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    East Asia Forum

    Arguments currently raging in Australia about the so-called China choice have not addressed the crucial issue about what specific concessions must be made to accommodate a rising China. Instead, debate consists of generalised statements that the US needs to provide China with strategic space by acknowledging its legitimate strategic interests.

    China has identified Taiwan, Tibet and, more recently, the South China Sea as core national interests. Currently, most of Australia’s attention about China’s growing assertiveness has been focused on the East China Sea and the South China Sea.

    Beijing, however, has not renounced its threats to use armed force to regain what it sees as the renegade province of Taiwan. In the two Taiwan Strait crises of 1954 and 1958 the US made it clear that it would defend Taiwan, including with nuclear weapons if necessary. In 1996, Beijing held military exercises off the coast of Fujian province opposite Taiwan simulating an amphibious landing on hostile territory. America’s response was to send two aircraft carrier battle groups through the Taiwan Strait in a show of force, signifying that the US was too powerful to be coerced.

    Now, there is huge trade between Taiwan and China worth US$165 billion and growing by 18 per cent per annum, investment in China worth US$14 billion annually, and tourism involving 800 aircraft flights a week. These sources of ‘soft power’ have cemented a prolonged period in which the threat of force between Beijing and Taipei has been put to one side. Diplomacy on both sides of the Taiwan Strait seems to have prevailed. The question now is whether an increasingly assertive China will calculate that time is not on its side, with Taiwan becoming far too ensconced in its democratic independence.

    Taiwan has been off the radar screen for almost 20 years now. But as Henry Kissinger observes in his book On China, the potential for confrontation in the US–China relationship is the unresolved challenge.

    The latest Pentagon report to the US Congress about China’s military power observes that preparing for potential conflict in the Taiwan Strait, which includes deterring or defeating third-party intervention (in other words, the US), ‘remains the focus and primary driver of China’s military investment’. China appears prepared to defer the use of force as long as it believes that unification remains possible in the long term. But it believes that the credible threat of use of force is essential to maintain the conditions for progress in cross-strait relations and to prevent Taiwan from making moves toward de jure independence.

    China is developing formidable military forces to coerce Taiwan or to attempt an invasion if necessary. Taiwan’s security has historically been based upon the PLA’s inability to project power across the 160 kilometre wide Taiwan Strait due to natural geographic advantages of Taiwan’s defence. All of this is now changing, with a massive build-up of Chinese military forces opposite Taiwan, the loss of the Taiwanese military’s technological advantage, and rising doubts about America’s willingness to intervene given the superiority of PLA military forces in its immediate neighbourhood.

    China still lacks the conventional amphibious capacity required to support a full-scale invasion of Taiwan. But it has overwhelmingly superior numbers of combat aircraft within unrefuelled range of Taiwan as well as large numbers of attack submarines, surface combatants and naval aircraft designed to achieve sea superiority. Taiwan’s own 2013 National Defence Report states that the PLA is capable of blockading Taiwan and seizing its offshore islands. As ASPI’s Ben Schreer points out, these factors have greatly complicated Taiwan’s current strategic situation because the PLA has changed the cross-strait military balance and thereby also raised doubts about the United States’ will and ability to come to Taiwan’s defence.

    If China ever decides to attack Taiwan, Taipei will critically depend on US military intervention on a large scale. This would mean war with China and it would raise questions about which US allies would also come to the defence of Taiwan. Other than the possibility of logistics support by Japan, it is unlikely that any other Asian country would join America in such a conflict. And it is hard to think of any European country fighting on the other side of the world, especially given current preoccupations in Europe with Putin’s Russia. That leaves Australia being faced with the ultimate challenge in the so-called China choice.

    Over the decades, successive Australian governments have quite rightly refused to respond to any questions about such a contingency. But a refusal on Australia’s part to invoke the ANZUS Treaty in such a major conflict, involving Chinese attacks on US armed forces, could well be an alliance-breaking issue.

    Short of such worst-case contingencies, it is important for the US and its allies, like Australia, to resist any moves by Beijing to force Taipei into becoming part of a Chinese hegemonic regional order and giving up its vibrant democracy. As Kissinger argues in his latest book, World Order, the question now is how China will relate to the contemporary search for world order. And the central issue for Taiwan’s survival, in this context, boils down to the quest for legitimacy over naked power politics.

    Paul Dibb is Emeritus Professor of strategic studies at The Australian National University’s College of Asia and the Pacific. He was a guest of Taiwan’s Foreign Ministry from 9–13 September 2014.

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

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    Lowy Interpreter

    Recently I was invited by the Korean National Defense University to present at a conference on regional powers' responses to Korean unification. It is an important topic, because I think it is increasingly clear to South Koreans, or at least the Government, that unification will be more impacted by regional players, especially China, than they might like. That is to say that a German-style, wholesale absorption of North Korea with little regional input, beyond reluctant acquiescence, seems unlikely.

    In 1990, the Soviet Union was collapsing. Mikhail Gorbachev was desperate to lower the Soviet military burden and cut the costs of the Eastern European albatross. (Where the Eastern European glacis had been a security boon in the 40s and 50s, by the 70s it had become a serious economic weight, as had many of the USSR's allies, who nearly all demanded subsidies, North Korea included.) In this environment, Gorbachev effectively 'sold' the German Democratic Republic for around 75 billion marks, plus a much-disputed reassurance from US Secretary of State Jim Baker that NATO would not expand east.

    China, North Korea's patron today, faces no such constraints. China is rising, not collapsing. It does not need the money; its ability to support a stumbling client is improving, not declining. Hence I have argued repeatedly that Korean unification will face a harder course than Germany's. And this is exacerbated because North Korea is in much worse condition than East Germany was, and South Korea is less capable of absorbing North Korea in one shot than West Germany was. Also, the US is not nearly as regionally dominant in East Asia today as it was in Europe in 1990.

    With that in mind, I argued that China does in fact have a pretty profound security interest in keeping North Korea afloat, and hence delaying unification as long as possible. As is often the case with Chinese foreign policy toward North Korea, I find this cynical and manipulative. China manipulates arguably the worst country on earth with little care for the horrible oppression going on within, and it asserts the importance of its own 're-unification' (with Taiwan) while tacitly acting to deny that to the Koreans.

    Beijing should not be surprised at the dearth of strategic trust it faces. It has earned it. But from a strictly realpolitik perspective, North Korea serves at least three basic purposes to Beijing:

    1. North Korea, as Chinese analysts openly admit, is a 'buffer' between China and the robust democracies of South Korea, Japan, and the US. International relations work on buffer states has noted that they often facilitate great power peace by reducing the perception of zero-sum territorial competition. Today's conflict in Ukraine may be seen as Russia's attempt to keep a buffer between it and NATO. Similarly, China perceives the value in North Korea 'distancing' the democratic practices and military power of the Republic of Korea (ROK), Japan, and the US from its border. The US and its Asian allies are not just a potential military threat to Chinese territory, most obviously in the case of a Sino-US conflict. They also represent, as democracies, a regime challenge to China's post-communist oligarchy. The persistence of North Korea keeps alive the useful fiction for China that somewhat 'communist' states continue to exist, and that democracy is not an ever-widening global norm, at least not in Asia.

    2. Korea's division distracts US attention from the biggest foreign policy issue for China – the future of Taiwan. In its long-standing effort to end Taiwanese 'splittism', China's first goal is to inhibit US intervention, diplomatic or otherwise. As long as North Korean shenanigans keep Washington focused on northeast Asia, strategic attention and military resources are not available for Taiwan contingencies. This likely explains Beijing's frustratingly tepid response to even egregious North Korean behavior such as the 2010 sinking of the ROKS Cheonan or the shelling of Yeonpyeong Island. So long as North Korean bad behavior does not become too dangerous, it serves a running Chinese interest in distracting the US.

