Chinese buyers are responsible for 46 per cent of the global consumption of luxury goods, according to the Fortune Character Research Institute.

Total Chinese luxury goods consumption in 2014 was US$106 billion, up 4 per cent from the year before. However, consumption in Chinese domestic market declined 11 per cent to US$25 billion.

On the other hand, Chinese tourists spent a record US$81 billion outside of China. Between 2010 and 2014, the number of Chinese tourists going abroad more than doubled from 53 million to 117 million within four years.

Chinese tourists are mostly buying luxury goods abroad due to price disparities. 

Guangzhou, one of China’s largest cities, has lowered its GDP growth target to a single digit for the first time in the last two decades after failing to meet its official growth target of 10 per cent last year reports Caixin.

According to the magazine, the city government’s growth goal for 2015 is 8 per cent. Apart from Shanghai and Tibet, 26 Chinese provinces have lowered their GDP growth forecasts. Shanxi, Gansu and Liaoning lowered theirs by as much as three percentage points.

A researcher from the Guangdong Academy of Social Sciences says Guangzhou should follow Shanghai’s example of abolishing its GDP growth target once for all.

“I can’t give you a date when it will fall, but China’s Communist Party has entered its endgame.” So says one of America’s most experienced China watchers to a small table of foreign diplomats at a private dinner in Washington, D.C. The pessimism from someone with deep connections to the Chinese government is notable. Washington should start paying attention if it wishes to avoid being surprised by political earthquakes in the world’s second-largest economy.

The China scholar at my table is no conservative. Nor are the handful of other experts. Each has decades of experience, extensive ties to Chinese officials and is a regular visitor to the mainland. No one contradicts the scholar’s statement. Instead there is general agreement.

“I’ve never seen Chinese so fearful, at least not since Tiananmen,” another expert adds, referring to the 1989 massacre of pro-democracy student demonstrators in the heart of Beijing. When prodded for specifics, he mentions increased surveillance, the fear of being investigated and increased arrests.

Just as there is no dissent from these views, there is unanimity on the cause of the new atmosphere of fear: President Xi Jinping .

In just two years, Mr. Xi has become the most powerful Chinese leader since at least Deng Xiaoping, and perhaps even since Mao Zedong. Some longtime experts talk about the possibility of something approaching one-man rule in Beijing, anathema since the excesses leading up to Mao’s death in 1976. Others argue that collective leadership is alive and well, but the party is indeed tightening its grip on Chinese society.

The clearest manifestation of Mr. Xi’s power is the unprecedented crackdown on corruption. The sensational corruption and murder scandal of former Politburo star Bo Xilai in 2012-13 was just the starting point in a campaign that has also snared Zhou Yongkang, the former head of the powerful security committee and an inner member of the Standing Committee. Now the former chief of staff to ex-President Hu Jintao is also being investigated. State media report that 180,000 party officials have been “disciplined.”

While Mr. Xi clearly is attempting to restore the party’s credibility with cynical and disenchanted Chinese, he is also sending messages about his strength and the reach of the Party throughout Chinese society. Faced with an economic slowdown that may impact the living standards of the middle class, Mr. Xi is short-circuiting any potential large-scale unrest. More worrisome, he may be gathering unprecedented power—but perhaps it is more the flaring of a candle before it gutters.

If the party really is in its endgame, then neither Mr. Xi’s dramatic anticorruption campaign nor his reform program will mean much, at least in the long run. Cynicism in China is at an all-time high. The elite hold foreign passports for their families, and wealth is being transferred offshore through real estate holdings and other means. A maturing Chinese economy means an economic slowdown in any case, but a more sustained downturn would exacerbate the tensions that remain just under the surface. Nor can one discount the possibility that the knives will come out for Mr. Xi, leading to internecine war within the party.

It is hard, if not impossible, to imagine a post-Communist China. The country’s democratic and liberal voices have been suppressed for decades, and the extent of public sympathy for their cause is ultimately unknowable. A period of increasing unrest and internal disruption would undoubtedly follow any loss of power by the Communist Party.

If all this is accurate, then what should the West do? “Get outside the Fourth Ring Road,” the first specialist says, referring to the center of government power in Beijing. Western diplomats, scholars and NGOs are too isolated from the Chinese people. Greater engagement with China’s various voices, from farmers to educators to liberal activists, is the only responsible approach for the long run.

Also build links to marginalized Chinese. “When was the last time you heard Washington criticize Beijing’s human-rights record or labor relations?” the same scholar asks. It’s time to show that the West has a moral stake in China’s development. Decades of official interaction have done little if anything to change the behavior of China’s leaders.

The West must alter its approach to China. Hopes for a mature cooperative relationship have foundered on economic and security disagreements. Beijing’s support for aggressive actors like North Korea and Iran, and its repression of its own people, leave no mystery about the nature of the regime.

The endgame in China may not come for years. But being on the right side of history, no matter how messy it turns out, is the wise play.

