A second U.S. Senate committee is nearing a vote on a bill aimed at giving the U.S. Treasury Department new tools to pressure China to raise the value of its currency, congressional aides said on Tuesday.
The Senate Banking Committee will meet on Wednesday morning to consider the legislation drafted by Chairman Chris Dodd, a Connecticut Democrat, and Sen. Richard Shelby of Alabama, the top Republican on the panel.
The committee vote is scheduled the same day as U.S. Treasury Secretary Henry Paulson will be meeting top Chinese officials in Beijing on the currency issue. Last week, the Senate Finance Committee voted 20-1 to give the U.S. government new tools to pressure countries with "fundamentally misaligned currencies."
Those include U.S. anti-dumping duties if countries refuse to reform their currency policies after being formally cited by the United States in a new semiannual report replacing an old one requiring the Treasury Department to identify countries that are manipulating their currency for a trade advantage.
The Banking and Finance committees have sparred recently over which panel has jurisdiction for currency legislation.
The Dodd-Shelby bill, as described by the senators last month, would make it harder for the Treasury Department to avoid labeling China a currency manipulator, rather than abandon that designation as the Finance Committee bill does.
Countries with a material global current account surplus and a significant bilateral trade surplus with the United States would be classified as "currency manipulators, without regard to intent," they said.
The bill also would require a number of Treasury Department actions once currency manipulation is found. Those include developing a plan of action within 30 days that sets benchmarks and time frames for the foreign trading partner to reform its currency practices.
It mandates U.S. action through the International Monetary Fund to pressure countries to end currency manipulation, and authorizes the Treasury Department to file a World Trade Organization case if "goals and benchmarks are not met within nine months."
The legislation also would create a process for Congress to formally voice its disapproval if Treasury fails to cite a country for currency manipulation.
Other provisions would hold Treasury's feet to the fire in terms of pressuring China to open its financial services markets to more U.S. companies.
Tuesday, July 31, 2007
US health chief urges China to improve food and drug safety
US health chief Mike Leavitt urged China Tuesday to improve the safety of its food and drugs, amid a series of international health scandals involving Chinese exports.
"Our US regulatory agencies are concerned about what they see as an insufficient infrastructure across the board in China to assure the safety, quality and effectiveness of many products exported to the United States," Leavitt said.
He made the remarks as US health officials were in Beijing as part of a series of bilateral meetings aimed at hammering out two agreements on food and drug safety by the end of the year.
"We believe that with the technology, the scientific expertise, and the commitment each side has, we can work together to correct the outstanding issues," Leavitt said.
"I am hopeful that we can achieve two strong, action-oriented documents by December."
Seafood exports will top this week's meeting that ends August 4 after Washington announced this month it would slap broad controls on Beijing's seafood imports over unsafe chemical residues on farm-raised fish.
The image of China's exports has been severely tarnished in recent months by regular reports of shoddy or dangerous goods.
Reports in the United States of tainted pet foods, dangerous toys, drugs and cosmetics and other products from China have led to a spate of recalls and bans there.
This month a US congressional panel condemned US import inspections systems after finding that only one percent of all food imports are inspected.
The committee also found US authorities had known for years that seafood imports from Asia were arriving in packages treated with carbon monoxide gas to make them look fresher than they really are.
"Our US regulatory agencies are concerned about what they see as an insufficient infrastructure across the board in China to assure the safety, quality and effectiveness of many products exported to the United States," Leavitt said.
He made the remarks as US health officials were in Beijing as part of a series of bilateral meetings aimed at hammering out two agreements on food and drug safety by the end of the year.
"We believe that with the technology, the scientific expertise, and the commitment each side has, we can work together to correct the outstanding issues," Leavitt said.
"I am hopeful that we can achieve two strong, action-oriented documents by December."
Seafood exports will top this week's meeting that ends August 4 after Washington announced this month it would slap broad controls on Beijing's seafood imports over unsafe chemical residues on farm-raised fish.
The image of China's exports has been severely tarnished in recent months by regular reports of shoddy or dangerous goods.
Reports in the United States of tainted pet foods, dangerous toys, drugs and cosmetics and other products from China have led to a spate of recalls and bans there.
This month a US congressional panel condemned US import inspections systems after finding that only one percent of all food imports are inspected.
The committee also found US authorities had known for years that seafood imports from Asia were arriving in packages treated with carbon monoxide gas to make them look fresher than they really are.
U.S. team heads for China to discuss food safety
A U.S. delegation arrives in Beijing on Tuesday on a five-day fact-finding mission on food and drug safety amid a series of health scares about the "made in China" label.
The United States stepped up inspections of imports from China after a chemical additive in pet food caused the death of pets there this spring.
Since then, poisonous ingredients have been found in Chinese exports of toys, toothpaste and fish, while the deaths of patients in Panama was blamed on improperly labeled Chinese chemicals that were mixed into cough syrup.
"Our U.S. regulatory agencies are concerned about what they see as insufficient infrastructure across the board in China to assure the safety, quality and effectiveness of many products exported to the United States," the U.S. Department of Health and Human Services said in a statement.
Following the mission, China and the United States would begin discussions to develop bilateral agreements on food and feed safety and on drug and medical device safety, the statement said.
The two countries hope to have "strong, action-oriented documents" by December, it added.
Last week, EU Consumer Protection Commissioner Meglena Kuneva urged China to step up export quality. She said she had seen some improvement in how China handled EU warnings of faulty or substandard goods, but much more was needed to be done.
Earlier this month, the head of China's General Administration of Quality Supervision, Inspection and Quarantine said the visitors from the U.S. Food and Drug Administration would specifically discuss a dispute over China's seafood exports.
The FDA last month banned imports of Chinese farm-raised catfish, basa, shrimp, dace and eel unless their suppliers could prove they were free of certain veterinary substances, which pose no immediate health risk but could be a problem in the long run.
China in turn has tightened inspections of U.S. imports at its ports, and halted shipments of poultry, pigeons and meat as unsafe.
U.S. Treasury Secretary Henry Paulson is currently on a visit to China in which is due to press for faster appreciation of the yuan and other financial reforms.
The United States stepped up inspections of imports from China after a chemical additive in pet food caused the death of pets there this spring.
Since then, poisonous ingredients have been found in Chinese exports of toys, toothpaste and fish, while the deaths of patients in Panama was blamed on improperly labeled Chinese chemicals that were mixed into cough syrup.
"Our U.S. regulatory agencies are concerned about what they see as insufficient infrastructure across the board in China to assure the safety, quality and effectiveness of many products exported to the United States," the U.S. Department of Health and Human Services said in a statement.
Following the mission, China and the United States would begin discussions to develop bilateral agreements on food and feed safety and on drug and medical device safety, the statement said.
The two countries hope to have "strong, action-oriented documents" by December, it added.
Last week, EU Consumer Protection Commissioner Meglena Kuneva urged China to step up export quality. She said she had seen some improvement in how China handled EU warnings of faulty or substandard goods, but much more was needed to be done.
Earlier this month, the head of China's General Administration of Quality Supervision, Inspection and Quarantine said the visitors from the U.S. Food and Drug Administration would specifically discuss a dispute over China's seafood exports.
The FDA last month banned imports of Chinese farm-raised catfish, basa, shrimp, dace and eel unless their suppliers could prove they were free of certain veterinary substances, which pose no immediate health risk but could be a problem in the long run.
China in turn has tightened inspections of U.S. imports at its ports, and halted shipments of poultry, pigeons and meat as unsafe.
U.S. Treasury Secretary Henry Paulson is currently on a visit to China in which is due to press for faster appreciation of the yuan and other financial reforms.
US Treasury Secretary meets China leadership on currency, trade
US Treasury Secretary Henry Paulson renewed efforts in meetings with top leaders Tuesday to persuade China to allow faster currency appreciation and wean itself off exports by adjusting consumption.
The former Goldman Sachs chief executive met with Chinese Vice Premier Wu Yi and central bank governor Zhou Xiaochuan in the latest round of a bi-annual economic strategic dialogue between the two nations.
Paulson, who helped establish the talks in 2006 to ease trade tensions between the two economic powerhouses, is to meet President Hu Jintao on Wednesday.
His visit comes amid growing pressure to reduce the yawning US trade deficit with China and moves in the US Congress to punish Beijing for what some say are unfair trade policies.
The three-day visit began Monday in China's vast and poor northwestern province of Qinghai, where he inspected a range of environmental protection projects.
"I am sure your visit to Qinghai will deeply enrich the material you can present to Congress in future testimony," Wu told Paulson after a one-on-one meeting.
"In making this contrast, you can understand -- who could China threaten?"
The forum covers a range of economic and environmental issues but the issue at the forefront is the yuan, seen by US lawmakers as grossly undervalued to give China an unfair trade advantage.
US legislators say an undervalued yuan makes US-bound exports cheaper, thereby fuelling the trade deficit with China, which hit 232.5 billion dollars last year according to official figures.
China itself has acknowledged that its surplus, up 85.5 percent to an all-time high in June of 26.91 billion dollars, is too large and has enacted curbs, such as the abolishment of export tax rebates on July 1.
But last week, the Senate Finance Committee overwhelmingly approved a bill that requires the Treasury to identify nations with "fundamentally misaligned" currencies, potentially opening the door to economic sanctions against Beijing.
Paulson will again push the Asian giant to rebalance its export-reliant economy by boosting consumption as well as press China for a quicker pace of yuan appreciation.
"Having a currency that reflects economic reality, that is reflective of economic fundamentals, is in China's best interest," he told Xinhua news agency late Monday.
At the same time he played down expectations that China would take immediate action, saying dialogue was better than threats but it was "unrealistic" to expect the talks to erase trade tensions between Washington and Beijing.
"President Hu is going to do exactly what he believes is in the best interests of China," Paulson told reporters in Xining, capital of Qinghai.
China revalued its currency in July 2005 and Beijing has since repeatedly said it will allow the yuan to strengthen as part of overall reforms to a financial system it says would risk full collapse with a full flotation.
For China's main trade partners, the United States and the European Union, the 9.4 percent appreciation of the yuan since 2005 has come far too slowly, even though Paulson acknowledged the gains.
"The rate of appreciation has gone up considerably over the last year and the renminbi (yuan) has now appreciated well over nine percent," Paulson told reporters on the way to China.
Ministry of Commerce economist Mei Xinyu said both sides were acutely aware of the trade-gap and currency problems, but concrete results were unlikely now.
"These talks can't be taken as aiming to solve these problems but only as a way to talk about how to deal with these rather difficult people in the US Congress," Mei said.
Paulson and Wu discussed the agenda for the next full meeting scheduled for December, which comes after a key Communist party congress, where many of China's top leaders will be reshuffled for the next five-year period.
The two sides agreed that trade relations should be handled with a long term strategy in mind, Xinhua quoted China's foreign ministry as saying.
The former Goldman Sachs chief executive met with Chinese Vice Premier Wu Yi and central bank governor Zhou Xiaochuan in the latest round of a bi-annual economic strategic dialogue between the two nations.
Paulson, who helped establish the talks in 2006 to ease trade tensions between the two economic powerhouses, is to meet President Hu Jintao on Wednesday.
His visit comes amid growing pressure to reduce the yawning US trade deficit with China and moves in the US Congress to punish Beijing for what some say are unfair trade policies.
The three-day visit began Monday in China's vast and poor northwestern province of Qinghai, where he inspected a range of environmental protection projects.
"I am sure your visit to Qinghai will deeply enrich the material you can present to Congress in future testimony," Wu told Paulson after a one-on-one meeting.
"In making this contrast, you can understand -- who could China threaten?"
The forum covers a range of economic and environmental issues but the issue at the forefront is the yuan, seen by US lawmakers as grossly undervalued to give China an unfair trade advantage.
US legislators say an undervalued yuan makes US-bound exports cheaper, thereby fuelling the trade deficit with China, which hit 232.5 billion dollars last year according to official figures.
China itself has acknowledged that its surplus, up 85.5 percent to an all-time high in June of 26.91 billion dollars, is too large and has enacted curbs, such as the abolishment of export tax rebates on July 1.
But last week, the Senate Finance Committee overwhelmingly approved a bill that requires the Treasury to identify nations with "fundamentally misaligned" currencies, potentially opening the door to economic sanctions against Beijing.
Paulson will again push the Asian giant to rebalance its export-reliant economy by boosting consumption as well as press China for a quicker pace of yuan appreciation.
"Having a currency that reflects economic reality, that is reflective of economic fundamentals, is in China's best interest," he told Xinhua news agency late Monday.
At the same time he played down expectations that China would take immediate action, saying dialogue was better than threats but it was "unrealistic" to expect the talks to erase trade tensions between Washington and Beijing.
"President Hu is going to do exactly what he believes is in the best interests of China," Paulson told reporters in Xining, capital of Qinghai.
China revalued its currency in July 2005 and Beijing has since repeatedly said it will allow the yuan to strengthen as part of overall reforms to a financial system it says would risk full collapse with a full flotation.
For China's main trade partners, the United States and the European Union, the 9.4 percent appreciation of the yuan since 2005 has come far too slowly, even though Paulson acknowledged the gains.
"The rate of appreciation has gone up considerably over the last year and the renminbi (yuan) has now appreciated well over nine percent," Paulson told reporters on the way to China.
Ministry of Commerce economist Mei Xinyu said both sides were acutely aware of the trade-gap and currency problems, but concrete results were unlikely now.
"These talks can't be taken as aiming to solve these problems but only as a way to talk about how to deal with these rather difficult people in the US Congress," Mei said.
Paulson and Wu discussed the agenda for the next full meeting scheduled for December, which comes after a key Communist party congress, where many of China's top leaders will be reshuffled for the next five-year period.
The two sides agreed that trade relations should be handled with a long term strategy in mind, Xinhua quoted China's foreign ministry as saying.
Top Bush aides warn against China currency bills
U.S. Treasury Secretary Henry Paulson and other top Bush administration officials warned on Tuesday of risks to the U.S. and global economies if Congress passes legislation aimed at punishing China for its currency policy.
"At a time when U.S. exports are growing globally, such legislation also exposes the United States to the risk of 'mirror legislation' abroad and could trigger a global cycle of protectionist legislation," Paulson, U.S. Trade Representative Susan Schwab and Commerce Secretary Carlos Gutierrez said in a joint letter to senior senators.
Paulson, who is in China this week, and the other senior administration officials said they shared the lawmakers' concern "that China's currency is undervalued and that the pace of economic reform is too slow, to the detriment of American businesses and workers."
But a bill passed last week by the Senate Finance Committee and another scheduled for a vote on Wednesday in the Senate Banking Committee will not accomplish their goals of persuading China to "implement economic reforms and move more quickly to a market-determined exchange rate," the officials said.
Instead, those bills "would substantially weaken the position of the United States in our ongoing efforts to achieve essential economic reforms in China and around the world, while jeopardizing our rapidly growing exports that have benefited American workers and farmers," they said.
The best way to pressure China to revalue its currency is through intensive dialogue, "coupled with appropriate reliance on WTO litigation and WTO-consistent trade remedies under U.S. law," the officials said.
The Bush administration has employed all those tools and is beginning to get results, "although more is needed and at a faster pace," they said.
Certain provisions of both bills "appear to raise serious concerns under international trade remedies rules and could invite WTO-sanctioned retaliation against U.S. goods and services," they warned.
"At a time when U.S. exports are growing globally, such legislation also exposes the United States to the risk of 'mirror legislation' abroad and could trigger a global cycle of protectionist legislation," Paulson, U.S. Trade Representative Susan Schwab and Commerce Secretary Carlos Gutierrez said in a joint letter to senior senators.
Paulson, who is in China this week, and the other senior administration officials said they shared the lawmakers' concern "that China's currency is undervalued and that the pace of economic reform is too slow, to the detriment of American businesses and workers."
But a bill passed last week by the Senate Finance Committee and another scheduled for a vote on Wednesday in the Senate Banking Committee will not accomplish their goals of persuading China to "implement economic reforms and move more quickly to a market-determined exchange rate," the officials said.
Instead, those bills "would substantially weaken the position of the United States in our ongoing efforts to achieve essential economic reforms in China and around the world, while jeopardizing our rapidly growing exports that have benefited American workers and farmers," they said.
The best way to pressure China to revalue its currency is through intensive dialogue, "coupled with appropriate reliance on WTO litigation and WTO-consistent trade remedies under U.S. law," the officials said.
The Bush administration has employed all those tools and is beginning to get results, "although more is needed and at a faster pace," they said.
Certain provisions of both bills "appear to raise serious concerns under international trade remedies rules and could invite WTO-sanctioned retaliation against U.S. goods and services," they warned.
China's mobile maestro
China Mobile has 330 million subscribers, thousands of shareholders, and one Communist Party to please. That's not an easy job for CEO Wang Jianzhou, reports Fortune's Clay Chandler.
(Fortune Magazine) -- In New York City last year for a meeting with News Corp.'s Rupert Murdoch, Wang Jianzhou, CEO of China's largest mobile-phone company, came across an ad for Cingular Wireless that gave him pause. Touting low dropped-call rates and a vast web of base stations - "over 47,000 cell sites, more than any other wireless network" - the ad proclaimed Cingular, then the largest U.S. mobile operator, "the only true leader in wireless."
Wang wouldn't dream of making such a boast; he'd be too embarrassed. His company, China Mobile, has a network of more than 230,000 base stations and is spending furiously to put up more. When you run the biggest mobile-phone network in the world's most populous country, you operate on a different scale.