    3. Korea's division helps inhibit a Korean-Japanese rapprochement; continuing division prevents any Japanese foothold on the peninsula. Korean tension with Japan is obviously rooted in memory and territorial issues, but antipathy toward Japan also serves a national identity-building purpose in South Korea. The ROK is trapped in a debilitating national legitimacy contest with the aggressively nationalist DPRK which does not hesitate to play powerful nationalist cards against the South: South Korea is Hanguk, while North Korea is Joseon. South Korea is the bastardized, globalized, 'Yankee Colony' selling Korea's heritage, folkways, and racial integrity to foreigners, while North Korea, despite its poverty, defends the minjeok against its many predators, including Japan and the US. To counter this narrative and the national confusion it generates, the ROK targets Japan instead of the DRPK as the focal point of its state-building nationalism. If the ROK cannot be the anti-DPRK, then it will be the anti-Japan. And China, especially under Xi Jinping, clearly manipulates Korean disdain for Japan. But when Korea unites, the anti-Japan animus needed for the intra-Korean competition will be unnecessary. The ensuing Japanese-Korean rapprochement would be a serious geopolitical set-back for China.

    If points 1-3 are downsides to unification and strong reasons for China to prop-up North Korea, it should also be noted the North Korea has learned how to play on its 'buffer' role:

    4. China's North Korean (quasi-)ally has a penchant for 'reckless driving.' That is, the DPRK does not follow Beijing's lead reliably. It is prone to rebuff and even slight Beijing to remind it that Pyongyang is still sovereign even if it iseconomically dependent. Both the nuclear tests in spite of Beijing's warnings and the brutal purge of Jang Sung Thaek seemed calculated, among other things, to remind Beijing that North Korea is not a colony or satellite. The obvious security cost for China here is that North Korea may one day go too far in its provocations and incur a South Korean or American counter-strike, which may in turn spiral into a conflict that chain-gangs in China. The DPRK may be a buffer, but is a highly unreliable ally.

    To summarize, the buffer is the big reason, as best the panelists at the Korean unification conference last week could tell. There were four of us – me, plus two Koreans, and a Chinese. The two Koreans also emphasized this point, while the Chinese colleague was noticeably silent when pushed on this. This has been my experience before. I first started hearing Chinese conferees openly speak of the 'buffer' in 2009, but that seems to be fading, given how obviously manipulative it sounds.

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

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    CALGARY—Chinese state-owned energy companies have been unfairly targeted in Canada by regulations on investment from foreign government-controlled companies, according to China’s top diplomat in the Canadian oil patch.

    The critique comes amid a steep drop in new investment in Canadian energy assets by Chinese state-owned enterprises. That has raised questions about China’s commitment to increasing its presence in Canada’s oil and gas industry, which requires foreign capital to fund development.

    “Discriminating against SOEs from China is not very wise. For commercial deals, the companies are making their own decisions” instead of taking orders from Beijing, Chinese Consul General Wang Xinping told The Wall Street Journal in an interview.

    Attracted by Western Canada’s vast untapped oil reserves -- the third largest in the world -- China has invested tens of billions of dollars over the past five years in Canadian energy. The bulk of that investment has involved its three largest state-owned enterprises, including the US$15.1 billion purchase of Calgary-based Nexen Inc. by Cnooc Ltd, and deals by China National Petroleum Corp., or PetroChina, and China Petroleum & Chemical Corp., known as Sinopec.

    The Nexen deal and the subsequent US$5 billion buyout of a Canadian natural gas firm by Malaysia’s state-owned energy giant Petronas sparked concern in Ottawa about foreign ownership of assets in an industry considered strategically important. In late 2012, Canada’s federal government revised the Investment Canada Act to effectively ban SOEs from oil sands deals worth more than US$330 million.

    Investment bankers and lawyers working with Chinese and other foreign investors say the move put a chill on energy deals due to uncertainty about the regulatory environment in Canada. The restrictions have also irked Beijing, which says SOEs shouldn’t be held to different standards.

    “Treatment of any company-either SOEs from China or private or otherwise-should be the same, be equal,” Mr Wang said.

    But the Consul General said the slower pace of Chinese foreign investment in Canadian energy reflected a number of factors, including a need by China’s SOEs to consolidate their recent acquisitions and a broader downturn in crude oil and natural gas prices on global markets.

    Unexpectedly difficult operating conditions in Canada have also been a source of frustration for Chinese companies in Canada, Mr Wang said. He singled out for criticism Canadian regulations limiting the number of foreign workers, especially in the province of Alberta which is home to much of the country’s oil and gas industry and has long suffered from chronic labour shortages for skilled trades.

    Chinese SOEs are particularly unhappy by the difficulty they have faced trying to staff their local operations with technicians from China, he said.

    ”They cannot get a work permit or permission to come over to support their company’s operation, especially those technical people who are really needed,” Mr. Wang said. “In Calgary, the technical people of the energy industry are in dire need. Locally, you can hire but it’s so, so expensive and that makes companies really feel the pinch,” he said.

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    New investment in Canadian energy assets by Chinese state-owned enterprises has dropped.

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    China Hong Kong politics chief executive Leung Chun-Ying and former CE Tung Chee Hwa

    As protests in Hong Kong move into their third week with no end in sight, citizens are getting used to a "new normal".

    Longer commutes cause some grumbles, but Hong Kongers are also enjoying the new public open spaces and cleaner air, with office-workers strolling at lunchtime down car-free streets and picnicking on the traffic barriers.

    Over the weekend a tent city sprang up at the main Admiralty protest site as thousands settled in for what became a weekend resembling nothing so much as an outdoor community arts festival. As well as the growing collection of protest art installations, crowds were entertained by musicians, dance performances, free portrait sketching, movie screenings and origami lessons. After weeks of exhorting participants that this protest was a serious matter and "not a carnival", student organisers on Sunday finally relented and published a program for the coming days' activities, including guest speakers and a live band.

    Carpenters have been helping to build increasingly sophisticated staircases over the cement road barriers, as well as rows of desks for the now-famous "homework zone". As the infrastructure in the stretch of occupied 8-lane highway that has now been dubbed "Umbrella Square" becomes more entrenched by the day, one would not be too surprised if by this time next week the makeshift "shower" tents have been plumbed in with hot and cold running water.

    Behind this festive atmosphere, however, questions are intensifying about the long-term impact of the protests on business confidence in Hong Kong.

    If business confidence is threatened, it will not be the fault of the protests themselves. Indeed, Financial Secretary John Tsang said in a speech a few days ago that despite the protests "the markets are operating smoothly and we have not encountered any difficulty in our trading activities", while immigration department statistics showed tourist arrivals have been unaffected.

    Rather, the threat to confidence arises because the past few weeks have exposed a weak and incompetent government, as well as deep fissures in the "one country, two systems" foundation upon which Hong Kong stands.

    After an initial clearance operation that the police have now publicly acknowledged was a failure, the Hong Kong police force has become the butt of online jokes, with the spokesperson at their daily four o'clock press conferences dubbed "4pm Hui Sir" and gaining minor celebrity status with his catch phrase "I now recap in English". While the online humour may not harm Hong Kong's image, the impression that the police force are leaving policing to triad gangs certainly will. Those allegations have still not been seriously investigated or addressed, beyond the police issuing flat denials.

