THE

THE May-July
2009

CHINA
CHINA ANALYST
ANALYST
A knowledge tool by THE BEIJING AXIS for executives with a China agenda

Charting China’s crisis exit strategy

– The road ahead in 2009

Features
Re-engineering Growth: China’s Crisis Exit Strategy 6
China’s Stimulus Package: How Green? 9
China’s Africa Engagement: New Issues, Salient Trends 12

Regulars
Macroeconomic Monitor 15
China Sourcing Strategy 22
China Inc. Goes Global: OFDI/M&A 30
Advertisement
 GDP
GDP2008 (USDtn)
2008 (USD tn) Current Account Balance / GDP (%) Budget Balance GDP (%)
18.4 US US -4.6
EU -3.2
US 14.3 Japan -5.4 Japan 3.5
Japan 4.9 China -0.1 China 10.2
China 4.4 Germany 0.2 Germany 6.6
Germany 3.7 Britain -5.3 -2.2
Britain
Britain 2.9 France -3.2 France -1.8
France 2.7
Canada 0.3 Canada 1
Canada 1.6
Brazil 1.5
Brazil -0.7 Brazil -1.4
Poland 0.5 Poland -1.8 Poland -5.6

Worldwide Stimulus Packages (USD bn)

Hungary 6.5
Russia 42
Canada 30 Netherlands 7.5 Poland 31
Britain 30
Germany 109 Kazakhstan 25 Japan 650
USA 787 Spain 113 France 33
Italy 6.3 S. Korea 10.8
EU 255 China 586
Mexico 54 Saudi Arabia 17.3
India 4 Philippines 6.1

Singapore 13.6
Brazil 283

Chile 4 South Africa 3.7 Australia 27

Argentina 13.2
New Zealand 5

Breakdown of Selected Stimulus Plans

US China Japan Germany

5% 4% 1%
7% 1% 7% 3%
7% 9%
30%
38%
43%
10% 9% 46% 54%
70%
14%
18% 24%

Tax Relief Infrustructure First package First package

State and Local Fiscal Relief Disaster Reconstruction Second package Second package
Infrastructure and Science Rural Construction USD 111 billion for tax cuts, 1st: Infrastructure; Tax relief &
Protecting the Vulnerable Environmental Protection
Social Welfare more than half of total for capi- Support for SMEs; Education
Health Care
Technological Innovation tal injections for lenders and 2nd: Aid to auto industry; Tax
Education and Training
Energy Value-added Tax Cuts financial institutions relief for households
Other Education and Health Care
Sources: IMF; Various Press; TBA Analysis
4
At the Highest Level
China has been able to weather the global economic storm better than most. China’s dramatic slowdown
halted during March-April 2009, and further consolidation looks likely in the near future. But risks remain
and unrealistic expectations should be avoided. At the very least, we must look out for regional, sectoral
and value chain variability in the economy. Simply put, navigating in the Chinese landscape has just be-
come even harder. But the long term prize is still unparalleled: China, the world’s third-largest market, is
set to maintain its solid lead on developed and developing economies.
During the latter part of Q1 2009, China’s economy
emerged from a period of rapid slowdown that had
ensued in Q3 2008. With 6.1% y-o-y GDP growth in Q1
2009, and with many indicators pointing to a mild recovery
in activity, the scene is now set for China to hover near 6-
7% growth over the next few months before entering into a
somewhat higher pace of growth towards the end of 2009
and into 2010. With a consolidating global environment—
albeit only a tentative consolidation based on a reduction
in negative news, somewhat stabilized financial markets,
the edge coming off the credit crunch and a more unified
G20 voice — there is scope for optimism. Confidence in
the global economy is a key requirement for an eventual
broad-based recovery.
Indeed, in recent months some Chinese economic sectors
(such as auto, selected property segments and credit
growth, etc) have recorded a markedly ‘better’ perform-
ance compared with the period of spontaneous destruction
between August 2008 and February 2009. But some sec-
tors remain weak and are unlikely to return to their previ-
ous lofty levels. Herein lies the management challenge. It
is now both more difficult and more important than ever to
analyse the multitude of volatile indicators and divergent
trends that characterize the Chinese landscape. In short,
the one-way-bet scenario of recent years, when most indi-
cators trended higher, have come to an end and managers
with a China agenda must now manage in a more complex
environment. China has become a country where some
sectors (perhaps most) far outpace global averages, but
others are now below the waterline. This new environment
is in fact only an inevitable shift towards normalcy and is
likely to be with us over the long term.
In order to mitigate risks that arise in this new era it is nec-
essary to manage information well. That implies having the
right people, processes, methodologies and systems in
place. Below we identify a number of focus areas for those
who manage China ventures:
• Regional disparities are likely to become more distinct.
Expect changes in the relative and absolute attractive-
ness of certain areas based on their share of exports in
GDP, share of FDI, the cost of doing business, govern-
ment incentives, infrastructure, etc. These regional dis-
crepancies will be felt in the urban-rural divide, between
eastern and western China, and between provinces in
the east, i.e. those that form a contiguous belt on the
coast. Location studies now become more important
and it is necessary to think about the opportunity in sec-
ond tier, third tier and fourth tier cities and areas
• Sectoral disparities are also emerging. Gone are the
days when almost all sub-sectors exhibit super-fast
growth. It will become far more difficult to identify sec-
tors and sub-sectors that will be the sustained drivers of
overall growth
• Not all areas of the value chain within a particular indus-
try will enjoy the same prospects. It is now more essen-
tial to identify which industries will see differences be-
tween the upstream and downstream segments. This
has widespread implications, i.e. for regulatory changes,
for input and gate price changes and for fluctuating in-
ter-dependencies between various industries
• The past 6-9 months have shown that economic reform
in China is as unpredictable as ever and policy levers
can be used aggressively in order to stimulate or con-
strain target areas, sectors and sub-sectors
The list goes on, but it is clear that a more uncertain envi-
ronment spells a new strategic landscape where strate-
gies will have to be more finely calibrated. The ability (or
inability) to manage information and more sophisticated,
forward-looking planning processes will determine the win-
ners and losers in China.
Yet this more complicated planning environment does not
mean that the overall risks outweigh the rewards. On the
contrary, China’s Q1 2009 performance clearly showed its
continued dominance as the world’s most robust large
market. It leads global growth and continues to outperform
developing and developed markets alike. And nothing sug-
gests that this is about to change. As such, while it is nec-
essary to carefully navigate the immediate challenges in a
changing landscape, we must not lose sight of, or be de-
flected from, the opportunity to capture full long-term ad-
vantage in the world’s third-largest economy.
I trust that our readers will enjoy this edition of The China
Analyst – and as always we welcome all feedback.
Kobus van der Wath
Founder & Group Managing Director
THE BEIJING AXIS
China Business Solutions
Strategy I Sourcing I Investment
 5

Table of Contents May-July 2009

6 Re-engineering Growth: China’s Crisis Exit Strategy

The financial crisis and the adherent global economic stasis have severely impacted China’s exporting growth engine, yet
can China be the first nation to recover by reconfiguring its economy?
China’s Stimulus Package: How Green?
9 One of China’s greatest concerns is the rising environmental damage that the past 30 years of breakneck economic devel-
opment has created. Will the country continue its efforts in the areas of efficiency and environmental regulation?
China’s Africa Engagement: New Issues, Salient Trends
12 As more Chinese companies feel the need to enter new markets and gain more resources, Africa will see increased Chinese
business and investment activity in more sectors on the continent.
Macroeconomic Monitor: China’s Tentative Consolidation
15 While the world remains firmly in recession, Q1 2009 has delivered tentative signs of a recovery in China. We expect
China’s economy to recover gradually in 2009, and then more rapidly in 2010 as demand eventually rebounds.
Financial Markets
19 Tracking the dynamics of China’s Shanghai and Shenzhen Composite Index indicators and benchmark interest rates, Finan-
cial Markets also illustrates recent trends and transformations in China’s exchange rate regime.
China Facts & Figures
20 China Facts & Figures provides a cross-section of data illustrating growth, transformations and trends in China’s commerce
and industry.
China Sourcing Strategy
22 China’s economy is exhibiting some positive signs, but how has the China sourcing risk profile changed for international
procurement managers—and what can they do to formulate appropriate China Sourcing Strategies in 2009?

26 China Sourcing Blog Highlights

Highlights from The China Sourcing Blog, THE BEIJING AXIS online information portal and discussion forum on all issues
relevant to sourcing from China.
BRICS Breakdown
27 Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS Breakdown is a compara-
tive segment that evaluates and contrasts China with the other leading developing economies.
China Trade Roundup
28 This section illustrates the main trends in the growth and transformation of China’s trade profile, and summarises a selection
of the latest available trade statistics for China.
China Inc. Goes Global: OFDI and M&A
30 While the current investment climate continues to provide new opportunities for Chinese investors, Chinese firms may yet
face more hurdles in their plans for making foreign acquisitions.
China Business News Highlights
34 A roundup of the main business headlines from China during the first quarter of 2009, including positive signals of China’s
economy slowly emerging from the crisis, as well as the latest on China’s headline deals in the natural resources sector.
Regional Focus: China-Africa
36 China recently announced that trade between Africa and China exceeded its USD 100 bn goal, that was set to be achieved
only in 2011. With the China-Africa Summit set for late 2009, trade and investment are expected to expand further.

40 Regional Focus: China-Australia

At such a critical juncture of the global economy, China-Australia relations are being tested and fashioned anew. Beijing and
Canberra are scrambling to forge a mutually-beneficial arrangement that will enable them to emerge stronger from the crisis.

43 Regional Focus: China-Latin America

China’s influence in commodity prices and the likely rebound of its economy by the fourth quarter of 2009 are key for the
growth prospects of Latin America’s resource-intensive economies. We analyze the drivers, enablers and constrains.
Regional Focus: China-Russia
46 China and Russia bilateral trade values steadily declined in the first quarter of 2009. However, within this period a number of
long-awaited agreements to promote strategic cooperation were signed between the two countries .
Upcoming Events
50 A schedule of all the major upcoming fairs, exhibitions and conferences in China, with a focus on events pertaining to re-
sources and industrial sourcing.
Careers at THE BEIJING AXIS
52 THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and
future business challenges. Positions are available in multiple international offices.
THE BEIJING AXIS News
53 TBA news for the first quarter, including speaking at Mining Indaba in Cape Town, PDAC in Toronto, AMEC in Perth, a se-
ries of TBA presentations delivered at Beijing’s Capital Club, as well as exciting new team developments.
THE CHINA ANALYST is published & distributed quarterly by THE BEIJING AXIS. For more on our services, see p. 54.
6

Re-engineering Growth: China’s Crisis Exit Strategy

The financial crisis and the adherent global economic stasis have severely impacted China’s export-
ing growth engine, and tens of millions of jobless makes anything less than the fabled 8% growth feel
like a recession. Yet can China be the first nation to escape the recession by reconfiguring its econ-
omy? By Barry van Wyk.

In one highly symbolic picture of the

line-up at the recent G20 Summit
in London, the fact that Chinese Presi-
increasing speculation on whether
and when China’s economy may be
reaching the bottom of its downturn.
dent Hu Jintao appeared in the pre- The economist Nouriel Roubini has
eminent position on the right of host pointed out that if China measured its
Gordon Brown in the front row, seemed GDP on a quarter-to-quarter annual-
a clear indication of China’s importance ized basis, the figure for Q4 2008
in this gathering, the highest interna- would actually have been close to
tional forum dealing with the crisis. In zero, or even negative. In the wake of
line with appearances, both China’s the slowdown in developed econo-
leaders have recently voiced their opti- mies from Q4 2008, a number of indi-
mism at China’s resilience in the face of cators reflected that China’s economy
the financial crisis. US President had followed suit: slowing GDP
Obama, however, languishing in the growth, industrial production and PMI;
back row in the picture, can still see lower production of electricity; weak
nothing more than glimmers of hope auto sales; a fall in home sales; and
when referring to the US economy. Ac- falling imports and exports. Most
cording to Chinese premier Wen Jia- problematic of all, perhaps, is that the
bao, however, China may have seen 6.1% GDP growth registered in Q1
the worst of it. 2009 is the slowest pace of growth in
nearly a decade.
China’s impeccable economic growth 20,000 hopefuls: Job fair in Beijing,
trajectory of the last 30 years has to a February 2009. China’s phenomenal economic
large extent relied on investment from growth in the last 30 years (averaging
and exports to the developed world. While household con- 10% annual GDP growth) has largely been investment-led,
sumption accounted for around 50% of China’s GDP in the supported by massive domestic savings and large inflows
1970s, economic reform since then has been accompa- of Foreign Direct Investment (FDI). This development strat-
nied by a decline in the contribution of household con- egy has very effectively boosted growth, yet has been
sumption to GDP, reaching a low of 35% in 2006 characterized by weak domestic consumption and an over-
(compared to about 70% in the United States), and a con- reliance on exports, which has made the Chinese econ-
comitant increase in household saving rates from 15% in omy vulnerable to the international economic slowdown.
1995 to 25% in 2007 (compared to less than 5% in Japan While China’s GDP expanded by 260% between 2000 and
and Korea). Rapid growth has transformed China in the 2008, China’s net exports increased eleven-fold in the
last thee decades, yet the global financial crisis has driven same period. As the crisis intensified in Q4 2008, however,
a temporary wedge in China’s economic relationship with China’s exports began to shrink, declining sharply in No-
the rest of the world, and in mitigating the impact of the vember and falling a further 21% y-o-y in the first two
crisis, China’s government have one place to turn: Inward. months of 2009. Exports in February were a full 26% less
than a year earlier, and declined for a fifth consecutive
The slowdown has seriously impacted China’s export sec- month in March, yet at a slower rate of 17.1%.
tor and caused a large number of job losses, yet in the
same instance it has also provided a massive incentive – a The marginally improved trade figures for March has in-
compulsion even – to further wean China’s economy off spired talk of China ‘bottoming-out,’ complemented by a
its traditional growth engines of exports and investment rebound in March of industrial output growth of 8.3% (from
towards exports, and to focus more on spurring consump- a record low of 3.8% in the first two months of 2009), and
tion in the domestic market. In fact, by means of its USD by the CFLP measure of the Purchasing Managers’ Index
586 billion stimulus package, China is not only attempting (PMI) rising for three months to finally break through the
to keep its economy growing by offsetting the slack global 50-level mark (indicating expansion) in March. China’s
demand for Chinese manufactures, but also to reconfigure stock market rallied in Q1, and retail sales and urban fixed
the set of structural economic factors that has underpinned investment have remained robust if not growing particularly
the Chinese success story of the last 30 years. fast. There is also some evidence of a recovery in the
housing sector with an increase in sales volume, although
Looking for the bottom home prices remain low due to excess inventories of un-
sold homes. March has nonetheless delivered a slight
Following Wen Jiabao’s optimism, there has recently been growth trend in the real estate market in China’s major cit-

ies, with the trade volume of residential units in Beijing
reaching 2,124, up 23.6% compared to February. Media
reports have also hailed the rising sales volume of pas-
senger vehicles in March, increasing 10% y-o-y and 27%
from February.
While profits at China’s SOEs declined by 43.7% y-o-y in
the first two months of 2009 (which the Ministry of Fi-
nance described as the first decline in many years),
March brought indications of the impact of the stimulus
package. The chairman of the State-owned Assets Su-
pervision and Administration Commission (SASAC)
stated in April that 170 SOEs had increased their profits
in March by 26% y-o-y. The various economic indicators
above clearly show signs of economic recovery, and fore-
casts are for accelerated growth in Q2-Q4 2009.
Reaching the other China
Striving to get near the self-imposed 8% growth bench-
mark is by their own admission not the Chinese govern-
ment’s primary objective in their response to the current
crisis. Commerce Minister Chen Deming earlier this year
said that he was not really worried about GDP growth;
China’s biggest challenge, he claimed, was unemploy-
ment. China’s Academy of Social Sciences has reported
that 670,000 small and medium enterprises in places like
Guangzhou, Dungun and Shenzhen have closed down,
with job losses of up to 2.7 million. Various media reports
have indicated, moreover, that more than 20 million mi-
grant workers may have lost their jobs due to the crisis –
yet these are not recorded in official statistics. With a fur-
ther 6 million university graduates expected to join the
work force this year, the Asian Development Bank has
concluded that China’s RMB 4 trillion fiscal stimulus will
not be able to create enough new jobs to absorb the labor
surplus.
Increased rural unemployment and a downturn in farm
product prices are severely inhibiting the government’s
stated goal this year of boosting rural incomes and nar-
rowing the gap between the rich and poor. While over
600 million people have been lifted out of extreme pov-
erty in China since 1981, the World Bank still groups
China among lower-middle income countries, with USD
936–3,705 in annual per capita income in 2007, on a par
with countries such as Bolivia, India, Morocco and Syria.
Real per capita income in rural households increased
almost fivefold between 1980 and 2007, yet disparities
with urban areas in terms of income and the provision of
public services have developed. In addition, while the
permanent urban population (apart from migrants) is cov-
ered by medical insurance, the majority of the rural popu-
lation remains subject to expensive medical treatment
and tertiary education.
Before the advent of China’s economic reform pro-
gramme, a state-funded social security net was in opera-
tion. Reform of the system in the 1980s, however, aimed
at reducing the costs of SOEs by commercialising social
security services and allowing the state, employers and
individuals to share the costs. Yet medical services came
to be unequally distributed between urban and rural ar-
7
China Major Growth Targets for 2009
• 8% GDP growth
• 9 million new jobs in urban areas
• Urban registered unemployment rate under 4.6%
• Steady growth in urban and rural incomes
• CPI increase of about 4%
• Improvement of balance of payments
2009 China Government Spending Plan (RMB bn)
Social safety net 293
Science & Technology 146
Sichuan reconstruction 130
Agriculture subsidies 123
Employment policies 42
Teacher salaries 12
Funding for SMEs 10
0 100 200 300
Source:Key figures in gov. work report by Chinese Premier, Xinhua (05/03/09).
eas, and did not adequately cater to China’s large mi-
grant populations. Unsurprisingly, Chinese household
savings amounted to 24.7% of their disposable income in
2006 (compared to only 0.7% in the US). The absence of
a substantial social security net, increasing joblessness
and falling rural incomes have continued to inspire high
precautionary saving rates among households in China,
and this structural barrier remains a clear impediment to
the government’s hopes of creating growth this year by
increasing consumption in the domestic market.
Bricks, people and confidence
According to Wen Jiabao, confidence is more important
than money or gold. Hence to inspire more confidence in
China’s population, and given the obvious latent potential
of China’s under-spending, over-saving population, in-
vestment in ‘people’ by means of initiatives designed to
boost domestic consumer spending, health care and so-
cial security are among the key drivers of the stimulus
package announced late last year.
Yet the largest share (RMB 1.5 trillion, or 38%) of the
stimulus spending is devoted to ‘bricks’: public infrastruc-
ture, with projects lined up including railways, irrigation,
roads, and airport construction. RMB 1 trillion is to be
spent on funding reconstruction work in the quake-
affected Sichuan province. RMB 400 billion has been ear-
marked for civil works, including low-income housing and
renovation, while RMB 370 billion will be spent on rural
infrastructure, including improvements to the power grid,
roads and substandard housing. In the revised outline of
the stimulus spending announced in March this year,
RMB 370 billion was devoted to technology initiatives,
and RMB 210 billion to energy-saving projects, while
RMB 150 billion was allocated to educational, cultural and
family planning purposes. Following the release of
8
China’s GDP data for Q1 2009, 8 additional measures to
spur the economy were announced, laying out a range of
broad objectives including the boosting of fixed-asset in-
vestment, consumption and exports.
Intended both to encourage employment and expand
China’s social security net, the stimulus package endeav-
ours to address the structural reasons why Chinese private
and household savings are high and the consumption
share of GDP is relatively low. The share of household
income in GDP is very low in China (about 40%) yet the
share of corporate savings in GDP is relatively high as
most of the corporate sector’s profits in China are held by
firms in the form of retained earnings and not distributed to
shareholders as dividends. In a world where the US con-
sumer can no longer be the consumer of first and last re-
sort, government spending and investment in China must
over time be compensated by private consumption.
China’s infrastructure-dominated fiscal stimulus, however,
while attempting to better develop China’s consumer mar-
ket, is still a capital-intensive growth strategy consistent
with China’s investment-led path of development and is
unlikely to raise a significant amount of confidence over
the short term among Chinese consumers to dispense with
more of their savings.
China GDP Expenditure Approach Breakdown, RMB bn
30,000
Government Consumption Expenditures
25,000 Household Consumption Expenditures
Gross Capital Formation
20,000 Net Exports of Goods and Services
15,000
10,000
5,000
0 China noted that the cost of insuring against customers
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: China Statistical Yearbook 2008
Plans for the two-year stimulus spending requires the cen-
tral government to contribute RMB 1.2 trillion, divided into
RMB 104 billion in Q4 2008, 488 billion in 2009, and the
rest in 2010. The first two instalments, implemented this
year, makes up about 1.8% of China’s expected GDP for
2009, and combined with RMB 300 billion which the Minis-
try of Finance has earmarked for tax and fee cuts (0.9% of
GDP) and the additional 0.3% of GDP for increased social
spending, the stimulus is expected to amount to about 3%
of China’s GDP for 2009. Local governments will supple-
ment this amount, and much of this financing will be under-
taken by banks, who have been asked to issue long-term
loans to local government entities.
Side effects
While the basic structure of the stimulus package can be
divided into infrastructure projects and spending to im-
prove people’s livelihoods, revitalisation plans have also
been announced for ten manufacturing industries: textile;
light industry; electronics and information; logistics; auto-
mobile; shipbuilding; machinery; steel; nonferrous metals
and petrochemicals. Yet analysts have pointed to the po-
tential risk that these ten stimulus plans will not adequately
address the concern of clearing out excess capacity, in-
stead creating more inventory and an illusion of increased
demand.
The government has limited its deficit to 3%, but has
placed no obvious limit on bank lending. In fact, China’s
banks are expected to fund much of the stimulus. The gov-
ernment has been encouraging banks since November to
extend more credit, and in March Chinese banks accord-
ingly lent a record amount of RMB 1.9 trillion, an increase
of more than six-fold compared to a year earlier and the
third straight month that bank lending has exceeded RMB
1 trillion. This lending surge has raised fears of the emer-
gence of a new credit bubble. According to the Bank of
China, first quarter 2009 lending amounted to RMB 4.6
trillion, already more than 90% of the full-year target of
RMB 5 trillion and fast approaching the full amount for the
whole of 2008 (RMB 4.9 trillion). Growth in M2, the broad-
est measure of money supply, hit a record 25.5% in March,
8.5 percentage points higher than the government’s tar-
geted annual rate. In light of the vastly increased bank
lending during Q1 2009, the chairman of the China Bank-
ing Regulatory Commission has warned China’s banks to
be cautious about loan assessment and management. Ex-
cessive discounted bill financing, however, which made up
40% of lending in January and 45.5% of loans in February,
have prompted a government investigation into where the
capital went, with speculation that the funds may have
been diverted to the stock exchange.
In April, the French insurance firm Coface reported a rapid
deterioration in the ability of Chinese companies to honour
payments to their suppliers which, it concluded, has signifi-
cantly increased the risk of doing business in China. The
head of the firm’s underwriting and claims business in
defaulting on payments in domestic trade has risen by
30% since the advent of the crisis. The change in the risk
environment, moreover, seems to be more acute for
China’s SMEs (particularly in the export-oriented sectors)
who have been faced with a liquidity crisis as China’s
banks are traditionally more accustomed to extend credit
to large state-owned enterprises.
Riding out the storm
China has embarked on a massive stimulus package to
get its economy back on track. As such, the spending-led
intervention is not a significant break with trusted growth
models. Yet inherent in the vigorous response is a more
long-term trend tied to China’s balanced growth as a na-
tion. China’s future path lies in the development of its citi-
zens as consumers and contributors to the economy, and
if China’s population can be given incentives to play a
greater role in China’s economy, the financial crisis may
just go from being a temporary jolt to a stepping stone.
Barry van Wyk, Consultant
barryvanwyk@thebeijingaxis.com