And what a scale it is. With 330 million subscribers as of June, China Mobile serves five times as many customers as AT&T (Charts, Fortune 500), the largest U.S. carrier since acquiring Cingular last year, and continues to sign five million new users a month. In China's largest cities, where mobile penetration rates match those in the U.S. and Europe, China Mobile offers a dizzying array of non-voice services including Internet search, ringtones, and music downloads. It has struck content deals with domestic and foreign providers, including News Corp. (Charts, Fortune 500) , MTV Networks, Yahoo (Charts, Fortune 500), and the National Basketball Association, and transmits 1.2 billion text messages every day.
In rural China, home to two-thirds of China's 1.3 billion people, the carrier has launched an aggressive expansion drive, joining with government agricultural bureaus to beam farmers in remote hamlets advice on improving harvests and where to get the best prices for their crops. China Mobile's wireless network now stretches from Hong Kong to the Himalayas, offering mobile coverage to 97% of China's citizens. Its signal comes in strong on the Beijing subway, inside Shanghai elevators, in Guangxi rice paddies - even atop Mount Everest.
So far, this breakneck growth hasn't come at the expense of profit. Far from it: In 2006 the company reported net income of $6.3 billion, up 24% from the previous year, on sales of $35.9 billion. As of early July its shares traded at $59 on the New York Stock Exchange, an eightfold increase since their October 1997 debut, lifting China Mobile's market capitalization to $234 billion. The result? China, a country where only two decades ago fixed-line phones were a privilege of the Communist elite, now claims the most valuable mobile-phone company in the world.
But running this behemoth is no cinch. Wang, an unassuming 58-year-old engineer who started his career three decades ago as a bureaucrat in the Ministry of Post and Telecommunications, may have one of the trickiest jobs of any Fortune Global 500 CEO. It's hard to imagine another chief who answers to as many masters. First and foremost, he must heed the wishes of the Chinese government, China Mobile's regulator and its controlling shareholder. Beijing wants China Mobile, which has a 73% market share, to become a global powerhouse, but without beating up too badly on China Unicom, China's other mobile carrier. Government planners have prodded China Mobile to take an active approach to foreign acquisitions, as it did this year when parent company China Mobile Communications, which Wang also heads, snapped up Paktel, Pakistan's fifth-largest wireless company, for $460 million. They've also ordered China Mobile to take the lead in developing a Chinese standard for third-generation mobile services rather than rely on existing technologies from the U.S., Japan, or Europe.
But investors, who own 25% of China Mobile's (Charts) shares, fret that Beijing's national policy goals threaten the bottom line. They worry that Wang will be encouraged to overpay for foreign acquisitions he doesn't need, forced to overspend on unproven homegrown 3G technologies less efficient than those already available, and discouraged from seizing opportunities in his home market for fear of becoming too dominant.
And then there are all those customers: on the one hand, hip, young urbanites demanding world-class mobile services, and on the other, farmers clamoring for lower prices. How to reconcile these divergent interests? Wang insists he isn't fazed. "I don't think it's so difficult to find the balance," he says at China Mobile's imposing headquarters in Beijing's new financial district. "As head of a state-owned enterprise, my duty is to maximize the value of state assets. As CEO of a listed company, my job is to enhance value for our shareholders."
Improbably, Wang has hatched a growth strategy that, for now at least, is keeping everyone happy. The secret to his balancing act can be found in places like Wuzhubi, a village of about 250 families nestled deep in the mountains of Yunnan province not far from the Tibet border. Until last year only a handful of Wuzhubi's residents owned a mobile phone. And little wonder: To pick up a signal, would-be callers had to hike to the top of a ridge several miles away. But all that changed in March, when China Mobile erected a transmission tower atop a nearby hill. Hundreds of residents purchased handsets. Dozens invested in wireless terminals on which they can make unlimited calls within the village at a monthly rate of less than $2.
He Wanyong, Wuzhubi's 39-year-old chief, marvels at the speed with which mobile phones have transformed life in his isolated village. Now, when He wants to convene a meeting of Wuzhubi's 20-member council, he just rings them up or shoots them text messages. In the pre-wireless era, he recalls, he had to spend an entire morning walking house to house to let folks know. For He, who also serves as village grocer and pharmacist, the arrival of the China Mobile tower has made it easier to restock cigarettes and dispense medicine. "To do all the things I do now," he says, "I used to need three heads and six arms."
North of Wuzhubi, beyond the towering rock cliffs of Tiger Leaping Gorge, ethnic Tibetans, who live in rough-hewn homes and dress much as they have for centuries, have embraced the mobile phone as an invaluable tool. In the tiny hamlet of Dala, residents use mobile phones to track fluctuations in the price of wild pine-ear mushrooms. In the late 1980s they learned from Japanese visitors, much to their astonishment, that the mushrooms - known as songrong in China and matsutake in Japan - could fetch hundreds of dollars a kilogram in Tokyo. But before wireless coverage, locals were at the mercy of a handful of mushroom brokers who cheated them on price. With mobile phones, they can call around. "Mushroom prices can fluctuate a lot, even in a single day," says Nongbu Qilin, Dala's village chief. "You might get 200 yuan per kilogram in the morning but 500 yuan at night. You really need to know the right time to sell."
Dala lies near the center of a sparsely populated county that changed its name a decade ago to Shangri-la in a bid to draw tourists. The cobalt skies, rugged terrain, and proximity to Tibet evoke the hidden paradise described by James Hilton in his 1933 novel Lost Horizon. These days the horizon is dotted with transmission towers: Even in Shangri-la, there are few spots where the China Mobile signal can't find potential customers.
That has revolutionized one of the region's oldest trades, yak herding. In a makeshift hut on a ridge thousands of feet above Dala, 73-year-old Nongnu says he and his wife, Xizha, 71, use their mobile phone to ask family members below for supplies, let them know they've collected enough yak milk for churning, and alert them if a yak has wandered off. Until China Mobile's signal came to their mountaintop three years ago, Nongnu's grandchildren had to trek two hours up the mountain every couple of days to check on them. Now they come only every five days, although lately the interval is shrinking. It seems Nongnu and his wife spend so much time on the phone that they often run down their one battery after a few days, requiring someone to hike up for the battery, hike down to recharge, then hike back up again. (China Mobile says it's developing an affordable solar-powered battery recharger.)
Nongbu, the village chief, bought his first mobile phone when he was a salesman at a sawmill. It cost him 6,000 yuan, more than many families made in a year. But it was worth it, he says, assuring that he never missed sales and could keep his customers happy. Now that handsets are cheaper, he changes models every three or four months. He uses the phones to manage village affairs, keep tabs on the truck he rents out for cargo jobs, dispatch his duties as secretary general of a local transport cooperative, stay in touch with his mother - and, as he demonstrates during a visit, follow the NBA. "I really love LeBron James," he says. "He's better than Yao Ming." In a flash, he rings a friend in town to find out that the Cavs won a playoff game by one point.
Bringing mobile-phone service to Dala and Wuzhubi is part of an ambitious rural expansion drive launched by China Mobile in 2004, when Wang was named CEO. Last year rural subscribers accounted for more than half of China Mobile's 53 million new subscribers. Given that rural China has a mobile-phone penetration rate of only 17% - compared with more than 60% in major urban centers - Wang figures rural growth can continue at its current pace for years to come.
In its early stages, this rural buildout was dismissed by foreign analysts as an effort to win Brownie points with China's Communist leadership. Certainly the strategy was consistent with the goals espoused by President Hu Jintao, who has emphasized the need for policies to close the gap between rural and urban living standards.
But the decision to take wireless services to the rural masses also made good business sense. While China's urban markets had reached the saturation point, rural China was wide open. Signing new customers in the countryside is far less expensive than trying to lure them away from China Unicom in the cities - not least because regulators allow Unicom to offer its services for as much as 10% less than China Mobile's. There's less need to shell out for TV commercials or billboard space; in many villages, China Mobile can promote its brand for little more than the cost of the bucket of paint required to emblazon its logo on the side of a shed. Adding cell sites is cheaper too. A new transmission tower in rural areas costs less than $65,000, on average, a fraction of what it takes to build a tower in Beijing.
True, rural customers have far less to spend on mobile-phone services than their urban counterparts and aren't much interested in music downloads, the latest ringtones, or games. But it turns out they use their phones for voice and text messaging more frequently than anyone imagined. To attract more rural customers, China Mobile has gradually lowered rates, but only to the extent that reductions are offset by increased usage. Average revenue per user - the favorite benchmark of telecom analysts - has held steady at around $11 a month in the first half of this year, down less than two percentage points from 2004, when the rural expansion drive began.
Wang, a fan of Insead management professors W. Chan Kim and Renée Mauborgne, talks about China's hinterland as a classic "blue-ocean market," where the company can cast its net widely without worrying about getting tangled up with the nets of rivals. To be sure, the fish are tiny: In many of China's rural communities, per capita income is less than $50 a month. But China Mobile's low cost structure assures comfortable margins serving such small fry. In that sense the company's strategy reflects the wisdom of another popular management guru, C.K. Prahalad, who promises that big corporations capable of serving the world's aspiring poor will discover a "fortune at the bottom of the pyramid."
Wang chuckles as he recalls the frosty reception he received from analysts three years ago when he unveiled his rural strategy. "Analysts and investors, managers of large institutional funds, all thought China Mobile's years of high growth were over," he says. "They thought we were a good company, but they considered us a big, slow elephant. I went around asking why, and always the answer was this: 'You can still add to your subscriber base, but from now on all your customers will be low-end users. You'll run up big capital expenditures to reach them and high operational costs to serve them, but they won't bring you much profit.' But I had worked in this industry many years. I knew the numbers. I knew what kind of returns we could see on those investments. I told skeptics, 'You are absolutely wrong.'"
Great Northern Telegraph, a Danish firm, opened China's first telephone office in Shanghai in 1882. One hundred years later, Wang says, the country had no more than 2.3 million fixed-line phones. But in his early years as a bureaucrat there was no need to think about consumers, and the only marketing skill required was an ability to persuade people to be a little more patient. Wang didn't get a phone for his family until 1987, after he'd toiled in the ministry for more than a decade.
Wang's own marketing skills have improved considerably since then. He is arguably the most polished CEO at any of China's state-owned giants. He speaks English fluently, is well versed in the latest management literature, works at building relationships with global telecom leaders, and has gone to great lengths to meet foreign analysts and investors.
Still, Beijing keeps even its most talented executives on a short leash - something made clear in 2004, when the State Assets Supervision and Administration Commission (SASAC), which holds ultimate control over China's two fixed-line and two mobile carriers, rotated the CEOs of three of the four companies into one another's jobs. Wang, then president of China Unicom, was ordered to clear out his desk and report for duty at China Mobile. Wang says he took his 2004 transfer in stride, although he admits it caught him by surprise. "I don't talk about my old job," he says.
At the end of his workday, Wang says, he enjoys using his own mobile phone to surf the Internet. "The search engine is very useful for me," he says. "On my way home from work, I'll sit in the back of the car and put my name into Baidu or Google to look for the daily news reports about myself." And why not? For now at least, the news about Wang and China Mobile is pretty good.
But the pressure on Wang can only increase. Beijing has decreed that China will deploy its own 3G standard, known as TD-SCDMA, to compete with CDMA2000, the dominant U.S. protocol, and W-CDMA, favored in Europe and Japan. They have also vowed to have 3G networks up and running in at least ten cities by next summer, when tens of thousands of athletes, journalists, dignitaries, and tourists descend on China for the Olympics. China Mobile's parent has been tasked with developing the standard, and China Mobile has been ordered to roll out the service in eight cities. Whether the new standard is ready for prime time remains one of China's most guarded state secrets. Wang won't comment, but earlier this year a top official declared TD-SCDMA "commercially mature."
Analysts remain skeptical, as regulators have been promising a 3G rollout for years. But they are paying close attention because many believe the rollout, when it comes, will occasion an industry revamp. Officials have repeatedly said China's telecom sector is out of balance. In the wireless segment, China Mobile dominates. And the fixed-line carriers, while big, are far less profitable than the mobile carriers. Among the possible scenarios: The state will break up China Unicom and parcel out its mobile networks to the fixed-line operators, creating two much stronger competitors to slug it out with China Mobile.
Some analysts are betting 3G will be put on hold until after the Olympics, reasoning that Beijing is too proud to roll out TD-SCDMA before it's perfect. Plans for China Mobile to list shares on Shanghai's stock exchange - a development expected as early as August - may add to regulators' aversion to risk. But Goldman Sachs analyst Helen Zhu predicts 3G will be up and running and the industry shaken up well before the Olympics, arguing that it won't be possible to work the bugs out of TD-SCDMA without loading "substantial numbers of subscribers on the network" and rolling out on a commercial basis.
Regardless of timing, restructuring is sure to make life tougher for Wang, which explains why he's moving so aggressively to stake his claim in rural China. "The longer regulators wait to restructure," says BDA International research director Zhang Dongming, "the more subscribers China Mobile can load onto its network. This is an old-fashioned land grab: China Mobile is trying to lock up the countryside while it can." Mobilizing rural masses is a time-honored strategy in China; after all, it worked for Chairman Mao. For China's newly connected farmers, the results of this campaign may prove no less revolutionary.
(Fortune Magazine) -- In New York City last year for a meeting with News Corp.'s Rupert Murdoch, Wang Jianzhou, CEO of China's largest mobile-phone company, came across an ad for Cingular Wireless that gave him pause. Touting low dropped-call rates and a vast web of base stations - "over 47,000 cell sites, more than any other wireless network" - the ad proclaimed Cingular, then the largest U.S. mobile operator, "the only true leader in wireless."
Wang wouldn't dream of making such a boast; he'd be too embarrassed. His company, China Mobile, has a network of more than 230,000 base stations and is spending furiously to put up more. When you run the biggest mobile-phone network in the world's most populous country, you operate on a different scale.
And what a scale it is. With 330 million subscribers as of June, China Mobile serves five times as many customers as AT&T (Charts, Fortune 500), the largest U.S. carrier since acquiring Cingular last year, and continues to sign five million new users a month. In China's largest cities, where mobile penetration rates match those in the U.S. and Europe, China Mobile offers a dizzying array of non-voice services including Internet search, ringtones, and music downloads. It has struck content deals with domestic and foreign providers, including News Corp. (Charts, Fortune 500) , MTV Networks, Yahoo (Charts, Fortune 500), and the National Basketball Association, and transmits 1.2 billion text messages every day.
In rural China, home to two-thirds of China's 1.3 billion people, the carrier has launched an aggressive expansion drive, joining with government agricultural bureaus to beam farmers in remote hamlets advice on improving harvests and where to get the best prices for their crops. China Mobile's wireless network now stretches from Hong Kong to the Himalayas, offering mobile coverage to 97% of China's citizens. Its signal comes in strong on the Beijing subway, inside Shanghai elevators, in Guangxi rice paddies - even atop Mount Everest.
So far, this breakneck growth hasn't come at the expense of profit. Far from it: In 2006 the company reported net income of $6.3 billion, up 24% from the previous year, on sales of $35.9 billion. As of early July its shares traded at $59 on the New York Stock Exchange, an eightfold increase since their October 1997 debut, lifting China Mobile's market capitalization to $234 billion. The result? China, a country where only two decades ago fixed-line phones were a privilege of the Communist elite, now claims the most valuable mobile-phone company in the world.
But running this behemoth is no cinch. Wang, an unassuming 58-year-old engineer who started his career three decades ago as a bureaucrat in the Ministry of Post and Telecommunications, may have one of the trickiest jobs of any Fortune Global 500 CEO. It's hard to imagine another chief who answers to as many masters. First and foremost, he must heed the wishes of the Chinese government, China Mobile's regulator and its controlling shareholder. Beijing wants China Mobile, which has a 73% market share, to become a global powerhouse, but without beating up too badly on China Unicom, China's other mobile carrier. Government planners have prodded China Mobile to take an active approach to foreign acquisitions, as it did this year when parent company China Mobile Communications, which Wang also heads, snapped up Paktel, Pakistan's fifth-largest wireless company, for $460 million. They've also ordered China Mobile to take the lead in developing a Chinese standard for third-generation mobile services rather than rely on existing technologies from the U.S., Japan, or Europe.
But investors, who own 25% of China Mobile's (Charts) shares, fret that Beijing's national policy goals threaten the bottom line. They worry that Wang will be encouraged to overpay for foreign acquisitions he doesn't need, forced to overspend on unproven homegrown 3G technologies less efficient than those already available, and discouraged from seizing opportunities in his home market for fear of becoming too dominant.
And then there are all those customers: on the one hand, hip, young urbanites demanding world-class mobile services, and on the other, farmers clamoring for lower prices. How to reconcile these divergent interests? Wang insists he isn't fazed. "I don't think it's so difficult to find the balance," he says at China Mobile's imposing headquarters in Beijing's new financial district. "As head of a state-owned enterprise, my duty is to maximize the value of state assets. As CEO of a listed company, my job is to enhance value for our shareholders."
Improbably, Wang has hatched a growth strategy that, for now at least, is keeping everyone happy. The secret to his balancing act can be found in places like Wuzhubi, a village of about 250 families nestled deep in the mountains of Yunnan province not far from the Tibet border. Until last year only a handful of Wuzhubi's residents owned a mobile phone. And little wonder: To pick up a signal, would-be callers had to hike to the top of a ridge several miles away. But all that changed in March, when China Mobile erected a transmission tower atop a nearby hill. Hundreds of residents purchased handsets. Dozens invested in wireless terminals on which they can make unlimited calls within the village at a monthly rate of less than $2.
He Wanyong, Wuzhubi's 39-year-old chief, marvels at the speed with which mobile phones have transformed life in his isolated village. Now, when He wants to convene a meeting of Wuzhubi's 20-member council, he just rings them up or shoots them text messages. In the pre-wireless era, he recalls, he had to spend an entire morning walking house to house to let folks know. For He, who also serves as village grocer and pharmacist, the arrival of the China Mobile tower has made it easier to restock cigarettes and dispense medicine. "To do all the things I do now," he says, "I used to need three heads and six arms."
