In the mind of an international investor based outside Australia, it’s all about China for stocks Down Under. That’s at least the perception of State Street Global Markets, who aren’t exactly gung-ho about the China story. State Street may have a point. Chinese investors aren’t exactly brimming with confidence about their own markets.

Hong Kong’s stock market, home to China’s largest company by market value, PetroChina, is the second worst performing developed market in the world this year, down 5 per cent. The Shanghai market has performed even worse, down 7.4 per cent in 2013. Plainly, State Street Global Markets Asian head of sales, trading and research Jeremy Armitage told Markets Spectator local Chinese investors have lost confidence in their own markets, and more tellingly the health of their economy.

Chinese and foreign investors may be of the same mind when it comes to Chinese stocks. They are now following breathlessly any news on the much maligned lending for real estate development in the world’s most populous nation. Foreign fund managers are afraid that these loans for hotels, leisure facilities and housing – often ventures between local governments and builders – are a tsunami of non-performing loans that will overwhelm the balance sheets of Chinese financial institutions particularly if state-owned enterprises struggle as growth slows.

So if China sneezes will Australian stocks catch a cold? After all, the world’s second-biggest economy is the biggest buyer of Australian exports. From 2011 to 2012 China accounted for 27 per cent of the total value of Australia’s exports of goods and services, according to a research paper by the Australian National University.

Still, a Chinese virus may not necessarily affect Australian shares. Amid the poor performance of the Hong Kong and Shanghai stock markets, the S&P/ASX200 Index has done quite well thank you very much. Australia’s benchmark index has gained 9.4 per cent this year. Some of the market’s biggest stocks have domestically focused businesses, notably the four-biggest banks, which saved them in the wake of Lehman Brothers’ bankruptcy.

Investors recognise this. In part, because bank stocks – their dominant franchises that are primarily focused on Australia – have gained this year. Commonwealth Bank shares are up 16 per cent this year. Westpac’s stock has added 19 per cent.

As markets continually discount events ahead of time, it is not as though the potential machinations in China’s economy have not wound their way into the share prices of mining stocks. BHP Billiton’s shares are down 6.2 per cent this year. Rio Tinto’s stock has fallen 12 per cent.

State Street’s Armitage says there is global rotation by stock investors out of value and into growth. That may help shares of biopharmaceutical manufacturer CSL and online job site Seek. Many of the world’s stock markets, including Australia, may continue to benefit from low interest rates and perceptions of a future pick-up in growth. That makes some more confident about their estimates for company earnings growth even if Australia’s reporting season has hardly bolstered confidence that 2014 will be a better year.

Prime Minister Kevin Rudd has called for China to be admitted to the Trans-Pacific Partnership trade talks, according to media reports.

Speaking at the Lowy Institute in Sydney, Mr Rudd welcomed Japan’s entry into the talks and supported moves for the TPP to take on new members.

"That starts 'stateside' and ends up 'China-side' and wraps in as many economies as possible," Mr Rudd said, according to Ninemsn.

"I will urge all governments who are party to the TPP to leave the door open to the People's Republic of China in the future.

"This would be good for everybody."

Japan was the latest country to join the talks, taking the overall number of participant countries to 12, including Australia.

The 18th round of the TPP negotiations, which are aimed at establishing a free-trade area in the Asia Pacific, concluded in Malaysia last month.

Mr Rudd also called for a new "regional disputes mechanism" in the East Asia Summit, according to China Daily. 

"We must work with others in the region to build collectively a shared political, economic and security agenda – a sense of common security across our wider region," he said.

By a staff reporter, with AAP

Business groups including the Business Council of Australia have warned that Kevin Rudd's hardline stance on foreign ownership could undermine Australia's ability to secure free-trade agreements with key Asian trading partners and risks crucial foreign investment, The Australian reports.

Prime Minister Kevin Rudd opened up debate on the issue when he told a people's forum in Sydney on Wednesday he was a "bit anxious" about an "open-slather" approach to foreign ownership of agricultural land.

Mr Rudd said his preference was for joint ventures involving Australian and overseas firms.

"We need to take a more cautious approach to this in the future without throwing the baby out with the bathwater," he said.

Former Reserve Bank board member Warwick McKibbin toldThe Australian Mr Rudd was sending a "terrible, terrible" message offshore when foreign investment was vital.

In China, the newspaper said there was concern foreign investment rule changes could hold up the free-trade agreement between Australia and China that has been under negotiation for nearly nine years, while resource employers declared the "borderline-xenophobic remarks from a government pandering to ill-informed union backers" would quickly travel to international investors and have a "profound" impact on Australia's reputation abroad.

The Business Council of Australia told the newspaper the nation needed foreign investment in an environment where GDP was slowing and business investment was forecast to decline.

Agriculture Minister Joel Fitzgibbon said the government hasn't discussed tightening Foreign Investment Review Board rules.

The prime minister was simply sending a message that while foreign investment was welcome, the government would prefer partnerships with Australian companies.

"Politics is not just about legislation, it's about leadership, and sending the right messages, including messages to the world," Mr Fitzgibbon told ABC radio on Thursday.

