Goldman Sachs is among those on the hunt for China insurance assets. The global investment bank announced last month that it was pursuing a stake in Dazhong Insurance, but it faces competition from domestic insurer China Life Insurance and Germany's Allianz AG, both of which already had offers on the table.
Insurance Australia Group is also set to enter China, last month making a bid for a 24.9% stake in China Pacific Property Insurance, with an option to lift its ownership to 40%. Meanwhile, China Life Insurance Chairman Yang Chao announced the Mainland's largest insurer would sell a 10% stake to three as-yet-unnamed strategic investors – two from overseas, and one from the Mainland – Caijing magazine reported.
Bank of China, China Construction Bank, and Bank of Communications have also announced intentions to enter the market as the China Insurance Regulatory Commission mulls overturning rules currently barring domestic banks from the sector. The rule change is being considered among a range of CIRC measures aimed at revitalizing the industry, which has slowed since 2004 – after 25% annual growth over the past decade – as stiffer rivalry encourages firms to refocus product portfolios on long-term profit.
Other changes include plans to improve corporate governance of insurers, broaden their investment scope and attract more investors into the sector, which is dominated by just three major state-owned players – China Life Insurance, Ping An Insurance and China Pacific – which together account for around 90% of the market.
The CIRC's revitalization plans aim to double annual insurance premium earnings to US$124 billion and more than triple industry assets to US$621 billion by 2010.
With fewer than 4% of China's 1.3 billion people currently in possession of insurance cover, there is still plenty of room for new entrants to help China meet its future social security needs.
Banking irregularities up 31%
The China Banking Regulatory Commission unearthed banking irregularities involving US$95.1 billion at Mainland banks in 2005, a 31% increase from 2004, the Wall Street Journal reported. The misused funds were spread over about 1,200 financial institutions. The banking watchdog didn't give a breakdown of the violations, but said its audits had uncovered 1,272 criminal cases and helped to recoup about US$1.82 million. It said it disciplined 6,826 staff at the offending institutions, including 325 senior managers.
Green light for yuan swaps
The central bank gave the go-ahead to a pilot scheme for yuan interest rate swaps that will allow banks to hedge against their exposure to changes in interest rates. Under an agreement sealed in October but put on hold pending approval, China Everbright Bank and China Development Bank will now be among the first to swap interest rates. CEB will exchange a 10-year fixed interest rate of 2.95% for a floating rate based on the one-year yuan deposit rate, currently 2.25%. Further reform measures saw the central bank announce plans to adjust its rediscount rate, which has been fixed at 3.24% for nearly two years.
ABC seeks bailout
Agricultural Bank of China was looking to receive massive government capital injections this year to wipe US$90 billion of bad debts of its books. Vice Chairman Han Zhongqi said the bank had still to be informed of any impending bailout, despite the fact that ABC is expected to finish restructuring by the end of 2006. With the bank reporting that one in four of its loans were sour at the end of last year, any state support is likely to dwarf the US$60 billion spent on removing bad debts held by the other three of the Big Four banks. ABC is keen to find foreign strategic investors once restructuring is complete, with France's Credit Agricole touted as a possible partner.
Ex-BOC executives to stand trial
Two former Bank of China branch managers were charged with embezzling US$485 million with the help of another former bank executive, state media reported. A grand jury indicted Xu Chaofan and Xu Guojun, the former bosses of the Kaiping BOC branch in South China's Guangdong province, their wives, and another relative on 15 counts of racketeering, money laundering and fraud. They were due to stand trial February 27 in Nevada and intended to plead not guilty. Xu Guojun was arrested in Kansas in September 2004, while Xu Chaofan was apprehended in Oklahoma the following month.
