This week’s revirew of last week’s news follows below:

The latest estimate of GDP growth for 2010 comes from the Chinese economist at the World Bank, and suggests 10% – inline with the estimate from Development Research Center of the State Council a couple of weeks ago. Inflation, as then, remains a worry.

China’s overseas investment continues to heat up, with US$100 billion estimated by 2013, according to the China Industrial Overseas Development and Planning Association. People’s Daily notes that “In the first half of 2010, China’s direct investment in the United States reached 605 million U.S. dollars, 3.6 times the same period of 2009, and China’s direct investments towards ASEAN reached more than 1.2 billion U.S. dollars, an increase of nearly 126 percent compared with 2009…In addition, China’s direct investment in the European Union reached 406 million U.S. dollars, an increase of more than 107 percent compared with 2009”

While economic and ODI growth has been positive, what should be made of the China banking regulator’s claim that the top 5 banks has a non-performing loan ratio of just 1.46%? The sector as a whole has be said to risk levels of 20%, while may risks will take time to flow through the system. We’ll have to wait and see.

We all know that statistics can be complicated…and unreliable. This seems to be true of China’s data on income. A recent report from the National Economic Research Institute in Beijing, noted that “ the present statistics on residential incomes have major distortions, especially in the part concerning the disposable income of high-income residents in urban areas,” The Wall Street Journal reported the reports figures: “China’s average annual per-capita income for 2008 is nearly twice the 15,781 yuan (about $2,300) estimated by the NBS. And this is primarily because of unreported “gray income” among higher-income groups”. Anecdotal evidence does suggest significant unreported income, and even an NBS official has suggested this is the case. Remember that research results often need to be researched before use….

All that income that is hidden from the tax man may yet be seen by the salesman. A Forbes’ blog article noted that “the Chinese middle class will wield enormous spending power as it reaches 600 million to 800 million people in 15 years. As their incomes rise, so will consumption, making China the third-largest consumer market in the world after the United States and Japan.” And some.

With all those high-spending consumers it is perhaps no wonder that local brands are stepping up to the plate – including the likes of Shanghai Jahwa, Li Ning, Me & City, 9you – all of which have been noted in recent news, along with news of more foreign celebrity endorsements.

While some local brands may be improving their branding, Chinese education (as we have previously noted) has some reputational issues to deal with. The latest blow relates to the quality of PhDs China is producing. According to China Daily “The number of PhD students in China reached 246,300 in 2009”, but “About 70 percent of employers complain that employees who hold PhDs show little innovation in their work performance”.

Despite a lack of innovative PhD’s China is still managing to make high-tech progress, and to become more competitive in a range of sectors – from aircraft to autos and construction equipment. While sales of these national champions will be domestic initially, they could represent significant competition in international markets, especially when Chinese growth eventually eases and new markets are needed. It will be an interesting transition to watch.

SOE successes may be good, but are they sustainable? Paul Denlinger writes in the China Tracker that “China has become too dependent on its own state-owned enterprises to maintain growth and employment at all costs”, and goes on to say that “It is time to rebalance Chinese society so that the private business sector and farmers have a greater say in China’s future”.

Finally, we return for an update to an old story – Rio Tinto’s trials (literally) and tribulations in China. The New York Times reported that “last month, Rio signed a deal to develop with Chinalco a huge iron ore project in the West African country of Guinea. And this last week, on a visit to Shanghai, Thomas Albanese, Rio’s chief executive…declared China not just a customer but a partner…“The key for what we want to do in China is to develop long-term relationships…He declined to discuss the highly publicized trial, instead noting that Rio had “faced some challenges in China over the past year.” A bit of an understatement, but also a reminder that (political and resourceful) business can move quickly in China.

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Welcome to our weekly pick of (last week’s) news from our ChinaBlogTweets Twitter feed. This week’s post is another lighter, holiday version. Full service (and commentary will follow again next week).

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We already know that China is the largest IPO market but, after the Agricultural Bank of China slipped on its “greenshoe”, China has now also produced the largest IPO ever (again). Reuters reports:

“Agricultural Bank of China’s (AgBank) (1288.HK)(601288.SS) initial public offering hit a record $22.1 billion on Friday, after it exercised an over-allotment option in full…AgBank’s IPO thereby toppled fellow Chinese lender Industrial and Commercial Bank of China’s (ICBC) (1398.HK)(601398.SS) $21.9 billion offering in 2006 to become the world’s biggest.”.

Perhaps the bank (and its advisors) will celebrate over a few cold beers – as, you guessed it, China is now the biggest beer market…

From The Economist (via @Chinahearsay):

“In the space of a couple of decades the country has gone from barely touching a drop to become the world’s biggest beer market, a considerable distance ahead of America. And beer drinking in China is growing fast, by nearly 10% a year according to Credit Suisse’s World Map of Beer”.