"The important message to say to the Australian community is to say 'Don't worry about foreign investment, we're going to produce a register which will allow you to monitor it, and to demonstrate to you how low it is'.

"We're also sending a message to foreign investment that we are welcoming of it, but ... if they really want to be involved in Australia, to ensure that they look at doing it in conjunction with and in partnership with Australian companies."

FT.com

The sale of AIG’s aviation leasing business to a Chinese group is close to collapse, signalling the implosion of yet another Chinese bid to control such assets — the third in just a few years. When Chinese groups show up at auctions these days, the response is more scepticism than celebration.

In this case, the Chinese buying group fell apart. In other cases, involving potential purchasers ranging from obscure groups to well-known banks, either approvals or financing or the prevailing fear of overpaying were factors.

China Development Bank submitted the highest bid for the aviation leasing assets of Royal Bank of Scotland by a margin of $US240 million ($A268.3 million), despite the bank believing it had no chance of getting approval for the deal. A Chinese group bidding for Hawker Beechcraftcould not come up with the financing and lobbied vehemently (albeit unsuccessfully) for the return of its $US50 million deposit. Bank of China submitted a lowball bid not once, but twice for an Indonesian bank that Temasek was selling, which went ultimately to Maybank).

Investment bankers who once boasted to clients in the west of their contacts among potential Chinese buyers of assets and companies are no longer quite as confident in the strength of that pitch.

It was not supposed to be like this. China has massive amounts of money and a hunger for everything from the natural resources it lacks to leading-edge technology. If it is to transform itself into a consumer-led economy, it needs to upgrade manufacturing, its brands and design. The degree of competition in China is intense, so even where overcapacity is not an issue, profit margins are often razor thin, making overseas markets far more attractive by comparison.

Yet it is clear that China is not quite ready for primetime on the mergers and acquisitions front. Just having money and ambition, it seems, is not quite enough. One adviser retained to help a Chinese bank acquire a Russian bank (for reasons that remain obscure) asked the hopeful buyer if there was anyone at the bank who actually spoke Russian, and was told there was not. So, even when approvals and financing are forthcoming, more intangible, cultural factors remain a problem — language being only one of them.

Moreover, there are few domestic mergers and acquisitions, so most companies have little practical experience of how deals get done. In addition, with the exception of a few technology companies, Chinese companies still lack internal specialists with titles such as ‘chief strategic officer’ to think about these matters.

In many cases, the Chinese encounter hostility and xenophobia when they do venture abroad. Consider the contention around Shuanghui International’s $4.7bn acquisition of Smithfield Foods, which has become hostage to pork-barrel politics in the United States.

Of course, there are sectors where the Chinese have successfully closed deals. The two top sectors —oil and gas and mining — account for more than half of all deals since 2000 and involved nearly $US200 billion out of a total $US368 billion in outbound transactions, according to data from Dealogic. The Chinese government was behind virtually all these transactions, which were led by state-owned enterprises with the cheap financing of the policy banks such as China Development Bank that have access to the balance sheet of China itself.

So far, most successful acquirers have been state-owned companies with the blessing of the government.

Looking ahead, the next wave is likely to involve more privately owned companies doing smaller deals, particularly technology companies that are intrinsically more global. Such deals are likely to be targeted more at Europe (particularly Germany) than the United States, where the only thing equal to the paranoia of the US about China is China’s paranoia about the United States. But that should not restrict capital outflows from China.

Many people involved on both sides of the border believe the next big thing will be real estate, as Chinese developers and institutional investors look abroad, especially to the United States.

Funding and permission are easier to obtain in China and often are a simple formality in the United States.

“Mergers and acquisitions are the hardest outbound capital to succeed,” says Howard Chao, a lawyer with O’Melveny & Myers on the west coast. “You have to move fast and have everything in order and get approvals. It is much easier to buy big buildings. You can move money quickly, and there are usually no political issues. Chinese portfolio flows will also be big. Mergers will take a smaller part of the capital flowing out of China.”

There is another (unvoiced) reason real estate deals are attractive. With enough money, Chinese investors can get temporary green cards. Chinese people are increasingly following their money out of China.

Copyright The Financial Times Limited 2013

AAP

China's manufacturing activity strengthened in August to its highest level in 16 months, official figures show, in the latest data to suggest the world's second-largest economy is picking up steam after two quarters of slower growth.

The official purchasing managers' index (PMI) rose to 51.0 last month from 50.3 in July, according to figures released by the National Bureau of Statistics (NBS).

The index tracks manufacturing activity in China's factories and workshops and is a closely watched gauge of the health of the economy.

A reading below 50 indicates contraction, while anything above signals expansion.

The August PMI was the best since a reading of 53.3 in April last year, according to previous results.

It also marked the second straight month of strengthening and comes as other recent data has spurred optimism a slowdown in the economy may have been stemmed.

Zhao Qinghe, a statistician with the NBS, said in a report on the bureau's website that the result was the highest this year and "shows that China's manufacturing industry as a force for economic development has strengthened to some extent and makes obvious that a return to corporate stability has quickened further".

In July, generally upbeat economic data, including a jump in industrial production to a five-month high, helped spur optimism that China's economic weakness may have hit bottom.