Mr. Auslin is a scholar at the American Enterprise Institute in Washington, D.C. and a columnist for WSJ.com.

This article first appeared in the Wall Street Journal.

Wynn Resorts Ltd. ’s fourth-quarter profit fell sharply as the casino operator reported steep declines at its operations in Macau, China’s semiautonomous gambling hub.

A corruption crackdown, tighter regulations and a weakening economy on the mainland have cut into business in Macau, the only place in China where casinos are legal. Chinese government officials have said they plan to expand a smoking ban that went into effect in October, prohibiting smoking anywhere in a casino, including VIP rooms.

Since June, when Macau reported the first year-over-year monthly decline in overall gambling revenue since 2009, gross revenue has declined every month, ending the year down 2.6 per cent from 2013. In January, gambling revenue shrank another 17 per cent to 23.75 billion patacas ($2.97 billion), according to Macau’s Gaming Inspection and Coordination Bureau.

For the most recent period, Wynn reported revenue from its Macau operations fell 32 per cent to $761.2 million, with table games turnover in its VIP segment declining 39.9 per cent.

Average daily rates rose 5.4 per cent to $332, while occupancy reached 98.6 per cent, compared with 96.7 per cent for the year-earlier period.

Revenue per available room, a closely watched figure to measure performance in the industry, rose 7.9 per cent to $328.

Chief Executive Stephen Alan Wynn told investors in a conference call to discuss third-quarter results in October that Wynn remained “very bullish” on Macau, saying he expected a slight improvement of mass market margins citing a “dramatic capacity increase” in its Macau hotel in January along with the planned opening of Wynn Palace in Cotai in the first half of 2016.

In addition to its majority-stake at Wynn Macau , Las Vegas-based Wynn Resorts owns a resort in Las Vegas and is developing a resort in Everett, Mass., north of Boston.

In the latest period, Wynn’s Las Vegas operations posted a 5.8 per cent decrease in revenue to $376.8 million. Average daily rates rose 5.9 per cent to $271, and occupancy improved to 82.1 per cent from 80.8 per cent. Net casino revenue fell 15.5 per cent to $171 million.

Revenue per available room rose 7.2 per cent to $222.

Over all, Wynn reported a profit of $109.3 million, or $1.07 a share, down from $213.9 million, or $2.10 a share, in the year-ago period. Excluding preopening costs and other items, profit fell to $1.20 from $2.27 a share a year earlier.

Net revenue fell 25 per cent to $1.14 billion.

Analysts surveyed by Thomson Reuters expected $1.43 a share on $1.21 billion in revenue.

BEIJING—China reported the largest deficit in its capital and financial account in more than a decade for the last quarter of 2014, the latest evidence showing that capital is flowing out of the country.

China recorded a deficit of $91.2 billion in the period under its capital and financial account, which covers investments, the State Administration of Foreign Exchange said Tuesday, based on preliminary estimates.

The figure is the largest quarterly deficit under its capital and financial account since at least 1998, according to data provider Wind Information Co., though the data are estimates and often subject to wide revisions. It brought the capital-account deficit for the full year to a preliminary $96 billion, after a revised deficit of $9 billion in the 2014 third quarter.

China has been facing capital outflows as its economy slows and the nation’s currency weakens. The government has also been encouraging domestic companies to play a bigger role in the global economy by investing overseas.

Economists have said that slower economic growth and rising labor costs are making China a less attractive destination for some types of foreign investment, while the weaker yuan is convincing some exporters to hold on to foreign exchange instead of converting it into the local currency.

In the fourth quarter, China had a surplus of $61.1 billion in the current account, which covers trade in goods and services. It had a surplus of $213.8 billion for all of 2014, according to initial estimates, and that included a revised surplus of $72.2 billion in the third quarter of last year.

In 2013, China posted surpluses in both its capital and current accounts, with the capital account showing a $326.2 billion surplus and the current account surplus at $182.8 billion.

The data are largely in line with other data released by the government. China’s central bank and financial institutions sold a net 118.365 billion yuan ($18.91 billion) of foreign exchange in December, reversing a net purchase of 2.17 billion yuan in November, according to a Wall Street Journal calculation based on central-bank data issued last month. Foreign exchange purchases by the banking system are widely seen as indicative of capital flows.

BEIJING—As Lenovo Group Ltd. executives reintroduced Motorola smartphones to China last week in a festive launch here, they reminisced on stage about falling in love with Motorola devices back when mobile phones were still rare and Chinese companies didn’t make them under their own brands.

The patter hinted at one reason the Chinese personal-computer maker splashed out $2.91 billion to buy the unprofitable U.S. phone maker in October. With the acquisition now complete, Lenovo is hoping that the Motorola brand will carry weight with emerging-market consumers who aspire to own upmarket devices.

It is a good time for Lenovo to shore up. Even though it is the world’s third-largest smartphone vendor behind Samsung Electronics Co. and Apple Inc., it is facing vigorous competition on all fronts.

