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Australia should welcome more Chinese SOE investment

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East Asia Forum

As the negotiation of the Australia–China Free Trade Agreement (FTA) moves into what is hopefully its final phase, there is intense focus on how the investment chapter of the FTA will treat the access of Chinese state-owned enterprises to the Australian investment market.

Currently all investment proposals by state-owned enterprises (SOEs) are subject to screening by Australia’s Foreign Investment Review Board (FIRB), no matter what their scale or country of origin.

But there being no country of origin specifications, these guidelines were introduced explicitly after China opened the door to large scale SOE investment abroad and after there was a huge surge of interest by Chinese firms in investment in the Australian resources sector at the height of the minerals boom.

Over this period, Australia — rather than the US or any other country in the world — became the largest single ultimate destination for Chinese direct investment. Chinese investment in Australia was as big as in all of Europe.

Australia’s ranking as a Chinese investment destination has since slipped. Competition for investment in the resource industries has also become keener and Chinese investment in Australia has retreated with the retreat of the minerals boom.

But the slip in Australia’s ranking as a Chinese investment partner was also, in part, a result of uncertainties in China about the treatment of investment in Australia. The scale and pace of growth in Chinese direct investment led to populist reactions that challenged the open investment regime and, in particular, questions about whether investments by SOEs needed to be treated differently from private investment proposals.

The current Australian guidelines are a blunt instrument for dealing with whatever issues were supposed to arise from SOE investment in Australia.

In our lead this week, Paul Hubbard and Patrick Williams point out that the first step in understanding Chinese investment is the distinction that we need to make between the giant, central SOEs dominating strategic industries from Beijing and the tens of thousands of provincially and locally owned SOEs.

‘China’s largest companies are almost all central SOEs and state-owned banks. Of the top 50 firms in 2011, central SOEs control 72 per cent of the total revenue, with other central financial enterprises and the post office making up a further 17 per cent’, they explain, while ‘Sinopec’s 2011 gross revenue was only marginally below that of the Australian government’. The senior executives of these companies are appointed by the Communist Party and are listed among the top officials in the country. ‘Central SOEs and the banks control more than half of the revenue of China’s top 500 firms’.

The overwhelming majority of SOEs operate in a very different environment from these central SOEs. Provincial SOEs operate in a highly fragmented market, with supervision spread across 36 provincial-level asset management commissions and 442 sub-branches. Hebei Iron and Steel, for example, China’s largest steel producer, accounted for less than 6 per cent of national steel output, while Japan’s Nippon Steel produced 45 per cent of Japan’s total in 2013.

These local SOEs collectively control more state equity than central SOEs. They are more likely to be competing against each other as well as with private firms. They are also under local political pressure to be more profitable, rather than being loss-making ‘national champions’. This competitive environment occurs across all sectors of the Chinese economy with various degrees of state ownership.

While SOEs remain a prominent feature of the Chinese economy, they now account for only 30 per cent of industrial output and even the huge central SOEs are supposed to run at arm’s length from the state — an issue that is currently a focus of China’s Third Plenum reform agenda despite the continuing commitment to SOEs. Market competition and the corporatisation and the privatisation of many loss-making SOEs in the 1990s have seen the environment in which they operate change dramatically.

There is no logical basis for treating the vast bulk of Chinese SOEs or similar investors from other states any differently from other potential investors in Australia, comply as they must with Australian laws and corporate and other regulations.

And there is legitimate expectation, both in China and among the Australian business community, that the FTA with China will ease access to Chinese investors (both SOEs and private investors) in a way that reflects the treatment of other partner investors under similar FTA arrangements in return for major concessions from China on agricultural and services trade access as well as investment treatment. Australia’s FTAs with the United States, New Zealand, South Korea and now Japan exempt foreign investment proposals valued up to $1 billion from FIRB scrutiny and approval.

Australia still has the potential to remain one of China’s largest foreign investment outlets and, as global sources of foreign investment have shrunk since the global financial crisis, China is a large and promising source of new investment for Australia and other countries.

Australia cannot expect to capture new Chinese markets without the links or the capital that Chinese foreign investment provides. And without common sense in the formulation of foreign investment policy, or its expression in the trade and investment arrangements that are negotiated with China and other partners, Australia is likely to damage its foreign investment standing more broadly.

This piece was originally published at East Asia Forum. Reproduced with permission. Peter Drysdale is Editor of the East Asia Forum.

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The vast bulk of Chinese SOEs are small, lean and profit-driven. They should not be treated any differently from other potential investors in Australia.

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Palmer apologises to China for rant

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Clive Palmer has apologised to the Chinese ambassador for his televised tirade against the country last week.

"I regret any hurt or anguish such comments may have caused any party and I look forward to greater understanding for peace and cooperation in the future," he wrote in a letter to China's ambassador, Ma Zhaoxu.

The Palmer United Party leader described the Chinese government as mongrels and bastards and accused them of trying to take over Australia in a rant on the ABC's Q&A program last Monday.

He later insisted the live-to-air comments were directed at a Chinese company he's fighting in court, not the Chinese government or people.

On Monday he wrote to the ambassador, releasing the letter publicly on Tuesday.

"I now come to the realisation that what I said on Q&A was an insult to Chinese people everywhere and I wish to assure them they have my most genuine and sincere apology," he wrote.

"I am sorry that I said the things I said on the program."

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Clive Palmer apologises to the Chinese ambassador for his televised tirade against the country last week.

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Palmer apologises to China

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Clive Palmer has apologised to the Chinese ambassador for his televised tirade against the country last week.

"I regret any hurt or anguish such comments may have caused any party and I look forward to greater understanding for peace and co-operation in the future," he wrote in a letter to China's ambassador, Ma Zhaoxu.

The Palmer United Party leader described the Chinese government as mongrels and bastards and accused them of trying to take over Australia in a rant on the ABC's Q&A program last Monday.

He later insisted the live-to-air comments were directed at a Chinese company he's fighting in court, not the Chinese government or people.

On Monday he wrote to the ambassador, releasing the letter publicly on Tuesday.

"I now come to the realisation that what I said on Q&A was an insult to Chinese people everywhere and I wish to assure them they have my most genuine and sincere apology," he wrote.

"I am sorry that I said the things I said on the program."

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PUP leader sorry for televised tirade, looks forward to future co-operation.

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Independent Chinese travellers hold the key to Australia’s tourism market

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For years tour groups formed the backbone of Chinese tourists visiting Australia. They followed a simple pattern: visiting sites in chartered buses and shopping at certain stores and establishments with close connections to tour operators.

This cosy arrangement ended last October when the Chinese government outlawed coercive shopping tours after tourists complained bitterly about their nasty experiences abroad, especially in Hong Kong. There are reports of abusive tour guides who unleash expletives on tourists who are not interested in shopping.