China’s Stimulus Package: How Green?
One of China’s greatest concerns is the rising environmental damage that the past 30 years of break-
neck economic development has created. Will the country continue its efforts in the areas of effi-
ciency and environmental regulation for sustainable development, or will it sacrifice these issues in
order to avoid the rise of unemployment and lower growth rates during this crisis? By Lilian Luca.
“China is fully aware of the consequences on energy de-
mand, energy imports, and security of supply of its im-
pressive economic growth. Already China is using regula-
tion to channel development into more energy-efficient
forms. [...] not just in the automobile industry — by
clearly stated national policy it applies to all areas of in-
dustrial activity.”
— Amory Lovins, Chairman, Rocky Mountain Institute.
Recent environmental pressure build-up in China
“P ollution” is often the number one problem cited by
first-time visitors to China. The gray air of Beijing
or Shanghai, or any other large Chinese city for that mat-
ter, takes a little getting used to. According to a 2007
World Bank report, 20 of the world’s top 30 most-polluted
cities are Chinese. The energy intensity of the economy,
measured in BTU per USD of GDP, is still about five
times that of Germany and eight times that of Japan
(2005 data). The numbers have improved somewhat for
the past 3 years, but there is still significant room for effi-
ciency.
Increasing health problems for the population and a grow-
ing burden for the nation’s healthcare system have not
been the only problems associated with pollution and en-
vironmental degradation. China has become the world’s
largest CO2 emitter in 2007, due to its heavy reliance on
coal-generated power to fuel the economy. Environ-
mental damage and resource overuse have also been
associated with floods, insufficient freshwater access in
some areas of China, an increase in the number of en-
dangered species and a general perceived lack of quality
scenic spots for tourism.
Moreover, a recent phenomenon brings together accusa-
tions of a lack of environmental protection and regulations
and anti-dumping investigations. For example, US steel-
makers announced in March a large-scale investigation of
China’s environmental policies and enforcement mecha-
nisms as a way to prove unfair advantage for Chinese
steelmakers and push the US Congress to pass legisla-
tion for punitive tariffs on Chinese steel products. Similar
studies and lobbying efforts are also contemplated by US
industry associations against Chinese rubber, glass and
cement producers.
To address the environmental pains of its growing econ-
omy, the Chinese government has in the past launched a
number of initiatives, some more successful than others.
For example, the country’s development plans foresee a
20% increase in energy efficiency from 2006 to 2010, and
9
it seems that China is well under way to exceed these
targets—the energy intensity of GDP has fallen by 4.2%
in 2008 after an earlier decline of 3.7% in 2007. China’s
environmental protection agency has been given addi-
tional powers and the rank of a ministry in 2008, but on
the other hand, the project of “Green GDP”, a statistic
measure championed by the agency’s energetic and vo-
cal Mr. Pan Yue, originally designed to align the interests
of economic development and sustainability, was
scrapped in March 2009.
In the area of renewable and clean energy, China has
been very supportive of wind and solar generation, and
has for many years pursued hydro power. The country is
a world leader in terms of the proportion of hydro power
resources it utilizes, and home to the International Centre
for Small Hydro Power, a UN-sponsored organization. In
addition, quite a few Chinese companies aggressively
pursue energy-efficient equipment and technologies—for
example, China is one of the largest markets for GE’s
most sophisticated and expensive diesel locomotives,
partly due to their fuel-efficiency.
Crisis response and environmental concerns
A major concern voiced in the recent few months world-
wide and in China is the fear that the economic priorities
of the present downturn—job creation, support to industry
and boosts to consumption—will push energy and re-
source efficiency and environmental issues in general to
the back burner. The Keynesian approach to an eco-
nomic stimulus plan, adopted by quite a few governments
around the world, including China, stresses the impor-
tance of infrastructure projects to stimulate investment.
The cement and steel industries would be major benefici-
aries of infrastructure stimulus plans, and these industries
are not generally too environmentally-friendly. Investment
plans may be selected for their ‘shovel-readiness’, rather
Comparative Energy Intensity of GDP, Selected Countries
BTU per USD of GDP,2005
Russia 86,686
China 35,766
India 24,799
Poland 18,425
S.Korea 14,539
Brazil 13,917
Mexico 10,809
US 9,113
Sw eden 8,662
Germany 7,396
UK 6,145
Japan 4,519
Source: HSBC
10
than economic and environmental efficiency.
An additional concern not directly related to the stimulus
package’s environmental impact has more to do with the
price for oil and gas. China, among other countries, has
supported the renewable energy industry for many rea-
sons, the chief ones being the reduction of its depend-
ence on imported oil. These projects were economically
viable when energy prices were high, but it is uncertain
whether the Chinese government will keep its commit-
ment to the diversification of energy sources in an era of
low oil prices.
China’s stimulus plan: USD221 bn devoted to ‘green’
The government has detailed its economic stimulus plan
in March, and now we can be fairly certain that many of
the environmentalists’ concerns are indeed being ad-
dressed in the plan. As researchers from HSBC have
pointed out in a recent report, China is devoting a larger
amount than any other country to ‘green’ causes. The
main uses of these funds are for railway transportation,
upgrades to the electric grid and waste and water man-
agement.
The railway investments are a big part of the plan—
overall, China plans to spend over 5 trillion RMB (USD
730 bn) on constructing over 16,000 km of rail lines,
mainly for passenger transportation, and on railway stock.
Railway transportation emits less CO2 and is generally
more efficient and environmentally friendly than truck and
bus transportation that are so popular in China, so this
part of the plan is expected to have a major positive envi-
ronmental impact.
In upgrading the electric grid, especially the transmission
infrastructure, China is targeting efficiency (loss reduc-
tion) and flexibility in the utilization of multiple, competing
energy sources, including renewable, in an intercon-
nected, smart system. Over RMB 1.1 trillion (USD 146
bn) has been earmarked by the stimulus plan to the elec-
tric grid upgrades.
‘Direct’ environmental projects, such as improving the
waste treatment and water management infrastructure,
as well as conservation and other environmental protec-
tion areas, are also part of the stimulus plan, and an
Green Stimulus Spending, USD bn
China
US
South Korea
EU
Germany
Japan
France
Canada
Australia
UK
0 20 40 60 80 100 120 140 160 180 200 220 240
Source: HSBC
amount of RMB 230 bn (USD 34 bn) has been devoted to
such projects.
In addition to the main stimulus plan, a separate plan
supporting the car industry’s development of electric
cars—including rebates and sales tax reduction—was
announced in January 2009. Industry experts hope that
this measure will help China leapfrog into the electric car
leadership. Indeed, China is among the countries best
positioned to benefit from a shift of auto transportation to
plug-in or hybrid electric cars. The commutes tend to be
shorter than in other countries, and most of the com-
mutes are city commutes (electric cars tend to be more
efficient in a city, ‘stop-go’ environment). In addition,
China does not have the a major technological and in-
vestment stock ’legacy’ in traditional auto technologies—it
can make the leap to electric easier than countries such
as the US or Germany.
There are also other ways in which China’s central gov-
ernment’s actions and plans are having, directly or indi-
rectly, an overall positive environmental effect. A major
restructuring, driven by M&A activity and the closing
down of smaller, less efficient plants and mines, is ex-
pected in the metals & mining industry. A few deals in the
steel sector have already been announced, including the
one that created the largest listed Chinese steel com-
pany—a three-way merger of Tangshan, Handan and
Chengde Xinxin. In the electricity generation sector, the
National Energy Bureau announced at the end of March
that outdated, polluting coal-fired generation plants with a
total capacity of 200,000 kW will be closed down by the
end of this year.
The housing part of the stimulus plan, that which ear-
marks 20% of the stimulus package to affordable housing
projects, while not directly a ‘green’ package, also has the
potential for positive environmental impact. China has
adopted its own ‘green’ building standards in 2007, and
may apply these selectively to the affordable housing pro-
jects to achieve higher short– and long-term cost effi-
ciency and resource utilization efficiency for the new
buildings.
The so-called ‘circular economy’ law adopted in 2007 (it
came into force at the beginning of 2009) has the poten-
tial to make a very significant impact, especially for new
projects in metals & mining, petrochemical and construc-
tion industries. It includes stricter controls of emissions
and waste, promotes recycling of water and energy effi-
ciency, and forbids the use of oil-fired fuel generators and
boilers in favour of natural gas and alternative fuels gen-
erators. Special economic incentives are reserved for the
re-utilization of mining and agricultural waste and by-
products.
Implications for Chinese firms
Companies in China stand to mostly benefit from the
‘green’ measures of the Chinese government in the
stimulus package. Railway equipment companies, steel-
makers, construction industry players—all will benefit
from a surge in investments in railroads and railway

World Green Stimulus Spending Timing, USD bn*
Low Carbon Energy Efficiency Wate/Waste Management
143
88
48
40
21 22
12 14 15 10
4 4
2009 2010 2011 2012
Source: HSBC. *For countries that have announced plans by 04/09.
stock. As noted by the Economist publication (April 16,
2009), railway investment has already tripled in China,
year-on-year basis. In a similar fashion, construction and
steel industry will benefit from the increased government
spending on affordable housing.
The Chinese government’s push for consolidation, cou-
pled with more stringent environmental and labour com-
pliance supervision in the heavy industries (such as steel-
making and mining), will probably damage the interests of
the shareholders in the smallest, least efficient (and most
polluting) players. But it will no doubt benefit the modern,
large-scale players, many of which are state-owned—
through increased market share, a more level playing
field for all companies and less pressure from cut-throat
cost competition. Further cost reductions from economies
of scale and quality improvement as a result of industry
consolidation and increased investment levels should
follow suit.
In addition, the measures may prove extremely beneficial
to these industries in the long run, by bringing them
closer to international standards in terms of environ-
mental and labour compliance, which in turn may lift
some worldwide barriers to Chinese exports. This should
raise the image of Chinese producers abroad, and lower
the instances of anti-dumping measures often initiated in
other countries on the grounds of unfair advantage that
Chinese companies have due to their minimal compliance
costs, when compared to their Western counterparts.
The upgrade of the national electric grid, even though it is
another substantial part of the stimulus package, is not
strictly a new idea. The Chinese government has in the
past few years pushed hard new ’smart grid’ technologies
that offer better monitoring of user activity and pricing /
charging, minimizing the losses of electricity in the sys-
tem and allowing for better load balancing. With the
stimulus now in place, the innovation and investments in
these areas only stand to accelerate on the same trajec-
tory. We expect this part of the stimulus to benefit domes-
tic firms to a large extent, but at least some of the bene-
fits will accrue to foreign firms. Areas to watch are the
ones in which Chinese firms do not yet possess the tech-
nologies and knowledge to produce, and especially to
11
integrate some of the more sophisticated components of
the ‘smart grid’.
Opportunities for foreign companies
This leads us to another interesting issue—to what extent
and how exactly can foreign companies benefit from the
Chinese stimulus package? Even though the government
has tried hard to avoid protectionist language in the
stimulus package legislation, one may expect that on a
project-by-project basis, both local authorities and the
central government will prefer the funds to benefit domes-
tic firms, and thus trickle further down the economic
chain. This is especially true for traditional, established
industries and projects where foreign companies do not
have a significant advantage over domestic firms.
We therefore are inclined to recommend our clients, in
their quest to benefit from the resilience of the Chinese
economy, to focus more on technologies, knowledge and
products which China still lacks.
A few examples of such technologies come from our in-
house research of the needs of Chinese mining firms.
One area of interest for them is bio-leaching and other
advanced methods of efficient extraction of minerals from
poor ores and tailings. Deep-level underground mining
technologies and modern use of IT in mining are also
important areas for foreign suppliers to the mining indus-
try to watch and pursue.
Environmentally-friendly mining and metallurgical tech-
nologies, such as low-waste, advanced water treatment
and circulation technologies are also interesting to Chi-
nese metals and mining firms. Sure, Chinese companies
will face more stringent environmental controls and will
feel compelled to utilize environmentally-friendly tech-
nologies and methods in their work. But some will be
more readily acceptable than others—especially the tech-
nologies that combine environmental damage reduction
and cost reduction.
Lilian Luca, Director: Russia/CIS & Group Corporate
Office
luca@thebeijingaxis.com
12

China’s Africa Engagement: New Issues, Salient Trends

There are a number of African elements that are critically important to China’s global strategy: The
African continent’s geopolitical importance, big untapped market, and rich natural resources. As more
Chinese companies feel the need to enter new markets and gain more resources, Africa will see in-
creased Chinese business and investment activity. By Edward Wang.
frica has presented an untapped source of natural re-
A sources and a big potential market for Chinese inves-
tors with different mindsets and ways of doing business
compared to their western counterparts. China’s growing
demand for aluminium, copper, nickel, iron ore and oil has
compelled the Chinese government to establish mining
interests in a range of African countries. China Inc has in-
vested billions in Africa; it is harvesting, yet it is also feeling
backlash from some host governments and criticism from
Western countries. Trade between China and Africa
reached a record USD 106.84 billion in 2008, up 45.1% y-
o-y. The number of African countries with which China had
more than USD 1 billion in trade increased to 20 in 2008
from 14 in 2007. China’s emerging political and economic
power in the world is set to lead to more Chinese political
influence and investment activities in Africa, which is
changing and reshaping the business landscape of the
continent.
Historical antecedents
China sees its relations with Africa as firmly embedded in
history. Ever since the 1950’s, China has viewed Africa as
a potential strategically important partner on the world po-
litical arena and has put a great deal of effort into develop-
ing stronger China-Africa relations to play a significant role
in gaining geopolitical weight for the Third World, of which
China saw itself as the leader at that time.
China’s development of relations with Africa can be classi-
fied into three phases:
• The Political Phase (1950’s to late 1970’s)
• The Dormant Phase (late 1970’s to late 1990’s)
• The Commercial Phase (late 1990’s up to now)
For almost half a century before the 1990’s, however,
China’s relations with Africa were of a more political rather
than economic nature. Before 1978 when China adopted
an opening-up policy, as part of its Third World strategy,
China had delivered many infrastructure projects in sup-
port of African countries’ social and economic develop-
ment. The Tanzania-Zambia Railway is a famous part of
the legacy of China’s tangible assistance during this pe-
riod. Medical teams were also sent to many African coun-
tries by China to treat African people with various illnesses,
which has greatly helped relations between China and Af-
rica at grass-root levels.
For almost two decades after 1978, China’s relations with
Africa entered into a kind of dormant phase. This is mainly
because China had to deal with many new and difficult
challenges derived from the strategic and fundamental
transformation of its economic system and development
mode.
As China came to be more economically developed in the
late 1990’s, the increasing demand for resources to sus-
tain the high-speed economic growth required it to acquire
oil, gas and minerals outside China. As China’s good rela-
tions with Africa had previously helped China with its cor-
porate investments on the continent, the African continent
naturally had much attraction for China.
There are a few African elements that are critically impor-
tant to China when it comes to China’s global strategy:
Africa’s geopolitical importance, its big untapped market,
and its rich natural resources. China knows Africa is dis-
tinctively different from the West in many ways: views on
domestic issues, goals of economic development, values
and cultural norms. From the perspective of its global strat-

China has gone through three Phases in its Engagement with Africa

Political Phase Dormant Phase Commercial Phase

• Relations primarily of a
political nature
• Economic aid for infra-
structure and medical
teams
• Effort to gain support for
the Third World
• China’s priority shifted to-
wards establishing a more
market-based economic
model while integrating
itself with the world’s lead-
ing economic powers
• Less effort towards gain-
ing political influence
• Followed the rise of China
as an economic power
with surging demand for
raw materials
• FOCAC 2006 drew Chi-
nese businesses’ attention
to Africa
• Increasing Chinese invest-
ment in more sectors

Source: TBA Analysis


Number and Size Distribution of Chinese-Financed Infrastructure Projects in Sub-Saharan Africa, 2001-2007
Estimated Number of New Projects
50 Chinese Sources Total Press Reports
40
30
20
10
0 0
2001 2002 2003 2004 2005 2006
Source: World Bank–PPIAF Chinese Projects Database
egy and domestic economic development, China regards it
as in its strategic interests to deal with Africa in a fashion
different from the West.
Though China’s strategy of engagement with Africa is re-
viewed, designed and implemented from a wider angle
than economic or commercial considerations, China tries
to separate political issues from commercial issues. Politi-
cally and diplomatically, China has dealt with sensitive is-
sues of African countries in a manner which is considered
by many African countries as non-interference in their in-
ternal affairs, though the West has quite a different view on
China’s ways. Yet China’s diplomacy has rewarded it with
more of Africa’s trust and cooperativeness.
China also took actions to counter the West’s criticism that
China’s goal is only to grab African resources. In February
this year, President Hu Jintao visited four African coun-
tries, and it is clear that one important goal of this trip was
to show the world that China's commitment to the continent
reaches beyond business and resources, as the four Afri-
can countries (Mali, Senegal, Tanzania and Mauritius) he
visited are not renowned for possessing natural resources.
China’s different political attitudes and measures, com-
bined with a long period of Chinese economic aid to Africa,
have helped China develop a close relationship with many
African countries, which has created favourable conditions
for Chinese investment in Africa.
Chinese investment in Africa grew very fast in the last few
years. OFDI flow into the continent stood at only USD 74.8
million in 2003, yet this had increased to USD 1574.3 mil-
lion by 2007. From oil contracts in Sudan to a substantive
stake in a leading South African bank, China’s investment
activities are sprawling across the African continent.
At the high official level, the Chinese government already
realized the strategic economic implication of China-Africa
relations right after China’s opening-up policy was adopted
in late 1970’s. Back in 1982, the then Chinese prime minis-
ter visited 11 African countries with 4 principles for the de-
velopment of economic and technological cooperation with
Africa. At the business level, however, only after the late
13
Project Size Distribution (USD mn)
40
30
20
10
2007 <50 50-100 100-250 250-500 500- 1,000+
1,000
Source: World Bank–PPIAF Chinese Projects Database
1990’s, when China’s economy was more developed and
its growing economy required more markets and re-
sources, did Chinese companies start to look at overseas
investment. Africa then became an attractive region for
market development and resources investment for some
Chinese companies. Especially after the staging of FO-
CAC in Beijing in 2006, more of Chinese companies’ atten-
tion was drawn to the African continent and more Chinese
companies started to consider and plan for doing business
in Africa. Since then it can be seen that Chinese invest-
ment in Africa has been growing more rapidly in various
sectors and in annual value.
Salient features
From our observations and engagement with Chinese
companies, we can observe some features of Chinese in-
vestment in Africa. Firstly, Chinese investment is heavily
slanted towards resources, i.e. China’s investments in Ni-
geria and Sudan are in the oil industry; China’s invest-
ments in the DRC and Zambia are in the copper mining
industry. However, a diversified investment trend is also
clearly visible in the last few years, i.e. ICBC acquired 20%
of Standard Bank for USD 5.6 billion in October 2007; in
2004, a Wenzhou shoe company set up a shoe-making
plant with annual production of 6 million pairs of shoes in
Nigeria, and its total investment was more than USD13
million by 2007; a large Chinese private cement producer
invested in cement production in Madagascar; a Zhejiang
company invested USD 51.8 million in setting up the
China-Botswana Economic & Trade Cooperation Zone
which includes a manufacturing base, a logistics centre
and a free trade zone.
Over the last number of years, Chinese investors have
learnt many lessons from their engagements in Africa.
Many Chinese companies have now realized that to re-
search and do due diligence on various aspects of invest-
ment opportunities and targets are critically important.
They are now more accustomed to using advisory services
before and during the process. More than 80% of Chinese
investors in Africa are private companies. One model or
pattern of the investments of these private companies is
that these companies normally start their engagement in
14
Africa by trading. For example, a Shanghai-based private
company started its mining business in Africa by collecting
and trading copper ores in the DRC and Zambia. Now this
company has set up four other companies in the DRC and
they are all engaged in mining exploration. It is estimated
that the company has invested about USD 100 million in
the DRC.
The ‘trading’ of infrastructure projects for raw material con-
tracts is one strategy China has used to establish itself on
the continent. For example, in September 2007, China
signed a deal to lend the DRC a total of USD 5 billion to
develop infrastructure and mining. In exchange, China will
get rights to the DRC’s extensive natural resources, includ-
ing timber, cobalt and copper. A similar earlier soft loan
deal with Angola has resulted in that country now being the
leading supplier of oil to China.
Supporting investment in Africa
The Chinese government and government-owned compa-
nies have made much effort in the following five aspects to
promote and support China’s investment in Africa:
• High-level visits by Chinese top officials
• Policies and measures preferential to Africa
• Economic aid to Africa
• Financial support
• Cultural influence
At the highest level, China has been actively engaging Af-
rica, which has helped create a more favourable setting for
Chinese investors. China’s president, prime minister and
foreign minister have all visited the continent on a regular
basis. From early 2004 to most recently, President Hu
Jingtao has made four visits to Africa. The four visits have
taken him to 18 African countries, including Egypt, Gabon,
Algeria, Morocco, Nigeria, Kenya, Cameroon, Liberia, Su-
dan, Zambia, Namibia, South Africa, Mozambique, Sey-
chelles, Mali, Senegal, Tanzania, and Mauritius. On his
recent visit to four African countries, President Hu repeat-
edly pledged that China will continue to increase its aid to
Africa, reduce tariffs and expand trade with and investment
in African countries, within China's capabilities.
China has adopted a range of policies with the intention of
encouraging investment in African countries. In terms of
investment, the Chinese government not only encourages
and supports Chinese enterprises' investment and busi-
ness in Africa, but also provides preferential loans and
buyer credits to this end. The Chinese government is also
continuing to negotiate and implement the Agreement on
Bilateral Facilitation and Protection of Investment and the
Agreement on Avoidance of Double Taxation with African
Countries.
In China’s African Policy, published in January 2006,
China promised that, in light of its own financial capacity
and economic situation, it will do its best to provide and
gradually increase assistance to African nations with no
political strings attached. Though not on the same scale as
three decades ago, China is still continuing its economic
aid to Africa as part of its strategy.
Financially, China has cancelled the debts of 33 African
countries as a gesture of goodwill. China has also cut im-
port tariffs on hundreds of items from 32 least-developed
African countries to promote business development be-
tween China and Africa. To support Chinese investors,
China set up China-Africa Development Fund to provide a
source of finance.
Going global is a relatively new task for Chinese compa-
nies. Where more international standards and processes
are required, Chinese companies will have more problems
and issues in terms of communication with foreign part-
ners, sufficient managers with good skills, business system
standards etc. In addition to the above-mentioned issues
and problems, Chinese companies have encountered la-
bour issues In Africa in particular.
Chinese companies prefer importing their own workforce,
especially on big construction projects. Their unwillingness
to employ local workers has created discontent in some
African countries. In Angola in June last year, the Angolan
government cancelled a deal with Sinopec to build an oil
refinery in Lobito, a USD 3 billion project, because of the
Chinese company’s tendency to import labour rather than
use locals. In some African countries where locals are em-
ployed, Chinese companies have found it difficult to handle
labour issues.
Looking ahead
China and Africa will continue to work together to cope
with the economic difficulties brought about by the unfold-
ing global downturn, especially in the following six key ar-
eas:
• Strengthen solidarity and mutual assistance to jointly
meet the challenge of the global financial crisis
• Enhance mutual trust and cement the political
foundation for traditional friendship
• Raise the level of practical economic cooperation
and trade on the basis of reciprocity and mutual
benefit
• Expand people-to-people exchanges and deepen
cultural cooperation
• Work closely together and strengthen coordination
in international affairs
• Enhance coordination and jointly promote the further
development of the Forum on China-Africa
Cooperation
With the Chinese government working to improve strategic
cooperation between China and Africa in the areas men-
tioned above, the business space between China and Af-
rica will be further broadened and deepened. As more Chi-
nese companies feel pressured for new markets and re-
sources, Africa will see more Chinese business and invest-
ment activities, and in more sectors.
Edward Wang, Director: China Capital Advisors
edwardwang@thebeijingaxis.com
 15

Macroeconomic Monitor: China’s Tentative Consolidation

While the world remains firmly in recession, Q1 2009 has delivered tentative signs of a recovery in
China. We expect China’s economy to recover gradually in 2009, and then more rapidly in 2010 as
demand from overseas markets eventually rebound. Over the longer term, however, the need to ad-
dress structural issues in China’s economy remains. By Barry van Wyk and Javier Cuñat.