And British banking giant HSBC said last month that the initial reading of its PMI survey for August came in at 50.1, rebounding from an 11-month low and the first time since April the indicator had expanded.

HSBC is due to release its closely watched final PMI index for August on Monday.

By a staff reporter

Activity in China's manufacturing sector expanded in August, but fell just shy of expectations, according to a leading survey.

HSBC's manufacturing purchasing managers' index printed at 50.1 for the month, recovering from an 11-month low of 47.7 in July.

Bloomberg had expected the index to print at 50.2.

Any reading above 50 indicates expansion.

HSBC chief economist, China, Hongbin Qu said the result implied growth in China's manufacturing sector has started to stabilise on the back of a modest rebound of new orders and output.

"This was mainly driven by the initial filtering through of recent stimulus measures and companies’ restocking activities," he said.

"We expect some upside surprises to China's growth in the coming months."

AAP

China has lowered its figure for economic growth for last year to 7.7 per cent from 7.8 per cent, the National Bureau of Statistics says, in an unexpected downgrade for the key number.

The world's second-largest economy has long been looked to as a potential driver of global recovery, but has put in a mixed performance in recent months.

The new figure posted on the National Bureau of Statistics website on Monday remains the lowest for gross domestic product growth since 1999, when it expanded 7.6 per cent.

China's GDP stood at 51.9 trillion yuan ($8.5 trillion) for 2012, the NBS added.

The country officially overtook Japan as the world's second-largest economy in 2010 and the growth figure is a key statistic for global investors, businesses and institutions.

Like other economies, China regularly revises its annual GDP figures although it usually does so in an upward direction.

But now its leaders are looking to steer it towards a hoped-for soft landing after years of high-speed expansion.

The statistics bureau cited "more comprehensive and reliable fundamental" information for the change.

The revision was "preliminary", it added, and the figure could be altered again as more data was obtained.

The 7.7 per cent result remains above the government's economic growth target for last year of 7.5 per cent.

Beijing normally announces a conservative growth target and generally exceeds it.

The target for this year is also 7.5 per cent. But after an acceleration to 7.9 per cent in the final three months of 2012, growth slowed to 7.7 per cent in the January-March period and 7.5 per cent in the second quarter.

Growth in the first six months of the year came in at 7.6 per cent, the NBS said in July, calling the performance "generally stable" and within expectations.

Despite two straight quarters of slowing growth, recent data for the current third quarter have been surprisingly solid so far, causing some economists to believe that it may be poised to stem the slide.

The 2012 figure compares with expansions of 9.3 per cent in 2011 and 10.4 per cent in 2010 and underscores a slowing trend after years of double-digit growth.

China's leaders say they want to retool the country's economic model away from a reliance on big ticket government-led investments and make private spending the key driver for what they hope will be expansions that are sustainable.

President Xi Jinping said in April that China's days of "ultra-high speed" growth are probably over, but he said the country can "sustain a relatively high speed of economic growth".

The reliability of China's statistics often prove vexing for economists who follow the country.

Even new premier Li Keqiang has expressed doubts, telling the US ambassador to China in 2007 when he was a top provincial official that some Chinese data were "man-made" and thus unreliable, according to leaked US diplomatic cables.

Li said he focused on only three figures -- electricity consumption, rail cargo volume, and the amount of loans issued -- when evaluating the provincial economy, according to a confidential memo released by the WikiLeaks website in late 2010.

"All other figures, especially GDP statistics, are 'for reference only,' he said smiling," according to the cable.

World Resources Institute

China launched its first pilot emission trading program this past June. This development is potentially a major marker in the country’s efforts to reduce greenhouse gas emissions.

The Shenzhen Emissions Trading Scheme program will cover some 635 industrial companies from 26 industries. This is the first of seven proposed pilot greenhouse gas cap-and-trade schemes in China, which the country has been developing since 2011. Besides Shenzhen, four of the other pilots are expected to start trading this year.

In 2010, these 635 industrial companies emitted 31.7 million tonnes of carbon dioxide and contributed 59 per cent of the Industrial Added Value (gross domestic product due to industry) and 26 per cent of Shenzhen’s GDP.

While most experts agree that the ETS will not be a major driver of emission reductions in the immediate future, these pilots are an important capacity-building mechanism for the government, companies, and third parties to test relevant methodologies and procedures.

Traditionally, China has been better at using administrative measures rather than market-based measures to meet its carbon emissions reduction goals. For example, China reduced its energy intensity by 19 per cent during the 11th Five Year Plan period (2006-2010), mainly through top-down, national policies, such as closing down small plants; disaggregating reduction targets to large companies, provinces, and cities (this is important because it places responsibility for meeting the targets directly on individual government officials and large companies – see: Top-1000 program and Energy-Saving Target Responsibility System); and setting up product energy performance standards.

An ambitious target

Shenzhen has set up quite an ambitious target for its ETS compared to existing national or local commitments.

The 635 companies will be given a roughly 100 million metric tonne CO2 emission allowance for free over the next three years. If the companies only emit their allotted amount, this would be equal to a 32 per cent reduction in terms of GDP emission intensity.