Of course size is only one measure of success. Both the IPO and the beer market have had challenges, and China is often associated with a fair amount of froth…but the scale of opportunity means rich rewards for those that can get it right. For those that don’t, there is always a good horror story ot two to tell over a beer. Or two.

Welcome to our weekly pick of the news from our ChinaBlogTweets Twitter feed. This week’s post is a lighter, holiday version (next week too). Full service (and commentary will follow again thereafter).

Three personal profiles, relating to three interesting businesses, caught our attention last week, and they are presented via the links below.

Li Shufu: Geely Chairman
Profile RT @eobserver: Reading: The Economist’s Face value: Li Shufu – China’s lucky man bags Volvo – http://bit.ly/9Tgdj4

Robin Li: Baidu CEO
RT @niubi: Meet Baidu CEO Robin Li. @ChristinaLarson FP Passport http://bit.ly/aVLw0Q @kaiserkuo underpaid $bidu

Marc van der Chijs: Tudou Co-founder / Director
@ThatsShanghai Who made Tudou (Chinese YouTube)? The ultimate expat success story: http://bit.ly/tudouguy

We’ll be keeping an eye out for key people in China’s business world, so stay tuned.

China’s growth seems set to continue its managed slow-down – and a recent estimate from the State Information Centre, reported in China Economic Review, puts the Q3 GDP figure at 9.3% year-on-year (compared to 10.3% in Q2 and 11.9% in Q1. However, for all the estimates and statistics, an open mind is still required. As Global Times reported “Something is fishy in the provinces” – where GDP rates run ahead of the national figure.

All that growth has been fuel for China bears fearing a bubble. So it was interesting to see Standard Chartered’s research in the Wall Street Journal’s blog, suggesting that the real estate developers in tier 2 and 3 cities remain relatively bullish, despite Beijing’s cooling measures and, “if sales and construction activity holds up in most Tier 2 and Tier 3 cities, then the economy will not tank”. As usual, you have to get into the detail, and not make too many assumptions, based on too few data points in too few cities (and with too much reliance on back-office figures, and too little input from front-line people).

Those tier 2 and 3 cities have had a lot of press over the past few years (and, more recently, city clusters), but industry clusters are also well established, and it was good to find the Wall Street Journal mapping some of them out – from children’s clothing in Zhili and lighters in Wenzhou, to socks and ties in Shaoxing. However, rising costs (which we have been following in recent updates) are challenging the status quo, and accelerating investment in automation.

Not all the economic action has been at home. China’s overseas direct investment has seen a success in the completion of Geely’s purchase of Volvo. The Local reported that “Geely…has said it will spend $2.7 billion on the deal—the original price tag of $1.8 billion, plus $900 million in working capital to improve the brand.” And like other international auto brands, Volvo could do well in China, with the right positioning, while China gets and technology, design and international network.

For those with an interest in M&A, the action goes in to, as well as out of, China. WilmerHale reminds us that: “Proposed mergers and acquisitions in China need to be structured carefully to take into account government policy priorities. Lack of alignment of deals with government policies can often lead to deals being rejected or subject to onerous conditions under regulations governing mergers and acquisitions and other regulations”. Too right.

That alignment is important not just for M&A, but for business generally. Siemens clearly knows this, as a recent piece in China Daily shows: Their China head, Cheng Mei-Wei, was reported as saying that “companies should work to “adapt themselves to the rapid changing market…Cheng said he is “optimistic about Siemens’ future in the Chinese market” as the company’s portfolio fits well with the country’s needs in areas including urbanization, demographic change and environmental protection.”. Buzz words such as “localization” and “R&D” were also thrown in for good measure, befome coming to a strong close: “We are a multinational company, but we are also a Chinese company”. Siemens will not be without difficult issues, but a little friendly alignment can be a good long-term policy.

Perhaps Siemens had advance sight of the latest employment survey from ChinaHR.com – which was strangely anti-MNC (not all are convinced – but it is interesting to consider the implications). That other official organ, the People’s Daily tells us: “The number of foreign companies on the list of the top 50 preferred employers voted by Chinese college students has plunged to four from last year’s 21”. This may reflect increased wages, or more perceived stability (or accessibility), in local firms. MNCs may not be out of the picture, but for some it will prompt some proactive positioning. Perhaps, like Siemens, they will remember to repeat “we are also a Chinese company”…

Just as students want access to increasingly rare jobs, China wants access to some rare raw materials. Yes, rare earths are back in the news, along with Chinalco. People’s Daily reported that the company: “is eyeing rare earth mines in Guangxi Zhuang autonomous region to bolster reserves”, and that “The government has indicated that it wants big companies to spearhead the consolidation of the nation’s rare earth sector”. This is a worrying policy for international firms that rely on these materials for high-tech production as “China supplies more than 95 percent of the global output of rare earth oxides and sits on half of the reserves in the world”. This is a policy – and a risk issue – to watch.

