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Shanghai stumbles into suburbia

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Wall Street Journal

“I’ve been to a lot of places -- I’ve been to England, America, Russia ...” Wang Jianhua pauses for a moment. “Also Malaysia, Thailand, South Africa, New Zealand …” Her friend stands next to her, smiling each time a new country is mentioned.

“Okay, but if you’ve been to the real England, why did you come here?”

The two women and I are standing on a cobblestoned street, Edwardian-style buildings lining either side. The spire of a church pokes up over a roof behind Wang. The sky is gray, which is fitting since we’re in Thames Town, a quasi-British development on Shanghai’s western outskirts.

“We’re just here on a day trip,” Wang explains. A retired doctor, she still lives downtown, about 40 kilometers away. Her friend is a former journalist. I’ve interrupted a ladies’ day out.

“But is it authentic?”

Wang shrugs. “It’s pretty good.”

Pretty good or not, what Wang doesn’t know is that a few years back Thames Town was a sensation in the Western media. Everyone from CNN to the Mail Online ran pictures of the development’s red telephone booths and statues of famous Brits like Winston Churchill and Harry Potter that dot the public squares. Headlines threw around words like “fake” and “copy.” A frequent takeaway was: Look, there goes China with another white-elephant project mimicking the West.

But Ms. Wang is not perturbed by the mockery. “It’s relaxing.” Her friend adds, “We’re having fun.”

Thames Town was a whimsical offshoot of a serious piece of urban planning. When Shanghai created its 10th five-year plan in 2001, it included a measure called 'One City Nine Towns'. Foreseeing an influx of migrants that might strain downtown housing and infrastructure, the city decided to “decentralize” the population by constructing new urban centers on Shanghai’s periphery. But in an added twist, each town was to have a small portion built in the style of another country. Now Shanghai has an Italian town, a German town, even a Canadian town.

Thames Town gained the most media attention. Foreign journalists were struck not only by the familiar architectural tropes, but also by how the town was almost completely empty. Houses were bought but never occupied or rented, a frequent investment pattern in 21st-century China. And it seemed the only visitors were the stream of brides coming to the cobbled streets for a European background to their prewedding photo shoots.

Yet like many other initially empty developments, Thames Town has slowly become a functioning community. And the people I meet in Thames Town are bemused by all the fuss over the town’s foreign appearance.

Take Wang Ronggen, an artist with a studio in Thames Town. “A few years ago I had dinner with a reporter from France. He asked me why we take the British style, why do people live here.” He takes a puff from a cigarette. “No one took the style. They borrowed. And this is a place to live.”

Other residents had similar interactions with journalists. Tang Yuhai, a worker in the pharmaceutical industry in his late 50s, was once featured in an article titled “China’s Great British Love Affair” that ran in the Daily Telegraph’s weekend magazine. He owns a town house in Thames Town for him and his wife to stay in on the weekends. And while he appreciates British culture, that’s not the main draw.

“It’s very peaceful,” he says. “But now more and more people are coming here, especially on the weekends.”

Tang offers to take me on a brief tour. He points out how the local government has made the area more livable: There’s a large public square with a museum and urban-planning exhibit, and public art is displayed in open areas. Even though it’s Saturday -- the town’s busiest day -- it seems impossible that this is part of Shanghai, China’s most populated city.

As we end our walk, I learn that Tang has decidedly to settle here permanently. “Thames Town is a great place to grow old,” he says.

That testimony speaks to a success ignored by the sensational media coverage. While Thames Town can feel eerily quiet at times, the development offers an alternative from the hubbub of downtown Shanghai. It’s a place where people can find space for themselves. And while the 10th five-year plan did not say it in so many words, that’s what “One City Nine Towns” set out to do—create a Chinese vision of suburbia.

Cameron White is a Princeton in Asia fellow at The Wall Street Journal Asia editorial page.

This article was first published at the Wall Street Journal. Reproduced with permission. 

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Chinese investors buy record amount of HK stocks through trading link

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HONG KONG—Chinese investors bought a record amount of Hong Kong shares this week using a new trading link, as worries mount that a rally in Shanghai may be running out of steam.

Purchases of shares by Chinese investors resulted in an inflow of about US$US811 million to the former British colony’s stock market from the mainland, easily beating the $US514.6 million that came in during the first week of the Shanghai-Hong Kong Stock Connect.

Still, even on its most active day this week, 16 per cent of the quota for buying into Hong Kong was taken up, indicating that the program still is struggling to gain traction.

Since the trading link kicked off in mid-November, mainland investors have been fixated on their own markets, causing the Shanghai Composite to rise 53 per cent in 2014. That has left the market looking expensive compared with Hong Kong, and recent volatility in the Shanghai market may be scaring some investors away.

“It’s another way to diversify,” says Zhao Guanglin, a 40-year-old accountant in Shanghai, who says he wants to invest in blue chips, which are cheaper in Hong Kong.

He said he has about 500,000 yuan ($US80,500) already invested in Shanghai-listed blue-chip stocks, but wants to switch some cash into Hong Kong using the new program.

“I’ve been so busy, I haven’t gotten a chance to use the program yet,” he said, adding that he plans to use the program after Lunar New Year in February.

Many of the stocks most popular in Hong Kong with Chinese buyers have been those that can’t be bought in the mainland. Chinese Internet giant Tencent Holdings Ltd. has gained 13 per cent in the past week, while China Mobile Ltd. is up 4 per cent in the past week.

Still, overall demand remains tepid for the program. Only 14.2 billion yuan out of the 250 billion yuan maximum quota has come into Hong Kong. By contrast, 78.4 billion yuan of the 300 billion yuan quota of Shanghai shares has been bought by overseas investors.

Interest from mainland Chinese investors has been disappointing, said Raymond Cheng, head of research at Bank of Communications.

“Northbound interest is still notably higher,” he said. “In general I don’t think there’s as much interest as we would have hoped for.”

Brokerages have blamed factors including a cap restricting use of the program to individuals with more than 500,000 yuan available to invest, as well as a lack of smaller stocks in Hong Kong that are typically favored because they offer the chance for greater gains.

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Shanghai-Hong Kong Stock Connect still trying to gain traction.

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Li Ka-shing to divide empire

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HONG KONG—Asia’s richest person, Li Ka-shing , is reorganizing his empire into two companies, separating his Hong Kong property assets from his internationally focused conglomerate, which includes businesses as diverse as ports and telecommunications.

Mr. Li, 86 years old, controls two major companies listed in Hong Kong, Cheung Kong (Holdings) Ltd. and its affiliate, Hutchison Whampoa Ltd. , that have a combined market capitalization of roughly 312 billion Hong Kong dollars (US$US40 billion) and globally employ more than 280,000 people. He said Friday that the real-estate assets of both Cheung Kong and Hutchison will be carved out into a new company listed in Hong Kong, CK Property.

The remaining assets of both companies, which include ports in 26 countries, mobile-telecom operations and a stake in Canadian oil companyHusky Energy Inc., will be listed separately as CKH Holdings. Both listings will be done by introduction, meaning that no funds will be raised.

The company said in a written statement that reorganizing the companies will create shareholder value through the elimination of a “holding company discount.” Hutchison is currently 49.97 per cent-owned by Cheung Kong. Mr. Li said Friday that he was confident the group will pay higher dividends to shareholders after the deal is completed during the year’s first half.

Cheung Kong said its current structure where it and Hutchison own real-estate operations means its market capitalization is at a 23 per cent discount, or a discount of about HK$US87 billion, to its book value of HK$US379 billion. The two companies currently have joint stakes in some Chinese real-estate assets, as well as hotels in Hong Kong and China.

“We’ve been wanting to deal with the holding-company-discount issue for many years,” said Victor Li, Cheung Kong and Hutchison’s deputy chairman and elder son of Mr. Li.

“I am happy our senior executives came up with this restructuring idea” in recent months, he said.

