 for senior Chinese officials. Over the past few months, Mr Zhou has continued to press for market reforms, including liberalising interest rates. The Chinese leadership, meanwhile, has become concerned that reforms now will add another burden on an economy that is struggling to meet the government's target of 7.5 per cent annual growth. 

Removing Mr Zhou "could suggest a subtle shift in the balance of power between reformist and reactionary forces, with the momentum for reforms being eroded by the loss of growth momentum in the economy," Eswar Prasad, a Cornell University China expert, said. 

One reason to retain Mr Zhou is fear of the market reaction to his departure, say the party officials. Mr Zhou is perhaps China's best-known economic official. He represents China at meetings of the International Monetary Fund and Group of 20 and plays tennis with central bankers and senior economic officials. He and Lawrence Summers, US President Barack Obama's then chief economic adviser, once jokingly bet when they played doubles against each other that the winner of the match would set the US-Chinese foreign exchange rate. (Mr Summers lost and asked for a rematch.) 

Removing Mr Zhou could add to uncertainty about the direction of China's economic policy making and the strength of the leadership's commitment to reform, said the party officials, at a time of when many other parts of the global economy are sputtering. 

Messrs Zhou and Guo couldn't be reached for comment. In a statement to The Wall Street Journal, the PBOC said that Mr Zhou wouldn't be stepping down soon. The Communist Party's Organization Department, which controls personnel decisions for key government posts, declined to comment. 

Should Mr Zhou be replaced, his departure would be portrayed as a matter of his age, said the party officials, although only 18 months have passed since his latest reappointment. He is now 66 years old. 

But there are larger policy issues involved. 

Mr Zhou kept pressure on leaders to stick with reform even if it diminished the growth rate. While the government and party in principle backed the idea of letting bank deposit rates float freely, for instance, Mr Zhou tried to nail down a date for lifting government controls, a move he has said is critical in forcing banks to compete and allocate credit more efficiently. In March 2014, he said the goal could be accomplished in two years, and on July 10 reiterated that goal. 

That was out of tune with top leaders. Two weeks later, the State Council, the government's top decision-making body, said the reform would be carried out in an "orderly" way -- usually code words for moving slowly. 

Top party leaders are also considering splitting the roles of PBOC governor and party chief after Mr Zhou retires, the officials said. Currently, Mr Zhou has both jobs. Leaders considered such a plan in late 2012, with Mr Zhou remaining as PBOC chief and someone else taking the party job, but they viewed the idea as unworkable because it could be seen as a demotion for Mr Zhou. In China, party officials generally outrank government officials in an organization. 

Still, splitting the PBOC job could lead to confusion about who runs the institution. In China, the central bank -- known locally as "yang ma," or "Big Mama" -- isn't independent. For major decisions, it needs approval from the State Council, and sometimes the ruling seven-member Politburo Standing Committee, the inner sanctum of party power. 

Early in his most recent term, Mr Zhou accumulated greater influence than he had under Mr Xi's predecessors. Mr Zhou allies were given prominent roles in Mr Xi's economic policy making bodies, and Mr Zhou's ideas of freeing up interest rates and cross-border capital flows were reflected in party and government policy documents. 

But as the Chinese economy continued to lose momentum this year, the PBOC came under increasing pressure to help spur the economy by providing credit -- or ordering banks to do so. 

So far, the central bank has been aiming its stimulus narrowly, to avoid a broad-based lending spree such as the one that propped up growth following the 2008 global financial crisis but also saddled the economy with debt and bad loans. Other government agencies, though, are calling for across-the-board cuts in interest rates. 

"Everybody seems to be interested in talking about reform, but they really fear what they are professing to love," Zhang Xiaohui, head of the PBOC's monetary-policy department, said in a May 2014 meeting, according to a transcript of her remarks viewed by the Journal

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China's leading central banker could be replaced as Xi Jinping seeks more allies in key roles.

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Putting China's economic reforms into perspective

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It is easy to get pessimistic about China these days. The economy is faltering after three decades of breakneck growth and some commentators are even questioning whether the much-lauded Chinese economic miracle is, in fact, a mirage.

People are seriously questioning Beijing’s resolve to implement its comprehensive economic reform package announced at the end of last year. It is easy to get caught up in the pessimistic mood and China Spectator shares some of the gloominess. 

But it is also important to put things into historical perspective. At a time when China has reached yet another crossroad in its future development, it is necessary to look at the country’s recent history of economic development to get a sense of how far China has come in its long march to prosperity.

1978 should be a good starting point. At the time, China had only one bank and no insurance company. Savings from state-owned enterprises and governments accounted for 83.8 per cent of the total. The average income for urban residents increased 4 yuan annually between 1958 and 1978 and for farmers, it was only 2.6 yuan.

A report from a Japanese business journalist illustrates how backward China was at the time. When he was visiting a steel mill in Chongqing, he was astonished to discover a British-made steam-operated steel presser from 140 years ago. He couldn’t believe it -- and the mill manager told him it was true.

This little episode is from Wu Xiaobo’s masterpiece Thirty Years of China Business, which captures the turbulent history of China’s modern business history. 

Wu, China’s most formidable business writer, also told us a story of how Liu Chuanzhi, the founder of Lenovo (the world’s largest computer maker by unit sales) got excited about reading an article on how to raise pigs on the notoriously political People’s Daily.

Liu, who was a 34-year-old researcher at the Chinese Academy of Sciences at the time, regarded that as a sign that things were about to change course after years of Maoist political madness.

Indeed, there were many momentous changes in 1978.

Eighteen peasants from a small, poverty-stricken village in Anhui signed a contract to divide up communal land between them, a move that potentially carried the death penalty. But it signalled the beginning of the end of Mao’s mad experiment of the People’s Commune, which killed millions from starvation.

The daring move was soon introduced across the country and unleashed the biggest increase in farm productivity since the Chinese communist party took power in 1949. The end of the disastrous People’s Commune system of collective land ownership is arguably one of the most important economic events in 20th century China.

The original contract signed with blood from 18 peasants is now enshrined in China’s national museum.

Another groundbreaking change was the re-opening of the country’s higher education system. When Mao was still in power, the country sank into an abyss of permanent class struggle against intellectuals and scholars. Universities were closed down; a whole generation of Chinese was lost to political slogans and Mao’s red books.

But in 1978, five million aspirants sat for university admission exams and 400,000 of them were offered places. Those people would become the backbone of China’s economic miracle for years to come, including some of the country’s best known businesspeople.

Before 1978, Beijing treated foreign capitals like the bubonic plague, but once it decided to throw open its doors to foreign investors, it courted capitalists from arch-enemies like the United States and Japan.

Li Ka-shing, the richest and most powerful tycoon from Hong Kong, was even invited to appear at the Tiananmen gate alongside Chinese party elders during 1978’s national day celebration.

Deng Xiaoping, who is widely regarded as the modern architect of the country’s reform, courted the Japanese, who he fought against in the 1930s and ‘40s to invest in China. Japanese companies like Panasonic started to invest in China that year. During the same year, Coco-Cola also sold its first batch of drinks in red China.

These seemingly innocuous changes were hugely controversial at the time. Party ideologues resisted the tide of change but the momentum for reform carried the day.

This article is not to indulge in historical nostalgia but to highlight how far China has come from its utter isolation and deprivation three decades ago. A lot of contemporary commentary around China is often highly critical of the slow progress in China’s reform pace, which is a fair assessment.

But at the same time, some commentators fail to acknowledge the tremendous changes that have taken place, such as the end of collective farming; the emergence and subsequent flourishing of private entrepreneurship; the partial death of the planned economy; and perhaps most importantly, the end of the suicidal focus on political struggle instead of economic development.