…But it is not the only risk. And others are less rare, such as bribery and state secrets. On one hand the fall out from the Rio case has continued – with the sentencing of some of the Chinese-side players (on trade secret issues).

On the other hand are the “state secrets”, which are (thanks to Baker & McKenzie) well worth reading up on before the State Secrets Law knocks on the door on 1st October.

See the related tweets, and links below.

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Photo link

Last week’s news included the a warning that while policy-induced slowing of the economy continues (not a bad thing), some risks remain. In Caixin, Yi Gang, a deputy governor of the People’s Bank of China (and leader of SAFE) said that “the probability [of a double dip] is small. Nevertheless, he said that the growth rate will inevitably slow down, given the current size of China’s economy as well as environmental restraints”.

Some measures, however have been growing – as yet more statistics have been revised. The China Real Time Report notes that the “National Bureau of Statistics’ on-the-ground efforts discovered additional household spending equivalent to about 0.8% of annual gross domestic product over the years 2004 to 2008… In 2008, for instance, household expenditure was revised up to 11.06 trillion yuan, an increase of 220.23 billion yuan or about $29 billion”. Regional GDP figures have also been called into question. Not for the first time. As ever, take statistics with a grain of salt, focus on the trend, and do primary research.

Slower growth aside, China may have already become the world’s 2nd largest economy – overtaking Japan – after growing 11.1 percent in the first half of the year. Reuters reported that Yi Gang (as above) reported that “China, in fact, is now already the world’s second-largest economy”.

All that growth, slowing or not, has created pressures. We have recently covered some of those affecting factory workers, but this week the focus is on industrial accidents and the environment. According to Reuters “China, the world’s largest polluter, said the number of environmental accidents rose 98 per cent in the first six months of the year, as demand for energy and minerals lead to poisoned rivers and oil spills.” Incidents that leap to mind include Zijin Mining, Dalian port (which seems to be worse than originally thought).

Coming back to the pressure on workers…that is continuing to have an impact (and a lot of mainstream news coverage, including in the Economist). Following up on some of the original headlines on the issue, we are now following Foxconn to central China (to Henan, and away from the Pearl River Delta, labour unrest, and shortages).

Much of the recent labour unrest has been focused on foreign-invested enterprises (FIEs), and the government generally seems happy for workers to vent. But other news served to remind us of the role FIEs also play in China’s economically important exports. The Economist reported: “Of China’s 200 biggest exporters last year, 153 were firms with a foreign stake”.

Another issue we have covered is the state of the China business environment but, interestingly the failure of the largest foreign takeover of a Chinese company to date (a US$1.6 billion deal for Charles River to buy Wuxi PharmaTech) has failed not because of Chinese protectionism, but because of shareholder dissent in the US. Further tests, on both sides, are sure to follow.

China’s outbound investment has also been active, and not entirely uncontroversial. On one hand Chalco has concluded a US$1.3 bn deal with Rio Tinto (remember them?!), while on the other Huawei failed in its attempt to buy US internet software company 2Wire. The FT reported that in that (and a recent Motorola deal) “serious questions over Huawei’s ability to win regulatory approval for the acquisitions played a role in the bidding process, forcing Huawei to offer a higher premium. Both deals would have had to win approval from the Committee on Foreign Investment”. “National security” sensitivity anybody?

Of course the US is not the only place with such security sensitivities. China’s “indigenous innovation” policy has caused serious concerns, and claims of protectionism.These have been looked at in detail by APCO’s James McGregor and a report that puts the policy “in political, economic and historic context and perspective”. It makes for interesting reading. And, anyone with high-tech IP should be interested.

And finally…when wining, dining and otherwise entertaining Chinese guests, give some thought to what is being gifted. As Dan Harris at China Law Blog points out: “...the provision of conspicuous or unusually expensive entertainment… might attract attention” in relation to the Foreign Corrupt Practices Act (FCPA) – especially where “foreign officials” (who can be difficult to define) are concerned.

See the related tweets, and links below.

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The economic debate on growth and inflation continues to rage, and was put nicely in the FT – drawing on an old Standard Chartered report it wondered whether the economy could be served up at just the right temperature, or whether the bears (exemplified by Andy Xie) would be right about inflation risks. For the moment it seems the bears are under control, and Morgan Stanley has revised its 2010 (CPI) inflation and GDP estimates to 2.8% (from 3.2%), and 10% (from 11%) respectively.