To put things into perspective, China is committed to reduce its emission intensity by 40-45 per cent by 2020, and Shenzhen’s carbon intensity reduction target during the current Five-Year Plan period (2011-2015) is 21 per cent.

It is worth noting that the allowances are determined by emissions intensity rather than in absolute terms, meaning the government will review companies’ Industrial Added Value on an annual basis and increase or decrease the absolute emission allowance to maintain a fixed emissions-to-GDP ratio. Intensity-derived allowances are a novel concept and could hold lessons for other developing countries.

Some challenges

One of the main challenges that the ETS pilots face is their legal basis.

For energy conservation, the national Energy Conservation Law provides a solid legal basis for the government. The law allows the government to collect energy-related data and set conservation targets for enterprises, as well as to stipulate legal consequences for non-compliance.

The ETS pilots, however, are based on ordinances from local legislatures. As a result, the regulation has fewer teeth. Ensuring that there are strong, enforceable penalties for non-compliance will be important for the success of the program.

Data quality is another frequently cited challenge. The national government has not yet mandated a unified methodology to account and report greenhouse gas emissions. Although the ETS pilots are adopting internationally recognised greenhouse gas accounting and reporting frameworks, each ETS pilot is likely to develop similar but slightly different methodologies, making it more difficult to link between pilots or scale them up to the national level.

Furthermore, the ETS pilots are generally hesitant to put in place stringent data-quality requirements out of the fear that companies don’t have enough capacity. The fact that caps are derived from intensity targets adds another layer of uncertainty, as economic data such as Industrial Value Added may also be subject to manipulation. The pilots will provide an opportunity for China to address data quality issues.

Last but not least, the political will to reach the ambitious reduction target is yet to be tested.

Chinese officials have estimated China’s emissions will peak between 2030 and 2040. However, there are influential experts advocating for the 2025 timeline, and at least one ETS pilot is studying the possibility of peaking as soon as 2015.

Building support for the ETS pilots will come from showing that the pilot programs are compatible with economic growth, which continues to be a priority in China. In 2012, Shanghai’s economy grew its GDP by 7.5 per cent, which was the slowest economic growth of any pilot site. Four of the seven pilot sites had double-digit GDP growth.

While these are some of the obstacles to overcome, the ETS projects can offer a strong starting point for a market-based approach to constrain emissions in China. If successful, these pilots can then be scaled up nationally, and will help show that China is serious about tackling its emissions and addressing the growing threat of climate change.

Ranping Song is team leader of WRI China's climate and energy program.

Follow WRI:TwitterFacebookYoutubeLinkedInRSS

- See more at: http://insights.wri.org/news/2013/08/inside-china%E2%80%99s-emissions-trading-scheme-first-steps-and-road-ahead#sthash.0kK5tXwl.dpuf

This post originally appeared on WRI’s ChinaFAQs blog. Republished with permission.

Follow WRI:TwitterFacebookYoutubeLinkedInRSS

- See more at: http://insights.wri.org/news/2013/08/inside-china%E2%80%99s-emissions-trading-scheme-first-steps-and-road-ahead#sthash.0kK5tXwl.dpuf

By a staff reporter

Activity in China's non-manufacturing sector slowed in August, according to official data released by the country's National Bureau of Statistics.

The non-manufacturing purchasing manager's index (PMI) fell to 53.9 in August from a level of 54.1 in July.

A PMI reading above 50 indicates an expansion, whereas a reading below indicates contraction.

AAP

Australia's next federal government faces a world that's still a long way from a sustainable economic recovery.

The Organisation for Economic Cooperation and Development's (OECD) latest report on the world's biggest economies says North America, Japan and the United Kingdom are expanding while the euro area as a whole was no longer in recession.

Growth in China - Australia's number one trading partner - also appears to have passed a trough, but recent financial market turbulence points to difficulties in a number of other emerging economies.

"While the improvement in growth momentum in OECD economies is welcome, a sustainable recovery is not yet firmly established and important risks remain," the Paris-based institution said in a 2013 economic update released on Tuesday.

The group's findings tally with the current Labor federal government's view that Australia continues to face economic headwinds from offshore that could dampen domestic growth.

The OECD believes the euro area remains vulnerable to renewed financial, banking and sovereign debt tensions.

At the same time, there are potential serious negative economic consequences if there's a repeat of earlier episodes of "deadlock and brinkmanship" over fiscal policy in the United States.

It also says there's a risk recent financial market volatility and strong capital outflows in some emerging economies could intensify, exerting an additional drag on global growth.

"As emerging economies contributed the bulk of global economic growth in recent years, and since their share of global output has increased so much, this widespread loss of momentum makes for sluggish near-term growth prospects for the world economy," the OECD says.

It believes major economies should keep interest rates low, but also thinks the US Federal Reserve should gradually reduce its pace of quantitative easing by buying back US debt.

In China, subdued inflationary pressures create room for monetary policy easing if growth were to flag, but authorities need to be cautious because of strong credit growth.

The OECD's latest outlook did not include Australia.

But in May it forecast Australia's growth to slow to 2.6 per cent in 2013, before picking up to around 3.2 per cent in 2014.

The Australian Bureau of Statistics will release June quarter growth numbers on Wednesday.