The number of Chinese tourists to Australia plummeted 9.4 per cent in November -- a month after the new law was introduced -- sending shivers through the tourism sector, which relies on China for growth.

Tourism Australia is adjusting its strategy to counter the decline in numbers of tour groups visiting Australia. Even more importantly, it wants to position Australia to ride the new wave in Chinese outbound tourism as China’s affluent middle classes start to value experiences over shopping.

In an interview with China Spectator, Tourism Australia managing director John O’Sullivan reveals China is going to the single most important market for Australia in an increasingly competitive global market and can be worth as much as $13 billion by the end of this decade. 

The new focus is on free and independent travellers in the aftermath of new Chinese tourism law. “We knew that as a part of anti-corruption crackdown in China that the government would introduce the new law,” he says.

“Traditionally the Chinese tourism market had been built in Australia around tour groups. There are still a number of tour groups that come to Australia,” he says. However, there has been a shift in their style of travel with more coming to Australia as independent travellers rather than in tour groups.

O’Sullivan says a big shift away from lower yielding group travel to more free and independent travel is an important trend and to capture this lucrative market Tourism Australia is enlisting the help of an elite network of 31 specialist travel agencies to promote Australia in key Chinese cities such as Beijing, Shanghai, Guangzhou and tier two cities such as Nanjing.

“The vast majority of international travel out of China is still booked through travel agencies, and under this program we believe we’ve identified the best of the best,” he says. 

Food and wine is one of the key selling points for Australia. “We know food and wine is a big driver for Chinese tourists. The fact that we have great produce here, it is very safe, it is very fresh and it is what they are looking for,” he told China Spectator.

However, there is a perception gap. Tourism Australia research shows that the Chinese rate Australian food and wine behind France and Italy. However, the rating changes dramatically once Chinese tourists actually experience Australian produce.

In fact, Chinese tourists who have visited Australia rate our food and wine as the best in the world. But for people who have not been to Australia, our reputation lags behind not only France and Italy but also Brazil, Hawaii and Mexico. 

Tourism Australia will soon launch a new campaign to bridge this perception gap in China later this year to showcase the best wine and food the country has to offer.

Using social media is also a key element of Tourism Australia’s marketing strategy globally and especially in China. “In recent years, our whole marketing has been built very strongly around social media,” he says. “The over-arching reason has been that we know the power of advocacy and particularly in a market like China.

“Advocacy is in many ways as important as paid advertising because we know Chinese tourists take words of mouth and referrals from people who they know as being a key driver of choice and influence.”

Tourism Australia has a large presence on social media including six million Facebook followers, 800,000 on Instagram and 200,000 Twitter followers across its various accounts. It also boasts 350,000 fans on Weibo, a Twitter-like micro-blog social media platform in China.

Like many industries in Australia, tourism sector is also heavily exposed to China with 18 per cent of tourism-related revenue coming from the Chinese. But when asked if Australia depends too heavily on China, O’Sullivan says it is an “important market, but we take a portfolio approach”.

“We also spend significant amount of money in regions such as Southeast Asia, the US and Britain,” he says. “Our approach has been very much about ensuring that we don’t just rely on one market.”

Though Tourism Australia is not putting all its eggs in the China basket, it is still worth noting that China is Australia’s most valuable market at $5 billion -- the fastest growing market and also the highest yield market. 

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China’s new law banning coercive group shopping tours has resulted in Tourism Australia striving to attract more independent Chinese travellers to our shores with the promise of good food and wine.

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Plain-talking Palmer finds friends on Weibo

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It took a week, but Clive Palmer has finally swallowed his pride and apologised for his outburst on the ABC’s Q&A program in which he referred to Chinese “bastards” and “mongrels”.

"I regret any hurt or anguish such comments may have caused any party and I look forward to greater understanding for peace and cooperation in the future," he wrote in a letter to China's ambassador, Ma Zhaoxu.

"I now come to the realisation that what I said on Q&A was an insult to Chinese people everywhere and I wish to assure them they have my most genuine and sincere apology," he wrote.

But judging from the reaction to the tirade on Chinese social media, he needn’t have apologised at all. A surprising number of comments on China’s main micro-blogging service Weibo welcomed Palmer’s initial comments.

The most popular post about the incident which, as of writing, has been forwarded 3588 times and has 1689 comments, reveals a unexpectedly high amount of support for his tirade. In fact, of the top ten most liked comments on that post, all ten agree with him.

The most liked comment, by Weibo user Gu Wan Ju Shi, reflects the cynicism many more liberal Chinese people feel towards the fiercely nationalistic Global Times.

“He’s definitely cursing the Chinese government, don’t think that by omitting the full text of his remarks we won’t know that,” the user wrote.

The second most liked comment, by Zeng Shengmin, who is listed as the CIO at a software company in Guangzhou Province, expresses gratitude towards the member for Fairfax for his comments.

“Thank you to this Australian member of parliament for taking a principled stand on behalf of the Chinese people,” he writes.

Yet another comment by user Feng Mang Blue reads: "If he's not referring to the Chinese people, then he's exactly right."

The surprising reaction is most likely a result of some over-reach in the Global Times’ reporting. Curiously, in the original Chinese version of an op-ed published last week, the paper chose to translate Palmer’s "they shoot their own people" comment as "massacre their own people".

Now that oblique reference to the Tiananmen Square massacre of 1989 has been met with agreement, soul-searching and ridicule of the Chinese nationalist press.

Admittedly, Weibo does have a liberal bent, but the outpouring of support has still been startling.

At least eight posts on the topic were censored according to Weiboscope, a Chinese social media data collection and visualisation project run out of the University of Hong Kong.

Now with Palmer’s unreserved and grovelling apology and with the Australian governments move to ‘distance’ themselves from his remarks, these internet users have been left out to dry.

China’s official mouthpiece, the People’s Daily, is already making hay of Palmer’s backflip and have tweeted the apology in full.

This whole unedifying affair comes just a month after foreign minister Julie Bishop declared that “China doesn’t respect weakness” and that Australia would be taking a much more robust stance towards defending peace, liberal values and the rule of law.

China’s human rights issue should not be a plaything of a political and economical elite who bring it up when they want to seem principled, only to cynically discard it when it becomes inconvenient.

Meanwhile, a story about a racist rant targeting a Chinese woman on a Perth train last week was the fourth most searched for topic on Weibo this morning.

At this rate, if all Chinese people end up thinking Australians are unprincipled racists, who could blame them?

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Clive Palmer's initial comments about China garnered extraordinary support on social media site Weibo, but his astonishing about-face has hung these internet users out to dry.

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Palmer 'should have said sorry sooner'

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Clive Palmer should have apologised for his anti-China rant earlier, Foreign Minister Julie Bishop says, but she's pleased he's done it now.

A week after describing the Chinese government as mongrels and bastards who shoot their own people, the Palmer United Party leader has written to China's ambassador, Ma Zhaoxu, to apologise.

