This month’s stat wrap core comes courtesy of Caijing Magazine, which informs us in its newsletter that:

• “China’’s gross domestic product (GDP) grew 10.4 percent to top 13 trillion yuan during the first half of the year (according to National Bureau of Statistics)…was down 1.8 percentage points from the same period last year.

• “The consumer price index (CPI) grew 7.9 percent in the first half of 2008, 4.7 percentage points higher than the rate posted for the same period last year…But the June CPI of 7.1 percent was 0.2 percent below the May rate. And most economists think CPI will continue falling in the second half when compared with the high figures posted late last year. However, the producer price index (PPI) deviated from the CPI trend by rising to 8.8 percent in June, representing higher costs for oil and other production inputs.”

• Growth in fixed asset investment remained robust, reaching 6.84 trillion yuan in the first half of the year, up 26.3 percent year-on-year. Urban fixed asset investment grew 26.8 percent to 5.84 trillion yuan.

• “Inflation pressure remains high and poses a major challenge for the country, NBS said”.

In other statistical news:

Business week reports on China’s (finally) shrinking trade surplus:

“China’s global trade surplus in June was $21.3 billion, the biggest monthly gap since December, but a 20 percent decline from the same month last year, according to the China’s General Administration of Customs.

Exports rose by 18.2 percent over the year-earlier period to $121.5 billion — a sharp drop from May’s 28 percent growth rate, the data showed. Imports surged 23.7 percent to $100.1 billion.

… “This is crunch time for China,” said Standard Chartered economist Stephen Green. “Beijing is more than a little concerned about the impact of a slowing global economy.””

MarketWatch reports that FDI into China remains strong:

“Foreign direct investment in China jumped 46% in the first half, according to government data released Friday. Overseas firms brought in $52.4 billion in investment during the six-month period, the Ministry of Commerce said Friday. Foreign direct investment in China was up 14% in 2007 against the preceding year.”

How much of this FDI is really foreign (rather than round-tripped), and how much is “hot” money seeking an uplift from the RMB’s rise is unclear from the official figures.

News Sources:

Caijing Weekly Review (Email newsletter)
Caijing

Foreign direct investment in China surges 46% in first half
MarketWatch - USA
By Chris Oliver HONG KONG (MarketWatch)– Foreign direct investment in China jumped 46% in the first half, according to government data released Friday. …

China’s June trade surplus shrinks
BusinessWeek - USA
By JOE McDONALD China’s rapid export growth plunged in June, the government reported Thursday, and analysts said Beijing might respond by slowing its …

While China has been in the WTO since December 2001, it has only now had the first case (the background to which we reported here in September 2006) found against it, as PA reports:

“The World Trade Organization made public its first official condemnation of Chinese commercial practices on Friday, releasing a February ruling that sided with the United States, the European Union and Canada in a dispute over car parts.

…In the sweeping decision, the three-member WTO panel ruled against China on nearly every point of contention with the U.S., the 27-nation EU and Canada. The panel found that Chinese measures “accord imported auto parts less favorable treatment than like domestic auto parts” or “subject imported auto parts to an internal charge in excess of that applied to like domestic auto parts.”

And it is not expected to be the last case, not least because a host of international manufacturers will be looking to China for the growth that now looks unlikely at home – and they will fight to break down any barriers they find:

“…The dispute has likely been closely watched by makers of everything from batteries and brakes to seats and spark plugs on both sides of the Atlantic, including U.S.-based Delphi Corp., General Motors’ former parts supplier, and Robert Bosch GmbH in Germany.”

In terms of the auto market, it is clear why there is interest, as is indicated in a new report from Research and Markets (China Automobile Sector to 2010) which notes in its key findings that:

• “It is projected that China will add 33 Million automobiles during 2008-2010.
• Passenger car production in China is expected to cross 7 Million Units in 2008.
• Passenger car stock per 1000 population is likely to increase at a CAGR of 19.8% from 2008 to 2012 in China.
• Sales of commercial vehicle in the country are forecasted to grow at a CAGR of around 5.5% during 2008-2010.
• Based on the past performance, it is projected that passenger car sales will cross 11 Million Units in 2010.
• Sedan will be the preferred segment among the Chinese consumers during the forecasted period”.

However the auto case develops, it seems that China will continue to open up its markets as its more sensitive local industries become stronger and more internationally competitive. But, whatever WTO rules, foreign domination is still not part of The Plan.