The report's expected to show Australia is growing at an annual rate of 2.5 per cent.

In recent conversations last month with government officials, policy wonks and businesspeople from Thailand, Indonesia and Malaysia about their country’s political and strategic future, I received the distinct impression that the implications of China’s rise was at the forefront of their minds. Although only a couple of people used these words, a widespread perception is that China’s ‘economic domination’ of Southeast Asia is already happening and all but assured. Wary as they remain about China’s rise, the Middle Kingdom will be too seductive and overwhelming an economic partner for old strategic alliances and partnerships to survive in their current form into the future.

To be sure, there is disagreement about timeframes. Some believe Chinese economic (and therefore strategic dominance) in Southeast Asia could occur this decade; others point to a longer time horizon. Either way, the trends appear obvious. But are they? In reality, hard statistics about Chinese trade and investment activity in these key Southeast Asian states tell a much more uncertain story.

Let’s begin with foreign direct investment into these still developing Southeast Asian economies. It is essential if they are to reach middle-income status in the case of Thailand and Indonesia, and transcend it in the case of Malaysia.

Taking 2005 to 2011 as two years for comparison, Chinese FDI into Indonesia grew from $US57 million to $US592 million. In Malaysia, it has increased from $US56 million to $US95 million. The figures for Thailand are $US4.8 million to $US230 million respectively.

Chinese FDI is clearly becoming more important. But there are a couple of things to note. First is the fact that Chinese FDI into these countries is still small compared to other major investor countries.

Take Indonesia for starters. In 2005, Chinese FDI constituted 3.6 per cent of all FDI into the country. Despite the absolute growth in Chinese FDI, Chinese FDI in 2011 was only 1.2 per cent of all FDI into the country. In contrast, Japan was behind over 27 per cent of all FDI into Indonesia in the same year. Singapore was behind 42.8 per cent, the UK 5.8 per cent, and ASEAN (Association of South-east Asian Nation states) as a whole behind 43.3 per cent.

The absence of Chinese FDI dominance is also clear in Thailand. In 2006, the figure was a tiny $US15.8 million, compared to $US230 million in 2011 – large growth in absolute terms. But in relative terms, the story is different. In 2011, cumulative (or outstanding) Chinese FDI into Thailand as a proportion of all cumulative FDI in the country was 1.23 per cent. In comparison, Japanese share of cumulative FDI was 46.9 per cent, the EU’s share 25.9 per cent, Singapore’s share 24.11 per cent, and America’s share 13.4 per cent. ASEAN’s share as a whole was 27.68 per cent.

To complete the trilogy, let’s take Malaysia. In 2005, Chinese FDI into the country totalled US$56.7 million, rising to US$95.1 million at the end of 2011. This represented about 0.5 per cent of all FDI into Malaysia in 2011. In comparison, Japan accounted for over 15 per cent of FDI in 2011, South Korea just under 8 per cent, the US and Singapore just under 4 per cent respectively and Saudi Arabia just over 3 per cent.         

Indeed, Chinese FDI into ASEAN trade-dependent countries with relatively open economies (Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines) have generally increased by very similar levels to increases in intra-ASEAN FDI over the past decade – around 22-23 per cent per annum. This means that Chinese investment is an important component of regional investment, but by no means dominant. In fact, Japan and Singapore are far more important FDI sources for the region than China, and will remain so for the foreseeable future.

Let’s now turn to trade. Volume of trade with China by all these three Southeast Asian countries is rising rapidly. Even then, two-way trade growth between these countries on the one hand and China on the other has generally matched intra-ASEAN trade growth and growth between ASEAN countries and the other two East Asian giants (Japan and South Korea) – all growing at about 30 to 35 per cent per annum over the past decade. Once again, we need to look behind the headline figures to work out what is really going on.

One can find a powerful clue in the fact that when the consumer economies of the US. and EU stagnate, trade between China and these three ASEAN countries decline or else stagnate in absolute terms (as occurred in 2009-2010.)

What does this indicate? Even after decades of rapid regional growth, it is often missed that the domestic consumption markets of the US and EU are over $US11 trillion each, compared to a Chinese domestic consumption market of under $US3 trillion respectively. After all, the genuine consumer class in China — consumers with the buying power of middle classes in middle- and high-income countries — number less than 100 million.

Moreover, booming trade with China merely reflects the fact that regional and Western export manufacturers have largely outsourced many stages of production to the ASEAN+3 (ASEAN + China, South Korea and Japan) countries and have done so since the 1990s. This is clear from figures indicating that America’s deficit in manufactured goods is almost entirely with Asia, while almost all of America’s trade deficit with China is in processing trade (in contrast to ordinary trade, where the product is solely produced in the one country before being exported.)

The recent difference — particularly since early this century — is that China’s rise has caused many firms to relocate export-orientated manufacturing processes from countries such as Thailand and Malaysia to China’s Pearl River Delta region. This is reflected in the fact that around two-thirds of America’s trade deficit is with China, and much of the remaining third with the other ASEAN+3 economies such as Japan, South Korea and Malaysia.