North of Wuzhubi, beyond the towering rock cliffs of Tiger Leaping Gorge, ethnic Tibetans, who live in rough-hewn homes and dress much as they have for centuries, have embraced the mobile phone as an invaluable tool. In the tiny hamlet of Dala, residents use mobile phones to track fluctuations in the price of wild pine-ear mushrooms. In the late 1980s they learned from Japanese visitors, much to their astonishment, that the mushrooms - known as songrong in China and matsutake in Japan - could fetch hundreds of dollars a kilogram in Tokyo. But before wireless coverage, locals were at the mercy of a handful of mushroom brokers who cheated them on price. With mobile phones, they can call around. "Mushroom prices can fluctuate a lot, even in a single day," says Nongbu Qilin, Dala's village chief. "You might get 200 yuan per kilogram in the morning but 500 yuan at night. You really need to know the right time to sell."
Dala lies near the center of a sparsely populated county that changed its name a decade ago to Shangri-la in a bid to draw tourists. The cobalt skies, rugged terrain, and proximity to Tibet evoke the hidden paradise described by James Hilton in his 1933 novel Lost Horizon. These days the horizon is dotted with transmission towers: Even in Shangri-la, there are few spots where the China Mobile signal can't find potential customers.
That has revolutionized one of the region's oldest trades, yak herding. In a makeshift hut on a ridge thousands of feet above Dala, 73-year-old Nongnu says he and his wife, Xizha, 71, use their mobile phone to ask family members below for supplies, let them know they've collected enough yak milk for churning, and alert them if a yak has wandered off. Until China Mobile's signal came to their mountaintop three years ago, Nongnu's grandchildren had to trek two hours up the mountain every couple of days to check on them. Now they come only every five days, although lately the interval is shrinking. It seems Nongnu and his wife spend so much time on the phone that they often run down their one battery after a few days, requiring someone to hike up for the battery, hike down to recharge, then hike back up again. (China Mobile says it's developing an affordable solar-powered battery recharger.)
Nongbu, the village chief, bought his first mobile phone when he was a salesman at a sawmill. It cost him 6,000 yuan, more than many families made in a year. But it was worth it, he says, assuring that he never missed sales and could keep his customers happy. Now that handsets are cheaper, he changes models every three or four months. He uses the phones to manage village affairs, keep tabs on the truck he rents out for cargo jobs, dispatch his duties as secretary general of a local transport cooperative, stay in touch with his mother - and, as he demonstrates during a visit, follow the NBA. "I really love LeBron James," he says. "He's better than Yao Ming." In a flash, he rings a friend in town to find out that the Cavs won a playoff game by one point.
Bringing mobile-phone service to Dala and Wuzhubi is part of an ambitious rural expansion drive launched by China Mobile in 2004, when Wang was named CEO. Last year rural subscribers accounted for more than half of China Mobile's 53 million new subscribers. Given that rural China has a mobile-phone penetration rate of only 17% - compared with more than 60% in major urban centers - Wang figures rural growth can continue at its current pace for years to come.
In its early stages, this rural buildout was dismissed by foreign analysts as an effort to win Brownie points with China's Communist leadership. Certainly the strategy was consistent with the goals espoused by President Hu Jintao, who has emphasized the need for policies to close the gap between rural and urban living standards.
But the decision to take wireless services to the rural masses also made good business sense. While China's urban markets had reached the saturation point, rural China was wide open. Signing new customers in the countryside is far less expensive than trying to lure them away from China Unicom in the cities - not least because regulators allow Unicom to offer its services for as much as 10% less than China Mobile's. There's less need to shell out for TV commercials or billboard space; in many villages, China Mobile can promote its brand for little more than the cost of the bucket of paint required to emblazon its logo on the side of a shed. Adding cell sites is cheaper too. A new transmission tower in rural areas costs less than $65,000, on average, a fraction of what it takes to build a tower in Beijing.
True, rural customers have far less to spend on mobile-phone services than their urban counterparts and aren't much interested in music downloads, the latest ringtones, or games. But it turns out they use their phones for voice and text messaging more frequently than anyone imagined. To attract more rural customers, China Mobile has gradually lowered rates, but only to the extent that reductions are offset by increased usage. Average revenue per user - the favorite benchmark of telecom analysts - has held steady at around $11 a month in the first half of this year, down less than two percentage points from 2004, when the rural expansion drive began.
Wang, a fan of Insead management professors W. Chan Kim and Renée Mauborgne, talks about China's hinterland as a classic "blue-ocean market," where the company can cast its net widely without worrying about getting tangled up with the nets of rivals. To be sure, the fish are tiny: In many of China's rural communities, per capita income is less than $50 a month. But China Mobile's low cost structure assures comfortable margins serving such small fry. In that sense the company's strategy reflects the wisdom of another popular management guru, C.K. Prahalad, who promises that big corporations capable of serving the world's aspiring poor will discover a "fortune at the bottom of the pyramid."
Wang chuckles as he recalls the frosty reception he received from analysts three years ago when he unveiled his rural strategy. "Analysts and investors, managers of large institutional funds, all thought China Mobile's years of high growth were over," he says. "They thought we were a good company, but they considered us a big, slow elephant. I went around asking why, and always the answer was this: 'You can still add to your subscriber base, but from now on all your customers will be low-end users. You'll run up big capital expenditures to reach them and high operational costs to serve them, but they won't bring you much profit.' But I had worked in this industry many years. I knew the numbers. I knew what kind of returns we could see on those investments. I told skeptics, 'You are absolutely wrong.'"
Great Northern Telegraph, a Danish firm, opened China's first telephone office in Shanghai in 1882. One hundred years later, Wang says, the country had no more than 2.3 million fixed-line phones. But in his early years as a bureaucrat there was no need to think about consumers, and the only marketing skill required was an ability to persuade people to be a little more patient. Wang didn't get a phone for his family until 1987, after he'd toiled in the ministry for more than a decade.
Wang's own marketing skills have improved considerably since then. He is arguably the most polished CEO at any of China's state-owned giants. He speaks English fluently, is well versed in the latest management literature, works at building relationships with global telecom leaders, and has gone to great lengths to meet foreign analysts and investors.
Still, Beijing keeps even its most talented executives on a short leash - something made clear in 2004, when the State Assets Supervision and Administration Commission (SASAC), which holds ultimate control over China's two fixed-line and two mobile carriers, rotated the CEOs of three of the four companies into one another's jobs. Wang, then president of China Unicom, was ordered to clear out his desk and report for duty at China Mobile. Wang says he took his 2004 transfer in stride, although he admits it caught him by surprise. "I don't talk about my old job," he says.
At the end of his workday, Wang says, he enjoys using his own mobile phone to surf the Internet. "The search engine is very useful for me," he says. "On my way home from work, I'll sit in the back of the car and put my name into Baidu or Google to look for the daily news reports about myself." And why not? For now at least, the news about Wang and China Mobile is pretty good.
But the pressure on Wang can only increase. Beijing has decreed that China will deploy its own 3G standard, known as TD-SCDMA, to compete with CDMA2000, the dominant U.S. protocol, and W-CDMA, favored in Europe and Japan. They have also vowed to have 3G networks up and running in at least ten cities by next summer, when tens of thousands of athletes, journalists, dignitaries, and tourists descend on China for the Olympics. China Mobile's parent has been tasked with developing the standard, and China Mobile has been ordered to roll out the service in eight cities. Whether the new standard is ready for prime time remains one of China's most guarded state secrets. Wang won't comment, but earlier this year a top official declared TD-SCDMA "commercially mature."
Analysts remain skeptical, as regulators have been promising a 3G rollout for years. But they are paying close attention because many believe the rollout, when it comes, will occasion an industry revamp. Officials have repeatedly said China's telecom sector is out of balance. In the wireless segment, China Mobile dominates. And the fixed-line carriers, while big, are far less profitable than the mobile carriers. Among the possible scenarios: The state will break up China Unicom and parcel out its mobile networks to the fixed-line operators, creating two much stronger competitors to slug it out with China Mobile.
Some analysts are betting 3G will be put on hold until after the Olympics, reasoning that Beijing is too proud to roll out TD-SCDMA before it's perfect. Plans for China Mobile to list shares on Shanghai's stock exchange - a development expected as early as August - may add to regulators' aversion to risk. But Goldman Sachs analyst Helen Zhu predicts 3G will be up and running and the industry shaken up well before the Olympics, arguing that it won't be possible to work the bugs out of TD-SCDMA without loading "substantial numbers of subscribers on the network" and rolling out on a commercial basis.
Regardless of timing, restructuring is sure to make life tougher for Wang, which explains why he's moving so aggressively to stake his claim in rural China. "The longer regulators wait to restructure," says BDA International research director Zhang Dongming, "the more subscribers China Mobile can load onto its network. This is an old-fashioned land grab: China Mobile is trying to lock up the countryside while it can." Mobilizing rural masses is a time-honored strategy in China; after all, it worked for Chairman Mao. For China's newly connected farmers, the results of this campaign may prove no less revolutionary.
China's Golden Cyber-Shield
The Chinese government is an infamous enforcer of digital apartheid; when its citizens try to access prominent international Web sites like Wikipedia and Flickr, they hit a filter that blocks politically sensitive material. In the West, that information blockade is often described as the "Great Firewall of China."
But in Mandarin, it is called jindun gongcheng, the Golden Shield. As that name implies, China's controls on the Internet are capable of blocking inbound as well as outbound traffic. And according to some security professionals, that means the Golden Shield is more than just a barrier to free expression; it may also be China's advantage in a future cyber-war.
"China has powerful controls over content going out and coming in at every gateway," says Jody Westby, chief executive of security consultancy Global Cyber Risk. She argues that the tight relationship between China's government and its Internet service providers--originally established to stop Web users reading about censored topics like Tiananmen and Taiwan--also means the country could better coordinate a defense against online attacks.
In the U.S., by contrast, the autonomy of the Internet may leave it vulnerable to state-sponsored enemies trying to steal classified data or shut down servers controlling energy or telecommunications. "They have a decided defensive advantage," says Westby. "China simply doesn't have the same issues of coordination [the U.S.] would face in the case of information warfare."
Sizing up threats in a hypothetical cyber-war is still based on educated guesswork and speculation, but no longer mere science-fiction: A political dispute in May over a U.S.S.R. memorial in Estonia led to massive attacks on the country's government Web sites; state servers were paralyzed with "distributed denial of service" attacks, which use tens of thousands of simultaneous requests for information to overwhelm Web-connected computers. Estonia initially accused the Russian government of launching the blitzkrieg, though the use of "botnets"--herds of PCs hijacked with malicious software--made tracing its origin difficult.
The threat of an information-based war with China is particularly real. A Department of Defense report earlier this year warned that China's military is putting more resources into "electromagnetic warfare," focusing on attacking and defending computer networks.
The first shots may have already been fired: In August and September 2006, Chinese computers penetrated the State Department and the U.S. Department of Commerce's Bureau of Industry and Security. The attack, known as "Titan Rain," forced the government to replace hundreds of computers and take others offline for a month. While that attack couldn't be traced to any official source, the U.S.-China Economic and Security Review commission subsequently claimed that China is developing computer viruses intended to disable military defense systems.
If China did turn computer viruses into a military tool, the Golden Shield could be used to prevent collateral damage, says Jayson Street, a consultant at the computer security firm Stratagem 1 Solutions. "The firewall would protect China from whatever it releases," says Street. "When a worm goes out, it's not a gun, it's a bomb. It affects everyone. That's why the Golden Shield could be so effective."
Chinese cyber-attacks might take the same form as the denial of service attacks that rattled Estonia, using botnets to overwhelm foreign servers and depending on the Golden Shield to block attempts at retaliation.
The exact anatomy of the shield is known only to the Chinese government, but most security professionals believe it's capable of not only filtering for certain politically charged keywords, but also examining the structure and origin of information moving into and out of the country's networks. That means botnet attacks could be deflected more easily than in the U.S., where there are virtually no checks on international Internet traffic.
Still, the shield's effectiveness as a defense in cyber-warfare is far from clear: Bruce Schneier, the founder and chief technology officer of security firm BT Counterpane, argues that no single strategy can stop determined hackers.
"It's a pipe dream to think that a country can secure its cyber-borders," says Schneier. He points out that in general, security vulnerabilities are much easier to find than they are to patch. "If you look at what's happening now in the computer security field, the bad guys are winning, and they're just criminals," says Schneier. "Imagine if militaries got involved."
If China did face all-out digital war, it might have at least one resource that the U.S. wouldn't: an Internet kill switch.
"It's true that it's impossible to completely defend against denial of service attacks and still be accessible," says Marcus Ranum, chief security officer of Tenable Security. "But if you're willing to go off the air completely, you could disrupt the enemy's command and control." Ranum suggests that China's worst-case strategy in a cyber-war would simply be to "pull the plug," temporarily isolating the Chinese Internet. That's not an option in the U.S., where the Web is less regulated and considered a basic freedom.
If China made itself immune from outside attack, it could still be vulnerable to botnets run from within the country, says Allan Paller, director of research at the SANS Institute. "Installing malware on computers within the country would be the real key to an Internet Cold War," he says. Military enemies could launch denial of service attacks that begin and end within China's own network.
To grab control of those computers, Paller imagines CIA agents working in Chinese Internet cafes or other domestic access points. Timed botnet attacks could also be organized to launch automatically, without an external go-ahead.
At the end of 2006, China had 26% of the world's malware-infected computers, more than any other country, according to a report from Symantec. But most of those PCs are likely controlled by spam-sending cyber-criminals, not foreign militaries.
Whether of note the U.S. military has caught on to these nuances of the digital arms race, it will soon, Paller argues. "This is going to be an area of huge investment for the military for the next hundred years," he says. "It isn't just the future of information warfare. It's the future of warfare."
But in Mandarin, it is called jindun gongcheng, the Golden Shield. As that name implies, China's controls on the Internet are capable of blocking inbound as well as outbound traffic. And according to some security professionals, that means the Golden Shield is more than just a barrier to free expression; it may also be China's advantage in a future cyber-war.
"China has powerful controls over content going out and coming in at every gateway," says Jody Westby, chief executive of security consultancy Global Cyber Risk. She argues that the tight relationship between China's government and its Internet service providers--originally established to stop Web users reading about censored topics like Tiananmen and Taiwan--also means the country could better coordinate a defense against online attacks.
In the U.S., by contrast, the autonomy of the Internet may leave it vulnerable to state-sponsored enemies trying to steal classified data or shut down servers controlling energy or telecommunications. "They have a decided defensive advantage," says Westby. "China simply doesn't have the same issues of coordination [the U.S.] would face in the case of information warfare."
Sizing up threats in a hypothetical cyber-war is still based on educated guesswork and speculation, but no longer mere science-fiction: A political dispute in May over a U.S.S.R. memorial in Estonia led to massive attacks on the country's government Web sites; state servers were paralyzed with "distributed denial of service" attacks, which use tens of thousands of simultaneous requests for information to overwhelm Web-connected computers. Estonia initially accused the Russian government of launching the blitzkrieg, though the use of "botnets"--herds of PCs hijacked with malicious software--made tracing its origin difficult.
The threat of an information-based war with China is particularly real. A Department of Defense report earlier this year warned that China's military is putting more resources into "electromagnetic warfare," focusing on attacking and defending computer networks.
The first shots may have already been fired: In August and September 2006, Chinese computers penetrated the State Department and the U.S. Department of Commerce's Bureau of Industry and Security. The attack, known as "Titan Rain," forced the government to replace hundreds of computers and take others offline for a month. While that attack couldn't be traced to any official source, the U.S.-China Economic and Security Review commission subsequently claimed that China is developing computer viruses intended to disable military defense systems.
If China did turn computer viruses into a military tool, the Golden Shield could be used to prevent collateral damage, says Jayson Street, a consultant at the computer security firm Stratagem 1 Solutions. "The firewall would protect China from whatever it releases," says Street. "When a worm goes out, it's not a gun, it's a bomb. It affects everyone. That's why the Golden Shield could be so effective."
Chinese cyber-attacks might take the same form as the denial of service attacks that rattled Estonia, using botnets to overwhelm foreign servers and depending on the Golden Shield to block attempts at retaliation.
The exact anatomy of the shield is known only to the Chinese government, but most security professionals believe it's capable of not only filtering for certain politically charged keywords, but also examining the structure and origin of information moving into and out of the country's networks. That means botnet attacks could be deflected more easily than in the U.S., where there are virtually no checks on international Internet traffic.
Still, the shield's effectiveness as a defense in cyber-warfare is far from clear: Bruce Schneier, the founder and chief technology officer of security firm BT Counterpane, argues that no single strategy can stop determined hackers.
"It's a pipe dream to think that a country can secure its cyber-borders," says Schneier. He points out that in general, security vulnerabilities are much easier to find than they are to patch. "If you look at what's happening now in the computer security field, the bad guys are winning, and they're just criminals," says Schneier. "Imagine if militaries got involved."
If China did face all-out digital war, it might have at least one resource that the U.S. wouldn't: an Internet kill switch.
"It's true that it's impossible to completely defend against denial of service attacks and still be accessible," says Marcus Ranum, chief security officer of Tenable Security. "But if you're willing to go off the air completely, you could disrupt the enemy's command and control." Ranum suggests that China's worst-case strategy in a cyber-war would simply be to "pull the plug," temporarily isolating the Chinese Internet. That's not an option in the U.S., where the Web is less regulated and considered a basic freedom.