    Chief Executive CY Leung remains under a cloud following allegations relating to payments made to him by Australian company UGL raised in a report by Fairfax journalists last week. Leung has done little to address the allegations beyond saying in a pre-recorded television interview on Sunday that he felt there was no conflict of interest and no legal or ethical issues in connection with the payments. Hong Kong, Australian and UK regulators are said to be considering whether to open formal investigations. A leader in any Western democracy in a similar position would generally be expected to resign, or at least stand aside until any investigation cleared their name. Leung shows no inclination to do so, although it would seem untenable for him to retain any authority - or maintain Hong Kong's reputation for impartial and transparent government - in the current circumstances.

    Perhaps of most concern, the administration does not appear to have any strategy to resolve the current crisis beyond simply hoping it all goes away. The government failed to take any decisive action to clear the protests, and at this stage any such action would likely require use of force to a level that would be unacceptable to the Hong Kong or international community. The government is also refusing to negotiate with the protest leaders and failing to engage meaningfully on issues which are clearly of great community concern. Indeed, Leung and his chief secretary Carrie Lam have both left town to attend an investment conference in Guangzhou.

    The ongoing government inaction is stoking further frustration in certain segments of the community and leaving a vacuum, which threatens to be filled by vigilantism. There have been numerous cases of people attempting to take matters into their own hands over the past week, and pro-Beijing groups have announced they will attempt to clear protesters forcefully on Tuesday. If continuing government inaction allows these vigilante incidents to continue or worsen, the consequences would be even more damaging to Hong Kong's image and business confidence.

    Underlying these protests is a sense among Hong Kong people that their way of life is under threat - a way of life that they see as distinctly different from that of the "one country" to which they are told they belong. This has raised questions about the tenability of governing two such different "systems" under the same, ultimately authoritarian, style of governance, which the currently-disputed NPC Decision - and the Chief Executive election method it mandates - seeks to impose upon Hong Kong.

    If Hong Kong is to salvage business confidence, the time has come for the government to stop blaming the protesters, and to find an alternative to its policy of "wishful thinking" that they will just lose interest and go home. The government must engage and communicate with the people, formulate a policy, and take action.  Most importantly, if they are to preserve business confidence, any action the government does take must also show that "one country, two systems" can continue to work and thrive. Simply removing the protesters by force will fail to achieve that aim. They must take the difficult step of ceasing to merely administrate and actually starting to govern.

    Antony Dapiran is a Hong Kong-based international lawyer.

     

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    Lowy Interpreter

    A professor of classical music in Beijing startled me in 2010 when he said, 'when I look at my students, I fear we are headed for war within five years.'

    'War with whom?', I enquired.

    'With anyone.'

    His students don't seem like fenqing ('angry youth'). They are in a musical conservatory, after all, not a military academy. Many have overseas connections. But they are also ambitious, emotional, fiercely nationalist and for them war – any war – would be a gratifying affirmation of their country's ascendance. Like the 2008 Olympic Games but with real explosions, not fireworks. These kids lap up PLA propaganda films like Silent Contest even as they dream of Juilliard. My professor friend worries they just haven't thought things through, that their various aspirations are totally misaligned.

    A similar message comes from a recent essay in The Economist. 'What does China want?' it asks, and it concludes China may not get all it seeks. Understandably, China wants wealth and power. It also wants respect. Yet respect is love as much as fear. The Economist wonders if the Chinese state, with its heavy hand at home and blaring 'cold-war, Manichean imagery', will achieve this aim.

    What do the Chinese people themselves want? As patriots, they want wealth, power and respect for their country.

    They also want out. Of those who can afford to, 64 per cent wish to leave, an extraordinary figure. At the same time however, most Chinese are nationalistic, so perhaps Beijing merely reflects their mood. As Jessica Chen Weiss argues, nationalism is not new. The only thing that varies is the Government's 'green light/red light' indulgence of nationalistic public protest. Most alarming is the high level of anticipation for war among the Chinese public. And thanks in part to an endless parade of World War II television dramas, the target is clear: Japan. In a recent survey, only one-quarter of Chinese do not foresee future military conflict with Japan. 

    The 'strange revival of nationalism' is a paradox of our age. War worship should totally contradict materialist aspirations, yet the two often go together. Perhaps some new citizens want the goodies of Western life without the full package of liberal rights and responsibilities. In the words of philosopher John Gray they 'don't much care about getting to Denmark', the supposed nirvana of Francis Fukuyama's modernity. Or they might, but they don't become Danes when they do.

    Historically, the morphing of prosperity into nationalism has been a powerful trend. The 'strange revival' may be exactly that: an atavistic reversion to type. In 1841, a Prussian aristocrat proclaimed the great virtue of economic progress over warfare:

    Under a good and wise administration...are not (our) inhabitants better fed, clothed and schooled? Are not such results equal to a victorious campaign...with the great difference that they are not gained at the expense of other nations, nor the sacrifice of the enormous number of victims that a war demands?

    Azar Gat's magisterial War in Human Civilization identifies that aristocrat as Field Marshal Helmuth von Moltke, the German Chief of General Staff, who 50 years later would blame the 'passion of the populace' for warmongering: 'Today, war and peace (are) no longer cabinet questions...Public opinion (may) prove stronger than the will of those who rule.' By the 1890s, Bismark's restrained Prussian growth machine had become unified Germany, now under the bombastic Wilhelm, who would later 'roll the iron dice' for the honour of his Reich. Germany's economic success led to an expanded sense of diplomatic entitlement.

    On the other side of the world, the New York Times (30 July 1894) fretted: 

    Japan is panting for a fight. She has, at great cost, reorganized her army and founded a fleet, and would...readily avail herself of any opportunity of proving their value and showing to an admiring world what she can do with them. Of all possible opponents, China would be the most preferred, for the Japanese regard (the) mainland with a most holy hatred, mixed with a great deal of contempt.

    Those same words are depressingly imaginable today, with the roles reversed. Xi Jinping commands the PLA to be battle-ready. The state media uses harsh words like 'unswerving', 'unflinching' and 'uncompromising'. A defence academic warns the nation to prepare for World War III. An active-duty PLA major general scoffs that Japan can be 'taught a lesson' with a third of his forces. No wonder 64% of Chinese surveyed think 'hardening our position' is the way to resolve territorial disputes.

    How do we explain the apparent contradiction between China's hostile nationalism and its great globalisation project? Wouldn't war itself be greatest of all threats to its ambition? And why are the very countries demonised most by China's nationalism also attracting Chinese talent and wealth? There are many possible explanations. Of course people emigrate for many reasons, practical and personal. Perhaps China will prevail either in peace or war, and is spreading its reach confidently. The affluent 64 per cent who want to emigrate probably aren't the same hard 64 per cent who want to man up against Japan. Perhaps outsiders just don't 'get' China. Or maybe folks are simply hedging their bets. Maybe the odds of war really are rising, and Chinese are voting with their feet.

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

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    China's government has said it will impose a resources tax of between two and ten per cent on the country’s struggling coal industry after last week’s shock announcement of an increase in tariffs for both coking and thermal coals.

    The Ministry of Finance said on Saturday that the country would allow provincial authorities to set their own resources tax according to their local situation after considering the tax burden on companies and their level of reserves.

    “The coal resources tax range will be between 2 per cent and 10 per cent with the specific tax rates to be set by provincial level finance and tax departments,” the Ministry of Finance and the State Administration of Taxation said in statements posted on their websites, “provincial governments need to submit their proposed tax rates for final approval.”