W e were somewhat surprised by

the Q1 y-o-y GDP growth rate
of 6.1%. Looking at the macroeco-
China’s Quarterly GDP Growth, % y-o-y, 2007–2010F
14
Q3 and Q4 2008 GDP Q3 and Q4 of
Q1 2009 sur-
nomic picture in the developed world growth of 9.0% and 6.8% 2009 will likely
12 prised with a
showed the initial slowdown see a mild re-
and the link to Chinese exports, we firmer than
expected 6.1% covery from Q1
had expected a more dramatic eco- 10 and Q2 levels
nomic slowdown in China after the 8
already slower y-o-y GDP growth of
9.0% in Q3 and 6.8% in Q4 of 2008. 6
As such, the stronger number sug- 4
gests that China’s slowdown has
been more modest and that a recov- 2
ery is perhaps underway. We there- 0
fore revise our 2009 GDP forecast Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F
up by around 1% to 6.8%. 2007 2008 2009
Sources: China Monthly Economic Indicators; TBA Analysis
This still represents a slowdown
against full year 2008 GDP growth of weak overseas demand will limit reform and rebalancing the structural
9.0% and 13% in 2007 (revised up China’s export performance through- composition of China’s economic
from 11.9%) - and well below the out 2009, China’s investment-led growth.
average annual rate of over 11% economy, self-dependence on fi-
sustained for the past 4 years - but it nancing and a stronger state-owned Yet over the short term, the heavy
is nonetheless a relatively strong banking system provides the funda- reliance on exports for growth will
performance in the context of recent mentals for a more substantial re- keep China from returning to the
global events. The next few quarters bound of China’s economy in Q4 10% plus growth band—at least until
will be critical to gauge China’s abil- 2009. recovery has fully set in in the devel-
ity to maintain strong growth, but for oped world. But 10% plus growth
now there is relief that the nation can China’s immediate fiscal policy re- was never healthy nor sustainable.
potentially at least maintain a 6-8% sponse to the worldwide recession— Hence, we expect China’s economy
range over 2009-10. the implementation of a RMB 4 tril- to begin a more sustained recovery
lion (USD 586 billion) stimulus pack- in Q3-Q4 2009, albeit at lower levels,
China’s Q1 GDP growth rate of 6.1% age as well as the 4.85 trillion yuan as the impact of the aggressive gov-
could be the lowest since the gov- (USD 670 billion) of new loans is- ernment intervention intensifies in
ernment began publishing quarterly sued by Chinese banks in the first the real economy.
figures in 1992, yet this stands in three months of the year—will
stark contrast to the negative 6.1% gradually boost domestic demand As reflected in the table on page 18,
annual GDP growth recorded in the and domestic consumption, provid- in response to positive signs ema-
US for Q1. Despite the fact that ing a renewed impetus for advancing nating from China’s Q1 data, several

China Annual GDP Growth, % y-o-y, 1978–2010F

Temporary slowdown
16 Overheating below 7-8% ’minimum
concerns range’ in 2009
14 Past periods
7-10% GDP of overheating 7-8% GDP
12 growth ‘band’ growth ‘band’

10
8
6
4
2
0
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F

Sources: World Bank; China Statistical Abstract 2006; OECD Report; TBA Analysis
16
Monthly Imports, % y-o-y, USD bn
Imports (lhs)
140
120
100
80
60
40
20
0 -40%
06-Jan 06-Jul 07-Jan 07-Jul 08-Jan 08-Jul 09-Jan
Source: China Monthly Economic Indicators
institutions have recently revised
upwards their forecasts for full-year
growth in 2009. At the present junc-
ture, however, China’s recovery still
remains of a preliminary state. The
government stimulus plan is a public
spending mechanism to engineer
growth over the short term, yet over
the medium to long term it remains
to be seen not only how successful
China will be to engineer growth by
raising consumption levels in the
domestic market, but also how fast
Chinese exports will recover.
Positive signals
By the end of Q1 2009, a few clear
positive signals were apparent in
China’s economic statistics:
• China’s leaders have hailed the
slightly improved trade figures for
March. The decline in China’s
exports decelerated in this
month, falling 17% y-o-y
(compared to the -25.7% in Feb-
ruary, see chart above)
• Industrial production growth rose
to 8.3% in March and 5.1% for
Q1 y-o-y, after maintaining an
average of 3.8% during the first
Monthly Retail Sales, % y-o-y, USD bn
160
140
120
100
80
60
40
20
0 10%
07-Jan 07-Jun
Source: National Statistics Database
Monthly Exports, % y-o-y, USD bn
Grow th Rate (rhs)
40% 140
30% 120
20%
100
10%
80
0%
60
-10%
40
-20%
-30% 20
0 -30%
06-Jan 06-Jul 07-Jan 07-Jul 08-Jan 08-Jul 09-Jan
Source: China Monthly Economic Indicators
two months of the year
• The Purchasing Managers Index
(PMI) of China’s manufacturing
sector rose to 52.4 in March, re-
bounding above 50 for the first
time since July last year
• As a more direct signal that
China’s USD 586 bn stimulus
package is taking effect, fixed
investment soared by 30% in
March. In conjunction with the
government’s stimulus plan,
fixed-asset investment is forecast
to maintain rapid growth in Q2 of
around 27% y-o-y
• Tentative signs of improvement
have also been apparent in the
real-estate market in the form of
a rebound in property transaction
volumes and the first rise in
month-on-month prices since July
2008. Prices in March still fell
1.3% y-o-y, however
• China’s oil demand in March de-
clined by 0.3% y-o-y, but stood at
its highest level since September
2008
• Power generation fell by 0.7% in
March, yet declined at a slower
rate compared to February. Ne-
vertheless, China’s Electricity
Retail Sales
07-Nov 08-Apr
Exports (lhs) Grow th Rate (rhs)
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
Council announced that China’s
industrial use of electricity actu-
ally fell by 8.38% in the first quar-
ter.
In essence, while the export outlook
is still uncertain, China’s economy
seems to be showing hints of stabi-
lising and/or approaching the end of
the worst part of the financial and
economic crisis.
Warning signs
Government-driven economic inter-
vention is proving to be effective in
the short term, but the effectiveness
of this is still uncertain in the medium
to long term if market conditions and
financial flows do not improve in the
economies of China’s trading part-
ners.
Weaker labour demand is generat-
ing notable pressure for job creation
with the added risks of social insta-
bility. China retains a serious unem-
ployment problem, while given the
capital-intensity of the stimulus pack-
age and the weaknesses of labour-
intensive SMEs in the export sector,
the outlook for China’s labour mar-
Grow th Rate
26%
22%
18%
14%
08-Sep 9-Feb
 17

kets in 2009 remains weak. Lower
external demand is also generating
the problem of overcapacity, which
at the same time may intensify un-
employment and put downward
pressure on prices.
While growth in domestic consump-
tion in China has not slowed down
as yet, the ability of China to in-
crease domestic demand to com-
pensate for slowing net exports re-
mains limited. Government spending
and investment can in the short term
fill up some of the slack, but over
time China faces a serious structural
challenge to fundamentally increase
domestic consumption.
The lending surge may currently
also be the main driver of positive
signs in the property sector. The
eventual need to contain credit
growth renders this a temporary res-
pite, and once that reality hits home,
continued property price decreases
could precipitate a further downturn
in real-estate investment. This would
also harm local governments, who
will be expected to fund much of the
government’s stimulus while relying
on land sales and taxes for about
half of their fiscal income.
On the other hand, the surge in lend-
ing may be able to bolster domestic
demand until global demand picks
up again. China’s drive to attain 8% hoods and take up some of the slack
GDP growth in 2009-10 will be a of sagging demand for overseas.
contest between falling private in-
vestment and shrinking exports on Ultimately, however, China’s recov-
one hand, and rising public invest- ery remains in large part based on
ment on the other, with private con- the state of the global economy. It is
sumption forming an additional, criti- likely, however, that growth in the
cal variable. Growth of retail sales in US, EU and Japan will remain nega-
China has held up well in Q1 2009, tive for the duration of 2009, while
with record vehicle sales of 1.11 mil- 2010 could see no more than sub-
lion units in March (during which dued growth. China’s stimulus
brands such as Audi and GM regis- spending may be effective in the
tered their best sales ever in China). short term, but the rebalancing of
Consumption growth seems to have China’s economy away from invest-
been especially fast in China’s less- ment- and export-led growth and
prosperous central and western re- more towards private consumption
gions. Thanks in part to government as a growth driver will require deter-
subsidies in rural areas, companies mined action to address income ine-
like GM and Nissan have spoken of quality and to provide a better safety
an auto boom in rural China. net and higher incomes.
Structural concerns
Since the global recession regis-
tered its most severe impact during
Q4 2008, the Chinese government
has undertaken a range of aggres-
sive monetary and fiscal policy ac-
tions in order to re-engineer eco-
nomic growth. As a result of mone-
tary and credit easing, China has
experienced a credit boom in Q1,
while USD 586 bn of government
spending, tax cuts, provision of a
social safety net and subsidies to
poor and unemployed is being im-
plemented to improve people’s liveli-

The China Compass—May 2009

A country in figures
By THE BEIJING AXIS China Strategy Group

Contents
History
Country Profile
China Economic Indicators
International Comparison
Conclusion
About THE BEIJING AXIS

The China Compass—May 2009 is a publication by THE BEIJING AXIS China Strategy Group. It is a navigational instrument
for determining China’s direction relative to the world’s economic poles.
Combining basic country data with more detailed analysis of a wide range of macroeconomic and social data, The China Com-
pass—May 2009 presents a comprehensive picture of the ever-changing and evolving Chinese landscape.
The China Compass, published in presentation form, is full of up to date statistics, topical themes and insights. It is easy to
read and presents a rich, useful desk-reference for executives with a China agenda.

The China Compass can be downloaded from the Knowledge section of THE BEIJING AXIS website at www.thebeijingaxis.com
Alternatively, to request a copy of The China Compass, please send an email to barryvanwyk@thebeijingaxis.com
18

Selected Quarterly TBA Forecasts for China

(% y-o-y)
2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F
Real GDP 11.7 12.2 12.2 11.9 10.6 10.1 9.0 6.8 6.1 6.5 7.0 7.5
Retail
19.2 20.9 23.1 26.0 n/a 24.0 22.2 19.8 17.0 16.0 15.5 18.0
Sales
Capital
- - - 24.8 - - - 25.5 - - - 29.0
Formation
Industrial
15.1 18.3 18.7 17.5 16.6 15.9 13.0 6.8 6.0 8.2 9.5 10.5
Output
Exports 27.9 27.4 26.2 22.2 21.3 22.3 23.1 14.6 -15.0 -4.0 1.0 5.0
Imports 18.2 18.2 20.7 25.4 28.7 32.4 25.7 -10.1 -18.0 -8.0 2.0 3
CPI 102.7 103.6 106.1 106.3 108.0 107.8 105.3 103.2 102.0 101.0 100 100
USD/RMB 7.76 7.68 7.56 7.43 7.16 6.96 6.84 6.83 6.8 6.8 6.7 6.65

China Consensus: China GDP Growth Forecasts for 2009 by Selected Analysts
(% y-o-y)
Highest to Lowest Latest forecast Previous forecast for 2009 Previous forecast for 2009
(April 2009) (by December 2008, (by beginning of Q4-2008)
January 2009)
9.3
CASS 8.3 (started to signal downside 9.7
risk)
Goldman Sachs 8.3 6.0 n/a
Wing Hang Bank 8 8 n/a
Merrill Lynch 8 8 8.6
HSBC 7.8 8 n/a
Asian Development
7.0 8.2 9.5
Bank
Deutsche Bank 7.0 7.0 7.6
RBS 7.0 5.0 8.0
THE BEIJING AXIS 6.8 5.6 8.5
BMI 6-7 6-7 8.8
UOB 6.5 8.3 n/a
EMIS 21 Source
Consensus n/a 7.76 >9
(30 Dec 2008)
7.5
World Bank 6.5 (Reference to sub-6% 9.2
growth)
UBS 6.5 7.5 9.5
AT Kearney 6.0 6.0 n/a
EIU 6 6.0 7.5
Global Insight 5.9 6.9 n/a
Asianomics n/a 0-4
(saw 30% risk of negative n/a
growth)

Sources: Press; Various; TBA

 19

Financial Markets
Tracking the dynamics of China’s Shanghai and Shenzhen stock markets and Benchmark Interest
Rates, Financial Markets also illustrates recent trends and transformations in China’s exchange rate
regime.

Shanghai & Shenzhen Composite Index, Monthly RMB Exchange Rates, 12 Month Trailing, Indexed
Index: December 2002 = 100% Index: April 30 2008 = 100%
500 USD ZAR AUD RUB
450 Shanghai Shenzhen 110
400 100
350
300 90
250 80
200
150 70
100 60
50
0 50
2003 2004 2005 2006 2007 2008 Q1-09 30 April 08 30 April 09

Sources: Shanghai Stock Exchange; Shenzhen Stock Exchange Source: Oanda Corporation

Benchmark Interest Rates, as on 30 April 2009 10 Largest Chinese Listed Companies, USD bn
15%
PetroChina 282.85
10.25% ICBC 154.21
10% 8.50% Sinopec 103.42
Bank of China 92.61
4.75% 5.31% 74.46
5% China Life
3%
Shenhua Coal 64.39
1.25%
0.10% 0.25% 0.50% Ping An Insurance 28.67
0% China Merchant Bank 28.00
EU
US

UK
Japan

India

China

Brazil
Australia

South Africa

Bank of Comm. 26.40

CITIC Securities 24.60

0 50 100 150 200 250

Source: Central banks Source: Shanghai Stock Exchange, as on May 5 2009

Dow Jones Global Titans, YTD % change as on 1 May 2009

% y-o-y
38.3 -34.4 China
34.1 -57.9 Russia
17.0 -42.1 Sw eden
13.2 -37.9 Turkey
6.7 -29.1 South Africa
4.9 -58.4 Egypt
3.5 -37.7 HK
3.1 -29.9 Australia
-0.3 -46.5 UK
-1.0 The Dow Jones Country Titans -53.0 Netherlands
-2.4 Indexes span major markets from -42.4 Japan
-4.1 across the globe -37.6 Sw itzerland
-5.9 -42.4 Germany
-6.2 -48.7 Italy
-6.4 -37.1 US
-7.3 -44.8 France
-8.3 -44.3 Spain
Sources: Dow Jones Indexes; Google Finance
20

China Facts & Figures

China Facts & Figures provides a cross-section of data illustrating growth, transformations and
trends in China’s commerce and industry.

China Selected Economic Indicators

General Statistics 2004 2005 2006 2007 2008
Population (mn) 1,300 1,308 1,314 1,321 1,330
Nominal GDP ($bn) 1,932 2,244 2,645 3,242 4,445
GDP per capita ($) 1,486 1,716 2,012 2,454 3,342
Real GDP growth (%) 10.1 10.4 11.1 11.4 9.0
Prices, interest rates and exchange rates
CPI inflation (%, December over December) 2.4 1.6 2.8 6.5 1.2
CPI inflation (% change in average index for the year) 3.9 1.8 1.5 4.8 5.9
Exchange rate (RMB per USD, average) 8.28 8.19 7.97 7.61 6.9
Fiscal data
General government fiscal balance (% of GDP) -1.3 -1.2 -0.8 -0.6 -0.04
General government expenditure (% of GDP) 17.8 18.5 19.2 19.9 20.8
General Government revenue (% of GDP) 16.5 17.3 18.3 19.9 20.4
Money supply and credit
Broad money supply (M2,% of GDP) 158.9 160.7 163.9 163.6 158.0
Broad money supply (M2,% year-on-year change) 14.6 17.6 16.9 16.7 17.8
Balance of payments
Exports (total value, % of GDP) 34 37.3 40.1 41 32.1
Imports (total value, % of GDP) 31.4 31.7 32.2 32.2 25.5
Exports (goods and non-factor services, % increase in $value) 35.2 27.6 26.9 25.2 17.3
Imports (goods and non-factor services, % increase in $value) 35.1 17.4 19.8 22.2 19.4
Current account balance ($bn) 68.7 160.8 249.9 372 440
Current account (% of GDP) 3.6 7.2 9.4 11 10.1
FDI ($bn) 60.6 72.4 72.7 83.5 92.3
External debt outstanding ($bn) 247.6 283.8 325 373.6 420
Central bank gross FX reserves ($bn) 610 819 1,066 1,528 1,980
Sources: China Monthly Indicators; TBA Analysis

World GDP growth, % y-o-y, 1997-2010

China
14 Emerging and Developing Economies
13
12 World
11
10 Advanced Economies
9
8
7
6
5
4
3
2
1
0
-1
-2 98 99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-3
-4
-5
Sources: IMF; TBA Analysis
 21

FAI by Province

2008 China Fixed Asset Investment in Urban Areas

Provinces in red made up

70% of Total Fixed Asset
Investment in Urban Areas Heilongjiang
in 2008

Jilin
Xinjiang Beijing

Gansu Liaoning
Inner Mongolia

Hebei Tianjin
Qinghai Ningxia
Shandong
Shanxi

Tibet Shaanxi Henan Jiangsu

Sichuan
Hubei Shanghai
Anhui
Chongqing
Zhejiang
Hunan Jiangxi
Guizhou
Yunnan Fujian
Regional Distribution, % of total
Taiwan
Fixed Asset Projects Guangxi Guangdong
Investment under
Completed Construction
Eastern Area 50% 38%
Central Area 27% 33% Hainan
Western Area 23% 29%

Fixed Asset Comparable Fixed Asset

% of Projects under % of Projects under Comparable
Investment % of Gross Fixed Investment
Regional construction Regional construction % of total Gross Fixed
Completed total Capital Invest- Completed
GDP (units) GDP (units) Capital Investment
(USD bn) ment (USD bn)

Anhui 87.8 69% 20,937 6% Indonesia Jiangsu 168.1 39% 15,843 4% Mexico

Beijing 52.1 34% 2,930 1% Southern Africa Jiangxi 63.8 68% 10,308 3% Poland

Chongqing 54.9 75% 7,743 2% Southern Africa Jilin 69.3 75% 9,181 3% Sweden

Fujian 67.8 44% 11,627 3% Austria Liaoning 131.3 68% 14,733 4% Netherlands

Gansu 22.1 48% 7,822 2% Egypt Ningxia 10.9 69% 1,501 0% Belarus
Qinghai 7.6 55% 2,522 1% Luxembourg
Guangdong 127.2 25% 17,346 5% Netherlands
Shaanxi 185.2 41% 27,614 8% Central America
Guangxi 49.1 48% 17,185 5% Southern Africa
Shandong 64.6 33% 5,237 1% Norway
Guizhou 23.7 49% 9,100 3% Israel
Shanghai 63.2 63% 6,778 2% Poland
Hainan 9.9 47% 1,235 0% Slovenia
Shanxi 47.2 47% 6,778 2% Poland
Hebei 110.4 47% 21,000 6% Northern Africa
Sichuan 93.7 52% 17,267 5% Northern Africa
Heilongjiang 49.8 42% 7,715 2% Southern Africa Tianjin 46.9 51% 3,204 1% Southern Africa
Henan 128.6 49% 29,559 8% Netherlands Tibet 3.9 69% 2,551 1% Uruguay
Hubei 75.9 47% 14,316 4% Greece Xinjiang 29.2 48% 6,068 2% Algeria
Hunan 71.3 44% 18,611 5% Greece Yunnan 45.9 56% 13,360 4% Southern Africa

In. Mongolia 78.7 70% 9,612 3% Belgium Zhejiang 96.4 31% 15,161 4% Northern Africa

Sources: China Monthly Indicators; UNCTAD

22

China Sourcing Strategy

Stimulated by a series of measures, China’s economy is exhibiting some positive signs such as a
growing PMI and indications of stabilizing exports. But how has the China sourcing risk profile
changed for international procurement managers—and what can they do to formulate appropriate
China Sourcing Strategies in 2009? By THE BEIJING AXIS China Sourcing Unit team.