China’s continued growth remains an opportunity for international business but, as we have noted in previous posts, many have become frustrated with what is perceived to be a more challenging business environment (“indigenous innovation”, state secrets etc.). While difficulties remain, it should be remembered that China cannot be seen in black and white – and some companies are doing very well. The reality is that structure, sector and location play an important part in commercial success. As the FT notes: “GM’s joint ventures…have found it hard to keep up with demand over the past year. China may well be GM’s most profitable global market”.

The New York Times also looked at GM as a successful case study, highlighting its plan to introduce a new brand (“Baojun” or “treasured horse”) specifically for the China market, targeting the growing demand outside the major cities (we noted a couple of weeks ago that GM’s China sales have overtaken those in the US ). And GM is filling both ends of its China pipe, with the China Economic Review reporting that it is investing US$250m in an R&D centre in Shanghai. Investing, developing R&D, localizing the offer, and looking to the lower-tier cities, are good boxes to be ticking.

Sticking with the automotive strand, and the grey nature of things, it is worth remembering that not all is rosy for everyone. Recent strikes have continued to cause problems at some companies, including Honda suppliers. Reuters reported that “strikes at Atsumitec Co, which supplies Honda Motor Co’s China operations…ended after workers agreed to a 45-percent pay raise to 1,420 yuan ($210) per month”. Risks remain, and wage bills continue to rise. Businesses in China would do well to proactively review wage, as well as wider labour force, issues (which are here to stay).

While big business is already big in China, SMEs have been looking at it with fresh eyes while their traditional markets have been slowing. China Law Blog pointed to some advice from Technomic Asia’s Business Podcast, and made the point that while there is a lot of opportunity, there is “little room for error”. Read Dan’s post and avoid the “lights out” legal errors that others have made.

Legal issues are never far from the service anywhere business is done, and China is no exception. A raft of recent graft cases have been topped by the incomparable conviction of the former deputy head of the Public Security Bureau’s (PSB’s) Economic Crimes department, in relation to US$2m of bribes from founder of Gome (whose trial appeared in a previous update). Of course, corruption is not just on the Chinese side – Avon is just the latest foreign firm to face investigation of business practices in China. A(nother) timely reminder for an audit and some training / re-education?!

Protection of intellectual property is another regular feature of China business discussions and, while the tend is positive, a few industrial espionage cases have hit the headlines, including Motorola vs. Huawei (and former staff), BP vs. former staff, and GM vs. (former staff and Chery). AS China Law Blog has pointed out before, “NDA’s are not enough” (here and here).

Disasters of a different nature have also hit the news, with China’s biggest oil spill closing Dalian port, and causing widespread environmental damage, as well as economic loss. Needless to say, environmental issues are sensitive socially, politically and economically. Another issue for constant corporate review.

At least there is some good news on the energy / environment side – as China has announved a RMB5 trillion investment plan for renewable energy to help it meet carbon emission reduction targets for 2020. Peoples’ Daily reports that “the new plan will greatly ease China’s excessive reliance on coal in 2020 and cut sulfur dioxide emissions by about 7.8 million tons and carbon dioxide emissions by about 1.2 billion tons in a year”.

Once again there has been so much news, it has been a challenge make our picks. While we like to have a number of sources, and to build on some key themes, we also like (and agree with) Janet Carmosky’s take on the China Daily (USA edition). She notes: “To be sure, its editorial policy is under the eye of the state. But it’s also a reliable force for increased transparency and an invaluable window to modern China…” Among the top reasons to read it, is that fact that it is “impossible to miss the official position”. And the official position is always good to know…

And finally (11th out of our allotted 10), given our recent interest in books on China, check out this podcast on some excellent reads (and subscribe for well-informed, weekly discussions on all things China): RT @imagethief: New Sinica podcast with @KaiserKuo, @goldkorn and me…death of the China blog: http://is.gd/dDg4o Slightly misleading title

See the news, and links to sources, below:

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Regular readers may recall our involvement with (and interest in) Enjoy Shanghai (also on Twitter). We are excited to announce the launch of a new daily deal service for group purchases.

Check out EnjoyMeitain which offers, each day, a “fantastic deal on something cool to do in Shanghai. From dining and nightlife, spas, health and beauty services, sports, arts and cultural activities, we’ve got something for everyone.

Enjoy!

There is little time available for most people to prioritise and process the torrent of information that constantly flows out of China. But, with the rapid pace of change, executives and investors in China cannot afford to fall behind the times, or to miss emerging trends, opportunities or risks. As a result we have put 20 years of China-watching and practical experience to work, and have structured our public news feeds for your convenience:

We hope you find these services useful for your China business, but please contact us if you would like to discusss the practical applications, or if there are any issues you would like our assistance with.

Updated 28/7