    The new resources tax is the latest move introduced by Beijing to combat the country’s worsening environmental crisis following the decision last week to impose a levy of three per cent on coking coal imports and six per cent on lower grade thermal coal.

    China Coal Industry Association, the country’s leading industry body, estimates more than 70 per cent of coal miners have made losses this year.

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    New resource tax of between two and ten per cent follows decision to impose new tariffs on coal imports.

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    China's trade balance narrowed in September, coming in well below analyst expectations according to official data. 

    In the month, China's trade surplus was $US30.94 billion, from $US49.84bn in August and well below the consensus of analysts surveyed by Bloomberg at $US41.1bn.

    In September, exports from China rose 15.3 per cent, against expectations of a 12 per cent lift.

    Meanwhile, imports into the nation grew seven per cent, well ahead of expectations of a two per cent decline. 

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    Official data shows China's trade balance comes in well below analyst expectations.

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    China's exports of steel products rose to a fresh record last month, almost doubling from a year ago as steelmakers burdened by China's slowdown boost cheap exports to make up for lost margins at home. 

    Chinese mills habitually use exports as a means to bolster sagging domestic sales, which has often threatened to swamp global supplies and led to trade friction with major importers such as Europe and the US Chinese steel officials say they are trying to get mills to cut back on such exports. 

    September net exports of steel products reached 7.2 million metric tons, rising 4.5 per cent from the last all-time high posted in May. Steel exports in the first nine months are up 39 per cent to 65.3 million tons. 

    By absolute volume, exports reached 8.5 million tons, also a record. The September shipments rose 73 per cent, nearly double the volume a year earlier. 

    Analysts say the US remains a top destination for Chinese steel exporters, as weak manufacturing conditions and slack demand for steel spurred price cuts and exports among domestic steelmakers, according to the consulting firm Applied Value. 

    Cheap Chinese steel prices are boosting exports to record levels, especially to the US where current domestic hot-rolled prices are comparatively $US209 a ton higher, it said. 

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    September exports almost double from one year ago, amid lost margins at home.

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    China will meet its growth target of around 7.5 per cent this year helped by urbanisation and economic restructuring, its central bank chief said. 

    However, a property market downturn, the government's efforts to fight pollution and a slowing manufacturing sector are weighing on economic growth in the short term, Zhou Xiaochuan said in a statement released Monday on the central bank's website. 

    The country's economy likely grew 7.2 per cent in the third quarter from a year earlier, slowing from a 7.5 per cent year-over-year increase in the second quarter, according to the median forecast of 15 economists polled by The Wall Street Journal. Sluggish domestic demand and an ailing property market have raised concerns that Beijing may fail to hit this year's economic growth target. 

    Premier Li Keqiang said last week that the government would tolerate a growth rate slightly below 7.5 per cent and said the authorities plan to ramp up investment in projects such as water conservation and technology. 

    Mr Zhou said since the country's job market is stronger than expected and inflation remains at a relatively low level, the People's Bank of China will continue with a prudent monetary policy, while pushing ahead with financial reforms and stepping up risk management. 

    The governor was speaking to officials of the International Monetary Fund and the World Bank over the weekend, according to the statement. 

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    Statement says urbanisation, economic restructuring to aid 7.5 per cent growth.

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    Scuffles broke out at the main Hong Kong protest site on Monday afternoon as hundreds of anti-protest activists confronted pro-democracy demonstrators in an attempt to break through barricades that continue to block downtown areas. 

    The confrontations came at the start of the third week of the standoff and just hours after police started removing some barriers that they said were unmanned. 

    Meanwhile, Hong Kong Chief Executive Leung Chun-ying, who is in Guangzhou, China, for prescheduled meetings, didn't comment on questions whether the city had set a deadline to clear the protest sites. 

    "The Hong Kong government and the police will continue to exercise a high level of tolerance," he told reporters. "Still, this situation can't last for long," he said as he also vowed that he wouldn't heed protesters' demand that he resign. 

    "I won't resign, I don't need to resign," Mr Leung said. 

    In the afternoon on a key road leading to the city's banking district, witnesses said a large truck arrived to clear barricades. 

    "Those guys from the truck cut and tore down tents on the protest site and put them on the truck," Eric Chiu, an onlooker who said he wasn't involved in the protests, said. 

    A large purple-coloured metal container on the rear of the truck appeared to contain barricade-related items collected from roads. 

    Uniformed and plainclothes police asked protesters to clear the area. Officers surrounded the truck and linked arms in an effort to block well over a hundred democracy protesters from getting closer. The move sparked anger from people in the crowd, who accused the police of aiding the anti-protest activists. 

    At one stage, dozens of taxis joined the activists as the drivers sounded their car horns and demanded that the pro-democracy protesters remove the barricades. 

    Earlier Monday, police removed some protest barricades that they said were unmanned. 

    Protesters gathered as the barricades were moved in the early-morning hours but didn't confront the officers, some of whom were carrying riot gear. Police didn't plan to confront protesters, a person with knowledge of their plans said. 

    Students have been under pressure from taxi and truck drivers to open Queensway, a main road into the city's primary business district where police were removing some barricades. Students had considered opening the road over the weekend but decided against it, hoping to extract concessions from the government in exchange. 

    "Our concern is that the public opinion will turn against us if we continue to block the main roads," Ting Ka-Ki, a standing committee member of the Hong Kong Federation of Students, said at a protest site in the busy shopping district of Mong Kok, one of the three areas blocked by demonstrations. 

    The police strategy was to clear any barricades that are unmanned but to avoid confrontation with the protesters, according to one person with knowledge of the situation. 

    "No blood. They can clear if it's an unmanned barricade," this person said. But police have the option to use force if they are attacked by protesters, this person said. 

    Asked on the scene if the police plan to start removing more barricades around the city, one senior officer said: "no plan yet." 

    The barricades were removed from the Admiralty and Mong Kok districts and were put on trucks. Most of the police officers left the scene soon after. Traffic began flowing on some of the previously blocked streets and students reinforced barricades closer to their main protest sites. 

    Over the weekend, both sides boosted their rhetoric, days after the government cancelled the first formal negotiations with students. In a televised interview Sunday, Hong Kong's chief executive called the demonstrations -- where tens of thousands of protesters have camped on major traffic arteries -- an "out-of-control mass movement." 

    Leaders of the three main organising groups -- Scholarism, the Hong Kong Federation of Students and Occupy Central -- responded in a statement posted on Facebook that it was the "government that is out of control," referring to an early attempt to disperse protesters with tear gas. 

    A group of pro-democracy lawmakers said they would increase pressure on Mr Leung to step down, by calling for inquiries into his administration's handling of the demonstrations, and whether he violated anti-graft laws in accepting payment of GBP4 million ($US6.4 million) from Australian engineering company UGL Ltd. 

    Mr Leung said the deal was a standard "noncompete, nonpoach" agreement and said there is no conflict of interest with his public duty. 

    The protests centre on a demand for general elections to choose Hong Kong's leader in 2017. Beijing has said it would allow only preapproved candidates, and Mr Leung has said he and the Hong Kong government stand by that decision. 

    Mr Leung and his deputy, Carrie Lam, who was set to negotiate with student protesters last week, went to Guangzhou for previously scheduled meetings on regional economic cooperation this weekend. 

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    Most Australian coal producers are expected to absorb Chinese tariff hikes as the world's second largest economy seeks to also impose an impost on its own producers.

    But industry commentators say some local mid-tier coal miners are in danger of losing money unless thermal and coking coal prices improve.