China’s economic miracle is real and it is a product of the country’s bustling entrepreneurial spirit. Nicholas Lardy, one of the best China economists and a senior fellow from the Peterson Institute for International Economics, argues in his new book Markets over Mao: the rise of private business in China, that the widely held view that the state-owned sector dominates China’s economy is false.

In fact, he says, SOEs appear to be a relative small portion of the Chinese economy. They account for between one third and one quarter of GDP. In many sectors, private enterprises have largely replaced state-owned companies.

We have to give credit to China’s past reform measures. There is a little doubt the country is going through a difficult period of adjustment. But the country’s entrepreneurial energy will eventually prevail and the rise of world-class Chinese tech companies like Alibaba offers us a ray of hope. 

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China's stuttering economy has led many to question its commitment to reform. But while there will be challenges ahead, history shows the country has come a long way.

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China’s war on pollution could leave Aussie coal out in the cold

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China’s recent move to limit imports of the dirtiest coal from 2015 onwards is a scary prospect for Australian miners.

The proposed restrictions will ban the burning of coal with high levels of ash or sulphur in areas around major cities, as the Beijing government battles its pollution crisis. Analysts say that as much as half of the thermal coal currently shipped from Australia to China could run afoul of the new measures.

The exact effects on Australia’s coal export market are hard to predict, and will doubtless vary between different companies and coalmining regions. But what is clear is that unless it can find some new customers, the sector is likely to find itself in trouble.

Aussie Coal

Australia is the world’s fourth-largest coal nation, with a A$16.9 billion industry that produces 401 million tonnes a year– almost 8.9% of the world total.

Industry groups have claimed that coal mining contributes some A$60 billion a year to Australia’s economy – roughly the same as the iron ore and agricultural sectors – while supplying A$3 billion in total yearly royalties to the Queensland, New South Wales and Victorian state governments.

Like other resource exports, Australia’s thermal coal sales – worth A$16 billion worldwide according to the Bureau of Resource and Energy Economics– are at the mercy of the world market.

The Australian coal industry is already reeling after two years dogged by job losses, increased costs and rapidly eroding profitability. Nearly 10,000 coal workers lost their jobs in 2013, and more lay-offs are expected in the future.

Prices tumbling

With coal prices already falling, Australian exporters could also face the extra prospect of having to “wash” their product to bring ash and sulphur within China’s new guidelines – which will add costs and damage profit margins. The potential extra cost has been estimated at anywhere between A$1 and A$27 per tonne.

Since 2004 there has been a continuous slowdown in mining sector productivity (the output relative to capital and/or labour input), mainly because both labour and capital costs have been consistently above the global average.

Yet despite these productivity issues, and the growing worldwide expectation that coal mining and coal-fired power generation should meet higher environmental standards, the Australian coal sector is focusing on increasing its production. Recently, despite contention about the environmental impacts, federal environment minister Greg Hunt and the Queensland government approved the Carmichael coalmine in the Galilee Basin.

One of the largest coal projects in the world, the new mine will cover 200 square km and add up to 60 million tonnes annually to Australia’s existing coal production. In an increasingly competitive market, Australia will need to find more buyers for its new coal supplies.

New customers needed

Indonesia already competes with Australia to export to China, and it is anticipated that the United States will increase its coal exports from the Powder River Basin in Wyoming and Montana over the next few years. Meanwhile, other emerging producers including Mongolia and Mozambique are expected to create significant competitive pressure in the world’s coal export market.

At the same time, many Asian economies are increasing their electricity generation capacity – some of it through renewable energy, but significant amounts through fossil fuels – which may open new avenues for Australian coal exports.

China has recently shown interest in investing in coal-fired power plants in Pakistan, and Pakistani power minister Khawaja Muhammad Asif said earlier this month that one of the sources of coal could be Australia.

What will China's new rules mean?

It is not yet clear how much Australia’s coal industry stands to lose from China’s new rules. The costs of processing it to the required standard are not clear, particularly because much of Australia’s coal is well above the Chinese requirements anyway.

But the move nevertheless represents another new problem for a sector that is facing many other challenges, including deterioration in terms of trade (the ratio of export prices to import prices), low coal prices, exchange rate appreciation, declining productivity, and the emergence of overseas rivals with lower production costs.

That is why Australia’s coal sector is now focusing on ramping up production, to try and gain a competitive advantage over emerging Asian and African miners and capture a greater market share for sustained export earnings.

The climate challenge

The other major challenge facing Australian coal, highlighted by this week’s UN Climate Summit in New York, is fact that much of the world is aiming to wean itself off it.

China’s thermal coal use is forecast to peak in just two years, and UN climate chief Christiana Figueres has advocated the replacement of fossil fuels with alternative energy sources.

China’s investment in up to 200 gigawatts of wind energy is just one sign that it is aiming to reduce its dependence on coal. There is a growing sense that China is getting serious about cutting its greenhouse emissions.

China’s new coal regulations are a warning to Australian miners that they won’t survive either without exploring other export markets besides their traditional customers, China and Japan.

And if Australia wants to remain an energy exporter far into the future, it should focus on exploiting its admirable technological abilities to develop renewable energy products that could diversify its exports still further.

The author acknowledges comments on this piece from Dr Jo-Anne Everingham and Professor Saleem Ali at the University of Queensland.

The Conversation

Shabbir Ahmad does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

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

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China's plan to ditch dirty coal means Australia must clean up its carbon act or find new customers.

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China's tech factories turn to student labour

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CHONGQING, China—On the outskirts of this southwestern Chinese hub lie the student factories.

Schools send thousands of teenagers here to put together electronic devices for some of the world's largest brands. Many students say they are given no choice.

"I was suddenly told I had to spend the summer making computers or I couldn't graduate," said a 16-year-old girl surnamed Xiao who is in a college-preparatory program at a local vocational school. "I feel like I've been tricked."

Ms. Xiao and her classmates have worked on the assembly line of a Hewlett-Packard supplier called Quanta Computer for 12 hours a day, six days a week—conditions that violate Chinese regulations for workers under 18. "Sometimes we are so tired on the night shifts we almost fall asleep," she said.

Chinese law limits student interns to eight work hours a day with no night shifts, and states that schools should place students in internships related to their majors. These rules are widely disregarded by factories.

Student interns have become increasingly entrenched in China's labour force, especially among major electronics makers. At some factories, interns say they outnumber regular workers.

Some major brands like H-P and Apple Inc. say they are working with their suppliers to make sure intern use is reasonable and complies with labour laws, but acknowledge that violations occur.

The practice has the official stamp of approval of China's Ministry of Education, which in 2010 said vocational schools must supply students to fill labour shortages. The internships can run from three months to a year, depending on the school. Students don't attend classes during the internships. The ministry said there are at least eight million such student interns each year. It didn't respond to requests for comment.

China has traditionally relied on migrant workers to man factories in China's coastal areas, but in recent years the government has started directing industries inland. Chongqing has seen an explosion in worker demand as electronics makers moved here en masse.

But with Chongqing's minimum wage only about two-thirds of coastal Shanghai's, migrant workers are less eager to go west. "Most regular workers want to go somewhere with better wages," said Qin Lei, 18, who recently completed a yearlong mandatory internship on a Pegatron Corp. laptop assembly line.

On a recent evening, uniformed workers streamed out of Chongqing's major electronics factories to buy noodles or sizzling sausages. Of the roughly two dozen workers stopped at random, nearly all said they were vocational students, with majors ranging from computer science to tourism to education.