"I now come to the realisation that what I said on Q&A was an insult to Chinese people everywhere and I wish to assure them they have my most genuine and sincere apology," Mr Palmer wrote.

"I am sorry that I said the things I said on the program."

Ms Bishop welcomed the apology but said she wished it would have been a littler quicker coming.

"It seemed to be an example of Mr Palmer confusing his private interests with his public duties as an elected representative but I'm pleased that he's made an apology," she told reporters in Canberra on Tuesday.

She hoped PUP senator Jacqui Lambie would follow Mr Palmer's example and reflect on her own anti-China comments and their negative impact on a major trading relationship.

Mr Palmer didn't take any advice from the foreign minister's office or department on the wording of his apology, she said.

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Foreign Minister Julie Bishop says Clive Palmer should have apologised for his anti-China rant earlier.

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China won't be insulted by Palmer remarks

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Beijing has acknowledged Clive Palmer's apology for his "mongrels" and "bastards" rant and declared the Chinese people cannot be insulted by such outbursts.

The maverick MP and mining magnate on Tuesday caved in after a week of relentless criticism and "most sincerely" apologised to Chinese ambassador Ma Zhaoxu for his televised tirade last week.

Mr Palmer sparked outrage when he accused the Chinese communist government on national television of shooting their own people and plotting to take over Australia.

Mr Ma said the Chinese government had severely condemned Mr Palmer's "insulting remarks" but understood they by no means represented Australia's parliament or its people.

"Ambassador Ma stressed that the Chinese people are never to be insulted," an embassy spokesperson told AAP in a statement on Tuesday.

"Any remarks attacking or slandering China would not gain support and were doomed to failure."

Mr Palmer recanted in a letter to Mr Ma as Chinese protesters gathered outside parliament demanding a full and unqualified apology from the crossbench MP.

He wrote that he now realised his comments were an offence to Chinese people everywhere and offered his "most genuine and sincere apology".

"I regret any hurt or anguish such comments may have caused any party and I look forward to greater understanding for peace and co-operation in the future," he wrote.

It was an about-face for the outspoken MP, who defied near universal condemnation all week and refused to back down.

Shadow attorney-general Mark Dreyfus said Mr Palmer's comments were inappropriate for an Australian parliamentarian but he was a crossbench MP and his views didn't represent the country.

"China is very capable of seeing that in the right context," he told reporters in Canberra on Tuesday.

Australian Industry Group boss Innes Willox said Mr Palmer's apology should avert what could have been a potentially damaging situation.

"The incident serves as a reminder that there should be no room for abuse in political debate and it carries real risks for business if such abuse is directed at our trading partners," Mr Willox said in a statement.

China is Australia's largest trading partner, with the two-way exchange of goods and services exceeding $150 billion last year.

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Chinese ambassador acknowledges Clive Palmer's apology for his "mongrels" and "bastards" rant.

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A reality check will ground China's sky-high ambitions

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In 2008, the government set up the Commercial Aircraft Corporation of China to try to break into the commercial airplane market dominated by America’s Boeing and Europe’s Airbus. With the 100-200 seat single-aisle passenger airplane market worth an estimated $US20 trillion over the next 20 years, Beijing has pulled out all the stops to help state-owned COMAC break into what many consider to be the world’s toughest market in any sector.

The story so far for COMAC is not encouraging. The smaller ARJ-21 aircraft, which carries less than 100 passengers, has been beset by continual delays with the latest report that it will be able to enter service at the end of 2014 have been in development since 2003 even before COMAC was formed.

The record for development of the C919, which can seat up to 174 people and on which Beijing is placing its main hopes on in the all-important 100-plus passenger market, is even worse. The C919 will not have its first proper test flight until at least 2015 with a market release date of 2018. Most credible analysts believe it will be sometime in the next decade until the C919 enters the market and, when it does, the C919 will be obsolete vis-à-vis new and upgraded models that Boeing and Airbus will bring to the market before then.

All this is reflective of the challenges faced by a Chinese government that insists every important and lucrative sector be led by designated 'national champions' (state-owned enterprises under close supervision from the government) rather than private firms.

It is more than likely that an SOE will be able to successfully build a passenger plane that works and is even certified by international regulatory authorities. But building a successful and profitable commercial passenger plane business that can compete with the best in the world is the real challenge for COMAC, and China’s other 'national champions'.

In addition to the understandable desire to break into a lucrative market, Beijing is quite explicit that the ability of a national champion to build a passenger jet will serve as proof of China’s emergence as a genuinely high-tech and advanced economy that can match the best leaders in Asia, Europe and North America.

To do so, COMAC has pursued the same strategy followed by China’s state-owned high-speed rail firms: engage in domestic manufacturing of passenger aircraft using foreign designs from joint ventures; develop Chinese designs from these foreign blueprints with the help from foreign manufacturers; and then build an aircraft using wholly domestic (predominantly state-owned capabilities) without any foreign existence.

That Chinese SOEs in the high-speed rail sector did this through initially inviting Japanese and German firms into joint ventures before cancelling contracts part of the way through, and subsequently introducing domestically built high-speed trains almost identical to the designs of Japanese and German trains is the darker side of Beijing’s industrial strategy. In particular, state-owned CSR Sifang Locomotive’s claim to ‘digest’ all the technology it needed in a mere two years during a joint-venture with a leading Japanese high-speed rail company, the Kawasaki consortium, is scarcely believable for a company that knew very little about high-speed rail when the joint-venture began. CSR Cifang’s trains look exactly the same as Kawasaki’s, while 98 per cent of the technology and internal design of the Chinese trains are the same as Kawasaki trains.

When it comes to building Chinese passenger planes, COMAC is currently at stage two: development Chinese designs from foreign blueprints with the help of foreign manufacturers. There has been Chinese progress in many areas and capabilities needed to build a successful and certifiable passenger jet plane. Where there have been obstacles, leading American and European companies such as GE, Rockwell Collins, Honeywell and Liebherr have been paid handsome sums to help COMAC develop major subsystems and key parts that are beyond the Chinese company. With help from international partners, COMAC will eventually get passengers travelling on an ARJ-21 or C919.

But this does not mean that COMAC will get a significant slice of the commercial airplane market and make a dent in Boeing or Airbus’ stranglehold. Indeed, the odds are that it will not.

For a start, those committed to buying COMAC planes when they eventually pass all regulatory and air safety standards and are ready to fly have been forced by Beijing to do so. From latest reports, almost all advanced purchase of COMAC aircraft have been Chinese domestic airlines, which accounted for 251 of the 267 orders (94 per cent) for the ARJ-21. Of the 380 advanced orders for the C919s, 370 are by domestic Chinese airlines. These Chinese airlines have been compelled by Beijing to choose COMAC over Boeing and Airbus aircraft.