If China made itself immune from outside attack, it could still be vulnerable to botnets run from within the country, says Allan Paller, director of research at the SANS Institute. "Installing malware on computers within the country would be the real key to an Internet Cold War," he says. Military enemies could launch denial of service attacks that begin and end within China's own network.
To grab control of those computers, Paller imagines CIA agents working in Chinese Internet cafes or other domestic access points. Timed botnet attacks could also be organized to launch automatically, without an external go-ahead.
At the end of 2006, China had 26% of the world's malware-infected computers, more than any other country, according to a report from Symantec. But most of those PCs are likely controlled by spam-sending cyber-criminals, not foreign militaries.
Whether of note the U.S. military has caught on to these nuances of the digital arms race, it will soon, Paller argues. "This is going to be an area of huge investment for the military for the next hundred years," he says. "It isn't just the future of information warfare. It's the future of warfare."
Monday, July 30, 2007
Green credit: To fight pollution, China takes the capitalist route
BEIJING: The Chinese environmental agency is working with the banking authorities to identify companies that fail pollution checks or bypass environmental assessments for new projects and to restrict their access to fresh credit.
Pan Yue, the deputy chief of SEPA, the State Environmental Protection Administration, said the country should use more economic muscle to fight air and water polluters as he listed some polluting companies that would be barred from borrowing money from banks.
The credit blacklist was the most forceful measure the environment agency could impose to clean up rivers in China, Pan said in comments posted on the SEPA Web site.
But, he added: "It cannot fundamentally contain the trend of worsening pollution, and we need the force of even more combined economic levers."
The World Bank estimates that about 460,000 Chinese die prematurely each year from ailments related to water and air pollution and that about 300,000 others die from indoor toxins.
"The severe state of China's environment shows that the emissions-reduction measures of a few specialized agencies are limited and we must unite with more macroeconomic departments," Pan said.
One of the factories on the blacklist, an agricultural chemical plant in Bengbu, Anhui Province, dumped ink-black waste into a river, the official Xinhua news agency reported. The plant was part of an industrial cluster that villagers said had contributed to a sudden increase in cancer and other illnesses in the area, the report said.
Pan, an ambitious advocate of tougher environmental controls, has seized an opportunity opened by broader government efforts to punish errant factories, even if punishment leads to slower economic growth.
But local banks and many officials who are eager to encourage economic growth appear unlikely to embrace Pan's plea for "green credit."
The central bank, the People's Bank of China, recently asked commercial banks to stop lending to those who pollute and to call in loans to projects banned by the government. But at the end of May, the major Chinese banks had 1.5 trillion yuan, or $198 billion, in medium- and long-term loans outstanding to energy-intensive and polluting sectors, up 21.8 percent from a year earlier.
Pan said that he expected the People's Bank of China and the China Banking Regulatory Commission to restrict credit to the companies identified on the blacklist. And he promised additional measures to come.
"Green credit is just a start," Pan said in an earlier version of his comments sent to reporters in an e-mail message.
Officials will also consider incorporating environmental standards in tax, insurance and stock market regulations, he said.
Britain needs to toughen proposed targets for carbon dioxide cuts to help achieve the European Union's goal of limiting global warming to 2 degrees Celsius, or 3.6 Fahrenheit, a panel of lawmakers said Monday, according to Bloomberg News.
In March, David Miliband, who was environment secretary at the time, outlined a draft climate change bill that would require Britain to cut emissions of the gas from 1990 levels by 26 percent to 32 percent by 2020, and 60 percent by 2050.
But the cross-party Environmental Audit Committee said Monday in an e-mailed statement that while enshrining targets in law would help reduce emissions, the proposed goals do not go far enough.
The panel recommended in its 86-page report that the government include emissions from international flights and shipping in its targets and that a proposed Committee on Climate Change be given more power.
The use of carbon offsets overseas - a mechanism by which companies unable to achieve their emissions targets domestically can instead invest in clean energy projects in developing countries - should be "strictly limited and transparently reported," the lawmakers said.
Pan Yue, the deputy chief of SEPA, the State Environmental Protection Administration, said the country should use more economic muscle to fight air and water polluters as he listed some polluting companies that would be barred from borrowing money from banks.
The credit blacklist was the most forceful measure the environment agency could impose to clean up rivers in China, Pan said in comments posted on the SEPA Web site.
But, he added: "It cannot fundamentally contain the trend of worsening pollution, and we need the force of even more combined economic levers."
The World Bank estimates that about 460,000 Chinese die prematurely each year from ailments related to water and air pollution and that about 300,000 others die from indoor toxins.
"The severe state of China's environment shows that the emissions-reduction measures of a few specialized agencies are limited and we must unite with more macroeconomic departments," Pan said.
One of the factories on the blacklist, an agricultural chemical plant in Bengbu, Anhui Province, dumped ink-black waste into a river, the official Xinhua news agency reported. The plant was part of an industrial cluster that villagers said had contributed to a sudden increase in cancer and other illnesses in the area, the report said.
Pan, an ambitious advocate of tougher environmental controls, has seized an opportunity opened by broader government efforts to punish errant factories, even if punishment leads to slower economic growth.
But local banks and many officials who are eager to encourage economic growth appear unlikely to embrace Pan's plea for "green credit."
The central bank, the People's Bank of China, recently asked commercial banks to stop lending to those who pollute and to call in loans to projects banned by the government. But at the end of May, the major Chinese banks had 1.5 trillion yuan, or $198 billion, in medium- and long-term loans outstanding to energy-intensive and polluting sectors, up 21.8 percent from a year earlier.
Pan said that he expected the People's Bank of China and the China Banking Regulatory Commission to restrict credit to the companies identified on the blacklist. And he promised additional measures to come.
"Green credit is just a start," Pan said in an earlier version of his comments sent to reporters in an e-mail message.
Officials will also consider incorporating environmental standards in tax, insurance and stock market regulations, he said.
Britain needs to toughen proposed targets for carbon dioxide cuts to help achieve the European Union's goal of limiting global warming to 2 degrees Celsius, or 3.6 Fahrenheit, a panel of lawmakers said Monday, according to Bloomberg News.
In March, David Miliband, who was environment secretary at the time, outlined a draft climate change bill that would require Britain to cut emissions of the gas from 1990 levels by 26 percent to 32 percent by 2020, and 60 percent by 2050.
But the cross-party Environmental Audit Committee said Monday in an e-mailed statement that while enshrining targets in law would help reduce emissions, the proposed goals do not go far enough.
The panel recommended in its 86-page report that the government include emissions from international flights and shipping in its targets and that a proposed Committee on Climate Change be given more power.
The use of carbon offsets overseas - a mechanism by which companies unable to achieve their emissions targets domestically can instead invest in clean energy projects in developing countries - should be "strictly limited and transparently reported," the lawmakers said.
China tightens credit to cool economy
China tightened credit Monday in a new effort to cool its sizzling economy, ordering banks to shrink the pool of money for lending by increasing their reserves for a sixth time this year.
The move was widely expected after the economy grew by 11.9 percent last quarter, its fastest rate in 12 years despite earlier efforts to slow the expansion. Beijing raised interest rates on July 20 for a third time this year.
The amount of reserves that lenders must keep with the central bank was raised 0.5 point to 12 percent of their deposits, the central bank said. The increase takes effect Aug. 15.
China's communist leaders want to keep overall growth high to reduce poverty. But they worry that runaway investment in real estate and other industries could push up politically volatile inflation or spark a debt crisis if borrowers default.
Regulators have tried to target individual industries with investment curbs while keeping interest rate hikes small in an effort to avoid derailing growth. Even after three rises this year, the key lending rate stands at just 6.84 percent on a one-year loan.
But economic planners worry that the export-fueled flood of cash surging through China's economy is driving dangerously fast investment in stocks, real estate and other assets.
The surge in the money supply is straining the central bank's ability to contain pressure for prices to rise. It drains billions of dollars a month from the economy through bond sales, piling up reserves that have topped $1.3 trillion.
Still, Chinese banks are so flush with cash that moves such as Monday's reserve increase are considered to be just a government signal to curtail lending, not a real constraint on credit.
Bank deposits total more than 31 trillion yuan ($4 trillion) and are growing by tens of billions of dollars a month, leaving plenty of money for new lending.
The government has tried to rein in China's export surge by cutting rebates of value-added taxes and imposing new taxes on shipments of some goods such as steel. But the Chinese trade surplus soared to a new monthly high in June, widening 85.5 percent from the year-earlier period to $26.9 billion.
Outside analysts are forecasting economic growth of up to 11.5 percent this year. They raised earlier estimates after the second-quarter growth figures exceeded all expectations.
The rapid growth in money supply has helped to drive a boom in Chinese stock prices. The main index has risen by more than 60 percent this year, after more than doubling in 2006.
On Monday, the benchmark Shanghai Composite Index rose 2.2 percent to close at a new all-time high of 4,440.77, breaking the previous closing high of 4346.46 set on Thursday.
Inflation has crept up, hitting 4.4 percent in June — its highest level in more than two years — driven by a 7.6 percent jump in food prices. That is well above the official 3 percent target this year.
___
Chinese central bank (in Chinese): http://www.pbc.gov.cn
The move was widely expected after the economy grew by 11.9 percent last quarter, its fastest rate in 12 years despite earlier efforts to slow the expansion. Beijing raised interest rates on July 20 for a third time this year.
The amount of reserves that lenders must keep with the central bank was raised 0.5 point to 12 percent of their deposits, the central bank said. The increase takes effect Aug. 15.
China's communist leaders want to keep overall growth high to reduce poverty. But they worry that runaway investment in real estate and other industries could push up politically volatile inflation or spark a debt crisis if borrowers default.
Regulators have tried to target individual industries with investment curbs while keeping interest rate hikes small in an effort to avoid derailing growth. Even after three rises this year, the key lending rate stands at just 6.84 percent on a one-year loan.
But economic planners worry that the export-fueled flood of cash surging through China's economy is driving dangerously fast investment in stocks, real estate and other assets.
The surge in the money supply is straining the central bank's ability to contain pressure for prices to rise. It drains billions of dollars a month from the economy through bond sales, piling up reserves that have topped $1.3 trillion.
Still, Chinese banks are so flush with cash that moves such as Monday's reserve increase are considered to be just a government signal to curtail lending, not a real constraint on credit.
Bank deposits total more than 31 trillion yuan ($4 trillion) and are growing by tens of billions of dollars a month, leaving plenty of money for new lending.
The government has tried to rein in China's export surge by cutting rebates of value-added taxes and imposing new taxes on shipments of some goods such as steel. But the Chinese trade surplus soared to a new monthly high in June, widening 85.5 percent from the year-earlier period to $26.9 billion.
Outside analysts are forecasting economic growth of up to 11.5 percent this year. They raised earlier estimates after the second-quarter growth figures exceeded all expectations.
The rapid growth in money supply has helped to drive a boom in Chinese stock prices. The main index has risen by more than 60 percent this year, after more than doubling in 2006.
On Monday, the benchmark Shanghai Composite Index rose 2.2 percent to close at a new all-time high of 4,440.77, breaking the previous closing high of 4346.46 set on Thursday.
Inflation has crept up, hitting 4.4 percent in June — its highest level in more than two years — driven by a 7.6 percent jump in food prices. That is well above the official 3 percent target this year.
___
Chinese central bank (in Chinese): http://www.pbc.gov.cn
Sunday, July 29, 2007
Paulson Rejects Criticism, Says China Talks Yielding Results
July 30 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson, rejecting claims in Congress that he's too soft on China, said negotiations rather than sanctions have led to a faster appreciation of the yuan.
``We are getting results through this process that wouldn't have been achieved without it,'' Paulson told reporters as he traveled to China, where he arrived late yesterday. The Chinese currency's ``rate of appreciation has gone up materially over the past year,'' he said.
Paulson returns to China with the U.S. Congress increasingly hostile toward America's second-largest trading partner, which lawmakers claim keeps its currency weak to increase exports. At the same time, China's leaders have failed to cool their economy, which grew at the fastest pace in 12 years last quarter, and rein in the record trade surplus.
On July 26, the Senate Finance Committee approved legislation aimed at pushing China to let the yuan appreciate more rapidly. The measure allows U.S. companies to seek anti- dumping duties to compensate for the effects of an undervalued currency.
``I'm sick and tired of our Treasury Department pussyfooting around,'' Iowa Senator Charles Grassley, the senior Republican on the Finance Committee, said in an interview on July 23.
The yuan has risen about 5 percent against the dollar in the past year, compared with a gain of about 1.7 percent in the previous 12 months. On July 21, 2005, China ended a decade-old peg to the dollar.
Paulson, 61, didn't discuss the U.S. economy or financial markets during the media briefing on his military aircraft.
Treasury Strategy
He was selected for the Treasury job last year partly because of ties with Chinese officials honed as chief executive officer of Goldman Sachs Group Inc. Paulson said in a July 26 interview that his strategy is to engage China, convincing its leaders that a flexible exchange rate and open markets are in their interest.
The four-day trip is his fourth to China in a year as Treasury secretary, surpassing the combined total of his two immediate predecessors, John Snow and Paul O'Neill. One of the visits was to launch a series of twice-annual talks called the Strategic Economic Dialogue.
The dialogue, led by Paulson and Chinese Vice Premier Wu Yi, puts the heads of each nation's central bank and the leaders of ministries ranging from Finance to Health around one table. Paulson considers it important because officials such as Federal Reserve Chairman Ben S. Bernanke and Trade Representative Susan Schwab get to make their case to most of China's cabinet, rather than only their direct counterparts.
China's Pledges
The second meeting, held in Washington in May, ended with a pledge by China to open its skies to more U.S. flights and to allow international banks to issue yuan-denominated credit cards. That failed to impress the lawmakers who were looking for an appreciation of the yuan of as much as 40 percent.
``Paulson has not done a very good job either in managing expectations in Washington or in constructing goals for the SED that would create clear victories that he could carry back home,'' Arthur Kroeber, managing director of Dragonomics Research & Advisory in Beijing, said in an interview. ``He is basically on the defensive right now.''
Widening Surplus
Behind the rising congressional ire is China's surging trade surplus. China exported $112.5 billion more than it imported in the first six months of this year, an increase of 84 percent from a year earlier. The National Development and Reform Commission, China's top planning agency, forecasts the surplus will widen to between $250 billion and $300 billion this year.
China's economy, which accounts for about a 10th of global growth, expanded 11.9 percent last quarter compared with a year earlier. Three interest rate increases since March and restrictions on bank lending haven't slowed the surge.
Paulson said China is no more likely to change its policies under threat of sanctions than would be U.S. legislators if the situation were reversed. The country's leaders are more likely to respond to an argument that the country's economy has grown too large to manage from Beijing.
``There's a lot of concern around the world about the pace of China's economic development and the perceived threat that represents to a lot of economies,'' Paulson said. ``A lot of that is misplaced. The biggest concern is if China had a major shock or problem. The greatest risk is if they move too slowly.''
Meeting With Hu
Paulson will be in Beijing on July 31 and Aug. 1 for meetings with President Hu Jintao, Wu and other officials. He said the sessions will cover ways to ``rebalance'' China's economic growth, the environment, opening China's financial markets and the safety of Chinese exports, including food. The aim is to prepare for the next ministerial gathering under the dialogue, set for the Chinese capital in December, Paulson said.
First, Paulson will today visit Qinghai Lake, China's largest inland sea, covering 2,278 square miles of the Tibetan Plateau at 10,515 feet (3,205 meters) above sea level.
The point of the visit is to show that the U.S. is concerned about more than the exchange rate and pirated Hollywood movies, he said. Due in part to the effects of global warming, the lake is shrinking at a rate that would see it disappear in 200 years, according to the Chinese government.
Paulson said he wants to highlight the efforts the U.S. and China are making to try to better the environment, such as a push to lower import tariffs that increase the cost of buying technology that cuts smokestack emissions.
``People in China care about the environment every bit as much as Americans care about the environment,'' Paulson said. ``This trip gives us an opportunity to talk about these things and hopefully that will resonate with the Chinese people.''
``We are getting results through this process that wouldn't have been achieved without it,'' Paulson told reporters as he traveled to China, where he arrived late yesterday. The Chinese currency's ``rate of appreciation has gone up materially over the past year,'' he said.
Paulson returns to China with the U.S. Congress increasingly hostile toward America's second-largest trading partner, which lawmakers claim keeps its currency weak to increase exports. At the same time, China's leaders have failed to cool their economy, which grew at the fastest pace in 12 years last quarter, and rein in the record trade surplus.
On July 26, the Senate Finance Committee approved legislation aimed at pushing China to let the yuan appreciate more rapidly. The measure allows U.S. companies to seek anti- dumping duties to compensate for the effects of an undervalued currency.
``I'm sick and tired of our Treasury Department pussyfooting around,'' Iowa Senator Charles Grassley, the senior Republican on the Finance Committee, said in an interview on July 23.
The yuan has risen about 5 percent against the dollar in the past year, compared with a gain of about 1.7 percent in the previous 12 months. On July 21, 2005, China ended a decade-old peg to the dollar.
Paulson, 61, didn't discuss the U.S. economy or financial markets during the media briefing on his military aircraft.
Treasury Strategy
He was selected for the Treasury job last year partly because of ties with Chinese officials honed as chief executive officer of Goldman Sachs Group Inc. Paulson said in a July 26 interview that his strategy is to engage China, convincing its leaders that a flexible exchange rate and open markets are in their interest.
The four-day trip is his fourth to China in a year as Treasury secretary, surpassing the combined total of his two immediate predecessors, John Snow and Paul O'Neill. One of the visits was to launch a series of twice-annual talks called the Strategic Economic Dialogue.