In its home market of China, Apple rules the high-end smartphone arena where Chinese consumers consider the iPhone a luxury. For mid-to-low-end smartphone customers, it is battling Xiaomi Corp., China’s hottest startup with a market valuation of more than $46 billion and, until last quarter, China’s biggest smartphone vendor by shipments.

While a year ago, Lenovo outsold all vendors except Samsung in China, both Apple and Xiaomi have surpassed it by selling dreams of a fashionable lifestyle to Chinese consumers, albeit at different price tiers. Huawei Technologies Co. also is a serious contender, with its new Honor subbrand—aimed at young buyers—bringing in more than a quarter of its smartphone sales last year.

Lenovo Chief Executive Yang Yuanqing said in an interview Tuesday that the China smartphone market has changed and his company needs to adjust.

“The online model is disrupting the traditional model,” he said. “We definitely must address this.”

Mr. Yang said two trends in China are favoring newcomers like Xiaomi, which has climbed the smartphone market rapidly by selling high-quality, low-cost devices online. One is the decline in carrier subsidies, which has pushed the majority of Chinese consumers to buy devices not associated with a carrier. Lenovo sells most of its phones through carriers, he said. The second trend is the success that Xiaomi and others have had in marketing their products online through fan-club networks, resulting in low overheads and a pricing edge on traditional vendors.

After selling its first smartphone four years ago as a lean online startup, Xiaomi shot to the top of China’s smartphone market last year, although it was surpassed by Apple in the fourth quarter of 2014, according to market research firm Canalys.

One testament to Lenovo’s efforts to take on Xiaomi was its launch last week for Motorola in Beijing. In a launch style popularized by Xiaomi, the Motorola event put average users at the center, with fans flown in from around the country to participate and interactive social-media feeds scrolling across the big screen. Lenovo is pricing Motorola phones higher than its own-brand phones, with hopes of chipping away at rivals in higher price bands. Executives said Motorola smartphones would be priced above $400 and Lenovo ones below that price.

Motorola President Rick Osterloh said in an interview last month that he planned to expand the brand in other emerging markets in Asia, Africa and Eastern Europe.

Lenovo has also begun a cooperation with Chinese e-commerce website JD.com to sell phones, and it will launch this year in China a new online-only electronics brand, Shenqi, which has sometimes been translated as “Fancy Maker” in English-language reports, although the Chinese word is more akin to “magical.” Shenqi will sell Internet-connected devices, and appears aimed at combating Xiaomi’s recent moves in home appliances.

Investors were encouraged on Tuesday by Lenovo’s first earnings results since its acquisition of Motorola. The company said its fiscal third-quarter net profit fell 5 per cent to $253 million from $265 million a year earlier, beating analysts’ expectations for a net profit of $184.6 million. Revenue rose 31 per cent from a year earlier to $14.1 billion.

Investors had been warned that unprofitable Motorola would be a short-term drag on profit, and Mr. Yang has pledged to turn around the brand in six months. Lenovo’s Hong Kong-listed shares jumped as much as 8.6 per cent in intraday trade on Tuesday, the biggest spike in more than a year, and closed up 7.3 per cent at 10.92 Hong Kong dollars (US$1.41).

Barclays Managing Director Kirk Yang said that Lenovo’s smartphones unit will become increasingly important to investors as growth slows for its core personal-computer business. Lenovo is the world’s biggest PC maker by shipments.

“Investors expect 20 per cent EPS [earnings per share] growth each year,” he said. “With PC growth slowing down, Lenovo will have to rely more on smartphones.”

Mobile devices made up 24 per cent of Lenovo’s revenue in the quarter ended December, up from 16 per cent a year earlier.

Activity in China's services sector has continued to weaken hitting a six-month low in January.

The HSBC/Market Services Purchasing Managers’ Index (PMI) fell to 51.8 points in January from 53.4 in December.

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

Chief economist, China and co-head of Asian economic research at HSBC, Hongbin Qu, said both input and output price inflation had eased.

"Given continued contraction of the manufacturing sector, we believe more easing measures are warranted to support growth in the coming months” he said.

East Asia Forum

The further reform of China’s state-owned enterprises has attracted a lot of attention and triggered debate since it was discussed last year at the third plenary session of the Chinese Communist Party’s 18th Central Committee (the Third Plenum). Three areas need to be addressed if reforms are to be meaningful and comprehensive: reforming the property rights system of SOEs by developing a ‘mixed ownership economy’; shifting from managing state assets to managing state capital; and promoting a modern corporate system.

At this stage the key to reforming the property rights system of SOEs under the ‘mixed ownership’ model lies in continuing the transformation from an old traditional enterprise system to the modern enterprise system. This will require a four-pronged approach.

First, corporatising the remaining wholly state-owned enterprises should be accelerated. According to the Chinese Ministry of Finance, 16 per cent of SOEs—more than 20,000— fall into this category, having not yet transformed into companies under China’s Company Law.