    China's government on the weekend said it would impose a coal resources tax of between two and 10 per cent to improve the country's worsening environmental situation.

    The announcement came a day after China's shock decision to place a levy of three per cent on coking coal imports and six per cent on lower grade thermal coal.

    Simon Bennison, chief executive of the Association of Mining and Exploration Companies (AMEC), said the tariff decision would compound problems for mid-tier coal producers who were struggling with margins.

    "It puts a significant direct cost onto the bottom line," Mr Bennison told AAP.

    "You've got companies that are working in virtually break-even who will obviously be taken into negative territory unless we get a kick in the price of thermal and coking coal."

    However he said it was still unclear whether China's domestic resource tax would help balance out the announced tariffs.

    Prime Minister Tony Abbott has described China's tariff decision as a "hiccup" as free trade negotiations with Australia's largest trading partner continue.

    Mr Abbott hopes to clinch a free trade deal with China at or before the G20 summit in Brisbane in November.

    On Monday he opened a new coal mine in Queensland and told BHP workers that coal was an essential part of Australia's economic future.

    Morningstar analyst Mathew Hodge said the issue seemed to be bigger than just coal, but added the potential long-term effects on the local industry were uncertain.

    "External conditions are already very difficult so this would make things even harder," Mr Hodge said.

    "Supply and demand is going to have to meet at a price or margins that are different to here," he said.

    CMC Markets analyst Michael McCarthy said the local coal industry would be concerned about future tariff hikes.

    "It's clearly not a positive, but it might not be as negative as the first headlines appeared given that internal coal producers will also be subject to a lift," Mr McCarthy said.

    "It's not a positive for the market and we're seeing some pressure on coal miners."

    He said coal stocks were already under pressure following the Australian National University's recent announcement that it is divesting its fossil fuels portfolio.

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    Some local mid-tier coal miners are in danger of losing money unless thermal and coking coal prices improve say analysts.

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    Australian companies are increasingly being targeted by elite Chinese hackers for the purpose of learning trade secrets, cyber security firm Mandiant has said, according to The Australian Financial Review.

    Mark Goudie, who heads Australian investigations at Mandiant, said Australian mining and resources firms had been a key target during periods of commodity price fluctuations, merger and acquisition discussions and contract negotiations.

    “In a number of cases Chinese state-owned enterprises have been involved in business relationships with the Australian companies at the time of compromise,” he told the AFR.

    The hacks have been brought about for two reasons, according to Mr Goudie: the hunt for more details amid close dealings with Chinese state-owned enterprises and, secondly, the stealing of intellectual property.

    Among local Mandiant clients are NBN Co, National Australia Bank, Westpac and Commonwealth Bank, but it is not known if any of these firms have been compromised.

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    Chinese hackers have allegedly stepped up attempts to steal secrets from local firms.

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    China's Sunshine Insurance Group is edging closer to the purchase of Sydney’s Sheraton on the Park for a record price of about $465 million.

    Sunshine Insurance, one of China’s top 500 companies, is reported to have agreed to terms on a deal to buy the landmark property on Friday night.

    On some accounts, contracts have been exchanged on the trophy property, but some executives involved said the deal was not yet finalised.

    A purchase of the hotel overlooking Hyde Park from the US hospitality group Starwood would be a major marker in the march of Chinese insurers in buying global property assets.

    Last week, Hilton announced it had sold its New York luxury flagship hotel the Waldorf Astoria to China’s Anbang Insurance Group for a massive $US1.95 billion ($2.23bn).

    Chinese insurers Ping An and state-owned China Life have also been splashing out on property in the US and Britain.

    Buying the 557-room Elizabeth Street hotel, which has benefited from an upsurge in international leisure and business tourists, would be a big step for Sunshine.

    The group is yet to secure a property in Australia though it missed out on buying the Sofitel Sydney Wentworth, which was purchased in May by Frasers Centrepoint for $202m.

    Starwood said this year it would exit hotel ownership in Australia, though it has also flagged aggressive plans to increase its management of hotels in the country.

    The company said in a statement yesterday: “We do not comment on any market rumours and will not announce any transaction until it is complete. What we can say is that we seek long-term partners who share our vision for our hotels to be brand enhancing properties, and that we remain highly committed to the Australian hotel market.”

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    Square

    On today's blog:

    Got something you would like to add to the blog? Email (harrison.polites@businessspectator.com.au) or get in touch on Twitter.


    2.45pm - Don't expect the corporate sector to drive an economic recovery: J.P. Morgan

    By Chris Kohler, BusinessNow

    Today’s NAB Business Confidence data shows the Australian corporate sector will continue to tread carefully, according to J.P Morgan.

    “The RBA’s official liaison program has characterised the sluggish transition of the economy back to trend growth as being driven by a lack of animal spirits in both the household and corporate sectors,” Ben Jarman of J.P. Morgan said.

    “Households are cautious due to fears of rising unemployment, and firms are unwilling to hire or invest until they see compelling evidence that a demand recovery is in place.”

    “From the corporate side, today’s survey shows little signs of the corporate sector being willing to risk moving first, and driving a cyclical recovery. We don’t have particularly high hopes for tomorrow’s October WMI consumer survey either, given that domestic economic news has remained downbeat, and falling equities are weighing on household wealth.”

    Read more about NAB's latest business confidence survey here. 


    2.35pm - One graph which destroys Joe Hockey's latest climate blunder

    From Climate Spectator:

    Treasurer Joe Hockey has told a British interviewer in London that it's 'absolutely ridiculous' to suggest Australia is one of the OECD's highest per capita carbon emitters, despite the Garnaut Climate Change Review saying the nation was in the No.1 position, Fairfax reports.

    "We've got a small population and very large land mass and we are an exporter of energy, so that measurement is a falsehood in a sense because it does not properly reflect exactly what our economy is," Mr Hockey told the BBC, according to Fairfax. "Australia is a significant exporter of energy and, in fact, when it comes to coal we produce some of the cleanest coal, if that term can be used, the cleanest coal in the world."

    And from Twitter


    2.10pmA surprising number of Australian companies already have an internal carbon price

    The same company that has installed over 550,000 solar panels on its stores now has another climate feather in its cap. Yes, Swedish homewares company IKEA is now considering an internal carbon price for its operations.

    However, this move is not as uncommon as it sounds. Based off the Carbon Disclosure Project’s latest report (pdf), here’s a quick list of all of the Australian companies it found to be using a carbon price.

    • Treasury Wine Estates Australia
    • Wesfarmers Australia
    • Woolworths Limited Australia
    • Aquila Resources Australia
    • Caltex Australia Australia
    • Santos Australia
    • Woodside Petroleum Australia
    • Australia and New Zealand Banking Group Australia
    • GPT Group Australia
    • Insurance Australia Group Australia
    • Macquarie Group Australia
    • National Australia Bank Australia
    • Westfield Group Australia
    • Westpac Banking Corporation Australia
    • Qantas Airways Australia
    • Transpacific Industries Group Australia
    • Amcor Australia
    • Boral Australia
    • Fortescue Metals Group Australia
    • AGL Energy Australia
    • APA Group Australia

    And some notable international companies:

    • SingTel (Optus)
    • BP
    • Deutsche Bank AG Germany
    • Ernst & Young LLP U.K
    • Rio Tinto
    • Google
    • Microsoft 
    • BHP Billiton

    Essentially this means that these companies are ready for a carbon price, should it be legislated by government. As the report points out, it was axed by the Senate earlier this year. 

    It’s worth noting that most don’t actually disclose the price they put on carbon. In the report, Westpac is identified as the only company that discloses a price. It values carbon at $US10 a tonne.