As far as external airlines are concerned, the only one that has made advanced orders for COMAC aircraft are state-owned airlines in Laos, after concerted diplomatic pressure by Beijing was placed on its small client state neighbour. State-owned airlines from Myanmar, another client state of China’s until recently, had ordered two ARJ-21s, but has recently cancelled these orders.

The broader point is that Chinese national champions like COMAC rely on state largesse and support in important ways for their existence and markets. Besides getting Beijing to do the selling and marketing for them, COMAC does not face competition from domestic rivals. As a result, it has little need or experience in cobbling together an effective marketing, positioning or branding strategy that can convince independent airlines to purchase its planes. As it is, brand ‘China Inc’ has a hard enough time convincing independent buyers that its advanced products can meet or surpass world-class safety and reliability standards. 

Then there is the issue of failure to integrate systems that continues to plague COMAC. Pouring money and offering privilege and protection to firms, which is an essential element of Beijing’s ‘national champion’ approach, can achieve good progress when it comes to developing advanced parts, components and designs. (A bit of intellectual property theft doesn’t harm either in this respect: the ARJ-21 has a suspicious resemblance in technology and design to McDonnell Douglas planes such as the MD-80, which was once built in China.)

But systems-integration -- bringing together the hardware, software, partner networks/relationships/capabilities, marketing/sales/branding functions etc --  is another matter. This is something much harder to buy with state money. The development of systems integration comes from cutting one’s teeth in genuinely competitive marketplaces and having the commercial freedom to outsource key processes to other partners (that COMAC cannot do to the same extent since Beijing insists that maximum value creation and essential processes be retained within the country and among a network of SOEs.)

For example, COMAC does not have the capacity to build a world-class logistics and servicing network for its aircraft, something Boeing and Airbus must do to help maintain their all-dominant market share. To do that, COMAC will need to cooperate with multiple commercial partners within China but also around the world. Whereas world class companies call this rational outsourcing to achieve the world’s ‘best practice’, Beijing sees this as a loss of control over and dilution of value of its ‘national champion.’ 

Even when it comes to ensuring that the airplane works safely and reliably, COMAC would have to fully integrate into the global commercial aviation manufacturing industry as Boeing and Airbus have done. But this could only occur if COMAC’s primary mission was to become the best international commercial airplane company it could be, rather than becoming China’s ‘national champion’.

In the end, COMAC will eventually get its planes into the market. But they will be obsolete, have no track record of reliability or safety, and lack a global part and servicing support network. In particular, when the C919 eventually is available to buy, COMAC (and Beijing) will have to decide whether they want to spend billions more dollars developing a newer version of the C919 and the necessary systems integration capabilities that it needs to be an attractive proposition.

If COMAC can one day cut it with Boeing and Airbus, then China as a country and economic system will have come of age. Until then, and while the notion of a ‘national champion’ in an advanced sector might appeal to the nationalist and control streak in all of us, they will not match their multinational private sector rivals.

Dr. John Lee is an Adjunct Associate Professor at the University of Sydney, a senior fellow at the Hudson Institute in Washington DC, and a director of the Kokoda Foundation defence and security think-tank in Canberra.    

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Despite pouring billions into the commercial airplane market, China will struggle match its high-tech, private sector multinational rivals.

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I won't apologise to China: Lambie

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Palmer United Party senator Jacqui Lambie won't apologise for warning of a Chinese invasion of Australia, despite her leader doing so for his anti-China rant.

Mr Palmer has apologised to the "Chinese people everywhere" for last week describing China's government as "mongrels" and "bastards" who shoot their own people.

Senator Lambie said the PUP leader had little choice because "people are still quite irate about his comments".

However, she would not offer a similar apology for her China invasion warning, in which she said Australia needed to double the size of it military to "stop our grandchildren from becoming slaves to an aggressive, anti-democratic totalitarian foreign power".

The outspoken Tasmanian senator on Wednesday declared: "I'm not backing down".

"I don't see why I would offer an apology when I'm actually speaking about the Chinese communist regime and not the Chinese people," she told ABC Radio.

"I'm very grateful to the Chinese people and having them as trading partners and I certainly know my Tasmania is."

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Palmer United Party senator won't apologise for warning of a Chinese invasion of Australia.

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I won't apologise to China: Lambie

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Palmer United Party senator Jacqui Lambie won't apologise for warning of a Chinese invasion of Australia, despite her leader doing so for his bizarre anti-China rant.

Mr Palmer has apologised to the "Chinese people everywhere" for last week describing China's government as "mongrels" and "bastards" who shoot their own people.

Senator Lambie said the PUP leader had little choice because "people are still quite irate about his comments".

However, she would not offer a similar apology for her China invasion warning, in which she said Australia needed to double the size of it military to "stop our grandchildren from becoming slaves to an aggressive, anti-democratic totalitarian foreign power".

The outspoken Tasmanian senator on Wednesday declared: "I'm not backing down".

"I don't see why I would offer an apology when I'm actually speaking about the Chinese communist regime and not the Chinese people," she told ABC Radio.

"I'm very grateful to the Chinese people and having them as trading partners and I certainly know my Tasmania is."

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Outspoken Tasmanian senator declares she's not backing down.

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China's Microsoft probe looks at media player, browser distribution

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Chinese authorities are looking at how Microsoft Corp. distributes its media player and browser in the country, an antitrust official said Tuesday, providing a further glimpse into a probe that led to surprise inspections of the software giant's China offices in recent weeks.

Zhang Mao, chief of China's State Administration for Industry and Commerce, said at a briefing that officials were probing distribution of those products, as well as how Microsoft sells its Office and Windows software.

"Microsoft is suspected of incomplete disclosure of information related to Windows and Office software, as well as problems in distribution and sales of its media player and browser." He didn't disclose additional details about the subject of the probe.

A Microsoft spokeswoman didn't immediately respond to a request for comment. The company has previously said it would cooperate with any inquiries.

In public statements, the State Administration for Industry and Commerce has said it was looking at compatibility and bundling issues with Office and Windows, but hasn't provided fuller details.

Mr. Zhang said Tuesday that Microsoft's executives "have said it would actively cooperate with our probe."

"It is still too early to say what the results of the investigation would be," Mr. Zhang said. "But no matter what, companies must obey Chinese laws."

Late last month, the State Administration for Industry and Commerce said about 100 investigators conducted surprise inspections of Microsoft's offices in a number of cities and confiscated email and other documents. The agency said it was responding to complaints from other businesses about Microsoft's Windows operating system and its Office productivity software. A week later, investigators returned to Microsoft's offices seeking executives who weren't there during the first visit.

The Chinese government has reacted with increasing concern to Microsoft's efforts to switch users to its Windows 8 operating system. China banned procurement of Windows 8 for government offices earlier this year.

The State Administration for Industry and Commerce oversees enforcement of China's antimonopoly law regarding matters other than pricing or mergers and acquisitions.

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Investigators searched software company's offices in July.