First foreign bank president resigns
The president of China's first foreign-controlled domestic bank, Shenzhen Development Bank, resigned last month. Jeffrey Williams became president after US private-equity firm Newbridge Capital acquired a 17.89% stake in the lender in May 2004, becoming the mid-size lender's biggest single shareholder. Since then, the bank's shares have fallen 31%, the worst performance among the nation's five publicly traded lenders. Frank Newman, SDB chairman and CEO, said Williams' departure would have little impact on operations and that no acting president would be appointed while a replacement was found. Williams and Newman are among a small number of non-Chinese nationals that have served in top management positions at listed Chinese companies.
CCB plans major restructuring
China Construction Bank announced it would restructure its bloated middle management and find internationally experienced executives for three newly created executive positions. The new positions were chief risk officer, chief financial officer and chief information officer. Chairman Guo Shuqing said the plan called for cutting "one or two layers", which would mean 30,000 middle-level executives being "reassigned." CCB raised about US$9 billion on the Hong Kong stock market in October last year in one of the world's largest IPOs.
RMB breaks 8.05 barrier
The yuan rose to its highest level against the US dollar since revaluation as the central parity rate for the dollar reached RMB8.0472 on February 13, the first time it has fallen below RMB8.05 (see graph, page 58). China's currency has gained an accumulated 2.77% against the dollar since it was de-pegged and partially floated against a basket of currencies on July 21 last year.
Consumption on the rise
Retail sales reached US$830 billion in 2005, up 12% from 2004, and potentially pushing China's inflation rate past 2% for the first time since April 2005. The Ministry of Commerce predicted sales to grow a further 12.5% in the first half of 2006. Meanwhile, some downward pressure was also expected on retail prices, with a survey showing that the supply of 72% of retail consumer goods would exceed demand in 2006, while the remaining 28% would face balanced supply and demand.
Shanghai to trial forex sales
The central bank announced plans to remove restrictions and allow the sale of small amounts of foreign currency on a trial basis in Shanghai's Pudong New Area this year. The trial was announced as part of the People's Bank of China work plan for 2006, but details such as maximum conversion limits were not disclosed. China imposes strict regulations on buying foreign currencies, which has led to a thriving black market, but a gradual relaxation of controls was introduced last year.
Interest rate gap key to stability
China's interest-rate gap with the US helps keep the yuan stable and provides favorable conditions for adjustments to the exchange rate and economic policies, Assistant Governor of the People's Bank of China Yi Gang told a seminar in Beijing. He said the difference in key interest rates between the two countries was more than 300 basis points and growing. He was referring to the 1.8% yield on China's one-year treasury bill and the 5% rate on the US dollar one-year bill on London's interbank market. A basis point is 0.01 percentage point.
Guangdong sees FDI slowdown
Rising labor costs and competition from other regions dampened foreign-funded enterprise investment in Guangdong province last year. Registrations of foreign-funded enterprises amounted to US$21.1 billion in investment in 2005, 3.3% down on 2004. The fall reversed a recent trend which saw investment peak at a record high of US$21.8 billion in 2004, up 24.5% from the US$17.5 billion invested in 2003. Manufacturing – the largest sector – was down 17.5% on 2004 but services saw a 35.5% increase.
Old tensions resurface
Storm clouds gathered over China's trading landscape during February as quiet mumblings about possible protectionist action from the US and Europe developed into substantive threats.
It began with hearings held by the European Commission on whether to impose anti-dumping duties on leather shoes and protective footwear produced by China. A decision isn't due till April but the case proved prominent enough to draw attention to anti-dumping as an increasingly popular weapon in Europe's battle against China's cheap exports.
However, this simmering debate was pushed to the sidelines by the official announcement of America's 2005 trade deficit: a record figure of US$725 billion of which China was responsible for US$202 billion, up from US$164 billion in 2004.
Earlier in the month, US Deputy Trade Representative Karan Bhatia had called on China to become a responsible stakeholder in global trading circles, pointing to Beijing's "decidedly mixed" record of compliance.
The release of the trade figures saw these sentiments repeated by US manufacturers in profoundly less diplomatic language. There were renewed calls for the imposition of tariffs on Chinese imports in order to prevent the use of "predatory trade practices to destroy US jobs and factories."