    12.35pm - Time has proven Xenophon right on Qantas

    Back in March Senator Nick Xenophon also wrote in the SMH

    And what about the plans to revive the Qantas Group? Jetstar domestically proved a treat; Jetstar internationally has been a toxic black hole. Idle planes sitting on the tarmac in France for a stalled Jetstar Hong Kong are the most recent symbol of a botched strategy in Asia.

    At Senate inquiries, Qantas Group executives were defensive when I asked whether the Jetstar Asia offshoots would be technically insolvent were it not for multi-million dollar injections from the parent company.

    Given current Australian accounting rules, which allow cost-shifting from one entity to another within group accounts, we may never know how much the Jetstar offspring has drained from its Qantas parent.

    But we do know that in 2008 Jetstar had 36 aircraft to Qantas' 188 planes. Today, it's 115 to 122. It seems that while Qantas could carry Jetstar, Jetstar cannot  do the same for Qantas.

    And the news today, as reported by Steve Creedy on BusinessNow:

    Qantas will shoulder about $55 million of a $120m deficit at Jetstar Japan after the start-up saw its losses rise 26 per cent in the last financial year.

    Start-up costs rose as the carrier grew from 13 to 18 aircraft but was unable to fully utilise the aircraft due to delays in opening its second base in Osaka and a delay in international services.

    A Jetstar spokesman today confirmed figures which showed increased costs outpaced a doubling of revenue to 29.1 billion JPY to see losses rise to 11.1 billion JPY.


    12.10pm - Three graphs on why Australia is still getting a raw deal on petrol

    As this chart from Quartz shows, crude oil has seen a steady decline since June. According to this graph from the Australian Institute of Petroleum, it looks as if our petrol prices have followed suit. 

    Though, as always with petrol, whether we’re receiving the full discount is questionable. 


    10.40amTracking fear: What Google’s data has to say about Ebola in Australia

    Google’s search analytics tool has been used to chart flu outbreaks in the past. This time, we’re putting it to a new use: tracking fear over Ebola in Australian society.

    The disease is yet to hit Australian shores, but according to Google, concern over Ebola reached new highs following the scare involving Queensland nurse Sue Ellen Kovack, who was suspected of having contracted  -- and later tested negative for -- Ebola.

    Simply put: despite the government’s rhetoric over terrorism, as a society we are significantly more worried about Ebola. 

    So why is this case? Well, part of it is likely due to misinformation. By now, we all know that Ebola has a mortality rate of between 25 and 90 per cent -- significantly higher than other diseases. As a society, we know far less about how it’s spread and its symptoms. The ABC has put together a really handy Ebola myth busting kit, that’s well worth a read if you are concerned about the disease. 

    The real battle revolves around containing Ebola and at the same time mitigating fear. It’s an interesting balance, as the fear generated by the disease is possibly the only catalyst that will spark an international response. Though, as Brookings noted during the Swine flu outbreak in 2009, the same fear that will spark us into action has the potential to do more damage to markets and society than the disease itself. 


    9.40amChina trade data continues to boost AUD

    By Chris Kohler, BusinessNow

    The Australian dollar remains higher after better-than-expected Chinese trade figures gave the currency a boost.

    At 8am (AEDT) the local currency was trading at US87.73c, up from US87.34c on Monday.

    The figures gave the Australian dollar a boost on Monday which continued overnight, Westpac senior market strategist in Wellington Imre Speizer said.

    “Yesterday’s strong Chinese trade data gave the currency the boost,” Mr Speizer said.

    “Equity markets in the states sold off heavily overnight and that may have an effect on the Australian dollar today.”

    Read our partner blog The Australian's BusinessNow here. 


    9.10am - Three things you need to know this morning

    Welcome to day two of The Ticker. If this is your first visit to this blog, you may want to read this quick explainer. Otherwise, here are today’s top stories.

    1. The cyber security firm that exposed Chinese hacking attempts on the US government last year has revealed that Australian companies are increasingly being targeted by elite Chinese hackers for the purpose of learning trade secrets.

    2. Treasurer Joe Hockey has told European leaders to "lift their eyes" and engage more with Asia or risk being left behind.

    3. Following moves by authorities in parts of Europe, the US will now start screening inbound travellers for signs of the Ebola virus at five airports around the country.

    From elsewhere

    Travel bans won’t prevent the spread of Ebola. Here’s why locking down countries will only make the matter worse.

    Chinese are slowly, but surely buying out Italian businesses. And it’s triggering a new wave of xenophobia and racism.

    Meet the invisible umbrella. It keeps water off you using high-powered streams of air.  

    Want to become an internet celebrity? All you need is $68 and two hours of your time.

    Prepare for ‘The Snappening’. Up to 200,000 nude images from SnapChat are about to be leaked onto the web.

    You can read yesterday's blog here.

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    MOSCOW—Russia and China have opened a currency-swap line, paving the way for further trade and investment between the neighbouring countries, Russia’s central bank said on Monday.

    Russia has stepped up efforts in recent months to develop closer ties with China after relations with the West deteriorated over the situation in Ukraine. Western sanctions, aimed at punishing Russia for the annexation of Crimea and its support of anti-Kiev rebels in eastern Ukraine, have effectively removed it from the global borrowing markets. The new foreign-exchange swap facility is designed to improve liquidity in Russia’s financial sector and beef up stability.

    The Bank of Russia and the People’s Bank of China agreed to open a yuan-ruble swap line worth 150 billion yuan (US$24.47 billion or 984 billion rubles) for three years. This will offer both countries access to each other’s currencies without the need to purchase them on the currency markets, Russia’s central bank said.

    The announcement follows a meeting between Russian Prime Minister Dmitry Medvedev and his Chinese counterpart, Li Keqiang, in which they talked over future steps regarding cooperation in the financial and energy fields.

    “The agreement on swaps in national currencies of the Bank of Russia and the National Bank of China will contribute to [the] development of two-party relations thanks to wider capabilities of financing trade and direct investments, as well as due to a more common use of Russia’s ruble and China’s yuan in the international trade and investment activity,” Russia’s central bank said in a statement.

    Russian officials have repeatedly called for an increase in yuan-ruble transactions with China -- Moscow’s second largest trade partner -- in an attempt to lower the country’s dependence on the U.S. dollar.

    The finance ministry said last month it was considering diversifying its debt portfolio away from countries that have imposed sanctions on Moscow and into the papers of Brazil, China, India, and South Africa, a bloc known as Brics.

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    Chinese car sales gains fell to a 19-month low in September amid a weakened economy and rising inventories.

    For foreign automobile makers, which increasingly have counted on the world’s largest car market to offset weakness elsewhere, the slowdown in economic growth adds to pressures that include increased regulatory scrutiny.

    China’s passenger-car sales last month rose 6.4 per cent from a year earlier to about 1.7 million vehicles, according to data released Monday by the China Association of Automobile Manufacturers, a government-backed industry group. Growth in total sales of automobiles including passenger and commercial vehicles shrank to 2.5 per cent from 20 per cent a year earlier.

    September’s passenger-car sales performance was the weakest since sales fell in February 2013, a month when China’s weeklong Spring Festival holiday closed car lots. Industry analysts said the latest results were below expectations for a traditionally strong month. Carmakers and dealers usually boost marketing efforts in September to attract consumers ahead of the weeklong National Day holiday that started Oct. 1.