The dialogue, led by Paulson and Chinese Vice Premier Wu Yi, puts the heads of each nation's central bank and the leaders of ministries ranging from Finance to Health around one table. Paulson considers it important because officials such as Federal Reserve Chairman Ben S. Bernanke and Trade Representative Susan Schwab get to make their case to most of China's cabinet, rather than only their direct counterparts.
China's Pledges
The second meeting, held in Washington in May, ended with a pledge by China to open its skies to more U.S. flights and to allow international banks to issue yuan-denominated credit cards. That failed to impress the lawmakers who were looking for an appreciation of the yuan of as much as 40 percent.
``Paulson has not done a very good job either in managing expectations in Washington or in constructing goals for the SED that would create clear victories that he could carry back home,'' Arthur Kroeber, managing director of Dragonomics Research & Advisory in Beijing, said in an interview. ``He is basically on the defensive right now.''
Widening Surplus
Behind the rising congressional ire is China's surging trade surplus. China exported $112.5 billion more than it imported in the first six months of this year, an increase of 84 percent from a year earlier. The National Development and Reform Commission, China's top planning agency, forecasts the surplus will widen to between $250 billion and $300 billion this year.
China's economy, which accounts for about a 10th of global growth, expanded 11.9 percent last quarter compared with a year earlier. Three interest rate increases since March and restrictions on bank lending haven't slowed the surge.
Paulson said China is no more likely to change its policies under threat of sanctions than would be U.S. legislators if the situation were reversed. The country's leaders are more likely to respond to an argument that the country's economy has grown too large to manage from Beijing.
``There's a lot of concern around the world about the pace of China's economic development and the perceived threat that represents to a lot of economies,'' Paulson said. ``A lot of that is misplaced. The biggest concern is if China had a major shock or problem. The greatest risk is if they move too slowly.''
Meeting With Hu
Paulson will be in Beijing on July 31 and Aug. 1 for meetings with President Hu Jintao, Wu and other officials. He said the sessions will cover ways to ``rebalance'' China's economic growth, the environment, opening China's financial markets and the safety of Chinese exports, including food. The aim is to prepare for the next ministerial gathering under the dialogue, set for the Chinese capital in December, Paulson said.
First, Paulson will today visit Qinghai Lake, China's largest inland sea, covering 2,278 square miles of the Tibetan Plateau at 10,515 feet (3,205 meters) above sea level.
The point of the visit is to show that the U.S. is concerned about more than the exchange rate and pirated Hollywood movies, he said. Due in part to the effects of global warming, the lake is shrinking at a rate that would see it disappear in 200 years, according to the Chinese government.
Paulson said he wants to highlight the efforts the U.S. and China are making to try to better the environment, such as a push to lower import tariffs that increase the cost of buying technology that cuts smokestack emissions.
``People in China care about the environment every bit as much as Americans care about the environment,'' Paulson said. ``This trip gives us an opportunity to talk about these things and hopefully that will resonate with the Chinese people.''
China Moves to Change Damaged Global Image
SHANGHAI, July 26 — After years of being accused by Western nations of making only token gestures to fight fake goods and months of complaints about the safety of its exports, China is taking extraordinary steps to change its image.
Last week, Beijing unveiled new controls aimed at fighting counterfeit drugs and substandard exports. High-ranking officials and regulators vowed to strengthen China’s food safety system, tighten controls over chemical use by large seafood and meat producers, and create a system that holds producers more accountable for selling unsafe products.
The government also announced that it had broken up a series of criminal rings that operated huge manufacturing centers, producing goods as varied as pirated Microsoft software, fake Viagra and imitation Crest toothpaste.
Authorities here have also reached out to Ogilvy Public Relations, an international consultancy that advises on crisis management.
“This is a very concerted effort to show they are doing something,” said Russell Leigh Moses, a longtime political analyst based in Beijing. “They are using work groups, issuing directives and closing factories. They are rolling out the artillery.”
Spurred on by a sense of economic realpolitik, Beijing has grown particularly fearful that mounting international pressure could lead to sanctions or embargoes, and thereby hinder China’s booming economy.
Whether promising to overhaul China’s regulatory regime and stepping up enforcement will be enough to tame what some view as the Wild, Wild East of capitalism is unclear, analysts say, because some of the problems are so deeply rooted.
“There’s no quick fix,” says Henk Bekedam, the World Health Organization’s top representative in China. “China has perhaps been cutting some corners because the focus has been on growth. But they have 5,000 companies that produce medicine. That’s far too many.
“The government has a limited ability to enforce things,” he said. “They need to start with simple things: reduce the number of people you monitor.”
Still, even critics of China’s policies have been impressed with the catalog of recently announced changes.
The bold actions, experts say, are partly aimed at easing political pressure from the United States and the European Union, where regulators and politicians are pressing for assurances about the quality and safety of goods made here after a string of recalls involving goods like tainted pet food and toothpaste, defective tires and dangerous toys.
In Washington this month, President Bush created a panel of cabinet officials to make recommendations aimed at minimizing the dangers from imported foods or other products. The announcement coincided with Congressional hearings on food safety.
And in recent weeks, several Democrats in Congress have pressed for tougher measures against China, including trade sanctions and new money for American regulators to guard against unsafe goods entering the country, particularly from China.
Those issues will lead the agenda for the United States Treasury secretary, Henry M. Paulson Jr., as he arrives for talks with Chinese officials this weekend.
Europe is also concerned. Top European Union officials are planning to meet in Beijing next month to discuss food safety and other issues.
And on Wednesday, the head of the European Union’s consumer protection agency, Meglena Kuneva, pressed Chinese regulators to improve their standards during a tour of a government testing lab and a Chinese toy factory near the city of Nanjing.
Ms. Kuneva said that she was hopeful China would make progress, but she added that if its products continued to be a problem, the European Union would block market access.
“Toys like this can be in the hands of children, so do a good job,” Ms. Kuneva told a young inspector. “The good name of this country is in your hands.”
Many experts doubt whether China can follow through on its promises — some of which have been made before. And Chinese officials have not conceded that all the problems lie here. Regulators have repeatedly accused the international news media of exaggerating the number of problem Chinese goods.
Some Chinese businessmen say protectionists in the West are seizing on isolated cases to drum up support for trade sanctions, at a time when China is amassing a huge trade surplus.
China has also argued that the quality of the food it exports is no worse than the quality of American food entering China. After the United States Food and Drug Administration moved last month to block five types of Chinese seafood from entering the United States market, China responded by banning some imports of American frozen poultry and pork, insisting they were tainted by antibiotic residues.
Still, many experts say China has also become more candid about the challenges facing the country.
The government recently acknowledged that 20 percent of its consumer goods and 14 percent of the truck tires made here failed safety inspections.
And, most dramatically, just two weeks ago, China executed the former head of the State Food and Drug Administration, Zheng Xiaoyu, for accepting bribes and failing to police the marketplace. Days after he was executed, a top drug agency official admitted that the obstacles to repairing the regulatory systems were daunting.
The admissions were a surprising about-face for China, which has been slow to accept blame for shipping tainted products overseas.
But analysts say that as the evidence and bad news began to mount this year, China was forced to respond in a less adversarial way, particularly because the country’s booming economy is built on foreign investment and trade.
Recently, the government has even sought crisis management advice from Western consultants.
“They have not historically been advice takers,” said Scott Kronick, president of Ogilvy Public Relations Worldwide China, part of the WPP Group. “But they are reaching out in a genuine way to seek advice. I think they recognize everything doesn’t have to be rosy.”
Since then, officials from various regulatory agencies and ministries have held news conferences to announce new regulations or to brief the news media on successful crackdowns.
Last week, China’s quality inspectors promised to improve quarterly reports to the European Union about consumer product safety. And on Thursday, the government said it planned to offer large rewards to citizens who report on illegal practices in the food industry.
Many experts say the problem in China is not oversight but enforcement.
“The issue is not whether Chinese businesses are regulated; they are,” says Yasheng Huang, an associate professor at the Sloan School of Management at the Massachusetts Institute of Technology. “The issue is that the regulators themselves are unable to be impartial in the enforcement of the laws. Those laws are meaningless in a system that does not even pretend to have judicial independence, media freedom and legislative oversight.”
Some say regulators are susceptible to corruption and that local inspectors can easily be bought off or persuaded that cracking down on local companies hurts economic development and risks jobs.
That may explain why after years of promising to tackle piracy and counterfeiting, the practice continues to flourish in China, often in the open.
Last week, the United States’ Federal Bureau of Investigation and China’s Ministry of Public Security said they had broken up one of the biggest software piracy rings ever, arresting 25 people and closing six manufacturing facilities in China.
They also seized $500 million worth of pirated Microsoft and Symantec software. A day later, the government here said it had seized a ton of fake Viagra pills and closed counterfeit drug factories that produced Tamiflu, anti-malaria drugs and other products.
The seizures may be a sign of progress, but they are also an indication of how widespread the problem has been for China, experts say.
“The problem is these are campaigns and they tend to be turned off at some point,” says Mr. Moses, the analyst in Beijing.
Last week, Beijing unveiled new controls aimed at fighting counterfeit drugs and substandard exports. High-ranking officials and regulators vowed to strengthen China’s food safety system, tighten controls over chemical use by large seafood and meat producers, and create a system that holds producers more accountable for selling unsafe products.
The government also announced that it had broken up a series of criminal rings that operated huge manufacturing centers, producing goods as varied as pirated Microsoft software, fake Viagra and imitation Crest toothpaste.
Authorities here have also reached out to Ogilvy Public Relations, an international consultancy that advises on crisis management.
“This is a very concerted effort to show they are doing something,” said Russell Leigh Moses, a longtime political analyst based in Beijing. “They are using work groups, issuing directives and closing factories. They are rolling out the artillery.”
Spurred on by a sense of economic realpolitik, Beijing has grown particularly fearful that mounting international pressure could lead to sanctions or embargoes, and thereby hinder China’s booming economy.
Whether promising to overhaul China’s regulatory regime and stepping up enforcement will be enough to tame what some view as the Wild, Wild East of capitalism is unclear, analysts say, because some of the problems are so deeply rooted.
“There’s no quick fix,” says Henk Bekedam, the World Health Organization’s top representative in China. “China has perhaps been cutting some corners because the focus has been on growth. But they have 5,000 companies that produce medicine. That’s far too many.
“The government has a limited ability to enforce things,” he said. “They need to start with simple things: reduce the number of people you monitor.”
Still, even critics of China’s policies have been impressed with the catalog of recently announced changes.
The bold actions, experts say, are partly aimed at easing political pressure from the United States and the European Union, where regulators and politicians are pressing for assurances about the quality and safety of goods made here after a string of recalls involving goods like tainted pet food and toothpaste, defective tires and dangerous toys.
In Washington this month, President Bush created a panel of cabinet officials to make recommendations aimed at minimizing the dangers from imported foods or other products. The announcement coincided with Congressional hearings on food safety.
And in recent weeks, several Democrats in Congress have pressed for tougher measures against China, including trade sanctions and new money for American regulators to guard against unsafe goods entering the country, particularly from China.
Those issues will lead the agenda for the United States Treasury secretary, Henry M. Paulson Jr., as he arrives for talks with Chinese officials this weekend.
Europe is also concerned. Top European Union officials are planning to meet in Beijing next month to discuss food safety and other issues.
And on Wednesday, the head of the European Union’s consumer protection agency, Meglena Kuneva, pressed Chinese regulators to improve their standards during a tour of a government testing lab and a Chinese toy factory near the city of Nanjing.
Ms. Kuneva said that she was hopeful China would make progress, but she added that if its products continued to be a problem, the European Union would block market access.
“Toys like this can be in the hands of children, so do a good job,” Ms. Kuneva told a young inspector. “The good name of this country is in your hands.”
Many experts doubt whether China can follow through on its promises — some of which have been made before. And Chinese officials have not conceded that all the problems lie here. Regulators have repeatedly accused the international news media of exaggerating the number of problem Chinese goods.
Some Chinese businessmen say protectionists in the West are seizing on isolated cases to drum up support for trade sanctions, at a time when China is amassing a huge trade surplus.
China has also argued that the quality of the food it exports is no worse than the quality of American food entering China. After the United States Food and Drug Administration moved last month to block five types of Chinese seafood from entering the United States market, China responded by banning some imports of American frozen poultry and pork, insisting they were tainted by antibiotic residues.
Still, many experts say China has also become more candid about the challenges facing the country.
The government recently acknowledged that 20 percent of its consumer goods and 14 percent of the truck tires made here failed safety inspections.
And, most dramatically, just two weeks ago, China executed the former head of the State Food and Drug Administration, Zheng Xiaoyu, for accepting bribes and failing to police the marketplace. Days after he was executed, a top drug agency official admitted that the obstacles to repairing the regulatory systems were daunting.
The admissions were a surprising about-face for China, which has been slow to accept blame for shipping tainted products overseas.
But analysts say that as the evidence and bad news began to mount this year, China was forced to respond in a less adversarial way, particularly because the country’s booming economy is built on foreign investment and trade.
Recently, the government has even sought crisis management advice from Western consultants.
“They have not historically been advice takers,” said Scott Kronick, president of Ogilvy Public Relations Worldwide China, part of the WPP Group. “But they are reaching out in a genuine way to seek advice. I think they recognize everything doesn’t have to be rosy.”
Since then, officials from various regulatory agencies and ministries have held news conferences to announce new regulations or to brief the news media on successful crackdowns.
Last week, China’s quality inspectors promised to improve quarterly reports to the European Union about consumer product safety. And on Thursday, the government said it planned to offer large rewards to citizens who report on illegal practices in the food industry.
Many experts say the problem in China is not oversight but enforcement.
“The issue is not whether Chinese businesses are regulated; they are,” says Yasheng Huang, an associate professor at the Sloan School of Management at the Massachusetts Institute of Technology. “The issue is that the regulators themselves are unable to be impartial in the enforcement of the laws. Those laws are meaningless in a system that does not even pretend to have judicial independence, media freedom and legislative oversight.”
Some say regulators are susceptible to corruption and that local inspectors can easily be bought off or persuaded that cracking down on local companies hurts economic development and risks jobs.
That may explain why after years of promising to tackle piracy and counterfeiting, the practice continues to flourish in China, often in the open.
Last week, the United States’ Federal Bureau of Investigation and China’s Ministry of Public Security said they had broken up one of the biggest software piracy rings ever, arresting 25 people and closing six manufacturing facilities in China.
They also seized $500 million worth of pirated Microsoft and Symantec software. A day later, the government here said it had seized a ton of fake Viagra pills and closed counterfeit drug factories that produced Tamiflu, anti-malaria drugs and other products.
The seizures may be a sign of progress, but they are also an indication of how widespread the problem has been for China, experts say.
“The problem is these are campaigns and they tend to be turned off at some point,” says Mr. Moses, the analyst in Beijing.
Friday, July 27, 2007
Tech Stocks Sink Lower; Intel, AMD Shares Slip
The Wall Street Journal Online
The Nasdaq Composite Index continued to slide Friday following the recent selloff, as an upbeat GDP report failed to ease investors' concerns over the economy.
In afternoon trading, the Nasdaq Composite Index gave up 24.18, or 0.9%, to 2575.40 points, after plunging 1.8% in the previous session on worries over the housing and energy markets. Morgan Stanley's high-tech index lost 4.53 to 637.43 and the Nasdaq 100 Index of nonfinancial stocks shed 15.56 to 1970.53.
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Stocks got an initial lift following a report early Friday that gross domestic product rose at a 3.4% annual rate April through June, but jittery investors shifted back to selling by midday.
Making headlines in the technology sector, shares of Intel slipped 22 cents to $23.78 on the Nasdaq Stock Market after European antitrust authorities charged the company with illegal tactics in competing against rival chip maker Advanced Micro Devices.
The commission said Intel offered computer hardware manufacturers cash payments, rebates and discounts to use its chips instead of AMD's. The Commission described these deals as part of a "single, overall anticompetitive strategy."
Shares of AMD dropped 82 cents, or 5.6%, to $13.91 on the New York Stock Exchange.
QLogic plunged $2.80, or 17%, to $13.87 on Nasdaq after the maker of storage-network infrastructure components reported lower-than-expected first-quarter earnings and revenue. QLogic said its first-quarter earnings fell 9.9% to $19 million, or 12 cents a share, while revenue for the recent quarter rose 2% to $139.8 million.
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Shares of Netgear slid $8.70, or 23%, to $29.12 on Nasdaq after the networking products company said its second-quarter net income fell 38% to $6.13 million, or 17 cents a share. Revenue grew 26% to $164.3 million.
MicroStrategy shares fell $9.24, or 11%, to $76.34 on Nasdaq. The maker of business software posted a 30% drop in net income, and said revenue for the recent quarter rose 14% to $84.8 million as product support and other services revenue rose 24%, offsetting a 6% decline in product-license revenue.
Shares of Microchip Technology lost 11 cents to $37.06 on Nasdaq after the semiconductor company's third-quarter sales growth forecast fell below analysts' revenue estimates. Microchip said revenue for the recent quarter increased slightly to $264.1 million from $262.6 million a year ago, and it expects third-quarter sales to be flat to up to 2%.
Cisco Systems slipped 12 cents to 29.55 on Nasdaq after the company announced it would buy a $150 million stake in software designer VMware's initial public offering. Cisco's board also approved an additional $5 billion worth of stock buybacks, to add to its previous plan for $47 billion in buybacks.
Semiconductor test equipment maker Cohu is up 51 cents to $21.12 on Nasdaq after reporting second-quarter earnings of $2 million. Cohu's earnings fell 57% from the second quarter a year ago, during which the company earned $4.7 million. But its revenue rose to $66.4 million from $61.9 million.