For example, the US had a significant trade deficit of $US14 billion in 2011 with Thailand, on bilateral volume of $US40 billion. Indeed, the Chinese Ministry of Commerce has indicated that foreign enterprises account for over half of China’s exports and imports, with the lion-share of FDI traditionally going into the export-manufacturing sector. More than 55 per cent of export-manufacturing growth in China is driven by the activities of foreign firms.

Regarding the ASEAN+3 economies as a whole, the evidence is that over two-thirds of the value of exports from the region eventually end up in the EU and US markets, rising from about half in 2006.    

It is clear that export-manufacturers view the ASEAN+3 region as a vast production chain with little discrimination as to where they locate production processes beyond commercial motivations of cost and reliability. This is important because such a trade structure gives Beijing far less capacity to use trade for political or strategic purposes than is often assumed. If Beijing were to prevent Thai or Malaysia firms, for example, from exporting components to China for assembly, this would merely harm its own export-manufacturing sector (which employs around 10 per cent of the workforce or approximately 75 million people) with deleterious consequences for local export-manufacturing employment, export-orientated FDI, and any resulting technology transfer that might occur. ASEAN firms would simply relocate part of the production process elsewhere. Given the complexity of intra-firm trade in the production process, it would be extremely difficult for Beijing to quarantine any fallout to just Thai or Malaysian manufacturing firms, as these firms are likely to be in partnership with other multi-national-corporations in the production process.       

American and European consumers remain far more important to the bottom line of Southeast Asian manufacturing firms than the Chinese consumer and will be so for quite some time – even if the potential of the latter generate the headlines.

But there is a further corollary to this intra-Asia trade structure for export manufacturing. Since China is not the epicentre of net consumer demand in the region or the world, Indonesian, Malaysian and Thai export manufacturing firms are instead competing with Chinese firms (and each other) for a larger share of the processing trade pie. Indeed, the raft of regional free-trade-agreements have generally made processing trade easier between all these countries, while all major ASEAN countries are at the same time complaining that Beijing places artificial barriers against accessing the Chinese consumer.

The point is that the increase in trade volumes between China and major ASEAN countries is largely due to processing trade which is ‘double-counted’ as it enters and leaves the country. Besides, rising trade with China could well exacerbate economic tension with China’s major regional trading partners. For example, traditionally important domestic sectors such as Malaysian and Thai electronic and machinery component manufacturers and Indonesian textile and garment manufacturers see trade with China as a major threat rather than a blessing.

Asia is a far messier and complex economic place than many believe, especially those who spruik the inevitability of a China-dominated Asian Century. The numbers bear that out. With days of double-digit growth behind it and domestic consumer failing to carry its weight, the future perception of China’s economic footprint in the region is likely to glide back to land and travel closer to its actual impact.

Dr John Lee is the Michael Hintze Fellow and adjunct associate professor at the Centre for International Security Studies, Sydney University. He is also a non-resident senior scholar at the Hudson Institute in Washington DC and a director of the Kokoda Foundation in Canberra.            

By a staff reporter

Activity in China's services sector hit a five-month high in August, according to a leading index.

The HSBC China services purchasing managers' index (PMI) printed at 52.8 in the month, after a reading of 51.3 in July. 

A reading above 50 indicates expansion, while below 50 points to contraction.

Hongbin Qu, HSBC's chief China economist said the five-month high was due to growth of new business.

"Employment decreased as service providers saw their profit margins squeezed despite a moderate increase of output prices in August; the first rise in four months," he said.

"A filter-through impact of VAT reform, combined with a rebound in manufacturing output, is expected to support service industry growth in the coming months."

AAP

United States aviation giant Boeing says it expects China's commercial aircraft fleet to triple in size over the next two decades as the country's strong economic growth boosts air traffic.

China will need 5,580 new aeroplanes worth $US780 billion ($A855.69 billion) by 2032, 16 per cent of the world total, the Seattle-based company said at a briefing on Thursday in Beijing.

The figures mark an increase from the company's forecast last year, when it said China would add 5,260 new aeroplanes to its fleet by 2031.

"Thanks to strong economic growth and increased access to air travel, we project China traffic to grow at nearly seven per cent each year," said Randy Tinseth, vice president of marketing for Boeing's commercial aeroplane division.

The company expects worldwide traffic growth to average 5.0 per cent a year over the period.

China's air travel is booming. A total of 319 million air passenger trips were recorded in the country in 2012, up 8.9 per cent from the previous year, official figures show.

The Boeing statement projected that China will have a total of 6,450 commercial aircraft by 2032, up from 2,100 last year.

Tourism within China and intra-Asia travel will help spur strong demand for single-aisle aeroplanes, with total deliveries in that segment reaching 3,900 through 2032, it said.

Long-haul international traffic to and from China is predicted to grow 7.2 per cent annually, leading to a demand for an additional 1,440 new fuel-efficient widebodies, it added.

"To compete in the long-haul international market, our Chinese customers are focused on growing their international networks, increasing their capacity and building resources," said Tinseth.

"These trends will shape market demand for aeroplanes that have high efficiency, low operating costs, environmentally progressive technologies and a great passenger experience."

AAP

China will allow unfettered exchange of its yuan currency in its first free trade zone, a draft plan seen by AFP showed, in a bold push to reform the world's second largest economy.