Some interns said they were paid around the same as regular workers, or around 1,300 renminbi (US$212) a month before overtime, though several students, including a 16-year-old girl surnamed Yang who makes laptops at Compal, said they had to pay most of their base wages to their school.

Students at three of the Taiwanese-owned electronics companies that make personal computers for many major global brands—Pegatron, Compal Electronics Co. and Wistron Corp. —said interns were in the majority at their Chongqing factories. Workers at the Quanta plant said a large proportion of workers were students.

Wistron, one of H-P's suppliers, disputed the workers' claim, saying the intern ratio had fallen to 48 per cent – 49 per cent. H-P said its checks showed only 12 per cent of workers at its assembly plants in western China were students in July. An H-P spokeswoman didn't elaborate on the discrepancy in numbers, but said Wistron was close to meeting H-P's guidelines.

Acer Inc., which sources laptops from Chongqing, said overuse of students was one of the most common violations in its 2012 audit of suppliers, resulting in the company's decision to launch a student worker management program last year.

"The percentage of interns at…factories in western China seems to be quite high," said Acer in a statement. It added that the percentage of interns at its Chongqing manufacturers has halved since last year and that students aren't forced to work.

Both Wistron and Pegatron acknowledged that interns sometimes work longer hours than their ages dictate, but said company officials are working to decrease such practices. Pegatron, which makes laptops for Toshiba Corp. and Asustek Computer Inc. in Chongqing, said 30 per cent of its workforce are interns. Quanta and Compal, the world's two largest laptop assemblers, declined to comment.

Asked about intern work conditions at its Chongqing suppliers, Asustek, which sells laptops and tablets under the brand Asus, said it would "conduct a thorough investigation."

A spokesman at Toshiba said the company wasn't aware of local working conditions at its suppliers in Chongqing but expected the factories to respect local laws and social norms. "If we find violations on this, we ask for them to correct it in a speedy manner," the spokesman said.

The Fair Labour Association, which promotes adherence to labour laws world-wide, last month published an assessment of Quanta factories making Apple products, which showed a number of labour violations including interns working too much overtime. Apple said Quanta had 86 per cent compliance with Apple's 60-hour workweek this year through July. "Excessive overtime is not in anyone's best interest, and we will continue to work closely with Quanta and our other suppliers to prevent it," Apple said in a statement.

But a widespread shift away from intern usage is unlikely at Chongqing's current wage levels: Executives squeezed by already-low margins say they have no alternative but to rely on students.

At Foxconn, Apple's largest supplier, intern levels have declined sharply with public scrutiny, but some of its smaller factories are still known internally as "intern factories" due to their concentration of students, according to a person familiar with the matter. The company said in a statement that interns made up 1.23 per cent of its more than one million employees in China in the year to date, and while student levels varied across factories, there were no campuses where interns were the majority of the workforce.

Factories typically pay 500 yuan to 1000 yuan (US$82-$163) to labour brokers for each student they arrange for an internship, and still save money as they spend less on insurance and other costs than for regular workers, said the person familiar with the matter. "It's not a system that helps students," he said.

The plant director for Pegatron's Chongqing factory, E.K. Liao, defended the internship programs as educational and said the local government had asked factories to train students as the city builds an IT industry. "The city needs more workers with this knowledge," he said. He denied that factories paid commissions to school administrators to encourage them to send more interns.

Factory campuses house nearly all workers. Festooned with slogans such as "Labour produces a happy life," they have ping-pong tables and basketball courts, and students seemed happy with living conditions there.

Some students said their parents liked that they are "getting a taste of society" at the factories, even though they are away from their families and not studying. But other parents have been angry. One complained in June that the Chengkou County Vocational High School didn't allow students to arrange internships related to their majors, instead forcing them to work at Pegatron's laptop factory.

"I think there's reason to believe the school is making improper profits from sending students to the factory as cheap labour," the parent wrote on the Chongqing government's website.

The government responded on the site that internships "must be aligned with the labour usage plans of Chongqing's six contract manufacturers." Neither the Chengkou school nor Chongqing's Economic and Information Commission responded to requests for comment.

Some schools say they are putting pressure on factories. At the Nanxi Vocational and Technical School, the director of employees, Wang Guiqing, said the school has asked Pegatron to limit students' work hours to eight hours a day and overtime to two hours a day.

But students at Pegatron and other factories said night shifts and long overtime hours continue to be standard.

China's vocational schools largely cater to students who don't plan to go on to a university education. Some provide high-quality training, while others dump students for long internships at factories, researchers say.

Scott Rozelle, director of Stanford University's Rural Education Action Program, which is evaluating vocational schools in Henan province in collabouration with Apple, said his research showed that students at certain vocational schools actually performed worse at math and other subjects at the end of their school studies than at the start.

China, which aims to shift its economy to more skilled sectors, last year announced an overhaul of vocational schools, which encompass 29.34 million students nationwide.

Few of the students interviewed see the internships as educational.

"I just put the same piece in the computers over and over, every day," said Ms. Xiao. "I'm not learning anything."

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Some teens in vocational schools work 12 hours-a-day for H-P, Apple suppliers.

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Chinese firms swoop into Israel looking for tech investments

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TEL AVIV—Chinese investors are pouring millions into Israel-focused, tech-investment funds — as well as launching their own funds and investing directly in Israeli startups — amid a frenzy of tech investment and deal making here.

Yongjin Group, a Chinese equity-investment management and financial- services company, has put between US$15 million and US$20 million into Israeli venture fund Pitango Venture Capital during the past year, according to people familiar with the matter.

Lenovo Group, the big Chinese computer maker, meanwhile invested around US$10 million in Canaan Partners Israel, a venture fund affiliated with American-based Canaan Partners, in late August.

And Ping An Venture, the venture investment arm of Ping An Insurance (Group), one of China's biggest financial conglomerates, in November created a US$100 million fund dedicated to U.S. and Israel tech ventures. It has made six investments in Israeli startups so far, said Jiang Zhang, an associate director at Ping An Ventures.

The moves come amid a frenzy of fundraising among Israeli entrepreneurs. Israeli and foreign investors—lured by a drumbeat of stock-market listings and acquisitions among Israeli tech startups—have rushed in. In the first half of 2014, 335 Israeli high-tech companies raised a record US$1.6 billion in capital, according to estimates by consultancy IVC Industry Analytics and KMPG. That was 81 per cent higher than in the year-earlier period.

While Israeli, European and American investors have long trawled Israel for tech opportunities, Chinese investors are relatively new here. Industry insiders say so far they have preferred longer-term bets and looked for technology that is already being used back home, or sought investment possibilities there.

"Most of the investments we're seeing are strategic investments and not purely financial ones," said Yoav Sade, a partner in law firm Meitar Liquornik Geva Leshem Tal and vice chairman of the Israel-China Chamber of Commerce.

"Chinese investors would look for tech companies that already have a product and sales with an added value that has to do with China," said Mr. Sade. "Many times the investment contracts include commercialization licenses for operations in China."

In July, Chinese venture fund SAIF Partners participated in a US$15 million funding round in app-monetization company SupersonicAds. It was SAIF's first investment in an Israeli company, according to Ben Ng, a partner at SAIF Partners, who joined Supersonic's board following the investment.

At the same time, Supersonic announced plans to expand its business in China, Japan and India, saying it intended to open offices in Beijing, Tokyo and Bangalore.

"For the last two years, SAIF has been looking to expand its portfolio with a cross-border view. We're looking at companies in Israel" and Silicon Valley, said Mr. Ng.

Ping An and Chinese venture investor China Broadband Capital Partners LP took part in a US$85-million, pre-initial public offering funding round in adware company IronSource. IronSource launched its Chinese branch with offices in Beijing this week.