See new sources:

WTO publishes trade ruling against China
The Associated Press -
The verdict — findings of which were obtained by The Associated Press five months ago — found that China was breaking trade rules by taxing imports of auto …

China Must Revamp Auto Component Tax Rules, WTO Says (Update1)
Bloomberg - USA
By Mark Drajem July 18 (Bloomberg) — China violates global trade rules by requiring automakers operating there to buy components from local suppliers or …

Now Available - China Automobile Sector to 2010
MarketWatch - USA
“In the past few years, precisely after its accession to the World Trade Organization (WTO) in 2001, China has seen a phenomenal

We are pleased to promote a new pair of business travel guides from our old friend Yintong Bester. Details, provided by the author, can be found below:

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Happy travels!

It has been widely reported that visa issuance policies in China have been tightened ahead of the Olympics. Visitors are recommended to make visa application arrangements in good time, and to have all supporting documentation (which may include travel and hotel documents) in place.

UK readers may wish to note the recent introduction of online appointment bookings and the use of an agency to manage visa applications on behalf of the Chinese Embassy. Readers elsewhere should check local policies.

The infamous trade surplus is falling, but rather than being driven by structural changes in trade, it is sky-high commodities prices that are having an impact, as AFP reports:

“Soaring imports caused China’s trade surplus to shrink nearly 10 percent as rising global commodity prices stoked inflation in the domestic economy, official figures showed Wednesday.

China’s trade surplus stood at 20.2 billion dollars in May, down 9.9 percent from 12 months ago, prompted mainly by a 40-percent spike in imports to 100.3 billion dollars, according to customs data.

…China’s May exports rose by a more modest margin than imports, increasing by 28.1 percent from the same month a year ago to 120.5 billion dollars, according to the customs authorities.

The Chinese government said last week the nation’s trade surplus is likely to shrink in 2008 for the first time in five years on weakening exports mainly due to the rising local currency and the US economic slowdown.
In the first five months of 2008, China’s trade surplus hit 78 billion dollars, a decline of 8.6 percent from the same period a year ago, according to customs.

In the five-month period, exports increased 22.9 percent to 545.1 billion dollars, while imports rose 30.4 percent to 467 billion dollars, customs said.”

Higher commodity prices, including for oil, have impacted in other areas too – as a result of government intervention on pricing. AFP notes:

“China sharply raised domestic energy prices across the board …as authorities shifted policy in the face of complaints that price controls were causing turmoil on global oil markets.

…The price controls in China, the world’s second largest oil consumer after the United States, have been blamed for distorting global markets, which have been in turmoil for months.

Wholesale petrol and diesel prices were raised 1,000 yuan (145 dollars) per tonne while aviation kerosene was hiked 1,500 yuan a tonne, the National Development and Reform Commission said.

Retail prices of diesel and petrol were hiked to 6,520 yuan and 6,980 yuan a tonne, increases of 18 percent and more than 16 percent respectively.

The rises would mean an increase of 0.92 yuan and 0.8 yuan a litre (51 cents and 44 cents per US gallon) for diesel and petrol, state-run Xinhua news agency said.

In a bid to appease those most affected by the price rise, the finance ministry Friday said it would allocate 19.8 billion yuan (2.9 billion dollars) in subsidies.

A Xinhua makes an interesting (for official Chinese media) point:

“…when the energy price is subject to the market rule instead of the administrative price intervention, it would help ease the shortage of supply against demand and improve the efficiency of macro economic policies.

Therefore, this price rise is a benefit viewed against the long-term prospective.

…In the market economy theories, one of the cornerstones is to respect the role of price in the market, because it is born as the most sensitive and effective element to balance demand and supply. Its change would directly encourage or suspend demand, which would, in turn, improve or distort market structure.

…Oil price rise might cause some immediate pressure or trouble, but a respect to the law of market economy would definitely promote smooth economic growth in the future.

More price reforms in the pipeline? My, how China has changed!