The free trade zone (FTZ) in Shanghai is intended to make the city into a true international trade and financial centre and challenge the free economy of Hong Kong, a special administrative region of China, analysts and government officials said.

Premier Li Keqiang, who took office in March, is backing the zone -- which his cabinet approved last month -- to be one of the crowning achievements of his administration, they said.

The draft plan seen by AFP showed the FTZ goes beyond greater liberalisation of trade to take in investment and financial services -- including free convertibility of currency.

"Under the pre-condition that risk can be controlled, in the zone convertibility of the renminbi on the capital account will be conducted, the first to carry out and test (it)," the plan said.

It does not explicitly state that the exchange rate will be purely market set.

China's yuan currency, also known as the renminbi, is convertible for trade but the government keeps a tight grip on the capital account on worries unpredictable inflows or outflows could harm the economy -- and reduce its control over it.

A government official familiar with the plans said companies registered in the FTZ could open special accounts to freely exchange yuan, but with only a few exceptions they would be required to close their onshore Chinese accounts.

Under the draft plan, the FTZ would let interest rates be set by the market.

China currently fixes deposit rates by administrative order, but the central bank began allowing banks to decide their own lending rates in July.

According to the Ministry of Commerce, the 29-square-kilometre FTZ groups four existing areas in Shanghai: the international airport, deepwater port, a bonded zone and a logistics area.

The draft plan said the FTZ would "support" establishment of foreign and joint ventures banks and welcome privately-funded financial institutions.

At present China's banking sector is overwhelmingly dominated by state-run institutions.

"They want an offshore harbour, basically like Hong Kong," said a financial industry executive briefed on the plans.

The government tapped commercial hub Shanghai because of the success of its Waigaoqiao bonded zone, the executive said, which allows goods to be imported tax-free, unless they are to be sold on within the domestic Chinese market.

The FTZ project as a whole "will be a bold step to escalate China's economic development to the next level", ANZ Banking Group said in a research report this week.

"Its success could be a model for the next stage of China's economic reform, opening up and capital account liberalisation."

But it warned such liberalisation would increase the risk of large capital flows, which could impact the economy.

For trade, the government envisions making the zone a centre for cross-border e-commerce transactions, a plan which may require cooperation with a payments provider, officials said.

The zone would create a "platform" for trading commodities such as metals, energy and farm products and "gradually" allow foreign companies to directly trade commodities futures, the draft plan showed.

Within the FTZ regulatory controls will be relaxed in 19 different business sectors, ranging from banking to culture.

But authorities have ruled out allowing casinos in the FTZ, officials said, a privilege enjoyed by Macau, another special administrative region of China.

Preparation work on the more sensitive financial reforms will take until the second half of next year, according to an official timetable.

AAP

Apple is reportedly preparing to ship new low-cost iPhones to China Mobile in a sign that the company has reached an agreement to supply the world's biggest mobile carrier.

The Wall Street Journal reported the news just days before Apple is expected to unveil new iPhone models including a cheaper version of its flagship model to better compete with rival Samsung in emerging markets.

Apple has been trying for years to strike a deal with China Mobile, the world's largest mobile phone operator with 740 million subscribers.

Apple is only the seventh largest smartphone seller in China, lagging behind Samsung and a raft of domestic manufacturers. Its third-quarter sales in China fell 14 per cent compared to a year earlier to 4.6 billion dollars ($A5 billion).

AAP

China's trade performance was better than expected in August, as stronger exports to recovering overseas economies caused the trade surplus to widen to $US28.6 billion ($A31.50 billion), customs figures show.

Improved exports, a key driver of growth for China, are a positive sign for the world's second-largest economy which has struggled since early this year, analysts said.

The trade surplus rose 8.3 per cent from the same month last year and also widened from $US17.8 billion in July, according to customs figures released yesterday.

Analysts had forecast a trade surplus of $US20.4 billion, according to a survey of 11 economists by Dow Jones Newswires.

"The surplus is higher than expected thanks to strong exports. The figures are good and show an upward trend in China's trade," Liao Qun, an economist at Citic Bank International, told AFP.

"China's export markets began to grow strong again as the United States is back on track and Europe is stabilising," he said.

Exports jumped 7.2 per cent year-on-year to $US190.7 billion last month, customs said in a statement on its website.

Economists had forecast a 6.0 per cent annual rise in exports for August, Dow Jones Newswires said. In July, exports grew just 5.1 per cent on the year.

Besides weak demand, China's exports have also been hurt by appreciation in its yuan currency, which makes its products more expensive overseas, analysts say.

Separately, imports rose a weaker-than-expected 7.0 per cent to $US162.1 billion in August, less than the 11.7 per cent rise forecast by analysts.

Weak imports could still be a sign of worry for the economy, signalling that domestic demand is faltering, analysts said.

"The import figure is lower than expected, indicating that the demand from the domestic market is not that strong," Ma Xiaoping, a Beijing-based economist for British bank HSBC, told AFP.

"However, there is no need to worry too much, as the effect of stimulus policies revealed earlier this year and the rebound in domestic demand will take time to realise," she said.