In the proposed arrangement, Mr. Li and his family trust will hold 30.15 per cent of both CKH Holdings and CK Property. Currently, the octogenarian and his trust own 43.42 per cent of Cheung Kong. They also own an additional 2.52 per cent in Hutchison apart from the stake Cheung Kong owns.

Cheung Kong Property shareholders will receive one CKH Holdings share for every one Cheung Kong Property share, while Hutchison investors will receive 0.684 CKH Holdings share for every one Hutchison share, according to the filing.

Cheung Kong Property is raising HK$US55 billion of debt, which it will then transfer to CKH Holdings as part of the transaction. The infusion of cash into the operating business could give Mr. Li more financial firepower to cut deals abroad.

CKH Holdings will own 3 Group PLC, which operates mobile-phone services in the U.K. and other parts of Europe, after the deal closes. The U.K. mobile-phone market is in a period of transition. BT Group PLC entered exclusive talks to buy British mobile operator EE in a nearly US$US20 billion deal, putting added pressure on 3 Group as the U.K. mobile-phone market consolidates.

Investors might find the property assets are more attractive on a stand-alone basis. Some investors view them as a higher-yielding substitute for fixed-income. With interest rates remaining stubbornly low, CK Property could find more investors drawn to it as it increases its payout.

“I expect the shares of both companies will go up on Monday as the proposed restructuring can enhance the values of their existing businesses,” said William Lo, portfolio manager at Ample Capital Ltd. in Hong Kong. Ample owns shares in Hutchsion.

The new CKH Holdings will be an internationally focused company, with assets in more than 50 countries. It will become Husky’s largest shareholder and have stakes in the ParknShop supermarkets in Hong Kong, drugstores in the U.K. and continental Europe, telecom assets, ports and acquisitions in Europe made during the past few years. The acquisitions in Europe include Northumbrian Water and Wales & West Utilities in the U.K., as well as a HK$US20 billion bet on aircraft-leasing assets.

In contrast, CK Property will be mainly focused in Hong Kong, where Mr. Li’s group is one of the city’s top developers. Hong Kong has posted record home-price gains in recent years and is one of the world’s most expensive cities. CK Property also has property assets in China, including some listed real-estate-investment trusts.

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Li Ka-shing to separate real-estate assets from the rest of his conglomerate.

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Alibaba to invest about US$575 million in Indian online-shopping service, Paytm

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BANGALORE, India—Chinese e-commerce giant Alibaba Group Holding Ltd. and its financial-services affiliate have agreed to jointly invest about $US575 million in India’s One97 Communications Ltd.’s online-payment and marketplace businesses, a person familiar with the matter said.

If the deal goes ahead, it would give Alibaba and Zhejiang Ant Small & Micro Financial Services Group a combined 30 per cent stake in One97 and would value the New Delhi-based company at more than $US2 billion, the person told The Wall Street Journal. 

A spokeswoman for Alibaba didn’t immediately respond to a request for comment. A spokeswoman for One97 said the company is in the process of raising money. “We will communicate as and when we complete the process,” she said.

The investment would be the Chinese group’s first in India’s small, but fast-growing, e-commerce industry, which has drawn substantial funding from Amazon.com Inc. of the U.S., Japan’s SoftBank Corp. and others betting that online shopping is set to boom in the world’s second-most-populous country.

Alibaba, which went public in the U.S. in September in the world’s largest initial public offering at $US25 billion, mainly operates online marketplaces. Its financial-services affiliate runs Alipay, which provides online-payment services

The Chinese group’s funds would go to One97’s Paytm unit, which also handles online payments and operates an Internet marketplace that Indian customers can use through their mobile phones the person said.

Alibaba has been moving to expand its services beyond its home country to allow more merchants abroad to sell to Chinese consumers, and Chinese sellers to tap into markets outside China.

Paytm says its marketplace has about 15,000 merchants, selling items from electronics to clothes and accessories, and has 25 million registered users. It has 20 million mobile-wallet users and counts taxi-hailing service Uber Technologies Inc., travel portal Expedia Inc. and apartment-rental site Airbnb Inc. among its customers, the company says.

Under the terms of the new agreement, which requires Chinese regulatory approval, Indian customers would be able to shop on Alibaba sites by making payments through Paytm, while Chinese customers can use Alipay to buy from merchants selling on Paytm’s marketplace, the person familiar with the matter said. Sellers on Alibaba’s sites would also be able to list their wares for sale on Paytm, and vice versa, the person said. 

The funds from the Alibaba investment would be mostly used to expand Paytm’s marketplace operations and develop payment technologies, the person said. As part of the agreement, Paytm would gain access to Alipay’s payment technologies, including its payment gateway, mobile-wallet system and antifraud measures.

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China’s Alibaba and affiliate Zhejiang Ant to take 30 per cent stake in One97 Communications, source says.

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Will milk be the next commodity to turn sour?

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One of the major focal points for the recently concluded China Australia Free Trade Agreement is the dairy industry. Trade Minister Andrew Robb fought hard for the ‘New Zealand plus’ treatment for Australian farmers and he got it.

Many commentators and analysts have been excited about the prospect for much freer access to one of the world’s largest consumer markets for dairy products. There are many stories of the insatiable demand for baby formula and the jaw-droppingly high prices that Chinese people are willing to pay for air-freighted fresh milk.

However, the reality of Chinese demand and global supply is much more sobering and it doesn’t justify the much-hyped optimism we have seen recently. In fact, there is a lot to worry about when it comes to the future of the dairy industry here in Australia and across the Tasman given the global supply glut and not so bullish demand in China.

In recent days, there has been wide-spread coverage of Chinese farmers dumping fresh milk into fields and turning cows into Big Macs and Quarter Pounders due to depressed milk prices. For example, the purchasing price for fresh milk in Shandong province has been reduced from 4.5 yuan per litre a year ago to about 1.5 yuan per litre at the moment.

The Ministry of Agriculture has urged local governments to support dairy farmers at a time of rapidly falling prices, asking food processors to do whatever they can to buy fresh milk from farmers.

The price of milk powder has also been slashed from about 50,000 yuan a tonne at the beginning of 2014 to less than 20,000 a tonne currently. Globally, milk prices fell 50 per cent in 2014. The dramatic fall in prices is largely due to a glut of global supply as a result of strong international production, high inventory levels in China and Russia’s ban on U.S and European dairy products.

The global over-supply problem could get worse in 2015 once the European Union removes production quotas on milk, allowing farmers to increase production without buying quota rights. South Asia and 25 countries in the EU account for 44 per cent of global milk production, according to the Food and Agriculture Organisation of the United Nations.

The global supply glut is already hurting New Zealand -- the Saudi Arabia of milk production. Export to China boomed following the signing of a free trade agreement in 2008 and export volumes have increased eight-fold. In 2014, New Zealand alone accounted for 85 per cent of total imported fresh milk in China.

For the last decade, the country dramatically scaled up its production and dairy cow numbers increased from 1.5 million to 6.5 million. However, the global oversupply is turning New Zealand’s China boom a bit sour. Fonterra, which buys 90 per cent of New Zealand’s milk production, slashed its forecast payout for the current season to $NZ4.7 per kilo of milk solids in December, from $NZ 8.65 in February 2014.

“There is still considerable volatility in global dairy markets, said John Wilson, Chairman of Fonterra, “falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand.”

We can see an analogy between falling iron ore and milk prices. The initial China fuelled demand has triggered a global increase in production and the resulting expansion in production is putting pressure on prices. The price squeeze is putting more pressure on small producers who don’t enjoy the benefits of economies of scale.

While the free trade agreement has finally levelled the playing field for Australia, the timing is terrible. Australian dairy farmers have to confront a new reality of falling milk prices, a global supply glut, geopolitical uncertainty as well as subdued demand from China. These market conditions don’t bode well for the sector, which needs farmers to make investment in herds.

The much-promised benefits of the free trade agreement for the dairy sector may not materialise in the short to medium term. Australian dairy farmers don’t have much confidence to invest in herds at the moment in face of failing milk prices and subdued demand from China. 