Second, the parent companies of the 113 central SOEs under the State-owned Assets Supervision and Administration Commission (SASAC) should be corporatised. Currently only seven of them have diversified equities, while in most the state is the exclusive investor. By contrast, the majority of these enterprises’ subordinate companies are now incorporated, and some are already publicly listed on the stock market.

Third, the state should reduce the average proportion of shares it holds in enterprises. In 2012, there were 54,000 wholly state-owned companies in China, accounting for 37 per cent of all SOEs. Their total assets reached RMB 36.7 trillion (US$5.9 trillion), or 41 per cent of the total. While a small number of industries related to national security can remain solely state-owned, most SOEs should diversify their equity structure and reduce their average percentage of state shares. This will improve governance structure by balancing the majority shareholder.

Fourth, the investment of state capital in major industries and key areas involved in national security and the economy should be redefined. More and more state capital should be distributed in the fields of public service, emerging and strategic industries, ecological protection, technological innovation and national security—instead of distributing in competitive fields. State-owned monopoly enterprises should also be encouraged to develop into mixed- ownership enterprises.

Another key area of reform is China’s current system for managing state assets, which needs to be transformed into a new system for managing state capital. It is important that policy guidelines for this new management system be developed at the national level and include the fundamental function of state capital and an operating earnings policy. The functions of capital owners and public administrators should be clearly defined. Separating the shareholder and regulatory functions of the State-owned Assets Supervision and Administration Commission will be crucial to avoid conflicts of interests. While the regulatory function can remain with the existing agencies, the investment arm must be assumed by the proposed government capital investment or operating company.

Efforts should be made to further explore the operational model of state capital to promote the idea of ‘capital management’, so as to increase the efficiency and performance of state capital. The next stage of reforms should focus on the authorised operational mechanism for state capital and establishing a number of specialised state investment and operational platforms. These proposed state capital investment and operational companies can take as examples the Temasek model in Singapore and the Central Huijin Investment model in Chinese state financial assets management which has improved corporate governance and reform in the banking sector.

While a number of state-owned capital operating companies needs to be established, some SOEs qualified in special industries could be reorganised into state capital investment companies. These two platforms could act as a firewall between the state capital owner and the enterprises. This would mean that SOEs had more room for development and ultimately improve the efficiency and performance of state capital.

The Third Plenum decision emphasised the importance of ‘promoting a modern corporate system for SOEs’. The question is: how to achieve that under the principle of ‘clearly established ownership, well-defined rights and responsibilities, separation of enterprise from administration, and scientific management’?

China’s existing SOEs can be classified into at least two categories: non-profit enterprises with policy intention and strategic objectives, and those which operate in fully competitive fields. According to the instructions of the third plenary session, China’s next stage of development will witness more input and support for the former. On the other hand, the latter will have to compete with non-SOEs on an equal footing under the principle of full competition for resources, markets and services.

Reform measures will differ across monopoly industries depending on their nature. Administrative monopolies—those that, by the grace of government, have had monopoly status conferred upon them—must be broken up. Reforms of natural monopoly industries will be aimed at separating enterprise from administration, government functions in managing public business, and state-owned capital management. For SOEs in competitive fields, the assessment and evaluation systems should be developed based entirely on market economy standards.

But even with all of this, traditional regulation—with the structure of SASAC—can only produce a traditional corporate system. Establishing a modern corporate system requires a functional, arms-length regulatory system.

Narrowing the focus, the ‘enterprise system’ at the micro level should also be improved. The first step is to reform and improve the current senior manager selection mechanisms, the salary system, and assessment and evaluation mechanisms—all of which are essential to a modern corporate system.

For example, in most cases, when selecting and recruiting senior managers for SOEs, the mechanism of party-cadre administrators is usually combined with the market mechanism. This is a special recruiting system. Unlike the professional managers that headhunting companies seek in the market, the senior managers of SOEs assume a dual identity: enterprise runner and leading cadre at a certain level.

This has both pros and cons. The upside is that these managers, as leading cadres, may have a stronger sense of responsibility and higher professional standards; the downside is the difficulty in efficiently combining these two systems and the effort required to improve them. The selection and recruitment of leading cadres also encounters the ‘revolving door’ problem. This occurs when the role exchange between government officials and enterprise managers introduces enterprise management experience into government departments and brings government management experience into enterprise operation—another pros-and-cons situation. The key problem lies in whether the departments concerned are willing to delegate powers.

The Third Plenum set out new tasks to deepen the reform of SOEs and made clear the key areas where change is needed. Though hardships are inevitable, as long as the reformers march in the right direction, with clear targets and appropriate methods, breakthroughs will be achieved. Where there is a will, there is a way.

Zhao Changwen is the General Director of the Department of Industrial Economy, part of the Development Research Center at the State Council of the People’s Republic of China.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’. Republished with permission.

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Central bank releases provincial break down of aggregate financing in 2014

Jiangsu, Guangdong and Beijing have topped a list that ranks China's provincial-level regions according to the total volume of financing that flowed from the financial system to the real economy in 2014.

