Highlights from the last week of China business news.

Wild ride for markets continues
Keep those seat belts fastened. Stocks in Shanghai and Shenzhen posted their fourth straight day of gains on Tuesday, led by brokerages such as Haitong Securities and Guoyuan Securities, and with a little help thrown in from rice companies who were boosted by gains in rice futures on the Chicago Board of Trade. But the very next day the benchmark Shanghai Stock Exchange fell 5.5%, with the Shanghai Composite Index posting its largest single-day drop in over two months to end at 3,413.907 points. Meanwhile consumers and entrepreneurs were at odds. The National Bureau of Statistics (NBS) said that its entrepreneur confidence index in the first quarter rose one point over the previous quarter to 140.6. Consumers, however, weren’t feeling as chipper. The NBS consumer confidence index dropped by 1.7 points in the first quarter to 94.8 points at the end of March, which represented a slight increase from an 18-month low of 94.3 recorded in February.

Car nuts, nutty pilots
Someone in China wants to sell you a car. Auto sales in China were up 21% in the first quarter from the same period last year to reach about 2.58 million. Both Ford and Volkswagen posted record sales in the period, and China’s booming auto market is doing its part to offset slowing sales in the US. But one company doesn’t have as much to cheer about. South Korea’s Hyundai, in response to slowing China sales in 2007, is revamping its Elantra line of sedans with an upscale model made exclusively for the China market. And for the time being, it might be better to drive than fly, given what’s been happening with China Eastern Airlines. The carrier suspended pilots for intentionally disrupting 21 flights late last month to express grievances over labor policies. Pilots either turned their flights around mid-way, or landed and took off again without allowing passengers to disembark. No one could confirm whether the 1,000 inconvenienced passengers were given an extra bag of peanuts for their troubles.

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Highlights from the last week of China business news.

Trying to keep a lid on prices
The government has been stepping up efforts to keep inflation under control lately. Premier Wen Jiabao announced a freeze on energy prices, meaning no increase in the price of oil products, natural gas and electricity. Then the NDRC said large food producers would have to get government approval if they wanted to raise prices. The central bank joined in by announcing its first reserve requirement ratio hike of 2008 - the 11th since the start of 2007 - bringing the rate to 15%. As Spring Festival (and its attendant price-gouging) approaches, the cabinet also toughened regulations on price manipulation, raising the maximum fine to US$137,000. And with inflation hitting an 11-year high in November, the last thing the government would want is even higher prices over the festive season.

End of the road for SIA-Temasek?
The saga continues. Singapore Airlines (SIA) said it wouldn’t raise its offer for a stake in China Eastern Airlines, days after the Shanghai-based carrier’s minority shareholders voted to reject a buy-in by SIA and Temasek. Air China and its parent, China National Aviation Holding Corp (CNAHC), looked set to pounce on the opportunity to expand their own stake in China Eastern (see our piece in last week’s mailer for a recap). But a glimmer of hope remained for the Singaporeans. China Eastern said it couldn’t consider any bid from CNAHC because of a technicality: a lockup clause embedded in the terms of the SIA deal that would run for the next eight months. Then that glimmer was extinguished when China Eastern said it would consider “any sincere bid” from CNAHC. Cathay Pacific Airways, which owns a bit of Air China and vice versa, said it will support Air China if it makes a bid for China Eastern. The momentum for a CNAHC deal is building.

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Highlights from the last week of China business news.