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With a glut in global milk production, Australian farmers are unlikely to see any immediate benefits from the much-touted dairy deal with China.

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The hole in the Asian doughnut

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East Asia Forum

The mutuality of Asia’s economic interests centring on deepening economic integration is a potential foundation for building an Asian economic community that encompasses the ASEAN 10 plus their six neighbours, Japan, South Korea, China, India, Australia and New Zealand.

The group, with close to two-fifths of world output, constitutes a growing slice of the global economy -- and is a major force of economic dynamism, with China’s growth expected to nudge 7 per cent again this year, India’s on the rise again and Indonesia’s stabilising at least, and possibly on the up once more. The ambitions for stronger economic cooperation are defined within ASEAN by the goal of building the ASEAN Economic Community and, by the broader group, in the negotiation of a Regional Comprehensive Economic Partnership. This year, 2015, is a key year in both endeavours.

Yet, there’s a hole in the Asian doughnut, a zone of less than fulsome cooperation over rights to the fisheries, resources and territories across the seas that connect Asia’s growing economic powers. There are the territorial issues between Japan and China (as well as Taiwan) in the East China Sea and Japan and South Korea in the Sea of Japan (or the East Sea). And there are the issues between China and five of the ASEAN partners in the South China Sea. Resolving maritime issues is bound up with progress on building an Asia Community.

Indonesia’s new president, Joko Widodo (Jokowi), has declared a new maritime priority for the Indonesian state. The largest archipelagic state in the world, Indonesia encompasses huge marine resources. The country has a total land area of 1.9 million square kilometres and an additional 3.2 million square kilometres of ocean lie within its borders. Unlike its ASEAN partners, among them Vietnam, the Philippines, Malaysia and Brunei, Indonesia ostensibly has no direct maritime disputes with China, although Luhut Binsar Panjaitan, Jokowi’s newly appointed chief of staff, was recently keen to make clear that Natuna, an area supposedly rich in gas reserves and on the edge of China’s famous nine-dash line, was clearly Indonesian territory.

Last month saw the Jokowi government assert Indonesia’s new maritime priorities in a somewhat dramatic way -- blowing up three Vietnamese boats found illegally fishing in the Natuna Sea. Carefully filmed and given wide publicity, this was meant to be a lesson, not specifically to the Vietnamese but to all who daily trespass in Indonesian waters. The Australian navy should be warned that its less than perfect navigational skills could be on notice! According to President Jokowi some 5,400 foreign boats intrude into Indonesian waters, ‘over 90 per cent of them illegally’.

Indonesia’s maritime priorities are an overdue and legitimate focus of national policy. Its seaways have too long been a barrier to, rather than a facilitator of, national integration. Its role as a maritime Asian nation needs to be strengthened as an enhancement to regional stability. Its neighbours, including Australia, Singapore, Malaysia as well as China and Japan have a constructive interest in this development.

But the Indonesian domestic political theatre around getting tough on illegal fishing in December and delivering ‘shock therapy’ (as Jokowi described it) to the Vietnamese offenders play somewhat awkwardly into the bigger regional drama surrounding the rights of access to the neighbouring South China Seas.

There is every sign that the Jokowi administration views the China relationship very positively and would not deliberately wish to knock it off course. He returned home after the APEC summit in China last November with very positive messages about its future. China is Indonesia’s second largest trading partner, and the bilateral relationship was upgraded into a comprehensive strategic partnership when President Xi visited Indonesia just over a year ago. Indonesia has joined the Asian Infrastructure Investment Bank (and offered to host it) and Jokowi in recent times noted the close alignment between Indonesia’s and China’s overarching maritime concepts -- Indonesia’s Global Maritime Fulcrum and China’s Maritime Silk Road.

In this week’s lead essay, Sourabh Gupta reminds us that, on an extremely well-informed reading of the issue, China’s controversial nine-dash line in the South China Sea might be seen as an indication of ‘the geographic limit of China’s historically formed and accepted traditional fishing rights in the semi-enclosed waters of the South China Sea, which are exercised today on a non-exclusive basis’. He argues persuasively that a US State Department study incorrectly suggests that ‘China, in acceding to UNCLOS’s exclusive economic zone regime and its exclusivity-based prerogatives, effectively conceded all prior usage-based claims that it may have held in foreign EEZs, even in semi-enclosed seas’.

While the onus, Gupta maintains, is on China to suggest the basis on which the nine-dash line might be interpreted to be in compliance with international law, ‘so long as China limits these rights to traditional fishing activities -- not resource development or marine scientific research -- and exercises them on a non-exclusive basis, the nine-dash line as a perimeter of China’s exercise and enforcement of such historic rights is not inconsistent with international law…(and) can remain a permanent feature of the South China Sea’s political and maritime landscape’.

Indonesia has played an extremely constructive role in ASEAN-China diplomacy over the vexed territorial issues and access rights in the South China Sea. It might not wish to compromise its role and broader regional interests in building an effective Asian Community there by blowing up a few Chinese fishing boats, even if they have strayed into what are unequivocally Indonesian waters. 

Peter Drysdale is Editor of the East Asia Forum. 

This article first appeared on East Asia Forum. Republished with permission.

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Indonesia’s role as a maritime Asian nation needs to be strengthened but the country's recent 'shock therapy' on illegal fishing won't go down well.

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Don’t rule out war with China

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If the results of the recent poll commissioned by the Australia-China Relations Institute are a reliable guide, the majority of Australians share a ruthlessly pragmatic approach to foreign policy.

Australians are apparently so averse to upsetting all-important diplomatic and trade ties with China that 68 per cent of respondents said Canberra should turn down a US president’s request for assistance in a military conflict over the Japanese-controlled, but Chinese-claimed, Senkaku/Diaoyu islands.

Notwithstanding legitimate concerns about being dragged into North Asia’s volatile great power politics, Australia should leave open the option of going to war with China in the East China Sea.

Of course, as former foreign and defence ministers Bob Carr and David Johnston have emphasised, it would be reckless to pre-emptively commit to providing Australian military support to Japan and the United States in the event of an escalating clash between the Japanese and Chinese militaries over the Senkaku/Diaoyu islands.

Such a commitment would prompt an angry reaction from Beijing, and would raise further Chinese suspicions that the US-led network of Asian alliances is a tool to contain China’s international ambitions.

Moreover, pre-emptively pledging Australian military support would be premature.

The US-Japanese security treaty commits the United States and Japan to ‘act to meet the common danger’ of ‘an armed attack against either party in the territories under the administration of Japan,’ including the disputed Senkaku/Diaoyu islands.

By contrast, the security treaty between Australia and the United States only calls on Australia to act to defend the United States in the event that its territories, armed forces, public vessels or aircraft are attacked.

This means that although a Chinese assault on the Senkaku/Diaoyu islands would prompt US action, it would only require an Australian response if the aggression also constituted an attack on the United States.

Given Australia’s deep diplomatic and political bonds with the United States and post-World War II record of consistently assenting to US requests for military support, there may be an overwhelming expectation in Washington that Canberra should join the fight. Nevertheless, the precise wording of the US-Australian security treaty would not require immediate Australian participation.

This, however, does not mean that Australia should rule out involvement in a US-supported Japanese war with China over the Senkaku/Diaoyu islands.

Beijing has a long track record of using border incursions, industrial sabotage, naval brinkmanship, and other aggressive tactics to advance its territorial claims in the East and South China seas and on the Indian subcontinent.

With the Chinese military expected to emerge as the world’s most powerful in the next few decades, and Beijing unlikely to give up its uncompromising stance towards its territorial claims, China’s already provocative tactics are likely to become increasingly aggressive.

In this context, an official Australian policy of neutrality in the East China Sea dispute would amount to a de facto assurance that Canberra will not stand in China’s way if it chooses to militarise the conflict.

This would not only alienate Australia’s numerous Asian friends and partners that are locked in tense territorial disputes with China, but would tacitly encourage Chinese territorial assertiveness.