See news sources:

China sharply hikes energy prices
AFP -
BEIJING (AFP) — China sharply raised domestic energy prices across the board on Friday, as authorities shifted policy in the face of complaints that price …

Strange Impact of China Raising Oil Prices
istockAnalyst.com - Salem,OR,USA
It is commonly thought that when a country like China that has been keeping the price of fuel artificially low changes that policy and allows the price of …

China allocates another 3.78 bln yuan in subsidies to offset fuel …
Xinhua - China
China’s benchmark gasoline and diesel oil retail prices were raised by 1000 yuan per tonne and that of aviation kerosene went up by 1500 yuan per tonne, …

For all its pains, energy price hike a wise move
Xinhua - China
When it comes to the specific issue of energy price in China, price rises on the domestic market could not be avoided although the timing of such a rise …

There have been a lot of wealthy people in China for quite a long time now – though simplistic reading of per capita statistics continue to convince some that Chinese people are poor. Many still are (though even they are better off than they used to be). But others are getting rich just as fast as many in the West are losing their shirts, as Times of India notes:

“The ranks of the world’s millionaires grew 6% last year, as people in the emerging economies of India and China grew richer, according to an annual survey by Capgemini SA and Merrill Lynch. The number of people with over $1 million to invest, not including the value of their homes or consumable goods, rose 6% to 10.1 million last year, the firms said in their World Wealth Report, published on Tuesday.

The world’s millionaires increased the value of their assets by 9.4% to $40.7 trillion, less than the 11.4% rise in 2006,India and China posted the biggest gains in millionaires, advancing by 23% and 20%, respectively.”

But what will these new rich do with their funds, now that the markets are looking less attractive? EU Bankers reports on some research out of China:

“A research report released Tuesday by China’s top bank Industrial and Commercial Bank of China (ICBC) shows that Chinese people are reluctant to invest their money in stocks and funds, while their willingness to invest in gold has risen and their interest in bonds and wealth management products has tended to stabilize.

According to the report, 17 per cent of the respondents are willing to invest in stocks, down from 32 per cent in the bank’s previous survey last year, and 12 per cent are willing to buy securities investment fund units, down from 26 per cent.

…The bank’s ICBC Investment & Wealth Management Index to reflect Chinese urban residents’ will of investment and wealth management, the first phase for 2008, released Tuesday, was 108, down from 115 for the second phase in 2007 and 126 for the first phase in 2007.”

The new rich make for an interesting niche.

See news sources:

‘India, China lead world millionaire club surge’
Times of India - India
The ranks of the world’s millionaires grew 6% last year, as people in the emerging economies of India and China grew richer, according to an annual survey …

EUBANKERS
Wealth investment appetite of Chinese weakening

Managing the Dragon recently wrote about arbitration in China, and where best to conduct it (referring to a Wall Street Journal Article). The article outlines some cases heard in Stockholm, won by the foreign party…however enforcement and recovery has not yet been achieved. Jack notes:

“Arbitration is only the first, and the easiest, of the two steps. Enforcement is where the rubber meets the road in China.

…My best advice on legal actions is to avoid them at all costs and use them only as a last resort. The outcome is uncertain, and it’s going to take time–no matter what….In my experience, negotiation is a better way to go.”

Of course, it is still a good idea to have a solid legal framework to support any negotiation, and to provide the litigation option, should it be needed.

China Law Blog has also written about arbitration problems, noting that most of them “could have been easily prevented with the right arbitration provision”. (Another post from them on this issue can be seen here).

It is certainly important to consider how disputes might be resolved (in practice, not just on paper) and to plan accordingly. For example a foreign arbitral award has to be registered in China before it is enforced there – and this process can be uncertain and costly (though if the Chinese party has assets overseas, if may be possible to enforce against those assets).

So getting (good) legal advice, from lawyers who know China, is critical when drafting an agreement. It is also a lot less costly than trying to sort it out after the fact…

Microsoft (the “small flaccid” one) is reported to be in the firing line of China’s antitrust investigators under the Anti-Monopoly Law, which we reported on here (see more background on China Law Blog here). ChannelWeb reports:

“China state media on Wednesday reported that the Chinese government’s State Intellectual Property Office has launched antitrust investigations against Microsoft and several other software vendors for allegedly charging more for their products in China than in other countries.

According to AFP, a source quoted by China’s Shanghai Securities News said a package consisting of one copy of Windows and one copy of Office can cost more than $1,000. The Chinese government passed a law last year specifically designed to address the high cost of genuine software, and it’s possible that lawsuits against Microsoft and other vendors could follow after the law takes effect August 1, the source said.”

Microsoft knows a thing or two about anti-trust investigations (so will no doubt be prepared). They may however wish that the Intellectual Property Office spent more time on protecting them against software pirates…

There is no doubt Microsoft is an important player (and – perhaps, at least in part, due to rampant software piracy of the past – the dominant one). It also has deep roots in China, and has done a good job of integrating itself into communities on the one hand (e.g. by supporting rural education programmes) and gaining commercial advantage (e.g. by getting agreement from hardware manufacturers to pre-install authentic software).