In Jiangsu, a coastal province directly north of Shanghai, over 1.3 trillion yuan of funds flowed into the real economy. Aggregate financing to the real economy also exceeded 1 trillion yuan in Beijing and Guangdong.

The list, which is provisional, was published by the People's Bank of China yesterday.

The national total for aggregate financing was almost 16.5 trillion yuan in 2014, according to the central bank.

(Phoenix Finance)

Ma Lin a front-runner for new head of Minsheng Bank: reports

Speculation about who will replace the outgoing head of Minsheng Bank has been rife this week.

Ma Lin, who previously was head of the Jilin branch of the bank, is a top candidate for the role of president, according to a report in yesterday's Time Weekly.

The shift may not occur until April or May. In the interim, the chairman of the bank's board, Hong Qi, will serve as the bank's president. 

(Time Weekly)

Beijing ramps up tax collection

Chinese tax authorities are cracking down on multinational companies as well as wealthy business people in a bid to raise more tax revenue for government coffers. 

The deputy head of State Administration of Taxation Zhang Zhiyong, said the government collected an extra 52.3 billion yuan in tax revenue from anti-avoidance measures as well as investigations. Beijing fined Microsoft for a record US$140 million last year.

The tax authorities are also eyeing wealthy people with assets stashed away in overseas tax havens such as the British Virgin Islands.  

(The Paper)

Chinese state-owned oil majors are tightening belts

The China National Offshore Oil Corporation says it will cut its capital expenditure by as much as 26 per cent to 35 per cent in 2015 due to lower oil and gas prices. The planned expenditure for this year is between 70 billion and 80 billion yuan.

Two other major state-owned oil companies, Sinopec and PetroChina, also scaled back their investment last year. The total M&A budget for the big three oil majors for 2014 was only US$3bn, down 90 per cent from the year before.

CNOOC plans to produce between 475 million and 495 million barrel of oil next year, up 10 to 15 per cent from the year. Chinese domestic oil fields will contribute to 67 per cent of total production and the rest will come from overseas oil fields.

(The Paper)

China’s largest property developer eyes overseas projects

The Chairman of China’s largest property developer Vanke, Wang Shi, says the company needs to shift 15 to 20 per cent of its total investment abroad to diversify its risk from the property bubble in China.

Mr Wang, says there is a property bubble in China, but it’s not clear whether it will actually burst. China’s economy is slowing but the process of urbanisation is still progressing and there are still opportunities, he said.

Mr Wang also warned of the risk of loose monetary policy as central banks around the world indulge in money printing and cutting interest rates. Wang says Vanke needs to avoid risky investments in third and fourth tier cities in China and should allocate between 15 and 20 per cent of their money to invest in overseas projects.

(Phoenix Finance)

Explosive growth in mobile internet users

China has a mobile internet user population of 557 million, an increase of 57 million people from the year before. The percentage of mobile internet users as a proportion of total users has increased from 81 per cent to 85.6 per cent.

134 million people use their phones to book tickets, hotels, trains and travel packages, an increase 194.6 per cent from the year before. Mobile phones have also replaced the PC as the number one preferred channel for watching videos.

304 million Chinese people use mobile phones to make payments. Mobile users make up 46.9 per cent of people in the country who use on-line payment systems.

(Sina Tech)

Provinces prepare for spending binge

Sichuan has become the fourteenth province to announce a massive investment plan on Monday reports Shanghai Securities News.

According to the paper, the 3 trillion yuan investment plan brings the total amount of investment across fourteen provinces to approximately 15 trillion yuan, exceeding total national tax revenue in 2014.

Sichuan joins Fujian, Hubei, Hunan, Henan in announcing trillion-plus investment plans. Anhui, Ningxia, Guizhou, Guangxi, Xinjiang, Yunnan, Jiangsu, Zhejiang also announced plans in the hundreds of billions.

Investment will range widely across transportation, energy, agriculture, forestry, water conservancy, IT, infrastructure and environmental protection.

(Shanghai Securities News) 

Economic fraud suspect extradited to China

One of China’s most wanted economic fraud suspects has been extradited back to China after 10 years on the run in Italy reports the Beijing News.

According to the newspaper, Zhang Mou, fled the country with 1.4 million yuan in late 2005. The female former member of a Hebei-based financial securities company is alleged to have swindled the money from her clients between 2000 and 2005.

Italian police arrested Zhang in October 2014. It is the first extradition of its kind to China from a European country.

(Beijing News) 

Key areas for reform in 2015 highlighted in provincial government work reports

SOEs, budgets, rural issues and prices are key areas marked for reform by local governments this year.

Over the past couple of weeks, provincial-level governments across China have been holding their annual political congresses.

As part of the process, a total of 28 of the country's 31 provincial-level governments have announced the areas of key reform for 2015.

Most provinces have focused on four key issues, according to a report posted to the website of National Business Daily that initially appeared in Shanghai Securities Journal.