Instead of playing into China’s revisionist goals with an official statement of neutrality, regional security and Australia’s national interest would be best served by a policy of ‘strategic ambiguity.’

Canberra should neither pre-commit to Australian participation in a US-supported Japanese military response to Chinese actions in the East China Sea, nor rule out going to war with China in the event of a request for assistance from Tokyo and Washington.

By taking a strategically ambiguous stance, Canberra would chasten Beijing’s territorial ambitions by leaving doubts in the mind of the Chinese leadership as to whether key regional powers like Australia will tolerate aggressive tactics.

Strategic ambiguity would also moderate a US-supported Japanese response by making it clear that an Australian military contribution is not assured.

Australians are understandably fearful of becoming entangled in Asia’s bitter territorial disputes, and yet a blanket refusal to take sides would simply benefit the most powerful and determined claimant state.

Canberra should therefore offer no assurances of neutrality and should leave open the option of joining a US-supported Japanese war with China over the Senkaku/Diaoyu islands.

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

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Australia should leave open the option of going to war with China in the East China Sea.

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China, Japan resume hotline talks

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Japanese and Chinese officials have resumed talks about setting up a hotline to prevent sea clashes, following frequent sparring between ships from the two sides around disputed islands.

The working-level talks, the first since 2012, were held in Tokyo, Kyodo News and Tokyo Broadcasting System reported on Monday.

The Japanese government has not disclosed a detailed schedule for the talks.

Japan's Prime Minister Shinzo Abe and Chinese President Xi Jinping agreed last November to ease tensions over the sovereignty of the Senkaku islands, an uninhabited rocky chain in the East China Sea which China also claims as the Diaoyus.

The meeting - the first face-to-face encounter since each came to power - followed a long period of hostile relations due to the territorial dispute and China's historical grievances over Japan's 20th century aggression.

Japanese and Chinese defence authorities have agreed in principle to set up a hotline, and use a common radio frequency for their ships and planes around the disputed islands.

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First talks since 2012 held on initiative to prevent sea clashes.

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China to raise consumption tax on oil products, cut prices

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China said on Monday that it would raise the consumption tax on a range of oil products for the third time in less than two months, as global oil prices remained under pressure. 

At the same time, the state economic planner said it would cut the official retail prices on gasoline and diesel, adding that the two moves effectively result in a net reduction of domestic oil prices. 

The moves are aimed at promoting energy conservation and cutting pollution, the Ministry of Finance said in statements on its website. 

China would raise the consumption tax on gasoline, lubricants and naphtha by 0.12 yuan (about US$US0.02) a liter to 1.52 yuan, while the tax on diesel, jet fuel and fuel oil would rise by 0.1 yuan a liter to 1.2 yuan, effective Tuesday, the finance ministry said. 

The ministry said the additional tax revenue will be used to clean up the air and water, and support the country's alternative energy industry. 

Also effective Tuesday, the National Development and Reform Commission said it would cut the retail price of gasoline and diesel by 0.13 yuan and 0.20 yuan a liter, respectively. 

Last month, the government raised the consumption tax on gasoline, lubricants and naphtha by 0.28 yuan per liter, and the tax on diesel, jet fuel and fuel oil by 0.16 yuan. The NDRC said it would cut the retail price of gasoline and diesel by 0.13 yuan and 0.34 yuan a litre, respectively. 

The government has been taking advantage of weaker oil prices to boost revenue. The central government has had slower revenue growth due to the decelerating economy in the past year. Government fiscal revenue was up 9.1 per cent from a year earlier in November, compared with a 9.4 per cent gain in October.

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Tax hike the third in two months as Beijing takes advantage of weaker oil prices.

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Sizing up China's true influence on the economy

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In the debate on the Australian economic outlook, one question looms large. What matters more for domestic growth prospects: the US economic boom or a Chinese slowdown?

At face value, the question is an easy one to answer. China takes just over 30 per cent of our exports, the US about 5 per cent. Consequently, China matters much more and its slowing heralds a new era of low growth for Australia -- and decades of deficits, of course.

But the actual dynamics are a little more complicated. China matters, of course. It matters a great deal, not only to the Australian economy but to global growth. Yet it’s important not to overstate the fallout from a slip in China’s growth rate to 7 per cent from 10 per cent or even 12 per cent.

The fact of the matter is, Australian exports to China are still booming -- they surged by just under 30 per cent in the fiscal year to 2014. Resource exports were obviously strong, particularly iron ore, which rose by over 20 per cent in value terms and nearly 15 per cent in volume terms. Recent data suggests that this strong growth has continued unabated, with ore exports up nearly 6 per cent in the September quarter to be about 20 per cent higher annually.

Yet even if exports weren’t surging, it still wouldn’t herald a period of low growth for Australia. Resource exports are less than 8 per cent of the Australian economy. Noting China’s stake in those and exports elsewhere leaves about 6-7 per cent of the Australian economy exposed to a Chinese slowdown. That means 93-94 per cent of the economy isn’t exposed.

That makes sense, as 92 per cent of the Australian economy (and 98 per cent of the labour market) is unrelated to mining. With that in mind, suggestions that the country’s economic prospects rest on one small sector are clearly wrong. Statements that imply this reveal a very poor understanding of the Australian economy.

In any case, seeing Chinese economic growth of 7 per cent (or 6 per cent or even 5 per cent) is still very strong growth. No one should forget that while China’s economy is ‘slowing’, 2014 will likely see the country’s largest expansion in history. That is, while China’s economic growth rate is slowing, the magnitude of its expansion is likely going to be the largest on record. 

On current trends, something over $1.4 trillion (in nominal terms) should be expected, which is significantly above what we saw prior to the GFC with double-digit real growth rates. Mathematically it makes no sense for anyone to be concerned about a ‘Chinese slowing’. It is pure ignorance. This is why ‘slower’ Chinese growth hasn’t (and won’t) lead to a noticeable fall in Australian export volumes.  

It’s against that backdrop that the US boom assumes more importance. Not forgetting that the US, by itself, directly consumes about 12 per cent of global exports, and 17 per cent of China’s and Japan’s. 

The US is obviously a very important global market and an uplift there will buttress Chinese economic growth and growth elsewhere throughout the region. This will benefit Australia.

Less directly, the US economic boom will do much to lift non-mining investment in Australia. Australian business investment has a solid correlation to US economic growth prospects, as does consumer spending. Economists can debate the exact transmission mechanism, but the fact is it exists. Certainly the strong financial linkages are well known: The Aussie and US share markets usually enjoy a strong relationship, as do bond markets -- and indeed monetary policy.

With that in mind, the US economic boom matters much more for Australian economic prospects than China’s ‘slowing’. It goes without saying that the net lift could end up being quite marked -- already there are signs aplenty that things are picking up. The small size of the resources sector and its relative unimportance to the jobs market means that an upswing in non-mining investment, housing and consumer spending would easily swamp the expected drop off in mining investment -- aided, of course, by continued strength in the export sector! 

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Economic growth in the US matters much more to Australia's prospects than a slowdown in China. Here's why.

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Why all the worry about China?

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China may not become the world’s largest economy after all.

In a paper last October, Harvard economists, Lant Pitchett and Lawrence Summers, took a look at economic history. What they found was that periods of rapid growth didn’t tend to last. Per-capita income in the world economy usually grows by around two percent each year. China’s rate of eight percent over the past three and a half decades is unprecedented. They took this to mean that the odds of China’s growth slowing, possibly sharply, are getting shorter.

In a discussion of their work, The Economist noted, “The surest of historical rules of thumb implies that 20 years from now, China’s economy, measured by market exchange rates, will probably still be smaller than America’s.”

Australian commentators Paul Dibb and John Lee have repeated this. In a paper published in November titled “Why China will not become the dominant power in Asia”, they predicted that, “China may soon be approaching the zenith of its power as its economy encounters serious structural impediments and demographic barriers to growth”.