Major Recent Developments Share of Net Exports in GDP Growth, y-o-y

• Total trade (imports and exports) in March totalled 60%
USD162.02 billion, down 20.9% y-o-y. Exports 40%
totalled USD90.29 billion and imports USD 71.73 20%
billion, decreasing 17.1% and 25.1% y-o-y, respect- 0%
ively -20%
-40%
• Total trade in March grew by 29.7% over the pre-
-60%
vious month, with exports up 39.1% and imports up
-80%
19.5%

2008E
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
• China’s manufacturing Purchasing Manager Index
(PMI) reached 52.4% in March 2009, the first time
Sources: China Statistical Yearbook 2008; Chinese Academy of Social Sciences
during the past 6 months that the index exceeded
50%. The index has, however, indicated continuous
growth since December China Monthly Exports, USD bn & Growth rate, y-o-y
• In April 2009 the PMI rose again, to 53.5%, showing 150 Export Grow th Rate (y-o-y) 40%
a further consolidation in economic conditions 30%
• China announced industry-specific stimulus plans for 120
20%
during January and February 2009: Auto, steel, 90 10%
shipbuilding, textile, machinery-manufacturing,
electronics and information, light industry, petroche- 60 0%
micals, nonferrous metals and logistics -10%
30
• China adjusted the export tax rebate rates for 3,802 -20%
items from 1 April 2009. This is the sixth increase 0 -30%
since last August when the government decided to Jan-08 Mar-08 May-08 Jul-08 Sep-08Nov-08 Jan-09 Mar-09
raise export tax refunds to stimulate exports Source: China Customs

In the Midst of a Crisis: Enhancing Supply Chain Risk Management in China with Good Access to Information
Globalization has accelerated the
growth of organizations, but also
somehow shaped the supply chain by
increasing global inter-dependencies
and the need for more overall stabil-
ity. The current economic crisis is per-
fect proof of this—as trade slumped
and companies failed the supply
chains of many organizations have
been inhibited or put under severe
stress. Therefore, it is more crucial
than ever to manage supply chain risk
well.
China is no different. There is an ele-
vated need to effectively manage the
internal organization, customers, sup-
pliers, the business environment and
the web of links in-between all of
these. But implementation of this can
potentially be much more difficult in
China due to the obstacles of lan-
guage, business culture, differences
in the economic system, etc. Pres-
ently, potentially pertinent risks in the
China supply may include the follow-
ing:
• Do your suppliers have adequate
access to finance/credit?
• What is the typical ‘demographic’
of your Chinese suppliers? Many
small and medium sized export-
ers will not survive or will suffer
severe dislocation so how to mine
information about supplier health?
• How does the regulatory frame
work look for your categories? Are
there prospects for changes in
taxes/subsidies?
• What about foreign exchange rate
risk now that the RMB apprecia-
tion has halted?
The best way to manage risk is to pre-
empt and anticipate. From a macro
perspective the entire landscape in
China has changed: market growth,
industry dynamics, profitability, confi-
dence, etc. To manage in this envi-
ronment requires extensive knowl-
edge, timely market information and
accurate analysis of how supply
chains are affected. But this is a chal-
lenge for international firms with time-
zone, language and cultural obstacles
to overcome. For example, China an-
nounced a series of stimulus plans for
10 industries, which included a host of
export encouragement regulations
and new policy trends. Without in-
depth analysis of the right information
the risk profile goes up exponentially.
Similarly, from the micro side, an or-
ganization must review its cooperation
with its Chinese suppliers and service
providers as well as audit their current
situations via interviews, visits, sur-
veys, and 3rd party due diligence.
In short, not to be closely tapped into
the state and condition of your suppli-
ers in the current environment simply
injects unacceptable risk.
 23

Regulation Watch Purchasing Managers Index, Jan 2007–Apr 2009

China raised export tax rebates twice during Jan - Apr PMI in Manufacturing Industry
60
2009:
1st time (effective 1 February 2009):
China increased the tax rebate rate for textiles and gar- 50
ments from 14% to 15% from 1 February 2009, which
was announced along with the national plan to invigorate
China's textile industry, as announced by China’s State The index has been
Council. 40 growing for five consecu-
tive months
The textile sector is the China’s traditional pillar industry.
This is the 3rd time that the Chinese government ad-
justed tax rebate for textiles since August 2008. The pre- 30
vious increase in November took the rate from 13% to Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09
14%. Source: China Federation of Logistics & Purchasing (CFLP)
nd
2 time (effective 1 April 2009):
• The CFLP manufacturing PMI in March 2009 grew to
China lifted the export rebate on 3,802 items in order to 52.4, which was the first time the index returned to
boost falling exports from 1 April 2009. The adjustment above 50 during the past 6 months
covers the export rebate for textiles and garments, iron • In April this trend continued with a small rise to 53.5
and steel, non-ferrous metals and petrochemical items. • By March 2009, 3 sub-indexes of the manufacturing
PMI were over 50, including output, new orders and
New export tax rebates for CRT colour TVs are 17%,
quantity of purchasers. The other sub-indexes have
16% for textiles and garments, and 13% for non-ferrous
also been growing, albeit at a slower rate
metals and furniture.
• Among the 20 industries surveyed in March 2009, the
It was the sixth increase since last August when the gov- PMI of manufacturing of 15 industries (including elec-
ernment decided to raise refunds in an attempt to deal tric equipment and machinery, transportation equip-
with the problem of slumping exports amid the global fi- ment, general equipment and tobacco) registered
nancial crisis. 50 or higher

WHY Source in China: Export Credit

During China’s development over the past 30 years, Ex- Export Buyer’s Credit Working Procedure
port Credit became an important financial facility for the 1. Commercial Contract
Chinese government to encourage exports and the Chi- Exporter
5. Down Payment Importer
nese ‘Going Global’ strategy. 6. Delivery of goods/services (Borrower)

The two main export credit players in China are China 2.Loan Agreement
7. Disbursement 8. Repayment
Export & Credit Insurance Corporation (Sinosure) and
The Export-Import Bank of China (China Exim Bank). China Exim Bank
4. Export Credit
Insurance
Sinosure is the only officially-supported insurance com- 3. Repayment Guarantee
pany specializing in credit and investment insurance in
China Export &
China, playing the role of Export Credit Agency for the Credit Guarantor
State. Sinosure is one of 51 members of Berne Union,
the leading international organization of public and private Source: China Exim Bank
sector providers of export credit and investment insur-
ance. China Exim Bank Export Credit 2003-2008E, USD bn
China Exim Bank is a government policy bank under the 30
direct leadership of the State Council. The bank approved
an aggregate of RMB 402.4 billion loans in 2008, with Seller's credit Buyer's credit
actual disbursement of RMB 296.1 billion, up by 53% and 20
51% respectively over 2007. These loans supported USD
102.8 billion-worth of exports of mechanical and elec-
tronic products, high- and new-tech products and agricul-
10
ture products as well as overseas investment projects
and contracted construction work.
As China is increasing fiscal input to stimulate exports, 0
export credit will be supportive and helpful for financing of 2003 2004 2005 2006 2007 2008E
Chinese exporters and overseas buyers.
Source: China Exim Bank
24
WHAT to Source in China: Implications from Stimulus Package
During Jan—Feb 2009, China unveiled stimulus packages for 10 industrial sectors: Auto, steel, shipbuilding, textiles,
machinery-manufacturing, electronics and information, light industry, petrochemical, nonferrous metals and logistics. As
one of the most important measures the Chinese government has taken to keep the Chinese economy growing in 2009,
these packages also include adjustment plans to stimulate exports, from which overseas buyers will also benefit. Here
we select 8 sectors to explain favourable trends for overseas buyers.
Auto (announced on 14 Jan 2009)
• Encourage large auto companies as well as major
auto-part makers to expand through mergers and
acquisitions so as to optimize resources and im-
prove their competitiveness on the international mar-
ket
• Encourage auto exports; export 10% of China’s
locally-manufactured autos
• Earmark RMB10 billion as a special fund to support
auto companies to upgrade technology and develop
new engines that use alternative energies in the next
3 years
Machinery (announced on 4 Feb 2009)
• Encourage major equipment manufacturers to ex-
pand by M&A and develop large enterprises with
comprehensive capacity for turnkey project imple-
mentation, system integration, international trade and
financing
• Encourage machinery exports by increasing export
credit
• Encourage introduction of overseas advanced tech-
nology and re-innovation; eliminate import duties and
value-added duties for the key parts and materials
which need to be imported
Shipbuilding (announced on 11 Feb 2009)
• Make effort to develop the international market; ex-
pand international market share of high-tech and high
value-added ship and marine project equipment
• Encourage financing organizations to increase export
buyer’s credit for shipbuilding exports
• Support shipbuilding enterprises’ R&D to develop ma-
rine engineering equipment; encourage the develop-
ment of marine engineering and power transmission
and other critical systems and ancillary equipment;
actively develop ship repair and modification abili-
ties
Light industry (announced on 19 Feb 2009)
• Further raise export rebates of some light industrial
products, and extend fiscal and credit support to
small and medium-sized firms
• Lift processing trade restrictions on some labor-
intensive, technology-intensive, energy-efficient, and
environmentally-friendly products
• Speed up technological upgrades in the fields of pa-
per making, home appliance and plastic sectors
• Increase supply of light industrial products in the
domestic market, and improve foreign trade services
and maintain export volumes
Steel (announced on 14 Jan 2009)
• Adopt a more flexible tax rebate policy to retain inter-
national market share
• Allocate special funds from the central budget to
promote technological advancement of the sector,
readjustment of products mix and improvements of
product quality
• Transforming ‘big’ industry competitors into ‘strong’
international players; eliminate outdated technology
• From 1 April, the Chinese government increased ex
port VAT rebates of some more value added steel
products
Textile (announced on 4 Feb 2009)
• Develop new domestic and international markets;
maintain global market share by expanding new
overseas markets
• Strengthen technical innovation and establish local
brands; support the localization of manufacturing and
textile machinery
• Expand financial support: Increase the export VAT
rebate for textiles and garments to 15%; provide
subsidies for small and medium sized companies
who are suffering from worsening business conditions
and cash-flow problems
Electronics & information (announced 18 Feb 2009)
• Promote outsourcing and encourage electronics and
information enterprises to go overseas and build re-
search and development centres, production bases
and marketing networks
• Increase financial input, including increasing the ex-
port VAT rebate of key electronic products to 17%
• Include 6 key projects under the stimulus plan: Inte-
grated circuit industry, plate-panel and colour TV, TD-
SCDMA, digital TV networks, computers and next-
generation internet and software and information ser-
vices
Non-ferrous (announced on 25 Feb 2009)
• Adjust the product to meet the demand of power,
transportation, construction, mechanics and light in-
dustries; encourage exports of high-tech and high
value-added products
• Adjust export VAT rebate rates
• Promote company restructuring and offer subsidized
loans to support technical innovations
• Eliminate technically undeveloped producers and
avoid an increase of excessive output capacity
• Establish a national reserve system; make full use of
both domestic and foreign resources
 25

HOW to Source in China

Common Modes for Establishing a Sourcing Hub in China: Representative Offices and Trading Companies
As a part of globalized sourcing strategy, many multinational companies are starting to establish their own sourcing hubs
in China to better manage their Chinese suppliers. Apart from using 3rd party sourcing facilities, these companies com-
monly have two options: A representative office or a WOFE (wholly owned foreign enterprise) trading company. Here we
list the main features of these two types that procurement managers must know before decision-making:

Type Attribute Operation Features Benefits Cost

Representative Has no qualification of a
Office legal entity, with incom-
plete economic functions
to engage in commercial
activities with common
significance
Cannot sign contracts
Cannot open LC
Cannot apply for im-
port/export license
Cannot employ staff
Better understanding of
suppliers
Better control of quality
Better assurance of deli-
very
Setup cost is low
Operational cost is
low

WOFE Trading With complete functions Can perform all duties
Company of a company including signing con-
tracts, applying for im-
port/export licenses,
employing staff inde-
pendently, issuing in-
voices
Better understanding of Setup cost is higher
suppliers than Rep office
Better control of quality Operation cost is
More assured of delivery higher than Rep
office
Can do domestic trade
Can get export VAT rebate
Can utilize China’s banking

Process Flow of TBA China Sourcing Unit (CSU) - Systematic Industry Search & Supplier Identification
This section introduces the process flow of THE BEIJING
AXIS China Sourcing Unit, i.e. from the point of receiving
enquiries from clients, the services included in the solu-
tion process and the benefits provided to our clients, as
well as lessons learnt. In this edition we discuss the stage
after Needs Analysis: Industry search and supplier identi-
fication. Which supplier(s) to deal with is always a crucial
decision, which directly impacts TCO, quality and lead
time you can attain and the overall risk of the sourcing
strategy that you are formulating. CSU identifies an initial
universe list of suppliers by conducting a comprehensive
and systematic industry search and employing on-the-
ground reach & established networks to ensure that all
the possible suppliers are included for evaluation.

3
Methodology Sources Research
Systematic Determine Identify infor- Populate
Supplier
Industry appropriate mation nodes exhaustive
Evaluation,
2 Search approach,
methodology
and all poten-
tial sources
UL based on
methodology Application
& Supplier to ensure full that encom- and sources of High-
Identification universe list pass full UL and iterate
level Filters
(UL)

Guidelines for Systematic Industry Search and Supplier Identification

The key is to arrive at a comprehensive all-inclusive universe list (UL) that includes ALL potential candidate suppliers.
Different industries, categories and product clusters would require a different approach in order to construct a UL. For
example, high regional-concentration cluster Industries often occur in the same region (i.e. most digital scanners are
manufactured in Guangdong in the Pearl River Delta, but trailers or auto components are manufactured across China.
Rank, classify possible suppliers from early on, based on industry ranking, technology, quality and specifications, com-
mercial standing, export history, references, price point perception, etc. All this information must enter the project data-
base. A good database would inform the specific sourcing strategy for this specific case, i.e. what tier of suppliers to
approach in terms of supplier size, price position, product range, service level, etc. Also, How to approach them, i.e. by
email, RFI, RFP, RFQ, by direct visit, via an introduction from guanxi, etc.
26

China Sourcing Blog Highlights

Amid an unfavourable economic environment, global trade and China sourcing are going on. CSB
recently investigated measures China’s Ministry of Commerce has taken to reverse the situation with
falling exports, and analyzed the role of e-commerce in global sourcing. We also offered practical tips
on enhancing the efficiency of plant tours and on making optimal use of sourcing exhibitions.

The China Sourcing Blog (CSB) is

THE BEIJING AXIS online media plat-
form to track the latest trends on
sourcing and the Chinese economy.
Taking on a multi-faceted, dynamic
subject and carefully scanning every-
thing from the mainstream media to
the distant corners of the Internet,
CSB strives to get to the bottom of all
the best bits and pieces on China
sourcing. The following is a selection
of CSB postings that appeared over
the last three months:

Posted: 3 February
China's economy has sustained dire
effects from the global economic
slowdown, and the spillover has im-
pacted e-commerce as a trading plat-
form. However, in these difficult times,
online business has shown itself to
have many advantages in comparison
with traditional trading methods. CSB
analyzed the current role of e-
commerce for global sourcing and
presented several factors which can
facilitate further growth of this type of
business.
Posted: 18 February
Surveys conducted by China's Minis-
try of Commerce (MOC) indicated that
the export growth of mechanical and
electrical products will slow considera-
bly in the first half of 2009, due to
dwindling demand from overseas
markets. CSB investigated in more
detail the measures that China’s
MOC plans to take to maintain
steady export growth for mechanical,
electrical and high-tech products.
Posted: 2 March
It is said that a trip to the Canton Fair
can save one from undertaking a
sourcing trip to China. While this is
not necessarily true, the Canton fair is
China’s premier sourcing event and
anyone sourcing from China or plan-
ning to source from China has to be
aware of this event and what it offers.
Make your presence felt: Are you making the most of China’s sourcing fairs? In a
series of postings The China Sourcing Blog outlined how to choose the right fair
and how to optimize your experience of the fair.
Hence CSB collected everything you
need to know about the fair into one
posting, including exhibition dates,
composition of exhibitors and ways to
register.
Posted: 4, 11 & 18 March
All international purchasing managers
try to minimize import risk, and in or-
der to achieve this goal in China we
always recommend you to undertake
plant visits before you place an or-
der. In a series of three postings, CSB
provided its readers with tips for orga-
nizing a plant tour in China, including
advice on making preparations before
coming over and necessary actions
after arrival. We also provided a thor-
ough explanation of the advantages
of such plant visits.
Posted: 6 March
For many years, China has been criti-
cized for lacking innovative and crea-
tive ideas in the course of its eco-
nomic development, a shortcoming in
large part ascribed to the technologi-
cal gap between China and devel-
oped countries. By means of a brief
overview of IPR in China in 2008,
CSB demonstrated that China has
kept making efforts towards improving
the situation with an innovative ap-
proach to economic development.
Posted: 17 March
In recent years, a significant number
of alarming incidents concerning food
safety have taken place in China.
CSB listed all the recent food scan-
dals that occurred in China and ana-
lyzed possible reasons and current
problems standing behind the issue of
food security.
Posted: 30 March, 14, 16, 24 & 30
April
Exhibitions are considered an impor-
tant step for buyers to meet suppliers.
However, many people experience
limited outcomes from attending exhi-
bitions in China. Based on TBA ex-
perts’ experience, CSB offered its
readers some advice on achieving
good results from sourcing exhibi-
tions. Recommendations are divided
into three main parts: Choosing the
right exhibition, doing sufficient prepa-
ration, and following up afterwards.
CSB@chinasourcingblog.org
www.chinasourcingblog.org
 27

BRICS Breakdown
Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS
Breakdown is a comparative segment that compares and contrasts China with the other leading de-
veloping economies.

Real GDP Growth for BRICS Countries, % Since the publication of the February edition of
2009 F
The China Analyst, economic observers and
2008
analysts from leading world institutions have
9.0
6.5 revised downward their 2009 forecasts for the
6.0 5.6 5.1 4.0 leading world economic activity indicators. The
3.1 BRICS countries are no exception. The World
1.0
0.5 -4.5 Bank, for example, has revised the real GDP
growth forecast in its March 30 update by 1-2
percentage points downwards on average for
these countries compared to its November 2008
China

India

Russia

Brazil

China

India

Russia
South Africa

Brazil
South Africa

publication.

China and India are forecast to still have signifi-

Source: World Bank, forecast as of 30 March 2009 cant GDP growth of 6.5% and 4%, respectively,
but the economies of South Africa and Brazil
Unemployment and Inflation in BRICS Countries, are feared to have almost no growth this year or
2009F,% even decline slightly. The IMF, for example,
China India Russia Brazil South Africa forecast a 0.3% GDP decline for South Africa
-1% and 1.3% decline for Brazil’s 2009 GDP.
-0.2 Inflation 2009F
4.4
5% 5.9 As for Russia, Q1 2009 real GDP fell by a stag-
8.3
gering 9.5% compared to Q1 2008, as an-
Inverted scale

4.2 6.0
10% nounced on April 23 by the Ministry of Eco-
7.2
8.4
nomic Development. No one doubts that the
15%
13.5 Russian economy will shrink this year—analysts
only argue by what amount. World Bank fore-
20% Unemployment rate 21.9 casts a 4.5% decline, IMF is more pessimistic
with a 6.0% decline forecast (as of April 2009).
25%

Source: Economist Intelligence Unit Other BRICS trends to watch for over the next
few months are the rising current account defi-
Current Account Surplus/Deficit as % of GDP
cits for resource-rich countries, such as South
12%
10%
Africa, Brazil and Russia; and the double-edged
China
8% sword of unemployment and inflation that is
6% bound to hit the populations of the most vulner-
4% able economies around the globe. Again, China
Russia
2% stands out as the only BRICS economy where
0%
Brazil both effects will be mild though still significant.
-2% The most troubling scenarios will be haunting
India
-4%
Russia, where both unemployment and inflation
-6%
South are forecast at high levels in 2009, and Brazil
-8% Africa
-10%
and South Africa, where inflation will be moder-
-12% ate, but unemployment will be a major cause of
2005 2006 2007 2008 2009F concern throughout 2009 and perhaps continu-
Source: IMF World Outlook
ing into 2010 and 2011.
28

China Trade Roundup

China Trade Roundup illustrates the main trends in the growth and transformation of China’s trade
profile, and summarises a selection of the latest available trade statistics for China.

China Total Imports & Exports 2000–Q109, USD bn China Total Trade Mar 08 – Mar 09, USD bn
Imports (CIF) Exports Imports
Exports (FOB)
1,250 120

100
1,000
80
750
60
500
40
250 20

0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 Q109 Mar Apr Mar Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Source: National Bureau of Statistics Source: National Bureau of Statistics

Total Imports by Main Commodities, USD bn Total Exports by Main Commodities, USD bn
100% 183.20 Copper Products 100% 245.54 Furniture
Refined Plastic Articles
22.51 Petroleum 28.80 Travel Good,
80% 80% 15.40 Handbags, etc
12.40 6.60 Others
11.90
6.00 4.10 7.40 6.20 Others
3.90 3.47 5.70 2.95
60% 2.91 60% 2.57
Soya Beans
Steel Products Footwear
40% Plastic 40% Mobiles Phones
121.30 164.62
Data Processing Textile, Fabrics
20% 20%
Crude Oil China Total Imports Garments & Clothing China Total Exports
Jan—Mar 2009 Jan—Mar 2009
Electronic Appliances Data Processing USD 245.54 bn
0% USD 183.2 bn 0%
Source: National Bureau of Statistics Source: National Bureau of Statistics

China Import and Export Monthly y-o-y Growth Rate, % 2008—Q1 2009

Exports Imports
45

35

25

15

5
Nov Dec Jan Feb Mar

Jan Feb Mar Apr May Jun Jul Aug Sep Oct
-5

-15

-25
Source: National Bureau of Statistics
 29

Total China Imports by Country/Region, USD bn Total China Exports by Country/Region, USD bn
40 70
2008 Jan-Mar 2009 Jan-Mar EU
65 2008 Jan-Mar 2009 Jan-Mar
35 Japan 60
EU ASEAN US
55
30 S. Korean
Taiw an 50
HK
25 45
US 40
20 35
30 Japan ASEAN
15 25
Australia 20 S. Korea
10
India Russia 15 India Russia Taiw an
5 HK 10 Australia
5
0 0
Source: National Bureau of Statistics Source: National Bureau of Statistics

Total China Imports and Exports by Country/Region, % Jan–Mar 2009

Imports Exports
Russia 2% India 2% Australia 2%
Taiwan 2%
India 2%
Australia 4%
Other 28% S. Korea 5%
Taiwan 8% EU 20%
ASEAN 8%

US 9%

Japan 9%
ASEAN 10%

EU 14% Others 21%

S. Korea 10% HK 12%

Japan 13% US 19%

Source: National Bureau of Statistics

2007 China Trade Balance Map, USD bn (Top 5 Trade Surplus & Top 5 Trade Deficit Partners)

UK South Korea

Netherlands
USA
Japan

UAE
China’s Top 5
Trade Surpluses and Deficits
Hong Kong Philippines
Surplus Deficit
HK, SAR 171. 6 3 Malaysia
US 16 3 . 57 Angola
Netherlands 36 .49
UK 23 .88
UAE 14 . 0 1
- 11. 0 1 Malaysia
- 11. 6 6 Angola
- 15 . 6 2 Philippines
- 3 1. 9 3 Japan
- 47.65 S. Korea
Source: National Bureau of Statistics
30

China Inc. Goes Global: OFDI and M&A

The popular view that Chinese companies should take advantage of the ongoing global financial cri-
sis to more actively acquire overseas assets continues to spread in China. Yet while the current cli-
mate provides new opportunities for Chinese investors, Chinese firms may yet face more hurdles in
their plans for making foreign acquisitions. By Edward Wang.

Highlights: China Outward FDI and M&A in 2008 China Outward FDI Flow 2003-2008, USD bn
• China’s outward FDI in 2008 was rather unexpectedly OFDI Grow th Rate
up 96.7% over 2007 to stand at USD52.2 billion, of
which 78% were non-financial investments. Chinese 60 52.2 150%
companies seemed more active in 2008 than the pre-
vious year, with some strategically important deals 40 100%
being concluded 26.5
• Since 2000 when the Chinese government more 21.2
openly encouraged Chinese companies to go global, 20 12.3 50%
Chinese companies have been integrating interna- 2.9 5.5
tional cross-border investment and M&A standards
0 0%
and processes into their planning. In 2009, more
2003 2004 2005 2006 2007 2008
Chinese companies from more sectors are clearly
Source: MOFCOM China
considering and pursuing cross-border expansion
• A steep fall in the price of key resources, triggered
by the global economic downturn, has provided op- Structure of China’s OFDI Flow 2003-2008, USD bn
portunities for Chinese companies to make overseas Non-Financial Financial
investments. More Chinese companies have deve-
2008 40.7 11.5
loped an appetite for overseas business development
as they see new opportunities with ‘distressed’ play- 2007 24.8 1.7
ers looking for capital / investors 2006 3.5
17.6
• But some high-profile Chinese acquisitions (e.g. Chi-
nalco's investment in Rio Tinto) have roused signi- 2005 6.9 5.4
ficant public as well as government concern in the 2004 5.5
destination countries. It is expected that Chinese
2003 2.9
firms may yet face more hurdles in their OFDI activi-
ties, such as national security issues and communi- 0 10 20 30 40 50 60
cation problems Source: MOFCOM China

Major Cross-border Deals, Q1 2009

1 China Minmetals Thompson Iron Mines Ltd, in return
for a 19.9% stake of 29.7 million
2 Wuhan Iron & Steel
common shares in the company.
3 CNPC
3 February 2009: China National
4 Hunan Valin Iron & Steel Petroleum Corp (CNPC) will buy
5 Chinalco Verenex Energy, a Canadian com-
pany that holds oil assets in Libya,
1April 2009: China Minmetals has for USD 402 million. CNPC's offer is
from two Harbinger Capital funds for
a combined 16.5% stake in Fortes-
cue. Valin also has a ‘standstill
agreement’ that prevents it from rais-
ing its stake in Fortescue above
17.5%. The deal has been approved
by the Australian government.
5 February 2009: Chinalco has

signed a USD 1.21 billion takeover
deal with Australian miner OZ Miner-
als which will leave it with USD 366
million in cash. The revised bid is
well below Minmetals' original USD
1.7 billion offer, and excludes the
Prominent Hill mine and other
"sensitive assets".
2 March 2009: Chinese steel
maker Wuhan Iron & Steel will invest
USD 240 million in the Canadian
m i n i n g c om p a n y C o n s o l i d a t e d
subject to conditions, including the
approval of the Libyan National Oil
Corp. Verenex's most valuable asset
is a 50% stake in the Area 47 prop-
erty in northwest Libya.
4 February 2009: Hunan Valin Iron
& Steel has bought a 16.5% stake in
Australia's third-largest iron ore pro-
ducer Fortescue Metals for USD 771
million. Valin purchased 225 million
new Fortescue shares at USD 1.61
per share, and 275 million shares
agreed to inject USD 19.5 billion into
Rio Tinto Ltd/Plc. This will bring Chi-
nalco's stake in Rio to 18%. Chi-
nalco will invest USD 12.3 billion in
three partnerships with Rio's copper,
aluminum and iron ore divisions,
taking minority stakes in nine assets.
Chinalco will also receive a seat on
Rio's board and the right to appoint
another at a later date. The cash
injection is pending regulatory ap-
proval in countries affected by the
deal, including Australia and Chile.
 31

China Total Outward FDI Capital Flow by Continent 2003-2007, USD mn*
2003 2004 2005 2006 2007

Europe
16593
1126 1540
58 126 321258 Asia
145 157 395 598
7663
North America China 4484
3014
1505
1574
392 520
8569 75 315
6466
4902 Africa
203 126 770
1763
34 120
1038

Oceania
Latin America
Source: MOFCOM China
*Note: The data illustrated here refers to investments from mainland China, and does not include investments from Hong Kong. This potentially significantly reduces the
flows as it might exclude investments by Chinese companies in cases where they draw funds from IPO receipts in HK.