The four areas targeted for reform are: SOE reform, fiscal and financial reforms, rural reform and price reforms.

Jilin, Hainan and Guangdong are yet to release their provincial government reports for 2015.

All of the 28 reports released so far mention SOE reform, with the use of key words like "mixed ownership", "full market listing" and "state asset investment trials" common.

(National Business Daily)

Chinese tax authorities are cracking down on multinational companies as well as wealthy business people in a bid to raise more tax revenue for government coffers according to The Paper.

The deputy head of State Administration of Taxation Zhang Zhiyong, said the government collected an extra 52.3 billion yuan in tax revenue from anti-avoidance measures as well as investigations. Beijing fined Microsoft for a record US$140 million last year.

The tax authorities are also eyeing wealthy people with assets stashed away in overseas tax havens such as the British Virgin Islands.  

The China National Offshore Oil Corporation says it will cut its capital expenditure by as much as 26 per cent to 35 per cent in 2015 due to lower oil and gas prices. The planned expenditure for this year is between 70 billion and 80 billion yuan.

Two other major state-owned oil companies, Sinopec and PetroChina, also scaled back their investment last year. The total M&A budget for the big three oil majors for 2014 was only US$3bn, down 90 per cent from the year before.

CNOOC plans to produce between 475 million and 495 million barrel of oil next year, up 10 to 15 per cent from the year. Chinese domestic oil fields will contribute to 67 per cent of total production and the rest will come from overseas oil fields.

The Chairman of China’s largest property developer Vanke, Wang Shi, says the company needs to shift 15 to 20 per cent of its total investment abroad to diversify its risk from the property bubble in China.

Mr Wang, says there is a property bubble in China, but it’s not clear whether it will actually burst. China’s economy is slowing but the process of urbanisation is still progressing and there are still opportunities, he said.

Mr Wang also warned of the risk of loose monetary policy as central banks around the world indulge in money printing and cutting interest rates. Wang says Vanke needs to avoid risky investments in third and fourth tier cities in China and should allocate between 15 and 20 per cent of their money to invest in overseas projects.

China has a mobile internet user population of 557 million, an increase of 57 million people from the year before. The percentage of mobile internet users as a proportion of total users has increased from 81 per cent to 85.6 per cent.

134 million people use their phones to book tickets, hotels, trains and travel packages, an increase 194.6 per cent from the year before. Mobile phones have also replaced the PC as the number one preferred channel for watching videos.

304 million Chinese people use mobile phones to make payments. Mobile users make up 46.9 per cent of people in the country who use on-line payment systems.

China's central bank said Wednesday that it would lower its reserve-requirement ratio for banks by 0.5 percentage point, effective on Thursday, which would boost liquidity and support the economy. 

In the same statement, the People's Bank of China said it would make a separate targeted cut of another 0.5 percentage point to some city commercial banks and rural banks. 

The PBOC also said it would offer a 4 percentage point cut in the reserve ratio for the Agricultural Development Bank of China. 

The official reserve-requirement ratio for most large banks will fall to 19.5 per cent after the cut takes effect.

In November, the PBoC slashed benchmark interest rates for the first time in more than two years, and analysts had expected further monetary easing as the economy showed more signs of distress.

An official survey at the weekend for the first time in more than two years showed China's manufacturing activity contracting, signalling further downward pressure on the economy.

The Purchasing Managers' Index released by the government's National Bureau of Statistics came in at 49.8 last month. A figure above 50 signals expansion, while anything below indicates contraction.

The price of iron ore is hovering around fresh five-year lows and is edging closer to $US60 a tonne as fears over the medium-term outlook for supply and demand of the commodity continue to weigh on investors. 

At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US61.40 a tonne, down 1 per cent from its previous close of $US62.90 a tonne. The current price is only slightly above the five-and-a-half-year low of $US61.30 a tonne, hit earlier this week.

The price of the commodity rose 1.1 per cent in the previous session, lifting for the first time in 11 sessions, however the spike seems to have been short lived. 

At current prices most mid-tier and junior miners are seen to be operating in, or near, the red, though heavyweights BHP Billiton and Rio Tinto remain comfortably in the black due to low operating costs.

Little respite is tipped in the coming 12-24 months as most analysts now forecast an average price of about $US60-$US65 a tonne for both 2015 and 2016.

US fast-food giant Yum Brands has reported a fourth-quarter loss, saying its recovery in China from a tainted meat scandal is taking longer than it expected.

The parent of KFC, Pizza Hut and Taco Bell restaurant chains said it had a net loss of $US36 million ($A46.28 million) in the October-December quarter compared with a net income of $US321 million a year ago.

Adjusted earnings per share, a gauge closely watched by Wall Street, fell 29 per cent to 61 US cents.

The Louisville, Kentucky-based company said its earnings were affected by the July tainted meat scandal involving a former supplier, after a strong first half of the year.

"While the sales recovery in China continues to be slower than expected, we anticipate a strong second half of 2015 as the turnaround gains momentum, led by menu innovation across the year," said Greg Creed, Yum's chief executive, in a statement.