The official response came in the US 2006 Economic Report, signed by President George W. Bush, which pinned a portion of the responsibility for the soaring trade deficit on China's still inflexible currency. The report even went as far as to accuse Beijing of "foreign exchange market intervention to limit currency appreciation."
China responded with claims that the US was making political capital out of the issue, emphasizing that market forces were driving the yuan and developments would continue at a sensible pace. But Washington was not to be deterred as Trade Representative Rob Portman followed up the Economic Report with promises of tougher action against Beijing.
As part of the first comprehensive review of Sino-US trade in five years, Portman announced plans to establish a task force to examine possible WTO cases against China, arguing that the country must be held to a higher standard than it had in the past.
"Our bilateral trade relationship with China today lacks equity, durability and balance in the opportunities it provides," he said.
Chinese and US trade officials are due to meet for talks on April 11.
January exports up 28%
Chinese exports surged 28% year-on-year to US$64.99 billion in January. Ministry of Commerce figures showed imports jumped 25% to US$55.5 billion during the same period, while the trade surplus narrowed to US$9.49 billion, down from US$11 billion in December. The National Bureau of Statistics said China's trade surplus will continue to narrow this year from last year's record US$101.88 billion, due to the lag effect of the yuan's rise.
Port volume up despite fee rise
Statistics showed record throughput at China's ports despite rising cargo-handling charges. The Shanghai International Port Group raised charges at its Waigaoqiao facility 10% following a similar increase last year. However, cargo volumes still grew 24% last year to 18.08 million teu (20-foot equivalent units), solidifying its position as the world's No 3 container port. Shenzhen Port, the Mainland's No 2 facility, handled 16.19 million teu last year, up 18.6%.
Pakistan trade hits US$4.26bn
Bilateral trade with Pakistan reached US$4.26 billion in 2005 from US$3.06 billion the year before, according to China Customs figures. Pakistani exports to China increased 39.2% to US$832 million, up from US$594 million the previous year. Figures have been rising since China and Pakistan signed the Early Harvest Program accords and trade volume is expected to grow to US$8 billion in 2007.
US activity expanding: survey
A survey by the American Chamber of Commerce in China found that members were introducing new products and services for Chinese customers and taking advantage of legal overhauls to expand and improve their operations. The annual survey also found US companies were battling other foreign enterprises as much as they were Chinese competitors for market share. Chamber President Charlie Martin said part of the problem for American exporters to China was their lack of experience and inefficient local distribution networks.
Plans to boost copyright protection
Further action will be taken to improve legislation and international cooperation over copyrights, the deputy head of China's copy-right watchdog said. A four-month internet copyright crackdown launched last September resulted in the closure of 76 websites. Of 172 cases involving material sold or shared illegally over the internet, 28 were deemed serious. It is hoped the improvement will pave the way for China to sign the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty to help fight digital piracy.
Oil drives Africa ties
Trade between China and African nations jumped 39% to US$32.1 billion in the first 10 months of last year, official Chinese customs figures revealed. The increase was attributed to China's oil imports, mostly from Sudan. However, the figures showed that Africa was also buying Chinese goods. Yu Yingfu, an official from the Chinese Ministry of Commerce, said China-Africa trade had increased since the start of a new era of cooperation that began with the 2000 China-Africa Forum.
"Problematic" plastic bag probe
The European Commission responded to China's description of an EU anti-dumping probe into plastic bag imports as "seriously problematic" by saying the number of companies lodging complaints was big enough to merit the probe. An official with China's Ministry of Commerce had said the EU producers who requested the probe were not sufficiently representative of the European sector to justify the investigation.