    Foreign automakers were immune to the industry’s slowing growth, taking market share as domestic Chinese brands endured the brunt of the cooling. On Monday, CAAM said foreign automakers again increased their share of the Chinese passenger vehicle market to 62.4 per cent in the first three quarters of the year from 60 per cent in the year-ago period.

    But now the slowing gains are being felt by foreign auto makers as well. Volkswagen AG’s China sales in September rose 6.7 per cent from a year earlier, compared with an 11 per cent year-over-year increase in August. One of Toyota Motor Corp.’s Chinese joint ventures, FAW Toyota Motor Co., slashed its sales target by 6 per cent this year, citing a sluggish economy and high inventory at dealers.

    On Monday, Credit Suisse cut its price target for BMW AG shares in part because it said the German car maker’s China sales were weaker than expected. Sales of BMW and Mini brands in China rose less than 4 per cent in September to about 37,111 cars, the report said. BMW, which said it doesn’t comment on outside estimates, said it is confident it will hit moderate sales growth by the end of the year.

    “The economic situation has had a spillover effect on the car industry, especially in midsize cities with a population of about five million, where economies are facing greater downward pressure,” said Peng Bo, a consultant with Strategy&. He expects China’s passenger car sales to rise up to 10 per cent this year, compared with a 16 per cent gain in 2013.

    Jessica Zhu, a 34-year-old Shanghai bank credit manager, is putting off a car purchase. She figures it is too expensive and troublesome to own a car. “Driving in big cities like Shanghai is not that pleasant,” she said. “Parking is getting more expensive and difficult. You will also have to worry about maintenance issues from time to time.”

    Fang Yongbin, 36, who works in the publishing industry, echoed those concerns. “On top of the one-off car-purchasing cost, you should spend at least 20,000 yuan (US$3,300) a year to maintain a car. That is too expensive,” he said. “Since public transportation has significantly improved in Shanghai, I don’t think it is necessary to own a car.”

    According to the China Automobile Dealers Association, a trade group, inventories at dealers stood at about 45 days in September, up from 36 days in the year-earlier period. Luo Lei, an executive at CADA, said the inventories of imported cars were running at about two months because demand for such cars slowed as growth has weakened.

    At a briefing in Beijing on Monday, Yao Jie, a CAAM deputy secretary-general, said an index measuring the prosperity of the auto industry fell 3.4 percentage points in the third quarter from the second quarter. “Inventories are continuing to increase,” he said, without disclosing further details.

    China remains a stronger growth engine than the U.S. and Europe, and continues to be a source of strength for many carmakers. General Motors Co.’s sales in China rose 15 per cent last month compared with a year earlier. Ford Motor Co.’s car sales fell 4 per cent in September from a year ago, the automaker’s first monthly drop in more than two years, but analysts attributed that decline to capacity constraints.

    China’s first-quarter economic growth came in at 7.4 per cent compared with a year earlier, its slowest pace in 18 months. Second-quarter growth rose slightly to 7.5 per cent, but measures of trade, property prices and manufacturing activity suggest momentum slipped in the third quarter.

    Ye Sheng, an analyst at market research firm Ipsos, said pressure from Beijing could be contributing to weakening sales. A number of foreign automakers have faced scrutiny from antitrust regulators over their business practices with dealers as well as their pricing of spare parts and services. Mr. Ye said that could affect the car association’s sales figures because they measure wholesale deliveries to dealers, not retail figures.

    “Auto makers had usually pressed dealers to take more orders than they needed. But such pressure on dealers has eased due to the antitrust move,” he said.

    China in September levied a combined US$45.8 million fine against local affiliates of Volkswagen’s Audi arm and Chrysler, owned by Fiat Chrysler Automobiles NV, after alleging they manipulated prices of vehicles and parts. Other auto makers that have been the subject of antitrust investigations include BMW, Daimler AG and Tata Motors Ltd.’s Jaguar Land Rover unit. The companies have said they were cooperating with the probes.

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    Graph for The cloud over China's coal imports

    Beijing stunned Australian coal miners and free trade agreement negotiators last week with a tariff increase on coking and thermal coals. The move is widely interpreted as an attempt by China to shore up its struggling domestic producers.

    The China Coal Industry Association estimates that more than 70 per cent of coal miners have made losses this year and has been lobbying Beijing intensively to impose tariffs on imported coal. They got what they wanted last week when Beijing imposed a 3 per cent tariff on coking coal and a 6 per cent tariff on thermal coal.

    The Abbott government is trying urgently to find the reasons behind the surprise increase and is pinning its hopes on signing the free trade agreement to reverse this damaging policy change for Australian coal exporters.

    However, at the same time as people are indignant over the Chinese protectionist move, Beijing also introduced a long-awaited coal resource tax of between 2 and 10 per cent on the country’s already struggling domestic coal producers.

    The net profits of the coal industry nosedived by as much as 46 per cent during the first eight months of the year and 70 per cent of medium- to large-sized coal mines made losses during the same period, according to the National Development and Reform Commission and the China Coal Industry Association.

    Why is Beijing introducing the much debated resource tax on the struggling coal industry while simultaneously lifting tariffs to protect it? The introduction of a comprehensive nation-wide resource tax is one of the top fiscal reform priorities for Beijing. The Chinese government has been running several pilot schemes with different resource-rich provinces for the past four years. 

    For example, the State Council, the country’s cabinet, introduced an ad valorem resource tax back in June in the resource-rich province Xinjiang, imposing a 5 per cent tax on petroleum and natural gas. In December 2010, the government expanded the pilot scheme to 12 western provinces. In November 2011, the resource tax on petroleum and natural gas has been levied on the basis of price instead of volume.

    The biggest and most significant move for the new tax is to shift from volume-based taxation to ad valorem taxation; the move is designed to better reflect fluctuating commodities price as well as streamline the country’s byzantine tax code.

    In China, the resource tax only accounts for about one per cent of the total revenue of the central government. So the industry is lightly taxed in theory, but is subject to a myriad of local charges, fees and levies, according to an estimate by Caixin, a respected Chinese business publication.

    For example, China has 109 coal industry-related taxes and fees, which include 21 types of taxes and 88 kinds of fees and charges, according to a report produced by the Coal Industry Research Institute at the Central University of Finance and Economics in 2013.

    All these fees and charges can account for as much as 43 per cent of the net profit of coal producers.

    With the introduction of this new tax, Beijing wants to abolish many of these local charges and fees to relieve tax burdens on domestic coal producers. However, it is much easier said than done. While the central government collects resource tax, provincial and local governments get to levy and charge all other additional fees.

    These hidden and sometime outright illegal fees are often used to replenish local government slush funds that can sometimes function as personal ATMs for corrupt officials. There would be considerable reluctance on the part of local governments to enthusiastically support Beijing’s effort to replace these complex resource-related fees with a much more transparent national tax.

    Some Chinese domestic coal producers have already voiced concerns about the new tax, saying they are not confident that local governments would want to reduce fees and charges in favour of a more transparent and accountable national tax.

    The success or otherwise of this new tax is dependent on the ability of Beijing to rein in hidden fees and charges relating to the country’s coal industry. The introduction of the new resource tax is likely to mitigate the price impact on Australian coal exporters of the surprise increase in tariffs last week -- well, at least for the short to medium term.

    Another reason for the introduction of ad valorem tax on coal is to better reflect the environmental costs of coal mining in China. The country is the world’s largest producer and consumer of coal and is in the midst of a worsening environmental crisis.

    Beijing was once again shrouded in grey smog last weekend and we should not underestimate public anger about air quality nor Beijing’s resolve to mitigate the harm. In future, it seems that both domestic and foreign coal producers will come under increasing pressure.      