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China is awash in grain crops

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As the harvest looms next month, the country is on track for an 11th year of bumper grain crops. But production is too much, even for the world's most populous nation, with warehouses bursting at the seams and posing a dilemma for policy makers.

Estimates from state media say the government will be sitting on 150 million tons of grains that include three of the most important crops for China: rice, wheat and corn. That is double the 75 million tons last year and adds to an oversupply of these agricultural commodities that is pressuring prices lower.

"Chinese officials always talk about having a big harvest," said Fred Gale, an economist at the U.S. Department of Agriculture. "That sounds like a good thing, as they have been worried about supply keeping up with demand. But now, China seems to be struggling with surpluses of most of their commodities."

The glut of grains is being lauded in a country that grappled with acute food shortages and starvation as recently as a few decades ago. But China is paying far more than necessary to feed its people and it will be forced to sell down its surpluses into a global market already suffering from oversupply, potentially driving down prices further.

The situation has exposed China's inefficient and expensive government subsidy program aimed at keeping farmers' incomes up. The government is struggling with how to protect its rural residents while cutting production of these perishable commodities to save money and keep surpluses down.

The precise size and costs of the subsidy program are hard to come by. Official data show that China buys up one-third of corn production, while an estimate by state media said the government spent $36 billion in the last two years to buy up corn when the market price has fallen below a minimum floor.

"The stockpiles are absolutely ginormous, way out of line with anything that you could justify holding onto on any sort of commercial basis," said Thomas Pugh, an economist at Capital Economics in London. "These are perishable goods, so they will start to deteriorate."

He estimates China holds about 40% of the world's corn stocks. China plans to build storage facilities to hold 50 million metric tons more of grain by 2015 to cope with the excess, according to state media.

About 70% of China's corn consumption goes to feed for livestock as the country's appetite for meat rapidly rises, and the rest is processed into syrups or starches.

It is a particularly vexing problem for China this year, as crop production is also booming in the U.S. and dragging down prices there to near four-year lows, while Chinese prices have remained elevated because of the subsidies. That creates an incentive for Chinese traders to import corn from overseas, exacerbating China's already huge stockpile, said Jikun Huang, director of the government's Center for Chinese Agricultural Policy in Beijing.

The USDA forecast this month that U.S. corn production will exceed 14 billion bushels, far above last year's record harvest.

Corn on China's Dalian Commodity Exchange traded at around 2,390 yuan ($388) a ton as on Monday, compared with corn on the Chicago Board of Trade which traded at about 367 cents a bushel -- equivalent to about 890 yuan a ton.

China has tried to curb corn U.S. imports this year, citing the presence of genetically modified strains. But Mr. Huang says traders are getting around it by importing other feed substitutes such as barley and sorghum.

And ridding China of these huge stockpiles isn't easy.

A recent government auction of corn from Heilongjiang province held by the Chinese government went awry, with only a fifth of it sold at the price of 2,200 yuan a ton, "more than twice what U.S. feed mills are paying for corn right now," said the USDA's Mr. Gale.

The government has signaled that it recognizes the problem. State media have said the shortage of storage is a problem and Chinese Premier Li Keqiang has been photographed on visits to grain depots recently.

"In the past we have focused on expanding production and grain quality...now we need reforms for better buying, selling, and storage, to contribute to national security," Mr. Li is quoted as saying on the State Administration of Grain website.

China's surplus couldn't have come at a worse time for U.S. farmers, who are expected by the USDA to harvest a record 14 billion bushels. Corn futures have dropped 15% this year after falling 40% last year, and China's unwillingness to buy U.S. corn will further pressure prices, said Jason Britt, president of brokerage Central States Commodities Inc. in Kansas City, Mo.

"China's [lack of buying] has been a contributing factor in these lower prices," he said. "Now, the job of the market is to go down to a level where we find demand.

"It's amazing that China can overlook GMOs when stocks are tight, but when they're trying to protect their domestic farmers or they're in surplus, they can come up with things to mess with us--they're trade barriers, let's just call them what they are."

In January, the government said it would start trial programs in cotton and soybeans--two less-strategically important crops--to end stockpiling, and implement a target price system instead, first for cotton in Xinjiang and soybeans in the northeast, so that commodity prices are more market-driven.

The government will pay farmers the difference when the market price falls below the target price, but the government doesn't buy the commodity in the market to keep prices at a certain level. The idea is to set target prices for agricultural commodities at more market-based levels, which should in turn influence how much farmers decide to produce.

China is also in the process of unwinding its 10 million-ton cotton stockpile since late last year, which means China's appetite for cotton imports is likely to fall in coming years. That has hit cotton prices hard. In the U.S., cotton futures have fallen more than 20% this year.

"The government is moving in the right direction, step by step," said Cherry Zhang, a corn analyst at Shanghai JC Intelligence Co. "But much depends on how the changes for cotton and soybeans pan out in practice."

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Surpluses will be sold into a global market already in oversupply.

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First-half profit growth slows at Agricultural Bank of China

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Agricultural Bank of China Ltd. reported the slowest first-half profit growth since it went public in 2010, while its bad-loan level picked up as the country's economic growth slows.

The results from China's third-largest lender by assets echoed those from two other major state-run Chinese banks in recent days, reflecting a slowdown of growth in the world's second-largest economy as well as gradual efforts by Beijing to overhaul the banking sector. Both Bank of China Ltd. and Bank of Communications Co. also reported slower profit growth and increases of soured loans in their first-half earnings reports over the past week.

AgBank said Tuesday that its net profit for the six months ended June 30 rose 13% from a year earlier to 104.03 billion yuan ($16.8 billion), mainly driven by strong growth in net interest income, or revenue mainly from its lending business. That was higher than 103.59 billion yuan median forecast of six analysts polled earlier by The Wall Street Journal.

"The bank's profit growth was in line with current economic situations," Zhang Yun, AgBank president, said on the sidelines of a briefing. "We are satisfied with the overall result," he added.

The bank said its net interest income, which accounts for more than 70% of its operating revenue, rose 16% compared with a year earlier to 209.44 billion yuan, while fee-and-commission income increased only 0.5% to 47.85 billion yuan. Its net interest margin--the difference between interest paid and received and a key measure for lender profitability--widened to 2.93% from 2.74% a year earlier.

However, the bank's finance management director, Zhang Keqiu, warned in the same briefing that as with other banks, it still faces increasing difficulty maintaining its current interest margin amid the government's efforts to give banks more freedom to set interest rates.

Chinese banks' interest margins are expected to fall in the long run as Beijing pushes ahead with long-promised interest-rate liberalization, which would inject more competition into the state-dominant banking sector and narrow the traditionally fat spread between lending rates and deposit rates.