If correct, the implication for Australian foreign policy is clear. Forget China, we should be getting closer to the U.S and Japan. Why support the China proposal for an Asia Infrastructure Investment Bank if the U.S and Japan want to stick with the rival Asian Development Bank?  

On face value this vigorous writing down of Chinese prospects appears compelling. But take a closer look and it becomes less plausible. In the final analysis, it’s a view of China that falls distinctly short.

To start with, no-one is saying that China is guaranteed to grow at the same rate as in the past. The serious forecasters are a long way from being this deluded. They are, in fact, quite realistic. Take the Commonwealth Treasury as an example. In 2013 it released long term projections for international GDP. These put China’s average annual growth rate over the period 2020-2030 at 4.3 percent. That’s down from eight percent over 2010-2020.

The reason? More investment comes with diminishing returns. That’s true in China, and everywhere else.

And yet, cutting to the chase, we can still be reasonably confident that China will have the world’s largest economy.

After all, to claim the title it doesn’t have that much further to go.  

According to the International Monetary Fund, when cost-of-living differences are taken into account, the size of China’s economy surpassed that of the U.S last October.

China has also contributed more to global economic growth than the U.S. in every year since 2007. 

When measured at market exchange rates, China’s economy still sits in second place. In per-capita terms, the gap to the U.S is even larger. But here’s the thing: China doesn’t need to reach anywhere near U.S levels of per-capita income to become the largest economy. Its population of 1.4 billion means that 23 percent of U.S levels will do just fine.  Right now it’s at around 15 percent. 

It’s not those at the coalface who need convincing that China already packs economic clout.  

Ask Australian universities whether they think the purchasing power of China’s middle class may not be all it’s cracked up to be. According to the Department of Education, as of October last year there were 91,386 Chinese students studying at Australian universities. This compares with a grand total of 4,037 from the U.S and Japan.  

While there’s nothing miraculous about the way China’s economy works, don’t forget the starting point. Never before has there been a country so poor, with such a large population and so little capital, with such a low rate of urbanisation, and with no private sector or international links to speak of, commit to economic reform.  

China’s growth will benefit from these initial conditions for some time yet. In 2012, Qu Hongbin, chief China economist at HSBC, estimated that despite extremely high rates of investment, the amount of capital available for each person in China in 2010 was still less than eight percent of that in the U.S. This implies that the problem of diminishing returns to investment is much smaller in China than in OECD countries.    

China’s economic reform program itself still has a long way to run. Consider its reintegration into the global economy. According to the World Trade Organization, China’s share of global goods trade has rocketed to a chart-topping 11.1 percent. But a Bank of England report in 2013 found that capital controls have meant that it holds less than a three percent share of global holdings of overseas assets and liabilities.

To the pessimists, the limited progress China has made in some sectors of the economy serves as evidence that growth will soon stall. To the optimists it appears as growth bursting at the seams, just waiting to be unlocked.    

Vested interests make economic reform difficult for leaders in all countries.  But Chinese leaders tend to be pragmatic. This was echoed in Deng Xiaoping’s famous line - “It doesn’t matter if a cat is black or white, so long as it catches mice”.  None of the reforms that China has implemented since 1979 have come easy.  The simple act of allowing non-state owned firms to set up shop in the early 1980s devastated the government’s own revenue base as the profits of state-owned enterprises were competed away. Yet according to China-economy specialist Nicholas Lardy, private firms now account for more than two-thirds of total output.

For all the policy and institutional shortcomings that remain, there’s a lot that China is doing right. Take a look at what’s happening in education. In 2004, China had eight universities in the world’s top 500 and none in the top 200. Just a decade on and the respective figures are 32 and six. China’s universities are now second only to those in the U.S in terms of research output.

Growth merely slowing in China is not something that Australia needs to fear. Each year China’s economy is getting bigger and so growth is coming off a higher base. In terms of the number of dollars being added to the economy – which is what buys Australian iron ore, beef and hotel stays - seven percent growth in 2014 is the equivalent of 10 percent growth in 2010 and 17 percent growth in 2005.   

Finally, why all the worry about China? There are grave concerns that OECD economies will not be able to grow at anything like the rates they have done. In fact, the U.S has failed to hit its long run per-capita income growth rate in every year since 2005. In 2014, a paper by eminent macroeconomist Robert Gordon concluded that in the coming decades, per-capita income growth in the U.S will only be 0.9 percent, less than half the long run average. And for the bottom 99 percent of the income distribution, it will be just 0.4 percent. 

So where does all this leave us? The balance of informed opinion - and that includes the OECD itself - adheres firmly to the view that sometime before 2030 it will be China that has the world’s largest economy.   

James Laurenceson is Deputy Director of the Australia-China Relations Institute (ACRI), University of Technology, Sydney.

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Beijing leaves little room for compromise in South China Sea

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Lowy Interpreter

Linda Jakobson's recent report, China's Unpredictable Maritime Security Actors, is an important contribution for China watchers, especially for those who seek to understand the relationship between Chinese actions associated with its maritime disputes in Asia and its broader strategic approach to the region. This relationship is an important policy question because observers, including myself, worry that the past two years of assertive behaviour in the East and South China Seas foreshadows Beijing's approach its neighbourhood when 'fully risen'.

Anxiety about heavy-handed Chinese hegemon-like behaviour in the future has grown because many observers believe China's approach to maritime disputes is the product of a deliberate and systematic strategy carefully harmonised within China's party-military-civil structure. In short, what the region has been experiencing is a well thought out and superbly executed strategy.

Jakobson's report says 'not so fast,' at least with regard to maritime disputes.

She argues, persuasively, that there is no evidence that China's recent actions in the maritime domain are part of a grand strategy China is pursuing to coerce its neighbours in a tailored way aiming towards a pre-defined goal. Her research convinces her that in China there is enough policy implementation flexibility for institutions with maritime interests (eg. local governments, law enforcement agencies, the People's Liberation Army, resource companies, and fishermen) to push their own agendas — particularly in the South China Sea. This results in more visibly assertive activity not specifically directed by Beijing. In short, Jakobson does not find an organised top-down structured 'salami-slicing' strategic approach to China's maritime sovereignty disputes.

I found Jakobson's discussion of the interests of different Chinese entities (party, state, provincial, law enforcement, commercial plus the media) helpful, and whether or not one agrees with her conclusions regarding the absence of a comprehensive strategy, those seeking a clearer understanding of the various Chinese institutional interests involved in the maritime domain should read this report with care. I am working on a project related to President Xi Jinping's call for China to become a 'maritime power,' and found Jakobson's work extremely useful.

Based on my own experience in the US Government, I find Jakobson's argument credible that various entities in China are pushing their own maritime interests while remaining within broad, and often vague, policy guidelines established by Xi. That is what good bureaucrats do. Within the US security establishment, hitching one's bureaucratic interests to authoritative Administration policy guidelines is normal procedure.

But in the US, if one goes too far and causes embarrassment or a political dust-up, it can be professionally damaging. Jakobson seems to suggest that Xi and policy makers at the highest level in China find it difficult to discipline entities that announce or execute embarrassing or counterproductive stances associated with 'safeguarding China's sovereignty in the maritime domain.' I am not sure this argument holds up, given what Xi is willing to take on in his anti-corruption campaign.

But whether Jakobson is right or wrong, detailed plan or no detailed plan, China's actions in the East and South China Seas have had strategic effects. China has changed facts 'on the water' to its advantage and at the same it has riven ASEAN on South China Sea maritime issues. And it has apparently gained wide public support with its tough stance on sovereignty claims.

However, from my perspective an argument can be made that the biggest strategic effect has been negative for Beijing. It has energised the Obama Administration's security relationship with the Philippines and encouraged most of China's neighbours seek closer ties with the US. It has reawakened Indonesia's concerns about the nine-dash line as well as its maritime frontier, and allowed Malaysia to become a new favourite of the Obama Administration, signing it up as a 'comprehensive partner.'