Despite these direct investments, much of the early money is being funnelled through Israeli funds. Chinese Internet-security company Qihoo 360 Technology and web search giant Baidu have both invested in Carmel Ventures, an Israel venture fund, according to people familiar with the matter, with Qihoo putting in about US$10 million in early 2014. Qihoo has also invested money with Jerusalem Venture Partners, according to people familiar with the matter.

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Yongjin Group invests US$15 Million to US$20 million in Pitango Venture Capital.

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Chinese steel companies are hit by slowing economy

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BEIJING—Two Chinese steel companies said they were having trouble paying back lenders, indicating that China's slowing economic growth and a steel glut were taking an increasing toll on the industry.

State-owned Sinosteel on Wednesday said it was having difficulty paying back some lenders as a result of unpaid bills from customers. It denied media reports that it failed to meet tens of billions of yuan in principal and interest repayments to domestic banks but didn't disclose an amount.

Meanwhile, Chinese steel transporter Anhui Wanjiang Logistics said one of its units failed to pay 2 billion yuan, or about US$325 million, in debt on time and that the unit's chairman had been detained by authorities on allegations of "serious dereliction of duty." Chairman Wang Xiaoxiu couldn't be reached for comment, and the company didn't return calls for further comment.

Anhui Wanjiang said it had been hit by the downturn of China's steel market and had used up its bank credit. The company said it had 16.7 billion yuan in debt, including 12.7 billion yuan owed to 19 banks, of which almost 1 billion yuan was overdue. The company said it had another 1.1 billion yuan in overdue nonbank debt.

Anhui Wanjiang also said banks had extended excessive credit to its Huaikuang Modern Logistics unit, which had 1 billion yuan registered capital but received 13 billion yuan in bank credit. "Banks didn't fulfill necessary examination duties when extending the credit," Anhui Wanjiang said in a filing with the Shanghai Stock Exchange.

At Sinosteel, board Secretary Li Kejie said the company faces financial strains this year because of "the economic slowdown, the steel-market downturn and tightened bank credit." He said the steelmaker was studying measures to reverse its difficulties and would seek external supports including those from financial institutions.

Industrial & Commercial Bank of China said Sinosteel hadn't defaulted on the bank's loans. The bank, the country's largest lender by assets, said its loans account for 1.3 per cent of the steel company's total borrowing.

China produces nearly half the world's steel and its output rose sharply in recent years as government policy spurred steel mills to expand output substantially. At the same time, steel companies racked up large amounts of debt to stay afloat.

Although Beijing has pledged to tackle overcapacity, China's steel industry continues to increase production. Part of the problem is that local governments are reluctant to close steel mills for fear of fueling unemployment. China's steel output rose 4 per cent in August from a year earlier to 68.9 million metric tons, according to the National Bureau of Statistics. The price of steel bars has fallen 18 per cent this year to 2,876 yuan (US$469) a ton, according to data provider Wind.

Beijing has targeted the steel industry for consolidation because of worries about overcapacity and pollution. The problems have been exacerbated by China's slowing economic growth, which was 7.4 per cent in the first half. The Chinese economy grew 7.7 per cent last year, slowing from previous years.

The slowdown has raised worries among economists about the potential for loan defaults and rising amounts of bad debt. Local governments and others have moved in to stop painful defaults, which has spared hits to the financial system but which experts warn could lead to bigger problems down the road.

China's unprofitable steel traders have been struggling to survive by getting cheap credit from banks, but a metal-financing scandal in the country's eastern port of Qingdao this summer has made the practice increasingly difficult.

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Sinosteel, Anhui Wanjiang Logistics report difficulty making payments on debt.

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Chinese ex-official admits bribery in high-profile trial

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SHANGHAI—In one of the highest-level prosecutions of a Communist Party official since China's corruption crackdown began 18 months ago, a former economic planner made an appeal for freer markets as he admitted he took millions of dollars in bribes to approve projects.

Liu Tienan told a courtroom on Wednesday that a more market-oriented economy that dilutes the power of officials like himself could help China crimp corruption.

Prosecutors on Wednesday alleged that Mr. Liu, the former head of the National Energy Administration and senior director in the National Development Reform Commission, had through his family accepted bribes while approving projects. The Langfang City Intermediate People's Court in Hebei province heard testimony that Mr. Liu, typically using his son as an intermediary, over a 10-year period accepted cash and shares worth 35.58 million yuan, or around US$5.7 million, from big players in China's aluminum, automobile and chemical industries.

Mr. Liu admitted guilt, according to court transcripts. They note he burst into tears, lamenting, "How could I fall like this?"

The court said Mr. Liu's family members, including the son, are being dealt with separately but their whereabouts aren't known.

The court didn't announce when it might announce a verdict. Politicized cases in China rarely end in acquittal, and bribe takers can face life in prison.

In his three decades at NDRC, Mr. Liu became one the most powerful party officials running an agency that is rooted in China's Communist past and that still today decides which companies can expand and how banks should allocate loans.

After spending time in jail, Mr. Liu testified that reducing official power is key to curbing corruption: "The major point, which is based on my own experience, is to give the market a great deal of power to make decisions."

The concession was a "very clever self-defense," said X.L. Ding, a professor of social sciences at Hong Kong University of Science and Technology. Mr. Ding said Mr. Liu shouldn't be considered a victim of temptation, but instead "one of the most powerful vested interests in the bureaucracy in China."

Prosecutors repeatedly credited Mr. Liu, who turns 60 next month, for conceding guilt, returning some of the funds and tipping investigators to irregularities they valued at 18 million yuan.

Detained in May 2013, the fallen economic planner was among the earliest senior officials fingered for corruption since President Xi Jinping took power in late 2012.

The trial testimony illustrated how officials in China can get rich leveraging their positions with big-money interests and involving family members, and it provided rare insight into how the government intends to prosecute suspects rounded up as part of Mr. Xi's signature domestic policy initiative. Despite government claims that thousands of officials have fallen under suspicion during the anticorruption campaign, their investigations are cloaked in secrecy and few cases have made it to courtrooms where detailed allegations might emerge.

China's legal procedures suggest more cases could be in the pipeline. Many of them relate to officials who previously served in China's oil industry and had ties to former political heavyweight Zhou Yongkang. The party in August said Mr. Zhou is being investigated for corruption; his whereabouts aren't known and he isn't reachable.

Among the cases still to come is that of Jiang Jiemin, the former party chief at China National Petroleum Corp. The party said in June Mr. Jiang was stripped of his membership for suspected corruption and would face prosecution. He also isn't reachable.

Highlights of Mr. Liu's case were published online in statements by the Hebei court on its official account with the service Weibo, and he was shown on state-run China Central Television.

The court didn't dwell on the trigger for the official's downfall: a magazine editor's assertion in late 2012 that Mr. Liu had grown corrupted. German watchdog Transparency International last November called the move courageous and announced an integrity award for the editor, Caijing's Luo Changping.

Since then, some reporters in China who have sought to publicly allege graft by officials have landed in hot water.

A number of alleged bribery arrangements outlined by the court involved state-owned car maker Guangzhou Automobile Industry Group and its joint venture with Toyota Motor. One deal allegedly created a no-show job for Mr. Liu's son at the company, and another gave the son a stake in a dealership. Spokeswomen for Guangzhou Auto and Toyota declined to comment.

In another example, the prosecutor said that after Mr. Liu helped secure chemical plant approvals for a company called Zhejiang Hengyi Group, the tycoon who controls it, Qiu Jianlin, lent Mr. Liu's son money, bought him a villa and a Porsche. A spokesman for the company said Mr. Qiu assisted the investigation.