CNet Networks, a media company, dropped 9.4%, or 78 cents, to $7.48 on Nasdaq after it swung to a second-quarter loss of $76,000, compared to earnings of $5.2 million during the same period last year. The company cited costs related to its stock options investigation to explain the loss. CNet's revenue rose to $97.2 million from $92.4 million a year ago.
Varian Semiconductor Equipment Association gained $1.55, or 3.4%, to $46.55 on Nasdaq after the company reported that its fiscal third-quarter revenue had increased by 55% from the same period last year. The chip company's earnings, however, fell to $23.4 million from $24.7 million.
The Nasdaq Composite Index continued to slide Friday following the recent selloff, as an upbeat GDP report failed to ease investors' concerns over the economy.
In afternoon trading, the Nasdaq Composite Index gave up 24.18, or 0.9%, to 2575.40 points, after plunging 1.8% in the previous session on worries over the housing and energy markets. Morgan Stanley's high-tech index lost 4.53 to 637.43 and the Nasdaq 100 Index of nonfinancial stocks shed 15.56 to 1970.53.
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Stocks got an initial lift following a report early Friday that gross domestic product rose at a 3.4% annual rate April through June, but jittery investors shifted back to selling by midday.
Making headlines in the technology sector, shares of Intel slipped 22 cents to $23.78 on the Nasdaq Stock Market after European antitrust authorities charged the company with illegal tactics in competing against rival chip maker Advanced Micro Devices.
The commission said Intel offered computer hardware manufacturers cash payments, rebates and discounts to use its chips instead of AMD's. The Commission described these deals as part of a "single, overall anticompetitive strategy."
Shares of AMD dropped 82 cents, or 5.6%, to $13.91 on the New York Stock Exchange.
QLogic plunged $2.80, or 17%, to $13.87 on Nasdaq after the maker of storage-network infrastructure components reported lower-than-expected first-quarter earnings and revenue. QLogic said its first-quarter earnings fell 9.9% to $19 million, or 12 cents a share, while revenue for the recent quarter rose 2% to $139.8 million.
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Shares of Netgear slid $8.70, or 23%, to $29.12 on Nasdaq after the networking products company said its second-quarter net income fell 38% to $6.13 million, or 17 cents a share. Revenue grew 26% to $164.3 million.
MicroStrategy shares fell $9.24, or 11%, to $76.34 on Nasdaq. The maker of business software posted a 30% drop in net income, and said revenue for the recent quarter rose 14% to $84.8 million as product support and other services revenue rose 24%, offsetting a 6% decline in product-license revenue.
Shares of Microchip Technology lost 11 cents to $37.06 on Nasdaq after the semiconductor company's third-quarter sales growth forecast fell below analysts' revenue estimates. Microchip said revenue for the recent quarter increased slightly to $264.1 million from $262.6 million a year ago, and it expects third-quarter sales to be flat to up to 2%.
Cisco Systems slipped 12 cents to 29.55 on Nasdaq after the company announced it would buy a $150 million stake in software designer VMware's initial public offering. Cisco's board also approved an additional $5 billion worth of stock buybacks, to add to its previous plan for $47 billion in buybacks.
Semiconductor test equipment maker Cohu is up 51 cents to $21.12 on Nasdaq after reporting second-quarter earnings of $2 million. Cohu's earnings fell 57% from the second quarter a year ago, during which the company earned $4.7 million. But its revenue rose to $66.4 million from $61.9 million.
CNet Networks, a media company, dropped 9.4%, or 78 cents, to $7.48 on Nasdaq after it swung to a second-quarter loss of $76,000, compared to earnings of $5.2 million during the same period last year. The company cited costs related to its stock options investigation to explain the loss. CNet's revenue rose to $97.2 million from $92.4 million a year ago.
Varian Semiconductor Equipment Association gained $1.55, or 3.4%, to $46.55 on Nasdaq after the company reported that its fiscal third-quarter revenue had increased by 55% from the same period last year. The chip company's earnings, however, fell to $23.4 million from $24.7 million.
China seizes dozens of fake types of drugs
China announced Friday the arrests of 15 gang members for making dozens of fake drugs, including rabies vaccines and blood protein, in the latest example of graft plaguing the nation's health sector.
The gang was caught producing 67 types of fake drugs, packing some of them with starch, and then selling them to medical institutions, the official Xinhua news agency reported.
Among the drugs seized during the raids on the gang were 10,000 doses of fake rabies vaccines, 20,250 bottles of an injection used to treat cardiovascular disease and 211 bottles of blood protein, Xinhua said.
Fifteen gang members, based in China's northeast Heilongjiang province, were arrested in the raids, according to Xinhua, which cited local police.
The announcement of the arrests come as China struggles to restore confidence in its corruption-wracked health system.
The former head of the State Food and Drug Administration, Zheng Xiaoyu, was executed this month following his conviction for taking bribes to approve hundreds of medicines, some of which proved dangerous.
China then announced fresh measures in an effort to ensure substandard drugs did not reach patients, bringing in extra layers of approval processes.
"In a renewed effort to ensure drug safety and salvage its credibility, China's drug watchdog announced revised methods... as part of the national crusade on restoring public confidence in the entire sector," the China Daily newspaper said in an editorial on July 12 after the regulations were announced.
In one of the most grisly examples of the devastating impacts of corruption and low standards on China's health system, thousands of people in central Henan province contracted AIDS through tainted blood transfusions in the 1990s.
The gang was caught producing 67 types of fake drugs, packing some of them with starch, and then selling them to medical institutions, the official Xinhua news agency reported.
Among the drugs seized during the raids on the gang were 10,000 doses of fake rabies vaccines, 20,250 bottles of an injection used to treat cardiovascular disease and 211 bottles of blood protein, Xinhua said.
Fifteen gang members, based in China's northeast Heilongjiang province, were arrested in the raids, according to Xinhua, which cited local police.
The announcement of the arrests come as China struggles to restore confidence in its corruption-wracked health system.
The former head of the State Food and Drug Administration, Zheng Xiaoyu, was executed this month following his conviction for taking bribes to approve hundreds of medicines, some of which proved dangerous.
China then announced fresh measures in an effort to ensure substandard drugs did not reach patients, bringing in extra layers of approval processes.
"In a renewed effort to ensure drug safety and salvage its credibility, China's drug watchdog announced revised methods... as part of the national crusade on restoring public confidence in the entire sector," the China Daily newspaper said in an editorial on July 12 after the regulations were announced.
In one of the most grisly examples of the devastating impacts of corruption and low standards on China's health system, thousands of people in central Henan province contracted AIDS through tainted blood transfusions in the 1990s.
China's SMIC Reports Yet Another Loss
Red ink continues to flow from Semiconductor Manufacturing International Corp. (SMIC). China's largest chip maker reported another loss during the second quarter as its struggle with profitability dragged on.
SMIC reported a second-quarter loss of US$2.1 million on revenue of $374.8 million. Excluding subsidies from the Chinese government, SMIC's losses were greater still. Without this non-operating income, the company turned in a loss of $8.6 million.
By comparison, SMIC reported a profit of $1.4 million on revenue of $361.4 million during the same period last year. But the company's profit during that period came as the result of an $18.9 million tax credit. Without that one-time gain, the company had a loss of $17.3 million.
These are dark days for SMIC, once the darling of pundits who predicted the company would lead China to dominate the contract chip-making market. Instead the Shanghai company has struggled to turn a profit in recent years, even as rivals in Taiwan and Singapore showed better results.
Richard Chang, SMIC's founder and CEO, described the second quarter as a "most difficult quarter" during a conference call with analysts. Chang said the company will post better results during the third and fourth quarters. "Our goal is still to be profitable for the entire year," he said.
SMIC reported a $9 million profit during the first quarter, thanks to a $6 million tax credit and a one-time gain of $27.2 million from the sale of used chip-making equipment. These results underscore SMIC's recent reliance on one-time gains to turn a profit.
SMIC's gross margin-- which shows the basic profitability of the chips it makes-- underscores the company's profitability problem. SMIC's gross margin during the second quarter was 10.3 percent.
By comparison, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), the top contract chip maker, reported its gross margin during the same period was 43 percent. Singapore's Chartered Semiconductor Manufacturing Ltd.'s second-quarter gross margin was 24.2 percent.
More troubling for SMIC, the company's gross margin has declined over time, suggesting it's under pressure to cut its manufacturing prices. During the second quarter of 2006, the company's gross margin was 12 percent.
Part of SMIC's problem is DRAM, which commands a significantly lower price than other chips, such as processors and graphics chips. Compared to TSMC and Chartered, SMIC relies more heavily on DRAM for revenue, with these chips accounting for 28.9 percent of its revenue during the second quarter. The company was also hit by an inventory glut that has slowed demand for chips in recent quarters.
SMIC reported a second-quarter loss of US$2.1 million on revenue of $374.8 million. Excluding subsidies from the Chinese government, SMIC's losses were greater still. Without this non-operating income, the company turned in a loss of $8.6 million.
By comparison, SMIC reported a profit of $1.4 million on revenue of $361.4 million during the same period last year. But the company's profit during that period came as the result of an $18.9 million tax credit. Without that one-time gain, the company had a loss of $17.3 million.
These are dark days for SMIC, once the darling of pundits who predicted the company would lead China to dominate the contract chip-making market. Instead the Shanghai company has struggled to turn a profit in recent years, even as rivals in Taiwan and Singapore showed better results.
Richard Chang, SMIC's founder and CEO, described the second quarter as a "most difficult quarter" during a conference call with analysts. Chang said the company will post better results during the third and fourth quarters. "Our goal is still to be profitable for the entire year," he said.
SMIC reported a $9 million profit during the first quarter, thanks to a $6 million tax credit and a one-time gain of $27.2 million from the sale of used chip-making equipment. These results underscore SMIC's recent reliance on one-time gains to turn a profit.
SMIC's gross margin-- which shows the basic profitability of the chips it makes-- underscores the company's profitability problem. SMIC's gross margin during the second quarter was 10.3 percent.
By comparison, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), the top contract chip maker, reported its gross margin during the same period was 43 percent. Singapore's Chartered Semiconductor Manufacturing Ltd.'s second-quarter gross margin was 24.2 percent.
More troubling for SMIC, the company's gross margin has declined over time, suggesting it's under pressure to cut its manufacturing prices. During the second quarter of 2006, the company's gross margin was 12 percent.
Part of SMIC's problem is DRAM, which commands a significantly lower price than other chips, such as processors and graphics chips. Compared to TSMC and Chartered, SMIC relies more heavily on DRAM for revenue, with these chips accounting for 28.9 percent of its revenue during the second quarter. The company was also hit by an inventory glut that has slowed demand for chips in recent quarters.
Food safety crucial to China's reputation: premier
China needs to improve the quality of its exports to win a better international reputation, Premier Wen Jiabao said during a meeting on Friday that set out punishments for food and drug firms that violate standards.
"Product quality relates to our people's interest, the survival and development of our enterprises and the image of our nation," Wen told the meeting on export quality.
It was crucial to win over the international market with good-quality exports, Wen added.
Chinese exports of everything from fish to toys, pet food to toothpaste, have been found in recent months to be mislabeled, unsafe or dangerously contaminated, creating an international backlash.
Wen's remarks were reported on state radio and TV, in a shift from a few months ago when most Chinese were unaware of the international storm surrounding food, drugs and other products.
"We will not avoid problems, but we protest against untrue reports that tell only part of the story, and trade protectionism and discrimination," Wen was quoted as saying.
Food safety scandals are a regular topic in the Chinese media, but the nation lacks a basic food safety law and the ability to enforce its food and drug safety regulations at home or for exports. Its imports are generally carefully scrutinized.
The head of the State Food and Drug Administration was executed last month, after being found guilty of accepting bribes to approve drugs.
"It is a timely, urgent and important job and also a long-term and enduring task for us to fully improve the quality of Chinese products," Wen said.
China would raise the threshold for products relating to human health and safety so as to prevent problematic exports from leaving the country, he said.
The authorities would also check every stage of production, including raw materials, additives and intermediate products, so as to make the "made in China" brand a symbol for goods with great quality, Wen said.
Producers of food, drugs and other agricultural goods that violate the food safety rules would face fines of up to 100,000 yuan ($13,220), have operation certificates or export permits cancelled or even risk arrest, according to regulations carried on the central government Web site (www.gov.cn).
($1=7.562 Yuan)
"Product quality relates to our people's interest, the survival and development of our enterprises and the image of our nation," Wen told the meeting on export quality.
It was crucial to win over the international market with good-quality exports, Wen added.
Chinese exports of everything from fish to toys, pet food to toothpaste, have been found in recent months to be mislabeled, unsafe or dangerously contaminated, creating an international backlash.
Wen's remarks were reported on state radio and TV, in a shift from a few months ago when most Chinese were unaware of the international storm surrounding food, drugs and other products.
"We will not avoid problems, but we protest against untrue reports that tell only part of the story, and trade protectionism and discrimination," Wen was quoted as saying.
Food safety scandals are a regular topic in the Chinese media, but the nation lacks a basic food safety law and the ability to enforce its food and drug safety regulations at home or for exports. Its imports are generally carefully scrutinized.
The head of the State Food and Drug Administration was executed last month, after being found guilty of accepting bribes to approve drugs.
"It is a timely, urgent and important job and also a long-term and enduring task for us to fully improve the quality of Chinese products," Wen said.
China would raise the threshold for products relating to human health and safety so as to prevent problematic exports from leaving the country, he said.
The authorities would also check every stage of production, including raw materials, additives and intermediate products, so as to make the "made in China" brand a symbol for goods with great quality, Wen said.
Producers of food, drugs and other agricultural goods that violate the food safety rules would face fines of up to 100,000 yuan ($13,220), have operation certificates or export permits cancelled or even risk arrest, according to regulations carried on the central government Web site (www.gov.cn).
($1=7.562 Yuan)
Thursday, July 26, 2007
Stocks Plummet on Credit Worries
The Wall Street Journal Online
It's like Johnny Cash's "Ring of Fire" – stocks just keep going "down, down, down."
Widening credit-market worries and surging oil prices forced the major indexes down more than 2% each on Thursday, as strong earnings from Apple and Ford Motor weren't enough to overcome a palpable sense of unease among investors.
The Dow Jones Industrial Average fell 296.86 points to 13488.21. The S&P 500 declined 37.25 to 1480.84, and the Nasdaq Composite Index was off 63.98 to 2584.19.
Trading curbs, which are meant to reduce volatility, were put into effect on the NYSE by midmorning. Volatility was high, with the VIX index over 20, continuing a trend that has gone on for over a week. And breadth was poor, with decliners outnumbering advancers on the NYSE by more than twelve to one.
"Everybody's so nervous," said Anthony Conroy, head trader at BNY Brokerage. "You have high energy prices, you have problems with mortgage financing … The dollar/yen broke 120, hurting the carry trade, and there are worries about the takeover game coming to an end."
"The major, major thing all goes back to weakness in the mortgages," said Larry Peruzzi, equity trader at Boston Company Asset Management.
More poor housing data only underlined the mortgage worry. Sales of single-family homes dropped 6.6% to a seasonally adjusted annual rate of 834,000, the Commerce Department said. Inventories stayed about even, and the median price of a new home fell 2.2% to $237,900. The data were worse than expected, failing to meet even low expectations.
Adding to the misery, builders got hammered as three major players fell into the red in the recent quarter after posting year-ago profits. Beazer Homes USA fell 11% after it swung to a loss of $123 million, or $3.20 a share, compared with earnings of $102.6 million, or $2.37 a share, a year earlier. D.R. Horton fell 4.1% after the company said it swung to a net loss for the period as it took land-related writedowns amid the continuing downturn in the housing market. Pulte Homes shares fell 4.9% after the company said it too swung to a net loss in the second quarter and that its revenue fell 40% to $2.02 billion. Also, WCI Communities tumbled 21% after it said there are no definitive proposals to buy it.
Oil prices rose 56 cents to $76.44 a barrel, near Nymex crude's record closing high last July of $77.03, continuing an upward trend that gained momentum Wednesday after weekly government inventory data showed a drawdown in oil stocks.
MARKETS ON THE MOVE
[Markets Data Center]
Track indexes and hot stocks, with roll over charting and headlines. Plus, comprehensive coverage of bonds, commodities and forex. Markets Data Center highlights:
Most Actives, Gainers, Losers
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Intraday Futures and Currencies
MARKET WRAP
• Most Asian Markets Close Lower
• European Shares Move Lower
• Stocks Advance, Overcoming Nerves
Apple shares rose 6.9% after the company reported a 73% profit rise on sales of Macintosh computers. The computer maker forecast that it will have sold one million iPhones by the end of its fiscal fourth quarter.
Credit-market woes have filtered into the stock market, as banks have been hurt by having to take loans onto their balance sheets instead of passing them on to outside investors. Wall Street is also concerned that a lack of funding will slow the wave of acquisitions from private-equity firms. These concerns have been around for months, but signs of real problems have been accelerating in recent weeks, with major acquisitions unable to find financing and the home-builders reinforcing the market's problems.
Shares of Exxon Mobil fell 4.7% after the world's biggest publicly traded oil company posted a 1% drop in second-quarter net income as lower natural-gas volume was offset by higher refining, marketing and chemical margins. This was particularly puzzling for investors, because usually high oil prices are a boon for oil titans like Exxon Mobil.
Other Dow-component decliners reflected woes in their sectors. Alcoa, which is still coming off a buyout-fueled rise, suffered a 7.3% decline, as the aluminum and airline sectors faltered amid higher oil prices. Other heavy industrials such as Boeing, Dupont and General Motors were off, too. Financials Citigroup and J.P. Morgan Chase lost 4.5% and 3.4% respectively as that whole sector weakened on the subprime and credit worries.