So if Jakobson is right, will Xi and the Politburo Standing Committee come to the judgment that greater centralised control over its South China Sea actors is necessary to redress the adverse strategic effects of China's approach? In other words, will Beijing follow the first rule of trying to get out of a hole and stop digging?

Perhaps the digging has already stopped. The regional policies announced by Xi at November's APEC and G20 summits suggest it may have. If the current smile campaign with Southeast Asian neighbours continues, this would suggest that Jakobson's analysis is correct, and the centre is cracking down on counterproductive activities.

Will this last, and is it a tactical or strategic change of policy aimed at assuaging concerns raised over the last two years of assertive maritime policies?

My bet is on tactical, because I think Xi and company are not all that worried about relations with China's neighbours. The realities of geography, military and vast economic power yield China essentially permanent advantages over its near neighbours. They are always going to live in the shadow of China, and their economies will continue to be become more closely integrated with China's. China's neighbours will always need Beijing more that it needs them. This leverage means that over the long term, whether control is centralised or not, China's strategic approach to maritime issues will leave little room for compromise.

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

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China has gotten itself into a hole through its assertive behaviour in the East and South China seas. Will it stop digging?

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The future of Australian finance in China

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Australia’s free trade agreement with China offers our financial services sector an unprecedented opening to the capital markets of what may soon be the world’s largest economy.

Yet even as China opens its financial sector to the forces of global competition, Australian banks, insurers, investment managers and securities firms need to move fast to secure any new opportunities.

They should heed the words of the great Canadian ice hockey player Wayne Gretzky, who once said: “I skate to where the puck is gonna be, not where it has been."

At the moment, the puck is moving fast.

China’s economic model is changing from one focused on export development to one that seeks new sources of growth through domestic consumption and more open markets.

As a result, China’s President Xi Jinping is moving to open up China’s capital markets by allowing private banking, loosening restrictions on the capital account, and making exchange and interest rates more market sensitive.

A good illustration of China’s move to liberalise its capital account was the establishment last year of a new trading link between the Hong Kong and Shanghai stock exchanges, the Hong Kong Shanghai Stock Connect.

The timing of these market openings could not be better for Australia given the promise of the China-Australia Free Trade Agreement, ChAFTA, signed last November in Canberra.

The FTA will provide new access to China’s financial services market for Australia’s banks, insurers and securities firms as well as fund managers.

It offers more than China has given to any other FTA partner and allows, for instance, up to 49 per cent Australian ownership in joint ventures.

At the same time, an agreement to establish an RMB trading hub in Sydney will make transactions between Chinese and Australian firms that much simpler.

A key aspect of the ChAFTA is that it will allow Australian financial institutions, including superannuation funds, to invest RMB in China’s onshore securities markets.

Australia is just the fourth country in Asia to be granted access to the RMB Qualified Foreign Institutional Investor program; and only 12 countries worldwide enjoy this right.

That will give millions of superannuation holders in Australia access, through their funds, to the dynamic shares of China’s firms.

Australia has developed a competitive advantage in wealth management that rivals all other global centres of finance. That’s a critical opening for our fund managers.

In its Positioning for Prosperity report, Deloitte spotlights wealth management as one of the ‘fantastic five’ industries which will have a major impact on Australia’s future prosperity. 

Our funds management sector has decades of accumulated expertise that can be used to help Chinese savers and retirees invest more productively.

The Australian funds management sector is the third largest manager of funds internationally and manages the largest pool of funds in Asia.

We can use these strengths to position Australia as a major provider of financial services to China, helping its savers and retirees invest their wealth more effectively.

The number of people aged 60 and over in China is forecast to increase from 180 million today, to 487 million by 2050 -- more than a third of the entire population.

Apart from the immediate benefits of the ChAFTA, China’s planned market reforms suggest a much broader set of opportunities for Australia’s financial services firms.

International capital outflows from China, for instance, are trending from institutional to private.

In May this year, China’s “cabinet” announced its intention to launch a new program allowing qualified individual Chinese investors to invest in overseas capital markets.

This is important because, under the ChAFTA, Australian brokerage and advisory firms will be able to provide financial advice and portfolio management services to these Chinese investors, as well as trading accounts in securities.

This could result in a changed mix of China’s international financial assets that would include more actively invested private wealth assets and savings in higher-yielding assets.

ChAFTA will help Australian superannuation funds to provide alternatives to the limited range of options currently available to Chinese investors, which includes such things as below-inflation bank accounts or real estate.

Shanghai could be a future testing ground for a free trade zone allowing qualified individuals to open capital accounts, albeit slowly and tightly regulated.

The impact of China’s financial deregulation is already being felt in the retail banking sector, where newcomer Yu’e Bao (owned by Alibaba) began to accept deposits from the Chinese public, placed in an “on-line investment fund”.

In under a year, Yu’e Bao has attracted more than 80 million customers, and with US$93 billion under management by mid-2014, it is one of the largest money markets in the world.

This illustrates the willingness of Chinese regulators to allow new players into a tightly controlled sector and shows the strong demand for financial products that offer higher returns.

Through the ChAFTA, Australian banks will gain easier access to China’s domestic market by having waiting periods for local currency licences reduced to one year from three and by being allowed to expand their branches more easily.   

Domestic financial services reform in China, a free trade agreement which grants new market access to Australian firms, and new RMB clearing bank arrangements put the Australian financial services industry in a very competitive position.

In a fast changing environment, however, the industry will need to keep its eye on the puck to secure any new opportunities as they emerge. 

David Landers is General Manager, Growth and Emerging Markets at Austrade.

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As China opens its financial sector to the forces of global competition, Australia's financial industry must move fast to secure any new opportunities.

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Kaisa Group defaults on offshore debt

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A default by a Chinese property developer on its offshore bonds could be a test case for foreign investors seeking to recoup losses from troubled companies in China.

Kaisa Group Holdings Ltd. said late Monday it has missed US$23 million in interest payments that it was due to pay last Thursday. Adding to Kaisa’s troubles, at least 15 Chinese financial companies have asked a court to freeze the firm’s assets, hurting the developer’s ability to sell off projects to raise funds and pay back lenders.

More than two dozen foreign fund companies, ranging from BlackRock Inc. to Fidelity Investments and Lion Global Investors, owned Kaisa debt in recent months, according to Thomson Reuters, although it isn’t clear how many currently hold the debt. BlackRock and Fidelity have declined to comment, while a spokesperson for Lion Global, a Singapore-based fund company, said it has sold its holdings.

China has issued a record amount of corporate debt in recent years, and international money managers have gobbled up the securities, attracted by China’s rapid economic growth and the substantial returns on offer. Yet investors have become increasingly cautious as economic growth slows.

Kaisa’s troubles are particularly worrying for offshore investors, who have little protection when companies on the mainland go bust. They get paid long after domestic investors and have no direct access to assets on the mainland because of capital restrictions.

“If the company has defaulted on its offshore bonds and winds down, the entire credit market is interested in how this is processed, the length of time and how much of its assets foreign investors would ultimately get,” said Jim Veneau, head of fixed income for Asia at AXA Investment Management, which has US$716 billion in assets.

There have been few previous defaults, but one example was in 2013, when China’s Suntech Power Holdings Co. , once a giant in solar power, defaulted on its overseas debt. U.S. bondholders are still fighting to get cash back, though most expect to recoup little. The company’s creditors in China were paid 30 cents on the dollar after Suntech restructured itself.

Kaisa’s troubles started late last year, when the Shenzhen government blocked approvals of some of its developments and property sales in the city—actions the company said in a Dec. 21 statement could have “an adverse impact on cash flow.” Several executives have left the company, including Kaisa’s founder and longtime chairman, Kwok Ying Shing. Neither the government nor Kaisa executives have offered explanations. On Jan. 1, Kaisa said it defaulted on a US$51.6 million loan from HSBC Holdings PLC.

Late Monday, it said the bank had granted it a waiver on Jan. 7, meaning Kaisa doesn’t have to repay the loan for now.