His thick hair streaked with gray, Mr. Liu wore a dark jacket zipped to the neck Wednesday as he explained his view that China's state bureaucracies are too powerful and its entrepreneurs are too weak. "Approvals should be developed in a system, rather by an individual's action," Mr. Liu said. "This would help prevent abuse of power for personal self-interest."

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Former economic planner argues freer markets could limit China's corruption.

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Baidu opens to Aussie business

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Dominant China search engine Baidu will offer Australian business unprecedented access to more than half a billion ­Chinese consumers in a major local marketing push.

At a launch event in Sydney yesterday, Baidu said it would partner with Belimark Australia, which would promote the benefits of Australians offering targeted search ­engine advertising in China.

Belimark will offer comprehensive consulting and support to Australian advertisers.

Another firm, Incremental Marketing Group, has been contracted by Belimark to build targeted marketing campaigns for Australian customers with travel and accommodation, education, real estate and retail for Chinese search engine users.

Baidu spokesman Charles Song said the launch into Australia was part of a global marketing strategy, with Baidu also expanding into Indonesia, Thailand, Egypt and Brazil.

Baidu’s strategy went beyond giving Australians access to China’s market to analysing the trade between Australia and China and providing analytics to local firms.

“We really want to help ­clients to analyse the market and introduce them to the Chinese people,” he said.

According to Baidu, two out of three Chinese citizens search the internet to plan their trips and purchases.

Last year, more than 98.2 billion trips were made by Chinese travellers and more than $110 billion spent.

Belimark Australia marketing director Max Qi said Australian companies previously needed local knowledge to crack China’s market.

“Before, if you wanted to use Baidu to advertise your business, you needed to understand the culture, understand the Chinese language, appoint a Chinese agent in China, and then communications and business was still very hard to do.”

Baidu said it had achieved an 83 per cent share of China’s search engine market on personal computers and a 68 per cent share on mobiles. China’s internet population was estimated at 564 million in 2012.

Baidu’s search engine handles more than 6bn search requests each day and raked in $US5.12bn in internet sales ­advertising revenue in China last year. Its nearest competitor, online shopping site Taobao, operated by Alibaba Group, snared $US4.6bn.

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Search engine to offer Australian business unprecedented access to Chinese market.

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Beijing’s growing influence over Hong Kong

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On 31 August, when Beijing’s offer of universal suffrage to Hong Kong came with an extremely restrictive framework allowing for only two to three establishment candidates, it was just another sign of the Chinese government taking greater control over its special administrative region.

The move is part of a far narrower interpretation of the ‘one country, two systems’ principle first agreed upon in the Sino-British Joint Declaration of 1984. The agreement stipulated that Hong Kong should be able to continue its ‘capitalist’ economic and political systems following the handover in 1997 for at least 50 years. While China maintained a relatively low profile in the period immediately after the handover, this has changed over the years.

After a mass demonstration on 1 July 2003, the Chinese government failed in its push to implement national security legislation in Hong Kong — prompting Beijing to increase its influence inside the city. This has intensified in more recent years. Many voices favourable to the pan-democracy camp have been forced out of Hong Kong’s traditional media. Overall the media has become more pro-China in recent years, and prominent firms have refused to advertise in pro-democracy newspaper Apple Daily. The newspaper’s owner, Jimmy Lai, also faced massive legal scrutiny after it was revealed that he had donated significant amounts of money to the democratic camp.

In June 2014, a Beijing white paper on Hong Kong’s status and political future reaffirmed China’s dominant role. The document seemed to undermine the principle of judicial independence when it described judges as administrators with an obligation to ‘love the country’, a slogan that is generally interpreted as synonymous with ‘loving the Communist Party’. The Chinese government has rejected this interpretation.

But the attempt to increase control has led to a backlash from many Hong Kongers. Not only were many lawyers outraged about the white paper but its timing played into the hands of democracy activists — activists who could mobilise an unexpectedly high number of people to participate in a referendum on which reform proposal the democratic camp should endorse. In the end, the Chinese government did not even consider the most conservative reform proposal and opted for a reform plan that would deny Hong Kongers any choice in the election for chief executive. It laid bare the unwillingness of the Chinese government to negotiate with anyone, not even moderates.

The Communist Party is worried that any form of popular mandate could make the chief executive in Hong Kong more powerful than the unelected leaders in China. Without any compromise from the Chinese side, the present reform proposal is likely to fail in the Legislative Council, where it needs the support of two-thirds of the legislators. This would mean securing some support from the pan-democracy camp now united in opposition to the proposal.

At the same time, democracy activists have called on their supporters to follow up on their promise to use disobedience and block the central district later this year. Whether or not this eventuates, it is unlikely to have any major effect on the Chinese government — an unfortunate reality that even most activists acknowledge. At this point, it is unclear what the Hong Kong government will do about the protests. Though a violent crackdown seems unlikely — if not impossible — activists are already preparing for that eventuality.

It is more than likely that Hong Kong will continue to be governed in its present form until at least 2047, when the ‘one-country, two-systems’ policy is set to end. But even then, without significant institutional reforms on the mainland, Hong Kong’s separate system holds more benefits for China than if it were to be fully integrated. As Foreign Policy recently reported, one Guangzhou-based research firm has argued that if the former British colony were to become just another mainland city, it would be reduced to second-tier status. This is because Hong Kong’s special status is a critical reason for its economic prosperity. The independent legal system and the free exchange of information provide the basis for both the financial system and the property market.

Most importantly, the aspects that make Hong Kong a developed economy also provide an important rationale for many companies aiming to locate their regional headquarters in Asia. If this advantage were to be lost, these companies would be likely to relocate to other places such as Singapore. In light of this, the Chinese government may want to maintain Hong Kong’s advantage.

Stephan Ortmann is a Visiting Assistant Professor at the Department of Asian and International Studies, City University of Hong Kong.

This article originally appeared on the East Asia Forum. Republished with permission.

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China uncovers $US10bn in fake trade financing

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A Chinese probe into trade financing found nearly $US10 billion in fake deals, a senior official said on Thursday, in the latest warning over practices that socked foreign and Chinese banks with major losses earlier this year. 

The comments by Wu Ruilin, deputy director of the supervision and inspection department of China's State Administration of Foreign Exchange, mark the most extensive official comments yet on problems in trade finance in China since a scandal involving metal supplies in the port cities of Qingdao and Penglai put the practice under international focus. Foreign banks and commodities firms have exposure to potential losses there of close to $US1 billion, while the estimated exposure for Chinese banks stretches into the billions of dollars, according to court filings, public statements by the banks and analysts' estimates. 

Mr Wu said the regulator started a campaign to crack down on fraudulent trade financing in April of last year in 13 provinces and cities. He said this year, it expanded the investigation to 24 provinces and cities, including Qingdao. 

So far this year, the regulator has discovered trade fraud of nearly $US10 billion throughout the country and has handed more than 15 cases over to police, Mr Wu said. 

"Trade-financing fraud is very harmful not only to trade but also to the overall economy," he told reporters on Thursday. "It increases the pressure of hot money inflows and has even become the channel through which funds of some criminal activities flow in and out of China." 

Some banks also have failed to fulfill their duty to check on the authenticity of the traders' documents, he added. 

The regulator will penalise the entities that were involved in the Qingdao case and will hand them over to police if they were found to have broken the law, he said. 

Mr Wu's comments follow earlier concerns that at least some of China's trade data is artificially inflated by companies faking trading invoices to secure financing, especially in Hong Kong, where borrowing rates are cheaper. Chinese regulators last year said they would crack down on the practice. 