In other news for the financial sector, Wells Fargo said it will close its nonprime wholesale lending business, which processes and funds subprime loans for third-party mortgage brokers. Shares were down 2.4%.
There were isolated bright spots. Ford Motor reported its first profit in two years as North American losses substantially narrowed amid its ongoing restructuring. The No. 2 auto maker in the U.S. also said it is exploring the potential sale of Jaguar and Land Rover. Ford shares rose 2.9%. And the Chinese Web search company Baidu.com reported that its profit doubled, sending its shares up 15%.
Mr. Conroy said "earnings are a strong catalyst for the future" because they have been coming in better than expected. "It's probably a good buying opportunity in the long term."
Indeed, many investors are still bullish, citing price to earnings ratios that are reasonable by historic standards, as well as the remarkable bull run stocks have enjoyed in recent months. After all, it wasn't long ago that the Dow breached 13000 for the first time.
Shares of Kraft Foods fell 4.1% after news that Berkshire Hathaway, run by billionaire Warren Buffett, has acquired a small stake in the company, joining veteran Wall Street raiders Carl Icahn and Nelson Peltz.
In other economic news, the Commerce Department said durable-goods orders increased in June by 1.4% to a seasonally adjusted $217.07 billion. Wall Street expected a 1.6% gain in durable-goods orders last month. And initial jobless claims fell 2,000 to 301,000 on a seasonally adjusted basis in the week ended July 21, the Labor Department said. Economists, on average, had expected claims would increase by 9,000.
The dollar dropped sharply against the yen. Yen strength can be an indicator of diminished risk appetite, as some investors borrow in the Japanese currency to invest elsewhere. Yields on Treasury bonds fell, a sign of further safe-haven buying.
At a business-taxation and global competitiveness conference sponsored by the Bush administration, Federal Reserve Chairman Alan Greenspan said he expects global interest rates will rise. "The cost of capital is not going to stay down at this level," he said. However, in the U.S. fed-funds futures market, investors raised the odds of a quarter-percentage-point cut by the end of the year to 76%.
In major market action:
Stocks retreated. On the New York Stock Exchange Thursday, 256 stocks gained and 3,083 declined, on volume of 1.26 billion shares traded on the exchange.
Bonds rose. The 10-year note rose 29/32, or $9.0625 for every $1,000 invested, yielding 4.785% Thursday. The 30-year bond gained 1-11/32, yielding 4.939%.
The dollar weakened. The euro was trading at $1.3764 from $1.3716 late Wednesday, while the dollar was at 118.88 yen from 120.51 yen.
It's like Johnny Cash's "Ring of Fire" – stocks just keep going "down, down, down."
Widening credit-market worries and surging oil prices forced the major indexes down more than 2% each on Thursday, as strong earnings from Apple and Ford Motor weren't enough to overcome a palpable sense of unease among investors.
The Dow Jones Industrial Average fell 296.86 points to 13488.21. The S&P 500 declined 37.25 to 1480.84, and the Nasdaq Composite Index was off 63.98 to 2584.19.
Trading curbs, which are meant to reduce volatility, were put into effect on the NYSE by midmorning. Volatility was high, with the VIX index over 20, continuing a trend that has gone on for over a week. And breadth was poor, with decliners outnumbering advancers on the NYSE by more than twelve to one.
"Everybody's so nervous," said Anthony Conroy, head trader at BNY Brokerage. "You have high energy prices, you have problems with mortgage financing … The dollar/yen broke 120, hurting the carry trade, and there are worries about the takeover game coming to an end."
"The major, major thing all goes back to weakness in the mortgages," said Larry Peruzzi, equity trader at Boston Company Asset Management.
More poor housing data only underlined the mortgage worry. Sales of single-family homes dropped 6.6% to a seasonally adjusted annual rate of 834,000, the Commerce Department said. Inventories stayed about even, and the median price of a new home fell 2.2% to $237,900. The data were worse than expected, failing to meet even low expectations.
Adding to the misery, builders got hammered as three major players fell into the red in the recent quarter after posting year-ago profits. Beazer Homes USA fell 11% after it swung to a loss of $123 million, or $3.20 a share, compared with earnings of $102.6 million, or $2.37 a share, a year earlier. D.R. Horton fell 4.1% after the company said it swung to a net loss for the period as it took land-related writedowns amid the continuing downturn in the housing market. Pulte Homes shares fell 4.9% after the company said it too swung to a net loss in the second quarter and that its revenue fell 40% to $2.02 billion. Also, WCI Communities tumbled 21% after it said there are no definitive proposals to buy it.
Oil prices rose 56 cents to $76.44 a barrel, near Nymex crude's record closing high last July of $77.03, continuing an upward trend that gained momentum Wednesday after weekly government inventory data showed a drawdown in oil stocks.
MARKETS ON THE MOVE
[Markets Data Center]
Track indexes and hot stocks, with roll over charting and headlines. Plus, comprehensive coverage of bonds, commodities and forex. Markets Data Center highlights:
Most Actives, Gainers, Losers
New Highs and Lows, Money Flows
Intraday Futures and Currencies
MARKET WRAP
• Most Asian Markets Close Lower
• European Shares Move Lower
• Stocks Advance, Overcoming Nerves
Apple shares rose 6.9% after the company reported a 73% profit rise on sales of Macintosh computers. The computer maker forecast that it will have sold one million iPhones by the end of its fiscal fourth quarter.
Credit-market woes have filtered into the stock market, as banks have been hurt by having to take loans onto their balance sheets instead of passing them on to outside investors. Wall Street is also concerned that a lack of funding will slow the wave of acquisitions from private-equity firms. These concerns have been around for months, but signs of real problems have been accelerating in recent weeks, with major acquisitions unable to find financing and the home-builders reinforcing the market's problems.
Shares of Exxon Mobil fell 4.7% after the world's biggest publicly traded oil company posted a 1% drop in second-quarter net income as lower natural-gas volume was offset by higher refining, marketing and chemical margins. This was particularly puzzling for investors, because usually high oil prices are a boon for oil titans like Exxon Mobil.
Other Dow-component decliners reflected woes in their sectors. Alcoa, which is still coming off a buyout-fueled rise, suffered a 7.3% decline, as the aluminum and airline sectors faltered amid higher oil prices. Other heavy industrials such as Boeing, Dupont and General Motors were off, too. Financials Citigroup and J.P. Morgan Chase lost 4.5% and 3.4% respectively as that whole sector weakened on the subprime and credit worries.
In other news for the financial sector, Wells Fargo said it will close its nonprime wholesale lending business, which processes and funds subprime loans for third-party mortgage brokers. Shares were down 2.4%.
There were isolated bright spots. Ford Motor reported its first profit in two years as North American losses substantially narrowed amid its ongoing restructuring. The No. 2 auto maker in the U.S. also said it is exploring the potential sale of Jaguar and Land Rover. Ford shares rose 2.9%. And the Chinese Web search company Baidu.com reported that its profit doubled, sending its shares up 15%.
Mr. Conroy said "earnings are a strong catalyst for the future" because they have been coming in better than expected. "It's probably a good buying opportunity in the long term."
Indeed, many investors are still bullish, citing price to earnings ratios that are reasonable by historic standards, as well as the remarkable bull run stocks have enjoyed in recent months. After all, it wasn't long ago that the Dow breached 13000 for the first time.
Shares of Kraft Foods fell 4.1% after news that Berkshire Hathaway, run by billionaire Warren Buffett, has acquired a small stake in the company, joining veteran Wall Street raiders Carl Icahn and Nelson Peltz.
In other economic news, the Commerce Department said durable-goods orders increased in June by 1.4% to a seasonally adjusted $217.07 billion. Wall Street expected a 1.6% gain in durable-goods orders last month. And initial jobless claims fell 2,000 to 301,000 on a seasonally adjusted basis in the week ended July 21, the Labor Department said. Economists, on average, had expected claims would increase by 9,000.
The dollar dropped sharply against the yen. Yen strength can be an indicator of diminished risk appetite, as some investors borrow in the Japanese currency to invest elsewhere. Yields on Treasury bonds fell, a sign of further safe-haven buying.
At a business-taxation and global competitiveness conference sponsored by the Bush administration, Federal Reserve Chairman Alan Greenspan said he expects global interest rates will rise. "The cost of capital is not going to stay down at this level," he said. However, in the U.S. fed-funds futures market, investors raised the odds of a quarter-percentage-point cut by the end of the year to 76%.
In major market action:
Stocks retreated. On the New York Stock Exchange Thursday, 256 stocks gained and 3,083 declined, on volume of 1.26 billion shares traded on the exchange.
Bonds rose. The 10-year note rose 29/32, or $9.0625 for every $1,000 invested, yielding 4.785% Thursday. The 30-year bond gained 1-11/32, yielding 4.939%.
The dollar weakened. The euro was trading at $1.3764 from $1.3716 late Wednesday, while the dollar was at 118.88 yen from 120.51 yen.
Baidu.com's Net More Than Doubles
The Wall Street Journal Online
NEW YORK -- Chinese Internet-search provider Baidu.com Inc. said Wednesday its second-quarter net profit more than doubled from a year earlier as the number of online-marketing clients rose, and the company forecast strong revenue growth in the current quarter.
Beijing-based Baidu.com, which is China's most popular search engine, reported net profit of 141.9 million yuan ($18.6 million, or 54 cents a share) for the three months ended June 30, up from 58.5 million yuan a year earlier. The results came in well above analysts' expectations. Analysts polled by Thomson Financial were expecting, on average, a per-share profit of 43 cents a share on revenue of $49 million. Revenue also more than doubled to 401.3 million yuan from 191.6 million yuan a year earlier, the company said in a statement.
"During the second quarter, we saw robust revenue growth and a healthy increase in online-marketing customers," Chairman and Chief Executive Robin Li said in the statement.
Online-marketing revenue more than doubled to 400.6 million yuan during the second quarter, helped by an increase in the number of active online-marketing customers and revenue per customer, Baidu.com said. Revenue per online marketing customer rose 48% from a year earlier to 3,100 yuan. Baidu.com said the number of active online-marketing customers during the quarter rose to 128,000, up 14% from the first quarter. For the third quarter, Baidu.com expects revenue of between 492 million yuan and 506 million yuan.
Nasdaq-listed shares of Baidu.com closed Wednesday's session up 4.7% at $183.23. In after-hours trading, shares of the company surged to $223.
Baidu.com is the dominant search site in China. In the April-June period, it accounted for 58% of revenue in China's Internet-search market, ahead of Google's 23% market share, according to Beijing-based telecommunications and technology research firm Analysys International.
Google Inc. wants to boost its market share in China, the world's second-largest Internet market after the U.S. with 162 million users at the end of June. In April, Google Chief Executive Eric Schmidt said his company was gaining market share and aims to become the market leader in China. Last month, Google and local Web portal Sina Corp. said they plan to work together on search services and advertising.
Baidu isn't seeking similar partnerships because the number of people using its Web site is growing fast, Li said during a conference call on Baidu's second-quarter earnings. Baidu Chief Financial Officer Shawn Wang also said the company now has more than 3,000 sales staff after adding roughly 500 during the previous quarter.
NEW YORK -- Chinese Internet-search provider Baidu.com Inc. said Wednesday its second-quarter net profit more than doubled from a year earlier as the number of online-marketing clients rose, and the company forecast strong revenue growth in the current quarter.
Beijing-based Baidu.com, which is China's most popular search engine, reported net profit of 141.9 million yuan ($18.6 million, or 54 cents a share) for the three months ended June 30, up from 58.5 million yuan a year earlier. The results came in well above analysts' expectations. Analysts polled by Thomson Financial were expecting, on average, a per-share profit of 43 cents a share on revenue of $49 million. Revenue also more than doubled to 401.3 million yuan from 191.6 million yuan a year earlier, the company said in a statement.
"During the second quarter, we saw robust revenue growth and a healthy increase in online-marketing customers," Chairman and Chief Executive Robin Li said in the statement.
Online-marketing revenue more than doubled to 400.6 million yuan during the second quarter, helped by an increase in the number of active online-marketing customers and revenue per customer, Baidu.com said. Revenue per online marketing customer rose 48% from a year earlier to 3,100 yuan. Baidu.com said the number of active online-marketing customers during the quarter rose to 128,000, up 14% from the first quarter. For the third quarter, Baidu.com expects revenue of between 492 million yuan and 506 million yuan.
Nasdaq-listed shares of Baidu.com closed Wednesday's session up 4.7% at $183.23. In after-hours trading, shares of the company surged to $223.
Baidu.com is the dominant search site in China. In the April-June period, it accounted for 58% of revenue in China's Internet-search market, ahead of Google's 23% market share, according to Beijing-based telecommunications and technology research firm Analysys International.
Google Inc. wants to boost its market share in China, the world's second-largest Internet market after the U.S. with 162 million users at the end of June. In April, Google Chief Executive Eric Schmidt said his company was gaining market share and aims to become the market leader in China. Last month, Google and local Web portal Sina Corp. said they plan to work together on search services and advertising.
Baidu isn't seeking similar partnerships because the number of people using its Web site is growing fast, Li said during a conference call on Baidu's second-quarter earnings. Baidu Chief Financial Officer Shawn Wang also said the company now has more than 3,000 sales staff after adding roughly 500 during the previous quarter.
Jim Rogers cautiously bullish on China stocks
SHANGHAI (Reuters) - China's stock market is dangerously high but environmental protection, water, railways and renewable energy stocks are still worth holding, fund manager and investment author Jim Rogers said on Thursday.
Rogers, in a presentation at a conference, also reiterated his view to dump dollars and bonds and stay bullish on commodities, such as oil and aluminum. Gold was still going strong, but copper prices look stretched, he added.
A prominent China bull, Rogers said investors should be cautious after China's benchmark Shanghai composite index quadrupled over the past two years.
It closed at a record high on Thursday.
"The stock market is going through the roof over the past three years. That's always a dangerous sign," said Rogers, who co-founded the Quantum hedge fund with billionaire investor George Soros in the 1970s.
"And if you are new to the stock market, you probably think this is the way that things always work. This is not the way the market always works," he said.
"I'm not suggesting you sell your stocks. But I want you to know this is not usual," he said, adding that some Chinese shares were going to collapse as they were "crazily priced."
But Rogers sees opportunities in Chinese companies involved in sectors such as environmental protection, water, green energy, railways and education, where the government and public were expected to spend a lot of money.
"I'm not selling my Chinese shares. As I said, I bought more of them last week. If the market triples again in the next year I would probably have to sell my Chinese shares," said Rogers, who bought his first Chinese stocks in 1999.
Rogers, 64, urged investors to get exposure to the Chinese currency, the renminbi, and dump the U.S. dollar, which he calls "a terribly flawed currency" as the United States is deep in debt.
"Renminbi is going to be one of the strongest currencies for many years to come," he said.
Bonds around the world are headed down and that trend would also continue for many years to come, he said.
"If you invest in bonds anywhere in the world, sell it," he said. "If you invest in shares, think of Asia," he added.
Commodities such as oil and metals are expected to stay strong for many years, driven by supply and demand, Rogers said.
He said he favored aluminum over copper right now because copper prices had shot up, and said property in China is getting expensive.
"I will not buy in Shanghai or Beijing at the moment."
Rogers, in a presentation at a conference, also reiterated his view to dump dollars and bonds and stay bullish on commodities, such as oil and aluminum. Gold was still going strong, but copper prices look stretched, he added.
A prominent China bull, Rogers said investors should be cautious after China's benchmark Shanghai composite index quadrupled over the past two years.
It closed at a record high on Thursday.
"The stock market is going through the roof over the past three years. That's always a dangerous sign," said Rogers, who co-founded the Quantum hedge fund with billionaire investor George Soros in the 1970s.
"And if you are new to the stock market, you probably think this is the way that things always work. This is not the way the market always works," he said.
"I'm not suggesting you sell your stocks. But I want you to know this is not usual," he said, adding that some Chinese shares were going to collapse as they were "crazily priced."
But Rogers sees opportunities in Chinese companies involved in sectors such as environmental protection, water, green energy, railways and education, where the government and public were expected to spend a lot of money.
"I'm not selling my Chinese shares. As I said, I bought more of them last week. If the market triples again in the next year I would probably have to sell my Chinese shares," said Rogers, who bought his first Chinese stocks in 1999.
Rogers, 64, urged investors to get exposure to the Chinese currency, the renminbi
"Renminbi is going to be one of the strongest currencies for many years to come," he said.
Bonds around the world are headed down and that trend would also continue for many years to come, he said.
"If you invest in bonds anywhere in the world, sell it," he said. "If you invest in shares, think of Asia," he added.
Commodities such as oil and metals are expected to stay strong for many years, driven by supply and demand, Rogers said.
He said he favored aluminum over copper right now because copper prices had shot up, and said property in China is getting expensive.
"I will not buy in Shanghai or Beijing at the moment."
S&P raises outlook on China to positive from stable
Moody's lifts China's ratings a notch, citing strong external-payments position
NEW YORK (MarketWatch) -- Standard & Poor's raised its outlook on China to positive from stable, citing the country's reforms in bankruptcy, property, and labor laws this year.
"These reforms should underpin a high-single-digit trend rate of growth in China and at the same time improve the productivity of investment, thereby reducing the risks of unduly large fluctuations in growth," S&P credit analyst Kim Eng Tan said in a statement Thursday.
S&P doesn't expect any material disruptions between China and the U.S., its largest trading partner, despite rising protectionist attitudes in Congress. S&P affirmed its A long-term and A-1 short-term sovereign credit ratings on China.