Analysts and investors don’t expect Kaisa to be liquidated. Until a few months ago, the company had strong sales and solid cash flow. Even if it is liquidated, the company has plenty of physical assets it can sell to raise cash, though it is unclear how much would go to international investors.

“How will the onshore Chinese liquidators and courts understand and handle offshore creditors’ demand? These remain to be watched,” said Ivan Chung, a senior vice president at Moody’s Investors Service. “We will see how big the gap is between foreign investors and domestic creditors.”

He added that onshore creditors, including banks and trust-loan providers, have collateral on their loans to Kaisa and could have better access to the company’s assets than offshore investors.

Onshore creditors appeared to have accelerated their actions to preserve assets of the company.

“As of Jan. 9, several bank accounts of the group were frozen and under investigation by several banks,” Kaisa said Monday. The balances affected totaled roughly 713 million yuan (US$115 million), it said, without elaborating.

The company also said that as of Friday, various creditors have asked courts to help ensure its assets aren’t drained away, and that it has received a court order requiring it to preserve assets worth 651 million yuan.

Kaisa said Monday that it is looking to appoint a financial adviser to help the company to reach a solution, “taking into consideration the interests of all stakeholders, including the company’s onshore and offshore creditors.”

According to filings to the Intermediate People’s Court in Shenzhen, 10 banks, four trust firms and one wealth-management company have asked the court to freeze the assets of Kaisa’s units and its local partners in cities including Shenzhen, Zhuhai and Dalian.

Kaisa has a 30-day grace period on the interest payments it missed Thursday.

Kaisa’s troubles have shaken confidence among foreign bondholders, sending the company’s offshore bond prices tumbling 80 per cent over the past month to around 30 cents on the dollar, and sending yields to 48 per cent-79 per cent. Bond prices move inversely to yields. Onshore, Kaisa’s trust loans yield from 8 per cent-9.2 per cent, according to data provider Wind Info.

Trading in Kaisa’s stock has been halted since Dec. 29. The suspension will continue, Kaisa said Monday.

More broadly, the cost of issuing dollar bonds for below-investment-grade Asian companies has surged to 7.8 per cent—the highest level in 16 months—from as low as 6.9 per cent in August, while the cost for Chinese firms, investment grade or below, has jumped to 5.5 per cent, the highest level since May last year, from 5.3 per cent in early December, according to J.P. Morgan Asia Credit Indexes.

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Chinese firms seek asset freeze from Shenzhen court.

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China’s automobile sales to slow further in 2015

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DETROIT—China’s auto industry faces a second straight year of weaker growth after a sharp 2014 slowdown, according to an industry association and analysts, as car makers continue to grapple with a cooling economy and rising inventories.

The China Association of Automobile Manufacturers said Monday that it expects passenger-vehicle sales to rise 8 per cent to 21.3 million vehicles this year, compared with 9.9 per cent growth in 2014. While that pace is stronger than current outlooks for Europe and the U.S., it still marks a sharp slowdown from a 16 per cent gain in 2013 and even higher rates in some previous years.

Jochen Siebert, managing director of consulting firm JSC Automotive, said Western auto makers get such a large share of profits from China, slower gains “could be a slap in their face as the market begins to stall and regulators put an end to extraordinary profits in the aftermarket business.”

Consultant IHS Automotive estimates that in 2013 China contributed about 59 per cent of net profit at Volkswagen AG , 45 per cent at BMW AG and 37 per cent at General Motors Co. The car makers don’t separately disclose China profits.

BMW said China accounts for between 20 per cent and 30 per cent of its automotive-segment earnings, which excludes finance arm earnings. Ian Robertson, the German luxury-car maker’s global sales and marketing chief, said in an interview at the Detroit auto show that he expects BMW sales in China to rise at a moderate single-digit-percentage rate this year. Mr. Robertson said growth also was shifting among car segments, for example, to smaller luxury cars from larger models.

Volvo Car Corp. Chief Executive Håkan Samuelsson said it is important not to “over exaggerate” the effects of China’s slowdown. “It’s going to be tougher,” he said. “But there is still solid growth,” he added.

Mr. Samuelsson said growth in China’s premium-car market in 2015 of between 5 per cent and 10 per cent would be “more realistic.” Volvo expects its growth would outperform, but wouldn’t be as high as when its sales rose about 35 per cent in 2014.

Analysts expect China’s slowing growth will weigh on auto sales over the course of the year. China’s gross domestic product is widely expected to rise 7.3 per cent in 2014, the weakest since 1990, and further deceleration is likely, said economists.

“Sales growth of sedans has almost stalled in recent months because buyers of sedans are very vulnerable to the economic situation,” said Yale Zhang, managing director of consulting firm Automotive Foresight. In 2014, China’s sedan sales rose only 3 per cent from a year earlier to 12.4 million cars.

Dealers including Xie Zongwei agree. “People are asking for greater discounts. I feel it’s getting more difficult to sell cars,” said Mr. Xie, who sells Chevrolet, Hyundai and Geely vehicles in Hebei province.

The China auto association offers a somewhat brighter outlook for commercial vehicles, which are more dependent on the property market. Overall, the group expects total sales of passenger and commercial vehicles to rise 7 per cent to 25.13 million this year, compared with 6.9 per cent last year.

The industry group’s estimates are largely in line with those of analysts. Business Monitor International, a unit of information-services firm Fitch Group, expects growth in China’s passenger-car sales to slow to 7 per cent this year. LMC Automotive forecasts a 9 per cent rise for the passenger-car market and IHS Automotive forecasts an 8 per cent rise.

In addition to the economic deceleration, demand for cars is taking a hit from the increasing number of cities placing restrictions on car sales to tackle their worsening air-pollution and traffic problems.

In December, the affluent southern city of Shenzhen joined other urban centers in curbing car purchases. The city now caps the number of new cars at 100,000 vehicles a year, less than half of an estimated 250,000 new vehicles sold in 2014.

Cities that might follow suit this year include Chengdu, Suzhou, Nanjing and Xian, said Ways Consulting Co., a Guangzhou-based consulting firm focused on the Chinese automotive industry. Each of the cities has had more than 100 autos per kilometer on the road, said the consultancy, adding that the four cities sold more than 1.2 million new cars in the first 10 months of 2014.

The association’s figures track vehicles shipped to dealers rather than sold to consumers, and rising inventories in dealer lots suggest more cars are going unsold.

Dealers for some foreign car brands, including BMW, have complained about what they called too-high sales targets and have demanded financial support from car makers to tide them through the slowdown.

Johan de Nysschen, president of General Motors’ Cadillac unit, said dealers for the brand in China hadn’t asked for such payments. “[But] we should anticipate it. Dealers for all franchises have taken note of this development,” he said.

The latest data from the China Automobile Dealers Association show that stockpiles at China’s more than 22,000 dealerships jumped to 55 days in November, up from 44 days in October and the highest level since June 2012.

Bill Russo, managing director of consulting firm Gao Feng Advisory, advised against car companies putting all of their eggs in the China basket. But he said there weren’t too many options. “If you’re a global auto maker, where else can you go for growth other than China?”

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After 2014 slowdown, inventories are rising as economy cools.

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Sinopec to list gas-station and convenience-store unit in HK

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HONG KONG— China Petroleum & Chemical Corp. is planning to raise billions of dollars from an initial public offering in Hong Kong this year of its gas-station and convenience-store unit, people familiar with the situation said Monday.

The state-owned oil company, also known as Sinopec, could raise more than US$5 billion by carving out its 30,000 gas stations and 23,000 convenience stores dotted across China.

The unit, Sinopec Marketing Co., received approval from the Chinese government last month for a sale of around 30 per cent of the company, Sinopec said in December, but gave no further details on a timetable for the listing. It plans to pick bankers for the IPO after the Lunar New Year holidays—Feb. 19-21.

A person close to Sinopec said Monday the retail unit’s board would decide on the strategy for the listing, but didn’t elaborate.