The state-owned lender also reported 97.47 billion yuan outstanding nonperforming loans at the end of June, increasing from 87.78 billion yuan outstanding at the end of last year. The nonperforming loan ratio, the amount of bad loans to the total lending, rose to 1.24% at the end of first half from 1.22% at the end of 2013.

Tian Jimin, a bank risk-control official, said at the briefing that AgBank wrote off 6.9 billion yuan in bad loans in the first half of the year and sold another 8.3 billion yuan worth to entities like asset-management companies.

The write-offs were more than double the 3.34 billion yuan amount the bank wrote off in the same period last year.

China's banking regulator has encouraged banks to write off more bad debt and build up their provisions against soured loans while enjoying the strong profits that allow them to build such buffers.

Analysts and investors widely expect bad-loan levels at Chinese banks to creep upward as China's growth slows, which could threaten borrowers' ability to repay debts. China posted 7.4% economic growth in the first half of the year, below last year's 7.7% growth rate. Some economists worry that China may miss its 7.5% annual growth target this year if the economic situation doesn't improve in the second half of the year.

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Country's third-largest lender also sees a rise in bad loans.

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Sinopec shortlists bidders for US$20b retail stake

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Chinese oil giant Sinopec has shortlisted 37 potential buyers for up to 30 percent stake in its fuel retail unit in a sale that could net US$20 billion.

The potential partners will have to go through more rounds of selection before the company chooses a winning bidder by the end of September.

Successful bidders will help the company build one-stop service centres at its 30,000 petrol stations and 23,000 retails stores across the country.

Sinopec Sales network of 23,000 convenience stores across China generated RMB 13.3 billion in revenue in 2013 and expects that figure to increase to RMB 15 billion in 2014.

Chairman Fu Chengyu said in a statement Tuesday that the Sinpoec’s retail arm has huge potential and pointed to expansion opportunities.

“While still continuing to develop its refined oil product business, Sinopec Sales will leverage its existing platforms and expand into new businesses including convenience retailing, car services, O2O, financial services, environmental protection and advertising” he said.

Sinopec also announced that it has signed a preliminary deal with Tencent Holdings, Asia’s largest internet company, to introduce digital commerce to its retail arm.

Sinopec says it will work with Tencent on areas like mobile payments, customer loyalty management and big data application.

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Winning bidders expected to be announced by the end of September.

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China's SMEs struggle to jump the credit hurdle

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Raising capital is a challenge for small and medium-sized businesses everywhere in the world. Some of these companies don’t have long track record of paying taxes, returning profits or having sufficient collateral. This problem is particularly acute in China where SMEs struggle to get access to credit in a state-controlled financial system.

This is one of many challenges confronting Beijing as it seeks to transform its economic structure. At the moment, small and medium-sized Chinese private companies are cash-starved and have to pay usurious interest rates to keep their operations going. At the same time state-owned giants are enjoying some of the cheapest capital in the world.

Let’s illustrate this issue with an example; a medium-sized construction material company needs to borrow 150 million yuan ($A26 million) this year. In theory, the repayment should be 18 million yuan at 12 per cent annualised interest rate. However, the company’s chairman says the actual repayment is about 33 million yuan because he needs to pay many so-called fees as well as loan guarantors.

Though the People’s Bank of China’s base interest rate is 6 per cent, which is already one of the highest amongst large economies, small and medium-sized enterprises would be lucky to get their loans at 12 per cent, according to Zhang Ming, a researcher from the Chinese Academy of Social Sciences, an influential state-backed think tank.

According to the latest report from the Ministry of Industry and Information technology, the cost of funding for small and medium sized-businesses increased 17.5 per cent in the first six months of 2014; some businesses are paying as much as 30 per cent interest on their loans. The Bank of Communications chief economist Lian Ping estimates that the average cost of capital for micro and small businesses in Shanghai is about 18 per cent every year.

The difficulty of raising fund from the bank-dominated financial system has partially contributed to the rise of the shadow banking sector. Businesses often have to pay 15 per cent or more in interest rate to so-called trust companies to raise funds. Traditional bank lending as a proportion of total lending in the country has declined from 73 per cent in 2008 to 55 per cent in 2013.

How can Chinese businesses afford 15 per cent or more in interest rate payments and especially when the economy is slowing down? The short answer is they can’t.

Bai Chongeng, vice-dean of School of Economics and Management at Tsinghua University, and one China’s most eminent economists, calculates the average return on capital for listed companies has declined from 15 to 16 per cent in 2007 to 11 to 12 per cent in 2012. Listed companies are mostly better managed and more profitable, it would be safe to say that many private companies don’t have the same rate of return.

Businesses who can afford these exorbitant rates are property developers and local government financing vehicles. Property prices in China have skyrocketed in recent years, developers have enjoyed many bumper years and they can afford to borrow at 15 per cent a year. But their profitability is under pressure as the sector faces sluggish demand and declining prices.

Local governments have borrowed heavily from the shadow banking sector to splurge on their pet infrastructure projects. They rely on land sales to pay off their debts as well as interest; this model is becoming increasingly untenable as property sector is facing rough time ahead.

The Chinese government has made a priority to address this issue, which is hurting the real economy at a crucial time when the economic growth is facing significant downward pressure. The State Council, the Chinese cabinet, has issued 10 directives that are designed to force the cost of borrowing down. However, Beijing shies away from cutting interest rate for the fear of making the debt problem worse.

The Chinese central bank has lowered the capital reserve ratios for commercial banks that allocate certain proportion of their lending to SMEs. However, Chinese commercial banks are reluctant to lend to smaller businesses despite Beijing’s directives.

The former chief economist of the World Bank Justin Li told China Spectator: “There is a mismatch between China’s real economy and the financial system. The country’s real economy is largely comprised of farmers, small and medium-sized businesses and yet the financial sector is dominated by big banks that prefer to deal with big companies.”

Though the cost of funding may come down a bit in the future due to Beijing’s intervention, it is unlikely to have a lasting impact. The country’s needs to develop a more sophisticated financial system that better support the dynamic private sector.

Zhang Ming from the Chinese Academy of Social Sciences suggests that Beijing should encourage the development of rural credit union, privately owned banks that cater for SMEs, venture fund and private equity industry to fill the gap in the country’s financial system.

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Small and medium-sized businesses are finding it increasingly difficult to gain financial support in China and can be crippled by high interest rates while larger, state-owned companies are enjoying an easier ride.

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China Volkswagen probe not tied to antitrust investigation

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A Chinese government probe into current and former executives at a Volkswagen AG joint venture isn't tied to an antitrust investigation into foreign auto makers, according to the auto maker and its local partner.

The probe comes as foreign carmakers are under the spotlight for the prices they charge Chinese consumers for spare parts and services. Still, Volkswagen's Chinese partner, government-controlled FAW Group Corp., said the two executives were put under investigation following China's latest round of routine inspections of official conduct at state-run companies, and not as part of the antitrust probe.

"There is no need to speculate too much about the connection," said an FAW spokeswoman, who added that the company is cooperating.