"The ratings on China could rise if its leadership embraces market-based policies more readily, or if the government strengthened public finances further," Tan said.
The ratings-outlook revision by S&P comes after Moody's upgraded China's long-term foreign-currency bonds to A1 from A2 Thursday. Moody's cited the exceptional strength of China's external-payments position, favorable government debt trends, and continued progress in economic reform.
"China's very strong external-payments position provides insulation from external shocks and allows the authorities time to expand and deepen structural reform," Moody's Senior Vice President Tom Byrne said in a statement.
"Official foreign-exchange reserves continue to grow and now exceed $1.3 trillion, and external obligations of the government and state-owned banks are a small fraction of that sum," Byrne said.
China's Shanghai Composite index rose 0.5% to a record finish of 4,346.46 Thursday. The Dow Jones China 88 index, a measure of 88 highly liquid stocks listed in Shanghai and Shenzhen, rose 0.6% to 374.62. See Asia Markets.
NEW YORK (MarketWatch) -- Standard & Poor's raised its outlook on China to positive from stable, citing the country's reforms in bankruptcy, property, and labor laws this year.
"These reforms should underpin a high-single-digit trend rate of growth in China and at the same time improve the productivity of investment, thereby reducing the risks of unduly large fluctuations in growth," S&P credit analyst Kim Eng Tan said in a statement Thursday.
S&P doesn't expect any material disruptions between China and the U.S., its largest trading partner, despite rising protectionist attitudes in Congress. S&P affirmed its A long-term and A-1 short-term sovereign credit ratings on China.
"The ratings on China could rise if its leadership embraces market-based policies more readily, or if the government strengthened public finances further," Tan said.
The ratings-outlook revision by S&P comes after Moody's upgraded China's long-term foreign-currency bonds to A1 from A2 Thursday. Moody's cited the exceptional strength of China's external-payments position, favorable government debt trends, and continued progress in economic reform.
"China's very strong external-payments position provides insulation from external shocks and allows the authorities time to expand and deepen structural reform," Moody's Senior Vice President Tom Byrne said in a statement.
"Official foreign-exchange reserves continue to grow and now exceed $1.3 trillion, and external obligations of the government and state-owned banks are a small fraction of that sum," Byrne said.
China's Shanghai Composite index rose 0.5% to a record finish of 4,346.46 Thursday. The Dow Jones China 88 index, a measure of 88 highly liquid stocks listed in Shanghai and Shenzhen, rose 0.6% to 374.62. See Asia Markets.
Wednesday, July 25, 2007
Governments Get Bolder in Buying Equity Stakes
The Wall Street Journal Online
By JASON SINGER in London, HENNY SENDER in New York, JASON DEAN in Beijing and MARCUS WALKER in Berlin
Foreign governments, flush with cash and no longer content with the meager returns to be had on safe but low-yielding investments like Treasurys, are becoming increasingly aggressive players on the equity front.
The new boldness of these government-controlled investors was on display Sunday night when entities controlled by the governments of China and Singapore agreed to invest as much as $18.5 billion in return for stakes in the big British bank Barclays PLC.
In doing so, Chinese lender China Development Bank and Temasek Holdings Pte. Ltd., the Singapore government's investment agency, could play a role in the outcome of the biggest bank-takeover battle ever. That increasingly bitter contest pits Barclays against a consortium of European banks led by Royal Bank of Scotland Group PLC in seeking to acquire Dutch banking giant ABN ABN Amro Holding NV.
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The Barclays deal is the latest in a string of investments in U.S. and European companies by governments in Asia and the Middle East. Temasek last year became the largest shareholder in London-based Standard Chartered PLC, a bank that has most of its assets in Asia. In May, the Chinese government invested $3 billion in Blackstone Group on the eve of the U.S. private-equity giant's initial public stock offering.
And last week, an investment fund controlled by the government of Qatar made a $21.8 billion takeover approach for British supermarket chain J Sainsbury PLC, one of the largest potential acquisitions ever by a state-owned fund.
While potentially boosting their investment returns, such deals expose the government-controlled funds and other entities involved to risks that range from simple investment losses to political backlash. If it continues, the trend could also reshape global financial markets, bidding up prices for more speculative assets like stocks, corporate bonds and real estate, while crimping demand for safer investments like Treasury bonds.
"There has been a fairly spectacular increase in financial assets under management by governments," said Dominic Wilson, director of global macro and markets research at Goldman Sachs Group. "The scale of the issues around such investment is different than anything the world has ever seen. Neither [governments] nor the markets know exactly what they should do with the assets."
China Development Bank plans to invest as much as $13.5 billion in Barclays, in what could become the largest overseas investment by a Chinese company to date. The planned investment is part of a broader deal that also includes as much as $4.97 billion in funding from Temasek, and would enable Barclays to buttress its bid for ABN Amro.
Should Barclays succeed in acquiring the Dutch bank, the deal ultimately could leave China Development Bank with a stake of about 8% in the newly enlarged Barclays, making it by far the biggest shareholder.
If completed, the Barclays deal would provide further evidence of an important global shift in wealth. "This is basically a flow of capital from emerging markets to established markets," says John Studzinski, former chief of investment banking at HSBC Holdings PLC and now head of Blackstone Group's mergers-and-acquisitions advisory group, which advised China Development on the deal. The private-equity firm's role shows how private and public investors are joining together to create powerful forces.
![[Cash on Hand]](http://online.wsj.com/public/resources/images/P1-AI519_SOVERE_20070723195738.gif)
"Going forward, you have to look at where wealth is being created...I think it's a very logical trend," adds Mr. Studzinski.
To be sure, investors controlled by foreign governments have bought stakes in Western companies before. One example, the Kuwait Investment Office, which grew into an investment heavyweight as oil prices boomed in the 1970s, amassed sizable holdings in several major companies, including the then-British Petroleum and Germany's Daimler-Benz AG. But what distinguishes the latest wave of investment is the sheer size of the sums involved, which could give those investors the potential to affect strategy and bolster or block corporate transactions like takeovers.
China Development Bank's agenda in the Barclays deal is somewhat unique, say people close to it. It hopes that substantially expanding its existing, but narrower, relationship with the 300-year-old British bank will help accelerate its own transformation from a policy institution to more of a commercial bank, and give it a much higher profile overseas.
But many other recent deals reflect the quest by China and other countries for higher returns on their mounting foreign-exchange reserves. Those holdings traditionally were invested in safe, liquid investments that could be quickly converted to cash to buy up local currency if it came under speculative attack. But in many countries, especially China and the oil-producing nations of the Middle East, global trade has swelled those holdings to far more than might be needed to stabilize their currencies.
Since 2002, such holdings have increased 20% a year, according to U.S. Treasury calculations, well ahead of the average 6% rate of 1997-2001. Global foreign-exchange reserves now stand at about $5.6 trillion. An additional $1.5 trillion to $2.5 trillion held by "sovereign wealth funds" brings total assets controlled by governments to "roughly $7.6 trillion," or 15% of global gross domestic product, the Treasury says.
![[Go to Real Time Economics blog.]](http://online.wsj.com/public/resources/images/it_hourglass-economic06292005183453.gif){kind=small}
As a result, governments are treating these reserves less like rainy-day funds and more like pools of investment capital.
Sameer Al Ansari, executive chairman and chief executive officer of state-back investment firm Dubai International Capital, says he is scouring the world's 500 largest publicly traded companies looking for a place to invest as much as $10 billion. His next target: a U.S. company that he has already identified but will only describe as "a household name."
Mr. Ansari says Dubai International, which has $6 billion under management, is hoping to announce the U.S deal in September. His company bought a major stake in London-based HSBC Holdings PLC earlier this year, and this month bought 3% of Airbus maker European Aeronautic Defence & Space Co. and 3% of India's ICICI Bank Ltd.
The new wave of investment carries numerous risks. Most obvious is the potential for political backlash. Political pressure to block or restrict these investments appears to be mounting.
In the U.S., a Dubai company's deal last year to buy a British ports operator that operated several American ports ran into political obstacles, as did a 2005 attempt by Chinese oil company Cnooc Ltd. to buy U.S. oil producer Unocal Corp. Dubai Ports World ultimately agreed to sell off the U.S. holdings, and Cnooc pulled out of the Unocal bidding.
In Europe, there is a rising clamor to restrict foreign investment. German Chancellor Angela Merkel said last week that state-controlled investors might use stakes in European companies to pursue political, rather than only financial, goals. The European Union should think about ways to protect its firms from politically motivated buyers, she said, mentioning the U.S.'s interagency Committee on Foreign Investment in the U.S. as a possible model. CFIUS reviews the national-security aspects of overseas deals.
Others have been more outspoken. Ms. Merkel's powerful conservative colleague Roland Koch, governor of the German state of Hesse, has warned in stark terms about encroachment by industrial groups such as Russia's OAO Gazprom, as well as financial investors controlled by China and other emerging economies. "We haven't only recently gone through the trouble of privatizing companies like [Deutsche] Telekom and Deutsche Post so that the Russians can nationalize them again," he told German media.
Even the idea of such sales could inflame nationalist passions, as occurred last year when there were riots in Thailand following Temasek's attempt to buy Thai telecommunications provider Shin Corp.
Critics say backlashes could go beyond issues of foreign investment and hurt global trade. "Once you start to define what sensitive sectors are, you realize that clever lobbyists can identify nearly every sector as sensitive, because everything is connected with everything," says Norbert Walter, chief economist at Deutsche Bank in Frankfurt. "This will open a wide door for protectionism," he says.
Another risk is that the investments go bad. The financial landscape is littered with examples of foreign buyers being duped by savvy locals into overpaying for assets. The Singaporeans, for example, lost money on dot-com flameouts.
"The government's management of its hoard of cross-border assets either in the form of reserves or in some type of sovereign wealth fund is likely to be a source of political controversy and frictions as the inevitable losses are recorded," Edwin Truman, a former U.S. Treasury official and now a senior fellow at the Peterson Institute for International Economics, warned in a recent speech.
The trend toward more aggressive government investments also has the potential to reorder global financial markets. "We have entered a whole new world," says Jim O'Neill, head of Global Economic Research for Goldman Sachs International in London. "We are at the early stage of a secular process where the relations between the prices of stocks and bonds will change. The whole world is discovering the equity culture."
While Singapore's Temasek, which manages about $85 billion in assets, has long invested in private companies mostly in Asia, the Barclays deal launches onto the international stage a large but so-far little noticed Chinese institution. In contrast to Temasek, whose main role is to invest government money, China Development's main business is lending to companies and local governments for government-backed infrastructure projects in China.
Under 62-year-old chief Chen Yuan, China Development Bank has been run increasingly like a commercial entity, and one with a growing international agenda. China Development boasts an international advisory council including major figures in global finance like Maurice "Hank" Greenberg, the former head of insurer American International Group, and Sir Edward George, former Bank of England governor.
Mr. Chen is the son of one of the Chinese Communist Party's most senior early leaders, the late Chen Yun, who along with Mao Zedong and Zhou Enlai is enshrined in modern Chinese political lore as one of the party's "Eight Immortals." The younger Mr. Chen graduated from Beijing's prestigious Tsinghua University, and served for many years as a Chinese central bank official before taking the helm at China Development in 1998.
Under terms of the Barclays deal, China Development will buy up to €2.2 billion ($3 billion) of new Barclays shares initially, amounting to a 3.1% stake. China Development will then buy as much as €7.6 billion worth of additional Barclays's shares, if the British bank's bid for ABN succeeds, and if regulators agree. China Development had just $6.6 billion in cash and cash equivalents at the end of last year. To finance the deal, it will raise funds by issuing debt on China's domestic market.
The World's Capital: Going Global
The Wall Street Journal Online
In Bid to Land ABN,
Barclays Taps Funding
From China, Singapore
By CARRICK MOLLENKAMP and JASON SINGER in London and JASON DEAN in BeijingBarclays Taps Funding
From China, Singapore
What started a few months ago as a clubby European bank deal has become perhaps the first global takeover battle, drawing in financial institutions from the U.S., Asia and Europe.
| Robert Diamond, president of Barclays, discusses the cash infusion the bank received from two Asian investors for an ABN Amro bid. WSJ's Dennis Berman has the interview. |
Barclays PLC, its plans to acquire ABN Amro Holding NV of the Netherlands in a friendly transaction spoiled by a richer bid from a rival consortium, reached halfway across the world to government entities in China and Singapore to boost its offer to $93.34 billion and offer more cash.
In so doing, it quickly illustrated how new sources of capital may play an increasingly influential role in deal making.
Barclays said yesterday that China Development Bank, a Chinese government-controlled lender, plans to invest at least €2.2 billion ($3.04 billion) and as much as €9.8 billion for a stake in Barclays of at least 3.1% and as much as 8%, if Barclays's bid for ABN succeeds and if regulators approve. It could become the largest overseas investment by a Chinese company to date. And at 8%, China Development Bank would be, by far, the biggest shareholder in the British bank. Singapore's Temasek Holdings Pte. Ltd. will invest as much as €3.6 billion in Barclays.
![[John Varley]](http://online.wsj.com/public/resources/images/HC-GD287_Varley_20070319152846.gif)
Increasingly, banks outside the European sphere are playing a role in the ABN fight. In a side deal to ABN's sale to Barclays, ABN agreed to sell its U.S. unit, LaSalle, to Bank of America Corp. But that move sent the ABN sale into courts in the Netherlands and U.S. until recently when the Dutch Supreme Court allowed the $21 billion LaSalle sale to go through.
It remains unclear whether bringing in the Asian entities as investors will be enough to put Barclays over the top in its battle for ABN. The cash infusion increases the Barclays bid to €68.89 billion from €64.79 billion and changes its all-stock offer to one that is 37% cash, an effort to make it more appealing to ABN investors. Still, it remains well shy of a €72.37 billion bid from a consortium of Royal Bank of Scotland Group PLC, Spain's Banco Santander Central Hispano SA and Dutch-Belgian bank Fortis NV.
![[A Bidding War for ABN]](http://online.wsj.com/public/resources/images/it_battleground09142004171604.gif){kind=small}
A BIDDING WAR FOR ABN![[Rijkman Groenink]](http://online.wsj.com/public/resources/images/HC-GH248_Groeni_20070509140456.gif)
KEY PLAYERSThe fight to acquire ABN Amro, in what would be the largest bank deal ever, is growing increasingly contentious. Here's a look at the key players in the takeover battle.
To close the gap between its offering -- €36.47 per ABN share -- and the consortium's offer of €38.31 per ABN share, Barclays is counting on its stock price to go up. Yesterday, Barclays shares closed at 735 pence in London, up 3%. Robert Diamond, Barclays president, said that with "a little bit of time," the stock could increase. Barclays's chief executive, John Varley, meanwhile, said he doesn't plan to increase his offer. "We're not going to top it up with cream," Mr. Varley said. "It is rich in cream."
But even if Barclays fails, Mr. Varley will have radically sped up his goal of moving Barclays deeper into emerging markets.
China Development, headed by Chen Yuan, has an extensive portfolio of Chinese customers it can introduce to Barclays for more complicated financial products and services that China Development doesn't provide, such as asset-management services. China Development's main business is lending to Chinese government-owned companies, a number of which are doing big business overseas, and as Chinese companies expand into places like South Africa, Barclays hopes to capture the banking business behind those deals.
Given China Development Bank's role in infrastructure and China's booming demand for commodities such as metals, Barclays plans to provide expertise in hedging commodities. The British bank, for example, will put employees on the ground to provide training and assist in infrastructure buildout.
"If you look at even the amount of infrastructure investment that African countries are projected to make over the next five to 10 years, it's clearly an area that the Chinese have deemed to be of strategic importance to them," said Jerry del Missier, co-president of Barclays Capital, the capital markets business of Barclays. Mr. del Missier helped in structuring the stake sales.
![[Barclays]](http://online.wsj.com/public/resources/images/MI-AM449_CBARCL_20070723195103.gif)
Barclays began courting China Development Bank and Temasek in May and June as the RBS-led consortium became aggressive in its pursuit of ABN. Barclays's Mr. Diamond directed top Barclays officials to approach China Development Bank, with which Barclays had an existing but much narrower relationship, and Temasek. In London, the two worked with Naguib Kheraj, Barclays's former finance chief who is advising the bank on the ABN transaction.
To ensure the China Development-Barclays deal wouldn't be caught in the political backlash that prompted China's Cnooc Ltd.'s to abort its attempt to buy U.S. oil producer Unocal Corp., Blackstone Group LP discussed the deal with British government officials, including Alistair Darling, the new chancellor of the exchequer; Mervyn King, governor of the Bank of England; and Sir Callum McCarthy, the outgoing chairman of Britain's Financial Services Authority.
The officials said the deal would be seen as a vote of confidence in Britain's financial sector, not as a threat, said John Studzinski, former head of investment banking at HSBC Holdings PLC, who is now head of Blackstone Group's mergers and acquisitions advisory group, which advised China Development on the deal.
Antony Leung, a former Hong Kong finance secretary who now heads Blackstone's private-equity operation in Greater China, acted as the liaison with China Development.
China's Barclays investment comes just two months after China's government agreed to invest $3 billion of the country's foreign-exchange reserves in Blackstone Group, on the eve of the U.S. private-equity giant's initial public offering.
The Barclays deal launches onto the international stage a large but so-far little noticed Chinese institution. China Development Bank was set up in 1994 as a policy bank, to make loans that support the Chinese government's economic initiatives. Its main business has been lending to companies and local governments for government-backed infrastructure projects in China.
But under Mr. Chen, it has been run increasingly like a commercial entity, and one with a growing international agenda. China Development boasts an international advisory council including major figures in global finance like Maurice "Hank" Greenberg and former Bank of England Governor Sir Edward George.
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