Highlights from the last week of China business news.

Is Ballmer giving Ma an ulcer?
Alibaba’s chief Jack Ma must be following the Microsoft/Yahoo takeover saga with a bottle of Pepto-Bismol in hand. Shares in Hong Kong-listed internet firm Alibaba.com fell 6% on Monday to HK$15.25 following news that Microsoft had bailed on a takeover bid for Yahoo. Yahoo owns 39% of Alibaba Group, Alibaba.com’s parent company. While some speculated that the decline in share price was caused by the abandoned takeover bid, analysts suggested the drop was due to profit-taking just ahead of the firm’s quarterly earnings report. As it turned out, Alibaba.com’s first quarter net profit more than doubled year-on-year to US$43 million from US$20 million. Revenues from the firm’s China Marketplace platform increased by 81% year-on-year to US$31 million. The stock closed at HK$15.40 on Tuesday, erasing Monday’s decline. Microsoft, meanwhile, is doubling down in China, at least from an R&D perspective. The firm broke ground on a US$280 million R&D center in Beijing and intends to double its full-time R&D staff in China to 3,000 over the next few years.

Almost quiet on the eastern front
Relations with a certain eastern neighbor of China’s appeared to enter a new stage of symbolic good cheer with Hu Jintao’s visit there, the first by a Chinese president in over a decade. Hu intended to honor the time-honored Chinese-official-visit tradition of playing ping pong and talking about pandas. Along the way, there were discussions about a certain disputed area in the East China Sea that may or may not have gas reserves. While these major disputes have yet to be ironed out, China and Japan have pledged to hold annual meetings and put past suspicions behind them. The western front, however, might need some more tending to. Having achieved no concrete progress on easing tensions following the riots in Tibet at their first meeting in Shenzhen, Chinese and Dalai Lama representatives agreed to meet again at an undetermined time. Just south of the autonomous region, India’s defense ministry announced that it had successfully tested a nuclear-capable missile that had the ability to hit Shanghai and other major Chinese cities.

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Highlights from the last week of China business news.

Eat your heart out, Adam Smith
What was that famous metaphor about the markets, something about an invisible hand? Beijing has a thing or two to say about that. Today the CSRC slashed China’s stamp duty, bringing it down to 0.1% - the same rate it was at last year before it was hiked. If you recall, when they raised the stamp duty last year, it was because the market was too high; the regulator’s move caused a dip. Now, the market is too low - the Shanghai Composite Index on Tuesday was down 50% from its October high - so the regulator reached in and lowered the duty. It works. The SCI jumped nearly 10% in early trading and was around the 3,500 mark at mid-day, AP reported. Early in the week, the regulator also implemented another rule, limiting block trades to prevent a possible flood of shares into an already low market.

China Mobile keeps raking it in
Another nice reporting season for China Mobile, which posted first-quarter profits that were 37% higher than the same period last year. By contrast, China Telecom posted a 0.5% rise in net profits, due to a shrinking fixed-line subscriber base (all those customers are getting mobile phone accounts) although its earnings were shored up by its broadband internet business, which has a growing user base. Look a little closer at China Mobile’s numbers, however, and there is one negative indicator. The cute-sounding ARPU (average revenue per user) number fell by about US$0.40. It’s a key metric for carriers, and it could indicate that China Mobile isn’t working hard enough to get cash out of its users. Oh, one more thing - that long-rumored telecom restructuring (see the current issue of CER) has been lent credence by a CDMA joint venture that could happen between Korea’s SK Telecom and China Telecom. The latter is supposed to run a CDMA network after the restructuring.

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Highlights from the last week of China business news.

Numbers, numbers, numbers
The numbers are in, and China’s economic growth in the first quarter moderated to 10.6%, from 11.7% in the first quarter of last year. But inflation was on the rise, with the consumer price index climbing 8% year-on-year due in part to soaring food prices, which rose by 21% in the first quarter. Price growth did ease some to 8.3% in March from 8.7% in February, but Deutsche Bank economist Jun Ma doesn’t think China’s in the clear. He attributed the March dip to recovering vegetable production, more meat supplies and improved transportation following February’s winter storms. And just in case you thought this economy was weakening, a World Bank report said that China has finally overtaken Japan! Well… sort of. China was named the world’s second-largest economy as measured by purchasing power, although China is still behind the US, Japan and Germany in terms of GDP. While the US economy remains the top dog no matter how you measure it, China did beat back Germany to secure the number two spot in terms of purchasing power.

In appreciation of currency appreciation
The yuan continued its rise by climbing to its highest level against the dollar in more than a decade. It ended trading in Shanghai last Thursday at 6.9916 to the dollar, compared to 7.0017 the previous trading session, for an 18% rise against the greenback in the last three years and 4.5% this year alone. The yuan’s climb hasn’t been lost on speculators who’ve flooded China with hot money to the tune of US$80 billion in the first quarter, according to the deputy chief of the State Information Center’s economic forecasting department. This compares to US$120 billion in all of 2007. He encouraged China to maintain its tough stance on monetary policy, and the People’s Bank of China seems on board. PBOC governor Zhou Xiaochuan pledged to keep a tight rein on monetary policy and resisted calls to allow the currency to appreciate faster. The PBOC however did raise the reserve ratio requirement for commercial banks by 50 basis points to 16%.