China OFDI Flow to Africa 2003 & 2007, USD mn

2003 Total: USD 74.81 m n 2007 Total: USD 1,574.31 m n Top 10 CAGR
8% Destinations 2007 2003-2007
2% South Africa 119.8%
12% 3%
28% Nigeria 74.1%
3%
4% Algeria 126.1%
Zambia 84.8%
42% 4%
Niger -
Sudan -
33% 6%
Congo DR 294.4%
Libya 235.1%
8% Angola 193.2%
3%
7% 3% Egypt 64.1%
9% 25% The rest Africa 33.6%
Source: MOFCOM China

Features and Trends of China’s OFDI China Investment in Africa

• The view that Chinese companies should take ad-
vantage of the ongoing global financial crisis to
more actively acquire overseas assets continues
to spread in China. Resources companies are
particularly attractive to Chinese investors
• The trading of infrastructure projects for raw materi-
al contracts is one strategy China has utilized to es-
tablish itself in some foreign countries. In 2007,
China signed a deal to extend USD 5 billion of soft
loans to the DRC to develop infrastructure and
mining. In exchange, China received rights to DRC’s
extensive natural resources. Subsequently China
has also used the strategy in other countries
• China’s recent high-profile acquisitions in Australia,
Peru and elsewhere has provided valuable insight for
Chinese companies to better utilize PR strategies in
their overseas expansions, and a steadily more so-
phisticated approach can be expected. It is clear that
in most cases Chinese SOEs are encountering more
resistance in overseas M&A than private companies,
i.e. a sovereign state (company) buying into an-
other’s resources does not sit well with most recipi-
ent countries
• Chinese investment in Africa is heavily slanted to-
wards resources, i.e. China’s investments in Nigeria
and Sudan are in the oil industry; China’s invest-
ments in the DRC and Zambia are in the copper/
cobalt mining industry
• However, a degree of diversification is also evident in
the last several years, i.e. ICBC acquired 20% of
Standard Bank for USD 5.5 billion; a Wenzhou shoe
company set up a shoe-making plant with annual
production of 6 million pairs of shoes in Nigeria; a
large Chinese private cement producer invested in
cement production in Madagascar; a Zhejiang com-
pany in vested USD 51.8 million in setting up the
China–Botswana Economic & Trade Cooperation
Zone
• More than 80% of Chinese investors in Africa are
private companies. One model or pattern of the in-
vestments of these private companies is that they
normally start their engagement in Africa by tra-
ding. After they have learnt more about the environ-
ment, they start to venture into investment
• FOCAC 2009, to be held in Q4 2009, will further un-
derpin China’s investment in Africa
32

China Cross–border Investment Deal-sheet: Major Deals in 2009 and the Second Half of 2008
Date Acquirer / Investor Target / New Company Value (USD) Country Stake
Apr-09 Minmetals OZ Minerals 1.2 bn Australia 100%
Mar-09 Beijing Jingxi Heavy Industry Co. Delphi Corporation 100 mn USA n/a
Mar-09 Wuhan Iron & Steel Co. (WISCO) Consolidated Thompson 240 mn Canada 19.9%
Mar-09 China Nonferrous Metals Mining Corp. Terramin Australia Ltd. 46 mn Australia 12.29%
Mar-09 Geely Automobile Drivetrain Systems Int’l 40 mn Australia 100%
Mar-09 Diigo Furl (LookSmart) n/a USA n/a
Mar-09 Sinosteel Murchison Metals Ltd. undisclosed Australia 5.85%
Feb-09 Hunan Valin Steel Co.,Ltd. Fortescue Metals Group 438 mn Australia 17.6%
Feb-09 China National Petroleum Corp. Verenex Energy 402 mn Canada 100%
Feb-09 Weichai Power Moteurs Baudouin 380 mn France 100%
Feb-09 Jiangsu Huadong Nonferrous Metals Arafura Resources Ltd. 5.4 mn Australia 25.0%
Feb-09 China Mobile China Mobile Pakistan Corp. 0.5 bn Pakistan 100%
Feb-09 Chinalco Rio Tinto 19.5 bn Australia 18%
Feb-09 Anshan Iron & Steel Co.,Ltd. Gindalbie Metals 108.35 mn Australia 36%
Jan-09 Lenovo Switchbox Labs undisclosed USA 100%
Jan-09 Minmetals Vizirama n/a South Africa 70%
Jan-09 LiveChain LCM GROUP 2 mn USA n/a
Jan-09 Markor Schnadig 8.94 mn USA n/a
Dec-08 China Union Ltd. Refining factory at Bong iron mines 2.6 bn Liberia n/a
Dec-08 Wuhan Iron & Steel Co. (WISCO) Centrex 6.84 mn Australia 15%
Dec-08 Wuhan Iron & Steel Co. (WISCO) Centrex's 5 iron ore projects 127 mn Australia 50%
Dec-08 Kingsoft Sky Profit 8 mn UK 30%
Dec-08 263 iTalk Global Communications n/a USA 50%
Dec-08 Henan Yima Coal Mining Group Anju Coal Mining Association n/a Korea n/a
Dec-08 Shougang Mount Gibson Iron Ltd. 110 mn Australia 28.6%-40.5%
Dec-08 Shenzhen Nonfemet Perilya Limited 28.9 mn Australia 50.1%
Nov-08 Zhuzhou CSR Time Elctric Co.,Ltd. Dynex Power 14.53 mn Canada 75%
Oct-08 China Everbright Alam Group 0.85 mn USA 51%
Oct-08 Anshan Iron & Steel Co.,Ltd. Vigano n/a Italy 60%
Oct-08 China Merchants Bank Wing Lung Bank n/a Hong Kong up to 98%
Sep-08 Sinopec Tanganyika Oil 2 bn Canada 100%
Sep-08 CNOOC Awilco Offshore ASA 2.5 bn Norway 100%
Sep-08 Sinochem International Corp. GMG Global Ltd. 197 mn Singapore 51%
Sep-08 ICBC RosEvroBank 800-850 mn Russia 100%
Sep-08 People's Bank of China Drax Group 32.2 mn UK 0.7%
Aug-08 Sinopec & CNPC Petro-Tech Peruana 2 bn USA n/a
Aug-08 Cheung Kong Infrastructure Holdings Taharoa Iron Sands Business 174.275 mn New Zealand 100%
Aug-08 Jinchuan Group Tiomin 25 mn Canada 70%
Aug-08 Hunan Valin Steel Co. Ltd. Golden West Resources 23.27 mn Australia 11%
Aug-08 People's Bank of China Prudential 250 mn UK 1%
Aug-08 People's Bank of China Legal & General n/a UK n/a
Aug-08 People's Bank of China Old Mutual Plc n/a UK n/a
Jul-08 Bank of China Heritage Fund Management 8.7 mn Switzerland 30%
Papua New
Jul-08 China Metallurgical Group Corp. Ramu nickel project 1.37 bn n/a
Guinea
Jul-08 Sinosteel Midwest 906 mn Australia 51%
Jun-08 Sinopec AED Oil Ltd 561mn Australia n/a
Jun-08 China Metallurgical Group Corp. Cape Lambert‘ iron ore project 367 mn Australia n/a
Jun-08 Tsinghua Tongfang Tinggi 5 mn Singapore 60%
Sources: Multiple sources; Press; TBA Analysis
 33

China non-Financial OFDI by Province 2008, USD mn Destination of China's OFDI Flows of more than
USD100 Million 2007, USD mn
0 100 200 300 400 500 600 0 1000 2000 3000
1213.9 13732.4
Guangdong HK, China
Zhejiang Cayman Islands
Shandong British Virgin Islands
Hunan
Canada
Gansu
Pakistan
Liaoning
Shanghai Britain
Fujian Australia
Jiangsu Russia
Yunnan South Africa
Henan Singapore
Beijing Nigeria
Xinjiang
Kazakhstan
Tianjin
Germany
Shaanxi
Heilongjiang Papua New Guinea
Sichuan Mongolia
Chongqing USA
Guangxi Laos
Jilin Algeria
Anhui Argentina
Hebei Zambia
Hubei
Saudi Arabia
Shanxi
Ningxia Vietnam
Jiangxi Holland
Inner Mongolia Niger
Source: MOFCOM China Source: MOFCOM China

Top 30 Chinese non-financial Companies by Sales Top 30 China non-financial Companies by Total
Revenue Abroad 2007 Assets Abroad 2007
1 Sinopec 1 China Mobile
2 PetroChina Company 2 China Resources Corp.
3 China Mobile 3 China Network Communications Group Corporation
4 Legend Holdings Ltd 4 China National Petroleum Corporation
5 China Resources Corp. 5 COSCO
6 COSCO 6 SINOPEC
7 Sinochem Corporation 7 China Merchants Group
8 China Network Communications Group Corporation 8 China United Telecommunications Corporation
9 COFCO 9 CNOOC
10 Huawei Technologies 10 China State Construction Engineering Corp.
11 China Shipping (Group) Company 11 Shenzhen Energy Investment
12 China Minmetals Corporation 12 COFCO
13 Zhuhai Zhengrong Company 13 CITIC
14 China State Construction Engineering Corp. 14 Legend Holdings Ltd
15 Baosteel 15 China National Aviation Holding Company
16 Shanghai Automotive Industry Corp. 16 Shum Yip Holdings Company Limited
17 CITS Group Corporation 17 Guangzhou Yuexiu Group
18 Sinosteel 18 Guangdong Holdings Limited
19 China Aviation Oil Group 19 Huawei Technologies
20 CNOOC 20 China Shipping (Group) Company
21 China Electronics Corporation 21 Shanghai Zhangjiang High-Tech Park Development Limited
22 CITIC 22 CITS Group Corporation
23 Anshan Steel 23 China Power Investment Corporation
24 Taigang Group International Trade Corp. Ltd 24 Sinochem Corporation
25 Shougang 25 China Minmetals Corporation
26 China National Chemical Corp. 26 Fengli Group Limited
27 China Merchants Group 27 Shanghai Automotive Industry Corp.
28 Guangdong Holdings Limited 28 Sino Trans Limited
29 China North Industries Group Corporation 29 China National Chemical Corp.
30 Shanghai Zhangjiang High Technology Park Development Ltd. 30 Sinosteel
Source: MOFCOM China Source: MOFCOM China
34

China Business News Highlights

While still grappling with negative effects of the ongoing financial crisis, in Q1 2009 the Chinese
economy started to show signs of improvement. Exports, one of the essential attributes of the growth
of the Chinese economy, have kept on falling, but at a slower pace. The first quarter of the year also
saw a few successful deals for China in the realm of natural resources.
General
China's GDP grew by 6.1% year-on-
year in the first quarter, reaching RMB
6.5745 trillion (USD 939 billion). The
quarterly growth rate was the lowest
in 10 years as the global financial cri-
sis continued to affect China’s econ-
omy. Q1 growth was 4.5 percentage
points lower than the first quarter of
2008 and 0.7 percentage points lower
than the previous quarter.
China’s consumer price index (CPI)
fell 1.2% year-on-year in March, com-
pared to a decline of 1.6% in Febru-
ary, which was the first monthly fall
since December 2002. For the first
quarter, CPI declined 0.6% year-on-
year. China's producer price index
(PPI) fell 4.6% in the first quarter
year-on-year. PPI declined 0.3% in
March compared to the level for Feb-
ruary.
China’s trade surplus rose to USD
18.56 billion in March, up 41.2% from
a year earlier. In March, China's ex-
ports fell for the fifth month in a row
to USD 90.29 billion, down 17.1%
from a year earlier, compared with a
25.7% year-on-year decline in Febru-
ary. Imports slumped 25.1% year-on-
year in March to USD 71.73 billion,
compared with a 24.1% decline in
February
ment stood at RMB 2.36 trillion in the
first quarter, 2.7 percentage points
higher year-on-year. Fixed asset in-
vestment in rural areas was up
29.4% to RMB 456.7 billion, 11.1 per-
centage points higher year-on-year.
Property prices in 70 major Chinese
cities fell 1.3% in March from a year
earlier. Prices continued to decline for
a fourth consecutive month, having
previously dropped 1.2% in February,
0.9% in January and 0.4% in Decem-
ber.
German engineering giant Siemens
has won an order for 100 trains for
China's Beijing-Shanghai high-
speed railway. Siemens will supply
components worth 750 million euros
(USD 1 billion) for the Velaro trains,
which will be assembled in China
and used on the Beijing-Shanghai
route from 2010. The Velaro, a de-
velopment of Siemens’ successful
express train model used in Ger-
many, has a total length of 400 me-
ters, making it the world's longest
single train used in high-speed trans-
portation. Siemens has already deli-
vered 11 high-speed trains to China
of an earlier order for 60.
Sales of domestically produced
motor vehicles in China set a new
record of 1.11 million units in March,
up 5% from a year earlier, the China
Association of Automobile Manufac-
turers (CAAM) announced on April 2.
This was the third consecutive month
that China's auto sales exceeded
those in the United States, still the
world's largest auto market.
Mergers & Acquisitions
Aluminum Corporation of China
(Chinalco) in February announced its
intention of investing USD 19.5 billion
in the Anglo-Australian miner Rio
Tinto. The deal, which is currently still
being evaluated by the Australian For-
eign Investment Review Board, would
be the biggest overseas investment to
date by a Chinese company. If ap-
proved, the deal would raise Chi-
nalco’s stake in Rio Tinto to 18%, and
would also increase its leverage in
pricing negotiations for iron ore from
Rio’s mines.

Foreign direct investment (FDI) in

China declined 20.6% year-on-year in
the first quarter to USD 21.78 billion.
In March FDI dropped for the sixth
consecutive month to USD 8.4 billion,
down 9.5% from a year earlier. Al-
though the figure continues to fall, it
showed an improvement from the
15.81% drop in February and the
32.67% drop in January.

China's fixed asset investment in

the first quarter rose 28.8% year-on-
year to RMB 2.81 trillion (USD 411.4
billion). The growth rate was 4.2 per-
centage points higher than the year Signs of growth: Domestically-produced car sales in China set a new record in
before. Urban fixed asset invest- March, reaching 1.11 million units. (Photo: Passion84Photos / flickr)

On March 31, Australian regulators
gave approval to Hunan Valin Iron &
Steel Group’s USD 920 million in-
vestment in Fortescue Metals Group
Ltd, Australia's third-largest iron ore
producer.
On April 23 Australian regulators ap-
proved a revised USD 850 million
Minmetals bid for mines owned by
OZ Minerals, Australia’s third-largest
diversified mining company.
Natural Resources
China's crude oil output reached a
total of 190 million tons in 2008, up
2.3% year-on-year, the highest growth
reported in three years, according to
the China Petroleum and Chemical
Association. Imports of crude oil
rose 9.6% year-on-year to 179 million
tons last year, which accounted for
48% of China’s total crude oil de-
mand.
China and Russia have agreed to
jointly construct a USD 3.1 billion oil
refinery in the Chinese city of Tianjin.
The refinery, to be built by China Na-
tional Petroleum Corporation
(CNPC) and Russia's OAO Rosneft,
will eventually have an annual refining
capacity of 10 million tons of crude oil.
Construction of the refinery is sche-
duled to be completed by 2012. In
February this year, China and Russia
also completed the signing of a
loans-for-oil agreement worth USD
25 billion for Russia to supply China
with oil for 20 years.
China is expected to own rights of
more than 100 million tons of over-
seas iron ore assets by 2010, ac-
cording to an estimation of Lange
Steel Information Service, one of
China's leading steel information pro-
vider.
Industry
Industrial production in China dur-
ing the first quarter grew by 5.1%
year-on-year. In March alone indus-
trial production increased by 8.3%.
The aggregate profit of China's non-
ferrous metal producers fell by 45%
last year to RMB 80 billion (USD
11.73 billion), the China Nonferrous
Metals Industry Association an-
nounced on March 19.
Holding steady: Retail sales growth in China remained robust in the first quarter,
and was 15.2% higher y-o-y. (Photo: DCF pics / flickr)
China's top steel maker, Baoshan
Iron & Steel Co. Ltd. (Baosteel), cut
steel prices for a second straight
month during March. Prices will be
reduced by RMB 250 (USD 36.63)
per ton for major hot-rolled steel prod-
ucts, and by RMB 200 (USD 29.27)
for cold-rolled steel products. After
the decreases, prices for hot-rolled
steel products will be RMB 3,292
(USD 482) per ton, and 3,826 (USD
560) per ton for cold-rolled steel pro-
ducts.
Retail
China's total retail sales grew 15% to
RMB 2.94 trillion (USD 430.4 billion)
in the first quarter of 2009.
ICT
China Mobile, China’s largest mobile
phone network operator, announced
on March 19 that its net profits had
jumped by 29.6% during 2008. In
January, China Mobile was awarded
one of the three licenses to operate
3G networks across the country. The
other two license holders are China
Unicom and China Telecom. China
Mobile currently has more than
200,000 3G customers in China, and
aims to have 238 Chinese cities cov-
ered by their 3G network by end of
this year.
Huawei Technologies, the Chinese
telecommunications equipment
maker, increased its global market
share of deals to supply mobile infra-
structure from 7.2% in 2007 to 15.5%
35
in 2008, making the company the
third-largest supplier in the world after
Ericsson and Nokia Siemens Net-
works.
Finance
Bank of China has announced that
its 2008 Q4 net profit dropped 59%
year-on-year to USD 646.8 million as
the global economic crisis affected the
lender’s overseas investments. None-
theless, the bank's full-year income
still increased by 14% to USD 9.4 bil-
lion.
China’s foreign exchange reserves
increased by 16% year-on-year to
USD 1.9537 trillion by the end of
March.
Credit extended by China's banks in
the first quarter of this year reached a
total of RMB 4.58 trillion (USD 670
billion). In the month of March alone,
new yuan-denominated loans in-
creased by RMB 1.89 trillion (USD
276 billion), the third straight month
that new loans exceeded the RMB 1
trillion mark.
China's banking industry took the
world's number one place in 2008 in
terms of net profits, which grew by
30.6% year-on-year to reach a total
sum of RMB 583.4 billion. Chinese
banks also obtained first place in the
global banking industry in terms of
returns on investment, which stood at
17.1% last year, around 7 percentage
points higher than that of the global
average.
36

Regional Focus CHINA–AFRICA

China recently announced that bilateral trade with Africa in 2008 exceeded the USD 100 billion target
that was set to be achieved only in 2011. China’s exports to Africa achieved double-digit growth, and
mineral and oil imports from Africa have also accelerated. With the China-Africa Summit set for later
this year, trade and investment between China and Africa are expected to grow further. By Jackie Li.
China’s Exports to Africa, 2008 (USD bn)
China’s Exports China’s Exports China’s Exports to Africa, 1999-2008, USD bn
to the World to Africa • In 2008, China’s exports to Africa
(USD 1428 bn) (USD 52.26 bn) 60
52.26 made up 3.66% of its total exports.
50 Though relatively small, exports to
South 38.43
Africa increased by 26.3% from
19.11% 40 2007 to 2008, compared to 15.5%
Africa
27.84 growth in China’s total exports to
Asia 38.67% 30 the world for the same period.
19.85
Nigeria 12.85% 20
Exports to Africa have been growing
14.43
10.36 by an average of 27% for the past
7 six years
10 4.1 4.65 6
Egypt 11.06% • China’s exports to Africa continues
0 to be concentrated in a small num-
Algeria 7.01% 99 00 01 02 03 04 05 06 07 08
EU 20.23% ber of countries such as South
Angola 5.57% Africa (USD 9.98 bn) and Nigeria
Morocco 4.43% China’s Exports to Africa by Sector in 2008 (USD 6.76 bn). The top 10 African
Benin 4.38%
22.19%
50.96% importing countries accounted for
USA 17.67% Sudan 3.52% M echanical & Elect rical
75% of China’s total exports to Af-
Ghana 3.30% Product s
Libya 3.09% Textile Yarn, Fabrics & rica
Africa 3.66% 2.50%
Product s
Rolled Steel • Since early 2003, China’s exports to
Russia 2.31% Africa have moved away from tex-
Australia 1.56% Others 25.34% 5.78% Garments and Clot hing
Accessories tiles. In 2008, exports of mechanical
Others 15.90%
6.65% Footwear and electrical products accounted
Ot hers for over 50% of total exports value
11.92% to Africa
Sources: World Trade Atlas; SARS

China’s Imports from Africa, 2008 (USD bn)

China’s Imports China’s Imports China’s Imports from Africa, 1999-2008, USD bn
from the World from Africa
60 • China’s imports from Africa grew at
(USD 1131 bn) (USD 50.96 bn)
50.95 a similar rate as China’s exports
50 to Africa. In 2008, China’s imports
from the world grew 15% y-o-y, but
40 33.78 imports from Africa increased by
30 26.8 28% y-o-y
Asia 45.59% Angola 43.79%
19
• In the past ten years, the highest
20 13.74 growth ever in China’s imports from
7.4
Africa was 46.14% between 2003
10 4.8 4 4.6 and 2004. In the following 3 years,
2.37
annual growth was between 20.66%
0
and 29.10%. In 2008, China’s im-
99 00 01 02 03 04 05 06 07 08
Sudan 12.34% ports from Africa grew 33.7%. Im-
EU 11.73%
China’s Imports from Africa by Sector in 2008 plementation of several oil supply
USA 7.19%
South
8.62% 1% contracts was the major reason
Africa 2% 10%
3%
3% 82% M ineral products • China’s top import partners in Af-
Africa 4.5%
Australia 3.20%
Congo B. 7.29%
Spec class/ parts f or motor
rica remains among the oil- and
Russia 2.10% Libya 5.04% vehicles resources-rich countries such as
Wood products
E.G 4.44% Angola (USD 21.77 bn), Sudan
DRC 3.49% Precious stones and metals (USD 6.30 bn) and South Africa
Others 25.24% Gabon 3.09% (USD 4.27 bn)
Mauritania 2.02% Base met als
Algeria 1.65% • Imports from Africa remain largely
Ot hers
Others 8.23% focused on mineral products, which
Sources: World Trade Atlas; SARS amounted to USD 46 bn in 2008
 37

African Countries’ Trade Surplus and Trade Deficit with China

Trade deficit Trade surplus Do not Africa’s Top Trade Deficit & Trade Surplus Countries with
with China with China recognise China China 2008, USD bn
Trade Surplus with China
Angola

Morocco Sudan

Libya Congo B.
Egypt Endowed with
Algeria Equatorial Guinea
Oil reserves
Gabon

Mauritania Trade Deficit with China

Niger Benin
Chad
Sudan Algeria
Egypt
Nigeria Not endowed
Central African with oil reserves South Africa
Benin
Cameroon Republic Nigeria
Gambia
Burkina E.G Uganda -20 -10 0 10 20
Faso
Gabon Congo Rwanda
B. DRC SADC Bilateral Trade with COMESA Bilateral Trade with
China, 2004-2008, USD bn China, 2004-2008, USD bn
SADC Exports to China COMESA Exports to China
Angola Malawi SADC Imports from China COMESA Imports from China
2008 Top 10 Bilateral Trade Zambia 40
Countries with China 40 Trade Balance
Zimbabwe Trade surplus
Angola USD 25.30 bn Namibia Trade deficit
30 reached USD 30
South Africa USD 14.28 bn peaked at USD
Sudan USD 8.15 bn Botswana 13.9 bn in 2008
3 bn in 2007 -5
Nigeria USD 7.26 bn Swaziland 20 20
Egypt USD 6.24 bn
Algeria USD 4.53 bn South
Congo B. USD 4.34 bn Africa 10 10
Libya USD 4.20 bn
Morocco USD 2.79 bn 0
0 0
E. G. USD 2.54 bn
'04 '05 '06 '07 '08 '04 '05 '06 '07 '08
Sources: World Trade Atlas; SARS Sources: World Trade Atlas; SARS