A deal fails to take off
Another deal gone bad for Temasek. Its plan to buy a chunk of China Eastern Airlines, in partnership with portfolio company Singapore Airlines, fell apart at the last minute this week. This was cunningly engineered by China National Aviation Holding Company, owner of rival firm Air China (and also a 12.07% owner of China Eastern). The deal-busters came in with an offer of HK$5 per share, which looked a lot better to China Eastern shareholders than the Singaporeans’ HK$3.80. So more than a third of the shareholders voted against the SIA-Temasek buy-in on January 8 at a meeting in Hongqiao, and the deal was off. The acquisition was already looking shaky after Air China partner Cathay Pacific nearly put in a bid in December, but SIA-Temasek looked to be on safe ground because they had the blessings of the State Council. In the end, savvy business skills put the kibosh on the bureaucrats’ plans. The Singaporean sovereign wealth fund and flagship airline, for all their capital and political connections, couldn’t figure a way past determined local opposition. Is a Singaporean counter-bid in the offing? Unlikely, but let’s hope it is - just to add another twist to this unusually entertaining acquisition saga.

All aboard
Five hours by train from Shanghai to Beijing? Sign us up. And, apparently, sign China Development Bank and a Ping An Insurance-led consortium up too - for more than US$3 billion. Construction began on the Shanghai-Beijing high-speed railway this week, and the project attracted plenty of investor attention too. Ping An is leading a group of insurance companies to sink more than US$2 billion for 14% of the company that runs the railway, becoming the firm’s second-largest shareholder, behind the Ministry of Railways. China Development Bank, the policy lender that’s often saddled with funding unattractive, state-mandated projects but is supposed to be becoming more commercially oriented, could get a juicy reward if it succeeds in putting in US$1.37 billion into the project. The 1,318-km railway will be complete in five years and will surely be a hit with travelers weary of flight delays. Speaking of high-speed trains, whatever happened to the mainland-Hong Kong through-train scheme that caused such a stir when it was announced? We’re still waiting for that one to - forgive us - get back on track.

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We have a Q&A with the Lord Mayor of London coming up in our next issue. Before he spoke to CER - which, incidentally, took place in his (official?) Jaguar en route to Hong Kong airport - he shared a few thoughts with a gathering of people at the Hong Kong Club.

As a man whose job it is to talk up the City of London and its stock exchange, the Lord Mayor was obviously willing to question the stringent US listing requirements brought in under the Sarbanes-Oxley act, which have put Chinese companies off New York IPOs (”People feel sorry for the Americans because of what they have got themselves into”).

But Heathrow, London’s - erm, flagship - airport also came in for a bit of a bashing. “Heathrow Airport is negative for London in the same way that pollution is negative for Hong Kong,” the Lord Mayor observed.

As a former London resident and a current Hong Kong one, would I be willing to swap the clean, efficient and generally pleasant environment that is Hong Kong International Airport (with Airport Express thrown in, of course) for the Bermuda Triangle of baggage reclaim that is Heathrow? Even if it did mean shipping the smog back to London? Perhaps it is testament to the troubles of Heathrow that I remain undecided on that one.

However, there is one airport experience I dread even more - queuing for a taxi at Hongqiao airport in Shanghai. Imagethief wrote about this problem last month and it stuck in my head because it is such an accurate account.

My most recent hour-long stint of queuing was spent behind a man who was trying to negotiate the barrier-flanked channel with a golf bag resting length-ways across his airport luggage trolley. I hate to think what would happen if they let him behind the wheel of a car.

Highlights from the last week of China business news: Cathay’s attempt to block SIA’s deal with China Eastern gets blocked by the big boys in Beijing; Foreign investment banks are finally allowed to buy stakes in local securities firms.

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Passengers’ fears about the impact of air travel on global warming have been blamed for drops in passenger numbers in Europe. China has an easier way to cut its jets’ emissions, by sorting out its skies. Better air traffic management should mean less carbon emissions.

Every minute of flight costs US$120 and emits 160 kg of CO2. Because China’s military controls most of the airspace civil airlines have to take circuitous routes that add up to half an hour onto some routes. The situation is most acute in the Pearl River Delta, and will get worse as Olympics-related traffic and chartered team jets start coming through southern China.

Running more efficient jets is urgent too, particularly as fuel prices stay stubbornly high – fuel accounted for 34% of Air China’s operating costs in 2006.