Sinopec’s gas-station and convenience-store business made headlines last year as one of a handful of state-owned enterprises to be restructured. In September, Sinopec agreed to sell around 30 per cent of its closely held retail business to a range of outside investors, including non-state-owned e-commerce firm Tencent Holdings Ltd. , for around 107 billion yuan, or about US$17 billion, valuing the retail unit at US$57 billion. The deal has yet to be completed.

It said then that such a sale would help it boost returns and efficiency and revitalize its gas-station business. It isn’t known whether Sinopec plans to sell more of its stake in the IPO or issue new shares.

With a fundraising size of at least US$5 billion, Sinopec Marketing’s IPO could be one of the biggest in Asia this year, beating potential deals by state-owned firms such as debt-clearer China Huarong Asset Management Co., which could raise around US$3 billion in a Hong Kong listing, and reinsurance firm China Reinsurance (Group) Corp, which plans to raise around US$2 billion in the city. TPG Capital plans to explore a sale or float of Australian power company Alinta Energy for up to US$3.6 billion in Australia.

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Sinopec could raise more than US$5 billion from IPO.

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Volvo to sell Chinese-made cars in US

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Volvo Cars, the Chinese-owned Swedish automaker, says it will export cars made in China to the United States.

The move is a step forward for Beijing's ambitions to extend the global reach of its auto manufacturing industry.

The cars would be exported from Volvo's factories in China, said a Volvo public relations manager, Chen Yu. She said she had no details on when shipments would start or a sales target.

A handful of vehicles made in China have been exported to the United States but if Volvo's plan goes ahead, it could represent the first mass-market sales of Chinese-made vehicles there.

China's domestic automakers and joint ventures between global brands such as General Motors Co and local producers export sedans, mini-vans and other vehicles to Latin America, the Middle East and other emerging markets.

Several Chinese brands have expressed interest in entering developed markets but have yet to satisfy US emissions and safety standards.

Volvo was acquired in 2010 by Geely Holding Group Ltd, which also sells cars under its own name. The following year, Volvo announced an $US11 billion ($A11.90 billion), five-year global expansion plan.

The company has assembly lines in the southwestern city of Chengdu and in Daqing in the northeast and an engine factory in the central city of Zhangjiakou. Volvo has created an extended version of its S60 sedan, the S60L, for the Chinese market.

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Volvo cars is set to extend the global reach of its auto manufacturing industry.

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Strong imports, exports boost China trade surplus in December

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China's trade surplus came in ahead of forecasts in December, on the back of better-than-expected exports and imports.

According to official data, China's trade surplus narrowed to $49.61 billion in December from $54.47bn in November. 

Analysts surveyed by Bloomberg had expected the trade balance to come in at a surplus of $US49 billion.

China's exports rose 9.7 per cent in December from a year earlier. This was up from a 4.7 per cent rise in November and above the median forecast for 6.6 per cent growth by 17 economists surveyed by The Wall Street Journal. 

Imports fell 2.4 per cent from a year earlier after a 6.7 per cent fall in November, less than economists' median forecast for a 7 per cent decline. 

For the full year 2014, the country reported a trade surplus of $382.46bn, compared with a surplus of $259.75b in 2013. Exports rose 6.1 per cent in 2014, down from an increase of 7.9 per cent in 2013. Imports climbed 0.4 per cent, down from growth of 7.3 per cent in 2013.

The Australian dollar lifted on the news, hitting US81.89c at just before 1.30pm (AEDT).

China imports record amount of iron ore in 2014

China imported 86.85 million metric tons of iron ore in December and 932.5 million tons for the full year, both record-high volumes for the month and year respectively, according to General Administration of Customs data Tuesday. 

Imports for December rose 18.3 per cent from a year earlier and 29 per cent from November. 

The volume for the full year was a 13.8 per cent rise from 2013, customs said.

Meanwhile, China imported 30.37 million metric tons of crude oil in December, equivalent to 7.2 million barrels a day, preliminary data from the General Administration of Customs showed.

Imports were 13.4 per cent higher than the 26.78 million tons of crude shipped during the corresponding month last year, and up around 19.5 per cent from 25.41 million tons in October, according to Wall Street Journal calculations. 

December's imports surpassed a previous absolute high in January of 28.16 million tons and a previous daily high in April of 6.8 million barrels a day. 

Refined oil-product imports totaled 3.2 million tons, while exports totaled 2.82 million tons, the data showed. 

China imported 27.22 million tons of coal and lignite and exported 430,000 tons in October, according to the data.

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Better-than-expected exports buoy result, 2014 iron ore imports reach record level.

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US economic recovery boosts Chinese exports

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Chinese exports rebounded sharply during the final month of 2014, beating expectations from economists and analysts. Export growth increased sharply from 4.7 per cent in November to 9.7 per cent in December. This was stronger than the Bloomberg median forecast of 6 per cent.

Today’s trade data makes China’s export sector one of the best performing sectors in the world, according to Capital Economics, a London-based global economic consultancy. The rebound in the export sector is indicative of a slowly recovering world economy -- especially in the US, which is regaining its momentum.

The slowdown in Chinese imports also moderated in December, rising from a 6.6 per cent decline in November to a 2.4 per cent drop last month. The growth in Chinese imports has been weighed down by sharp falls in global commodity prices such as oil and iron ore. The oil has price dropped below $US50 per barrel for the first time since April 2009 and the iron ore price has also dipped below $US70 per tonne.

Apart from declining global commodity prices, Chinese demand for capital goods, such as machinery, is also moderating due to a combination of import substitution industrial policy as well as more subdued domestic demand. Import growth for electronics and machinery goods increased by just 0.9 per cent during the first 11 months of 2014.

The December trade surplus of $US49.6 billion was only slightly smaller than the historically high trade surplus of $US54.5bn in November. China’s foreign exchange reserve is approaching a record high of $US4 trillion. Believe or not, this vast war chest is becoming a nasty headache for the country’s central bankers, as they find it difficult to manage such a large holding.

The deputy governor of the central bank, Yi Gang, who is in charge of managing the foreign exchange reserve, has said repeatedly he wants the country to import more goods from abroad to ease the pressure on increasing the size of the reserve any further.

Looking ahead in 2015, China’s export industry is expected to perform better as key export markets, including the US, gain more recovery momentum. In addition, Beijing’s grand strategy of building better connectivity between China and emerging economies in Southeast Asia and Central Asian countries has the potential to boost Chinese exports -- especially for capital goods such as construction machinery.

As far as imports are concerned, don’t expect Beijing to unleash another round of reckless stimulus to boost its slowing economy despite media reports of a planned $US1.1 trillion infrastructure splurge in 2015. Officials from the powerful National Development and Reform Commission, the country’s key planning agency, went on record to say the spending plan was fundamentally different from the 4 trillion yuan rescue package during the financial crisis.

Continuous falling commodity prices and weak Chinese demand will further weigh on the country’s import figures. For 2014 as whole, China's imports only grew 0.4 per cent, with the sluggish import performance playing a key role in missing the trade growth target of 7.5 per cent.  

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Today’s trade data makes China’s export sector one of the best performing sectors in the world, according to Capital Economics.

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China sacks leading official amid graft probe

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China's Communist Party has dismissed a top legislative official and expelled him from the ruling organisation, its anti-corruption watchdog says, amid a sweeping crackdown on graft.

Bai Enpei, 68, deputy head of the environment and resource protection committee of China's rubber stamp parliament, was investigated by the Central Commission for Discipline Inspection (CCDI) for "serious discipline violations", according to a statement on the commission's website.

During the investigation, Bai, who was formerly Communist Party chief of Yunnan province, was found to have "taken advantage of his position to benefit others" and accepted "huge bribes", it said, without giving further details.

His current position is equivalent to a minister's rank according to internal Communist Party rules.

Bai's case will soon be transferred to judicial authorities for criminal prosecution, the statement said.

Previously, Bai held other high-profile positions, including acting governor of Qinghai province and deputy Party secretary of Inner Mongolia.

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Deputy environment head found to have 'taken advantage of position to benefit others'.

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