China-Africa Trade Highlights

• Bilateral trade between China and Africa reached USD 103.21 bn in 2008. This is a significant 30% increase com-
pared to the previous year of USD 72 bn. In 2008, Africa had a total trade deficit with China of USD 1.3 bn, which
was a marked reduction compared to the USD 4.65 bn trade deficit in 2007
• Much of the growth in bilateral trade was heavily focused on a selected number of countries such as Angola, South
Africa, Sudan and Nigeria. The top 10 countries accounted for 77.2% of Africa’s total bilateral trade with China
• 15 of Africa’s 53 countries (28%) had a trade surplus with China last year. Of these countries, only six had a trade
surplus of more than USD 1 bn. Angola had the single largest trade surplus with China, amounting to USD 18.24 bn,
which constitutes 56.7% of the total trade surplus of the 15 countries
• The majority of the African countries that have a trade surplus with China are strong in oil, gas and natural re
sources. Although Africa only holds a small percentage of the world’s proven oil reserves (9%), oil exports to China
have grown significantly in the past three years. Africa currently supplies around 2.31 million barrels of oil per day to
China. Africa’s principal oil-supplying countries to China are Angola, Sudan, Congo Brazzaville, Equatorial Guinea
and Gabon, all of which enjoyed a trade surplus with China last year
• A number of African countries that have a trade surplus with China are also rich in agricultural products, such as tim-
ber, cocoa and cotton. Gabon, for example, is Africa’s largest timber exporter to China, having exported 278,800m³
of logs in 2008, equivalent to USD 459 mn, which accounted for roughly 27% of Gabon’s total export value to China
• Coastal countries in Africa often have greater trade benefits by acting as a gateway for land-locked countries. In
fact, 80% of the countries enjoying a trade surplus with China have a coastline. Poor and inefficient road & rail infra-
structure is a major trade constraint for land-locked countries such as Uganda, Niger, Rwanda and Chad
• 38 African countries had a trade deficit with China in 2008. With 11 of these countries having a deficit greater than
USD 1 bn, they collectively held 85% of Africa’s total deficit with China, which amounted to USD 30.59 bn. These
countries generally rely on imports of capital goods, industrial goods, consumer goods, food and textiles
• The Southern African Development Community (SADC) has held a trade surplus with China for the past five
years. In 2008, 9 of the 15 SADC countries held trade deficits with China, but Angola’s trade surplus was large
enough to offset this. The Common Market for Eastern and Southern Africa (COMESA) countries (19 in total) in-
curred a trade deficit with China, but with COMESA including top trading countries such as Sudan and Libya, the
trade balance is expected to shift due to ever-increasing oil exports to China
• The 3 countries (Gambia, Swaziland and Malawi) that maintain diplomatic relations with Taiwan have limited trading
activities with mainland China, all maintaining less than USD 200 mn in bilateral trade
38

China-Africa Investment
• Africa’s Foreign Direct Invest- FDI Inflows from Mainland China FDI Flows: World to Africa, China to
ment (FDI) inflows from the world to Africa 2003-2008, USD mn Africa, 2003-2008, USD bn
reached USD 52.9 bn in 2007, 1574 1370 70 World FDI to Africa
61.9
and according to UNCTAD, the 1400 China FDI to Africa
60
total amount for 2008 is esti- 52.9
1200
mated to have been USD 61.9 Inflows from 50 45.75 1.3
1000 China peaked
bn 40 1.59
in 2007
• Africa’s top 10 countries in terms 800 29.46 0.52
of FDI inflows accounted for 82% 600 518 30
18.72
391.7 18.02
of t o t a l i n f l o w s i n 2 0 0 8 400 316.9 20 0.39
(based on estimates), with 9
countries receiving inflows of 200 74.8 10 0.08 0.32
USD 1 bn or more 0 0
• Based on China’s Balance of 03 04 05 06 07 08 E 03 04 05 06 07 08 E
Payments Report for H1 2008, Source: UNCTAD Source: UNCTAD
China’s FDI to Africa reached reached USD 1.57 bn in 2007. China’s OFDI to the World 1H08,
USD 686 mn for the first half of This figure is estimated to recede USD 34.3bn
2008. It is expected that this fi- slightly to USD 1.37 bn in 2008, 2% (USD 686 mn)
of China’s total FDI
gure will increase towards the according to UNCTAD. This is went to Africa
third quarter of 2008, and finally mainly due to the impact of the 5% 4%
reach USD 1.37 bn global economic crisis 0.6%
0.4% Asia
• Based on the same report, • In 2008, China introduced a se- North America
China’s FDI outflows to Africa ries of favourable FDI policies, Atlantic
represented less than 3% of and further increased the China 88% Africa
China’s global FDI outflows in Africa Development Fund to USD Latin America
2007; this share is expected to 5 bn. These measures will en- Europe
remain at around 2% for 2008 courage continuous growth in
• Africa’s FDI inflows from China China’s investment into Africa Source: China’s Balance of Payments Report H1 08

China’s Trade Zones in Africa & Major Investments in 2008
The Lekki Free Trade Zone in
Nigeria, with phase 1 being
completed in Feb 2009. The
Jiangning Economic and Tech-
nology Development Zone and a
local partner are the major
investors
4
7 2
3 6
The Nigeria-Guangdong Economic
and Trade Cooperation Zone. In-
vested by the Guangdong Xinguang
International Group. The plan involves
building mineral processing plants,
heavy-industry plants, as well as
introducing technology firms
Sources: China Daily; Various
The Egypt Suez Economic and
Economic Zones Trade Cooperation Zone, invested
by Tianjin TEDA Investment Hold-
ings, is situated in the North-East of
Major Investments Egypt. A number of Chinese firms
have already been established in
the zone
The Ethiopian Oriental Industrial
Park, is invested by the Jiangsu
Yonggang Group. The zone will
introduce 80 projects in the next
5 years
12
8 The Mauritius–China
10 11 Economic and Trade
9 Cooperation Zone was
established in 2008 by
the Shanxi Tianli Enter-
prise Group. The zone
1 14 is in a free port
5
13 The Zambia-China Economic and
Trade Cooperation Zone was estab-
lished in Feb 2007 by China Nonfer-
rous Metal Mining with a focus on
mining, copper processing, and the
ferrous metals industry. A sub-zone
was established in Lusaka in Jan
2009
Major Investments 2008-2009
1 Angola - USD 1 bn agricultural de-
velopment (Mar 09)
2 Nigeria - USD 16 mn vehicle as-
sembly plant (Feb 09)
3 Liberia - USD 2.6 bn iron ore min-
ing project (Jan 09)
4 Mauritania - USD 282 mn port,
Nouakchott expansion (Jan 09)
5 Zimbabwe - USD 500 mn electri-
city generation capacity (Dec 08)
6 Cameroon - USD 340 mn cement
factory & fertiliser plant (Nov 08
7 Ghana - USD 150 mn Ghana tele-
com system expansion pro-
gramme (Sept 08)
8 Uganda - USD 1.5 bn Lake Victoria
Free Trade Zone (Aug 08)
9 DRC - USD 6 bn infrastructure in-
vestment (July 2008)
10 Gabon - USD 4.9 bn iron ore mi-
ning project (May 08)
11 Congo B. - USD 2.9 bn copper &
cobalt mining project (May 08)
12 Sudan - USD 396 mn JV in power
generation capacity (April 08)
13 South Africa - USD 5.5 bn acquisi-
tion of 20% of Standard Bank (Jan
08)
14 Zambia - USD 150 mn Chambishi
copper mine investment to 2010

CHINA–AFRICA
A New Chapter for China and Africa - The Impact of President Hu Jintao’s visit
pon invitation from African and
U Middle Eastern countries, Chi-
nese President Hu Jintao traveled to
the Middle East and Africa from 10-16
February 2009. The trip, which was
described as a ‘journey of friendship
and cooperation’, took him to Saudi
Arabia, Mali, Senegal, Tanzania and
Mauritius.
In Dakar (Senegal), President Hu
commented that China would keep
the promise it made at the Beijing
Summit of the China-Africa Coopera-
tion Forum in November 2006 not to
reduce its aid to Africa, notwithstand-
ing the country’s efforts at addressing
the global financial crisis.
President Hu expressed on a number
of occasions during the trip that China
was willing to boost trade with Africa
by undertaking preferential measures
to increase imports from the conti-
nent. The Chinese government also
encouraged Chinese businesses to
further invest in Africa, create more
jobs for the local populations, in-
crease technology transfers as well
Forum on China Africa Cooperation (FOCAC) - Cairo 2009
S ince the first Forum on China-
Africa Cooperation (FOCAC) in
Beijing in 2000, the political and eco-
nomic relationship between Africa
and China has strengthened signifi-
cantly. Bilateral trade has increased
from USD 10 bn in 2000 to USD 106
bn in 2008.
From a Chinese point of view, FO-
CAC is a forum for facilitating collec-
tive consultation and for working to-
gether through pragmatic cooperation
based on equality and mutual benefit.
Yet FOCAC is also designed to ad-
vance South-South cooperation.
In the wake of each of the Forums in
the past 10 years, China-Africa eco-
nomic cooperation has expanded,
and a number of significant Chinese
commitments have been made and
put into action.
During the first FOCAC held in Bei-
as to take greater social responsibility
into consideration.
China currently has significant invest-
ments in Mali and Senegal, and is
preparing relatively large investments
in Mauritius. Although these are not
China’s most strategic relationships in
Africa, this trip reinforced the image of
China benefiting from broad-based
engagement with Africa. The trip was
also seen as a necessary pre-cursor
Country Visited
Mali USD 74.9 mn
12 Feb 2009 Bamako Bridge
construction
Senegal USD 23 mn public USD 25 mn Gov-
13-14 Feb 2009 bus renovation
(CFA loan)
Tanzania USD 17.5 mn
15 -16 Feb 2009 agricultural
finance
Mauritius USD 260 mn air-
17 Feb 2009 port expansion
Source: China Daily
jing in 2000, over 80 ministers from
China and delegates from 44 African
countries and 17 regional and inter-
national organisations attended. Be-
tween 2000 and 2003, China agreed
on debt exemption for 31 African
countries, involving an amount of
USD 1.3 bn. In addition, between
2002 and 2003, 117 Chinese compa-
nies invested in Africa, and 245 new
economic assistance agreements
were concluded with Africa.
In 2003, FOCAC was held in Addis
Ababa, Ethiopia. More than 70 Chi-
nese ministers and 44 African coun-
tries attended. During and after the
Forum, China committed to tariff ex-
emption on 190 export items from
Africa, as well as a contribution of
USD 500,000 to the New Partnership
for Africa’s Development (NEPAD).
By the end of 2004, 127 economic
assistance agreements had been
concluded with Africa.
39
Focus
to the Forum on China-Africa Coop-
eration (FOCAC), which will be held in
Egypt in October 2009.
During the trip, millions’ worth of
agreements were signed, including
infrastructure development, exports,
interest free loans, grants and gifts. It
once again confirmed Beijing’s long-
term strategy for Africa and its deter-
mination to open a new chapter in the
China-Africa relationship.
Major Agreements Signed
Aid to construct a hospital, a sugar plant and an aid centre
for women and children
USD 18 mn grant, Purchase of 10,
ernment communi- and USD 49 mn 000 tons of
cation system national security ground nut oil
renovation (CFA loan
loan)
USD 4.4 mn Zan- USD 56 mn fund for building a 60,000
zibar state radio seat national stadium
and television
rehabilitation
USD 6.5 mn inter- USD 5 mn grant To further assure
est free loan the USD 730 mn
trade zone con-
struction
The most prominent Forum was FO-
CAC III, held in Beijing in 2006. This
Forum was attended by 48 African
countries, and a total of 1,700 dele-
gates from China and Africa. After
the Forum, China agreed to set up a
USD 5 bn China-Africa Development
Fund to support Chinese business
and FDI into Africa. China also in-
creased tariff-free African exports to
over 400 items. China also aimed at
establishing 7 special economic
zones in Africa, two of which had
commenced construction in 2009.
FOCAC IV, scheduled for October
2009 in Cairo, will take place in the
current gloomy global economic envi-
ronment, yet China is set to achieve
deeper cooperation with African
countries. The promotion of bilateral
trade, agricultural development, and
cross-border investments will remain
the main objectives for FOCAC this
year.
40

Regional Focus CHINA–AUSTRALIA

At such a critical juncture of the global economy, China-Australia relations are being tested and
fashioned anew. With diminishing trade, ailing industries, stalled agreements, and political scandals
battering both sides, Beijing and Canberra are scrambling to forge a mutually beneficial arrangement
that will enable them to emerge stronger from the crisis. By Barbie Co.

China-Australia Highlights International Student Enrolments

by Top 5 Nationalities in Australia
• China and Australia to expand military cooperation: Chen Bingde, Chief
(Feb 2009)
of the Ge neral Staff of the People’s Liberation Army, met with the Aus-
Nationality Total
tralian Chief of the Army Ken Gillespie in Beijing in March 2009. Both sides
agreed to strengthen cooperation in combating terrorism, carrying out disas- China 89,907
ter relief and conducting peace-keeping operations
India 68,854
• Australian PM Kevin Rudd and China Propaganda Chief Li Changchun
discussed ways to further develop bilateral relationship: In a private South Korea 22,068
meeting in 21 March 2009, the two officials discussed the stalled FTA
Malaysia 17,573
agreement, the economic crisis and China’s role in the IMF, among other is-
sues Nepal 14,683
• China needs Australian uranium: With 11 power plants in operation, 24 Other nationalities 161,366
under construction and 5 scheduled to be built this year, China’s inadequate
uranium resources prompts it to look at Australia. The China National Nu- Total 374, 451
clear Corp. has held preliminary talks with Australian uranium miners Source: Australian Education International

China-Australia Annual Trade 2001 - 2008, USD bn China-Australia Trade Highlights

Exports to Australia Imports from Australia • China-Australia trade tells different stories depending on
Trade Balance the source. Chinese statistics indicate that China had a
40 0 USD 15 bn deficit with Australia in 2008, whereas the
35 Australian Bureau of Statistics (ABS) indicate that Austra-
lia had a USD 3.8 bn deficit with China
30 -5
Despite the ongo- • Whatever the case is, both countries are in agreement
25 ing crisis, China’s that China became Australia’s second-largest trade part-
imports of Austra-
20 lian resources -10 ner in 2008, while Australia was China’s eight-largest
remain robust trade partner. Two-way trade reached USD 65.2 bn, an in
15
crease of 28.3% year-on-year
10 -15 • State-level figures show that New South Wales imports
5 the most from China, while W. Australia exports the most
• Ores, slag and ash remain the major exports of Australia
0 -20
to China, while Australia imports a significant amount of
2001 2002 2003 2004 2005 2006 2007 2008
Chinese electrical machinery and equipments
Sources: China Statistical Yearbook; TBA Analysis Sources: DFAT; ABS; Austrade; China Statistical Yearbook; UN Comtrade

China-Australia Annual Trade 2001-2008, USD bn China-Australia Trade by State 2008, USD mn
Exports to China Imports from China Exports Imports Trade Balance
22,000 20,000
Trade Balance
40 0 20,000
15,000
35 18,000 WA’s significant trade
16,000 surplus with China is on 10,000
30 -5 account of its mineral
14,000 resource exports
25 ABS figures show a 5,000
12,000
relatively stable trade
20 -10 10,000
balance between the 0
15 2 countries 8,000
6,000 -5,000
10 -15
4,000
5 -10,000
2,000
0 -20 0 -15,000
2000-'01 2002-'03 2004-'05 2006-'07 ACT NSW NT QLD SA TAS VIC WA
Sources: Australian Bureau of Statistics; TBA Analysis Sources: Australian Bureau of Statistics; TBA Analysis
 41

China-Australia Investment Highlights

• The USD 438 mn Hunan Valin Iron and Steel–Fortescue deal and the USD 1.2 bn Minmetals–OZ Minerals deal have
been granted approval by the Australian government, while the Chinalco–Rio Tinto deal is still in the hands of the
FIRB and Federal Treasurer Wayne Swan. Approval of the Minmetals–OZ Minerals deal came after the Australian
government rejected the Chinese company’s initial offer of USD 1.8 bn due to Prominent Hill security concerns.
Minmetals immediately resubmitted an offer that was deemed acceptable by the government
• The Australian Greens will move for a Senate inquiry into whether foreign acquisitions of the country’s resources sec-
tor by foreign government entities are in the national interest. This comes in the wake of the successive mining deals
• Real estate investments have been steadily increasing from USD 83.36 mn in 2004 to USD 604.27 mn in 2007 as a
growing number of affluent Chinese families set up their children in what will be their second homes in Australia

Foreign Investment in Australia by Sector, 2007 FIRB Approved Chinese Investments in Aus. by Industry
USD mn
In 2005, the mining sector overtook
100% 319.92 Mining the manufacturing sector, which used
6,000 Services and tourism 1000
to receive the most direct invest- Real estate
ments from abroad 5,000 Mineral exploration and development
80% Manufacturing 800
Manufacturing
78.24 Agriculture, forestry and fishing
4,000
Wholesale and Retails Trade Number of Approved Investments
600
60% Finance and Insurance
57.34 3,000
Transport & Communications
Property & Business Services 400
40% 46.25 2,000
Constructions
43.31 Unallocated 200
1,000
20% 27.45 Elec., gas
& water
26.82 0 0
13.2 Others
0% 12.64 8.52 6.16 1994-95 1997-98 2000-01 2003-04 2006-07
Sources: Australian Bureau of Statistics; TBA Analysis Sources: FIRB Annual Reports; TBA Analysis

Australian Natural Resources M&A Inflow by Buyer’s Nation

China
China US
US Switzerland
Switzerland UK
UK Canada
Canada Malaysia
Malaysia Japan
Japan HK
HK Other
Others

2009
Figures have not
yet taken into
2008 account the 2
2008 latest approved
deals: Minmetals-
2007
OZ Minerals and
2006 Hunan Valin-
Fortescue
2005

2004
2004

2003
2003

0%
0% 20%
20% 40%
40% 60%
60% 80%
80% 100%
100%
Source: DEALOGIC

Recent Developments in China-Australia Foreign Investment 2008-2009

Month Acquirer Target Amount USD Stake Status
May-09 Anshan Iron and Steel Gindalbie Metals 108.85 bn Up to 36.28% Approved
Apr-09 Chinalco Rio Tinto 19.5 bn 18% Pending
Apr-09 China Nonferrous Metals Mining Terramin Australia Ltd. 46 mn 12.29% Pending
Apr-09 Minmetals OZ Minerals 1.2 bn 100% Approved
Mar-09 Hunan Valin Iron and Steel Fortescue Metals Group 438 mn 17.55% Approved
Mar-09 Minmetals OZ Minerals 1.8 bn 100% Rejected
Mar-09 Geely Automobile Drivetrain Systems Int’l 40 mn 100% Completed
Mar-09 Sinosteel Murchison Metals Ltd. Undisclosed 5.85% Completed
Feb-09 Jiangsu Eastern China Nonferrous Arafura Resources Ltd. 15.216 mn 25% Pending
Sources: Press; TBA Analysis
42
CHINA–AUSTRALIA
The Changing Landscape of China’s Australian Investments
In the face of the current global crisis and China’s tireless development, the Rudd administration
needs to adroitly juggle the demands of national security, economic advancement and the populace
in considering the wealth of mining investments coming from China. By Barbie Co.
he approval of the 17.55% stake
T of Hunan Valin Iron and Steel in
Fortescue Metals Group and the more
recent approval of the USD 1.2 bn
offer of Minmetals for OZ Minerals
illustrates China’s continuing pursuit
of resources to fuel the country’s de-
velopment. Presently, the major deal
that hangs in the balance is Chi-
nalco’s USD 19.5 bn bid for a stake of
debt-laden mining giant Rio Tinto.
The recent sudden upsurge in the
number of Chinese applications for
investments in Australia, coloured by
resource security concerns and politi-
cal undertones, has been a controver-
sial topic in the country. Financially
distressed companies, particularly
mining companies, are rejoicing at the
thought of fresh cash inflows and a
window into the biggest resource mar-
ket in the world.
A changed world
China entered this recession with the
world’s strongest forex reserve posi-
tion of nearly USD 2,000 bn. With
these resources at hand and their
development plans calling for foreign
technology, China is eager to do its
part in stimulating the global economy
by keeping investment and trade
open, instead of falling into the protec-
tionist trap which has traditionally
been the knee-jerk reaction of the US
to large-scale contagion.
How does this affect Australia?
Recent announcements have claimed
that Australia has been weathering
the global downturn quite well as their
financial markets are in better shape
than that of other countries. However,
the sudden drop of commodity prices
in the second half of 2008 sent panic
rippling through the country’s mining
sector. Companies across the board
were announcing job cuts, project
cancellations and production freezes,
and this has continued well into 2009.
This has left Australia’s mining com-
panies financially vulnerable. Coupled
with a weak Australian dollar and an
ailing economy, Chinese investors
saw this as a prime opportunity to
enter the market, stimulate much-
needed production while at the same
time securing a portion of Australia’s
resources to fuel its own develop-
ment.
Herein lies the crux of the Australian
government’s predicament: How does
it find an acceptable compromise be-
tween the demands of national secu-
rity, economic survival and the popu-
lace?
The government has already identi-
fied several realities that need to be
taken into serious consideration.
There is a strategic dimension to the
investments. Rio Tinto’s assets, in
particular, are a strategic resource for
the country. Unlike their gas deposits,
Australia does not have many other
iron ore deposits of Rio’s mines’
scale. Approval of this deal essentially
means allowing considerable access
and price leverage to a major con-
sumer. On the other hand, this also
provides a strategic opportunity for
Rio to further establish itself in the
Chinese market.
The sellers are in a weak financial
position. Last year, Rio Tinto an-
nounced redundancies of 14,000
workers after BHP Billiton abandoned
its suit for the second-largest Austra-
lian miner. April this year saw the ad-
ditional cutting of 700 positions due to
falling demand and prices. OZ Miner-
als urgently needs funds to pay a
standing debt of roughly USD 1.2 bn.
So far, both of the Federal Govern-
ment’s stimulus packages (worth USD
7.4 and 27 bn) have failed to ade-
quately address the needs of the min-
ing sector, leaving foreign investment
as the sole helping hand of these
firms.
The buyer is a state-owned enterprise
under the aegis of a centrally-planned
Focus
government. The Australian Foreign
Investment Review Board (FIRB)
finds itself in a unique position of
weighing the growing consequences
of having a singular foreign govern-
ment invest in potentially strategic and
sensitive areas of the Australian econ-
omy. This adds a distinct dimension of
foreign policy to the list of items that
the FIRB would be required to con-
sider.
Charting a course of action
The Australian government already
has a list of factors to consider when
examining proposed investments by
companies associated with foreign
governments. In some cases, they
may be easy to call as the nature of
the investments does not impact na-
tional interest or state security. In oth-
ers like the Rio Tinto and the OZ Min-
erals deals, a closer scrutiny is called
for as key resources, security issues,
large-scale employment and public
acceptance are on the line.
The FIRB has already decided to ex-
tend its review period for the Rio Tinto
deal and this gives them a bit of
breathing space to consider all the
variables at play. They would have to
carefully weigh the economic, diplo-
matic and social consequences of
their decisions in the short term and in
the long run, more so because the
two countries are at a critical juncture
of their economic relationship, with an
FTA agreement in the works.
At the end of the day, these compa-
nies urgently need financial assis-
tance to survive the current global
meltdown, and the Chinese compa-
nies have the cash that they need.
Barring any further security concerns,
there is arguably no reason for the
FIRB and Wayne Swan to block this
and future deals, as the alternative
would be to deal a heavy blow to their
mining industry, which has been the
bedrock of the country’s boom in the
past few years.
 43

Regional Focus CHINA–LATIN AMERICA

As the financial crisis continues to unfold and commodity prices decline further, LatAm’s resource-
intensive economies are set to experience a continuing economic slowdown. China’s influence in
commodity prices and the likely rebound of its economy in Q4 2009 are key for LatAm economic
growth prospects. We analyze the drivers, enablers and constraints. By Javier Cuñat.