"Our top priority is to recover sales in China and capture the significant profit leverage we have in this business," Creed said.

Creed said the company, which has more than 4,600 KFC restaurants and 1,100 Pizza Hut restaurants in China, plans to open at least 700 new units in China.

Yum maintained its 2015 full-year forecast of at least 10 per cent growth in earnings per share.

Worldwide sales in the fourth quarter grew three per cent, weighed down by an 11 per cent fall in the China division.

Fourth-quarter revenues gained four per cent at nearly $US4 billion.

For all of 2014, Yum reported a 3.7 per cent fall in net income to $US1.05 billion.

Adjusted earnings of $US3.09 per share were up four per cent.

Revenues rose one per cent to $US13.28 billion.

Investors welcomed the results which were posted after the market closed.

Yum shares were up 1.4 per cent at $US74.69 in after-hours trade.

GlaxoSmithKline's net profits almost halved last year, hit partly by a large Chinese fine following a bribery probe, the British drugmaker says.

Profit after tax dived to STG2.76 billion ($A5.38 billion) in 2014, compared with STG5.436 billion a year earlier, GSK said in a results statement on Wednesday.

The 2013 performance was however skewed by the STG1.3-billion sale of drinks brands Lucozade and Ribena to Japan's Suntory Holdings.

GSK added that revenues declined three per cent to STG23 billion last year, hurt by "challenging" trade in the United States.

Legal costs more than doubled to STG548 million in 2014, after Chinese authorities fined GSK 3.0 billion yuan last September after a nearly year-long bribery probe.

"Legal charges of STG548 million included a STG301 million fine paid to the Chinese government," GSK said on Wednesday.

The group also took a STG750 million restructuring charge last year, up from STG517 million in 2013.

GSK is seeking to move on from a damaging scandal, which resulted in a Chinese court fining the company over alleged bribery.

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

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The Conversation

The change of leadership in China in 2012 brought with it an intensive crackdown on bribery and corruption, both at home and abroad. This has resulted in the downfall of numerous officials, both low and high, with the most prominent victim so far being the former security chief, Zhou Yongkang.

The scope of the campaign against corruption has been broad, and has swept up officials and businessmen, as well as their assets, both inside and outside China. Foreign owned companies operating in China have also found themselves under official and public scrutiny. For officials, companies and company employees, the consequences of an investigation can be severe.

A conviction for bribery or for other white-collar crimes such as embezzlement can result in a substantial penalty, including a lengthy period of imprisonment or even the death penalty.

In September 2014, for example, GSK China, a subsidiary of GlaxoSmithKline plc was fined almost US$500 million by the Changsha Intermediate Court in Hunan Province after a one day trial for paying bribes to non-government personnel, while four of its employees were also convicted (although given suspended sentences).

The commitment of the current government to prosecuting corruption has proved to be unexpectedly far-reaching. It has been accompanied by legal changes, including proposals to tighten up the Chinese Criminal Law by criminalising the payment of bribes to close relatives of officials and tightening penalties for commercial bribery (solicitation or payment of bribes to officers or employees of companies which are not state-owned).

It has also had a number of economic effects, particularly by reducing gift-giving and hitting the international luxury goods market, although it is too soon to say whether it will have a long term effect in reducing corruption in China.

The crackdown coincides with the public commitment of the leadership to building the “socialist rule of law” through better legislation and administration and reforms to the judicial system. These include changes designed to reduce local protectionism by establishing divisional tribunals of the Supreme People’s Court and cross-jurisdictional tribunals; to improve judicial efficiency by establishing a civil service career structure and to discourage judges from avoiding potentially difficult issues by refusing to accept cases.

It has recently been reported that the Political and Legal Affairs Committee of the Communist Party has demanded the removal of goals for police, prosecutors and courts for arrest and conviction rates in criminal cases which have resulted in an almost 100% conviction rate and some very well-publicised wrongful convictions. These are significant reforms which, if fully implemented, should have a very positive effect on the Chinese justice system.

Does this mean the crackdown on corruption and the plans for judicial reform represent the commitment of Xi Jinping’s government to the implementation of the rule of law through a strong and independent legal and judicial system?

In relation to the reduction of corruption and the creation of a cleaner business environment, the answer to this is “probably not.” Although in January of this year, Xi Jinping was reported to have ordered Party committees to enable judges and law enforcement departments to exercise their duties independently, he also emphasised the leadership of Party committees in judicial affairs and the importance of judges and procurators being loyal to the Party, the State and the people.

Concurrent with the corruption crackdown and the announcement of judicial reforms, the government has been prosecuting, and the courts convicting and imprisoning, activists (including anti-corruption activists) on a range of charges. Despite the many improvements in the content of China’s laws and the quality of Chinese lawyers, judges and judicial system, the campaign against corruption, including decisions to investigate and prosecute corruption of officials and, in the case of officials, the entire investigation, is driven and run not by the police, the procuratorate and the courts, but by the leadership and investigators of the Communist Party.

