There may be light at the end of the tunnel for China’s seemingly perpetual flirtation with third-generation (3G) phone networks. The Beijing Olympics have long been pegged as the date for 3G’s introduction, and indeed, trial networks have been set up and testing is underway.
The hold-up has been attributed to Beijing’s insistence on introducing its own 3G standard, known as TD-SCMA. Development of the technology appears to have missed earlier deadlines, and using existing standards like CDMA2000 would be quicker and easier.
China’s 3G saga is closely linked to a long-rumored restructuring of the telecom industry. The idea is to give the fixed-line operators mobile capabilities, possibly by splitting up China Unicom to create three players who can offer both fixed-line and mobile services.
According to Dave Carini, an analyst at telecom consultancy Maverick China Research, an industry restructuring will likely coincide with the issuing of 3G licenses.
“It’s still all connected, although we have not had any clear indication yet about when [a restructuring] will happen,” he said.
Restructuring is expected largely because of China Mobile’s dominance of the sector. It has 350 million mobile customers to China Unicom’s 150 million, while fixed-line operators like China Telecom and China Netcom are suffering from declining subscriptions.
In the past, analysts theorized that Beijing would have to step in to save a struggling China Unicom, but the smaller mobile operator has improved its fortunes of late, creating separate teams to run its GSM and CDMA operations. Now, it’s the fixed-line operators who are clamoring for a government-led restructuring.
Speaking to Caijing magazine recently, China Netcom chairman Zhang Chunjiang complained that his firm was a victim of a price war between China Mobile and China Unicom, which made mobile phone accounts more attractive than the dying fixed-line business.
“We have to find a way out,” Zhang said.
A sweeping new labor law and long-term demographics promise to significantly affect China’s labor market this year.
The most important development for employers and workers this year will be a series of labor laws that come into effect throughout the year. The labor contract law and the employment promotion law come into effect on January 1. A dispute resolution law is expected in April or May and legislative reform of the social security system is likely to happen in late 2008.
The new laws give individual workers greater protection, but employers – particularly multinationals – should benefit. In the short-term, they will have to spend more to ensure compliance, but the new laws will help multinationals keep employees, who are still in short supply and therefore prone to leaving for better offers.
According to The Adecco Institute, the research arm of the Swiss staffing company, employee turnover in many sectors in China is now 20-30% and twice the world average.
“The laws will help slow the rapid turnover of staff,” said Peter Siderman, the institute’s managing director.
The labor reforms also give employers a clear indication of Beijing’s intentions for the development of the labor market. Measures to improve the protection of trade secrets are particularly important. A non-compete clause in the labor contract law means workers with knowledge of confidential information can be barred from working for a rival firm for up to two years, said Richard Hoffmann, a lawyer at consultancy Dezan Shira and Associates.
The laws, taken together, should create a more stable labor market where employers have greater incentive to train staff and thus address the endemic supply shortage in managerial and other positions – good news for employers.
But the laws of supply and demand are less forgiving to bosses. A small pool of qualified talent (Adecco says less than 10% of the 600,000 Chinese engineering graduates each year are considered employable by multinationals) and the high inflation means wages are pumped up. Dezan Shira and Adecco say wages for jobs requiring basic skills have risen by more than 8% this year. Skilled workers get bigger increases. “We think most sectors will be affected by wage inflation,” Siderman said. “We expect some impact from the new laws.”
China’s hunger for commodities is well-known, and it will continue unabated in 2008. From oil and gas to iron ore, the indicators are that domestic demand will remain strong.
As a result, China’s three state-owned oil and gas companies will all do well, according to Ma Shang, an analyst at Fitch Ratings in Beijing. By Ma’s reckoning, PetroChina leads the pack, thanks to its hugely successful A-share listing, large reserves and strong integration of its upstream and downstream businesses.
“PetroChina is the strongest among all three,” he said. “CNOOC should be second because of its profitable upstream business and Sinopec third.”
Ma doesn’t believe Beijing will make significant changes to its pricing regime for fuel, so the country’s oil giants will once again rely on strong upstream activity to offset the losses created by selling gasoline and diesel at artifically low prices back home.
PetroChina has also been active in the liquefied natural gas (LNG) market, an area that is tipped to become increasingly important. The company signed a 15-year US$37 billion deal with Woodside Petroleum for LNG from Western Australia – it is Australia’s biggest ever export contract. Gas is also likely to be imported from Russia, Turkmenistan and Myanmar.
However, the imported commodity currently attracting the most attention is iron ore.At the time of writing, Anglo-Australian miner Rio Tinto was still subject to a US$130 billion takeover bid from BHP Billiton and rumors of a counter offer from a Chinese consortium had dwindled. Chinese steelmakers have a vested interest in the outcome of the deal because iron ore contract prices are currently negotiated with Companhia Vale do Rio Doce, BHP Billiton and Rio Tinto. Analysts forecast a 50% rise in contract iron ore prices in 2008.
“China will be particularly affected [by a BHP Billiton takeover] because it sources the vast majority of its iron ore from Australia, because of the physical distance,” said Graeme Train, an analyst at Steel Business Briefing.
This is not the only issue preying on the minds of Chinese steelmakers. In April, value-added tax rebates were removed for certain steel products, causing exports to fall dramatically. Also, EU steel producers have filed a complaint with the European Commission in which they accuse the Chinese of “dumping” steel products in Europe at less-than-cost price.
Domestically, the central government appears to be encouraging a shift away from “long” products – things like steel bars for construction – to higher value-added “flat” products, which can be used in everything from automobiles to consumer electronics. This, coupled with the restrictions on exports, could create oversupply in the domestic market, Train said.
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