The fraudulent trade financing episode in Qingdao roiled metals markets after surfacing earlier this year. Authorities are investigating whether traders at the Qingdao and Penglai ports fraudulently used the same metals stockpiles to secure multiple loans. Executives at Western banks complain that they have been shut out of warehouses in both Qingdao and Penglai. 

Chinese officials are looking into whether entities linked to Decheng Mining Ltd. illegally pledged the metals as collateral to get the loans, according to court documents and executives at banks that made some of the loans. The company hasn't responded to requests for comment. 

While initial fears have subsided that the suspected fraud would have a lasting impact on metals prices, banks and commodities traders have been left in a morass of legal action. 

Many of the legal cases involve banks, which lent money to commodities traders, including Decheng, and took the metal as collateral. 

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Probe reveals foreign banks, commodities firms have exposure close to $US1 billion.

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Adobe to shut China research arm

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US software giant Adobe will shut its research arm in Beijing, laying off 350 people, as foreign technology firms face a worsening business climate in China.

US tech firms, including Microsoft and Qualcomm, have come under investigation over business practices, the latest in a series of industries to face tougher government scrutiny.

However, Nasdaq-listed Adobe denies the move is a reflection of the Chinese market and says it is part of a broader strategy to place technical teams in fewer locations, according to the statement provided to AFP on Thursday.

"The move will not affect Adobe's overall level of investment in R&D (research and development) and is not an indication of financial performance in China or worldwide," the statement said, adding that its Beijing research arm will be shut by the end of 2014.

Adobe, which is based in San Jose, California, in September said net income for the three months ended August 29 had slumped 46 per cent year on year to $US44.69 million ($A48.35 million).

"We are committed to China as a long-term market, and will continue our sales presence nationally as always," the firm, which makes the Acrobat and Photoshop software, said.

Chinese authorities have raided the offices of Microsoft as part of an anti-monopoly investigation aimed at its Windows operating system -- which is used on the vast majority of computers in China -- and the Office suite of programs.

The head of the government agency investigating Microsoft for what it calls "monopoly actions" in August said the investigation includes the way the US giant distributes its media player and browser.

Chinese state media has reported that US chip maker Qualcomm is also being probed over an alleged monopoly position in the mobile phone chip market.

Some analysts have linked the investigations to a US government move to indict five members of a Chinese military unit for allegedly hacking American companies for trade secrets.

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US software giant will lay off 350 people in Beijing.

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Royal Bank of Scotland chair moves to GSK

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Royal Bank of Scotland chairman Philip Hampton is stepping down to take up the same position at British pharmaceutical group GlaxoSmithKline, the companies have announced.

Hampton, who during his more than five years as chairman has helped to guide the bailed-out bank through its recovery following a government rescue, will join GSK in the wake of a Chinese corruption scandal at the drugs firm.

Hampton will leave RBS in 2015 after a successor is appointed, the bank said, while GSK announced that he would replace Christopher Gent as its chairman by next September at the latest.

A Chinese court last week fined GlaxoSmithKline 3.0 billion yuan ($A530.16 million) following a nearly year-long bribery probe.

And the firm's former head of China operations, Mark Reilly, and four other ex-officials were given suspended sentences of between two and four years in prison.

The adverse impact of the probe, along with weak trading in the US, caused GSK to slash its 2014 profits forecast earlier this year.

Edinburgh-based Royal Bank of Scotland meanwhile remains 81 per cent state-owned after it was rescued with STG45.5 billion of taxpayers' cash during the 2008 global financial crisis, making it the world's biggest banking bailout.

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Philip Hampton's appointment follows a Chinese corruption scandal at the drugs firm.

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There's more to China's rise than state capitalism

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Our understanding of the Chinese economy is coloured by many conventional wisdoms --  one of the most enduring of which is state capitalism. There are many critics and commentators who believe that the state sector dominates the country’s economy and attribute China’s growth to the visible hand of Beijing.

This couldn’t be further from the truth. It's a view that gives too much credit to the ruling Communist Party. China’s economic miracle has been made possible by unshackling the country’s innate entrepreneurial energy.

Liu Yonghao, chairman of New Hope group and one of China’s most prominent businessmen, says that although private business employers only account 10 per cent of the labour force in China, they produce 40 to 50 per cent of all goods in China, account for 50 to 60 per cent of tax revenue and are responsible for creating 70 to 80 per cent of all jobs.

For those sceptical of Liu, Nickolas Lardy, a senior fellow at Washington think-tank the Petersen Institute for International Economics, makes similar claims.

He estimates private enterprises in China account for two-thirds of total output in China, up from zero three decades ago, when private business was outlawed in the country. The much criticised state-owned sector only accounts for between one third and one quarter of GDP, according to his latest book, ‘Markets over Mao’. In manufacturing, which represents about 41 per cent of GDP, state-owned enterprises only account for 20 per cent of output.

Our perception of the supposedly dominant state sector is coloured by its concentration at the top of China’s corporate league table. The country’s largest companies are inevitably state-owned and the leading private company, Huawei Technologies, is only ranked 37th in terms of revenue. But most small and medium sized companies are privately controlled, and they form the backbone of the economy.

The fact is the role of the state in China has diminished significantly since 1978. “When you look at the number of people employed by the state, it is less than France as a percentage of the labour force. China is not a pure market economy, but it is very hard to find pure market economies these days, especially given the recent history of the financial crisis and the degree of government ownership,” Lardy told the Wall Street Journal.

Despite the much diminished role of the state sector, it is still a huge drag on the economy because state-owned companies receive a large share of resources. Though they only account for between one third and one quarter of total output, state-owned companies receive nearly half of the total credit from the banking system.

That is a serious misallocation of resources. Analysts estimate that if state-owned enterprises can bring efficiency and productivity to the level of their private sector competitors. China’s GDP could add another two percentage points. That means an additional RMB11 trillion or A$1.9 trillion, more than Australia’s GDP.

One of the major reform initiatives on the horizon is the liberalisation of interest rates on deposits. Central bank governor Zhou Xiaochuan said repeatedly that the government was committed to lifting the official cap on deposit rates within two years.

When and if that happens, lending rates will tend to go up. It is good news for private companies, because of their higher productivity and profitability; they can afford to pay higher rates. Lardy says the ability of private companies to repay loans is more than twice as great as state-owned companies on average.

This means Chinese banks are more likely to direct their resources to underserved private companies.

Another area ripe for change is the services sector, which accounts for nearly 50 per cent of the economy. Unlike in the manufacturing sector, state-owned companies dominate many parts of the booming services economy, including in telecommunication, business and leasing services and transportation.

However, productivity differentials favour private sector challengers; you only need to look at Alibaba to see how disruptive a private company can be to established players. As China become a more service-oriented economy, there is an enormous opportunity for productivity growth.

“If China enacts economic reforms announced last year, particularly eliminating all but natural monopolies such as power distribution, and making the market the decisive factor in the allocation of resources, private businesses will displace state enterprises in services,” Lardy wrote in an op-ed for the Financial Times this month.

That would allow China to continue to grow for decades to come. He warns those making policies and predictions based on a fundamental misunderstanding of China’s ascent are likely to lose out. It would be wise to pay attention to advice from one of the most formidable minds on the Chinese economy. 

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Why Chinese property developers are targeting sites outside of China

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From a sales revenue of ‘only’ RMB 1.2bn (equivalent to A$ 207 million) per annum in 1998, to a staggering revenue of RMB  170.9bn (A$ 29.4bn) in 2013, Vanke has surely created history in the world of property development. 