Representatives for Volkswagen and its joint venture with FAW, FAW-Volkswagen Automobile Co., said the two inquiries weren't related. They didn't release additional details.

The Communist Party's Central Commission for Discipline Inspection said Tuesday it has launched a probe into Li Wu, a former deputy general manager at FAW-Volkswagen, and Zhou Chun, a deputy general manager of the joint venture's Audi sales division. The regulator cited "suspected serious violations of discipline and law," phrasing Chinese authorities typically use in reference to corruption allegations.

The two couldn't be reached for comment, and it wasn't clear whether they had lawyers.

"Li Wu had left the company in 2006, while the antitrust campaign only came to a peak in recent months," said Li Pengcheng, a spokesman for FAW-Volkswagen, who isn't related to Mr. Li. He said the company couldn't comment further on the investigation.

Volkswagen's Audi arm is one of several foreign automakers under scrutiny for the way they sell spare parts and services in China, the world's largest car market. Chinese antitrust officials have said they found evidence of price manipulation by Audi, Daimler AG's Mercedes-Benz and Fiat SpA's Chrysler for spare parts and aftermarket services. The companies have said they are cooperating.

FAW-Volkswagen, established in 1991, makes VW and Audi cars in China, where foreign automakers are required to team up with local partners to build cars domestically.

Chinese officials often train their sights on state-owned companies as they look for potential corruption, a process that had increased in intensity amid an anti-graft effort launched two years ago by Chinese President Xi Jinping.

FAW and its joint venture with VW has come under scrutiny before. In June 2012, China's top auditor, the National Audit Office, said that it found malpractice by FAW and FAW-Volkswagen, including failure to record sales of about 170 new cars. A few days after the audit report was issued, local anticorruption officials launched an investigation into Jing Guosong, then deputy general manager of FAW-Volkswagen's sales division, said the joint venture at that time. FAW and the joint venture on Wednesday declined to comment on Mr. Jing.

Established in 1953, FAW, previously known as First Automotive Works, was China's first post-revolution auto maker. Former President Jiang Zemin worked there from 1956 to 1962, according to official information, and he visited FAW's operations on at least three occasions after he became the Communist party's boss in 1989, according to the company's website.

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Other issues prompted government probe, automaker and local partner say.

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China to allow foreign ownership of hospitals

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China will let foreign companies own and operate hospitals in some parts of the country as part of an effort to overhaul its health-care system.

Foreign investors in some parts of the country will be allowed to set up new hospitals or acquire existing ones under a new pilot program, according to a statement issued jointly by the National Health and Family Planning Commission and the Ministry of Commerce. The notice was dated July 25 but posted on Wednesday.

The pilot program will apply to the cities of Beijing, Tianjin and Shanghai as well as provinces of Jiangsu, Fujian, Guangdong and Hainan, the statement said. Only investors from Macau, Taiwan and Hong Kong can set up hospitals devoted to traditional Chinese medicine, however.

Investors are expected to provide internationally advanced knowledge in hospital management, advanced medical technology and facilities to supplement or improve the deficiencies of local health care, ministries say. The applications will be approved by the provincial-level health authority.

The program marks China's latest step toward lowering barriers for private foreign investment in health care. In September the State Council, China's cabinet, allowed foreign funds to set up wholly owned hospitals in a new Shanghai free-trade zone. In May, it loosened limits on foreign investment in joint ventures involving medical institutions and eased approval procedures.

In July, German hospital operator Artemed Group agreed with other investors to establish a hospital in the Shanghai zone, making it the first hospital fully funded by foreign capital.

China is ramping up health-care spending to meet the growing needs of an aging population as well as greater expectations from the general population from China's social safety net. Health spending last year rose more than 13% to 820 billion yuan, or about $133 billion. That accounted for 5.8% of overall fiscal spending, according to the Ministry of Finance. Health spending in China is expected to reach $1 trillion by 2020, according to consulting firm McKinsey & Co.

Still, the country's medical system has been plagued by funding problems, leading many hospitals to mark up the price of drugs and other services, experts say. Such practices were put under a spotlight last year when Chinese authorities accused U.K. drug maker GlaxoSmithKline PLC of bribing doctors and hospitals to sell more of its drugs. Glaxo has said it is cooperating.

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New pilot program will let foreign companies own and operate hospitals in some parts of the country.

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Chinese industrial profit growth slows in July

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Chinese earnings growth slowed sharply last month, raising concerns about the country’s pace of economic growth.

Industrial profits increased 13.5 per cent in July from a year earlier, down from the 17.9 per cent growth posted for June, according to the National Bureau of Statistics.

In the first seven months of the year, industrial profits were 11.7 per cent higher than the previous corresponding period.

The result came on back of a string of worse than expected economic data last month including lending data. 

Chinese credit expansion plummeted last month. July’s new lending dropped to 385 billion yuan, or $A67bn, from 1.1 trillion yuan, a contraction of 65 per cent.

The last time China’s monthly lending was in the realm of 300 billion yuan was back in December 2009, when the world was in a deep credit freeze.

China’s total social financing (the country’s broadest measure of lending) also shrank by as much as 546bn yuan last month compared to the same period last year, dropping to 273 billion yuan.

New bank bill acceptances also declined by 400bn yuan, which was dubbed as the largest decrease in history.

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Official data raises concerns about the nation's pace of economic growth.

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China’s recipe for higher consumption and steady economic growth

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East Asia Forum

The slowdown of economic growth in China, since the global financial crisis, is obvious. The average growth rate dropped from above 10 per centto 9.3 per cent between 2008–2011, and then to 7.7 per cent in both 2012 and 2013, according to China’s National Bureau of Statistics. In the first half of 2014, the growth rate was 7.4 per cent.

The external reason for the growth slowdown is weak demand in international markets. The internal reason is the structural imbalances that have persisted in the economy for years. These structural imbalances are primarily reflected by three key realities. The first is the heavy reliance of economic growth on exports and investment. Second is the rapidly decreasing return on capital due to massive investment. Third is the low proportion of domestic household consumption in GDP.

China’s consumption rate gradually decreased from 78.9 to 62.1 per cent between 1952–1978, while the savings rate gradually increased. During the earlier reform period in the 1980s and 1990s, the consumption rate generally remained above 60 per cent, and then dropped significantly to 48.2 per cent from 2000–2010, a reduction of 14.1 percentage points. In the meantime, the share of household consumption in GDP fell from 46.4 to 34.9 per cent, the lowest level since the 1950s. The gross savings rate rose to 51.8 per cent of GDP in 2010, which was a rare situation in the world. It is only in the last couple of years that consumption rates have marginally rebounded.

The government-led investment expansion in the past decade, and the very loose monetary policy during the global financial crisis period, did not fundamentally solve the problem of insufficient aggregate demand. Instead, these both led to serious overcapacity in the manufacturing industry. Thus, the key issue is to resume a balanced structure between savings and consumption.