China-LatAm Highlights
LatAm economies have experienced economic growth in recent years, thanks largely to intense Chinese demand for
their natural resources. China's consumption of iron ore, copper, soya and oil seeds among others, has helped push the
price of commodities to new levels, presenting new opportunities for economic growth in the region. On the other hand,
this optimistic scenario has become a concern since China is also accentuating LatAm’s dependence on exports of pri-
mary products and therefore outperforming LatAm in global manufacturing markets. While the current environment will
not facilitate any industrial diversification strategy, which is a long-term approach desired by countries in the region,
China’s demand for resources will potentially be able to mitigate the worst effects of the crisis in Latin America.

Bilateral Trade China-LatAm 2003-2007, USD bn China-LatAm Trade Highlights*

50 • The dramatic growth of China-LatAm bilateral trade
China Exports to LatAm China’s
China Imports from LatAm trade deficit from USD 23 billion in 2003 to USD 90 billion by the
40 end of 2007 not only reflects China’s hunger for
natural resources and the expansion of commo-
30 dity exports to China, but also the internationalisation
of Chinese goods into LatAm’s growing consumption
20 market
• Chinese imports from the region have increased by an
10 annual average of 40% in the last eight years, ena-
bling countries like Brazil, Argentina, Chile, Peru
0 and Venezuela to have notable trade surpluses with
2003 2004 2005 2006 2007 China. In the case of Chile, for instance, China over-
Sources: UN Comtrade; TBA Analysis
took the United States as the largest destination of
Breakdown of Trade by LatAm Country 2007, USD mn Chilean exports in 2007
50,000 • China’s imports from LatAm are concentrated in three
Brazil
countries: Brazil, Chile and Argentina. These ac-
Chile
40,000 Brazil counted for 72% of the total import volume in 2007
Argentina
Brazil • China’s exports to LatAm are also concentrated in
30,000 Peru
three countries (Mexico, Brazil and Chile - 67% of the
Chile Mexico
Chile total), with Mexico being the better example of the
20,000 Venezuela
Cuba
increasing competitiveness of China as a low cost
Argent. country. China has already taken Mexico’s place as
10,000 Mexico Colombia
Uruguay the second largest supplier of the United States while
Ecuador Chinese products are also flooding the Mexican
0 market
Bolivia
China Imports from China Exports to
Paraguay *Note: LatAm here refers to the Latin American Integration Association (LAIA).
LatAm LatAm LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador,
Sources: UN Comtrade; TBA Analysis México, Paraguay, Perú, Uruguay and Venezuela.

Breakdown of China Imports by Product (2007) Breakdown of China Exports by Product (2007)
100% Primary driver: China’s hunger for natural resources 100%
Secondary driver: LatAm consumption market
Elec.
Electrical Electrical
Ores Copper Machinery
machinery machinery
80% Oil 80%
seeds
Mech. Mech.
60% 60% appliances appliances
Oil Fats & Textiles,
40% 40% Opt./photo
Opt./photo
seeds Ores oils knitted
Tools
tools
Mineral
20% Mineral 20%
fuels
Wood fuels Others Others
pulp
0% Others 0%
Brazil Chile Argentina Mexico Brazil Chile
Sources: UN Comtrade; TBA Analysis Sources: UN Comtrade; TBA Analysis
44

China-LatAm Investment Highlights

In 2007, Latin America and the Caribbean received USD 4.9 billion from China in investment, which accounted for 18% of
the total Chinese OFDI for that year. These investments went mainly to the Cayman Islands and the British Virgin Islands,
the two main tax havens of the region. Investment in these areas typically results in re-investment in other host economies,
including China itself. Concerning other LatAm countries, the most favored areas of investment have been petroleum and
gas, minerals and metals (primary driver), telecommunications and electronic equipment (secondary driver). In addition,
Chinese investment in Latin America is also driven by the recognition of China’s status as a Market Economy, and by the
One China Policy.

Chinese OFDI Flow to LatAm 2003-2007, USD mn Breakdown of Chinese OFDI Flow to LatAm 2007
9000 100%
Chinese OFDI Cayman Is
8000 54%
in LatAm Br. Virgin Is
7000 80%
% Total 39% Argentina
6000 Chinese OFDI Venezuela
60% Guyana
5000
Brazil
4000
40% Bahamas
3000
Suriname
2000 20% Mexico
1000 Others
0 0% Note: Others refers to Panama (USD 8.3 mn), Peru (USD 6.7 mn), Cuba (USD
6.5 mn), St. Vincent & Grenadine (USD 5.8 mn), Chile (USD 3.8 mn), Ecuador
2003 2004 2005 2006 2007 (USD 3.58 mn), Bolivia (USD 1.9 mn), Uruguay (USD 0.5 mn), Barbados (USD
Source: Statistics Bulletin of China’s Outward Foreign Direct Investment 0.4) mn , Colombia (USD 0.2 mn) and Honduras (USD 4.38 mn)

Major Chinese Companies Operating In Latin America China-LatAm Investment Highlights

Petroleum Tele- Motor- Elec- • Brazil’s Petrobras is negotiating the terms of
Sector Mining Fishery IT
and gas com cycles tronics a USD 10 bn loan with the China Develop-
ment Bank after signing a memorandum of
Shanghai Fisheries

TTE (TCL Thoms.)

Main driver Secondary

Nanjing Jincheng
Shougang Group
China Minmetals

driver understanding in February 2009

Baosteel Group

• The sale of MMX (USD 1.4 bn), the Brazilian

Company iron ore project controlled by Eike Batista, is
Sinochem

Sinosteel
Sinopec

gaining momentum. Brazilian analysts said

CNOOC

Huawei

Lenovo
CNPC

CNMC

Put your graphs/tables or text that Wuhan Iron and Steel Group and Baos-
here. See attached file for teel are pursuing the asset
Argentina
chart-making
X X X X X • Telemar (the Brazilian telecom, also known
as Oi) has obtained a USD 300 mn loan from
Bolivia X X
China Development Bank, which plans to
Brazil X X X X X X X use proceeds to finance its 2008-2009 in-
Chile X X X vestment activity in China with network
Colombia X X X X X equipment supplier Huawei
Cuba X X • The People’s Bank of China and Central
Bank of Argentina announced the formal
Ecuador X X X X
signing of a RMB 70 bn (USD 10 bn) bilateral
Mexico X X X X X X currency swap arrangement
Peru X X X X X X • Ecuador has formally begun negotiations
with the Chinese state-owned Sinohydro to
Venezuela X X X X build the country's biggest hydropower plant
Sources: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Information from
(USD 2 bn, 85% financed by Sinohydro)
China’s consulates In Latin America and Ministry of Commerce of China, Statistics Bulletin of China’s Outward Foreign
Direct Investment 2006
Sources: NY Times; Latin Finance

LatAm and The One China Policy

• The LatAm region and Central America contain 11 of the 26 countries that still have official diplomatic ties with Tai-
wan, which represents a strategic challenge for Beijing. In June 2007, Costa Rica broke off diplomatic relations with
Taiwan, the first Central American country to do so
• Cuba, which recognised Beijing as early as 1960, was China’s major ally in the LatAm region prior to 1970, with a
strong ideological connection with China. Chile recognised China at the start of the 1970’s, and today it is recognised
by all LatAm countries except for six Central American countries (Belize, El Salvador, Guatemala, Honduras, Nicara-
gua, and Panama), four Caribbean countries (Dominican Republic, Haiti, St. Kitts and Nevis, and St. Vincent and the
Grenadines), and one South American country (Paraguay)

CHINA–LATIN AMERICA
Weaker Demand, Stronger Relationships
In contrast to the heavy dependence that Latin American countries have shown towards the US
economy in recent decades, the LatAm region is currently looking for more alternatives to rebound
from the global financial crisis. Despite the current recession, China has the potential to reinforce its
growing influence in the region. By Javier Cuñat.
G iven their strong commercial and
investment linkages with the US,
the economies of Latin America have
been strongly impacted by the finan-
cial crisis. As the recession and li-
quidity crisis continue to hit the US
and European economies, we will be
expecting lower capital inflows into
the region, lower exports due to re-
duced external demand and lower
revenues from tourism and remit-
tances. Furthermore, the decline in
commodity prices, one of the main
drivers of economic growth in the
past years, is a serious setback for
major LatAm economies such as Bra-
zil, Argentina, China or Venezuela,
whose economies are resource-
intensive and export-oriented.
Yet in contrast to the vulnerabilities
that LatAm economies showed in the
Great Depression or in the ‘lost dec-
ade’ of the 1980’s, the prospects for
LatAm economies for 2009 are better
than those of the developed world.
While the US and Europe are mired
in the worst recession in decades,
countries like Peru are expected to
grow as much as 5% in 2009, while
other small economies such as Cuba,
Panama and Uruguay will grow at
around 4%. Argentina is expected to
grow at 2.6%, Brazil at 2.1%, Chile at
2% and Venezuela at 3%. For the
whole of South America, ECLAC esti-
mates a 2.4% growth rate. Mexico
and other Central American countries
however, will experience the largest
contraction given the lower demand
from and the higher interdependence
with the US economy.
Improved monetary and fiscal poli-
cies, well regulated banking systems
and current account surpluses have
put some of the major LatAm econo-
mies in a better (or less worse) shape
than in the past. However, LatAm
countries’ recent economic growth,
which owed much to increasing bilat-
eral trade with China, undoubtedly
45
Focus
Fiscal Situation and Estimated Size of Announced Fiscal Stimulus
Packages in Major LatAm countries
Country Initial Conditions Estimated Size of Stimulus
Gross Pub- Budget Budget Ex- Estimated
USD bn
lic Debt % balance (% penditure % GDP tax cut
amount
GDP) GDP) (%GDP) share
Brazil 35.8% -1.4% N/A 8.6 0.5% 100%
Mexico 20.3% -0.1% 24.9% 8.6 1.0% 0.0%
Argentina 44.2% 1.3% 27.4% 4.4 1.3% 0.0%
Chile 4.8% 5.3% 19.0% 4.0 2.2% 63.0%
Peru 24.4% 2.2% 27.5% 1.4 1.1% 0.0%
Sources: EIU; IMF; Various
played a crucial role. pected to progressively boost imports
and prices of natural resources
In China’s economic boom and the again.
need to feed its fast-growing econ-
omy, LatAm countries have seen a Facts and cash
clear opportunity to diversify export
markets. LatAm’s export-oriented Far from being merely speculation,
economies are progressively chang- China is already facilitating liquidity in
ing the destination of their goods the region, negotiating and signing
from developed economies (mainly several deals. USD 2 bn to build a
the US) to the Asian emerging giants hydroelectric plant in Ecuador, a USD
(mainly China). Today, China is 10 bn loan to Petrobras or the USD
LatAm’s second-largest trading part- 10 bn bilateral currency swap with
ner (after only the US) and has be- Argentina are examples of the proac-
come a critical part of the engine of tive, resources-oriented and cash-
economic growth in the region. In backed alternative that China pro-
fact, China has just become Brazil’s vides to LatAm, especially relevant
biggest trading partner. Within the now in this time of crisis. This com-
context of global financial turmoil, plements the recent engagements
LatAm countries are now not only between the regions such as China’s
looking at the duration and intensity membership in the IADB; China’s first
of the recession in the US, but also to policy paper on LatAm; President
the opportunities that China are offer- Hu’s visit to Peru (APEC Summit),
ing. Costa Rica and Cuba or Chinese
Vice-President Xi Jinping’s visits to
At the current juncture, as govern- Jamaica, Colombia, Venezuela, Bra-
ment intervention seems to be the zil and Mexico.
most effective way to offset the con-
traction of external demand, LatAm While it is still uncertain what the full
countries are experiencing difficulties impact of the crisis will be for China
to formulate solid fiscal stimulus and the LatAm economies, it is likely
plans, mainly because of the de- that the outcome of the interaction
crease of export prices and govern- between the two regions in the cur-
ment debt. China is currently injecting rent environment will not only be
USD 586 billion in its economy, much weaker demand but also stronger
of it in infrastructure, which is ex- relationships.
50
46

Regional Focus CHINA–RUSSIA

Both China and Russia are still grappling with the negative effects of the financial crisis, and in Q1
2009 bilateral trade volumes steadily declined, while cross-border FDI investment did not see signifi-
cant change. Yet the first quarter of the year also saw the signing of a number of long-awaited agree-
ments between the two countries to promote strategic cooperation. By Julia Wang.

China-Russia Highlights
• Despite the ongoing financial crisis, economic and trade cooperation between China and Russia still grew
steadily in 2008. Bilateral trade volumes reached USD 56.83 bn, an increase of 18% compared with the previous
year. Due to the crisis, however, these bilateral trade volumes have decreased since November 2008
• In January, the total trade between the two countries declined by 35.4%, reducing Russia's exports by 42.7% and its
imports by 29.9%
• Both China and Russia have been heavily influenced by the crisis, but anti-crisis policy responses have been very
different. China's response has strongly supported infrastructure and industrial investment, while Russia’s commit-
ment to public service areas and social stability has been prominent. Comparing 2008-2010 fiscal stimulus
plans, Russia’s expenditure is USD 220 bn, accounting for a 13.9% share of GDP. China's expenditure is USD 568
bn, accounting for 13% of GDP. Judging from Q1 macroeconomic indicators, China has built up a good momentum of
credit, investment and consumption growth, yet the outlook for the Russian economy remains very negative
• China and Russia will continue to promote the development of bilateral trade in various ways, such as the organi-
sing of exhibitions, the transfer of technology and a trial program for renminbi (RMB) settlement. The first China-Rus-
sia Machinery and Electrical Appliance Exhibition will be held on May 16-18 in Heilongjiang province in the north of
China. China’s State Council has identified five key manufacturing cities: Shanghai, Guangzhou, Shenzhen, Zhuhai
and Dongguan, which have all been permitted to conduct international merchandise trade transactions entirely in
RMB

Russia-China Trade 1999-2008, USD mn China-Russia Trade Highlights

40,000 Russian Exports to China
• China is Russia's second-largest
Russian Imports from China
trade partner after EU; Russia is
China's ninth-largest trade partner
30,000 • By the end of 2008, China was
Russia's largest source of imports
• In 2008, the total amount of Rus-
20,000 sian exports to China was USD
20.39 bn, an increase of 5.6%
y-o-y; the total amount of Russian
10,000
imports from China was USD
34.66 bn, growing 42.7% y-o-y
0
• Mineral products, wood and fertili-
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
zers remain the top Russian ex-
ports to China. Exports of mineral
Sources: MOFCOM; TBA Analysis products increased by 68.7%
y-o-y, while exports of wood de-
Russia’s Imports from and Exports to China 2008, USD bn creased 8.9% y-o-y
• In 2008, mechanical and electrical
Trans- appliances became China’s lar-
100% port- Light Pulp and
1.92 100% Others 0.81
equip- 2.19
industry
1.14 paper gest export commodity to Rus-
2.92 products 1.66 sia, displacing light industry prod-
80% ment 80%
3.05 2.40 Base ucts. Imports of mechanical and
Textiles metals
2.48 electrical appliances, textiles and
60% Base 8.58 60%
metals Chemical base metal articles increased by
Others Wood
products 47.3%, 55.5% and 40.0%, re-
40% 40% spectively, taking the market
Mechani- 11.91 share of these Chinese exports to
16.00 cal and Mineral
20% 20% Russia to 21.6%, 39.7% and
electrical products
appli-
23.1%. These three imports ac-
0% ances 0% counted for 63.4% of Russia’s
2008 Imports 2008 Exports total imports from China in 2008
Sources: MOFCOM; TBA Analysis Sources: Multiple sources; TBA Analysis
 47

China-Russia Investment Highlights

• Mutual investment between China and Russia has been developing very slowly for a period of time. Yet Russia remains
an important target market for Chinese investors
• China’s FDI outflows to Russia declined by 83% from USD 440 mn in 2007 to USD 240 mn in 2008, while Russia’s
FDI outflows to China increased by 13% from USD 52 mn to USD 60 mn
• Investments by Chinese companies in Russia are concentrated in Siberia, the Far East, Moscow and St. Petersburg,
with a prominent Chinese presence in the natural resources and related sectors such as oil, gas and forestry
• Russian companies’ investments in China are mainly concentrated in the manufacturing sector
• The Intergovernmental Agreement on the Encouragement and Mutual Protection of Investment, signed on 9 Novem-
ber 2006 and implemented from March 2009, injected new vitality into business cooperation between the companies
of the two countries
• An increasing number of large Chinese companies, banks, and small and medium enterprises in various fields are
presently re-evaluating potential market opportunities in Russia, and are actively searching for new forms and me-
thods of cooperation

Russia Industrial Production and Investment y-o-y Growth Rate (%)

40 Fixed Investment Industrial Production Index

20

0
-20

-40

-60
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Sources: Russian Publishing Company “Expert Group”; TBA Analysis

Russia FDI Stock by countries 2008, USD bn Russia–China Bilateral FDI 2004-2008, USD mn
Ukraine 0.12 Russia FDI to China
China FDI to Russia
Germany 0.51 500
Armenia 0.68 450
United Kingdom 0.73 400
350
Sw itzerland 1.19
300
Belarus 1.32 250
Brit. Virgin Islands 1.45 200
United State 4.67 150
Netherlands 9.79 100
50
Cyprus 9.99
0
0 2 4 6 8 10 2004 2005 2006 2007 2008
Sources: ROSSTAT; TBA Analysis Sources: MOFCOM; TBA Analysis

Foreign Investment into Russia by Sectors, USD bn Russia FDI Inflow by Sectors 2008, USD mn
Total: 29.7 53.7 55.1 120.9 103.8 Electronic appliances
100% 27,027
Ot hers Crude oil
120
Real est ate operat ions Data processing
Financial act ivities
Transport and communicat ions 80% Plastic in primary form
17
90 Dist ributive trades 5,918 Steel products
Construction 8 12
Electricity, gas and water 60% 5,043 Soya beans
M anuf acturing 15
60 Unwrought copper
M ining operations 47
6 24 40%
3 9 4,979 Refined
30 20 6 petroleum
6 13 products
5 32 34 20% 3,994
11 18 15 Others
7 2,332 958 808
0
1,713
2003 2005 2006 2007 2008 0% 1,282
Sources: ROSSTAT; TBA Analysis Sources: ROSSTAT; TBA Analysis
48

CHINA–RUSSIA Focus
East Siberia-Pacific Ocean Crude Oil Pipeline Project: Long-awaited
Agreement Finally Reached
China and Russia are making joint efforts on maintaining strategic cooperation in the energy field.
With the slowing demand for natural resources, it is crucial for China to diversify its oil imports and for
Russia to guarantee long-term oil contracts. The 60th anniversary of diplomatic ties between these
countries has now been marked by the signing of an historic energy deal. By Nikita Popov.

O n 17 February 2009, China and

Russia finally reached consensus
on the largest ever energy deal be-
tween these two countries. China Na-
tional Petroleum Corporation (CNPC)
signed the contract with Russian
companies Rosneft and Transneft on
construction of the East Siberia-
Pacific Ocean (ESPO) crude oil pipe-
line, which will supply 15 million tons
of Russian crude oil per year to China
during the next 20 years. According to
the terms of the contract, designated
volumes of oil will be supplied to
China in exchange for the granting of
a USD 25 billion loan to the two Rus-
sian companies, of which USD 15
billion will go to oil-producing com-
pany Rosneft and USD 10 billion to
oil-transporting company Transneft.
Changing times in 2008
The history of the ambitious project
dates back to 2001, when former
Russian oil-producing company
Yukos proposed to build an oil pipe-
line to China. The pipeline was sup-
posed to stretch from the Russian
East-Siberian city of Angarsk, where
Yukos operated a refinery, to Daqing
in northern China. In 2002, Transneft
proposed an alternative project to
transfer oil from Taishet in the Irkutsk
Region and to the far east port of
Nakhodka, thus engaging Japan and
Korea as more potential consumers.
In May 2003, the government of the
Russian Federation decided to com-
bine these projects. According to the
initial plan, Transneft was supposed
to be in charge of the pipeline, while
Yukos would supply the oil. On 29
May 2003, Russia and China finally
signed the agreement on the con-
struction of the pipeline.
Actual implementation of the project,
however, turned out to be easier said
than done. During next five years,
Precious cargo: The new pipeline will pump up to 1.6 million barrels of crude oil
per day from Siberia to Russia's Far East and then on to China and the Asia-
Pacific region. (Photo: RIA Novosti/Mikhail Fomichev)
construction was delayed many times
for economic, technical, ecological
and political reasons. Initial problems
emerged just a few months after the
agreement, when in September 2003
Mikhail Khodorkovsky, CEO of Yukos,
was arrested on changes of fraud. As
a result, further negotiations on the
project were suspended. In 2006 a
Russian court declared Yukos bank-
rupt, and the company was liquidated.
Eventually, the other oil company,
Rosneft, assumed the right of provid-
ing oil for the ESPO pipeline. Yet ob-
stacles kept occurring along the way.
During the first months of 2006, Ros-
neft and Transneft were confronted
with complaints from the natural re-
sources committee of Russia’s State
Duma, Greenpeace and WWF. Con-
sensus was eventually achieved,
however, and on 28 April 2008 the
first joints of the pipeline were welded
together in Taishet, signaling the com-
mencement of construction on the
ESPO crude oil pipeline.
Despite all the agreements and terms
that were agreed to, the construction
process at first progressed excrucia-
tingly slow. The route of the pipeline
was altered a few times, and the
deadline had to be postponed due to
technical problems, according to the
statements made by the Transneft
leadership. All these lags, though
carefully explained away by the repre-
sentatives of Russian companies,
induced lingering assumptions that
the state-owned companies were de-
liberately stalling the construction
process. With oil prices still soaring in
the first half of 2008, it seemed that
the Russian companies could afford
taking their time, leisurely bargaining
for better terms of the deal. The situa-
tion changed dramatically, however,
with the advent of the financial crisis,
which dragged oil prices to appallingly
low levels.
Once oil revenues began tumbling,
the Russian oil companies had to jetti-
son any excessive expectations. In
light of the aggravated situation in the
energy market, the plight of Rosneft
was especially serious, considering
the company’s urgent need to gener-
ate cash inflows in order to pay off
bulging debts, which currently totals

CHINA–RUSSIA
nearly USD 21 billion, with USD 7
billion due for payment in 2009.
Small print
Details of the contract, signed on 17
February 2009, state that Russia will
construct Phase 1 of the ESPO pipe-
line, which extends from Taishet to
Skovorodino near the border with
China. Under the agreement, Russia
will build a 60km spur from Skovo-
rodino to the border, and China will
construct a 970km link to Daqing.
Construction of Phase 1 is planned to
be fully completed by the end of this
year.
The pipeline is expected to start oper-
ating to full capacity by the beginning
of 2011. The USD 25 billion loan will
be backed by China Development
Bank (CDB), one of China’s largest
state-owned enterprises. According to
the spokespersons of Rosneft, apart
from paying the company’s debts,
money will also be spent on acquiring
assets of oil companies abroad.
Prices for oil supplies have not been
disclosed yet. At present, it is already
known that the new brand of oil for the
ESPO crude oil pipeline, ESPL Blend,
is at the final stage of development
and will be completed during 2010.
Discussions on establishing a GOST
standard for this new oil brand are
ongoing in the Russian government.
The purpose of creating the ESPL
Blend is to distinguish price formation
for the oil in the ESPO project from
the oil of the Urals brand of general
Russian oil exports.
Give and take
Russian companies, trying to strike
the deal on more profitable terms, had
to make some concessions to the Chi-
nese side. These concessions were
not about the price of oil itself, but
about the terms of receiving and pay-
ing back the loan from CDB. While
both the Chinese and Russian top
officials involved in the negotiations,
including Chinese Vice Premier Li
Keqiang and Russian Deputy Prime
Minister Alexander Zhukov, agreed
that the deal was mutually beneficial
for both countries, it is still likely that
Done deal: Chinese Vice Premier Li Keqiang (right) and Russian Deputy Prime
Minister Alexander Zhukov during the meeting on strategic cooperation in Bei-
jing, March 27, 2009. (Photo: Xinhua/Huang Jingwen)
Russia could have turned the deal
more to their advantage had there not
been a sharp decline in oil prices.
At the end of March, CNPC and Ros-
neft also announced that they may
soon begin construction of their long-
planned Tianjin oil refinery. The idea
for this refinery project received new
impetus after Russia finally agreed to
pump oil to China via the ESPO pipe-
line. The Tianjin city government said
construction of the RMB 21 billion
(USD 3.1 billion) plant, which will be
located in its Binhai chemical area,
could be completed by 2012. After the
completion of construction of the link
to Daqing (Phase 1 of the ESPO pipe-
line), China hopes to extend a pipe-
line from Daqing southward to Tianjin
in order to secure supplies for the new
refinery.
A more assertive China
China is clearly continuing to make
efforts to diversify its oil imports, ac-
celerating efforts for striking new
deals in the energy field. The agree-
ment with Russia, though the most
notable and important, was not the
only one. About one week after the
contract with Rosneft and Transneft
was signed, China Development Bank
49
Focus (cont.)
agreed to lend USD 10 billion to Bra-
zil’s oil giant Petrobras in exchange
for long-term supplies of oil. The con-
tract will be finalised within the follow-
ing two months so it can be signed
when Brazilian president Luiz Inácio
Lula da Silva visits China in May. In
addition, at the beginning of February,
Chinese President Hu Jintao visited
Saudi Arabia, the world’s largest oil
exporter, to seek potential new oil
contracts.
Such increased activity demonstrates
that, in the light of the current eco-
nomic downturn, China is trying to
satisfy its growing domestic needs
and to attain strategic goals. It is also
possible to view China as acting more
assertively, ready to utilise its position
as a country with the largest foreign
reserves and a solid banking system
to obtain better access to the natural
resources of the main players in the
energy market.
50

Upcoming Events
THE BEIJING AXIS can assist delegates who wish to attend fairs, exhibitions and conferences in
China. Services include research, interpretation, negotiation and travel logistics. For more informa-
tion, please send an email to info@thebeijingaxis.com, or for more contact details see ‘About THE
BEIJING AXIS’ on page 54.