China’s airlines keep adding planes, so local airlines will have to get more efficient. Making
China’s fleet more fuel efficient should be easier. China’s average fleet age is 6.3 years, compared to a global fleet with a average of 12 years among other global fleets, so they’ll be more easily retrofitted.

But anyone who’s seen the bare-basics approach of some Chinese carriers on their newly acquired jets will wonder if they’ll want to spend more on fitting fuel-conserving equipment on their jet engines.

Ask not what your country can do for you … unless you’re a Chinese state-owned airline and it can secure you a plum route to New York before any of your American competitors can. Starting this December, China Eastern Airlines will have a four-times-a-week direct flight to New York’s John F. Kennedy International Airport, and is offering some mighty attractive fares for its first month of service - one travel agent sent us a promotion advertising a round-trip ticket at an unheard-of RMB2,888, or US$366 “between December 11th and January 10th”. (Just don’t bother trying to book a flight anytime near Christmas. Or New Year’s.)

The flights begin at about the same time an announcement is expected on which US airline will get the remaining flight between the US and China, which we wrote about last week. That route, still pending US Department of Transportation approval, would likely begin flying back in forth in March. China has not yet used up its allotment of flights to the US under its most recent bilateral agreement (under the agreement there is a certain number of flights allotted to airlines from each country), so expect more US routes for the big state-owned carriers in the future as traffic continues to ramp up.

China Eastern will be using its Airbus 340-600s on the route, which is about 14 hours either way. Compare that to the next-shortest/-cheapest Shanghai-New York flight I could find.

Before we all get too excited, just remember this is China Eastern we’re talking about here. Say what you will about American carriers, they will at least dare to explain to passengers the reasons for delays instead of say, making vague statements and breaking out the refreshment cart while the plane is still on the tarmac. China Eastern’s reputation for comfort and service is mixed at best.

Photo from scribeoflight’s Flickr page.

I spoke with some very excited gentlemen from Continental Airlines at a recent convention on business travel in Shanghai. The reason for the excitement: their proposed direct route from Shanghai to Newark, in consideration with three other bids from American carriers (Northwest wants a Shanghai-Detroit haul; United wants a “capital to capital” Beijing-Washington flight; American wants Shanghai-Dallas) is expected to be decided on next month. Though there will be a “rebuttal” period after the bid is announced, the winner could start service as soon as March.

The airlines aren’t waiting for a green light from the authorities in Beijing - that was already taken care of with a joint agreement between the US and Chinese governments. Right now the ball is in the US Department of Transportation’s court. This article highlights each carrier’s proposition. A running account of the story so far has been detailed on USA Today’s air travel blog.

Each airline seems to be badmouthing the others’ routes, in what one analyst calls “the best and most intense [route] competition I’ve ever seen”.

So which route makes the most sense (leaving aside the quality of the airlines, that is - I’d like to see Cathay Pacific get that flight as much as the next person, but that doesn’t look like it’s going to happen)? As a Shanghai resident I may be biased, but to me Shanghai to Newark would seem to be the elementary choice, for a couple of reasons.

First, it links the the business capitals of world’s largest economy and its fastest-growing challenger for the title. The “capital to capital” rationale seems more shamelessly symbolic and less sensical to me. I could be wrong, but does the traffic of US and Chinese government personnel back and forth from Beijing to Washington, DC really warrant an air route？ Detroit seems somewhat redundant when United already has daily service from Shanghai and Beijing to Chicago O’Hare. As for Dallas/Fort Worth, there is an argument about that hub’s connections to Latin America, but really, that route can wait. Let’s have a Shanghai-New York (effectively) connection first.
Second, it is just plain cool not having to fly over the Pacific or the Atlantic to get to the other side of the world. The Newark flight goes straight north, over Kamchatka in far eastern Russia (thank you for finally opening that airspace), over the North Pole and down through Hudson Bay in Canada, and shaves multiple hours off that flight. Counter-arguments/brighter ideas are welcome.