But the Chinese publicly listed company is not the only one to make a big profit. In fact, since 1998, the fast pace of property development industry in China has made a large number of billionaire and multimillionaire developers. While at the same time, the term “property developers” in China has been associated with terminologies such as “corruption”, “astronomical price”, “ridiculously huge profit”, it seems Chinese developers are among one of the most negatively seen groups in China.

Zhi Qiangren, Chairman of Hua Yuan Developments Ltd, one of China’s four largest property developers, says he is almost the third most hated person in China – after Junichiro Koizumi (former prime minister of Japan) and Chen Shui-bian (a former Taiwanese politician who was president from 2000 to 2008 and is imprisoned in 2008 for corruption and money laundering).

“And that’s purely because I am seen as the most active and publicised developer in China, where developers are known to be associated with the “dark side” of business making so much profit,” he laughs.

But is property development really a profitable business China-wide?

The answer is no, and there are good reasons – the same reasons that lead to the fact that a wave of Chinese developers are acquiring land overseas, including Australia.

The first reason is simply because it is too expensive to acquire land in China, in comparison to countries such as Australia. Chinese buyers blame Chinese developers for irregularly increasing the property prices, without realising that the Chinese local government is doing the same on land prices to developers.

“If you buy a property in China, say if it costs RMB 30,000 (A$5172) per square metre which is about average price in Beijing,” says Xian Pinglang, one of China’s most well known economists, “20,000 of this RMB 30,000 goes to paying for the land component, which means most of the profit gets pocketed by the government.” 

“In the recent years, there has been an average of RMB 1.69 trillion (equivalent to A$290 billion) of land transactions every year from land sales to developers,” says Xian, “which equates to almost 48 per cent of total fiscal revenue of the Chinese local government.”

My view is that in any country, if the land acquisition component is as high as 66 per cent of the sales revenue, any developer would struggle with making a profit.

In our dealings with Chinese developers, particularly those who recently came from China, they seem to be impressed with the price value ratio of the land, and how “clean” or straight forward a transaction could be. 

Plus, there is so much land available in Australia, comparing with China, and most land is privately owned.

The second biggest reason is exactly that – the availability of land in countries overseas, in comparison to China.

“In recent years, China’s Department of Land Resources plan to have approximately 185,000 – 200,000 hectares of land per year made available for development, but according to figures by developers, only less than 50,000 hectares were released per year,” says ZhiQiang.

In Australia, where land transactions mostly take place between private owners and buyers, more and more small to medium Chinese developers have taken the opportunity to acquire land. Most focus on inner city locations such as Melbourne, Southbank, South Yarra and St Kilda, as well as areas popular for Chinese residents such as Doncaster, Box Hill, Glen Waverley of Victoria and Hurstville, Chatswood and Epping of New South Wales. 

“Many Chinese developers are venturing into the medium density sites with developments ranging from four townhouses up to 20 apartments” comments Tim Heavyside, Director of Fletchers Real Estate.

“These properties tend to sell quickly and allow developers a speedy turnaround for their investment.  “Some of these developers have also commented on the availability of these sites being many more than currently being offered in China.”

Michael Yang is CEO of GiFang.com, Australia’s leading property portal open for high networth Chinese investors.

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The tough road ahead for China's reform effort

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Despite the challenges, China’s leaders are pushing into the most critical phase of their ambitious reform program, cautiously unleashing the power of private investment and consumption to breathe new life into its slowing economy. But it will be a tough road.

The systems which so successfully marshalled the capital to drive China’s first phase of growth are being swamped by the more complex economy they helped create. The result has been increasing misallocation of resources on the ground and growing imbalances within the financial sector.

The solution is to allow market forces to play a much greater role in the economy, but although that is simple in conception, in execution it is akin to playing three-dimensional chess against the clock.

Shifting China’s enormous economy from a state-controlled, investment-led growth model to a market-led, consumption-heavy model will not – and should not – happen overnight. We don’t underestimate the challenges, but this is not the first time that China has faced both cyclical and structural challenges. The government has the resources to avoid a hard landing, but delaying reforms would in itself pose a risk to the long-term health of the economy.

We expect the time frame for significant reforms will be within one to three years but this year and the next will be vital in pushing forward the reforms. The leadership is committed to reforms and has recognised that the price of inactivity is likely to be much higher than the costs of reform.

The pace of reform this year has slowed, but the government has announced more substantial and challenging reform as simpler changes to the economy -- the low hanging fruit -- were made some time ago. The thorniest decisions -- stripping big state firms of an implicit government guarantee; opening sectors such as banking to competition; and reforming the fiscal system to deal with local government debts -- still lie ahead.

China has set a clear timetable to build a modern fiscal system that will help optimise resource allocation, unify market standards and boost social justice. Major reform tasks concerning the fiscal and tax system will be completed by 2016, before a modern fiscal system will be built by 2020. The key is balancing the interests of central and local government; and business and society, but challenges remain for fiscal progress.

The potential impact of state owned enterprise (SOE) reform on the economy is massive. There were 113 SOEs controlled by the State Council at the end of 2013 and about 145,000 SOEs under local government control. The total assets of non-financial SOEs were worth RMB 91 trillion (US$ 14.6 trillion) at the end of 2013, or 160 per cent of China's GDP.  SOEs absorb a disproportionately large share of bank credit.

Breaking the SOE monopoly and relaxing price controls are a crucial part of opening the door to private capital in industries like finance, oil and gas, telecommunications, railway, natural resources -- all areas where government-owned companies have dominated. This indicates an eagerness to facilitate self-sustained private investment as an alternative to the government-driven investment that has led to low efficiency, excess capacity and debt problems.

We see this as a significant breakthrough that should improve the efficiency of SOEs and capital allocation throughout the economy. But reform of the SOEs will be a long process. These are still at an early stage and much more work is needed to reduce bureaucracy, simplify the investment approval process, further deregulate prices, better protect individual property rights and intellectual property rights and make life easier for small businesses.

The progress with reform at local levels, particularly in terms of asset divestment, could accelerate in 2015 and 2016 given local governments’ deteriorating fiscal position due to the property sector’s current weakness.

Financial reform will be the highlight of this year, especially in the banking sector. Banking reform, such as deregulating interest rates, increasing the limited range of investment products and allowing the entry of new banks, is under consideration.

We think the progress on interest rate liberalisation, the development of the bond market and renminbi capital account convertibility will be faster than many expect. A deposit insurance scheme is in the pipeline and this should pave the way for the next and the most critical step: market-set interest rates. This, plus the recent launch of local government bonds, should accelerate the development of more flexible domestic financial instruments.

There will be some short-term pain during these reforms – jobs will go as overcapacity is cut; local governments will have to surrender some autonomy as they accept the judgement of the markets on the viability of their pet projects; and some investors will lose money as the government allows borrowers to default.

Reform always carries an element of risk, but trying to maintain the status quo with its increasing imbalances and unsustainable future carries a greater threat to China’s enduring prosperity, and the immediate costs will be more than repaid in higher growth. The implementation of planned reforms should help lift China’s potential growth rate in the medium to long term.

David Liao is Head of Global Banking and Markets, HSBC China.

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The systems which so successfully marshalled the capital to drive China’s first phase of growth are being swamped by the more complex economy they helped create.

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Chinese leaders discuss replacing PBOC chief

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BEIJING—Chinese leaders are discussing replacing the central bank chief amid disagreements over the direction of financial policy, raising questions over how quickly and deeply Beijing wants to remake the economy amid slowing growth.

Chinese leader Xi Jinping is considering removing Zhou Xiaochuan —the face of the Chinese economy to markets globally—as part of a wider personnel shuffle that comes after internal battles over economic overhauls.