China secures auto trade surplus
Auto exports exceeded imports for the first time as China moved past Japan to become the world's second-largest auto market in 2005. Ministry of Commerce figures show auto exports jumped 120.5% to 172,639 in 2005 while imports rose just 8% to 161,608 in the same period. Meanwhile, domestic sales of China-made vehicles rose 14% to 5.8 million units, according to China Association of Automobile Manufacturers figures and sales are expected to grow 10-15% this year. However, because of the higher value of imports, a significant but narrowing trade deficit on autos continues.
Hybrid cars on market 2006
Environmentally friendly hybrid cars are expected to hit the Chinese market at the end of 2006 after four years of development. The cars, which run on a mixture of electricity and fuel, are made by several Chinese car makers, including the Dongfeng Motor Corporation (DFM), Changan Motor Corp, Chery Auto Company and the China FAW Group Corporation. Wan Gang, head of the hybrid automobile program, said scaled production of the vehicles has been listed as one of the key tasks in China's 2006-to-2010 Five-Year Plan.
Autos ignite new lead hunt
China's car demand has fueled plans to dig one of the world's first new lead mines in decades. Analysts said current demand for lead comes almost solely from carmakers, which equip vehicles with lead-acid batteries, while diesel-driven cars and an increase in electronics in new vehicles also increased demand. Ian Gould, managing director of Abra Mining, said his firm was searching 10 square kilometers of lead-bearing ore veins in a remote area of Western Australia after raising US$6.6 million in an IPO.
Russian tie-up for EU sales
Chery Automobile has signed a deal with Russia's Avtotor to assemble cars for sale in Europe and is considering a US$200 million investment in a new plant, the South China Morning Post reported, citing industry sources. Avtotor, on the border of Lithuania and Poland, is expected to assemble Chery models in its existing factories. It has the capacity to make 70,000 vehicles a year, having made 16,500 cars, including Kias, BMWs, Chevrolets and Hummers last year. The region enjoys tax benefits like those in China's special economic zones.
Fujian focuses on bus production
An auto industry project in Fujian province is to turn the port city of Xiamen into the world's biggest passenger bus producer. The first phase of the Xiamen Auto Industry Town project, worth US$24.8 million, is expected to be completed in March. It will provide production capacity for 6,000 large and midsize passenger buses. The second phase of the project is to be finished in 2010.
Dual listings debate
Expectation grew of imminent multibillion dollar listings by Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC) although it remained unclear whether shares would be made available in Shanghai as well as Hong Kong.
ICBC confirmed it had begun preparations for an initial public offering as early as possible this year, but did not specify a location. The bank, the country's largest lender by assets, is tipped to opt for a Hong Kong-only offering that could raise as much as US$10 billion. With the sale of 10% stake to a Goldman Sachs-led consortium for US$3.78 billion sealed at the end of January, ICBC was expected to invite investment banks to bid for book-running rights mid-February.
There were also signs that the bank is putting itself in order ahead of opening up to investors. ICBC announced a 21% rise in operating profits to US$11.2 billion in 2005 as its non-performing loan ratio fell from 4.6% to 4.43%. Revenue from fee-based services such as wealth management, credit cards and investment banking rose 20% to US$1.7 billion in 2005.
However, things didn't look so rosy for BOC amid reports that it was going to delay its projected US$8 billion IPO until the second half of the year. It was thought the bank, China's second largest by assets, had managed to evade government pressure to embark on a dual listing by agreeing to offer shares in Shanghai at some point in the future. But it was reported that a last-minute intervention had forced the bank to reconsider its strategy.
The situation ultimately hinges on when the China Securities and Regulatory Commission decides to resume share listings on domestic bourses. With the state-held share conversion program progressing well and the sluggish domestic markets in need of a boost, the government would welcome a high profile Hong Kong IPO from BOC followed by a swift listing in Shanghai to kick start the process.
It is hoped this would encourage the likes of Shenhua Energy and PetroChina – currently unrepresented in Shanghai or Shenzhen – to follow suit. Shanghai Stock Exchange Executive Vice President Zhou Qinye said such as a move could propel China's markets from seventh place up to third place in Asia by the end of next year.