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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.

A-share IPOs: No longer shooting for the stars
While 2008 may be a good year for sports, it’s apparently a bad year to go public in China. The total value of initial public offerings in China shrank to US$7.85 billion in the first quarter, down from US$9.06 billion in the same period last year. The quarter’s largest offering, in which China Coal Energy raised US3.65 billion, was also the quarter’s worst performing IPO. Sliding stock prices were partly blamed for dampening investor enthusiasm. But who can fault skittish investors in times like these? The Shanghai Composite Index fell by just over 4% on Tuesday to a one-year low, while the Shenzhen Composite Index closed down 7.3% amidst fears that the government would tighten monetary policy to rein in inflation. While the markets in Shanghai staged a small comeback the next day on the back of a Wall Street rally, the Shenzhen Composite Index fell another 4.4%.

Pundits cut back on their China growth forecasts
The World Bank scaled back its forecast for China’s economic growth this year to 9.4% from 9.6% (not to mention the 10.8% they’d predicted earlier). Shortly afterwards, the Asian Development Bank said it expected the economy to grow by 10% this year, though it also outlined a worst-case scenario that might see growth decline to 7%. Both banks cited rising prices as cause for concern. But have no fear. Wen Jiabao said that while rising prices for rice are having an effect on food prices here, China’s supply of rice remains “abundant.” The NDRC had previously announced it would increase payments to farmers for rice and wheat in order to boost supplies and fight inflation. And it’s not just farmers who’ll find a little extra cash in their pockets. The National Bureau of Statistics found the average salary of employees in China’s urban areas rose by 18.7% in 2007 to US$3,561.

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Highlights from the last week of China business news.

CITIC: moving on
CITIC Securities narrowly avoided a potentially disastrous relationship with (the new JPMorgan unit) Bear Stearns in what would have been a US$1 billion share swap. As Bear Stearns was forced to accept a US government bailout in the wake of the sub-prime mortgage meltdown, CITIC Group’s chairman Kong Dan was coy about the fate of the future tie-up, saying that it was not guaranteed, and that CITIC had yet to complete due diligence on Bear. JPMorgan Chase took over the beleagured Bear for a song, and CITIC, like a bridegroom discovering his bride’s criminal record, announced that it would abandon Bear. But CITIC is moving on. CITIC Securities said it still wants to invest in foreign banks, most likely through its Hong Kong unit. Meanwhile, CITIC Pacific set aside US$2.6 billion for capital spending this year, much of which will be spent on an iron ore project in Western Australia.

Not your average Zhou
Rumors of central bank governor Zhou Xiaochuan’s professional demise have been greatly exaggerated. Many believed that Zhou would be replaced during this year’s National People’s Congress (NPC). But China’s desire for stability and a seasoned hand at the helm won out and Zhou was reappointed to his post. He didn’t waste any time getting to business, either. During the NPC he announced that he saw “no need” to use the appreciation of the yuan to fight inflation, while hinting that further interest rate increases might be one of the weapons the PBOC uses fend off rising prices. Shortly after the NPC concluded, the PBOC announced that China would stop checking the sources of foreign exchange for Chinese outbound investments, a move likely to encourage capital outflows and curb excess liquidity. It also raised the reserve requirement ratio 50 basis points to a record 15.5%. The central bank added that it would consider ways to open its domestic financial markets to foreign investments, though no details were provided.

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Highlights from the last week of China business news.

IPO safe havens
The A-share market isn’t doing so well these days, and regulators have their hands full. It wasn’t so long ago that the CSRC was encouraging mega-IPOs to soak up liquidity in the soaring A-share markets. Now, they’re saying the opposite, telling Ping An, for example, to cut back its planned share and bond offering. Investors are piling into IPOs and ditching buying on the secondary market, as China Railway Construction Group’s US$3.1 billion Shanghai listing proved - the retail tranche was 155 times oversubscribed. The chronically underpowered SEPA actually aided the CSRC by delaying 10 domestic listings last year due to non-compliance with environmental rules. Two of the companies seeking listings have yet to be approved for IPOs.

Pitching in
Everyone needs China’s help these days. US Secretary of State Condoleezza Rice came to Beijing to ask President Hu Jintao to exert more pressure on recalcitrant neighbor North Korea to get rid of its nuclear program. There’s also Sudan, China’s troublesome trading partner. The Chinese special envoy has been dispatched to the country to find a solution to its ongoing civil strife (some say genocide). If you remember, he got on the plane just days after Steven Spielberg (who did Schindler’s List - and ET) quit his advisory role with BOCOG to escape being tarred by the genocide brush. As the Sudan-Olympics-genocide pressure builds, China will be looking for ways to relieve the pain. One of those remedies is to resume bilateral human rights talks with the US: during Rice’s visit, China said it was interested in doing just that. We speculate that this announcement probably didn’t rank among the personal highlights of the meeting for President Hu.