It is unlikely that, even after the removal of performance targets, there will be any surprises either in the conduct of a corruption trial or when the final verdict of the court is delivered.

In the case of foreign companies, which have argued that they have been targeted disproportionately in investigations relating to corruption as well as for price-fixing and monopolistic activities, there is a lack of transparency in the decision-making process relating to investigations which makes it easy to attribute political drivers to decisions to pursue foreign multinationals. This does not, however, reduce their potential legal liability.

Waiting until the trial to defend corruption charges would be a very risky strategy. After the verdict relating to GSK China was handed down, GlaxoSmithKline recognised its responsibility by stating that it had taken steps to rectify the issues with its operations in China, by decoupling sales targets from compensation, reducing and changing engagement with doctors and expanding its control over invoices. Other foreign companies in China would do well to take the same precautions.

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

The People’s Bank of China has joined its global peers in adopting a looser monetary policy to boost the country’s slowing economy. The central bank cut the reserve requirement ratio -- or the amount of deposits that banks must hold in reserve with the central bank -- by 0.5 per cent to 19.5 per cent for large commercial banks. It provides additional easing to smaller banks that have met the lending target to small and medium sized enterprises, slashing the reserve-requirement ratio by another 0.5 per cent.

This is the first time the central bank has slashed the reserve ratio since May 2012. Chinese banks hold 113.86 trillion yuan in deposits. The across-the-board cut in the reserve ratio will free up 570 billion yuan’s worth of cash for the banks to lend out. The additional cut for smaller banks will add another 130 billion yuan to the total.

The People’s Bank has been reluctant to cut interest rates or lower the reserve ratio in recent times due to concerns about building up more debt to the already highly leveraged corporate, as well as local government, balance sheets. Why did the central bank finally cut the reserve ratio?

It wants to boost confidence. Chinese GDP growth in 2014 was one of the slowest periods on record. The country’s manufacturing sector also contracted for the first time since September 2012 with the official PMI falling to 49.8 -- below the expansion threshold. Economists are predicting an even tougher year ahead for 2015.

Throughout 2014, the central bank used an alphabet soup of monetary tools to inject liquidity into the financial system without lowering the reserve ratio and only cut interest rates once. It did so reluctantly in order to help the cost of funding for the struggling SME sector.

The central bank wants to send out a signal that it will adopt a more accommodative policy to counter a weakening economy. “The PBOC last year was widely reported to have lowered the RRR for selected banks but it didn’t publicise these moves, apparently to avoid giving the impression that its policy stance had changed. Today’s more open approach is consistent with the more accommodative stance being taken since the benchmark interest cut in November,” says Mark Williams, chief asia economist for Capital Economics.

Apart from boosting confidence, the central bank’s cut in the RRR is also to address the problem of a massive outflow of capital last quarter and to offset drainage on domestic liquidity. Historically, Beijing has used the reserve ratio to soak up hot money flowing into China -- especially in the aftermath of quantitative easing in the US. 

However, because of a recovering US economy and the end of QE, the money is flowing in the opposition direction. China’s foreign exchange regulator said the country had a $US91 billion deficit in its capital and financial accounts last quarter. This outflow of capital has reduced the country’s domestic liquidity.

Over the longer term, China’s vast accumulation of foreign exchange reserves is probably coming to an end. As a result, Chinese banks no longer need to hold nearly 20 per cent of their total deposits to sterilise the large inflow of the greenback. So the central bank is effectively easing a 'tax' burden on its domestic banks.

Does the latest cut in the reserve ratio signal the Chinese central bank’s decision to join the rank of its global peers in adopting loose monetary policy to stimulate the economy? The estimated 700 billion yuan or $US112bn additional cash will have a limited stimulatory impact on the economy. Don’t forget China is a $10 trillion economy now.

The move is symbolically important; the central bank wants to give a more lasting boost to the real economy, increase the banks’ risk appetite -- especially for the struggling SME sector that has been starved of credit due to the high cost of funding. The additional cut to the reserve ratio for banks that lend a certain amount of money to SMEs and the agricultural sector is evident of that. 

The Chinese central bank still maintains a high benchmark interest rate (5.6 per cent) and high reserve ratio at 19.5 per cent. So there is a lot of room for the bank to move if the economy gets worse. At the moment, the central bank is happy with its piecemeal approach and doesn’t want to abandon its tight grip on credit creation. 

Internet data consumption continued to expand at a rapid rate last year, with average household mobile data usage expanding by almost 50 per cent to reach 200MB a month, according to figures published on the Ministry of Industry and Information Technology's website yesterday. 

As of the end of last year, China had 249 million fixed line phone users and 1.29 billion mobile phone users. The number of broadband users passed 200 million last year, with over 82 million internet users accessing a connection with peak download speeds in excess of 8MB/sec.

In terms of mobile downloads, there were close to 97 million accounts using 4G connections at the end of 2014.