The discussions occur as Mr. Xi, now two years in office, tries to place more allies into top positions in the government, military and Communist Party, said party officials with knowledge of the plans. The personnel shifts are expected around a major party conclave to be held in October, the officials said, while cautioning that no final decision about Mr. Zhou has been made.

Over the past few months, Mr. Zhou has continued to press for market changes, including liberalizing interest rates. The Chinese leadership, meanwhile, has become concerned that overhauls now will place another burden on an economy that is struggling to meet the government's target of 7.5% annual growth.

One reason to retain Mr. Zhou is fear of the market reaction to his departure, the party officials said. Removing him could add to uncertainty about the direction of China's economic-policy making and the strength of the leadership's commitment to overhauls, said the party officials, at a time when many other parts of the global economy are sputtering.

Removing Mr. Zhou "could suggest a subtle shift in the balance of power between reformist and reactionary forces, with the momentum for change being eroded by the loss of growth momentum in the economy," said Eswar Prasad, a China expert at Cornell University.

The top contender to succeed Mr. Zhou at the People's Bank of China is Guo Shuqing, a former banker and top securities regulator who is currently governor of Shandong, a prosperous eastern province, the officials said. Mr. Guo, a longtime friend of Mr. Zhou, is also considered a reformer. But it remains to be seen whether he would push for overhauls as hard as Mr. Zhou has been, Chinese officials and scholars said.

Within the central bank, word of Mr. Zhou's possible departure has been water-cooler talk for weeks, said PBOC officials and advisers. They were especially surprised when Mr. Guo unexpectedly and unusually attended a monthly meeting convened by the secretariat of the central bank's monetary-policy committee on Sept. 16, said the PBOC officials and advisers.

Also in attendance were economists from some of China's biggest securities firms, who provided the central bank with their views on the steps policy makers should take to rev up economic activities. Mr. Zhou often doesn't attend the monthly meeting and didn't this time.

President Xi named Mr. Zhou to a third term in March 2013, despite the central banker having passed the retirement age of 65 for senior Chinese officials. He is now 66 years old.

Mr. Zhou is perhaps China's best-known economic official. He represents China at meetings of the International Monetary Fund and Group of 20 leading nations and plays tennis with central bankers and senior economic officials.

He and Lawrence Summers, U.S. President Barack Obama's then-chief economic adviser, once jokingly bet when they played doubles against each other that the winner of the match would set the U.S.-Chinese foreign-exchange rate. (Mr. Summers lost and asked for a rematch.)

Early in his most recent term, Mr. Zhou accumulated greater influence than he had under Mr. Xi's predecessors. Mr. Zhou's allies were given prominent roles in Mr. Xi's economic-policy making bodies, and Mr. Zhou's ideas of freeing up interest rates and cross-border capital flows were reflected in party and government policy documents.

But as the Chinese economy continued to lose momentum this year, the PBOC came under increasing pressure to help spur the economy by providing credit—or ordering banks to do so.

So far, the central bank has been aiming its stimulus narrowly, to avoid a broad-based lending spree such as the one that propped up growth following the 2008 global financial crisis but also saddled the economy with debt and bad loans. Other government agencies, though, are calling for across-the-board cuts in interest rates.

Messrs. Zhou and Guo couldn't be reached for comment. In a statement to The Wall Street Journal, the PBOC said Mr. Zhou wouldn't be stepping down soon.

The Communist Party's Organization Department, which controls personnel decisions for key government posts, declined to comment.

Should Mr. Zhou be replaced, his departure would be portrayed as a matter of his age, said the party officials, although only 18 months have passed since his latest reappointment.

But there are larger policy issues involved. Mr. Zhou kept pressure on leaders to stick with changes even if doing so diminished the growth rate.

While the government and party in principle backed the idea of letting bank deposit rates float freely, for instance, Mr. Zhou tried to nail down a date for lifting government controls, a move he has said is critical in forcing banks to compete and allocate credit more efficiently.

In March, he said the goal could be achieved in two years, and on July 10 reiterated that goal. That was out of tune with top leaders. Two weeks later, the State Council, the government's top decision-making body, said the shifts would be carried out in an orderly way—usually code words for moving slowly.

Top party leaders are also considering splitting the roles of PBOC governor and party chief after Mr. Zhou departs, the officials said. Currently, Mr. Zhou has both jobs.

Leaders considered such a plan in late 2012, with Mr. Zhou remaining as PBOC chief and someone else taking the party job, but they viewed the idea as unworkable because it could be seen as a demotion for Mr. Zhou. In China, party officials generally outrank government officials in an organization. Still, splitting the PBOC job could lead to confusion about who runs the institution.

In China, the central bank—known locally as "yang ma," or "Big Mama"—isn't independent. For major decisions, it needs approval from the State Council, and sometimes the ruling seven-member Politburo Standing Committee, the inner sanctum of party power.

"Everybody seems to be interested in talking about reform, but they really fear what they are professing to love," said Zhang Xiaohui, head of the PBOC's monetary-policy department, in a May 2014 meeting, according to a transcript of her remarks viewed by the Journal.

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Potential move reflects disagreements over fiscal steps, Xi's plan to place more allies in top offices.

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NAB mulls selling life insurance unit

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National Australia Bank Ltd. is gauging interest in its life-insurance operation among potential suitors, according to two people familiar with the matter.

If NAB elects to seek a buyer for the business, it would be further evidence that Chief Executive Andrew Thorburn is acting swiftly to refocus on core operations in Australia and New Zealand since taking the helm on August 1.

A spokesman for the bank, based in Melbourne, declined to comment. Already, the CEO has swept in a new management team and unveiled plans to exit NAB's U.S. banking business.

If the bank goes ahead with a sale, the insurance business would likely attract the attention of a range of suitors including Japanese, Chinese and Canadian insurers, who have been expanding outside their home markets.

In June, Dai-ichi Life Insurance Co. said it would acquire U.S. insurer Protective Life Corp. for around US$5.7 billion, the largest purchase of a foreign company by a Japanese life insurer.

Shanghai-based Fosun International Ltd. bought a 20 per cent stake in Ironshore, a U.S. insurer, for US$463.83 million in August. And in January, Fosun paid €1 billion (US$1.27 billion) for a stake in the insurance arm of Portuguese state bank Caixa Geral de Depósitos, beating a bid by Apollo Global Management.

Still, the life insurance industry in Australia is facing headwinds. Growth is sluggish in the broader economy and some customers are allowing policies to lapse, or switching to better deals, taking advantage of strong competition and easier online shopping.

NAB's net income from life insurance was 560 million Australian dollars (US$497 million) in the last fiscal year, a fall of 24% compared with the prior year. Pressures on the result included a rise in claims and moves to strengthen insurance reserves.

In 2009, under its previous CEO, Cameron Clyne, NAB greatly expanded its life-insurance operations and investment platform, buying the wealth-management business of Aviva Australia Holdings for A$825 million.

Mr. Thorburn late last month said the bank was planning an initial public offering of Great Western Bancorp Inc., a lender in South Dakota, toward the end of the year, the first step toward selling the bank outright. The Australian bank bought Great Western six years ago for just over A$1 billion.

Weeks before Mr. Thorburn officially took over as CEO, NAB agreed to sell a £625 million (US$1 billion) basket of mainly distressed U.K. loans to the private-equity firm Cerberus Global Investors. The bank took on the commercial real-estate portfolio of its British banking units, Yorkshire Bank and Scotland's Clydesdale Bank, about two years ago.

Mr. Thorburn has said NAB would seek to speed up the sale of noncore assets.

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Sale likely to attract attention of range of suitors including Chinese, Japanese and Canadian insurers if goes ahead.

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