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    The ride for fund managers that rushed to buy shares of China’s state-owned firms this year is turning into a bumpy one that only long-term investors may be able to stomach.

    Optimism over these debt-laden behemoths, which control vast tracts of the world’s second-biggest economy, had risen on hopes that overhauls by Beijing would make them more efficient and nimble. But a series of disappointments for investors have sent shares tumbling since early September.

    Shares of China Petroleum & Chemical Corp., the country’s biggest oil refiner, jumped earlier this year when it set out to sell its network of gas stations, seen as the first of a number of moves by the Communist Party to overhaul state assets. In September, when the buyers were disclosed, more than two dozen investors had ended up with tiny stakes, making it less likely that the operation would be substantially changed. Many of the buyers had government affiliations, an apparent setback in efforts to reduce the state’s control.

    Investors grew more doubtful that the company, also known as Sinopec, would be able to deliver the level of returns and improvements to its business that they had hoped for.

    “The intent is pretty clear” that state-owned firms are on a path to change, said Stuart Rae, AllianceBernstein Holding’s Asia Pacific chief investment officer, who bought shares earlier this year in Sinopec. But, he said, “it’s a bit muddled” in the short term.

    Sinopec’s stock had risen from Feb. 19, when the sale plan was unveiled, until early September, but has fallen since then. Monday, it closed at 6.67 Hong Kong dollars (86 U.S. cents), 18 per cent below its September high, and near its level in February.

    Shares of other state-owned listed firms have also slumped. In Hong Kong trading, PetroChina Co. Ltd., a unit of oil-and-gas giant China National Petroleum Corp. which is divesting part of its natural-gas-pipeline business, closed Monday at HK$9.57, down nearly 18 per cent from an early September peak. Early euphoria has faded, in part because the company has yet to lay out a timeline for selling assets.

    Financial conglomerate Citic Ltd., formerly known as Citic Pacific Ltd., is down nearly 22 per cent from its top in mid-August, when Citic Pacific bought US$37 billion in assets from its parent company, an unlisted, state-owned enterprise on the mainland.

    The deal made it possible for the public to buy into the mainland business, but the government ended up with a stake of more than 80 per cent in Citic, suggesting investors will have a limited say over how the business is run.

    Pinpointing when to start investing in state-owned companies has been a challenge for fund managers. Starting last fall, Beijing detained a raft of current and former executives at PetroChina Co. in an effort to address corruption, but improving the firm’s actual business appeared to remain a secondary goal, said Nathan Griffiths, senior portfolio manager of emerging markets at ING Investment Management, which manages US$232 billion globally.
     
    “Reform in the energy sector is more political than anything else,” Mr. Griffiths said. It wasn’t until March, when PetroChina announced that it slashed 2013 spending to a level lower than forecast, that ING bought in.

    The poor track record of state companies gives investors reason to believe Beijing’s overhaul plans could sour. Around 75 per cent of state companies made money last year, compared with 90 per cent of private Chinese firms, according to Barclays Research. The return on equity for state-owned businesses was half that of all mainland-listed firms in 2012, according to the research firm’s latest data.

    State companies also operate in utilities, energy and other so-called old-economy sectors. In the 1990s and early 2000s, they helped fuel the expansion of China’s economy as it grew at double-digit percentage rates, but in recent years, private businesses tied more directly to local consumption have grown faster.

    For those reasons, many fund managers remain put off. François Perrin, who heads fund management for greater China at BNP Paribas Investment Partners, said he questions whether state-owned companies remain a “momentum trade,” meaning they are likely to benefit from people buying only because the prices are already heading up.

    “It’s very hard to justify at this point when you have growth elsewhere,” said David Gaud, senior fund manager at Edmond de Rothschild Asset Management.

    The firm sold its holdings of state-owned companies in 2007, when China’s mainland stock market turned down and the economy began slowing. In recent years, the asset manager has preferred to invest in sectors like e-commerce and wastewater treatment, where growth looks rosier.

    Even though Beijing poured trillions of yuan in stimulus funds into the economy in 2009, channelling most of it to state-owned enterprises, the gap in profitability between those firms and private enterprises is at its widest ever, according to research firm Gavekal Dragonomics.

    But fund managers like AllianceBernstein’s Mr. Rae say they are prepared for the long haul. They say that by choosing carefully, they can invest in firms making headway in improving how they allocate money and resources.

    “Just because it’s an SOE, doesn’t mean there’s reform taking place,” ING’s Mr. Griffiths said, emphasizing the importance of investing selectively.

    The firm bought shares of Shanghai Industrial Holdings Ltd, owned by the Shanghai government, amid signs that the city was at the forefront of nationwide overhauls. Shanghai Industrial owns highways that account for more than 40 per cent of all toll revenue from expressways in the city, as well as water facilities and other infrastructure.

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    Series of disappointments for SOE investors have sent shares tumbling since early September.

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    Building new submarines in Japan risks damaging ties with China, South Australia's defence industries minister says.

    The federal government insists no decision has been made about replacing the navy's six Collins Class subs, which retire in the 2030s, but the main contract appears likely to go to Japan.

    Breaking a pre-election promise to build the subs in South Australia could cost thousands of jobs, the state government has warned.

    Defence Industries Minister Martin Hamilton-Smith says building the subs in Japan could also antagonise China, the nation's largest trading partner.

    "We need to be very sensitive and very careful about our relationship with China before we make decisions about where we will build our submarines," he told reporters on Tuesday.

    "It is a relationship that we really value."

    Mr Hamilton-Smith was due to speak before a Senate inquiry into the future of Australia's naval shipbuilding industry in Adelaide on Tuesday.

    South Australian Labor senator Penny Wong addressed about 100 shipbuilders outside the inquiry, saying the federal government was planning to sell out future generations by moving jobs offshore.

    Senator Wong would not be drawn on whether a future Labor government would honour a contract to build the submarines in Japan.

    "I'm not even going to countenance that," she told reporters.

    "We're doing all we can to make sure that we don't have to look at a decision by this government to build the submarines in Japan."

    But Labor Senator Kim Carr said there was no doubt that a contract would be honoured.

    "The truth of the matter is that we don't renege on contracts," he told AAP.

    "There is always things you can do within a contract. We can always talk to people about changes, depending on how far it is along the project."

    An open tender process would be the only way to resolve conflicting claims about the quality and cost of the different build options, Senator Carr said.

    Figures released by SA's Economic Development Board this week show the national economy would take a $29 billion hit if the submarines were built overseas.

    The inquiry earlier heard that a mission of high ranking Defence officials, including a representative from the prime minister's office, had recently travelled to Japan.

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    SA defence industries minister says building new submarines in Japan could cost thousands of jobs and antagonise the nation's largest trading partner.

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    Costco Wholesale Corp has launched an online store through Alibaba Group Holding Ltd's Tmall Global platform, bringing the membership-only bulk seller to mainland China for the first time. 

    Costco's online store will initially sell food and health-care products, as well as Costco's private-label Kirkland Signature products to China. The store leaves Costco poised for growth in China, where consumer appetite for imported products has been high, said Jim Murphy, Costco's executive vice president, in a statement on Tuesday. 

    Last week, Costco said same-store sales growth and higher revenue from membership fees drove a 13 per cent increase in profit in its most recent quarter. 

    Alibaba, China's largest e-commerce company, doesn't sell products itself like Amazon. Instead, it earns some of its revenue by charging merchants for advertisements on its Taobao and Tmall sites. 

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    Online store to sell food, healthcare, Costco private-labelled products.

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