The market is watching for signs of recovery in China, which the global economy relies on to sustain growth.

China's economy expanded 7.7 per cent last year, the slowest growth since 1999.

In the final quarter of last year, growth accelerated to 7.9 per cent, but has slowed in successive quarters to 7.7 per cent in the first quarter and 7.5 per cent in the second quarter.

But China's manufacturing activity strengthened in August to its highest level in 16 months, official figures showed, with the closely watched purchasing managers' index (PMI) rising to 51.0 from 50.3 in July.

Another PMI measure released by HSBC rebounded to 50.1 in August, its first month of expansion since April. A reading below 50 indicates contraction, while anything above signals expansion.

By a staff reporter, with AAP

China's inflation has slowed to 2.6 per cent in August from 2.7 per cent in July, official data shows.

The consumer price index – a main gauge of inflation – fell by 0.1 percentage points month-on-month in August.

Authorities said food prices were the main driver of the increase, with meat, egg and vegetable costs all going up in the month, partly because of higher than average temperatures and lower rainfall than in previous years, Yu Qiumei, a senior National Bureau of Statistics analyst, said in a statement.

China's producer price index, which measures goods prices at the factory gate, rose 0.1 per cent in August, according to the NBS.

It was the first increase in six months and came after five months of deflation in producer prices.

"The changes in PPI showed that ... trends of the national economy stabilising and rebounding are becoming clear," said Yu.

Bloomberg had forecast the index would slip to 2.6 per cent.

By a staff reporter

Chinese industrial production lifted slightly in August compared to the previous month, while retail sales were flat.

The National Bureau of Statistics of China data showed industrial production grew at an annualised 9.5 per cent in the month, above the 9.4 per cent achieved in July.

The result is slightly better than expectations of 9.4 per cent growth.

Retail sales increased by an annualised 12.8 per cent in August, the same as the rate posted the previous month.

The figure is slightly below analyst expectations of a 12.9 per cent lift.

Yet more terrific news for the Australian economy, this time with conformation that the pace of economic expansion in China is picking up from the slowdown that reached a low point around the middle of the year.

The trifecta of economic news from China was in the form of better than expected results for industrial production, fixed asset investment and retail sales. This good news is consistent with a rate of GDP growth around 7.5 to 8 per cent rather than the sub-7 per cent that was feared a few months ago as the data turned sour.

Recall that China is in the second largest economy in the world behind only the US and it takes around one-third of Australia’s exports. Chinese economic news is more important to Australia than from anywhere else.

In terms of the specifics, industrial production rose by 10.4 per cent in the year to August, up from July’s 9.7 per cent and above the 9.9 per cent consensus estimate. This was the fastest rate of increase in 17 months. Fixed asset investment rose 20.3 per cent over the year, up from 20.1 per cent in the prior month, while retail sales lifted 13.4 per cent through the year to be above the 13.2 per cent growth rate recorded in the year to July.

Commonwealth Bank of Australia senior economist, Andy Ji saw the data as so positive that there is upside to its current forecast for 7.6 per cent GDP growth in 2013.

The news follows the better than expected international trade data and confirmation that inflation in China was still well contained, which would allow the authorities to hold policy at an easier setting for a little longer, thereby locking in a solid rate of expansion for the remainder of 2013 and into 2014.

In last month’s Statement on Monetary Policy, released days after it cut official interest rates to a record low 2.5 per cent, the Reserve Bank of Australia noted that “growth in China is now unlikely to pick up much, if at all, in coming quarters. Rather, it is expected to remain at a pace that is close to the official target [of 7 per cent]”.

Clearly, a lot can change in five weeks and it is nice, at last, to see the surprises coming on the high side after several years of growth downgrades. The recent trends in China will no doubt see the Reserve Bank move quickly to recast its forecast for growth and the terms of trade higher and in doing so, scaling back the forecast rise in the unemployment rate.

This news from China creates a new foundation for an upbeat outlook for the Australian dollar. It also means that the start of the fresh interest rate hiking cycles could be quite soon and the extent of those rate hikes much greater than just about anyone is currently anticipating.

The Aussie dollar jumped on the better news and there was also a lift in the stock market trends that spread to Europe and the US overnight. This morning the dollar is trading at US 93.15 cents, while US stocks rose around 0.75 per cent. Bond yields also moved higher. Rising stocks, bond yields and an appreciating Australian dollar are all signs of a favourable growth outlook with some upside risks to global inflation. 

Of course, there are risks ahead, as there always are in economics and financial markets. In China, there remains a perception that there is considerable excess capacity and that the shadow banking systems is sufficiently fragile that a property free-fall is being factored into some scenarios for 2014. Indeed, this looks to be the biggest risk for the Chinese economy. 

There is also the heavily intertwined risk where China’s largest buyer of manufactured goods, the eurozone, remains stuck in economic quicksand even though the run of recent news has been a little less down beat. If the hints of better news from the eurozone in recent months fade, the current round of good news from China may quickly reverse.

For now, with policy settings tilted towards growth and a recovery in export demand from slowly recovering western countries, China seems well placed to grow at a solid clip over the next 18 months and Australia once again will hang on for the ride.