CSRC to ease listing rules
The China Securities Regulatory Commission issued draft rules encouraging overseas-traded Chinese companies to list domestically, making it easier for big state companies to go public. Proposals included the removal of limits on the amount that can be raised in IPOs, currently set at twice net assets, and on transactions with affiliates, which are capped at 30% of annual sales. It also suggested permitting the sale of China Depositary Receipts by Hong Kong-incorporated companies with Mainland headquarters and operations.
Further A-share freedoms
The rules controlling foreign strategic investment into Chinese listed companies were loosened in a bid to boost the country's struggling capital markets. Under the new regulations, foreign investors can buy tradable shares from companies that have completed the conversion process of non-tradable shares into regular A-shares. This is in addition to the separate Qualified Foreign Institutional Investor program.
State firms to pay dividends
Beijing intends to force large state-owned enterprises to pay dividends to the state, the South China Morning Post reported. The plan emerged after the 169 SOEs under the State-owned Assets Supervision and Administration Commission posted a US$74.5 billion net profit in 2005. A SASAC spokesman said the Ministry of Finance had completed a plan for state-owned profit allocation and SASAC was in the process of preparing a similar plan for the companies under its control.
New bourse for startups
The State Council announced plans to create a Growth Enterprise Market in order to give small and medium-sized high-tech firms, including startups, access to capital. State media reports added that the IPO preparation period for these firms would be shortened and numerous other administrative procedures slimmed down. It is expected that Shenzhen's Small and Medium Enterprise Board could be converted into a GEM and the listing criteria lowered.
Security firms suffer losses
Securities companies lost more than US$120 million last year thanks to poor stock market performances, falling turnover and the suspension of Mainland listings. According to unaudited results from 43 brokerages, 22 made a loss – double the figure from a year earlier – while combined income fell to US$1.28 billion from US$1.4 billion. The total turnover on shares, funds and warrants from the Shanghai and Shenzhen markets was US$424 billion, a 20% fall on 2004. There were only 15 IPOs in 2005, compared to 98 the previous year.
Hong Kong hot for listings
Mainland companies raised more than US$18.9 billion on the Hong Kong stock exchange last year, up 141% on 2004, the China Securities and Regulatory Commission announced. The increase in money raised from both new and secondary shares was partly due to Beijing suspending offerings in Shanghai or Shenzhen in May while it converted non-tradable state-owned shares into tradable ones. Between January and May, Mainland markets had raised US$4.3 billion on the yuan-denominated A-share market, down from US$10.4 billion in 2004.
CMB to list in HK
China Merchants Bank, the nation's sixth-largest commercial bank by assets, was said to be planning a US$1.29 billion June IPO in Hong Kong. This would make CMB the first Chinese bank to list shares both domestically and overseas. Sources said Merrill Lynch & Co will underwrite the offering. The bank, which is already listed on the Shanghai Stock Exchange, has completed its domestic share-overhaul plan, making all of its shares tradable.
China's oil refining industry last month announced record losses of US$3.7 billion loss in 2005, renewing pressure on the government for energy price reform.
The loss, which follows a US$2.6 billion profit in 2004, came despite revenues for China's oil-refiners increasing 35% in 2005 to US$124.2 billion, National Reform and Development Commission figures show.
The poor performance has been blamed on a combination of global crude oil prices soaring to around US$70 a barrel last year, and state controls forcing companies to sell gasoline and diesel below market rates. Oil product prices are tightly controlled to protect vulnerable sectors like agriculture and the military from rising energy prices.
The NRDC warned that a continuation of the status quo could lead to supply problems in 2006 as refiners balked at boosting output in the face of slim or negative profit margins. It forecast that gas and diesel consumption would increase between 5.4% and 7% this year, bringing the country's total crude oil consumption to 315 million tons, while refining capacity was expected to increase just 4.5% to 328 million tons.