It will be interesting to see how they (and their lawyers and government relations advisors) deal with this investigation. But whatever the outcome, it seems that the age of the anti-trust investigation has arrived in China. How it will be applied (with regard to foreign vs. domestic firms) remains to be seen.

Indeed, China Law Blog suggests that we may have to wait longer than the initial reports suggest:

“It appears these reports may be false. Microsoft has stated it is unaware of any such investigation and the PRC State IP Office has issued a statement to the effect that it was not conducting any investigation and such reports were “seriously untrue.”"

The well thought-out reasoning behind this follows on their post “China Investigating Microsoft For Antitrust Violations. We Don’t Think So.”

These guys know their stuff, and their views have weight. But, whatever the outcome here, the issue is one that will surface somewhere, sometime (in the not-too-distant future). Best be prepared!

See news sources:

China Trains Antitrust Crosshairs On Microsoft
CRN - Manhasset,NY,USA
China state media on Wednesday reported that the Chinese government’s State Intellectual Property Office has launched antitrust investigations against …

Microsoft Partners in Learning
Microsoft will build 100 IT classrooms in China (mainly in rural and remote … The IT classrooms in Accessorial Experimental Middle School of Beijing …

Microsoft, Chinese PC maker sign deal to pre-install software in …
BEIJING: Microsoft Corp. and China’s No. 2 personal computer maker signed an … A Chinese school, shored up by its principal, survived where others fell …

Updated 19/6/08

The latest stats (with the usual warnings) to come out of China include:

Trade:
AP reports “China’s trade surplus shrank 10 percent in May from a year earlier, the second straight monthly decline…The $20.2 billion surplus for May was still relatively large — up from a $16.7 billion gap in April and $13.4 billion in March — and larger than analysts had predicted…The trade surplus for the first five months of the year was $78 billion, down 8.6 percent from the $85.7 billion surplus in January-May 2007”.

Foreign Direct Investment:
China Daily reports: “China used US$ 42.78 billion of foreign direct investment (FDI) in the first five months this year, an increase of 54.97 percent from the same period last year, the Ministry of Commerce (MOC) said.”

Inflation:
AFP reports: “China’s inflation rate was 7.7 percent in May, easing from April’s 8.5 percent, the government said Thursday, as analysts cautioned that some prices had been kept artificially in check.” Forbes adds: “The World Bank said it expects China’s economic growth to moderate to a more sustainable pace this year, expanding by 9.8 pct and easing further to 9.2 pct in 2009, against the 2007 revised rate of 11.9 pct.”

MarketWatch provides details of the World Bank’s 2008 projections:

GDP: 9.8% (up from 9.6%)

Inflation: 7% (up from 4.6%. 5.3% in 2009)

Updated 20/6/08

China is a big place, used to big deals. It is also fast-moving, and nowhere more so than in the (recently restructured) telecoms sector. Not everyone going to China gets it right – and Apple got bruised recently in its negotiations with China Mobile. However significant successes do some to some – with that very same company – which is suddenly on something of a policy-induced shopping spree. China Daily reports:

“Sun Microsystems Inc also announced a framework agreement with China Mobile on IT products and services projects in 2008. Sun will provide China Mobile with IT products and relevant services at an estimated price of some 34.8 million dollars”

The FT notes another China Mobile deal:

“Alcatel-Lucent on Tuesday trumpeted a framework agreement with China Mobile that could lead to $1bn of additional revenues.”

Good news for them perhaps, but the FT goes on to reveal the hard end of the deal:

“…But brutal competition means margins tend to be wafer thin.”

As Apple found out, that may be the cost of entry. The question is how far they can make it pay in the long term, once they have the platform and access on which to build. In the meantime, we can expect the telecom restructuring to make more commercial waves.

See news sources:

Alcatel-Lucent’s China deal
Published: Tuesday 17 Jun 2008 12:35
Alcatel-Lucent trumpeted a framework agreement with China Mobile that could lead to $1bn of additional revenues. But brutal competition means margins tend to be razor thin

China Mobile’s upgrade bid
Xinhua, China - Jun 17, 2008
The agreement was secured through Alcatel-Lucent’s flagship company in China, Alcatel Shanghai Bell. “We are delighted to be selected to continue providing …