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Highlights from the last week of China business news.

What does BOCOG pay its PR guys?
Call the spin doctors. It’s been a rough week for BOCOG, starting with Steven Spielberg’s decision to quit his job as an unpaid artistic consultant for the Olympics. “My conscience will not allow me to continue with business as usual,” he said, damningly, to the Wall Street Journal. The Chinese foreign ministry and BOCOG predictably countered with a statement saying that his move was against the “Olympic spirit.” The ministry then announced that a special envoy would be sent to Darfur - good timing to quell the bad PR. Yesterday the SCMP (subscription required) reported that 15,000 Beijingers have been moved to make way for Olympics venues - that’s the official figure, anyway. Last year, an NGO in Geneva estimated that 1.5 million Beijing residents would be evicted to make way for the games.

Dicey dealings
All kinds of M&A activity this week. Singapore Airlines confirmed it wouldn’t bid again for a stake in China Eastern, following a foiled attempt in January. CITIC and Bear Stearns are renegotiating their share-swap deal, with both sides deciding to increase their stakes in one another. Under the new terms, CITIC would become Bear’s largest single shareholder, with 9.9% of the US investment bank, while Bear would hold 7.5% in CITIC. The increased stakes were needed because both banks’ stock prices had fallen since the original deal was struck. The share-swap is pending regulatory approval. They will hope that this doesn’t end up like another high-profile deal, in which Huawei and Bain have abandoned their attempt to buy 3Com for US$2.2 billion after failing to overcome opposition from a US government vetting body. The body, the Committee on Foreign Investment in the US, had national security concerns about the acquisition.

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Highlights from the last week of China business news.

Icy chaos
A devastating winter is taking its toll on China. The civil affairs ministry has estimated exactly how much damage, in financial terms: US$4.5 billion. Dozens of people have lost their lives in the treacherous weather weather, the worst in 50 years. Electricity grids, roads and railways are overstretched as unusually heavy snow and rainfall batter the country. This has been compounded by the impending Lunar New Year holiday, which will see millions of workers returning to their home provinces by road and rail. The weather has left hundreds of thousands stranded: In Guangdong, 200,000 people claimed ticket refunds at the Guangzhou railway station, while another 200,000 continued to try their luck waiting. The country’s top leaders appear to be in full swing. Premier Wen Jiabao popped up at the Changsha railway station - and, just 24 hours later, at Guangzhou station - to show his support for stranded travelers. The People’s Liberation Army has reportedly mobilized half a million troops to clear roads of snow. China’s top meteorologist has said that snow and rainfall will ease on February 2, although it will still take weeks to get transport and electricity systems back to normal capacity.

Consume, consume!
It’s all about consumption. For deprived doughnut enthusiasts in China, Dunkin’ Donuts announced it will open more than 100 stores across the country in the next 10 years. For now, however, it’ll start with less than 10 stores in Shanghai. Just in case doughnuts weren’t sufficiently nutritious, McDonald’s said it will open 125 new restaurants in China this year. Half of those will feature drive-through windows - a sure way to tap into that lucrative middle-class market. These corporate announcements are bolstered by figures from the National Bureau of Statistics that show domestic consumption has overtaken foreign investment as a share of GDP in 2007. Bring on the doughnuts and burgers, we say.

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Highlights from the last week of China business news.

Insuring against rumors
Ping An’s moves abroad attracted attention this week. The Chinese press reported on a rumor that the insurance giant was planning to raise US$20 billion through a share and bond sale. A rumor that domestic insurers would be allowed to invest more abroad also floated around. The sector is liberalizing, as the State Council has now agreed to let insurers invest in local banks, and this gave credence to the rumors. The hearsay then began to firm up: Ping An wanted to buy into British insurer Prudential, which would explain why it needed to raise money from a stock and bond sale. This theory was supported by the SCMP, which said some Ping An shareholders in Hong Kong who had been surprised by the sudden proposal would vote down a share sale for funding M&A deals. Ping An apparently hasn’t told its shareholders exactly why it needs so much new capital. It might be prudent for it to do so.

Rough week for A-shares
A-share investors watched in horror as the Shanghai Composite Index dropped more than 5% at the start of the week. It was the biggest drop in more than six months, causing it to close below the 5,000 mark for the first time this year. The next day the index sank lower, almost touching 4,500; the Hang Seng Index followed suit. The fear was that Bank of China, as the largest subprime mortgage securities holder in Asia, would announce huge writedowns of those holdings. America’s deteriorating outlook didn’t help. But by Wednesday, the US Federal Reserve cut interest rates by 75 basis points, prompting a rally. The Hang Seng finished 11% higher, while the SCI was up 3.1%. Regional indexes in India, Singapore and Japan rose too. Nevertheless, the fear hasn’t totally dissipated. A new task force has been created to monitor and require monthly reporting of subprime holdings at China’s biggest banks.

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