In the wake of persistent lobbying by producers and gasoline shortages in some regions, Beijing has said it is considering dropping the pricing regime and hiking oil product prices so they track the international oil market more closely, but it has not announced a timetable for reform.
Guangdong Academy of Social Sciences economist Cheng Jianshan told the South China Morning Post the government had to realize that while price controls would cushion the economy from the impact of rising energy costs, cheap energy was no more and early action to even out price fluctuations was needed. However, he recognized the need for gradual reform, saying the economy would suffer if the gap between international and local oil prices exceeded 50% and the government suddenly opened up the fuel market.
Cheng predicted the government will take steps towards price reform, but would avoid an economic downtown in the short-term by using subsidies to minimize price fluctuation impacts on refiners, much as it compensated Sinopec for its losses with a US$1.24 billion hand-out at the end of 2005.
Mixed view on oil ties: US
A US Department of Energy report warned that Chinese efforts to reach out to oil-rich "despotic regimes" posed potential strategic problems to the US, but that such acquisitions were "economically neutral." The report claimed Beijing's relations with energy-rich states such as Sudan, Uzbekistan, and Burma ran counter to key US strategic goals and posed "a series of potential problems for the United States." However, while China's equity oil investments removed assets from the global market, they merely displaced what the Chinese would have otherwise bought on the open market, the report said.
Energy data scrutinized
China's announcement that apparent oil demand fell 0.3% in 2005, to about 6.4 million barrels a day, surprised energy markets and brought China's energy data under scrutiny, the Wall Street Journal reported. With 2005 economic growth around 10%, some analysts expressed skepticism over the latest figures. "I don't know where they're coming up with these figures. We have to look at them more deeply," said Jeff Brown, the International Energy Agency's oil-demand analyst. Flat demand in 2005 comes after China's demand grew 15% in 2004, straining global capacity and driving up prices. The IEA says that China's oil-demand growth should rebound to about 6% this year.
CAO to stage comeback
Shares of China Aviation Oil (Singapore), suspended since November 2004 after the company's US$550 million loss, will resume trading at the end of March, Bloomberg reported, citing Gu Yanfei, head of a task force to restructure the company. As part of the restructuring, China Aviation Oil's stock will be reduced to one share for every five held before the issuance of new shares to investors. The company's derivatives-related loss was Singapore's biggest in nearly a decade, but it avoided bankruptcy when creditors agreed to write down some of its debt in June.
Dam ahead of schedule
The Three Gorges Dam, the world's largest hydroelectric power project, will be completed in May this year, nine months ahead of schedule, state media reported. The project, which was launched in 1993 in the middle of China's longest river, the Yangtze, is set to cost US$22 billion and require 16 million cubic meters of concrete. It will officially be completed when the concrete level in the main dam reaches 185 meters above sea level.
Boost for alternative energy
China aims to cut its oil and coal dependency and increase its use of alternative-energy sources over the next five years. The measures were unveiled as part of the 2006-2010 Five-Year Plan, which is expected to be approved in March. The "alternative oil strategy" calls for a doubling in the use of renewable energy sources – such as wind, hydro and solar power – to 15% of the country's energy needs by 2020. The number of nuclear-power plants will rise from nine to 30 in the same period, and there will be vast investments in new technologies to turn coal into synthetic oil. Alternative energy use may well be boosted by an increase in the nation's tightly controlled gasoline prices.
Producer gets pipeline approval
PetroChina, the nation's biggest oil producer, obtained government approval to build two pipelines to pump refined oil to Central China from northeastern and northwestern areas, state media reported. The two pipelines will start at Lanzhou, in Northwest China's Gansu province, and Jinzhou, in Northeast China's Liaoning province, and converge in Zhengzhou, in the central province of Henan. A further extension will reach Changsha, the capital city of Hunan province, south of Henan. The pipelines are scheduled for operation in 2007 or 2008 and will cost about US$1.5 billion.
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