Insufficient consumption mainly arises from the current pattern of income distribution, due to both imbalanced income distribution between the government, corporations and households, and great income inequality. There are five related issues.

First, until recently, in the past few decades wages in China grew slower than economic growth, leading to a declining share of GDP for both household income and consumption. Meanwhile, the shares of both government and corporation revenues in GDP increased consistently from the mid-1990s.

Second, government expenditure in investment in fixed assets grew even faster than revenue, whereas expenditure for public services, social security and transfer payments grew relatively slowly. Local governments have strong incentives to promote local economic growth and offer preferential policies to large investment projects and enterprises. But this is disadvantaging labour-intensive small businesses in market competition, which is unfavourable to employment growth and balanced income distribution. All these factors have contributed to the decline of the share of household consumption in GDP.

Third, widening income disparity is also an important factor for the low consumption ratio. From 1985–2010, China’s Gini coefficient for income distribution rose from 0.31 to 0.48. Due to diminishing marginal propensity to consume, this negatively contributed to the consumption ratio. In 2011, the savings rate of the lowest tenth of urban households ranked by annual income was 6.5 per cent, while that of the top 10 per cent of households was as high as 40.2 per cent. This implies that the greater the income inequality, the higher the savings rate and the lower the rate of household consumption.

Fourth, firms with monopolistic resources — such as those in the banking, insurance, oil and gas, and telecommunication industries — have been enjoying rapidly rising profits, contributing to rising corporate savings.

Finally, China’s social security and public services systems are underdeveloped. In particular, a majority of the 160 million urban migrant workers from rural areas have been left out of the urban medical insurance and endowment insurance systems and do not have access to unemployment benefits. This forces them to save in order to safeguard themselves against financial hardship and reduces their consumption.

For China to solve the problem of insufficient domestic consumption demand, and thus to sustain fast economic growth, the key issue is to push forward institutional reforms and policy adjustments. Necessary and effective measures include reforms of the government sector, as well as the fiscal, taxation, household registration and social security systems. This will be needed to rationalise government spending, promote market-oriented resource allocation, and improve the social security, public services and transfer payment systems, in order to improve the pattern of income distribution.

If these reforms can be successfully implemented, China can be expected to remain in the fast lane of economic growth in the coming decades.

Wang Xiaolu is Deputy Director and Senior Fellow at the National Economic Research Institute, China Reform Foundation, Beijing. Zhou Yixiao is a doctoral candidate in economics at the Crawford School of Public Policy at the ANU.

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

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China may be able to remain in he fast lane of growth in the coming decades if it finally manages to to tackle key structural imbalances in its economy.

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The rise of a bigger and more complex Asia

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The rise of Asia has created commercial opportunities on a vast scale. The region accounts for 32 percent of the global economy, spends $7 trillion annually on consumer goods and services, and has over 230 cities with populations larger than one million people. These are the types of figures that excite boardrooms and no annual report is complete without an 'Asia story' to rally shareholders.

But the figures also mislead. For even as the region's commercial opportunities are growing, they are also growing in complexity as competition intensifies. Shoppers in Beijing have access to the latest Italian fashions or Australian cheese. Banks from around the world flock to Hong Kong to tap the region's affluent. Food processors in Bangkok produce at a quality comparable to those in the West.

That complexity isn't a reason to delay. Far from it. The opportunities to build scale in the region are too compelling. Consider how Linfox, the Australian trucking firm, has patiently developed its operations in China, India, Malaysia, and Thailand. Today the company generates one quarter of its revenues in the region, adding scale in a way that wouldn't have been possible by remaining at home.

But old assumptions must be ditched in favour of more developed commercial strategies. Trading business cards at trade shows worked in the 1990s, but today's leading Australian firms are adding market studies, focus groups, and competitor surveys to their strategy toolkit much as they might if entering the more developed markets of Europe or the United States.

Take the processed food sector as an example. We recently ran a series of consumer focus groups in Hong Kong. Food safety concerns were a high priority for all and many refused to buy "Made-in-China", preferring imported product. The fact purchasing power has risen steadily over the past decade makes imported product increasingly affordable for the middle-class.

This is the market that Australia food brand owners such as Carmen's, the muesli bar processor, have successfully tapped with the company's products widely distributed across the region. Much the same for Bellamy, the organic baby food company, whose products are similarly available in stores across the region as well as through China’s vast e-commerce channels, such as TMall and Yihaodian.

Yet the competitive gap is also narrowing. Walk down the chilled meat section of any Hong Kong supermarket, for instance, and Betagro's pork products stand out. One of Thailand's largest pork and poultry producers, the company sells high-quality pork, but a QR code allows customers to verify the source of the meat, right back to the farm gate. Not so the Australian products on sale nearby.

How long until Betagro sells to the Australia market? The company after all already sells to Europe and Japan. The company's success is an example of why an Asia strategy is not just about building market share, but also defending existing share at home, as increasingly sophisticated Asian competitors look to Australia's market, often starting by tapping the country's large ethnic-Asian populations.

The example of Betagro is also a timely reminder that the 'Asia opportunity' is about more than 'China'. Sure, China is the region's largest market. But it is also the most fiercely contested as local competitors compete head-on with multinationals;  consumers are spoilt for choice by the rapid growth of e-commerce; and regional differences mean having multiple partners and commercial strategies.

That makes Southeast Asia an easier entry point for many. The region's markets have also matured to the extent that sales in Malaysia or Thailand  can have a material impact on the performance of an even a large-sized Australian firm. That's doesn't mean overlooking China, but instead opting for a multi-speed strategy, say moving faster in Malaysia and more slowly exploring China.

The critical differentiator for those Australian companies that have successfully entered Asia is the commitment of executive boards and senior management. Take the fact that Aesop's Asia-Pacific manager is based in Hong Kong, rather than Australia. The latter might still be the larger market, but it's in Asia where the real growth opportunities lie.

For mid-sized firms, there is a consistent pattern among the most successful firms of business owners or CEOs actually moving to the region. Take Peoplebank or ResourceCo are good examples. That isn't possible for many, but it does illustrate the importance of senior management taking responsibility for an Asia strategy, rather than delegating responsibility to less empowered staff.

The time is also ripe for mid-sized firms. The last five years has seen a sudden increase in the number of family-owned business, for instance, exploring opportunities in the region. There’s no need to jump into Asia overnight. In fact, slow and steady is a good philosophy. But it is critical to have a long-term plan to both tap new customers and defend against new competitors.

Ben Simpfendorfer is Founder & Managing Director of Silk Road Associate, a Hong Kong-based consultancy. He is also author of the “The Rise of the New East and has worked in Asia and the Middle East for the past 20 years.

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In the new Asia, old assumptions must be ditched in favour of more sophisticated commercial strategies.

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