Date Event Location

3 - 7 May 09 China Import and Export Fair (Canton Fair) Guangzhou
5 - 7 May 09 5th Shanghai Tube Expo Shanghai
6 - 8 May 09 SNEC 3rd (2009) International Photovoltaic Power Generation Expo Shanghai
7 - 8 May 09 2nd Annual Energy Efficiency Asia 2009 Beijing
13 - 15 May 09 3rd China International Logistics Technology and Services Expo Suzhou
14 - 16 May 09 China International Foundry Fair Dongguan
8 - 12 Jun 09 8th China International Consumer Goods Fair Ningbo
10 - 12 Jun 09 6th PPI China Guangzhou
11 - 13 Jun 09 15th Shanghai Metallurgy Expo Shanghai
16 Jun 09 China Structured Products Forum 2009 Beijing
16 - 19 Jun 09 GMT - Canton Machine Tool Fair Guangzhou
17 - 21 Jun 09 Nonferrous Metals Mining Conference Guiyang
18 - 20 Jun 09 9th China International Steel Construction Fair Beijing
14th China International Exhibition for Building Material, Building System, Construc-
18 - 20 Jun 09 Beijing
tion Machinery & Architecture
Inner
18 - 20 Jun 09 2009 China Inner Mongolia International Coal & Energy Industry Expo
Mongolia
23 - 25 Jun 09 International Stainless Steel Conference Wuxi

23 - 26 Jun 09 4th China International Metals Industry Fair 2009 Guangzhou

23 - 26 Jun 09 10th China (Guangzhou) International Metal & Metallurgy Guangzhou

28 - 29 Jun 09 International Aluminium Fabricating Conference Shanghai

5th China International Coal Equipment and Mine Technical Equipment Exhibition
28 - 30 Jun 09 Beijing
2009
30 Jun - 2 Jul 09 Aluminium China 2009 Shanghai
8 - 10 July 09 7th International Exhibition on Electric Power Equipment & Technology Shanghai
10 - 11 July 09 2009 International conference on Information Engineering Taiyuan
17 - 21 Jul 09 7th Nonferrous Metals Mining Conference 2009 (NMM 2009) Guiyang
10th China International Industrial Automation and Instruments (Qingdao) Exhibi-
28 - 31 Jul 09 Qingdao
tion
28 - 31 Jul 09 10th China International Machine Tools & Modules (Qingdao) Exhibition Qingdao
29 - 31 Jul 09 9th Shanghai Children Baby Maternity Products Expo Shanghai
2nd International Conference on Computer Science and Information Techno-logy
8 - 11 Aug 09 Beijing
2009
13 - 15 Aug 09 China (Beijing) International Steel Tube Industry Expo 2009 Beijing
 51

Date Event Location

13 - 15 Aug 09 6th China (Beijing) International Casting & Forging Exhibition, 2009 Beijing
17 - 19 Aug 09 7th China International Auto Supplies Sourcing Fair Shanghai
18 - 20 Aug 09 5th China International Metal Working Technology & Equipment Exhibition Tianjin
19 - 21 Aug 09 2009 International Conference Industrial Globalization and Technology Innovation Shaanxi
21 - 23 Aug 09 7th International Symposium on Rockburst and Seismicity in Mines Dalian
1- 3 Sep 09 6th Shanghai International Stainless Steel Expo Shanghai
1 - 5 Sep 09 China International Equipment Manufacturing Expo (CIEME 2009) Shenyang
8 - 10 Sep 09 2009 China International Electronic Industry Expo Beijing
8 - 10 Sep 09 International Lead and Zinc Conference Lanzhou
8 - 10 Sep 09 International Manganese Conference Changsha
8 - 11 Sep 09 13th China International Fair for Investment and Trade Xiamen
17 - 18 Sep 09 4th Annual PorTech Asia 2008 Tianjin
24 - 26 Sep 09 China International Auto Parts Expo (CIAPE) Beijing
20 - 22 Oct 09 China Mining Tianjin

20 - 23 Oct 09 17th China (Shenzhen) International Toys & Gifts Fair Shenzhen

27 - 30 Oct 09 China Coal & Mining Expo 2009 Beijing

2 - 4 Nov 09 World Scrap Metal Congress 2009 Shanghai

3 - 7 Nov 09 Metalworking & CNC Machine Tool Show Shanghai

4 - 6 Nov 09 17th China International Industry Fair Chongqing

12 - 14 Nov 09 3rd China International Exhibition for Aluminium Industry Beijing

SUGGESTED READING China Entrepreneur (2009), reviewed by The Economist

Despite China’s remarkable transformation, it can still baffle foreign investors.
Yet for any entrepreneur planning a venture in China, China Entrepreneur:
Voices of Experience from 40 International Business Pioneers would be an ex-
cellent first step. Authors Juan Antonio Fernandez, professor of Management at
the China Europe International Business School (CEIBS), and Laurie Under-
wood, journalist and Director of External Communication at CEIBS, here distil
the combined wisdom of 40 entrepreneurs who have succeeded in China, se-
lected from a variety of industries and countries in the developed and developing
world. The chapters deal with starting up, choosing partners, getting paid, hiring
staff, corruption, negotiations, daily living and much more. The material is well-
organised and clear, with summaries, case studies, call-outs and key rules. Par-
ticularly illuminating are the insights on the importance of Guanxi - the network
of social and business connections so vital to doing business in China, as well
as material dealing with the pitfalls of business negotiations. The book is enli-
vened by the interviewees’ colourful personal anecdotes, and as such China
Entrepreneur successfully presents itself as an operational handbook for the
newcomer in China.

China Entrepreneur features THE BEIJING AXIS Founder & Group Managing
Director, Kobus van der Wath, as one of the 40 foreign China entrepreneurs
included in the book.
52

Careers at THE BEIJING AXIS

THE BEIJING AXIS is constantly looking for dynamic, performance-driven individuals to assist us in
meeting our business challenges. Applications will be treated confidentially. If you believe you can
make a contribution, send your detailed CV with a letter of motivation and references to Group MD
Kobus van der Wath: kobus@thebeijingaxis.com. (Note: international relocation is possible)
LEAD CONSULTANT
(CHINA CAPITAL ADVISORS)

Beijing: 1 position
Role
• Lead multiple advisory assign-
ments in the Investment Advisory
Division of THE BEIJING AXIS
• Project manage assignments and
ensure quality and time objec-
tives are met; ensure mainte-
nance of professional ‘best prac-
tice’ standards across assigned
projects
• Valuation, modelling, participation
in overall investment process
• Manage 2-4 deal-team consul-
tants and analysts
• Be a thought leader and promote
the development of learning pro-
cesses and platforms
• Improve process efficiencies,
optimise workflow, control costs
• Client relationship management
• Ensure alignment of Division’s
objectives with those of the
Group
• Multi-sector assignments with
emphasis on resources, mining
and industry
• Significant (international) travel
Requirements
• Superior analytical and problem-
solving abilities: Valuation, mo-
del ling and deal structuring
• Ability to work with diverse cul-
tures and backgrounds
• Interest in and knowledge of
China’s cross-border business
engagement
• Sound judgement, maturity and a
systematic mind
• Conceptual thinking and attention
to detail
• MBA/CFA/CA or legal back-
ground preferred with more than
3 years experience in finance/
consulting
• Native English written and verbal
communication skills essential
• Mandarin ability essential
• Willingness to travel
THE BEIJING AXIS is an entrepreneurial firm and welcomes applications
from persons with a well-grounded knowledge of their professional fields
in a China context. We offer a rewarding experience, international expo-
sure and competitive remuneration.
CONSULTANT / ANALYSTS
(CHINA STRATEGY GROUP)
Beijing: 1 Consultant position
Beijing, Singapore, Perth, Johan-
nesburg: 4 Analyst positions
• Employed in the Strategy Division
of THE BEIJING AXIS
• Sound analytical and problem-
solving skills
• Ability to work in teams with
colleagues from diverse cultures
and backgrounds
• Strong experience in the formula-
tion and execution of research
methodologies and analysis
• A business and/or technical de-
gree with a post-graduate qualifi-
cation
• Minimum 3 years experience in
an appropriate or related field
• Excellent communication skills,
including both spoken and written
English
• Mandarin not essential, but re-
garded as an advantage
• Willingness to travel
SOURCING ENGINEER
(CHINA SOURCING UNIT)
Beijing: 1 position
• Employed in the China Sourcing
Unit of THE BEIJING AXIS
• Sourcing (or manufacturing) pro-
ject management skills essential
• Focus: Project manage sourcing
schedules (i.e. ensure that spe-
cialised capital equipment is
manufactured to required stan-
dards and delivered on time);
technical QA/QC knowledge; ex-
pediting experience and strong
supplier management skills
• Provide support and technical
advice and expertise to China
Sourcing Unit colleagues and
department
• A degree in engineering, prefera-
bly mechanical/mining-related
with a minimum of 10-years’ work
experience in appropriate field
• Excellent English and Mandarin
written and spoken abilities
• Willingness to travel

THE BEIJING AXIS News
Learning & Getting Around
THE BEIJING AXIS Founder and
Group MD, Kobus van der Wath,
hosted a number of Business Round-
tables in Asia in Jan 09. The roundta-
bles, entitled ‘China in 2009’, were
held in Vietnam (Ho Chi Minh City),
Thailand (Bangkok) & Singapore.
Kobus van der Wath attended the
Macquarie China-Day Seminar on 6
Feb 09 in Cape Town, South Africa.
On 9-12 Feb 09, Kobus van der Wath
& Mitch Cosani, South Africa Office
Manager, attended the 2009 Mining
Indaba in Cape Town, SA. Kobus de-
livered a keynote presentation enti-
tled: ‘China’s Strategic Importance in
Global Mining’; and participated in a
panel discussion with the topic,
‘Resource Curses & Blessings: Chal-
lenges for the Last Mineral Frontier’.
On 20 Feb 09, Kobus van der Wath
hosted a China Business Roundtable
in Singapore.
On 26 Feb 09, The Capital Club (a
premier private business club in Bei-
jing) hosted a business seminar
where Kobus van der Wath and Ed-
ward Wang, TBA Executive Director,
were invited to deliver two presenta-
tions on the topic of China’s recent
bold international acquisitions and
what specific implications these have
for Africa, now and into the future.
Mitch Cosani and Jackie Li from the
SA Office were invited by the China
Foreign Trade Centre to attend a pro-
motion seminar in South Africa on 26
Feb 09 for the 105th China Import and
Export Fair (Canton Fair).
Staff from TBA’s investment unit,
China Capital Advisors, attended the
M&A Due Diligence conference in
Shanghai on 26-27 Feb 09.
Kobus van der Wath delivered the
keynote presentation at PDAC 2009
in Toronto on 1-4 Mar 09. Kobus’
presentation was entitled: ‘China’s
Role in Resources—Implications for
Resource Demand and Strategic
Capital from China into the Sector.’
On 12 March 09, Jackie Li, Business
Development Manager at the South
Africa Office, attended the Nepad
Ithuba Forum in Sandton, SA.
On 19 March 09 Mitch Cosani at-
tended a mining industry business
breakfast entitled: ‘The Future of the
SA Mining Sector’ in Rosebank, SA.
On 19 March 09, Jackie Li attended a
Nedpad Business Forum entitled:
‘Doing Business in Africa’ in JHB, SA.
On 23-27 March 09, staff members
from THE BEIJING AXIS’ global of-
fices attended the Asia Mining Con-
gress 2009 in Singapore.
On 27-29 March 09, staff members
from THE BEIJING AXIS attended the
International Mining Equipment Fair in
Handan, China.
On 31 March 09, Diana Wang, China
Sourcing Unit Manager, and Cheryl
Tang, China General Manager, at-
tended the 4th China International
Metals Industry Fair in Guangzhou.
On 29 April 09, Kobus van der Wath
delivered a presentation at the Capital
Club in Beijing, entitled ‘China’s rising
outward investment in Oil and Gas -
what’s in it for Africa?’
During April TBA was also repre-
sented at a number of events in Aus-
tralia, China, South Africa & Hong
Kong, which included:
• The 11th China International Ma-
chine Tool Exhibition in Beijing (6-
11 Apr 09)
• The SA Power Conference in
Sandton, SA (21-22 Apr 09)
• Presentation to an INSEAD
Business School ‘China Entrepre-
neurship’ Study Tour in Beijing
(26 Apr 09)
During May, June and July, TBA will
further be represented at:
• M&A presentation to the Curtin
Business School China Study
Tour 2009 in Beijing (2 May 09)
• China Sourcing presentation to
Australia Chamber of Commerce
Sourcing Working Group in Beijing
(5 May 09)
• CIPSA Western Australia Procure-
ment Forum in Perth (12 May 09)
• Presentation on Doing Business in
53
Russia/CIS at The Capital Club in
Beijing (14 May 09)
• China Investment in African Re-
souces at Macquarie’s Metals/
Mining Investor Day in HK (18 May)
• China Australia Business Con-
gress, Sydney (19 and 20 May)
• China Investment in Global Re
sources at AMEC 2009 in Perth
(21/22 May)
• China Sourcing Presentation at the
IPSA/CIPS Annual pan-African
Conference in JHB, SA (26 May)
• IWCC Annual Copper Event in
Seoul, South Korea (11-13 May 09)
• Nonferrous Metals Mining
Conference in Guiyang (17 May)
• Mines & Money Asia 2009 in Hong
Kong (3-5 June 09)
• Banking Outlook Africa 2009 in
Johannesburg, SA (6-10 July 09)
• Africa Mining Congress 2009 in
Johannesburg, SA (14-17 July 09)
Team Developments
Elena Zhou, previously Senior Con-
sultant within the Finance & Admin.
Dept., was asked to assume the re-
sponsibility of Manager, effective
from March 09.
William Dey Chao, consultant with
the China Strategy Group, was pro-
moted to the position of Lead Con-
sultant, effective from Feb 09.
Nikita Popov joined the Beijing Of-
fice in Feb 09 as an Analyst on the
Russia/CIS desk.
Jason Gao, previously an intern,
was asked to join as a full-time em-
ployee, effective from Feb 09 - Ja-
son now holds the position of Ana-
lyst: Knowledge Management, in
Beijing.
Tarryn de Beer joined the SA Office
in Jan 09 as an Analyst. Tarryn
holds an IMM Diploma and is cur-
rently studying towards her BBA.
At the beginning of April 2009, THE
BEIJING AXIS welcomed Avin
Zhang, Sandy Yang and Macy Chen
as interns at the Beijing Office.
We welcome them, congratulate
them and wish them all the very best
and continued success in the next
stage of their careers with TBA.
54

About THE BEIJING AXIS

THE BEIJING AXIS is a cross-border business bridge to and from China in three principal areas: Strategy, Sourcing and
Investment.
Since our establishment in 2002, we have successfully worked with many large international and Chinese MNC clients
across various sectors and industries, with a core focus on the Chinese mining and resources sector and on China’s bur-
geoning industrial and engineering sector. Our work is always cross-border — supporting international firms as they act
in unfamiliar territory in China, or supporting Chinese firms as they venture out and ‘go global’. We are committed to
safety and sustainability, and our solutions emphasise 'actions and transactions’. Our principal office is in Beijing with
additional offices in Shanghai and Hong Kong as well as in Singapore, Perth, Moscow and Johannesburg.
THE BEIJING AXIS is organised along 3 synergistic cross-border China businesses: the China Strategy Group, the
China Sourcing Unit and China Capital Advisors.

China Strategy Group China Sourcing Group China Capital Advisors

THE BEIJING AXIS China Strategy THE BEIJING AXIS China Sourcing THE BEIJING AXIS China Capital
Group provides professional business Unit supports sourcing and procure- Advisors provides cross-border advi-
solutions, with a clear focus on strategy ment initiatives to/from China with a sory services. The focus falls on cor-
formulation and implementation systematic and analytical approach porate finance origination activities

Strategy Formulation Strategic Sourcing Corporate Finance Origination

• Market intelligence • Supply needs analysis • Advising Chinese MNCs as they
• Market and industry research • Supplier identification, filtering, due seek overseas assets, equity,
• Market entry strategy diligence and selection projects or foreign co-investors
• Partnering strategy • Supplier engagement & negotiation • Advising foreign MNCs that are
• Business planning • Commercial and contract seeking Chinese assets, equity,
management support projects or Chinese co-investment
partners

Strategy Implementation Supply Chain Management Financial Advisory

• Market entry support & Support • Buy-side & sell-side M&A advisory
• Business development • Comprehensive project • Target identification, filtering and
• Operational support management selection
• Negotiation • Transaction monitoring • Engagement
• Agency services • QA/QC, expediting, managing 3rd • Project and target due diligence
• Relationship management parties (QA inspectors, lawyers, • Fundraising support
• Delegations etc.) • Valuations and modelling
• Logistics • Opinions
• Holistic risk management
• Strategic relationship management

For further information, please visit our English, Chinese, Russian or Spanish websites at www.thebeijingaxis.com

Beijing, China
Cheryl Tang
Director & GM: China
cheryl@thebeijingaxis.com
(T) +86 (0)10 6440 2106
(F) +86 (0)10 6440 2672
Contact Information
China Strategy Group
Javier Cuñat
Manager
javiercunat@thebeijingaxis.com
China Sourcing Unit China Capital Advisors
Diana Wang Edward Wang
Manager Executive Director
dianawang@thebeijingaxis.com edwardwang@thebeijingaxis.com

Johannesburg, South Africa Moscow, Russia/CIS Perth, Australia Latin America Desk
Michele (Mitch) Cosani Lilian Luca Jim Hu Javier Cuñat (in Beijing)
Manager: Johannesburg Office Director: Russia/CIS & Senior Consultant Manager
michelecosani@thebeijingaxis.com Group Corporate Office jimhu@thebeijingaxis.com javiercunat@thebeijingaxis.com
(T) +27 (0)11 201 2453 luca@thebeijingaxis.com
Jackie Li
Manager: Business Development
jackieli@thebeijingaxis.com
(T) +27 (0)11 201 2318
 55

Previous Editions of THE CHINA ANALYST

February 2009
Regulars
Macroeconomic Monitor
China Facts, Figures &
Forecasts
China Sourcing Strategy
China Sourcing Blog Highlights
China Trade Roundup
China OFDI and M&A
Regional Focus: Africa, Russia
and Australia
China Business News Highlights
Features
Financial Crisis: China Impact and Response
The slowdown has impacted China’s exports, yet with a
massive stimulus package, there’s much room for hope.
Financial Crisis: Beginning of the BRIC Era
While not unaffected by the crisis, BRIC countries will
emerge from it with a greater role in the global economy.
October 2008
Regulars
China Sourcing Strategy
China Sourcing Blog Highlights
Macroeconomic Monitor
China Facts, Figures &
Forecasts
China Trade Roundup
Financial Markets
China OFDI and M&A
The C in BRICS
China Business Highlights
Features
China Inc. Goes Global: The Long Road Ahead
Chinese companies are making headlines with foreign ac-
quisitions, yet what are the drivers of this trend?
Taking a Step Into Latin America
China is intensifying its ties with LatAm. We examine the
current critical juncture between these two regions.

July 2008 April 2008

Regulars
China Sourcing Strategy
China Sourcing Blog Highlights
Macroeconomic Monitor
China Facts, Figures &
Forecasts
China Trade Roundup
Financial Markets
China OFDI and M&A
The C in BRICS
China Business Highlights
Features
The Scramble for Australia
We take a look as China’s Australian mining ventures
move from trade to investment.
Sourcing High-Value Industrial Products from China
The era of Chinese high-value industrial exports is fast ap-
proaching, yet pitfalls and peculiarities remain.
To view or download a copy of current or previous editions of The China Analyst, visit our website at www.thebeijingaxis.com.
Regulars
China in Statistics
Statistics in the News
China Business News
China Perspectives
China Sourcing Blog Highlights
Upcoming Events
Features
Putting China’s Urban Billion into Perspective
To the business community, China’s population is an op-
portunity, yet to the government it is a serious challenge.
Africa & China: How Long will the Honeymoon Last?
As Chinese involvement in Africa grows, is there reason to
be concerned about the sustainability of the relationship?

DISCLAIMER
This document is issued by THE BEIJING AXIS Ltd. While all reasonable care has been taken in preparing this document, no responsibility or liability
is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without
notice. This document is for information purposes only, and solely for private circulation. The information presented here has been compiled from
sources believed to be reliable. While every effort has been made ensure that the information is correct and that the views are accurate, THE BEIJING
AXIS cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommenda-
tion or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future
movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily indica-
tive of future performance; the value, price or income from investments may fall as well as rise. THE BEIJING AXIS, and/or a connected company
may have a position in any of the investments mentioned in this document. All readers are advised to make their own independent judgement with
respect to any matter contained in this document.

Copyright Notice: Copyright of all materials, text, articles and information contained herein resides in and may only be reproduced with permission of
an authorised signatory of THE BEIJING AXIS. Copyright in materials created by third parties and the rights under copyright of such parties is hereby
acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests in and shall re-
main copyright of THE BEIJING AXIS and should not be reproduced or used except for business purposes on behalf of THE BEIJING AXIS or save
with the express prior written consent of an authorised signatory of THE BEIJING AXIS. All rights reserved. © THE BEIJING AXIS 2009.
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